UNIVERITY OF SANTO TOMAS-LEGAZPI

COLLEGE OF LAW

CORPORATION LAW
1ST Semester SY 2021-2022

ATTY. MARYLOU DUKA-CASTILLO

Professor

I. COURSE DESCRIPTION

A study about private corporations contemplated under the Revised Corporation Code of the
Philippines or Republic Act. No. 11232

II. CREDIT UNITS : 4

III. Time Allotment : 72 hours synchonous and asynchronous sessions

IV. General Objectives :

At the end of the course, the students are expected to :

1. Know the incorporation, organization and regulation of a private corporation, both stock and
nonstock, including religious, educational, foreign and one person corporations ;

2. Learn how to actually incorporate a corporation with the Securities and Exchange Commission
through its online services under the Electronic Simplified Processing of Application for
Registration of Company ( SEC eSPARC);

3. Be informed of the powers, duties, responsibilities and liabilities of Directors, Trustees and officers
of the corporation, rights and liabilities of the stockholders or members, and conditions under
which the corporations may transact business ;

4. Be knowledgable about acquisitions and mergers, consolidation, transfer or movement of shares

and other corporate transactions ;

5. Know about Dissolution, liquidation and winding up of corporate existence

6. Know the penalties for violations of the provisions of the RCC.

V. COURSE REQUIREMENTS
Online discussion, report and recitation 20%
Quizzes, Pre-lims, Mid-term and Final Examinations 60%
Project : Formulation of Article of Incorporation
and By-laws and actual filing with the S.E.C. 20%
100%
VI. COURSE METHODOLOGIES

1. Lectures via zoom

2. Online reporting
3. Case assignments
4. Webinars or lectures from guest lecturers

VII. REFERENCES

1) VILLANUEVA, CESAR L. and VILLANUEVA-TIANSAY, TERESA S. PHILIPPINE CORPORATION LAW

2018
2) VILLANUEVA, CESAR L, COMMENTARIES ON THE REVISED CORPORATION CODE, 2019
3) JAVIER, RUFINO SAN BUENAVETURA, THE REVISED CORPORATION CODE OF THEPHILIPPINES
ANNOTATED, 2019
4) AQUINO, TIMOTEO B. and AQUINO, MARIA MARGARETBERNADETTE A. REVISED CORPORATION
CODE OF THE PHILIPPINES, A Short Introduction 2019 ;
5) AQUINO, TIMOTEO B. PHILIPPINE CORPORATE LAW COMPENDIUM (2014)
NOTE : 1. RECORDING, TAKING PICTURES OR SCREENSHOTS ARE NOT ALLOWED
2. FB -GC shall record all attendance in the synchronous sessions
3. All submissions shall be through my email : maloucastle55@gmail.com

VIII. COURSE OUTLINE

TITLE I

1. Sec. 2 Corporation defined.

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,

2. FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2DEFINITION:

a. An Artificial Being:“A corporation is granted a juridical capacity to own properties, to contract and to
enter into legal relationships.”

b. Creature of the Law: “Each corporation is created by operation of law pursuant to a covenant to
pursue a business enterprise.”

c. With aRight of Succession: “A corporation has a juridical personality separate and distinct from its
stockholder or members, officers and directors or trustees.”
d. Creature of Limited Powers: “A corporation has only such powers, attributes and properties as are
expressly authorized by law or incidental to its existence.”

The Theory of Concession

- “A corporation is an artificial being created by operation of law “

- It owes its life to the State and its birth is purely dependent on the State’s will.
- An artificial being invisible, intangible, and existing only in contemplation of law”
- A corporation is not in fact and in reality a person, but the law treats it as though it were a
person by process of fiction, or by regarding it as an artificial person distinct and separate
from its individual stockholders. (Fletcher)

The Theory of Enterprise Entity

- A corporation is an association of individuals or aggrupation of natural persons allowed to

transact business under one corporate name, with a personality separate and distinct from
the individuals who compose it.

3. ADVANTAGEOUS ATTRIBUTES AND DISADVANTAGES OF THE CORPORATION

a. PRIMARY ATTRIBUTES OF THE CORPORATION UNDER CORPORATE LAW FRAMEWORK:

(i) STRONG/SOLEMN JURIDICAL PERSONALITY(Sec. 2; Arts. 44[3], 45 and 46, Civil Code)

While not in fact a person, the corporation is treated through fiction by the law as though it
were a person—an artificial person distinct and separate from its stockholders. Remo, Jr. v.
IAC, 172 SCRA 405 (1989).

(ii) CENTRALIZED MANAGEMENT(Sec. 22)

Under [Section 22 of the Revised Corporation Code], save in those instances where the
Code requires stockholders’ approval for certain specific acts, it is the Board of
Directors/Trustees which exercises all the corporate powers in a corporation.

(iii) LIMITED LIABILITY TO STOCKHOLDERS AND NON-LIABILITY TO

DIRECTORS/TRUSTEES AND OFFICERS FOR THE LIABILITIES OF THE CORPORATION

An important advantage of the corporation is the limitation of an investor’s liability to the

amount of investment, which flows from the legal theory that a corporate entity is separate and
distinct from its stockholders. San Juan Structural and Steel…, Inc. v. CA, 296 SCRA 631
(1998).

By virtue of the principle separate juridical personality, the corporate debts or credits are not
the those of the stockholders. This protection from corporate liability for shareholders is the
principle of limited liability. PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).
 (iv) FREE-TRANSFERABILITY OF “UNITS OF OWNERSHIP”(SHARES)(Sec. 62)

It is the inherent right of the stockholder to dispose of his shares of stock (which he owns as
any other property) anytime he so desires.
No corporation can restrict the right of a stockholder to transfer shares, but merely has
authority to adopt regulations on the formalities and procedure to be followed in effecting such
sale or transfer.

Relationships among stockholders are less personal since stockholders who wish to transfer
shares can transfer or assign his shares to any individual or entity without any approval from
other stockholders.

There is fast movement of shares from the transferor to the transferee.

(v) Huge amount of capital contributions/big commercial transactions

A corporation can gatherhuge amount of capital and undertake big projects, engage in
big commercial transactions through the contributions of the investors/stockholders;

(vi) More permanent existence/perpetual existence/right of succession

The existence of the corporation has some degree of permanence due to the
perpetual existence allowed by law, unless sooner dissolved.

The corporation can outlive the stockholders/directors composing it since it can exist
forever unless it decides to shorten its term.

Transfer of shares, death of a stockholder, change in the entire ownership of the

corporation does extinguish the life of the corporation..

b. Disadvantages of the Corporate Form of business:

(1) Agency Cost: Abuse of Management; Breach of Trust
(2) Abuse of Limited Liability Feature
(3) High Cost of Maintenance of the Corporate Medium
(4) Double Taxation:

• Dividends received by individuals from domestic corporations are subject to final 10% tax for
income earned on or after 01 January 1998. Sec. 24(B)(2), 1997 NIRC.

• However, inter-corporate dividends between domestic corporations are not subject to any
income tax. Sec. 27(D)(4), 1997 NIRC.

• Re-imposition of the 10% “improperly accumulated earnings tax” for holding companies.
Sec. 29, 1997 NIRC.

4.COMPARED WITH OTHER BUSINESS ORGANIZATION

Characteristic Sole Proprietorship Partnership Corporation

Method of Creation Created at will by owner
Created by agreement of Created by agreement of
the parties, for SEC’s the parties, subject to
recording only, not SEC’s approval
approval

Legal position No separate entity is A separate entity is A separate entity is

created created
Extent of liability Unlimited liability
Unlimited liability (except
limited partners)
Duration Determined by owner
Terminated by
agreement of the
partners
Transferability transferable
Partners’ interest can be
assigned, upon consent
of other partners
created
Limited liability
With perpetual term
unless otherwise
provided in the charter
Shares can be
transferred anytime
without the consent of
other stockholders
 Management Ownership and Ownership and
management belong to management belong to Ownership and
the owner the partners management are
usually separate except
one person or close
corp.

(Ownership belong o the

stockholders and board
of directors and
management of the
corporation belong to the
board of directors)

5. Practice of Profession not allowed in corporate form

Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).

A practice of profession is not for commercial purpose and therefore should not be in corporate
form since corporations are generally created for profit.

*EO No.65 –11th Regular Foreign Investment Negative List provides:

Corporate practice is allowed in the following professions, subject to the requirements and
Conditions under the pertinent professional regulatory law:

* Aeronnautical engineering (Sec. 28, PD No, 1570)

* Agricultural and bio systems engineering (Section R.A 10915)
* Architecture (Sec. 37, R.A. No. 9266)
* Chemistry (Sec. 35, R.A.No. 10657)
* Electronics engineering (Sec. 28, R.A. No.9292)
* Environmental Planning (Sec. 25, R.A. No.10587)
* Forestry (Sec. 25, R.A, 10690)
* Guidance and Counselling (Sec. 27, R.A No.9258)
* Interior design (Sec. 26, R.A. No. 10250)
* Landscape architecture (Sec. 26, R.A. No.9053)
* Naval architecture (Sec. 30 [g], R.A. No.10698)
* Psychology (Sec. 33, R.A. No. 10029)
* Real Estate service (real estate consultant, real estate appraiser, real estate assessor, real estate broker,
and real estate salesperson (Sec. 32, RA No, 9646)
* Sanitary engineering (sec. 30, R.A. No. 1364)
* Social Work (Sec. 1 {c}, R.A. No. 4373, as amended)

6. Generally, Corporations are Not Entitled to Moral Damages

A corporation, being and artificial person has no feelings, emotions nor senses, therefore it cannot
experience physical suffering and mental anguish. Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be
suffered by an artificial person Manila Electric Co.v. Nordec Philippines, 861 SCRA 515 2018

A corporation’s claim for moral damages arising from libel falls under Article 2219(7) of the Civil
Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or any other
form of defamation, and does not qualify whether the plaintiff is a natural or juridical person. A juridical
person can validly complain for libel or any other form of defamation and claim for moral
damages.Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448 SCRA 413
(2005).
A corporation, being an artificial person has no feelings, emotions nor senses; therefore, it cannot
experience physical suffering and mental anguish. Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be
suffered by an artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); Manila
Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).

THEDOCTRINEOFPIERCING THE VEIL OF CORPORATE FICTION

1. MAIN DOCTRINE:A Corporation Has a Personality Separate and Distinct from Its Directors or
Trustees, Officers, Its Stockholders or members

A corporation is a juridical entity with a legal personality separate and distinct from the people
comprising it,
The grant of legal or juridical personality, being a mere privilege, can be revoked anytime by the
sovereign power that granted the said privilege.
If the corporate fiction is used as a means to defeat public convenience, justify a wrong, protect
Fraud or defend a crime; or if the veil is used as a vehicle to evade an obligation or a debt, the veil
may be pierced and disregarded and the courts will treat the corporation as a mere aggrupation of
persons and the liability shall directly be attached to them.

Classification of Piercing Cases:

• FRAUD PIERCING: When corporate entity is used to commit a crime, to undertake fraud or do
a wrong, or that the corporate veil is used as a means to evade the consequences of one’s
criminal or fraudulent acts;
• ALTER-EGO PIERCING: When the corporate entity merely a farce since the corporation is
merely the alter ego, business conduit, or instrumentality of a person or another entity;

• DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate
corporate personality would be inconsistent with the business purpose of the legal fiction or
would merely confuse legitimate issues, or when piercing the corporate fiction is necessary
to achieve justice or equity for those who deal in good faith with the corporation. .

c. Objectives and Effects of the Application of the Piercing Doctrine

The main effect of disregarding the corporate fiction is that stockholders will be held personally
liable for the acts and contracts of the corporation, whose existence, at least for the purpose of the
particular situation involved, is ignored.

Another formulation of this doctrine is that when two (2) 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 entitled and
treat them as identical or one and the same. General Credit Corp. v. Alsons Dev. and Investment
Corp., 513 SCRA 225 (2007).

d. PIERCING DOCTRINE AS AN “EQUITABLE REMEDY”:Piercing the corporate veil is an equitable

doctrine developed to address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes.

(i) It Is aRemedy of Last Resort:Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available.
(ii) Available Only to Prevent Fraud or to Achieve an Equitable End: Piercing doctrine is
meant to prevent fraud, and cannot be employed when the net result would be to perpetrate
fraud or a wrong.

(iii) Piercing the Veil of Corporate fiction Is a Power Belonging to the Courts

2. FRAUD PIERCING CASES:

Guiding Principles in Fraud Cases:Why is there inordinate showing of alter-ego elements?

• There must have been fraud or an evil motive in the affected transaction, and the mere proof of
control of the corporation by itself would not authorize piercing;

• Corporate fiction is used as a means to commit the fraud or avoid the consequences thereof;
and

* The main action should seek for theenforcement of pecuniary claims pertaining to the
corporation against corporate officers and stockholders.
3. ALTER EGOPIERCING CASES:
a. Using the Corporation as a Mere Conduit or Alter Ego:
Guiding Principles in Alter-Ego Cases:
• Doctrine applies even in the absence of evil intent, because of the direct violation of a central
corporate law principle of separating ownership from management;
• Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity,
others cannot also be expected to be bound by the separate juridical entity;
• Piercing in alter ego cases may prevail even when no monetary claims are sought to be
enforced against the stockholders or officers of the corporation.
Section 3 - Classes of Corporation
Section 4 – Corporations created by special laws or charters

As to number of components
Corporation Sole
Corporation aggregate
As to functions:/in relation to the State
Public corporation (LGUs)
 Private Corporation
Quasi-Public corporation.
-Local water districts -performing public services, supplying public wnts (organized and created
nder PD 168); may also exercise the powers, rights and privileges given to private corps.

Government-owned and controlled corporations

As to legal status
De jure corporation - corporation organized in accordance with the requirements of the law
De facto corporation - formed where there exists a flaw in its incorporation but there is colorable
Compliance with the requirements of the law
Corporation by estoppel –a group of persons who misrepresent themselves as a corporation and
enter into contract with a third person on the strength of such
appearance cannot be permitted to deny its existence in an action
under said contract.

As to existence of stocks:
Stock
Non stock
As to laws of incorporation
Domestic
Foreign

As to relationship
Parent/holding corporation – a company who has control over another corporation directly or
Indirectly through one or more intermediaries;
- a company which owns all or substantially or the controlling
shares In the subsidiary.

Subsidiary – a corporation more than 50% of the capital stocks is owned or controlled directly
or indirectly through one or more intermediaries by another corporation, which
becomes a parent company

Affiliate – a corporation that is directly or indirectly, through one or more intermediaries,

controlled or is under the control of another corporation, which hereby becomes the
parent company.

Special corporations under the corporation Code

One person corporation

Educational Corporation
Close corporation
Religious corporation
Ecclesiastical (spiritual persons like bishops, deacons, etc) and Lay corporations
Eleemosynary (for charitable purposes) and civil corporation

Sec. 5.Corporators, incorporators, Stockholders and members

Sec. 6. Classification of shares

Common—voting shares
Preferred or redeemable shares—non-voting shares
Par value
No par value shares

Nature of shares; how classified

Non-voting shares shall nevertheless be entitled to vote in the ff cases:

a) amendment of AI
b) Adoption and amendment of BL
c) sale, lease, exchange, mortgage, mortgage, pledge, or other disposition of all or substantially all of the
corporate property.(Sec. 39, RCC);
d) incurring, creating or increasing bonded indebtedness (Sec. 37, RCC);
e) Increase or decrease of authorized capital stock (Sec. 37, RCC);
f) Merger and consolidation (Sec. 75, RC);
g) Investment of corporate funds in another corporation or business (Sec. 41, RCC);
h) Dissolution

Sec. 7. Founders’ Shares

Sec. 8. Redeemable Shares
Sec. 9. Treasury shares