BUSINESS LAW AND REGULATIONS

CORPORATION

A. What is a corporation?
Corporation is an artificial being created by operation of law having the right to succession and
the powers, attributes, and properties expressly authorized by or incidental to its existence.[1]

B. What are the attributes of a corporation?

1. Artificial Being
It has been well-expressed in our jurisprudence that a corporation is an artificial being created
by operation of law, and upon its existence, is invested by law with a personality separate and
distinct from those persons comprising it as well as from any legal entity to which it may be
related (EDSA Shangri-La vs BF Corp).
2. Creature of the Law
It is the State’s consent which gives life to the existence (juridical existence) of a corporation.
(e.g. Registration with the Securities and Exchange Commission)

3. Rights of Succession
The continuity of the corporation does not depend on the lives of the persons composing it.
Unlike in partnership, wherein if a partner dies or retires, the partnership ceases to exist. In
corporations, it will continue despite the death or retirement of an incorporator, stockholder or
member.
4. Creature of Enumerated Powers, Attributes, and Properties
A corporation has no power except those expressly conferred on it by the Corporation Code
and those that are implied by or are incidental to its business.[2]

C. What are the classes of Corporation

Corporations generally can be classified as Public and Private Corporations wherein the former
is organized by the state to perform its governmental and/or non- governmental functions
while the latter is organized by private person or the government for private ends or benefits.

A. Private Corporations on the other hand are divided into the following:
 1. Stock Corporations - are corporations which have capital stock divided into shares and
are authorized to distribute profits based on the shares held.[3]
2. Non-stock corporations - a non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers.[4] It is organized for non-
profit purposes, and primarily for charitable, religious, educational, fraternal, literary,
trade, industry and agricultural chambers or any combination thereof.
3. Corporation Sole - It is a special form of corporation which may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious
denomination, sector church for the purpose of administering and managing, as trustee,
the affairs, property and temporalities of such denomination, sect or church.[5]
B. Corporations can also be classified according to what laws it was incorporated namely:

4. Domestic Corporations - Corporations organized according to Philippine Laws

5. Foreign Corporation - a foreign corporation is one formed, organized or existing under
laws other than those of the Philippines’ and whose laws allow Filipino citizens and
corporations to do business in its own country or State. It shall have the right to transact
business in the Philippines after obtaining a license for that purpose in accordance with
this Code and a certificate of authority from the appropriate government agency.[6]
C. Corporations can also be classified as to its legal status which are the following:
6. De Jure Corporation – a corporation formed with all the requirements of the law.
7. De Facto Corporation – a corporation defectively formed from a bona fide attempt to
incorporate under existing laws, and which exercises corporate powers.

[Take Note: there must be a bona fide attempt to incorporate]

8. Corporation by Estoppel – It is a group of persons which holds itself out as a corporation

and enters into a contract with third persons on the strength of such appearance. It
cannot be permitted to deny its existence in an action under said contract.
On the other hand, a person who knowingly contracts with such persons cannot deny the
corporate existence of such group of persons.
9. Corporation by Prescription – It is a body which though not lawfully organized as a
corporation, has been recognized by immemorial usage as a corporation, with rights and
duties maintainable at law.
A new classification of corporation under the Revised Corporation Code is the so – called One
Person Corporation wherein a person can establish by himself a corporation in order to enjoy
the attributes of a corporation.
A One Person Corporation is a corporation with a single stockholder: Provided, that only a
natural person, trust, or an estate may form a One Person Corporation.[7]

D. Nationality of Corporations
Generally according to Philippine Law, a corporation’s nationality is based on the laws of the
place under which it has been organized and registered. This is known as the “Place of
Incorporation Test”

Ex. James, Daniel and Enrique are Filipino citizens living in New York City. They decided to
establish Gwapings, Inc. under State of New York. Is Gwapings, Inc. a Filipino corporation?
Answer: No, Gwapings,Inc. is considered a New York/American corporation because it was
incorporated under New York Laws.

On the other hand, “the Control Test” states that the nationality of a corporation of the
corporation is determined by the nationality of the majority of the stockholders on whom
equity control is vested, on the theory that they would be able to elect the majority of the
Board of Directors.
Ex. Auto Moto Corp. is a Japanese registered corporation but 60% of its shares is held by
Filipino business tycoon Mr. Jose Ma. Yaman. Is the corporation Filipino under control test?
Answer: Yes, Auto Moto Corp. is a Filipino corporation under the control test because majority
of the corporation’s shares is held by a Filipino.

In times of war, the “War-Time Test” is used to test the nationality of the corporation in which
the citizenship of its controlling stockholders is the determinant of its nationality.

Ex. Ni Hao Ma, Inc. is registered under Philippine laws wherein majority of its stockholders are
Chinese citizens. War then broke out between the Republic of the Philippines and the People’s
Republic of China due to territorial dispute in the West Philippine Sea. The Philippine
Government seized the properties of Ni Hao Ma, Inc. on the grounds that it is an enemy
corporation. Ni Hao Ma, Inc. raised the defense that it is not an enemy corporation because it is
registered under Philippine laws thus it is Filipino. Is the contention of Ni Hao Ma, Inc. correct?
Answer: Ni Hao Ma, Inc. is not correct because during times of war, the determinant to know
the nationality of a corporation is the citizenship of the controlling stockholders and not laws of
the place where it was organized and registered.
E. Corporate Juridical Personality
1. What is the doctrine of separate legal personality?

The law on corporations discusses the main doctrine that Corporations are juridical entities
with legal personality separate and distinct from those acting for and in behalf and, in general,
from the people comprising it; and that obligations incurred by the corporation, acting through
its directors, officers and employees are its sole liabilities.[8]

A corporation is an entity separate and distinct from its stockholders. While not in fact and in
reality a person, the law treats the corporation as though it were a person by process of a
fiction or by regarding it as an artificial person distinct and separate from its individual
stockholders.[9]

2. What are the legal consequences of a corporation’s separate juridical personality?

1. Such corporation may not be held liable for the obligations of the persons composing it
or that of its officers.
2. Neither can its stockholders be held liable for the obligations of such corporation.
3. Officers of a corporation are not personally liable for their acts as such officers unless it
is shown that they have exceeded their authority.
4. The property of the corporation is not the property of its stockholders or members.
5. Nor can the property of even the controlling stockholders or the officers be treated as
part of the corporate estate.
6. A suit against a corporation cannot be considered as a suit against its stockholders and
vise versa.
7. A mother or holding corporation has no proprietary interest in the property, rights, and
interests of the subsidiary or affiliate corporation.
8. The separate and distinct personality of a corporation is a fiction created by law for
convenience and to prevent injustice, it may be disregarded if it is used as a means to
perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues.
9. On the other hand, the following acts by themselves single or in combination, would not
warrant disregard of the veil of corporate fiction, absence fraud or other public policy
consideration:
• Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a co'/rporation.
• Having the same address
• Presence of interlocking directors
3. What is the Doctrine of Piercing the Veil of Corporate Fiction/Entity?
This doctrine states that the separate juridical entity of the corporation from that of its
stockholders or members as the case may be is not iron clad.
It has been held that under the doctrine, the corporation is looked upon by the court as a mere
collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group.

The doctrine of piercing the veil applies to the following basic instances:
1. When the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation.
2. In fraud cases, or when the corporate fiction is used to justify a wrong ,protect a fraud,
or defend a crime.
3. In alter ego cases, i.e. where a corporation is essentially a farce, since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs so conducted as to make it merely an instrumentality of
another corporation.[10]
Generally, the stockholders and officers are not personally liable for the obligations of the
corporation except only when the veil of corporate fiction is being used as a cloak or cover for
fraud, illegality, or to work injustice.

In summary, the Doctrine of Piercing the Veil of Corporate Entity is the law’s built - in
protection to secure that the privilege of the corporation separate juridical entity will not be
abused and be a tool for perpetration of injustice.

F. Capital structure
Just like all businesses or business organizations, capital is needed in order to get things going.
Capital is defined as the actual property or estate of a corporation whether property or money,
including surplus and undivided profits. On the other hand, Capital Stock is the amount of
money stated in the articles of incorporation to be subscribed and paid in.
During the time of a corporation’s incorporation, specifically stock corporations, the capital
stock will be stated in the Articles of Incorporation. The capital stock will then be divided into
shares of stocks.
The following are different classes of shares stocks:
1. Voting and Non-Voting shares
Voting Share – shares that can vote in all matters of the corporation

Non – Voting shares – Shares that cannot vote in the matters of the corporation but
nevertheless were allowed to do so in the following instances:
a. Amendment of the articles of incorporation
b. Adoption and amendment of the by-laws
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property
d. Incurring, creating or increasing bond indebtedness
e. Increase or decrease of Capital Stock
f. Investment of corporate funds in another corporation or business in accordance with
the RCC
g. Merger or Consolidation of the corporation with another corporation/s
h. Dissolution of the Corporations
2. Common and Preferred Shares
a. Common shares – the basic class of stock ordinarily issued without extraordinary
rights or privileges and entitles the shareholder to a pro-rata division of profits
b. Preferred shares – shares of stocks which entitles the holder certain preferences
over holders of common stock.
3. Founder's shares– shares classified as such in the articles of incorporation which 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 “Anti-
Dummy Law”; “Foreign Investments Act of 1991”; and other pertinent laws.[11]
4. Redeemable Shares – Redeemable shares may be issued by the corporation when
expressly provided in the articles of incorporation. They are shares which may be
purchased by the corporation from the holders of such shares upon the expiration of a
fixed period, regardless of the existence of unrestricted retained earnings in the books
of the corporation, and upon such other terms and conditions stated in the articles of
incorporation and the certificate of stock representing the shares, subject to rules and
regulations issued by the Commission.[12]

What are unrestricted retained earnings?

These are surplus profits not subject to encumbrance.
5. 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.[13]

II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

A. What is incorporation?
It is the performance of conditions, acts, deeds, and writings by incorporators, and the official
acts, certification or records, which give the corporation its existence. It is a meticulous venture
because most of the steps/processes must be in line with law, namely, the requirements of the
Revised Corporation Code (RA 11232 RCC).
Section 10 of the RCC states that “any person, partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in number may organize a corporation for any
lawful purposes”. Strictly speaking, the R.C.C stated those who are qualified to set up a
corporation.

B. What is an Incorporator?
They are those stockholders or members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories thereof.[14] In layman’s term,
they can be considered “the founders”.

C. Who are Corporators?

Corporators are those who compose a corporation, whether as stockholders or shareholders in

a stock corporation or as members in a nonstock corporation.

Distinctions between corporator and incorporator

INCORPORATOR CORPORATOR
Signatory of the Articles of Incorporation May or not be signatory of the Articles of
Incorporation
 Does not cease to be an incorporator
upon sale of his shares
Generally composed of 5 to 15 natural
persons
Exception: In case of cooperative,
incorporator of rural bank; corporation
sole
Originally forms part of the corporation
Filipino citizenship is not a requirement.
Except when engaged in a business which
is partly or wholly nationalized where
majority must be residents.
Cease to be a corporator by sale of his shares in
case of stock corporation. In case of non‐stock
corporation, when the corporator ceases to be a
member.
No limit
Not necessarily
Depending on the nature of business of the
corporation. If it is nationalized, the citizenship
becomes material.

D. What are the Qualifications of an Incorporator?

1. Natural Person - only a natural person can be qualified to be an incorporator. Juridical
persons such as partnership or other corporations are disqualified to do so.
2. Legal Age - An incorporator must at least be 18 years old.
3. Resident of the Philippines - The law provides that at least a majority of the
incorporators are local residents.
4. Owner or Subscriber - One cannot be qualified to become an incorporator if he is
neither an owner or a subscriber to at least one share of the capital stock.
E. What is the term of corporate existence?

A corporate’s life or term after incorporation is now perpetual unless its articles of
incorporation provides otherwise. In the old Corporation Code (Batas Pambansa Blg. 68), the
life or term of a corporation shall be a period not exceeding 50 years but is extendible.
A corporate term for a specific period may be extended or shortened by amending the articles
of incorporation: Provided, that no extension may be made earlier than three (3) years prior to
the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Commission: Provided, further, that such extension of
the corporate term shall take effect only on the day following the original or subsequent expiry
date(s).

A corporation whose term has expired may apply for a revival of its corporate existence,
together with all the rights and privileges under its certificate of incorporation and subject to all
of its duties, debts and liabilities existing prior to its revival. Upon approval by the Commission,
the corporation shall be deemed revived and a certificate of revival of corporate existence shall
be issued, giving it perpetual existence, unless its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks, banking and quasi-banking
institutions, preneed, insurance and trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service business, and other financial
intermediaries shall be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency.[15]

F. What is an Articles of Incorporation?

It refers to the document or papers drawn up by or on behalf of the incorporators of a

proposed corporation to be presented for approval by the Securities and Exchange Commission
(SEC).

The following are the usual contents and/or information found in an Articles of
Incorporation:
1. The Corporate Name - One of the requirements in a corporate name is that the word
“Corporation” or “Incorporated” or their abbreviations (Corp., ), respectively shall be
indicated.

Ex. CARD Bank,Inc.; Jollibee Foods Corporation.

2. The Principal and Secondary Purposes - the purpose of the purpose clause in the
Articles of Incorporation (AOI) is that it vests and also limits the powers that the
corporation may exercise.

Ex. Primary Purpose: Fishing of Sardines/Mackerel

Secondary Purpose: Canning of Sardines
3. The Principal Place of Business - It is usually the main office of a corporation. It is
necessary to determine the proper venue in filing of an action.
Ex. MANILA ELECTRIC COMPANY - Meralco Center, Ortigas Avenue, Pasig, Metro Manila
CARD Bank, Inc - 20 M.L. Quezon St., City Subd., San Pablo City, Laguna
1. The Corporate Term
2. The Incorporators
3. The Directors or Trustees
4. Interim Directors or Trustees
5. The Corporate Capital
6. Other matters
G. What is the effect of None Use or in-operation of a Corporation’s Corporate Franchise?
A corporation is deemed dissolved by virtue of its non-operation:
1. When the corporation fails to formally organize and commence operation within two (2)
years from its date of incorporation. This means that the board has not made any
organizational meeting for the purpose of commencing corporate operations or
2. When the operation initially organizes and operates but subsequently becomes
inoperative for a period of five (5) years.
However, this does not apply if the failure to organize, commence the transaction of its
business or the construction of its works, or to continuously operate is due to causes beyond its
control, the above mentioned rule does not apply.

III. BOARD OF DIRECTORS / TRUSTEES AND OFFICERS

A. Board of Directors or Trustees of a Corporation
The board of directors or trustees shall exercise the corporate powers, conduct all business,
and control all properties of the corporation.
Directors shall be elected for a term of one (1) year from among the holders of stocks
registered in the corporation’s books, while trustees shall be elected for a term not exceeding
three (3) years from among the members of the corporation. Each director and trustee shall
hold office until the successor is elected and qualified. A director who ceases to own at least
one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to
be such.

The board of the following corporations vested with public interest shall have independent
directors constituting at least twenty percent (20%) of such board:
1. Corporations whose securities are registered with the Commission, corporations listed
with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and
having two hundred (200) or more holders of shares, each holding at least one hundred
(100) shares of a class of its equity shares;
2. Banks and quasi-banks, Non-stock Savings and Loan Association (NSSLA’s), pawnshops,
corporations engaged in money service business, pre-need, trust and insurance
companies, and other financial intermediaries; and
3. Other corporations engaged in business vested with public interest similar to the above,
as may be determined by the Commission, after taking into account relevant factors
which are germane to the objective and purpose of requiring the election of an
independent director, such as the extent of minority ownership, type of financial
 products or securities issued or offered to investors, public interest involved in the
nature of business operations, and other analogous factors.
B. What is an Independent Director?

An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship
which could, or could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.

Independent directors must be elected by the shareholders present or entitled to vote in

absentia during the election of directors. Independent directors shall be subject to rules and
regulations governing their qualifications, disqualifications, voting requirements, duration of
term and term limit, maximum number of board memberships and other requirements that the
Commission will prescribe to strengthen their independence and align with international best
practices.[16]

C. Who are Corporate Officers?

1. President - must be a director at the time the assumes office, not at the time of
appointment.
2. Treasurer - must be a resident. May or may not be a director.
3. Secretary - must be a citizen and a resident of the Philippines. Need not be a director
unless required by the by‐laws.
4. Such other officers as may be provided in the by-laws
If the corporation is vested with public interest, the board shall also elect a Compliance Officer.
The same person may hold two (2) or more positions concurrently, except that no one shall act
as president and secretary or as president and treasurer at the same time, unless otherwise
allowed in this Code.
The officers shall manage the corporation and perform such duties as may be provided in the
bylaws and/or as resolved by the board of directors.[17]

IV. BYLAWS

A. What are bylaws?

Rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and of its stockholders or members and directors
and officers in relation thereto and among themselves in their relation to it.

In case of conflict between the bylaws and the articles of incorporation, the latter prevails
because the bylaws are intended merely to supplement the former.

B. What are the requisites for the validity of bylaws?

1. Must be consistent with the Revised Corporation Code, other pertinent laws and
regulations.
2. Must not be contrary to morals and public policy.
3. Must not impair obligations and contracts or property rights of stockholders.
4. Must be consistent with the charter or articles of incorporation
5. Must be reasonable
6. Must be of general application and not directed against a particular individual.

Distinctions between Articles of Incorporation and Bylaws

Articles of Incorporation Bylaws

Condition precedent in the acquisition of
corporate existence.
Essentially a contract between the
corporation and the stockholders/members;
between the stockholders/member inter se,
and between the corporation and the State.
Amended by a majority of the directors/
trustees and stockholders representing 2/3
of the outstanding capital stock, or 2/3 of the
members in case of non‐stock corporations.
Power to amend/repeal articles cannot be
delegated by the stockholders/members to
the board of directors/ trustees.
Condition subsequent; its absence merely
furnishes a ground for the revocation of the
franchise.
For the internal government of the
corporation but has the force of a contract
between the corporation and the
stockholders/ members, and between the
stockholders and members.
May be amended by a majority vote of the
BOD and majority vote of outstanding capital
stock or a majority of the member in non‐
stock corporation.
Power to amend or repeal bylaws or adopt
new bylaws may be delegated by the 2/3 of
the outstanding capital stock or 2/3 of the
members in the case of non‐stock
corporation.
V. MEETINGS

A. What are the different kinds of meetings?

Meetings of directors, trustees, stockholders, or members may be regular or special.

1. Regular meeting - Regular meetings of stockholders or members shall be held annually
on a date fixed in the bylaws, or if not so fixed, on any date after April 15 of every year
as determined by the board of directors or trustees.

Required written notice:

i. Written notice of regular meetings shall be sent to all stockholders or members of
record at least twenty-one (21) days prior to the meeting, unless a different period is
required in the bylaws, law, or regulation;
j. Written notice of regular meetings may be sent to all stockholders or members of
record through electronic mail or such other manner as the Commission shall allow
under its guidelines.
2. Special meeting - Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the bylaws: Provided, however, That at least one (1)
week written notice shall be sent to all stockholders or members, unless a different
period is provided in the bylaws, law or regulation.

B. Can a notice of any meeting be waived?

Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member,
exception:
3. General waivers of notice in the articles of incorporation or the bylaws shall not be
allowed.
4. Attendance at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.[18]C.

C. Where is the venue of a meeting?

Stockholders’ or members’ meetings, whether regular or special, shall be held in the principal
office of the corporation as set forth in the articles of incorporation, or, if not practicable, in the
city or municipality where the principal office of the corporation is located: Provided, That any
city or municipality in Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan areas
shall, for purposes of this section, be considered a city or municipality.[19]

D. What is the required quorum in a meeting?

Unless otherwise provided in this Code or in the bylaws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the
members in the case of nonstock corporations.

E. What is the quorum required for regular and special meetings of Directors or Trustees?
Unless the articles of incorporation or the bylaws provides for a greater majority, a majority of
the directors or trustees as stated in the articles of incorporation shall constitute a quorum to
transact corporate business, and every decision reached by at least a majority of the directors
or trustees constituting a quorum, except for the election of officers which shall require the
vote of a majority of all the members of the board, shall be valid as a corporate act.

F. Who Shall Preside at Meetings?

The chairman or, in his absence, the president shall preside at all meetings of the directors or
trustees as well as of the stockholders or members, unless the bylaws provide otherwise.

-end-

[1] Sec. 2, RA 11232 Revised Corp. Code of the Phils.

[2] GR No. 152542 & GR No. 155472
[3] Sec. 3, supra

[4] Sec. 86, supra

[5] Sec. 108, supra
[6] Sec. 140, supra
[7] Sec. 116, supra

[8] Santos vs. NLRC (1996)

[9] 172 SCRA 405,408 (1989)
[10] Pantranco vs. NLRC
[11] Sec. 7, supra
[12] Sec. 8, ibid

[13] Sec. 9, ibid

[14] Sec. 5, ibid
[15] Sec. 11, ibid
[16] Sec. 22, Ibid

[17] Sec. 24, Ibid

[18] Sec. 49, Ibid
[19] Sec. 50, Ibid