Title 1

GENERAL PROVISIONS
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
incident to its existence. (Sec. 2)

What does it mean that a corporation is an artificial being?

> It means that the corporation is treated as a person which is separate and apart from its individual
members or stockholders.
> the corporation is not liable for the debts of its stockholders and vice versa. Also, it can acquire property
and incur obligations and file cases in its own name.

Doctrine of corporate entity - The property in the name of the corporation is not the property of the
stockholders in the same way that the property of the stockholders is not the property of the corporation.

Why is the corporation considered as a person separate and distinct from the members/stockholders?
- the purpose of convenience and to promote the ends of justice.

Doctrine of piercing the veil of corporate entity - the fiction of corporate entity is being used as a cloak or
cover for fraud or illegality, this fiction will be disregarded and the individuals composing it will be treated
as identical.

What does it mean that the corporation is created by operation of law?

- means that corporations cannot come into existence by mere agreement of the parties.
- In the Philippines, this general law is Batas Pambansa Bilang 68 otherwise known as the Corporation Code
of the Philippines.

Note: Corporations created by special law is subject to the constitutional limitation that such corporation
shall be owned or controlled by the government. Also, under BP Blg. 68, it shall be governed primarily the
the provisions of the special law or charter creating them supplemented by the provisions of the
Corporation Code, insofar as they are applicable.

What does it mean that the corporation has a right of succession?

It means that a corporation has a capacity of continuous existence irrespective of death, withdrawal,
insolvency or incapacity of the individual members or stockholders and regardless of the transfer of their
interest or shares of stock.

What does it mean that the corporation has the powers, attributes and properties expressly authorized
by law or incident to its existence?
- corporation is merely created by law, it may exercise only such powers as are granted by the law of its
creation.
- a corporation organized for the purpose of supplying electricity to the public can build electrical facilities
but they cannot buy and sell agricultural lands because it is not within the power expressly or implicitly
authorized by law or incident to its existence.

How is a corporation different from a partnership?

1. Manner of creation – created by mere agreement of the parties while a corporation is created by law
or by operation of law.

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 2. Number of incorporators – A partnership may be organized by only two persons, while a corporation
(except a corporation sole) requires at least five incorporators.

3. Commencement of juridical personality – A partnership commences to acquire juridical personality

from the moment of the execution of the contract of partnership, while a corporation begins to have
corporate existence and juridical personality only from the date of the issuance of the certificate of
incorporation by the Securities and Exchange Commission under its official seal.

4. Powers – A partnership not contrary to law, morals, good customs, public order or public policy,
corporation can exercise only the powers expressly granted by law or implied from those granted or
incident to its existence.

5. Management – In a partnership, when the management is not agreed upon, every partner is an agent of
the partnership, while in a corporation, the power to do business and manage its affairs is vested in the
board of directors or trustees.

6. Effect of mismanagement – In a partnership, a partner as such can sue a co-partner who mismanages,
in a corporation, the suit against a member of the board of directors or trustees who mismanages must be
in the name of the corporation.

7. Right of succession – A partnership has no right of succession, corporation has such right.

8. Extent of liability to third persons – In a partnership, the partners (except limited partners) are liable
personally and subsidiarily (sometimes solidarily) for partnership debts to third persons, while in a
corporation, the stockholders are liable only to the extent of their investments as represented by the
shares subscribed by them.

9. Transferability of interest – In a partnership, a partner cannot transfer his interest in the partnership so
as to make the transferee a partner without the consent of all the other partners because the partnership
is based on the principle of delectus personum, while in a stock corporation, a stockholder has the right to
transfer his shares without the prior consent of the other stockholders because a corporation is not based
on this principle.

10. Term of existence – A partnership may be established for any period of time stipulated by the partners,
while a corporation may not be formed for a term in excess of 50 years extendible to not more than 50
years in any one instance.

11. Firm name – A limited partnership is required by the law to add the word “Ltd” to its name, while a
corporation may adopt any firm name provided it is not identical or deceptively similar to any registered
firm name or contrary to existing laws.

12. Dissolution – A partnership mayb be dissolved at any time by the will of any or all of the partners, whil
a corporation can only be dissolved with the consent of the State.

13. Laws which govern – A partnership is governed by the Civil Code, while a corporation is governed
by the Corporation Code.

What are the similiarities between a partnership and a corporation?

The following are the similarities between a partnership and a corporation:
1. Both has a juridical personality separate and distinct from that of the individuals composing it.
2. Like a partnership, a corporation can act only through agents
3. Both are composed of an aggregate of individuals.
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 4. Both distribute their profits to those who contribute capital.
5. A partnership, no matter how created or organized, is taxable as a corporation subject to income tax.

Different classifications of corporations :

1. Classification under the Corporation Code:
a. Stock corporation – It is created and operated for the purpose of making profit
b. Non-stock corporation – It does not issue stock and are created not for profit but
for the public good and welfare.

2. As to number of persons who compose them

a. Corporation aggregate – it is a corporation consisting of more than one member or corporator.
b. Corporation sole/ Religious corporation – one member or corporator only and his successors such as a
bishop.

3. Ecclessiatical corporation – It is one organized for a religious purpose

4. Eleemosynary corporation – it is one established for charitable purposes.

5. As to state or country under whose laws they have been created.

a. Domestic corporation – It is one incorporated under the laws of the Philippines.
b. Foreign corporation – it is one formed, organized or existing under any laws other
than those of the Philippines.

6. As to their legal right to corporate existence

a. De jure corporation – It is a corporation existing in fact and in law.
b. De facto corporation – It is a corporation existing in fact but not in law.

7.As to whether they are open to the public or not.

a. Close corporation – limited to selected persons or members of a family.
b. Open corporation – It is one which is open to any person who may wish to become a stockholder or
member thereto.

8. As to their relation to another corporation:

a. Parent or holding corporation – It is one which is so related to another corporation that it has the power
either directly or indirectly to elect the majority of the directors of such other corporation.
b. Subsidiary corporation – It is one which is so related to another corporation that the majority of its
directors can be elected either directly or indirectly by such other corporation.

9. As to whether they are corporations in a true sense or only in a limited sense

a. True corporation- is one which exists by statutory authority.
b. Quasi- corporation is one which exists without formal legilative grant. It is an exception to the general
rule that a corporation can exist only by authority of law and it may be:
i. Corporation by prescription which has exercised corporate powers for an
indefinite period without interference on the part of the sovereign power
and which by fiction of law, is given the status of a corporation. Example
is the Catholic Church.
ii. Corporation by estoppel which is neither de jure or de facto but is
considered a corporation in relation to those only who, by reason of their
act or admissions are precluded from asserting that it is not a corporation.

10. As to whether they are for public or private purpose

a. Public corporation – It is one formed for the government of a portion of the State.
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 b. Private corporation – It is one formed for some private purpose, benefit or end. It maybe stock or non-
stock, GOCC or quasi-public corporation

Corporation composed of :
1. Corporators – whether stockholders or members.
a. Stockholders – They are the owners of shares of stock in a stock corporation.
b. Members – They are the corporators of a corporation which has no capital stock.

2. Incorporators – They are those mentioned in the articles of incorporation as originally forming and
composing the corporation and who executed and signed the article of incorporation as such.

3. Promoters – They are persons who bring about the formation and organization of a corporation by
bringing together the incorporators or the persons interested in the enterpirse, procuring subscriptions or
capital for the corporation and setting in motion the machinery which leads to the incorporation of the
corporation itself.

4. Subscirbers – They are persons who have agreed to take and pay for original, unissued shares of a
corporation formed or to be formed.

5. Underwriter – is a person, usually an investment banker, who does the following:

a. Has agreed, alone or with others, to buy at stated terms an entire issue of securities or a substantial part
thereof
b. Has guaranteed the sale of an issue by agreement to buy from the issuing party any unsold protion at a
stated price
c. Has agreed to use his best efforts to market all or part of an issue
d. Has offered for sale stock he has purchased from a controlling stockholder.

Title 2
Incorporation and Organization of Private Corporations
Steps in the creation of a corporation
1. Promotion – The formation of a corporation is brought about by promoters or it may also be formed by
the incorporators themselves.
2. Incorporation – Here, the articles of incorporation is drafted by the incorporators and filed with the
Securities and Exchange Commission (SEC) together with the Treasurer’s affidavit and payment of the filing
and publication fees. After the SEC verifies and finds everything in order, it will issue a certificate of
incorporation.
3. Formal organization and commencement of business operation.

Articles of incorporation- purpose of the corporation, be definite

- The articles of incorporation is the document prepared by the persons establishing a corporation and filed
with the SEC containing the matters required by the Code. A copy of the articles filed which is returned with
the certificate of incorporation issued by the SEC under its official seal becomes its corporate charter
enabling the corporation to exist and function as such.

Contents of the articles of incorporation

1. Name of the corporation –
2. Purpose of the corporation
a. It must be for a lawful purpose.
b. While the purpose may be stated in broad and general terms, they should not be so stated indefinitely,
otherwise, the articles of incorporation may be rejected.

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 c. There can be more than one purpose but the primary purpose must be stated. The corporation is
prohibited from investing its funds for any purpose other than the primary purpose for which it was
organized unless it is approved by both its board of directors or trustees and its stockholders or members.

d. A non-stock corporation may not include a purpose which would change or contradict its nature as such.

e. The purposes, if there are more than one, must be capable of being lawfully
combined.

3. Principal office of the corporation –

4.
4. The term for which the corporation is to exist - Section 11 provides that a corporation
shall exist for a period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended.

5. Incorporating directors or trustees – Section 10 provides that the incorporators must

not be less than five but not more than fifteen. The qualifications are as follows:
a. Natural persons – .
b. Capacity to enter into contracts.
c. Majority must be residents of the Philippines
d. Citizens of the Philippines in certain corporations by specific constitutional and
legal provisions.
e. Owners of or subscribers to at least one share of the capital stock of the
corporation.

6. Capital stock/capital and subscribers/contributors – For stock corporation, the

articles of incorporation must state the following:
a. The amount of its authorized capital stock
b. The number of shares into which it is divided
c. The par value in pesos of each share
d. The names, nationalities and residences of the original subscribers
e. The amount of capital stock subscribed and paid by each on his subscription
f. If some or all of the shares are without par value, such fact.

If the corporation be a non-stock corporation, the articles of incorporation

must state the following:
a. The amount of its capital or money contributed or donated by specified persons
b. The names, nationalities and residences of the donors or contributors.
c. The respective amount contributed by each.

7.Treasurer’s Affidavit – The AI must be accompanied by a sworn statement of the Treasurer elected by the
subscribers showing that at least 25% of the authorized capital stock of the corporation has been
subscribed and at least 25% of the total subscription has been fully paid in cash and/or property the fair
valuation of which is equal to at least 25% of the said subscription, such paid-up capital being not less than
P5,000.

Rejection or disapproval of the articles of incorporation (AI)

1. is not substantially in accordance with the form prescribed by the Code.
2. unconstitutional, illegal, immoral, or contrary to government rules and regulations.
3. capital stock subscribed and/paid is false.
4. not been complied with as required by existing laws or the constitution.
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 5. AI is not accompanied by a favorable recommendation of the appropriate government agency.

Are these grounds exclusive?

These grounds are not exclusive. Under Presidential Decree No. 902-A, The AI may also be suspended or
revoked on the following grounds:
1. Fraud in procuring its certificate of incorporation
2. Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of or damage to the general public.
3. Refusal to comply with or defiance of a lawful order of the Commission restraining
the commission of acts which would amount to a grave violation of its franchise
4. Continuous inoperation for a period of at least 5 years
5. Failure to file by-laws within the required period
6. Failure to file required reports in appropriate forms as determined by the SEC within the prescribed
period.

What happens after the incorporators have complied and submitted all the requirements to
the SEC?
After the SEC verifies and finds everything in order, it will issue a certificate of incorporation. A corporation
commences to have juridical personality and legal existence only from the moment the SEC issues to the
incorporators a certificate of incorporation under its official seal.

What is the effect of being issued a certificate of incorporation by the SEC?

From the moment the SEC issues to the incorporators a certificate of incorporation, the corporation
commences to have juridical personality and legal existence.

However, in the case of religious corporations, the SEC is not required to issue a certificate of
incorporation. From the filing with the SEC of the AI, the chief archbishop shall become a corporation sole.

In the case of cooperatives, they acquire juridical personality upon registration with the Cooperatives
Development Authority. It need not be registered again with the SEC.

Also in the case of a de facto corporation which had not complied with all the requirements necessary to
be a de jure corporation but is in good faith and is acting as a corporation, it shall be accorded corporate
status as against third parties but not against the State. Furthermore, its personality can only be attacked
directly and not collaterally. (MAY DFECT THE CORPORATION PERO MAY GOOD FAITH)

Lastly, a corporation by estoppel which is one where persons assume to act as a

corporation knowing it to be without authority to do so, may be sued on any transaction entered by it as a
corporation or on any tort committed by it as such and it shall not be allowed to use as a defense its lack of
corporate personality. ( PRETENDING TO A BA CORPORATION )

Title 3
Board of Directors/Trustees

What is the Board of Directors (BOD)?

The board of directors/trustees is the governing body of the corporation chosen by the stockholders or
members. The corporate powers of all corporations formed under the Code shall be exercised, all business
conducted and all property of such corporations are controlled and held by the board of directors or
trustees, unless otherwise provided by law. (AGENT OF THE CORPORATION, EXTENTION OF THE
PERSONALITY
This OF THE CORPORATION)
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 The following are the limitations or restrictions on the power of the BOD:
1. The BOD must observe the limitations or restrictions imposed by the Constitution, statutes, and rules
and regulations having the force of law on the corporation, including its articles of incorporation and by-
laws;
2. It cannot perform constituent acts, that is, acts involving fundamental or major changes in the
corporation (such as amendment of the articles of incorporation);
3. It cannot exercise powers not possessed by the corporation.

The BOD decide for the corporation;

The BOD holds election in a meeting and executes a board resolution stating their decision therein. The
corporation can act only by authority of the BOD/T in a meeting duly convened.

The following are the requisites for validity of a corporate act:

1. Meeting of the directors/trustees duly assembled as a board
2. Presence of a quorum – quorum is such number of membership of a body as is competent to transact its
business or do any other corporate act. Under the Code, unless the AI or the by-laws provide for a greater
majority, a majority of the number of directors or trustees shall constitute a quorum.
3. Decision of the majority of the quorum or, in other cases, a majority of the entire body.
4. Meeting at the place, time and in the manner provided in the by-laws.

How many directors/trustees should compose the BOD?

Under the Code, the number must be not less than five nor more than 15, except as otherwise provided by
the Code or special law.

In ordinary non-stock corporations, the BOT, unless otherwise provided in the AI or the by-laws, may be
more than 15, with the term of office of 1/3 of their number expiring every year.

In a close corporation, the AI may provide that the business of the corporation shall be managed by its
stockholders rather than by a BOD in which case no meeting of stockholders need be held to elect
directors.

Trustees of non-stock educational corporations shall not be less than 5 nor more than 15, provided that
the number shall be in multiples of 5, with the term of office of 1/5 of their number expiring every year.

In a corporation sole, there is no BOD/T as it consists of one member or incorporator only.

The BOT of religious societies shall also be not less than 5 nor more than 15.

What is the term of office of the directors?

They shall hold office for one year and until their successors are elected and qualified.

Under Section 23 of the Code, the following are the qualifications of the directors/trustees:
1. For stock corporations:
a. Every director must own at least one share of the capital stock.
b. The share of stock held by him must be registered in his name on the books of the corporation.
c. Every director must continuously own at least a share of stock during his term, otherwise, he shall
automatically cease to be a director.
d. Majority of the directors must be residents of the Philippines.
e. In case of domestic banks, the General Banking Act requires that at least 2/3 of the members of the BOD
must be citizens of the Philippines.
2. For non-stock corporations: The trustees must be members thereof and like in stock
corporations, a majority of them must be residents of the Philippines.
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 What should the directors do after their election?
>Immediately after their election, the directors must formally organize by the election of the corporate
officers. 30 days thereafter, the secretary shall submit to the SEC the names, nationalities and residences
of the directors, trustees and officers elected.
>In case a director, trustee or officer die, resign or cease to hold office, his heirs in case of his death, the
secretary or any other officer of the corporation or the director, trustee or officer himself, shall immediately
report such fact to the SEC.

The following are the corporate officers provided by the Code and they are responsible for the day-to-
day running of the corporation:
1. President – He/she must be a director of the corporation and given general supervision and control of
the business. He presides at all meetings of the directors or trustees as well as of the stockholders or
members, unless the by-laws provide otherwise.

2. Secretary – The secretary must be a resident and a citizen of the Philippines. His/her duty is to make and
keep its records and to make proper entries of the votes, resolutions and proceedings of the shareholders
and directors in the management of the corporation and all other matters required to be entered on the
records.

3. Treasurer – The treasurer is entrusted with the authority to receive and keep the money of the
corporation and to disburse them as he may be authorized.

* Section 27 of the Code also provides that no person convicted by final judgment of an offense punishable
by imprisonment for a period exceeding six years or a violation of this Code, committed within 5 years prior
to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

* Other officers may also be appointed as the directors may deem necessary such as vice president and
general manager.

Majority vote of the board, except with respect to the following:

a. Approval of any action for which shareholders’ approval is also required
b. The filling of vacancies in the board
c. The amendment or repeal of by-laws or adoption of new by-laws
d. Amendment or repeal of any resolution of the board which by its express terms is not so amendable or
repealable
e. Distribution of cash dividends to the shareholders.

Can corporations with interlocking directors (one, some or all of the directors in one corporation are also
the directors in the other corporation) enter into a contract with each other?
- Yes as long as there is no fraud and the contract is fair and reasonable under the
circumstances.

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