III. CORPORATION LAW (Provisions of B.P. Blg.

68, as amended by R.A. No.

11232)

A. General principles 

a) What is a corporation?

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incidental to its existence. (Section 2, RCC)

b) Explain the attribute that the corporation is an artificial being.

The Supreme Court pronounced in the landmark case of Stonehill v. Diokno that a
corporation may invoke the right against unreasonable search and seizure. However, it
cannot invoke the right against self-incrimination. (BASECO v. PCGG, G.R. No. 75885, En
Banc, May 27,1987)

A corporation may also sue for moral damages. While it cannot experience wounded
feelings, anxiety, and sleepless nights, which are the causes of moral damages under the
Civil Code of the Philippines, it may acquire goodwill or reputation of its own, which, if
besmirched or tarnished, entitles the corporation to moral damages. (Filipinas Broadcasting
Network v. Ago Medical and Educational Center, G.R. No. 141994, January 17, 2005)

c) Explain the attribute that it has the right of succession.

The right of succession of a corporation does not connote that a corporation is

immortal. It simply means that it had the power to exist continuously, either by opting to
have perpetual existence or to extend its corporate life if a fixed term is specified in its
articles of incorporation. Its capacity for continued existence is not affected by any changes
in the composition of corporators.

d) Explain the attribute that it has the powers, attributes and properties expressly
authorized by law or incidental to its existence.

This means that a corporation can only exercise powers conferred upon it by law, its
articles of incorporation, those implied from the conferred powers, or incidental to its
existence. Any act of the corporation contrary to or outside these powers is ultra vires. The
test is whether the corporate act or transaction is related to or in furtherance of the purposes
of the corporation. For instance, whether or not a corporation may acquire property will not
only be tested by the lawfulness of the consideration but whether such property is necessary
to achieve the purpose of the corporation. Thus, a corporation engaged in mining cannot
acquire properties for urban development. A corporation organized as a lending investor
cannot engage in pawnbroking. (Heirs of Antonio Pael v. Court of Appeals, G.R. No.
133547, December 7,2001
1. Nationality of corporations 

a. Control Test 

1) Control test - It is a mode of determining the nationality of a corporation engaged in

nationalized areas of activities, provided for under the Constitution and other applicable
laws, where corporate shareholders with foreign shareholdings are present, by
ascertaining the nationality of the controlling stockholder of the corporation. If the
capital of the investing Corporation is at least 60% owned by Filipinos, then the entire
shareholdings of the investing Corporation shall be recorded as Filipino-owned thus
making both the investing and investee – corporations Philippine national.

2) What is the prevailing mode of determining the nationality of corporations engaged in

nationalized activities?

The “control test” is the prevailing mode of determining the nationality of

corporations engaged in nationalized activities. However, when in the mind of the Court
there is doubt as to where beneficial ownership and control reside, based on the attendant
facts and circumstances of the case, then it may apply the “grandfather rule.”

In fact, the Control Test can be, as it has been, applied jointly with the Grandfather
Rule to determine the observance of foreign ownership restriction in nationalized economic
activities. The Control Test and the Grandfather Rule are not, as it were, incompatible
ownership-determinant methods that can only be applied alternative to each other. Rather,
these methods can, if appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly nationalized activities.
(Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., G.R.
No. 195580, April 21, 2014)

The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first complied with that the Grandfather Rule may
be applied. Put in another manner, if the subject corporation’s Filipino equity falls below the
threshold of 60%, the corporation is immediately considered foreign-owned, in which case,
the need to resort to the Grandfather Rule disappears.

The Supreme Court stressed, however, that when the 60% Filipino ownership, is
never in doubt, the control test prevails. In the relevant case, it was held that the petition is
severely wanting in facts and circumstances to raise legitimate challenges to the joint
venture company’s 60-40 Filipino-Foreigner ownership. The application of the control test
will already yield the result that the company is a Philippine national. The grandfather rule
no longer applies. (Leo Y. Querubin v. Commission on Elections, el al., G.R. No. 218787,
December 8, 2015)

b. Grandfather rule
 1) Grandfather rule — This is “the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other applicable laws, is accurately computed,
in cases where corporate shareholders with foreign shareholdings are present, by
attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder.” Thus, to arrive at the actual
Filipino ownership and control in a corporation, both the direct and indirect
shareholdings in the corporation are determined. In the case of a multi-tiered
corporation, the stock attribution rule must be allowed to run continuously along the
chain of ownership until it finally reaches the individual stockholders.

The purpose of this rule is to trace the nationality of the stockholder of investor
corporations to ascertain the nationality of the corporation where the investment is
made.

2) When is the grandfather rule applied?

The grandfather rule is applied in the following cases:

i. Under the Grandfather Rule Proper, if the percentage of Filipino ownership in

the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality.

ii. Under the Strict Rule or Grandfather Rule Proper, the combined totals in the
Investing Corporation and the Investee Corporation, when traced (i.e.,
“grandfathered”) to determine the total percentage of Filipino ownership, show
less than 60% requirement.

iii. If based on records, Filipinos own at least 60% of the investing corporation but
there is doubt as to where control and beneficial ownership in the corporation
really reside.

2. Doctrine of separate juridical personality 

3. Doctrine of piercing the corporate veil 

B. De facto corporations versus corporations by estoppel

a) What is a de facto corporation?

A de facto corporation is one that is organized with colorable compliance with the
requirements of incorporation under the law and allowed to exist and exercise the powers of
a corporation until its corporate existence is assailed by the State in a quo warranto
proceeding.

b) What are the elements of a de facto corporation?

The requisites of a de facto corporation are as follows:

i. Existence of a valid law under which it may be incorporated;
ii. Attempt in good faith to incorporate; and
iii. Actual use or exercise in good faith of corporate powers.

As such, if the law under which it is incorporated is declared

unconstitutional, there is neither de jure nor de facto existence.

For instance, if Congress enacts a law to create a private corporation,

such corporation cannot be considered de facto because the law creating it is
unconstitutional.188 Congress can enact a law to create a corporation only if it is
owned and controlled by the government. (Feliciano v. Commission on Audit,
G.R. No. 147402, January 14, 2004)

With regard to the second element, attempt in good faith to incorporate, at

the very least, means obtaining a certificate of incorporation from the SEC. The
execution of the articles of incorporation and adoption of bylaws, per se, are not
enough to warrant de facto existence. In other words, there is no bona fide
attempt to incorporate until the SEC at the very least issues the certificate of
incorporation.

The filing of articles of incorporation and the issuance of the certificate of

incorporation are essential for the existence of a de facto corporation. In fine, it
is the act of registration with the SEC through the issuance of a certificate of
incorporation that marks the beginning of an entity’s corporate existence.
(Missionary Sisters of Our Lady of Fatima v. Alzona, et al., G.R. No. 224307,
August 6, 2018)
c) Are the stockholders of a de facto corporation liable as general partners?
 No, stockholders of a de facto corporation are liable in the same way as stockholders
of a de jure corporation. They are liable only to the extent of their subscription to the
corporation. Those liable as general partners are persons who assume themselves to be a
corporation when they have no legal authority to do so.191

d) Cite examples of defects in the formation of a corporation which give rise to a de facto
existence.

i. The treasurer’s affidavit on the amount of subscription and payment is

false.
ii. The required percentage of Filipino ownership in corporations engaged
in nationalized activities is not complied with.
iii. Natural person incorporators misrepresented their age.

e) What is a corporation by estoppel?

A corporation by estoppel is one that exists when two or more persons assume to act
as a corporation knowing it to be without authority to do so.

f) What are the liabilities under the doctrine of corporation by estoppel?

All persons who assume to act as a corporation 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: Provided, however, that when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such cannot resist performance
thereof on the ground that there was in fact no corporation. (Section 20, RCC)

Thus, the persons who illegally recruited workers for overseas employment by
representing themselves to be officers of a corporation which they knew had not been
incorporated are liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof. (People v. Garcia, G.R. No. 117010, April 18, 1997)

g) Are all those who subscribed for the stock of a proposed corporation which was never
legally formed liable as general partners?

The doctrine of corporation by estoppel does not apply against a person who takes no
part except to subscribe for stock in the proposed corporation which was never legally
formed, and hence, cannot be liable as a partner of those who engaged in business under the
name of the pretended corporation. (Pioneer Insurance and Surety Corporation v. Court of
Appeals, G.R. No. 84197, July 28, 1989). However, a passive subscriber who obtained
benefit from a contract entered into by others with whom he previously had an existing
relationship is deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel. (Lim Tong v. Philippine Fishing Gear Industries, G.R.
No. 136448, November 3, 1999)
h) May a corporation by estoppel be sued?

In the case of Macasaet v. Francisco,187 a newspaper which the plaintiff may have
believed as registered with the SEC was sued together with its publisher and editor. The
lawyer of the newspaper company filed a motion to drop such party-defendant because it
was not registered with the SEC and therefore, has no legal personality to be sued. The court
denied the motion. When the case reached the Supreme Court, it was held that RTC did not
abuse its discretion by denying its motion to drop the ostensible corporation as a party
defendant.

The Supreme court said that a corporation by estoppel may be impleaded as a party
defendant considering that it possesses the attributes of a juridical person, otherwise, it
cannot be held liable for damages and injuries it may inflict to other persons.

i) Who cannot invoke the doctrine of corporation by estoppel?

When the petitioner is not trying to escape liability from the contract but father the
one claiming from the contract, the doctrine of corporation by estoppel is not applicable.
This doctrine applies to a third party only when he tries to escape liability on a contract
from which he has benefited on the irrelevant ground of defective incorporation.
(International Express Travel & Tour Services, Inc. v. Hon. Court of Appeals, Henri Kahn,
Philippine Football Federation, G.R. No. 119002, October 19, 2000)

In other words, the doctrine can only be invoked by the aggrieved party who relied
on the representations by others that they are legally formed as a corporation. It cannot be
invoked by the one who benefited from the transaction.

In another case though, it was held that the doctrine of corporation by estoppel is
founded on principles of equity and is designed to prevent injustice and unfairness. It applies
when a nonexistent corporation enters into contracts or dealings with third persons. In
which case, the person who has contracted or otherwise dealt with the non-existent
corporation is estopped to deny the latter’s legal existence in any action leading out of or
involving such contract or dealing. While the doctrine is generally applied to protect the
sanctity of dealings with the public, nothing prevents its application in the reverse, in fact,
the very wording of the law which sets forth the doctrine of corporation by estoppel permits
such interpretation. Such that a person who has assumed an obligation in favor of a non-
existent corporation, having transacted with the latter as if it was duly incorporated, is
prevented from denying the existence of the latter to avoid the enforcement of the contract. In
this case, while the donation was accepted at the time the done was not yet incorporated, the
subsequent incorporation of the done corporation and its affirmation of the recipient’s
authority to accept on its behalf cured whatever defect that may have attended the
acceptance of the donation, applying the doctrine of corporation by estoppel under the
Corporation Code. (Missionary Sisters of Our Lady of Fatima v. Alzona, et al., G.R. No.
224307, August 6, 2018)
 The Supreme Court likewise stated that the donee could not be considered a de facto
corporation because, at the time of the donation, it was not registered with the SEC. The
filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.

C. Corporate Powers 

1) What is the theory of general capacity?

Under the theory of general capacity, a corporation holds such powers which are not
prohibited or withheld from it by general laws.

The general powers of a corporation are enumerated under Section 35 of the RCC,
to wit-.

a) To sue and be sued in its corporate name;

b) To have perpetual existence unless the certificate of incorporation provides
otherwise;
c) To adopt and use a corporate seal;
d) To amend its articles of incorporation in accordance with the provisions of the
RCC;
e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or
repeal the same in accordance with the RCC;
f) In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of the RCC; and to admit
members to the corporation if it be a nonstock corporation;
g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage,
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
h) To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;
i) To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, that
no foreign corporation shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
j) To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
k) To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.

2) What is the Theory of Specific Capacity?

Under the Theory of Specific Capacity, a corporation cannot exercise powers except
those expressly or impliedly given to it.
 The specific powers of a corporation can be found in Sections 36 to 43 of the RCC.

Theory of specific capacity — No corporation shall possess or exercise any corporate

powers except
a) Those conferred by law, its AOI,
b) Those implied from express powers and
c) Those as are necessary or incidental to the exercise of the powers so conferred.

The corporation’s capacity is limited to such express, implied and incidental

powers.

3) When may the power to extend or shorten the corporate term be exercised?

This power to extend the corporate term may be exercised in case the corporation
has opted to have a fixed term, as specified in its articles of incorporation, in lieu of
perpetual existence, and under the conditions specified by the RCC.

On the other hand, the corporate term may be shortened for corporations with a
specified term in the articles of incorporation or even those with perpetual existence.

When approved by a majority vote of the board of directors or trustees, and ratified
at a meeting by the stockholders or members representing at least two-thirds (2/3) of the
OCS or of its members.

In case of extension of corporate term, a dissenting stockholder may exercise the

right of appraisal.

1. How powers are exercised 

a. Ultra vires doctrine 

b. Trust fund doctrine 

D. Board of directors and trustees 

1. Basic principles 

a. Doctrine of centralized management 

b. Business judgment rule 

2. Tenure and qualifications of directors or trustees

3. Election and removal of directors or trustees 

4. Duties, responsibilities and liabilities for unlawful acts

E. Stockholders and members 

1. Rights and obligations of stockholders and members

a. Doctrine of equality of shares 

2. Participation in management 
a. Proxy 

b. Voting trust 

c. Cases when stockholders’ action is required 

i. By a majority vote 

ii. By a two-thirds vote 

iii. By cumulative voting 

3. Proprietary rights 

a. Right to dividends 

b. Right to inspect 

c. Pre-emptive right 

d. Right of first refusal 

4. Remedial rights 

5. Intra-corporate disputes (individual vs. representative vs.  derivative suits) 

F. Capital structure  

1. Shares of stock 

a. Nature of shares of stock 

b. Consideration for shares of stock 

c. Watered stock 

d. Situs of the shares of stock 

e. Classes of shares of stock 

2. Certificate of stock 

a. Nature of the certificate 

b. Uncertificated shares 

c. Negotiability; requirements for valid transfer of  stocks 

d. Issuance 

e. Lost or destroyed certificates 

3. Disposition and encumbrance of shares  

a. Sale of shares 

b. Allowable restrictions on the sale of shares

c. Requisites of a valid transfer 

d. Involuntary dealings  

G. Dissolution and liquidation 

1. Modes of dissolution 

a. Voluntary and involuntary dissolution 

2. Methods of liquidation 

H. Other corporations 

1. Close corporations 

2. Non-stock corporations 
3. Foreign corporations 

a. What constitutes “doing business” 

b. Necessity of a license to do business 

c. Requisites for issuance of a license 

d. Resident agent 
e. Personality to sue and suability 

4. One-person corporations 

I. Mergers and consolidations 

1. Concept 

2. Effects and limitations