Introduction to Corporation Law

What is a Corporation?

 An artificial being created by operation of law

having the right of succession, and the powers,
attributes and properties expressly authorized by
law and incident to its existence

Attributes of a Corporation

1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attribute and properties
expressly authorized by law or incident to its
existence.

Advantages of a Corporation against an unregistered

Association

1. enjoys perpetual succession under corporate

name and in an artificial form.
2. can take and grant property
3. can contract obligations
4. can sue and be sued in its corporate name as a
juridical person
5. capacity to receive and enjoy common grants of
privileges and immunities
6. no personal liability beyond value of their shares

Classes of Corporation

1. AS TO ORGANIZERS
a. public – by State only; and
b. private – by private persons alone or with
the State.
2. AS TO FUNCTIONS
a. public – governmental and
other functions; b. private – usually for
profit-making functions
3. AS TO GOVERNING LAW
a. public – Special Laws; and
b. private – Law on Private Corporations
4. AS TO LEGAL STATUS
a. de jure corporation –
corporation organized in accordance
with requirements of law
b. de facto corporation – a
corporation where there exists a flaw in
its incorporation
De Facto Corporation
REQUISITES OF DE FACTO CORPORATION:
1. The existence of a valid law under which it may
be incorporated
2. An attempt in good faith to incorporate
3. Use of corporate powers; and
Remember: There exists a flaw in a de facto corporation
5. AS TO PLACE OF INCORPORATION
a. Domestic corporation- corporation
formed, organized or existing under laws
of the Philippines
b. Foreign Corporation – a corporation
formed organized or existing under any
laws other than those of the Philippines
and whose laws allow Filipino citizens and
corporation to do business in its own
country or state
6. AS TO EXISTENCE OF SHARES OF STOCK
a. stock corporation – a corporation in
which capital stock is divided into shares
and is authorized to distribute to holders
thereof of such share’s dividends or
allotments of the surplus profits on the
basis of the shares held.
b. Non-stock corporation – not issue stocks
and not distribute dividends to their
members, its purpose is for public good
and welfare.
What are the Kinds of Shares?
 Common shares
o The basic class of stock ordinarily and
usually issued without extraordinary
rights and privileges, and the owners
thereof are entitled to a pro rata share in
the profits of the corporation and in its
assets upon dissolution and, likewise, in
the management of its affairs without
preference or advantage whatsoever.
 Preferred shares
o Those issued with par value, and
preferences either with respect to
 assets after dissolution,
 distribution of dividends, or both,
and
o other preferences.
 Redeemable shares
o Permits the issuing corporation to
redeem or
o purchase its own shares.
 Treasury shares
o Shares that have been earlier issued
as fully paid and have thereafter
been acquired by the corporation by
purchase, donation, and redemption or
through some lawful means.
 Founders' share
o Shares issued to organizers and
promoters of a corporation in
consideration of some supposed right or
property.
 Voting shares
o With a right to vote.
 Non-voting shares
o Without right to vote.
Other Kinds of Shares
 Over-issued stock
o Stock issued in excess of the authorized
capital stock. It is also known as spurious
stock. Its issuance is considered null and
void.
 Watered stock
o A stock issued not in exchange for its
o equivalent either in cash, property,
share,
o stock dividends, or services.
 Par value shares
o With a value fixed in the certificates of
stock and the articles of incorporation.
 No par value shares
o Have no par value but have issued value
stated in the certificate or articles of
incorporation.
7. OTHER CORPORATIONS
a. Close Corporation (Sec 95 of the RCC)
a. Limitation on the number of persons
to hold shares of stock, including the
limitation as to actual transfer of the
shares
b. Special Corporations
1. educational corporation
2. religious corporation
a. corporation sole
b. religious societies
Doctrine of Separate Personality
 A corporation has a personality SEPARATE AND
DISTINCT from that of its stockholders
or members.
DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION
 Allows the State for certain justifiable reasons to
disregard the fiction of juridical personality for
the corporation, separate and distinct from the
persons composing it.
Three Types in Piercing the Corporate Veil
1. Fraud Cases – when a corporation is used as a
cloak to cover fraud, or to do wrong.
 Incorporators
o They are those mentioned in the articles
of incorporation as originally forming
and composing the corporation, having
signed the articles and acknowledged the
same before a notary public. They have
no powers beyond those vested in them
by the statute.
Note: Minimum Number is Removed by the
Revised Corporation Code
Qualifications of Incorporators:
1. Any person whether natural or juridical
2. of legal age (for natural persons)
3. each must own or subscribe to at least one share.

Example: A company was incorporated in order to funnel

funds and launder money coming from a Drug Cartel

2. Alter Ego Cases – when the corporate entity is

merely a farce since the corporation is an alter
ego, business conduit or instrumentality of a
person or another corporation.
a. Where one corporation is so organized
and controlled and its affairs are
conducted so that it is in fact, a
mere instrumentality or adjunct of the
other, the fiction of the corporate entity
of the “instrumentality” may be
disregarded. The control necessary to
invoke the rule is not mere majority or Articles of Incorporation (AOI)
even complete stock control but such
domination of finances, policies, practices  “Framework of the Corporation”
that the controlled corporation has, so to o It is essentially a contract between
speak, no separate mind, will or existence the corporation and the
of its own, and is, but a conduit for its stockholders/ members; between the
principal. stockholders/ member inter se, and
3. Equity cases – when piercing the corporate fiction between the corporation and the State
is necessary to achieve justice or equity
Contents of the AOI
Formation of a Corporation
1. name of corporation
Who and What comprises a Corporation? 2. purpose/s, indicating the primary and
secondary purposes
1. Incorporators 3. place of principal office
2. Corporators 4. duration; (Revised Corporation Code now
3. stockholders and members provides Perpetual Existence)
4. promoter 5. names, nationalities and residences of
5. Board of directors incorporators;
6. Executive committee; and 6. Number of Directors names, nationalities and
7. Officers of the corporation. residences of the first directors.
 7. The Corporation’s Authorized Capital Stock
divided into the number of shares with its
corresponding par value.
8. names, residences, and amount paid by
each subscriber on their subscription
9. name of treasurer elected by subscribers
10. Undertaking to Change Name
11. if the corporation engages in a nationalized
industry, a statement that no transfer of stock
will be allowed if it will reduce the stock
ownership of Filipinos to a percentage below the
required legal minimum.
What cannot be Amended in the AOI
Those matters referring to facts existing as of the date of
the incorporation such as:
1. names of incorporators
2. names of original subscribers to the capital stock
of the corporation and their subscribed and paid-
up capital
3. treasurer elected by the original subscribers
4. members who contributed to the initial capital of
a non-stock corporation
5. date and place of execution of the articles of
incorporation
6. witnesses to and acknowledgment of the articles.
LIMITS ON THE USE OF CORPORATE NAME
1. Names which are identical, deceptively,
or confusingly similar to that of any
existing corporation
2. a name already protected by law
3. a name which is patently deceptive, confusing,
or contrary to existing laws
What are By-Laws?
 “Refers to the Management of the
Corporation Itself”
 “Set of Rules provided for the Conduct of
the Corporation’s Business”
Aptly defined as the rules for the internal government of
the corporation
Requirements for By-Laws to be Valid
1. Must not be contrary to existing law nor
inconsistent with the Code, else they have no
binding effect
2. Must not be contrary to morals and public policy
– State will interfere
3. Must not impair contractual obligations –Art III
Sec 10,1987 Constitution
4. Must be general and uniform – they must
affect all alike, and operate equally as to all
persons or matters standing in equal status or
circumstances and without any
unreasonable discrimination as to any particular
person or thing of the class
5. Must be consistent with the charter or articles of
incorporation
6. Must be reasonable not arbitrary or oppressive.
Reasonableness depends upon:
a. Facts and circumstances of the case
b. Nature, Purpose, Object of the
corporation
c. Whether or not it is within the
corporation’s power of adoption
d. The relation which the person raising the
question sustains to the corporation, i.e.,
whether he is a stockholder or member
or stranger to the corporation.
Binding Effects of By-Laws
1. AS TO MEMBERS AND CORPORATION-
a. They have the same force and effect as
the provisions of the charter and articles
of incorporation. They have the force
of contract between the members
themselves.
b. They are binding only upon the
corporation adopting them and on its
members and those having direction,
management and control of its affairs.
2. AS TO THIRD PERSONS
a. Strangers are not bound to know the by-
laws which are merely provisions for the
government of a corporation and notice
to them will not be presumed.
Rationale: by-laws have no extra-corporate force and are
not in the nature of legislative enactments so far as third
persons are concerned.
AOI v. By-Laws
ARTICLES OF INCORPORATION
1. It is essentially a contract between the
corporation and the stockholders/ members;
between the stockholders/ member inter se, and
between the corporation and the State; hence must
be notarized themselves;
2. It is executed before incorporation
3.It is a condition precedent in the acquisition
of corporate existence
4. It is 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
5. Power to amend/repeal articles cannot be
delegated by the stockholders/ members to the
board of directors/ trustees.
Management of Corporation Persons Involved Herein
The Power to Govern in a Corporation
 Board of Directors is the governing body of
a corporation which exercises the
corporate powers, conduct all business, and
control all properties of the corporation.
Note:
Stock Corporation – Board of Directors
Non-Stock Corporation – Board of Trustees
 President
o Person who runs the day-to-
day operation of the Corporation. He is
elected from the members of the Board
of Directors of the Corporation. He can
also preside the meetings of the Board
when Chairman is absent.
BY-LAWS
1. It is more of a rule 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
2. It is usually executed after the incorporation
although Sec. 46 allows simultaneous filling of the two
3.It is a condition subsequent
4. It 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
5. Power to amend or repeal by-laws or adopt new by-laws 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.
 Chairman of the Board
o Person who presides the meeting of
the Board of Directors. He / She
determines the order of the meeting, the
presence of a quorum, and determines
how each corporate act shall be approved
by the Board of Directors, based on the
by-laws of the Corporation.
Note: In some instances, the President and Chairman is
one and the same
 Corporate Secretary
Person whose functions, relate to the Conduct of Board
Meetings, which include:
1. Sending of Meeting Notices and Agenda
2. Taking of Minutes
3. Confirmation of Quorum
4. Issuance of Certifications related to
Corporate Resolutions
5. Issuance of Certificates and Maintenance of the
Stock and Transfer Book
Statutory Requirements for a Corporate Secretary

1. Citizen of the Philippines

2. Resident of the Philippines

Note: The position of Corporate Secretary cannot be

concurrently held by President of the Corporation.

 Corporate Treasurer
o Person whose functions include
Financial Management of Funds and
Assets of the Corporation.
o In compliance with rules on Audited
Financial Statements and Annual Income
Tax Returns, the Treasurer needs to sign
the Statement of Management
Responsibility for the Corporation

Statutory Requirements of Corporate Treasurer

 He/ She must be a resident of the Philippines

Note: The position of Corporate Treasurer cannot be

concurrently held by President of the Corporation.

 Compliance Officer
o Under the Revised Corporation Code, a
corporation vested with Public Interest
must appoint a Compliance Officer, who
is usually in charge with reportorial
requirements and ensures that all
laws affecting the operations of the
corporation are observed and complied
with

Requirement of Independent Director

 An independent Director is one, who apart

from shareholdings and fees received from
the Corporation, is autonomous from
Management, impartial and free from any other
business which could or could reasonably be
perceived to interfere with the exercise of his/her
own judgment
 It is mandatory for corporations vested with
public interest to appoint an Independent
Director
LIMITED PARTNERSHIP
 It is formed by two or more persons having as
members one or more general partners and one
or more limited partners, the latter not being
personally liable for partnership debts. (Art. 1843,
NCC)
Characteristics of Limited Partnership
1. It is formed by compliance with the stationary
requirements
2. One or more general partners control the
business and are personally liable to creditors.
3. One or more limited partners contribute to the
capital and share in the profits but do not
participate in the management of the business
and are not personally liable for partnership
obligations beyond their capital contributions.
4. The limited partners may ask for the return of
their capital contributions under conditions
prescribed by law.
5. Partnership debts are paid out of common fund
and the individual properties of general partners.
Rationale
1. Secure capital from others for one’s business and
still retain control
2. Share in profits of a business without risk of
personal liability
3. Associate as partners with those having business
skill. (De Leon, 2010).
Formation
1. Certificate of articles of limited partnership which
states the matters enumerated in Art. 1844, must
be signed, and sworn.
2. Certificate must be filed for record in the office of
the SEC.
NOTE: Strict compliance with legal requirements is not
necessary. It is sufficient that there is substantial
compliance in good faith. If there is no substantial
compliance, the partnership becomes general partnership
as far as third persons are concerned, in which the
member are liable as general partners.
Cancellations of certificate or articles of limited
partnership
1. When the partnership is dissolved
2. When all the limited partners ceased to be such
(Art. 1864, NCC)
Rights and Obligations of Limited Partner
1. To have partnership books kept at principal place
of business.
2. To inspect/copy books at reasonable hours.
3. To have on demand true and full information of
all things affecting partnership
4. To have formal account of partnership affairs
whenever circumstances render it just and
reasonable.
5. To ask for dissolution and winding up by decree
of court.
6. To receive share of profits/other compensation
by way of income.
7. To receive return of contributions, provided the
partnership assets are in excess of all its liabilities.
Substituted Limited Partner
 It is a person admitted to all the rights of a limited
partner who has dies or assigned his interest in
the partnership.
 Rights and liabilities of a substituted limited
partner.
General Rule: He has all the rights and powers and is
subject to all the restrictions and liabilities of his assignor.
Exception: Those liabilities which he was ignorant at the
time that he became a limited partner, and which could
not be ascertained from the certificate.
Requirements for the admission of a substituted limited
partner
1. All members must consent to the assignee,
becoming a substituted limited partner or the
limited partner, being empowered by the
certificate must give the assignee the right to
become a limited partner.
2. The certificate must be amended in accordance
with Art. 1865
3. The certificate as amended must be registered in
the SEC.
Liabilities of a Limited Partner
1. To the Partnership
o Since limited partners are not principals
in the transaction of a partnership, their
liability as a rule, is to the partnership,
not to the creditors of the partnership.
The general partners cannot, however,
waive any liability of the limited partners
to the prejudice of such creditors.
2. To the Partnership creditors and other partners
o A limited partner is liable for partnership
obligations when he contributed services
instead of only money or property to the
partnership
o When he allows his surname to appear in
the firm name
o When he fails to have a false statement in
the certificate corrected, knowing it to be
false
o When he takes part in the control of the
business
o When he receives partnership property
as collateral security, payment,
conveyance, or release in fraud of
partnership creditors
o When there is failure to substantially
comply with the legal requirements
governing the formation of limited
partnerships.
Dissolution of Limited Partnership
When may a limited partner have the partnership
dissolved?
1. When his demand for the return of his
contribution is denied although he has right to
such return
2. When his contribution is not paid although he is
entitled to its return because the other liabilities
of the partnership have not been paid or the
partnership property is insufficient for their
payment.
Return of Limited Partner’s Capital
When all liabilities of the partnership, except liabilities to
general partners and to limited partners on account of
their contributions, have been paid or there remains
property of the partnership sufficient to pay them and the
certification is cancelled or so amended as to set forth the
withdrawal or reduction:
1. On the dissolution of the partnership
2. Upon the arrival of the date specified in the
certificate for the return
3. After the expiration of 6 month notice in writing
given by him to the other partners if no time is
fixed in the certificate for the return of the
contribution or for the dissolution of the
partnership.
NOTE: Even if a limited partner has contributed property,
he has only the right to demand and receive cash for his
contribution. The exceptions are:
1. When there is stipulation to the contrary in the
certificate
2. When all the partners (general and limited
partners) consent to the return other than in the
form of cash.
Settlement of Accounts after dissolution
1. Those to creditors, in the order of the priority as
provided by law, except those to limited partners
on account of their contributions, and to general
partners
2. Those to limited partners in respect to their share
of the profits and other compensation by way of
income on their contributions.
3. Those to limited partners in respect to the capital
of their contributions.
4. Those to general partners other than for capital
and profits
5. Those to general partners in respect to profits
6. Those to general partners in respect to capital
(Art. 1863, NCC)
NOTE: Subject to any statement in the certificate or to
subsequent agreements, limited partners share in the
partnership assets in respect to the claims for capital and
in respect to their claims for profits or for compensation
by way of income on their contribution respectively, in
proportion to the respective amounts of such claims.
Effect of retirement, death, civil interdiction, insanity, or
insolvency of a partner
 General partner
o The partnership is dissolved. (Art. 1860)
unless the business is continued by the
remaining general partners:
 Under the right stated in the
certificate
 With the consent of all partners
 Limited partner
o The partnership is not dissolved except all
limited partners cease to be such