Professions that can form a corporation

1. Interior design – regulated profession (licensed) – Under the law that

professionalized interior design, they can form a corporation. (requires huge
capitalization)
2. Etc.

General banking law

- Bank as a product of merger or consolidation – law permits a maximum of 21

directors to the Board.
- In a closed corporation – the articles may provide that all stockholders are
directors of the corporation.
-

 Husband and wife are not precluded from forming a corporation but they cannot
provide that their respective shares are part of their separate property (violative
of Family Code) – no change of property regime during the marriage without court
authorization is permitted.

Paid up capital - paid-up capital is that portion of the authorized capital stock which
has been both subscribed and paid.

- To illustrate, where the authorized capital stock of a corporation is worth P 1

million and the total subscription amounts to P250,000.00, at least 25% of
this amount, namely, P62,500.00 must be paid up per Section 13. The
latter, P62,500.00, is the paid-up capital or what should more accurately be
termed as "paid-up capital stock.

SEC. 173. Outstanding Capital Stock Defined. – The term “outstanding capital stock”,
as used in this Code, shall mean the total shares of stock issued under binding
subscription contracts to subscribers or stockholders, whether fully or partially paid,
except treasury shares.

Incorporators

5 incorporators, all individuals

intended to have one million.
shares of stocks in the capital stock
to be written in the articles.

. 1. Of the 1M shares, they want 400T NOT VALID. Common shares cannot be
shares deprived of voting rights.
to be classified as common, no-par
value, Only preferred and redeemable shares
non-voting shares can be deprived of voting rights.

Non-Voting Shares Have Voting Rights In

The Following Matters: a
1. Amendment of Articles
2. Adoption/ Amendment of By-
Laws
3. Sale, lease, exchange, mortgage,
pledge or dispose of all or
 substantially all of corporate
property \
4. Incur, create, increase bonded
indebtedness
5. Increase, decrease capital stock f.
Merger/ consolidation with
another corporation
6. Investment of funds in another
corporation h. Dissolution of
corporation
400T for preferred, no par value but NOT VALID
voting shares.

3. 200T for preferred, par value of Php Initially not. Preferred stocks should
1,000 per share, but non-voting. have a stated par value.

That the authorize capital stock of said corporation consists of 1,000,000

shares, of which 600,000 have a par value of one thousand PESOS (Php 1,000.00)
each, and of which 400,000 shares are without par value.

Incorporators and Corporators

Section 5. Corporators are those who compose a corporation, whether as stockholders

or as members. Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the corporation and who
are signatories thereof.

Limitations on incorporators (Section 10)

- Not more than fifteen in number.

- Constitutional and Statutory limitations as the 100% citizenship requirement to
mass media corporations, among others.
- Each incorporator of a stock corporation must own or be subscriber to at least
one (1) share of capital stock.
- Must be of legal age.
- Natural persons who are licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a profession shall not be
allowed to organize a corporation, unless provided by a special law.

Incorporating Directors

- In case of a one-person corporation: one director

- Shall not be more than fifteen.
- Directors must be natural persons.
- Majority must be residing in the Philippines.
- Must hold at least one share of stock of the corporation in his/her name.
- Must be of legal age.
Capital Stock

a. Authorized capital stock – amount to be divided equally in the number of shares

indicated)

b. Subscribed – portion of the authorize capital stock subject of subscription

contracts.

c. Paid-up - paid-up capital is that portion of the authorized capital stock which has
been both subscribed and paid.

Outstanding Capital stock – shall mean the total shares of stock issued under
binding subscription contracts to subscribers or stockholders, whether fully or
partially paid, except treasury shares.

Minimum Requirements for Incorporation – AS TO writing article 7 of the Articles of

incorporation.

1. Redeemable or preferred shares

2. Voting and non-voting shares.
3. Par and non-par shares

Minimum Capitalization

- Under the new corporation code, the intention was to incentivize MSMEs which
constitutes 90% of the underground economy in the Philippines to bring them
in to the formal corporate structure in view of the many benefits of being a
corporation.
- Thus, the Revised Corporation Code imposes no minimum capitalization.
- Note: if the business is regulated under special law, that’s the time minimum
capitalization is necessary.
o Those seeking to incorporate banks, public utilities, quasi banks,
insurance companies, recruitment agencies, security agencies – there are
minimum capitalization under the law.
 i.e., Banks – 8 billion pesos
 Life – 1 billion pesos
- Check SEC, BSP, Insurance Companies, etc. for minimum capitalization.

- Minimum requirement: capitalization and subscribers’ clause must match.

Classification of Shares

Doctrine of Equality of shares - 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. (sec. 6) – in the absence of express stipulation (voting rights, etc.)
Common shares - are also called ordinary shares and they share in profits pro-rata.

- May either be no-par or par value shares

o Par value shares – with a restated amount or denomination fixed in the
Articles of incorporation which fixes the minimum selling price of a class
of shares of stocks.
 Selling of par shares below the minimum selling price is a criminal
act (watering down of the shares)
 Par value must not be less than Php 5 per share.

o No par Value – no pre-stated value / minimum

- Or with voting or non-voting rights

Preferred shares – shares that gives preferential rights to its holder and may either
be preferred for:

1. As to dividends
2. As to distribution of assets during liquidation
3. AS to any other manner stated in the AOI.

Note: ALWAYS WITH A STATED PAR VALUE.

Founder’s shares – shares given rights and privileges not enjoyed by owners of other
stocks; exclusive right to vote/be voted in the election of directors shall not exceed 5
years.

Redeemable Shares - Expressly provided in articles; may be purchased/taken up

upon expiration of the period of said shares purchased whether or not there are
unrestricted retained earnings; may be deprived of voting rights.

Treasury stocks - stocks previously issued and fully paid for and reacquired by the
corporation through lawful means (purchase, donation, etc.); not entitled to vote and
no dividends could be declared thereon as corporations cannot declare dividends to
itself.

Subscribers’ clause

- No legal necessity, that the subscribers’ clause will list persons or names who
are not necessarily incorporators.
- At minimum, incorporators must be a subscriber.
Treasurer-in-trust – appointed by the Articles.

- A regular treasurer is one who is duly elected and qualified in accordance with
the bylaws of the corporation.
- A treasurer in trust is selected by the initial subscribers as the temporary
custodian of all properties invested for the benefit of the future corporation.
o Name is indicated in the AOI.

- To execute the treasurer’s affidavit.

“That _____________________ has been elected by the subscribers as Treasurer of the

Corporation to act as such until after the successor is duly elected and qualified in
accordance with the bylaws, that as Treasurer, authority has been given to receive in
the name and for the benefit of the corporation, all subscriptions, contributions or
donations paid or given by the subscribers or members, who certifies the information set
forth in the seventh and eighth clauses above, and that the paid-up portion of the
subscription in cash and/or property for the benefit and credit of the corporation has
been duly received.”

Special Provisions

Arbitration Agreement (Section 181) – optional.

- When such an agreement is in place, disputes between the corporation, its

stockholders or members, which arise from the implementation of the articles of
incorporation or bylaws, or from intra-corporate relations, shall be referred to
arbitration. A dispute shall be non-arbitrable when it involves criminal offenses
and interests of third parties.

- Effect: shall be binding on the corporations, its directors, trustees, officers, and
executives or managers.

- To be enforceable, the agreement should indicate the number of arbitrators and

the procedure for their appointment to which the power to appoint the
arbitrators forming the arbitral tribunal shall be granted to a designated
independent third party.

- When an intra-corporate dispute is field before the courts, the same should be
dismissed.
 - Award is executory after the lapse of fifteen days from receipt and shall be
stayed only by the filing of a bond or the issuance by the appellate court of an
injunctive writ.

No-transfer Clause.

- No transfer of stock or interest which shall reduce the ownership of Filipino

citizens to less than the required percentage of capital stock as provided by
existing laws shall be allowed or permitted to be recorded in the proper books of
the corporation, and this restriction shall be indicated in all stock certificates
issued by the corporation.
o Must also be indicated in all stock certificates, in the by laws.
o Applies on businesses with Filipino citizenship requirements.

Important:

1. all incorporators must sign. (Incorporators must put their wet signature in the
AOI) – digital signature is not allowed.

2. Completion of the AOI is not enough to incorporate a corporation. The

necessary attachments and annexes must also be included. “Certificate of
authority to register”

a. Treasurer’s affidavit – required both for stock and non-stock corporation.

b. Favorable recommendation of the appropriate government agency – for
those engaging in the businesses regulated by a special law.
i. BSP – for incorporating a bank.
ii. Insurance commission – for insurance companies
iii. LTFRB – land transportation companies
iv. CAB – air transportation companies
v. MARINA – maritime transportation
vi. ERB – For energy related projects
vii. DEPED – for basic education
viii. And such similar bodies

Articles of Incorporation of a close corporation

- Article 7 (modify) – there can only be maximum of twenty (20) stockholders,

- Article 6 – it can provide that all shareholders shall be directors.

One-person corporation

- No need for a BOD.

Grounds for Rejection of Draft Articles (Section 16)

- Also applies for amendments.

- SEC shall give the incorporators, directors, trustees or officers a reasonable
time from receipt of the disapproval within which to modify the objectionable
portions the articles or amendments.
 - If none of these grounds are present, the SEC will issue a certificate of
incorporation.
o Merely a primary qualification. From the date stamped, the term of the
corporation begins.

1. The articles of incorporation or any amendment thereto is not substantially in

accordance with the form prescribed herein.

2. The purpose or purposes of the corporation are patently unconstitutional,

illegal, immoral, or contrary to government rules and regulations.

3. The certification concerning the amount of capital stock subscribed and/or paid
is false; and

4. The required percentage of Filipino ownership of the capital stock under

existing laws or the Constitution has not been complied with.

Amendments of Articles of Incorporation (Section 15, and 35)

- Requirement
o Majority vote of the board of directors or trustee
o Written assent of the stockholders representing at least 2/3 of the
outstanding capital stock without prejudice to the appraisal right of
dissenting stockholders.

- Appraisal right – right of a dissenting stockholder to demand appraisal and

payment of the fair value of his stocks from the corporate. It allows a
stockholder who dissents and votes against a proposed corporate action to
withdraw from the corporation by demanding payment of the fair value of his
shares.
- Effective steps
o Board meeting
o Board resolution towards amending the articles.
o Corporate secretary with authority from the president shall call for a
stockholder’s meeting.

- Amendments shall take effect upon approval by the SEC, or if not acted upon
within six (6) months from date of filing for a cause not attributable to the
corporation.
o In the latter mode: amendment is deemed effective on the date of filing
the amended AOI.

Poison pills/ High Quorum Requirement clauses

- For certain corporate acts, a higher quorum than that prescribed by the law is
necessary and therefore may be stipulated.
o i.e., enter into a merger and consolidation – majority of the BOD, 2/3 of
ACS
o In a HQR clause – it may be unanimous + 90% of ACS.
- Poison pills – “tends to discourage anyone to enter into such activity.
De Facto Corporation (Sec. 19)

The due incorporation of any corporation claiming in good

faith to be a 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.

- Inquiry as to the incorporation of a corporation claiming in goof faith to be a

corporation cannot be made in a private suit.
- Inquiry must be made by the Solicitor General in a quo warranto proceeding.
- Diligence and wisdom
- For all legal intents and purposes, a de facto corporation is in fact the same
with a de jure corporation.

Elements of a De facto corporation

1. Valid law under which the de facto corporation is to be incorporated.

2. Attempted in good faith to incorporate or “colorable compliance”
3. Assumption of corporate powers; and
4. Issuance of certificate of incorporation.

Corporation by Estoppel (Sec 20)

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.

- Applies when a non-existent corporation enters into contracts or dealings with

third persons. 41 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.

o Important: There must be no fraud.

- Grounded on the principle of unjust enrichment.

o If the courts were to disregard the existence of an entity which entered

into a transaction with a third party, unjust enrichment would result as
some form of benefit have already accrued on the part of one of the
parties.
Non-use of Corporate Charter and Continuous Operation (Sec. 21)

If a corporation does not formally organize and commence its business within five (5)
years from the date of its incorporation, its certificate of incorporation shall be deemed
revoked as of the day following the end of the five (5)-year period. However, if a
corporation has commenced its business but subsequently becomes inoperative for a
period of at least five (5) consecutive years, the Commission may, after due notice and
hearing, place the corporation under delinquent status.

A delinquent corporation shall have a period of two (2) years to resume operations and
comply with all requirements that the Commission shall prescribe. Upon compliance by
the corporation, the Commission shall issue an order lifting the delinquent status. Failure
to comply with the requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation’s certificate of incorporation.

The Commission shall give reasonable notice to and coordinate with the appropriate
regulatory agency prior to the suspension or revocation of the certificate of incorporation
of companies under their special regulatory jurisdiction.

- Certificate of Incorporation is deemed revoked, the day following the end of the
5-year period of non-commencement of business from date of incorporation.

- Delinquent status – the SEC may declare a corporation “delinquent applies

when it has commenced its business but subsequently became inoperative for a
period of at least five (5) consecutive years. (Requires due notice and hearing by
the SEC.)

o Effect: They shall have a period of two years to resume operations and
comply with all requirements.
o Upon compliance, the SEC shall issue an order lifting the delinquent
status.
o Failure to Comply = Revocation of Certificate of incorporation.

Doctrine of Corporate Entity - a corporation has a legal personality separate and

distinct from that of people comprising it. By virtue of that doctrine, stockholders of a
corporation enjoy the principle of limited liability: the corporate debt is not the debt of
the stockholder.

Thus, being an officer or a stockholder of a corporation does not make one's property
the property also of the corporation.
Doctrine of Piercing the Veil of Corporate Fiction

When corporation officers may be held liable

1. Section 31
2. Watering down the shares
3.
4. When a corporate officer is expressly made liable under law.

Note Pantranco case (parent company -> subsidiary company

- 11 factors for doctrine of piercing the corporate veil.

To pierce the veil – substantial evidence is required.

Powers of Corporations (Secs. 46 et seq.)

Theory of General Capacity Theory of Specific / Special Capacity
monteroA corporation is said to hold A corporation cannot exercise powers
such powers as are not prohibited or except those expressly / implied given
withheld from it by general law.
General Express Powers under the Specific Powers granted to
Corporation Code. (Sec. 35) Corporation by the RCC
1. Sue and be sued in its corporate 1. Power to extend or shorten
name. corporate term (Sec. 36)
2. Succession
3. Adopts and use of a corporate 2. Power to increase or decrease
seal. capital stock, or incur, create,
4. Amend articles of incorporation increase bonded indebtedness
5. Adopt, amend, or repeal by-laws. (Sec. 37)
6. For stock corporation – Issue
stocks to subscribers and to sell 3. Power to deny pre-emptive rights
treasury stocks. (Sec. 38)

For non-stock corporations – 4. Power to sell or dispose corporate

admit members. assets (Sec. 39)

5. Power to acquire own shares (Sec.

7. Purchase, receive, take or grant,
40)
hold convey, sell, lease pledge,
mortgage and otherwise deal with
6. Power to invest corporate funds in
real and personal property,
another corporation or business
pursuant to its lawful business
(Sec. 41)

8. Enter into partnership, joint 7. Power to declare dividends (Sec.

venture, merger, consolidation or 42)
any other commercial agreement
with natural and juridical 8. Power to enter into management
persons. contract (Sec. 43)

9. Reasonable donations for public

welfare, hospital charitable
cultural scientific, civil or similar
purposes (Prohibited: for partisan
political activity

10.Establish pension, retirement and

other plans for the benefit of
directors, trustees’ officers and
employees and other powers
essential or necessary to carry out
its purposes.

Express vs. Implied vs. Incidental Powers of a Corporation

1. Express – Those expressly authorized by the Corporation Code and other laws,
and its Articles of Incorporation or charter.

2. Implied / necessary powers – Those that can be inferred from or necessary for
the exercise of the express powers or for the pursuit of its purposes as provided
in the charter (i.e., powers related to the same line of business – e.g.,
stevedoring services to unload coal to its pier for corporations supplying electric
power
 3. Incidental / Inherent powers – Those that are deemed to be within the capacity
of corporate entities. These “necessarily flow” from the business and attach at
the moment of creation without regard to express powers or primary purpose.

Power to Sue and Be Sued (as discussed in the case of PNAS vs. Aquino)

 A corporation has no power, except those expressly conferred on it by the

Corporation Code 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.

Thus, it has been observed that the power of a corporation to sue and be
sued in any court is lodged with the board of directors that exercises its
corporate powers. In turn, physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the board of directors. It
necessarily follows that "an individual corporate officer cannot solely exercise
any corporate power pertaining to the corporation without authority from the
board of directors".

Power to Acquire, Dispose, Encumber Property