NO. 41232 gua HILI peru ope OF THEP PIN, s the “Revi, pe known a ; Code js Code shall le. - aes) corm reo a fthe philippines ett ‘i Vise rt tet C poration e February 23, 2019. 0.11232), took effect o, 7 js an artificial bein, = corporat sion an SEC.2. Corporation Defined. Ea the right of el a nid the created by operation ressly aut 0! or ywers, attributes, incidental to its existence. FING ; CORPORATION IS AN set vested with S ee personaly separate ber eae el those acting for and in its behal , al, from the people comprising it* It has a personality separate and distinct from ee composing it, as well as from any other legal entity to which it may be related, It is a basic principle in Corporation Law that a corporation has a personality, who compose it. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it? Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons} Characteristics of a corporation 1. Itis an artificial being; 2. Created by operation of law; ornare mates cieatieericircieneem rte ‘Company, GR. No. 142936, April 17, 2002. me on 186INBRAL PROVISIONS PM omit q. thas the right of succession; anq + thas the powers, attributes incidental to i and pri stence, - P'OPerties expressly authorized by law ori The abc e above definiti ‘on and characteristics refer to private corporation. ee reine (BSP) a private corporation? he BSP, Which is a corporat, ? purpose fs subject to the law coda created for a public interest or he BSP is a publi ' Ht es eee Corporation not subject to the test of government al 0’ and economic viability. As presently constituted, the psP still een instrumentality of the national government. uae Z attached to the DECS pursuant to its Charter and the Administrative Code of 1987. it - cae private corporation which is required to be owned or controlled by the government and be economically viable to justify its existence under a special law. The ownership and control test is likewise i - Paelowneraie s likewise irrelevant for a public What is government-owned or controlled corporation (GOCC)? “Government-owned or controlled corporation" refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock.5 Thus, for an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for non- ions, they must have members and must not distribute any part of their income to said members.6 LSE «Boy Scouts ofthe Philippines vs. Commission on Aud, GR. No. 177131, June 7, 2011 Section 2 (13) of the Introductory Provisions of the 1987 Administrative Code. «Phlippine Fisheries Development Authority vs.CA, etal GR. No, 169636, 187 7 SS SeeRALPROVISIONS = ) TITLE I - GENERAL PROVISIONS Itis clear, therefore, that a corporation is considered a governmen nt directly , owned or -controlled corporation only when the Governme! indirectly i of the capita stock. Applying this statutory criterion, the Court ruled in Leyson, Jr. v. fice of the Ombudsman: But these jurisprudential rules invoked by petitioner in Suppor. his claim that the CIF companies are government owned andj,, controlled corporations are incomplete without resorting 0 the definition tained in par. (13) of government owned or controlled corporation co’ ; Sec2, Introductory Provisions of the Administrative Code of 1987, ie, gy, agency organized as a stock or non-stock corporation vested ig “functions relating to public needs whether governmental or proprietary ‘nature, and owned by the government directly or indirectly through it or where applicable as in the case of soc, instrumentalities either wholly, corporations to the extent of at least fifty-one (51) percent of its capita, Stock The definition mentions three (3) requisites, namely, first, any agency organized as a stock or non-stock corporation; second, vested with junctions relating to public needs whether governmental or proprietary in nature; and, third, owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock. In the present case, all three (3) corporations comprising the CIF companies were organized as stock corporations. The UCPB-CIF owns 44.10% of the shares of LEGASPI OIL, xxx. Obviously, below 51% shares of stock in LEGASPI OIL removes this firm from the definition of a government owned or controlled corporation. xxx The Court thus concludes that the CIIF are, as found by public respondent, private corporations not within the scope of its, jurisdiction. Consequently, Radio Philippines Network, Inc. (RPN) was neither a government-owned nor a controlled corporation because of the Governments’ total share in RPNs capital stock being only 32.4%.” What is “Piercing the Veil of Corporate Fiction” or “Instrumentality’ or "Alter Ego” doctrine? : It is basic in corporation law that a corporation is a juridical entity vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The corporate veil should not and cannot be pierced unless it is clearly established that the 7 Antonio M. Carandang vs. Hon. Aniano A Desierto, G.R. No. 148076, January 12, 2011 188we mil GENERAL PROVISIONS and distinct.personality of the comoration was used to justi corporate veil ssible f the separate acto for the application of the doctrine of piercing the In Concept Builders, Inc. v. NLRC, the Court enumerated the po fe factors of identity which could justify the application © robative ee eeci Foctrine of piercing the corporate veil. These are: (1) Stock ownership by one or common ownership of both corporations; 5) identity of directors and officers; 4) The manner of keeping corporate books and @ Methods of conducting the business. records; and ‘The burden of proving the presence of any of these probative factors lies with the one alleging it. {ts of piercing the veil of corporate fiction Piercing the veil of corporate fiction may be allowed only if the following elements concur: 4, Control - not mere stock control, but complete do finances, but of policy and business practice in resP' ‘attacked, must have been such that the corporat transaction had at the time no separate mind, will or own; Element mination - not only of ect to the transaction te entity as to this existence of its defendant to commit a fraud fa statutory or other positive ntravention of plaintiff's st have been used by the the violation of \d an unjust act in col Such control mus or a wrong to perpetuate “Tegal duty, or a dishonest ant legal right; and dd control and breach of duty must have proximately caused the 3. The saic plained of injury or unjust loss com Problem: 1 Corp. imported oil products. Later, 0 Corp. was incorporated for the primary purpose of manufacturing, importing, exporting, buying, and selling in oil and gas. U Corp. and O Corp. had the same Board of Directors and that 0 Corp. was 100% owned by U Corp. of the Port of Manila formally demanded ‘The District Collector that U Corp. pay the taxes and duties on its oil imports that had arrived. rr "lngapo cy ve. SubeWaterand Sewerage Co ne GR. sy se Water and Sewerage Co, Ine, GR NO 171626 August, 2014. “ee yr ue Wate and eae nC Ne 171626 August 62014 gr Cy Sab Wate sua Deveopment Corporation vs Andrada Etc &Engnering Company, GR No. 142936, April 17, 2002, 189TITLE I - GENERAL PROVISIONS Y Subsequently, the Customs Co1 pay the amount P99,216,58 mmissioner directed that 0 representing U Corp's SPeCial duties, ve and Excise Taxes that it had failed to pay at the time of the release on 17 oil shipments that had arrived, ity On May 24,7 1959) 1 ‘corp, conveyed to Commissioner U Corps willin balance tobe | a period of 3 years to corresponding post-dated chee On July 2, 1999, the Custo for the total liability of P138,060, Also on July 8, on the ground that it taxes, ms Commissioner made a final demang 200 upon U Corp, : 1999, 0 Corp. formally Protested the assessmg ‘Was not the party liable for the assessed deficieng Can the Commissioner of Customs lawful ShrPorate fiction in order to treato Answer: Y pierce the y Corp. as the mer el of ealter ego of y Cor) Inc, the Court has are useful in the determination of whether a subsidiary is a mere j re instrumentality of the parent- corporation, viz: 1. Control, not mere majority or com, plete control, but complete domination, not only of finances but of policy and busines, practice in respect to the transaction attacked so that the corporate entity 190~ ne GENERAL PROVISIONS i 5 to this transaction had at the time no separate mind, will OF existence of its own; ¢.such contro! must have been used by the defendant to commit fraud ‘or wrong, Co perpetuate the violation ofa statutory or other positive al duty, oF dishonest and unjust actin contravention of plaintif’s legal rights; and 3, The aforesaid control and breach of duty must proxim' the injury or unjust lass complained of ately cause In applying the "instrumentality" or “alter ego” doctrine, the e concerned with reality, not form, and with how the torporation operated and the individual defendant's relationship to the P®rion. consequently, the absence of any one of the foregoing o 5 ° opments disauthorizes the piercing of the corporate veil. i Indeed, the doctrine of piercing the co rporate veil has no A js or shat ould defeat public convenience, justify wrons: protect for purposes that w fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception, or otherwise circumvent the law. It is also noteworthy that from the outset the Commissioner of Customs sought to collect the deficiency taxes and duties from U Corp., and that it was only on July % 1999 when the Commissioner of Customs sent the demand letter to both corp. and 0 Corp. That was revealing because the failure of the Commissioner of Customs to pursue the remedies against 0 Corp. from the outset manifested that its belated pursuit of 0 Corp. was only an afterthought"! courts a the corporate veil should be done with caution ‘The Supreme Court emphasized that the piercing of the veil of corporate fiction is frowned upon and can only be done if it has been clearly established that the separate and distinct personality of the corporation is ised to justify a wrong, protect fraud, or perpetrate a deception. Doctrine of piercing Hence, any ion. A court should be mindful of the milieu where it ‘ertain that the corporate fiction was misused to si fraud, of crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; i Otherwise, an injustice that was never unintended may result from an erroneous application.1? isto be applied. It must be such an extent that injustice, {Luz Commissioner of C “sLepenionefcatom ink eration Craton No. 16173, hy 2208 Fr a ant CR Ne 1s nua 13 103. 191EE y TITLE I - GENERAL PROVISIONS , Examples: The Supreme Court has pierced the corporate veil: 1. To ward off a judgment credit; ao 2, To avoid inclusion of corporate assets as part of the estate ofthe cede, 3. To escape liability arising froma debt; = 4, To perpetuate fraud and/or confuse oe issues; 5. To promote or to shield unfair objectives; an ie 6.To cover up an otherwise blatant violation of the prohibition agai, forum-shopping. tote yin these and siilr instances may the vel! Be Pierced ay) disregarded.3 | | Mm: a E Bank granted loans to H Corp. These were Spa the Agreement between E Benkand H Corp eran . : tx | Manager, C, granting H Corp. ] ee fae secured by a P9 Million-Peso i Estate Mortgage executed by G Corp. over several of its properties and a P25 Million-Peso Surety Agreement signed by C and his wife, U. ‘Thereafter, H Corp. had an outstanding obligation of P25,420,177 toE Bank. H Corp. defaulted in the payment of its loans prompting E Bank to foreclose on G Corp. Real Estate Mortgage. The mortgaged properties | were sold for P12 million during the foreclosure sale leaving an unpaid balance of P 13,420,177. For failure of H Corp. to pay the deficiency, Bank filed a Complaint for sum of money against H Corp., C, U, and G Corp, C and H Corp. did not file their respective answers and were declared in default. In her separate answer, U claimed that she was not liable to E Bank because she never executed a surety agreement in favor of E Bank. G Corp, on the other hand, also denies liability, averring thatit acted only as a third-party mortgagor and that it was a corporation separate and distinct from H Corp. 1, Can U be held liable to E Bank for the loan obligation of H Corp. asan officer and stockholder of the said corporation? 2. Can G Corp. be held liable for the obli mere alter ego of the latter? gation of H Corp. for beinga Answer: In this case, U and G Corp. are correct to argue that it was not alleged, much less proven, that U committed an act as an officer of H Corp. that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to U, E Bank did not nl demand that she be held liable forthe obligations of H Corp. because she was a corporat " Phlippine National Bank & National ugar Development Corporation vs. Andrada Electric & Engineering (Company, GR. No. 142936, April 17,2002, 192| ENERAL PROVISIONS qiTLeE officer who committed bad faith or gross negligence in the performance ofher duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she, together with her errant husband C, acted as surety of H Corp, as evidenced by her signature on the Surety Agreement which was later found by the RTC to have been forged. Considering that the only basis for holding U liable for the ayment of the loan was proven to be a falsified document, there was no sufficient justification for the RTC to have ruled that U should be held jointly and severally liable to E Bank for the unpaid loan of H Corp. At most, U could have been charged with negligence in the performance of her duties as treasurer of H Corp. by allowing the company to contract a loan despite its precarious financial position. Furthermore, if it was true, as U and G Corp. claim, that she no longer performed the functions of a treasurer, then she should have formally resigned as treasurer to isolate herself from any liability that could result from her being an officer of the corporation. Nonethele: which requires that the negligence of the officer must be so gross that it could amount to bad faith and must be established by clear and convincing evidence. Gross negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected. Indeed, there is no showing that U committed gross negligence. ‘And in the absence of any of the aforementioned requisites for making a ctor or stockholder personally liable for the obligations of a corporation, U, as a treasurer and stockholder of H Corp. cannot be made to answer for the unpaid debts of the corporation. Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and corporate officer, dire the same. While the conditions for the disregard of the juridical entity may vary, the following are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; G) The manner of keeping corporate books and records, and (4) Methods of conducting the business. 193TITLE I - GENERAL PROVISIONS y ‘These factors are unquestionably present in the case of G Con, and H Corp., as follows: 1. Both corporations are family corporations of € and his wife Uy, other incorporators and shareholders of the two corporations are y,, brother and sister of C and the sister of U. The Othe, incorporator/shareholder is the daughter of C and U. 2.H Corp. and G Corp. share the same office and practically transge, their business from the same place. 3. Cis the President and Chief Operating Officer of both corporations The promissory notes subject of this complaint are signed by him as H Corp.'s President and General Manager. The third-pq realestate mortgage of G Corp. is signed by him for G Corp. to secure the loan obligation of H Corp. with E Bank. The other third-pa real estate mortgages which G Corp. executed in favor of the other creditor banks of H Corp. are also assigned by C. 4, The assets of G Corp. and H Corp. are co-mingled. The real properties of G Corp. are mortgaged to secure H Corp.'s obligation with creditor banks. 5. When C "disappeared", G Corp. ceased to operate despite the claim that the other "officers" and stockholders are still around and may be able to continue the business of G Corp,, if it were different or distinct from H Corp. which suffered financial set back. Based on the foregoing findings, it was apparent that G Corp. was merely an adjunct of H Corp. and, as such, the legal fiction that it has a separate personality from that of H Corp. should be brushed aside as they are.undeniably, one and the same.1* SUCCESSION (Artificial Succession) The continuation of a corporation's legal status despite changes in ownership or management. 1° POWERS OF A CORPORATION A corporation has no power except those expressly conferred on it by the Corporation Code (or special laws) and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents ' Heirs of Fe Tan Uy vs. International Exchange Bank, G.R. No. 166282, February 13, 2013. ' see p.1660, Black's Law Dictionary, Tenth Edition. 194p -ENERAL PROVISIONS ite OFA CORPORATION TO OWN PROPERTY property acquired by a corporation is the property o pot the PODER of stockholders or members. and MO re note that a corporation is a/juridical entity vested with apsonaltY separate and distinct from the people comprising it. yf a corporation a legal pc. 3 classes of Corporations. - Corporations formed or organized this Code may be stock or nonstock corporations. | Stock ner c ‘ vprporacions are those which have capital stock divided into shares and authorized to distribute to the holders of such shares, dividends, oF res held. of the surplus profits on the basis of the sha! allotments of U other corporations are nonstock corporations. what isa stock corporation? | stock divided into shares and are Corporations which have capital to distribute to the holders of such shares divi jus profits on the basis of the shares held are stock corp' authorized idends or allotments jorations. ofthe surpl Examples of ‘GOCC organized as stock corporations: Congress has created through special charters several government-owned corporations organized as stock corporations. Prime gxamples are the Land Bank of the Philippines and the Development Bank of the Philippines. Other ‘government-owned corporations organized as Stock corporations under their special charters are the Philippine Crop Insurance Corporation, Philippine International Trading Corporation, and the Philippine National Bank before it was reorganized as a stock corporation under the Corporation Code." What is a non-stock corporation? ‘A non-stock corporation is one distributable as dividends to its members, truste¢ any profit which a non-stock corporation may obtain as an incidental to its operations shall, whenever necessary oF proper, be used for the furtherance ofthe purpose or purposes for which the corporation was organized. ‘The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations.” where no part of its income is .es, or officers. Provided, that Example of non-stock corporation: ‘st Luke's Medical Center, Inc. is organized as a non-stock and non- profit charitable institution." Mania International Airport Authority vs. CA, etal.G.R. No. 155650, July 20, 2006, . conn ‘86, Revised Corporation Code of the Philippines. one of Internal Revenue vs St. Lake's Medical Center, Ine, GR. No, 195908, September 26, 2012, 195y a stock or NOMS TITLE I - GENERAL PROVISIONS Is Manila International Airport Authority (MIAA) corporation? iy (IAA) ¥. Cou In Manila International Airport Auchoriey a GOCC ang. Appeals,the Court made a distinction be a instrumentality. Thus: rolled corporation must oration." MIAA is nat Organi, voeation. MIAA is not a stock corporat poral A nae eae divided into shares. MIAA has a A government-owned or cont “organized as a stock or non-s as a stock or non-s a because it hasno caj stockholders or voting shares. the Corporation Code defines a stock corporation a "ce k is divided into shares and Xxx authorized 1, | one ie to the holders of such shares aie XXX. ae has capital by, it is not divided into shares of stock. MIAA as no stockholders or vot) ‘shares. Hence, MIAA is not a stock corporation. ' MIAA is also not a non-stock corporation because it has 1 | members, Section 87 of the Corporation Code (Section 86 of the Revise; Corporation Code) defines a non-stock corporation as “one where no par of its income is distributable as dividends to its members, trustees g officers." A non-stock corporation must have members. Even if we assume | that the Government is considered as the sole member of MIAA, this will no, make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the MIA Charter mandates MIAA to remit 20% of its annual gross operating income | to the National Treasury. This prevents MIAA from qualifying as a non- | stock corporation. | xxx MIAA, a public utility, is organized to operate an international | and domestic airport for public use. Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled corporation Section 3 of capital stoc Public corporation A corporation organized for the | A corporation formed for some government of a portion of the State | private purpose, benefit or end. for the general good and welfare. Government-owned or controlled | Quasi-public corporation corporation A corporation owned by the | A private corporation which has Government directly or through its | accepted from the State the grantof "Philippine Fisheries Development Authority vs.CA, etal. G.R. No. 169836, 196) el GENERAL PROVISIONS qr inst wl tions, to the extent of corporat : . se 51% ofits capital stock, at A canta conformity with the sendatory statutory requirements s incorporation and the right of Mich to exist aS @ corporation cannot be successfully attacked or estioned by any party even in a are proceeding for that purpose py the State. _—_———~—__stoppel. Corporation by estoppel ho assume to act as a ‘All persons W! torporation Knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. mentalities either wholly, or, Taplicable as in the case of De facto corporation ‘orporation created in strict or |The due incorporation of any ood faith [ASto laws of incorporation Franchise or contract involving the performance of public duties but which is organized for profit (examples are electric, water, 4 transportation companies). oad corporation claiming in g to bea corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo | warranto proceeding. _____—+ Corporation by prescription ‘One which has exercised corporate powers for an indefinite period without interference on the part of the government. fees: Foreign corporation Domestic corporation ‘A corporation incorporated under the laws of the Philippines. ‘A corporation is formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State. [i Astowhethertheyare opento the publicornot__| Close corporation Open corporation ‘A corporation which is open to any person who may wish to become a stockholder or member thereto. ‘A close corporation is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20; (2) All the issued stock of all 197 classes shall be subject to one orTITLE I~ GENERAL PROVISIONS y EEE Eee eee arr ecco eereCHORS TS more specified restrictions >> transfer; and (3) The Corporatio, shall not list in any stock exchan, or make any public offering of an,| ofits stock any cas ‘sto relationship of management and control __>) Parent or holding corporation Subsi corporation ‘A corporation that hold stocks in | A corporation more than 50% gf another corporation for purposes of | the voting stock of which jg control. controlled directly or indirectly by grother corporation, Which thereby becomes its Parent corporation. ‘ons who compose them As to the number of pers! 0 | Corporation aggregate _| Corporation sole ‘A corporation consisting of only A corporati isting of more administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. ‘As to whether they are for religious purposes or not Ecclesiastical corporation Lay corporation ‘A corporation organized for A corporation organized for a religious purposes. _purpose other than for religion. ‘As to whether they are for charitable purposes or not Eleemosynary corporation Civil corporation ‘A corporation organized for |A corporation organized for charitable purposes. business or profit. | SEC.4. Corporations Created by Special Laws or Charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code insofar as they are applicable. General law vs. Special law A corporation is created by operation of law. It acquires a judicial personality either by special law or a general law. The general law undet which a private corporation may be formed or organized is the Corporation Code, the requirements of which must be complied with by those wishing '° incorporate. Only upon such compliance will the corporation come into being and acquire a juridical personality, thus giving rise to its right to exist andatt 198 allqiTle ]- GENERAL PROVISIONS egal entity. On the other hand, a government corporation is normally ee : by special law, referred to often as a charter.” create yporations created by special laws or charters : section 16, Article XII of the 1987 Constitution provides: eC. 16. The Congress shall not, except by general law, provide for the mation, organization, or regulation of private corporations. Government, ‘owned or controlled corporations may be created or established by specia charters in the interest of the common good and subject to the test of economic viabilite. The Constitution expressly authorizes the legislature to create government-owned or controlled corporations” through special charters only if these entities are required to meet the twin conditions of common and gconomic viability. In other words, Congress has no power to create government-owned or controlled corporations with special charters unless they are made to comply with the two conditions of common good and economic viability. The test of economic viability applies only to government- owned or controlled corporations that perform economic or commercial activities and need to compete in the market place. Being essentially ‘economic vehicles of the State for the common good — meaning for economic development purposes — these government-owned or controlled corporations with special charters are usually organized as stock corporations just like ordinary private corporations.?! SEC.S. Corporators and Incorporators, Stockholders and Members. - Corporators are those who compose a corporation, whether as stockholders or shareholders in a stock corporation or as members ina nonstock corporation. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Components of a corporation 1. Corporators Those who compose a corporation, whether as stockholders or as members. 2. Incorporators ee (has Dsopmen corporation Employes Union (DCE SENTRO NG DEMOKRATIKONG MANGCAGAWA {RM) "HON PURA FERRER CALLETA and BLISS DEVELOPMENT CORPORATION, GR. No S008? September 30, “ania International Airport Authority vs. CA, etalG.R.No, 155650, uly 20,2006 199 fe -_~FITLE | - EI GENERAL PROVISIONS he articles gy The stocl Stockholders or members mentioned in © poration ang ration ‘ o who are si nee ee formingand ‘composing the CO’ te Signatories thereof. ao (shareholders) fe owners ; 4. Members of shares of stock in a stoc’ The corporat kK 5. ne corporators of a non-stocl Board of Directors or Board of Trustees oe bk ‘The board of directors is the governing corporation, while the Board of Trustees is the BV non-stock corporation. 6. Corporate Officers The president, who shall may not be a director, a secretary ote ee the Philippines, and such other officers = be F by-laws. If the corporation is vested with public in' shall also elect a compliance officer. 7. Subscribers : 1 greed to take and pay for Or} Persons who have at es of a corporation formed or to be formed. incorpo) 3.81 x corporation. corporation. jody in a Stock ning body in a i ho maj director, a treasurer Wi0 TAY or A hall bea resident and citizen of y be provided for in the terest, the board ginal, unissued shar 8. Underwriter ‘A person who declared best effort basis the distril kind by another company. jally an investment banker, who A person or entity, espec guarantees the sale of newly issued securities by purchasing all or part of the shares for resale to the public. 7 9. Promoter Is a person who brings ab formation and organization of a corporation by: 1. Bringing together the incorporators or the persons interested in the enterprise; | 2. Procuring subscriptions or capital for the corporation; and 3, Setting in motion the machinery which leads to the incorporation of the corporation itself. | A founder or organizer of a corporation or business venture; one who takes the entrepreneurial initiative in funding or organizing? business enterprise.?8 on a firm commitment and/or f securities of any guarantees bution and sale o! out or cause to bring about the 28 p. 1759 Black’ Law Dictionary, Tenth Edition see p. 1408, Black's Law Dictionary, Tenth Edition. 200ee VISIONS. For the purpose of form Revised Corporation Code, oe @ new domestic (15), may organize themselves anq Pei Persons, bu Corporation, corporation under the it not more than fifteen Only a One Person ¢ ‘orporation (0 7 wa esa director Accordingly (° A ou havea single stockholder, correspi arate guidelines onthe estchie he GranoRe ene iment of an OPC. Note: Each incorporator of Q stock coy t least one (1 “< Orporation must i to, al e C ) share of the capital stock, Each ini ‘own, or bea subscriber corporation must be a member ofthe compen ct MeoPOTAtar of nonstack The incorporators may by pensonsls SECregistered purenmnPOsed of any combination of natural i 7 partnership/s — SEC-regis ic sormanation/s or association/s as wellas foreign corponionns | Incorporators who are natural sgn the Atles of morporanon a Persons must be fg ae and must Note: Each individual signing the Articles of Incorporation/Bylaws must indicate the capacity upon which he/she is affixing his/her signature thereto. (ie. Incorporator or Representative of X¥Z Corp.) An individual designated to sign the Articles of Incorporation/Bylaws on behalf of an must also indicate the corporate or partnership name of the entity being represented and for whom he/she is executing the Articles of Incorporation/Bylaws.2+ SEC. 6. Classification of Shares. - The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock. The shares in stock corporations may be divided into classes or series of shares, or both. No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there shall always be a class or series of shares with complete voting rights. ee “SEC Memorandum Circular (MC) No. 16, series of 2019. qs 201TITLE I - GENERAL ee ee ti on ac Gheene nonvoting shares shal nevertheless be entitled to, {a) Amendment of the articles of incorporation; (b) Adoption and amendment of bylaws; (c) Sale, lease, exchange, mortgage, pledge, or other dispos, all or substantially all of the corporate property; ‘, (a) Incurring, creating, or increasing bonded indebtedness; (e) Increase or decrease of authorized capital stock: | | ( Merger or consolidation of the corporation with anoty, corporation or other corporations; {g) Investment of corporate funds in another Corporation ,, business in accordance with this Code; and Dissolution of the corporation. fry Except as provided in vote required under this C shall be deemed to refer onl! the immediately preceding paragraph, 4, ode to approve a particular corporate ag ly to stocks with voting rights. The shares or series of shares may or may not have a par Value Provided, That banks, trust, insurance, and preneed companies, pubic utilities, building and loan associations, and other corporation; authorized to obtain or access funds from the public, whether public listed or not, shall not be permitted to issue no-par value shares of stoc, Preferred shares of stock issued by a corporation may be giver preference in the distribution of dividends and in the distribution « corporate assets in case of liquidation, or such other preferences Provided, That preferred shares of stock may be issued only witha stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferrel shares of stock or any series thereof: Provided further, That such term and conditions shall be effective upon filing of a certificate thereof wit the Securities and Exchange Commission, hereinafter referred to asthe “Commission”. ar value shall be deeme! | Shares of capital stock issued without p; f such shares shall not b fully paid and nonassessable and the holder o' liable to the corporation or to its creditors in respect thereto: Provid ‘That no-par value shares must be issued for a consideration of at leat Five pesos (P5.00) per share: Provided further, That the enti ts no-par value shaft consideration received by the corporation for i . shall be treated as capital and shall not be available for distribution” dividends. 202i ENERAL PROVISIONS nll f corporation may further classify its shares for the purpose ing compliance with constitutional or legal requirements. est ine of equality of shares Fach share shalll be equal in all respects (rights and liabilities) to other share except as otherwise provided in the articles of a gration and stated in the certificate of stock. inca! po! may classify shares? 1, Incorporators Itis to be determined by the incorporators by stating it in their articles of incorporation which will be filed with the Securities and Exchange Commission. Board of Directors and stockholders 7 The original classification of shares made by the incorporators which was stated in the articles of incorporation can be amended by a majority vote of the board of directors and the vote or written assent ofthe stockholders representing at least 2/3 of the outstanding capital stock. hat are voting shares? Shares with a right to vote. There shall always be a class or series of shares which have complete voting rights. The Right to Vote in STOCK Corporations The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or considered in determining whether a quorum is Present in a stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. is | Under Section 6 of the Corporation Code (Also, Section 6, Revised Corporation Code), each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquentunder Section 67 of the Code (Now Section 66, Revised Corporation Code). Neither the stockholders nor th shares that have never passed to the oy ' was, have again been purchased hig t i be taken into consideration in sha of a given proportion of the st es that have Passed from the coi ‘avs Paul Syeip and Merrtto Lim, G.R.No. 153468, August 17,2006, , 203 e corporation can vote or represent wnership of stockholders; or, having by the corporation. These shares are determining majorities. When the law tock, it must be construed to mean the poration, and that may be voted 25eae ee TITLE I - GENERAL PROVISIONS ‘The Right to Vote in NON-STOCK corporations ignts attach t In non-stock corporations, he voting rere Taw and th membership. to one vote Unless by-laws of the corporation. Each member sh ation or by. so limited, broadened, oF denied in t oF the quorum fOr Stock i nin} laws, We hold that when the Pr ciple for deep id ans ‘ons is applied by @ alogy to nons 101 26 all be entitle aricles of incorPO® Proviens tockholders of M CPP: with the Menge ae jatter owning Class "a" shares. tion. It ws organized sometime in No. 1459, the old ng class "B"s VII of M Corp's former holdit Corp. is 3s rr september 1977- ‘ ‘d effect. Article in force an the Securities and Corporation Law was still i cai TPO articles of Incorporation as app s ee ‘Commission (SEC) on ctober 26, 1977, reads as follows: ‘SEVENTH. xxx Only holders of Class A shares can have the right to vote and the right to be elected a5 directors or as corporate officers. y 31, 1981, Article VI of the Articles of Incorporation of On Jul ead thus: Corp. was amended, tor have the right to vote and the s corporate officers. XXX xxx Only holders of Class A shares right to be elected as directors or 4 On September 9, 1992, Article VII was again amended to provide as follows: only holders of Class Hx "4" shares have the right to vote and the right to be elected as | | directors or as corporate officers. on February 9, 2001, the shareholders of M Corp. held thei | annual stockholders’ meeting and election of directors. During the course of the proceedings, X, citing ‘Article VII, as amended, declared over the objections of herein A, B, and C, that no Class "B" shareholder 2 | qualified to run or be voted upon as a director. In the past, M Corp. bad | seen holders of Class "B” shares voted for an fthe | d serve as members 0! corporate board and some Class share owners were in fact nominat fo eee ™ Paul Lee Tan, etal. vs “Tan, etal vs. Paul Sycip and Merritto Lim, G.R. No, 153468, August 17, 2006. 204GENERAL PROVISIONS net hat ce thal on as board members. Nonetheless, X went on to epee in ding Class "A" shares were the winners of dle VII was ming that Artic ; d. A, B, and C protested, claiming ftheir right de (Batas for ele dates holi the orate boar the COMM" id for depriving them, as Class "B" shareholders, © null ae ‘and to be voted upon, in violation of the Corporation Cot : vans ‘Big. 68), as amended. May the holders of Class "B" shares of M Corp. be deprived of the right to vote and be voted for as directors in M Corp? ‘Answer nen Article VII of the Articles of Incorpora din 1992, the phrase “ L 5 inserted in the provision governing the grant of voting powers i 's "A" shareholders. This particular amendment is relevant for law providing for exceptions to the exclusive grant of voting jghts to Class "A" stockholders. Which law was the amendment eee to? The determination of which law to apply is necessary. There are a jaws being cited and relied upon by the parties in this case. In ie instance, the law in force at the time of the 1992 amendment was the corporation Code (B.P. Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed by then. We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At the time of the incorporation of M Corp. in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. Big. 68, retained the same grant of right of classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were explicitly provided for, such that “no share may be n of M Corp. was amende clas speaks of ak Tights.” Section 6 of the Corporation Code (Also Section 6, Revised Corporation Code) being deemed written into Article VII of the Articles of Incorporation of M Corp., it necessarily follows that unless Class "B" shares of M Corp. stocks are clearly categorized to be "preferred" or “redeemable” shares, the holders of said Class "B" shares may not be deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that Class "B" shares were categorized as either "preferred" or "redeemable" shares, conn Le ofthe rights of a stockholder is the right to participate in the =o and management of the corporation that is exercised through his 'e. The right to vote is a right inherent in and incidental to the 205 hnTITLE I- GENERAL PROVISIONS ownership of corporate stoc stockholder cannot be deprive right be essentially impaired, corporation, without his consent, through ame by-laws.27 d of the right to vote his stock nor may y, either by the legislature or by th nding the charter, or th, What are non-voting shares? Shares without a right to vote. : The law provides that shares classified and issued as, preferred or redeemable shares may be deprived of voting right What is a common stock? ‘A class of stock entitling the holder to vote on corporate matters, ty receive dividends after other claims and dividends have been paid (especially to preferred shareholders), and to share in assets upon liquidation. Common, stock is often called as capital stock, if it is the corporation’s only class of stock outstanding. Also termed ordinary shares’® Is one which has no preference and entitles the shareholder to a pro rata division of the profits, if any. The common stock shareholders have complete voting rights. What is a preferred stock? ‘A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends.” Preferences granted to preferred stockholders, moreover, do not give them alien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. What are redeemable shares? Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken ” see Cecilia Castillo, etal. vs. Angeles Balinghasay, et.al ober 18, 2004, ‘epee ce ay es Balinghasay, tal, No 150976, October 18, 2 wublic Planters Bank vs. Hon. Enrique A. Agana, Sr, etal, G.R. No. 51765, March 3, 19997. 206 , and as such is a property right, p,, |I- GENERAL PROVISIONS qin less of the tion, f the corpora’ in the articles of ted in the corporation upon the expiration of a fixed period, regard! \ up bY ae of unrestricted retained earnings in the books o! 4 existent such other terms and conditions as may be stated ‘ anduP™ ation, which terms and conditions must also be sta t inate of stock representing said shares. cl instane' es when holders of non-voting shares are allowed to vote Amendment of the articles of incorporation; adoption and amendment of by-laws; ‘ Hea . Je, lease, exchange, mortgage, pledge or other disposition of al "substantially all of the corporate property; s,tncurring, creating or increasing bonded indebtedness; 5, Increase OF decrease of authorized capital stock; or 6, Merger or consolidation of the corporation with another corporation other corporations; i z. Investment of corporate funds in another corporation or business I" accordance with this Code; and 8. Dissolution of the corporation. Shares classified both as voting and non-voting shares are entitled to vote in eight instances enumerated above. What are par value shares? Shares with a value fixed in the articles of incorporation and the certificate of stock. Whatare no par value shares? Shares with no par value. Note: Stocks shall not be issued for a consideration less than the par or issued price thereof. Limitations on no par value shares 1 The no-par value shares must be issued for a consideration of at least P5.00 per share; 2.Itis deemed fully paid and non-assessable; 3. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; 4. Itcannot be issued as preferred shares; 5.It cannot be issued by banks, trust, insurance, and preneed companies, Public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public whether publicly listed or not; and 207 aTITLE | - GENERAL PROVISIONS a ’ 6. The arti i i i articles of incorporation must state the fact that it is issued no p, value shares as well as the number of said shares. al What is promotion/al share? Ashare issued to promoters or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company. What is share in escrow? ‘A share subject to an agreement by virtue of which the share is | deposited by the grantor or his agent with a third person to be kept by the depositary until the performance of certain condition or the happening of | a certain event contained in the agreement. What is fractional share? ‘A share that is less than one full share. What is over-issued stock? It is a stock or share issued in excess of the authorized capital stock. Such issuance is null and void. What is convertible share? A share that is convertible by the stockholder from one class to another class at a certain price and within a certain period. SEC. 7. Founders’ Shares. - Founders’ shares may be given certain rights and privileges not enjoyed by the owners of other stocks. Where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years from the date of incorporation: Provided, That such exclusive right shall not be allowed if its exercise will violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law’; Republic Act No. 7042, otherwise known as the “Foreign Investments Act of 1991”; and other pertinent laws. What are founders’ shares? ‘hin the articles of incorporation which Shares classified as sucl may be given certain rights and privileges (eg. dividend payments) not enjoyed by the owners of other stocks. Limitation on founders’ shares The exclusive right to vote and directors, if granted, must be for a limited pet the date of incorporation. be voted for in the election of riod not to exceed 5 years from 208|- GENERAL PROVISIONS int pedeemable Shares. - Redeemable shares may be issued o a s6¢ 5 \jon when expressly provided in the articles of incorpor™ cot a shares which may be purchased by the corporation ete hey 4” g such shares upon the expiration of a fixed period, reBare polde’ ‘xistence of unrestricted retained earnings in the books of ue of tte on, and upon such other terms and conditions stated in a CT of incorporation and the certificate of stock representing the ants ‘subject to rules and regulations issued by the Commission. spares redeemable shares? : what ar” Mleemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. redemption by the corporation of its stock is, in a sense, ‘The present Code allows redemption of shares ? i ings on the books of the corporation. This is anew in effect qualifies the general rule that the corporation Minot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, thi rovision which Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.3° Limitations on redeemable shares ‘Lit must be expressly provided in the articles of incorporation; 2.The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificate of stock; 3.Itmay be deprived of voting rights in the articles of incorporation; and 4.Redemption cannot be made if it will cause insolvency of the corporation. What is retained earnings? A corporation's accumulated income after dividends have been distributed. Also termed earned surplus; undistributed profit." kinds of redeemable shares 1. Compulsory The corporation is required to redeem the shares. 2. Optional The corporation is not mandated to redeem the shares. De ta a "aie Pantes Banks Hon. Enrique A Agana, Sr, eal, GR. No 51765, March 3, 1997, 821 Bac’ Law Dictionary, Tenth Eton 209 aTr TLE 1 ~ GENERAL PROVISIONS Problem: i ¥ Corp. secured a loan from X Bank in the amount of As part ofthe proceeds ofthe loan, preferred shares of stocks w to X Bank, through its officers Band C. In other words, inste; the legal tender totaling to the full amount of the loan which X Bank lent such amount partially in the form of money and Partially j, the form of tock certificates exch for 400 shares with par value of per share, of for P4,000 each ora total of P8,000, Said stock erties e! Were in the name of B and C, who subsequently, es in favor of B. Beever certicates of stock bear the folie ‘The Preferred Stock shall have the followi P120,09 ere issy, ad of giyi, ing terms and conditions, faa ng rights, qualifications, and limitations, to wit: BMIS, preferences, 1. Of the right to receive a quarterly dividend of 1 , participating. of 1%, cumulative ang 200 XX 2 2, That such preferred shares may be redeemed, by thi drawing lots, at any time after 2 arid stem of Years from the date of issue at the Afterwards, Y Corp. proceeded against X Bank and filed a Complaint anchored on Y Corp.'s alleged rights to have X Bank redeem the same under the terms and conditions of the stock certificates. X Bank argues that it cannot be compelled to redeem the preferred shares issued to Y Corp. Answer: The redemption therefore is clearly the type known as “optional”. Thus, exceptas otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. The redemption of said shares cannot be allowed. As pointed out by X Bank, the Central Bank made a finding that said X Bank has been suffering from chronic reserve deficiency, and that such finding resulted in a directive to X Bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors, Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor a obviously meant to preserve the status quo, and to prevent the aaa ruin of a banking institution that would have resulted in advers 210 0, | is P120,0q¢. | however, endorseq his_ GENERAL PROVISIONS gI-6 qu a \e ercussions, not only to its depositors and creditors, but also to th fonking industry as a whole.22 an redeemable shares be reissued? Redeemable shares, once redeemed are retired unless reissuance isexpressy allowed in the articles of incorporation js Trust Fund Doctrine? / what e Trust Fund Doctrine, first enunciated by this Court in the 1923 eof Philippine Trust Co. vs. Rivera, provides that subscriptions to the capita x ofa corporation constitute stot for the This doctrine is the underlying principle in the procedure for © stribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: Q amendment of the Articles of Incorporation to reduce the authorized capital hase of redeemable shares by the corporation, regardless of the stock, (2) purchase 0 : i 1 existence of unrestricted retained earnings, and (3) dissolution and eventual figuidation of the corporation. dis ‘XXX The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the courta quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the "corporate peace" laudably hoped for bythe court will remain nothing but a dream because this time, it will be the creditors’ turn to engage in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.33 SEC. 9, Treasury Shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. What are treasury shares? Treasury shares are shares of stock which have been issued and Jilly paid for, but subsequently reacquired by the issuing corporation by Purchase, redemption, donation or through some other lawful means. ee Republic "lc Panes Bnkvs, Hon Enrgue Aga, Sr. tal GR No, S176, March 2197 moet Dard Thea ok No 4086 ap 2008, 211 iaTITLE I - GENERAL PROVISIONS Rights that are denied to the treasury shares 1. Voting rights 2. Right to dividends Note: Treasury shares sold below par value are not watered stock because watered stock contemplates an original issuance of shares. What are watered stocks? Stocks issued for a consideration less th thereof or in any other form other than cash value value. an the par or issued price id in excess of its fair Note: Watered stock refers only to original issue of shares but not to q +h shares by the corporation, Thus, treasury shares subsequent transfer of sucl may be sold for less than their par or issued value for they have already been issued and paid for. 212