THE LAW ON CORPORATION

KINDS OF BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP – one conducted for profit by a lone or single individual who owns all assets, personally owes and
answers all the liabilities or suffers all the losses and enjoys all the profits to the exclusion of others.

PARTNERSHIP – a contract where two or more persons bind themselves to contribute money, property or industry to a common
fund with the intention of dividing the profits among themselves (Art. 1767, Civil Code).

JOINT VENTURE – a one-time grouping of two or more persons, natural or juridical, in a specified undertaking.

CORPORATION – 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. 1, Corporation Code [CC])

ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.

RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more of its stockholder does
not result in its dissolution;

POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only such powers and can
hold only such properties as are granted to it by the enabling statutes unlike natural persons who can do anything as they please.

BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel, slander and other forms of defamation, a corporation is
entitled to moral damages.

A. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS

CAPACITY TO ACT AS A SINGLE UNIT – any number of persons may unite in a single enterprise without using their names,
without difficulty or inconvenience, and with the valuable right to contract, to sue and be sued, and to hold or convey property, in
the corporate name;

LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability since stockholders are not personally liable for the debts of the
corporation;

CONTINUITY OF EXISTENCE – rights and obligations of a corporation are not affected by the death, incapacity or replacement
of the individual members;

EASIBILITY OF GREATER UNDERTAKING – it enables the individuals to cooperate in order to furnish the large amounts of
capital necessary to finance large scale enterprises;

TRANSFERABILITY OF SHARES – unless reasonably restricted, shares of stocks, being personal properties, can be transferred
by the owner without the consent of the other stockholders;

CENTRALIZED MANAGEMENT – the vesting of powers of management and appointing officers and agents in board of directors
gives to a corporation the benefit of a centralized administration which is a practical business necessity in any large organization;
and

STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT AND FINANCE – which are provided under a well-drawn
general corporation law. The corporation statutes enter into the charter contract.

CHAPTER 2: DEFINITION AND ATTRIBUTES

B. DEFINITION

Sec. 2. Corporation Defined – A corporation is an artificial being created by

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

C. ATTRIBUTES (CARP)

1. CREATED BY OPERATION OF LAW – the formal requirement of the State’s consent through compliance with the
requirements imposed by law is necessary for its creation such that the mere agreement of the persons composing it or
 intending to organize it does not warrant the grant of its independent existence as a juridical entity;

2. ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.

3. RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more of its stockholder
does not result in its dissolution;

4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only such powers
and can hold only such properties as are granted to it by the enabling statutes unlike natural persons who can do anything as
they please.

D. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS

1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons may unite in a single enterprise without using their
names, without difficulty or inconvenience, and with the valuable right to contract, to sue and be sued, and to hold or convey
property, in the corporate name;
2. LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability since stockholders are not personally liable for the debts of
the corporation;
3. CONTINUITY OF EXISTENCE – rights and obligations of a corporation are not affected by the death, incapacity or
replacement of the individual members;
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the individuals to cooperate in order to furnish the large amounts
of capital necessary to finance large scale enterprises;
5. TRANSFERABILITY OF SHARES – unless reasonably restricted, shares of stocks, being personal properties, can be
transferred by the owner without the consent of the other stockholders;
6. CENTRALIZED MANAGEMENT – the vesting of powers of management and appointing officers and agents in board of
directors gives to a corporation the benefit of a centralized administration which is a practical business necessity in any large
organization; and
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT AND FINANCE – which are provided under a well-
drawn general corporation law. The corporation statutes enter into the charter contract and these are constantly being
interpreted by courts. An established system of management and protection of shareholders and creditors’ rights has thus
been and are being evolved.
E. GOVERNMENT POWERS IN RELATION TO CORPORATIONS

The Corporation Code places all corporations registered under its provision to be under the control and supervision of the Securities
and Exchange Commission (Sec. 19 and 144). Its powers and functions are clearly spelled out in PD 902-A, as amended by RA No.
8799, otherwise known as the Securities Regulation Code.

CHAPTER 3: CLASSIFICATION OF CORPORATION

A. CLASSES OF CORPORATIONS UNDER THE CORPORATION CODE

Sec. 3. Classes of corporations. - Corporations formed or organized under

this Code may be stock or non-stock corporations. Corporations which have
capital stock divided into shares and are authorized to distribute to the holders
of such shares dividends or allotments of the surplus profits on the basis of the
shares held are stock corporations. All other corporations are non-stock
corporations.

SIGNIFICANT DISTINCTION: Although a non-stock corporation exists for purposes other than for profit, it does not follow that
they cannot make profits as an incident to their operations. But a significant distinction is that profits obtained by a non-stock
corporation cannot be distributed as dividends but are used merely for the furtherance of their purpose or purposes.

B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER

Sec. 4. Corporations created by special laws or charters. - Corporations

created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are applicable.

C. OTHER CLASSES OF CORPORATIONS

1. PUBLIC AND PRIVATE CORPORATIONS

PUBLIC CORPORATION: those formed or organized for the government of a portion of the State or any of its political
subdivisions and which have for their purpose the general good and welfare.

It is to be observed, however, that the mere fact that the undertaking in which a corporation is engaged in is one which the State
itself might enter into as part of its public work does not make it a public one. Nor is the fact that the State has granted property or
special privileges to a corporation render it public. Likewise, the fact that some or all of the stocks in the corporation are held by the
government does not make it a public corporation.

The TRUE TEST to determine the nature of a corporation is found in the relation of the body to the State. Strictly speaking, a
public corporation is one that is created, formed or organized for political or governmental purposes with political powers to be
exercised for purposes connected with the public good in the administration of the civil government.

2. ECCLESIASTICAL AND LAY CORPORATIONS

ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed exclusively of ecclesiastics organized for spiritual purposes
or for administering properties held for religious ones. They are organized to secure public worship or perpetuating the right of a
particular religion.

LAY CORPORATIONS: are those organized for purposes other than religion. They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such as those organized for the purpose of maintaining
hospitals and houses for the sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit, pecuniary or otherwise, of its members.

3. AGGREGATE AND SOLE CORPORATIONS

AGGREGATE CORPORATIONS: are those composed of a number of individuals vested with corporate powers.

CORPORATION SOLE: those consist of one person or individual only and who are made as bodies corporate and politic in order to
give them some legal capacity and advantage which, as natural persons, they cannot have. Under the Code, a corporation sole may
be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder or religious denominations, sects or
churches.

4. CLOSE AND OPEN CORPORATION

CLOSE CORPORATIONS: are those whose shares of stock are held by a limited number of persons like the family or other
closely-knit group. There are no public investors and the shareholders are active in the conduct of the corporate affairs; recognized
under Sec. 96 of the Corporation Code.

OPEN CORPORATIONS: are those formed to openly accept outsiders as stockholders or investors. They are authorized and
empowered to list in the stock exchange and to offer their shares to the public such that stock ownership can widely be dispersed.

5. DOMESTIC AND FOREIGN CORPORATIONS

DOMESTIC CORPORATIONS: are those organized or created under or by virtue of the Philippine laws, either by legislative act or
under the provisions of the General Corporation Law.

FOREIGN CORPORATIONS: are those formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123, Corporation Code).

The second part of the definition is, however, somehow misplaced since any corporation for that matter, which is not registered
under Philippine laws is a foreign corporation. Such second part was inserted only for the purpose of qualifying a foreign corporation
to secure a license and to do business in the Philippines.

6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND AFFILIATES

PARENT OR HOLDING COMPANY: a corporation who controls another corporation, or several other corporations known as its
subsidiaries. Holding companies have been defined as corporations that confine their activities to owning stock in, and supervising
management of other companies. A holding company usually owns a controlling interest (more than 50% of the voting stock) in the
companies whose stocks it holds. As may be differentiated from investment companies which are active in the sale or purchase of
shares of stock or securities, parent or holding companies have a passive portfolio and hold the securities merely for purposes of
control and management.

SUBSIDIARY CORPORATIONS: those which another corporation owns at least a majority of the shares, and thus have control.
A subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence any claim or suit
against the latter does not bind the former or vice versa.

AFFILIATES: are those corporations which are subject to common control and operated as part of a system. They are sometimes
called “sister companies” since the stockholdings of a corporation is not substantial enough to control the former. Example: 15% of
ABCD Company is held by A Corp, 18% by B Corp, and another 15% by C Corp. – A, B and C are affiliates.

7. QUASI-PUBLIC CORPORATIONS

These are private corporations which have accepted from the state the grant of a franchise or contract involving the performance of
public duties. The term is sometimes applied to corporations which are not strictly public in the sense of being organized for
governmental purposes, but whose operations contribute to the convenience or welfare of the general public, such as telegraph and
telephone companies, water and electric companies. More appropriately, they are known as public service corporations.

8. DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL

DE JURE CORPORATIONS: are juridical entities created or organized in strict or substantial compliance with statutory
requirements of incorporation and whose rights to exist as such cannot be successfully attacked even by the State in a quo
warranto proceeding. They are, in effect, incorporated by strict adherence to the provisions of the law of their creation.

DE FACTO CORPORATIONS: are those which exist by the virtue of an irregularity or defect in the organization or constitution or
from some omission to comply with the conditions precedent by which corporations de jure are created, but there was colorable
compliance with the requirements of the law under which they might be lawfully incorporated for the purposes and powers
assumed, and user of the rights claimed to be conferred by law. Its existence can only be attacked by a direct action of quo
warranto proceedings.

CORPORATION BY ESTOPPEL: those which are so defectively formed as not to be either de jure or de facto corporations but
which are considered as corporations in relation only to those who cannot deny their corporate existence due to their agreement,
admission or conduct.

CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS

1. PROMOTIONAL STAGE

This is undertaken by the organizers or promoters who bring together persons interested in the business venture. They enter into
contract either in their own names or in the name of the proposed corporation.

LIABILITY OF PROMOTERS:
GENERAL RULE: a promoter, although he may assume to act for and on behalf of a projected corporation and not for himself, will be
held personally liable on contracts made by him for the benefit of a corporation he intends to organize. The personal liability
continues even after the formation of the corporation unless there is novation or other agreement to release him from liability. As
such, the promoter may do either of the following options:

2. PROCESS OF INCORPORATION

Includes the drafting of the Articles of Incorporation, preparation and submission of additional and supporting documents, filing with
the SEC, and the subsequent issuance of the Certificate of Incorporation.

CONTENTS OF THE ARTICLES OF INCORPORATION

Sec. 14. Contents of the articles of incorporation. - All corporations

organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly signed
and acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special
law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which
is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its
nature as such;
 3. The place where the principal office of the corporation is to be located,
which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and
qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in
lawful money of the Philippines, the number of shares into which it is divided,
and in case the share are par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the
shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn
statement of the Treasurer elected by the subscribers showing that at least
twenty-five (25%) percent of the authorized capital stock of the corporation
has been subscribed, and at least twenty-five (25%) of the total subscription
has been fully paid to him in actual cash and/or in property the fair valuation of
which is equal to at least twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five thousand (P5,000.00) pesos.

Sec. 15. Forms of Articles of Incorporation . - Unless otherwise prescribed by special law, articles of incorporation of all
domestic corporations shall comply substantially with the following form:

a. PREFATORY PARAGRAPH

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“KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this
day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines”
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It must specify the nature of the corporation being organized in order to prevent difficulties of administration and supervision. Thus,
the corporation should indicate whether it is a stock or a non-stock corporation, a close corporation, corporation sole or a religious
corporation.

b. CORPORATE NAME

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AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";
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The name of the corporation is essential to its existence since it is through it that it can act and perform all legal acts. Each
corporation should therefore, have a name by which it is to sue and be sued and do all legal acts.

A corporation, once formed, cannot use any other name, unless it has been amended in accordance with law as this would result in
confusion and may open the door to fraud and evasion as well as difficulties of administration and supervision.

Thus, the organizers must make sure that the name they intend to use as a corporate name is not similar or confusingly similar
to any other name already registered and protected by law since the SEC would refuse registration if such be the case.

Sec. 18. Corporate name. - No corporate name may be allowed by the

Securities and Exchange Commission if the proposed name is identical or
 deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is approved,
the Commission shall issue an amended certificate of incorporation under the
amended name.

1. The following words shall not be used as part of a corporate or partnership names:
a. As provided by special laws:
1. "Finance", "Financing" or "Finance and Investment" by corporations or partnerships not engaged in the financing
business (R.A. 5980, as amended)
2. "Engineer", "Engineering" or "Architects" as part of the corporate name (R. A. 546 and R.A. 1582)
3. "Bank", "Banking", "Banker", Building and Loan Association", Trust Corporation", "Trust Company" or words of similar
import by corporations or associations not engaged in banking business. (R.A. 337, as amended)
4. "United Nations" in full or abbreviated form cannot be part of a corporate or partnership name (R.A. 226)
5. "Bonded" for corporations or partnerships with unlicensed warehouse (R.A. 245)
b. As a matter of policy:
1. "Investment(s)" by corporations or partnership not organized as investment house company or holding company.
2. "National" by all stock corporations and partnership.
3. "Asean", "Calabarzon" and "Philippines 2000".

c. PURPOSE CLAUSE

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SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
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The statement of the objects or purpose or powers in the charter results practically in defining the scope of authority of the
corporate enterprise or undertaking. This statement both congers and also limits the actual authority of the corporate
representatives.

The reasons for requiring a statement of the purposes or objects:

1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines of
business his money is to be put at risks;
2. So that the board of directors and management my now within what lines of business they are authorized to act; and
3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates
entering is one within the general authority of the management.

SECONDARY PURPOSE: Although the Corporation Code does not restrict nor limit the number of purpose or purposes which a
corporation may have, Sec. 14 thereof, requires that if it has more than one purpose, the primary purpose as well as the secondary
ones must be indicated therein.

PROHIBITION: The following are prohibited by special laws for having any other purpose not peculiar to them:
1. Educational, religious, and other non-stock corporations cannot include any other purpose which would change or contradict its
nature or to engage in any enterprise to make profits for is members;
2. Insurance companies cannot engage in commercial banking at the same time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.

RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:

1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC is duty bound to determine the legality of the
corporate purpose/s before it issues the certificate of registration;
2. A corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy, either directly or
indirectly. These are reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso equivalent are reserved exclusively for Filipinos, or for
corporations or partnerships wholly owned by such citizen.
4. As a general rule, corporations with foreign equity are not allowed to engage in restaurant business but corporations with such
foreign equity can purse such undertaking if it is incidental or in connection with hotel or inn-keeping business.
5. Management consultants, advisers and/or specialists, must submit the personal information sheet of the incorporators and
directors in order that the SEC may be able to find out or determine whether or not the applicant corporation is qualified to act as
such.
6. As a matter of policy, financing companies are required by the SEC to submit certain additional documents together with their
applications for registration to verify compliance with RA 8556.
7. For bonded warehousing companies, an undertaking to comply with the General Bonded Warehousing Act must be submitted
along with the AOI.
8. In case the applicant proposes to engage in the business of hospital and/or clinic, the purpose clause must contain the following
proviso: “Provided that purely medical or surgical services in connection therewith shall be performed by duly qualified physician
and surgeon who may or may not be freely and individually contracted by the parties.”
9. In the case of Customs Brokerage business, the applicant must submit the license of at least two customs broker connected with
the applicant corporation;
10. Transfer Agents, Broker and Clearing Houses must submit the certificate of admission to the profession of the CPA of any officer
of the corporation;
11. Carriage of mails cannot be a purpose of a corporation unless a special franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose under the supervision of another government agency,
prior clearance and/or approval of the concerned government agencies or instrumentalities will be required pursuant
to the last paragraph of Sec. 17 of the Code.

GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or general terms;
3. If there is more than one purpose, the primary as well as the secondary ones must be specified; and
4. The purposes must be capable of being lawfully combined.

d. PRINCIPAL OFFICE
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THIRD: That the principal office of the corporation is located in the City/Municipality of............................................,
Province of................................................., Philippines
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It must be located within the Philippines. The AOI must not only specify the province, but also the City or Municipality where it is
located. In this regard, it is to be observed that the principal office may be in one place but the business operations are actually
conducted in other areas. The law does not, of course, require a statement of the place of corporate operations and, therefore, may
be dispensed with.

The principal office serves as the residence of the corporation, and is thus important in: (1) venue of actions; (2) registration of
chattel mortgage of shares; (3) validity of meetings of stockholders or members in so far as venue thereof is concerned.

e. TERM OF EXISTENCE
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FOURTH: That the term for which said corporation is to exist is............... years from and after the date of issuance of
the certificate of incorporation;
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Sec. 11. Corporate term. - 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. The corporate term as originally
stated in the articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code; Provided, That no
extension can be made earlier than five (5) 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 Securities and Exchange Commission

The corporate term is necessary in determining at what point in time the corporation will cease to exist or have lost its juridical
personality. Once it ceases to exist, its legal personality also expires and could not thereafter, act in its own name for the purpose of
prosecuting it business.

EXTENSION: can be made not earlier than 5 years prior to the expiry date unless there are justifiable reasons.

f. INCORPORATORS
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FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows:

NAME NATIONALITY RESIDENCE

..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
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Sec. 5. Corporators and incorporators, stockholders and members. -

 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.

Corporators in a stock corporation are called stockholders or shareholders.

Corporators in a non-stock corporation are called members.

CORPORATORS apply to all who compose the corporation at any given time and need not be among those who executed the AOI
at the start of its formation or organization.

INCORPORATORS are those mentioned in the AOI as originally forming the corporation and who are signatories in the AOI.

An incorporator may be considered as a corporator as long as he continues to be a stockholder or a member, but not all corporators
are incorporators.

Sec. 10. Number and qualifications of incorporators. - Any number of

natural persons not less than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the Philippines, may form a
private corporation for any lawful purpose or purposes. Each of the
incorporators of a stock corporation must own or be a subscriber to at least one
(1) share of the capital stock of the corporation.

g. DIRECTORS/TRUSTEES
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SIXTH: That the number of directors or trustees of the corporation shall be............; and the names, nationalities and
residences of the first directors or trustees of the corporation are as follows:

NAME NATIONALITY RESIDENCE

..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
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DIRECTORS compose the governing board in stock corporations. TRUSTEES refer to non-stock corporations.

There must be at least 5 but not more than 15 directors in a private corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations whose number of trustees, though not less than 5 and not more
than 15 should be divisible by 5.
2. In close corporations where all stockholders are considered as members of the board of directors (Sec. 97) thereby effectively
allowing 20 members in the board.

The by-laws of a corporation may provide for additional qualifications and disqualifications of its members of the board of directors
or trustees. However, it may not do away with the minimum disqualifications laid down by the Code. The minimum qualifications of
directors and trustees in a domestic corporation are provided under the 2 nd par. Of Sec. 23:

Sec. 23. The board of directors or trustees

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Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on
the books of the corporation. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the corporation of which he is a
director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. a majority of the directors or trustees of all
corporations organized under this Code must be residents of the Philippines.

QUALIFICATIONS OF DIRECTORS/TRUSTEES:
1. Must own at least 1 share in their own names or a member (in the case of trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as directors, provided that the majority of such directors
are residents of the Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like the management of educational
institutions and those governed by the Retail Trade Law.
 Sec. 27. Disqualification of directors, trustees or officers. - No person
convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within five
(5) years prior to the date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation.

DISQUALIFICATIONS:
1. Imprisonment for a period exceeding 6 years;
2. Violation of the Corporation Code within 5 years prior to the date of election or appointment;
3. Such other disqualifications that may be provided in the by-laws.

h. CAPITALIZATION
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SEVENTH: That the authorized capital stock of the corporation is................................................ (P......................)
PESOS in lawful money of the Philippines, divided into.............. shares with the par value of..................................
(P.......................) Pesos per share.
(In case all the share are without par value):

That the capital stock of the corporation is.......................... shares without par value. (In case some shares have par
value and some are without par value): That the capital stock of said corporation consists of....................... shares of
which...................... shares are of the par value of............................. (P.....................) PESOS each, and of
which............................... shares are without par value.

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed
as follows:

Name of Subscriber Nationality No of Shares Amount Subscribed

........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ...........................

NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as
follows:

Name of Subscriber Amount Subscribed Total Paid-Up

..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
....................
....................
....................
....................
....................

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the
above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money
contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or
donors and the respective amount given by each.)
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The Corporation Code requires the AOI to state the authorized capital stock, the number of shares and/or kind of shares into which
the authorized capital is divided, the par value of each share, if there by any, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each. At least 25% of the subscribed capital must be paid and in no case may
the paid-up capital be less than P5,000.

AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and paid-in or secured to be paid by
the subscribers. It may also refer to the maximum number of shares that a corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which there are contracts for their acquisition
or subscription. It is in effect, the stockholder’s equity account showing that part of the authorized capital stock which has been paid
or promised to be paid, or that portion of the authorized capital stock which has been subscribed by the subscribers or stockholders.

PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value which has been actually contributed or paid to the
corporation in consideration of the subscriptions made thereon. It may be in the form of cash, property or in the form of services
actually rendered to the corporation as provided under Sec. 62 of the Corporation Code:
 Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.

Where the consideration is other than actual cash, or consists of intangible

property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future
service.

The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose.

SHARES OF STOCKS AND THEIR CLASSIFICATIONS

SHARES OF STOCK designate the units into which the proprietary interest in a corporation is divided. They represent the
proportionate integers or units, the sum of which constitutes the capital stock of the corporation. It is likewise the interest or right
which the owner, called the stockholders or shareholder, has in the management of the corporation, and in the surplus profits and in
case of distribution, in all of its assets remaining after the payment of its debts.

CERTIFICATE OF STOCK is a document or instrument evidencing the interest of a stockholder in the corporation.

Sec. 6. Classification of shares. - The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be deprived
of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, further,
That there shall always be a class or series of shares which have complete
voting rights. Any or all of the shares or series of shares may have a par value
or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to issue no-
par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in

the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and
 non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other
share.

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary

to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.

COMMON STOCKS are the most commonly issued shares of stock of a corporation. Although no clear cut definition can be found,
it has been described as one which entitles it owner to an equal or pro-rata division of profits, if there are any, but without any
preference or advantage in that respect over any other stockholder or class of stockholders.

A common share usually carries with it the right to vote, and frequently, the exclusively right to do so. However, where the AOI is
silent, all issued and outstanding shares shall be considered to have the right to vote and be voted for.

PREFERRED STOCK is a stock that gives the holder preference over the holder of common stocks with respect to the payment of
dividends and/or with respect to distribution of capital upon liquidation. LIMITATIONS imposed by the Code in the issuance of
preferred stocks: (1) They can be issued only with a stated par value; and (2) The preference must be stated in the AOI and in the
certificate of stock otherwise each share shall be, in all respect, equal to every other share.

a. PREFERENCE AS TO DIVIDENDS
They have the privilege of being paid dividends first before any other stockholders are paid theirs. The guaranty is not absolute so
as to create a relation of debtor and creditor between the corporation and the holders of such stock. The amount of preference is
stated in the contract of subscription and is usually a fixed percentage or by specified amount indicated therein.

Participating and Non-Participating Preferred Shares

If the preferred shares are participating, they are entitled to participate in dividends with the common shareholders beyond their
stated preference. Non-participating preferred shares on the other hand are entitled to its fixed priority or preference only.

Cumulative and Non-cumulative Preference Shares

Cumulative preferred shares are those that entitle the owner thereof to payment not only of current dividends but also back
dividends not previously paid whether or not, during the past years, dividends were declared or paid. In light of the provision of the
Code stating that all shares are equal in all respects unless otherwise stated in the AOI, a preferred share to be considered
cumulative, the same must be provided for and specified in the certificate.

Non-cumulative preferred shares are those which grant the holders of such shares only to the payment of current dividends but not
back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same. This
type may be divided into three groups:
1. Discretionary dividend type – depends on the judgment or discretion of the board of directors. Unless there is grave abuse of
discretion as to result in oppression, fraud or unfair discrimination, the dividend right of stockholders of a particular year cannot be
made up in subsequent years;
2. Mandatory if earned – impose a positive duty on directors to declare dividends every year when profits are earned. In effect,
directors cannot withhold dividends if there are profits.
3. Earned cumulative or dividend credit type – gives the holder the right to arrears in dividends if there were profits earned during
the previous years. In effect, their right to receive dividends is merely postponed on a later date. The moment dividends are
declared, back dividends earned in previous years but not declared as such must first be paid to this type of preferred shareholders
before the common shareholders receive theirs.

DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are entitled to dividends whether or not there are profits.
Earned cumulative or dividend credit type is entitled only to arrears if there are profits in those years.

b. Voting Right of Preferred Shares

Preferred shares, along with redeemable shares, are usually denied voting rights as they are allowed to be denied of such as
provided in Sec. 6, but this right must clearly be withheld. However, even if deprived, preferred shareholders have the right to vote
in matters enumerated in the penultimate paragraph of Sec. 6.

c. Preference Upon Liquidation

Such preference must also be stated in the contract, accordingly giving them the preference to the distribution of corporate assets
upon liquidation or termination of corporate existence. If the preferred shares are cumulative, they have the right to any arrears in
arrears in priority to any distribution of assets to the common stockholders.

PAR AND NON-PAR VALUE SHARES

Par Value Shares are those whose values are fixed in the AOI. Its par value is the minimum subscription or original issue price of the
shares and indicates the amount which the original subscribers are supposed to contribute to the capital, which, however, may not
reflect the true value of the shares because the same may fluctuate depending on the liability and networth of the enterprise.

Watered Stocks are those issued at less than par value where the stockholders will remain liable for the difference between what he
paid and the actual par value thereof (Sec. 65).

No Par Value Shares are those whose issued price are not stated in the certificate of stock but may be fixed in the AOI, or by the
BOD when so authorized the articles or the by-laws, or in the absence thereof, the stockholders themselves. They do not purport to
represent ay stated proportionate interest in the capital measured by value, but only an aliquot part of the whole number of shares
of the corporation issuing it.

VOTING AND NON-VOTING SHARES

Voting shares as the name suggests, gives the holder thereof the right to vote and participate in the management of the
corporation, through the election of the BOD, or in any matter requiring stockholders’ approval.

However, voting shares may practically be denied the right to vote where there exist founders’ shares.

Non-voting shares do not grant the holder thereof, a voice in the election of directors and some other matter requiring stockholders’
vote.

Only preferred and redeemable shares may be denied the right to vote. But, even if denied such right, they may still vote on the
following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation

FOUNDERS’ SHARES are shares issued to the founders of the corporation which are granted certain right and privileges such as
the exclusive right to vote and be voted for in the election of directors.

Sec. 7. Founders' shares. - Founders' shares classified as such in the

articles of incorporation may be given certain rights and privileges not enjoyed
by the owners of other stocks, provided that 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 subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
 the aforesaid approval by the Securities and Exchange Commission.

The period of 5 years is non-extendable because it may result in the almost perpetual disqualification of other stockholders to elect
or be elected as members of the BOD resulting to the lack of proper representation thereat.

REDEEMABLE SHARES are those subject to redemption as may be provided in the subscription contract, which are usually
attached to preferred shares and other debt securities like bonds.

Sec. 8. Redeemable shares. - Redeemable shares may be issued by the

corporation when expressly so provided in the articles of incorporation. They
may be purchased or taken up by the corporation 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 as may be
stated in the articles of incorporation, which terms and conditions must also be
stated in the certificate of stock representing said shares

These types of shares grants the corporation the right to repurchase the shares at its option or at the option of the holder based on
the face or issued value plus specified premium, such redemption may be optional or mandatory at a fixed or future date.

Such repurchase may also be made regardless if there are unrestricted retained earnings. (see Power to Acquire Own Shares)

TREASURY SHARES

Sec. 9. Treasury shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors.

Treasury shares, as provided in Sec. 9, are reacquired but not retired. They may be issued for a price, even less than par, and the
purchaser will not be liable to the creditors of the corporation for the difference of the purchase price and its par value. They may
also be declared as dividends since they are properties of the corporation.

Such shares do not have the right to share in dividends nor the right to vote.

CAPITAL REQUIREMENTS

Sec. 12. Minimum capital stock required of stock corporations. - Stock

corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided for
by special law, and subject to the provisions of the following section

Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of the
authorized capital stock as stated in the articles of incorporation must be
subscribed at the time of incorporation, and at least twenty-five (25%) per cent
of the total subscription must be paid upon subscription, the balance to be
payable on a date or dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for payment by the
board of directors: Provided, however, That in no case shall the paid-up capital
be less than five Thousand (P5,000.00) pesos

From the above provisions, it can be said that there is no minimum capital requirement in order that a corporation may be duly
incorporated except in special cases and provided that at least P5,000 should be paid-in, which effectively would make the P5,000
the minimum capital requirement.

The 25% minimum paid-in capital can be paid by any shareholder, meaning that it is not particularly required that each subscriber
pay 25% of their subscription.

There are instances where the SEC, by virtue of an existing law, rules and regulations or policies, requires the payment of more
than the amount provided in the Code, such as Financing Companies where the required minimum paid-up capital be P10,000,000
(within Metro Manila), P5,000,000 (other cities), and P2,000,000 (municipalities).

i. RESTRICTIONS AND PREFERENCES

Corporations are not required to provide for certain restrictions and preferences regarding the transfer, sale or assignment of shares
in the AOI except in close corporations which would subject their shares to specific restrictions as required in Sec. 96 of the Code.
They are not, however, restrained or prohibited from doing so

If the corporation desires to grant such options, restrictions and/or preferences, the same must be indicated in the AOI AND in all
of the stock certificates. Failure to provide the same in the AOI would not bind the purchasers in good faith despite the fact that the
said restriction and/or preference is indicated in the by-laws of the corporation.

In a close corporation, however, such restrictions and preferences must not only appear in the articles of incorporation and in the
stock certificates BUT ALSO be embodied in the by-laws of that close corporation otherwise it may not bind purchasers in good
faith.

j. THE TREASURER
xxx
TENTH: That...................................... has been elected by the subscribers as Treasurer of the Corporation to act as
such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he
has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees)
or contributions or donations paid or given by the subscribers or members.
xxx

k. NO TRANSFER CLAUSE
xxx
ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide
the following):

"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper
books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation."
xxx

This indicates the treasurer who has been elected as such until his successor has been elected and qualified and who is authorized
to receive for and in the name of the corporation all subscriptions, contributions or donations paid or given by the subscribers or
members.

l. THE EXECUTION CLAUSE

xxx
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this..............day of.....................,
19.......... in the City/Municipality of......................................., Province of................................................, Republic of
the Philippines.

(Names and signatures of the incorporators)

xxx

The signatures are important as the AOI serves as a contract between the signatories thereof, by and among themselves, with the
corporation, and the latter with the State.

m. TREASURER’S AFFIDAVIT
xxx
TREASURER'S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES )

CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )

I,..................................., being duly sworn, depose and say:

That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my
successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such
Treasurer, I hereby certify under oath 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 paid, and received by me, in cash or property, in the
amount of not less than P5,000.00, in accordance with the Corporation Code.
.......................................

(Signature of Treasurer)
xxx

n. NOTARIAL ACKNOWLEDGMENT
 xxx
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of.................................
Province of........................................., this............ day of........................, 19.......; by........................................... with
Res. Cert. No..................... issued at................ on....................., 19.........

NOTARY PUBLIC

My commission expires on.........................., 19.......

Doc. No...............;
Page No...............;
Book No..............;
Series of 19.....
xxx

GROUNDS FOR DISAPPROVAL

Sec. 17. Grounds when articles of incorporation or amendment may

be rejected or disapproved. - The Securities and Exchange Commission may
reject the articles of incorporation or disapprove any amendment thereto if the
same is not in compliance with the requirements of this Code: Provided, That
the Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not

substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by existing
laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks,

banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public
utilities, educational institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by
a favorable recommendation of the appropriate government agency to the
effect that such articles or amendment is in accordance with law.

After filing of the AOI, the SEC will examine and process them to determine compliance with the requirements enumerated in Sec.
14 and if the form prescribed under Sec. 15 is complied with. Only substantial and not strict compliance is required.

The above grounds are not exclusive. There may be other reasons for rejection or disapproval such as the corporate name is not
legally permissible or that the minimum capital requirement is not sufficient.

3. COMMENCEMENT OF CORPORATE EXISTENCE

Corporate existence is reckoned from the time of the issuance of its CERTIFICATE OF INCORPORATION or registration. It is
only from this time that it acquires juridical personality and legal existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Those organized as Cooperatives covered by Bureau of Cooperatives and Home Owners’ Associations covered by Home
Insurance Guaranty Corporation.
d. Corporation Sole – which is reckoned from the filing of verified articles. (Sec. 112)

Sec. 19. Commencement of corporate existence. - A private corporation

formed or organized under this Code commences to have corporate existence
and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of incorporation under
its official seal; and thereupon the incorporators, stockholders/members and
 their successors shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in
accordance with law.

D. DEFECTIVELY FORMED CORPORATIONS

A corporation de jure is one created in strict or substantial compliance to the governing corporation statutes and whose right to
exist and act as such could not be attacked in a either collaterally or through a direct proceeding for that purpose even by the State.

4. DE FACTO CORPORATIONS

A de facto corporation is one that is so defectively created as not to be a de jure corporation but nevertheless exists, for all practical
purposes, as a corporate body, by virtue of its bona fide attempt to incorporate under existing statutory authority, coupled with the
exercise of corporate powers.

REQUISITES:
a. There is a valid statute under which the corporation could have been created as a de jure corporation (or according to some,
an apparently valid statute);
b. An attempt, in good faith, to form a corporation according to the requirements of law which goes far enough to amount to a
“colourable compliance” with the law;
c. A user of corporate powers, the transaction of business in some way as if it were a corporation;
d. Good faith in claiming to be and doing business as a corporation.

Sec. 20. De facto corporations. - 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

ATTACK: From the above provision, the only purpose of determining whether it is a de facto or de jure corporation is the
applicability of the rules on collateral and direct attack. Such that a de jure is impregnable to either, while a de facto corporation’s
existence can only be questioned in a direct proceeding by the State through a quo warranto. A de facto corporation’s corporate
existence however cannot be attacked collaterally.

5. CORPORATION BY ESTOPPEL

A corporation may exist on the ground of estoppel by virtue of the agreement, admission or conduct of the parties such that they
will not be permitted to deny the fact of the existence of the corporation. It is neither a de jure nor de facto because of serious
defects in its incorporation or organization, unlike the de facto doctrine, it does not involve a theory that the irregular corporation
has acquired a corporate status generally. It applies to the consequences of some particular transactions or acts done in the
corporate name by associates assuming to be a corporation.

Sec. 21. Corporation by estoppel. - 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 as a defense its lack of corporate
personality.

On who assumes an obligation to an ostensible corporation as such, cannot

resist performance thereof on the ground that there was in fact no corporation.

From the above provision, it is clear that the doctrine of estoppel may apply to the alleged corporation or to a third party transacting
with the former.

As to the Corporation – the members who purported to be a corporate body cannot deny their purported existence as a corporation
in an action against them on the contract, where the third persons were induced to deal with the supposed corporation. They
cannot avoid liability on the ground of lack of personality to be sued.

As to third persons – they are estopped from denying the existence of the alleged corporation in a suit to enforce a contract.
However, the association of persons must have purported or acted, and were treated by the third persons, as corporations. The
doctrine also applies when the third person tries to escape liability on a contract from which he has benefited on the irrelevant
ground of defective incorporation.
INDIVIDUAL LIABILITY of associates should not be overlooked. If the doctrine of corporation by estoppel cannot be applied in
their favor because the third party dealing with it has not, in any manner, deemed to have chosen to deal with it as a corporation or
in short not, estopped to deny corporate existence, the associates can be held liable either as partners or principals.

WHO SHOULD BEAR THE LOSS: The better view is that those who actively participated in holding out the association as a
corporation should be held personally liable by virtue of the express provision of Sec. 21 which provides that “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” therefrom.

1. ORGANIZATION AND COMMENCEMENT OF BUSINESS

a. CORPORATE ORGANIZATION

Sec. 22. Effects on non-use of corporate charter and continuous

inoperation of a corporation. - If a corporation does not formally organize
and commence the transaction of its business or the construction of its works
within two (2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a corporation
has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall
be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.

This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.

Once the certificate of incorporation has been issued, the corporation MUST formally organize and commence its business.

NON-USE OF CORPORATE CHARTER: Apparent from the above provision is that the failure of the corporation to organize
within 2 years would result in it automatic dissolution, unless, of course, its failure to do so is due to causes beyond its
control.

FORMAL ORGANIZATION: refers to the process of structuring the corporation to enable it to effectively pursue the purpose for
which it was organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD;
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its subsequent filing with the SEC which must be within 1
month from the issuance of the certificate of incorporation;
c. Organizational meeting of the BOD to elect the corporate officers, adoption of corporate seal, accepting pre-incorporation
subscriptions, establishing the principal office and such other steps necessary to transact the legitimate business for which the
corporation was formed.

Strict compliance is not required. Substantial compliance therewith is sufficient. Thus, it has been held in the case of Perez vs.
Balmaceda that a corporation is deemed to have formally organized if it had a governing board which direct its affairs, as well as a
treasurer and a clerk, and that through these instrumentalities, it actually functioned and engaged in the business for which it was
organized. It cannot be held to have forfeited its charter simply because it has not been shown that is also had a president and a
secretary.

b. COMMENCEMENT OF BUSINESS/TRANSACTION

This means that the corporation has actually functioned and engaged in business for which it was organized which must be done
within two years from the issuance of the certificate of incorporation lest it is deemed dissolved. This may take the
form of entering into contracts which tend to pursue its business undertaking or other acts related thereto.

If a corporation has commenced its business but subsequently becomes inoperative continuously for a period of at least 5
years, the same shall be merely a ground for suspension or revocation of its corporate franchise or certificate of
registration.

CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS

A. CORPORATE CHARTER

CORPORATE CHARTER signifies an instrument or authority from the sovereign power, bestowing rights or power, and is often
used convertibly with the term “act of incorporation”, where the corporation was formed under a special act of the legislature, and
with the “articles of incorporation”, when the corporation was formed under a general law.
FRANCHISE: appropriately applies to the right or privilege itself to be and act as a corporation or to do a certain act while charter
applies to the instrument by which the state vests such right or privilege. Franchise may either be: (1) Primary – nothing more than
the right or privilege of being a corporation; or (2) Secondary – the powers and privileges vested in, and to be exercised by the
corporate body as such. Example: Employment Agencies, primary franchise is the certificate of incorporation from the SEC, the
secondary franchise is the license issued by the POEA.

B. CORPORATE ENTITY THEORY

As a legal entity, the corporation is possessed with a juridical personality separate and distinct from the individual stockholders or
members and is not affected by the personal rights, obligations or transactions of the latter. The properties it possesses belongs to
it exclusively as a separate juridical entity such that the personal creditors of its stockholders or members cannot attach corporate
properties to satisfy their claims.

On the other hand, the corporation is not likewise liable for the debts, obligations or liabilities of its stockholders. Neither may it
properties be made answerable to satisfy the claim of creditors against its stockholders or member even if the stockholder
concerned is its president.

C. PIERCING THE VEIL OF CORPORATE FICTION

The notion of corporate legal entity is not, at all ties respected. This is because the applicability of the corporate entity theory is
confined to legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak or cover for fraud or
illegality, or to work injustice.

While no hard and fast rule exists as to when the corporate fiction may pierced or disregarded, it is a fundamental principle in
Corporation law that a corporation is an entity separate and distinct from its stockholders or member and from other corporations to
which it may be connected. But when the notion of legal entity is used to defeat public convenience, Justify wrong, Protect fraud,
Defend crime, the law will regard the corporation as a mere association of persons, or in the case of two corporations, merge them
into one, the one being merely regarded as part or instrumentality of the other. The same is true where a corporation is a mere
dummy and serves no business purpose and is intended only as a blind, or an alter-ego or business conduit for the sole benefit of
the stockholders.

In cases where the doctrine of piercing the veil of corporate fiction, liability will attach directly to the officers and stockholders, at
least, in so far as that particular act is concerned.

D. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

1. Absent any of the following circumstances, the courts will not be justified in disregarding the corporate entity;
a. The corporation is used or being used to defeat public convenience;
b. Justify wrong;
c. Protect fraud;
d. Defend crime;
e. Confuse legitimate issues;
f. Circumvent the law;
g. Perpetuate deception; or
h. An alter-ego, adjunct or business conduit for the sole benefit of a stockholder or a group of stockholders or another
corporation.
2. The wrong doing must be clearly and convincingly established. It cannot be justified by speculation and can never be
presumed.
3. The petitioner must seek to impose a claim against the stockholders or officers directly liable, otherwise piercing the veil of
corporate fiction would not be available nor justified.

BY-LAWS are rules and ordinances made by a corporation for its own government; to regulate the conduct and define the duties
of the stockholders or members towards the corporation and among themselves. They are the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and tis stockholder or members and
directors and officers with relation thereto and among themselves in their relation to it.

Sec. 46. Adoption of by-laws. - Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission , adopt
a code of by-laws for its government not inconsistent with this Code.
For the adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock,
or of at least a majority of the members in case of non-stock corporations, shall
 be necessary. The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the
Securities and Exchange Commission which shall be attached to the original
articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be

adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities
and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws
or any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the
effect that such by-laws or amendments are in accordance with law.

EFFECTIVITY: After approval of the SEC.

BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the incorporators without the need of the affirmative vote of
the majority of the outstanding capital stock or the members provided it is submitted together with the AOI.

AFTER INCPORPORATION: Must be submitted one month after the issuance of the certificate of incorporation and must be
approved by a majority of the outstanding capital stock or members and signed by such stockholders or members voting for them.
Failure to file within 1 month may result to suspension or revocation of corporate franchise.

THIRD PERSONS: are generally not bound, affected or prejudiced the by-laws, it being merely internal rules of the corporation,
EXCEPT: if they have knowledge of its existence and contents.

CONTENTS:

Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution,

this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings
of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and the
mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.

AMENDMENT:

Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a

majority vote thereof, and the owners of at least a majority of the outstanding
 capital stock, or at least a majority of the members of a non-stock corporation,
at a regular or special meeting duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal any by-laws
or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority
of the members in non-stock corporations, shall so vote at a regular or special
meeting.

Whenever any amendment or new by-laws are adopted, such amendment or

new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the
Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code.

Meetings applies to every duly convened assembly either of stockholders, members, directors or trustees, managers, etc. for any
legal purpose or the transaction of business of common interest.

Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders,

or members may be regular or special.

A. STOCKHOLDERS’ MEETING

Sec. 50. Regular and special meetings of stockholders or members. -

Regular meetings of stockholders or members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any date in April of every year as
determined by the board of directors or trustees: Provided, That written notice
of regular meetings shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required
by the by-laws.

Special meetings of stockholders or members shall be held at any time deemed

necessary or as provided in the by-laws: Provided, however, That at least one
(1) week written notice shall be sent to all stockholders or members, unless
otherwise provided in the by-laws.

Notice of any meeting may be waived, expressly or impliedly, by any

stockholder or member.

Whenever, for any cause, there is no person authorized to call a meeting, the
Securities and Exchange Commission, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have been chosen one of their number as
presiding officer.

The stockholders have no power to act as or for the corporation except at a corporate meeting called and conducted according to
law. This rule arises from the need to protect the stockholder by providing them with notice of meeting and giving them opportunity
to attend the meeting, discuss the issues and vote (an exception would be an ordinary amendment where “written asset” is
acceptable).

DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not fixed, on any date of April of very year as the BOD/T may
determine. April, because this is the time the Audited Financial Statements are already available.

DATE OF SPECIAL MEETING: At any time deemed necessary or as provided for in the by-laws.
A. CHAPTER I – EDUCATIONAL INSTITUTIONS

Sec. 106. Incorporation. - Educational corporations shall be governed by

special laws and by the general provisions of this Code.

EDUCATIONAL INSTITUTIONS are those that provide facilities for teaching or instruction. It includes both public and private
schools or colleges and universities and are subject to the provisions of special laws and by the general provisions of the Code.

PUBLIC SCHOOLS or those created by the government are, however, subject to the law of their creation. UP for instance has its
own special charter and would thus be governed by the special law creating it. Insofar as they may be applicable however, the
provisions of any special law or the Corporation Code supplement the law of their creation.

PRIVATE SCHOOLS OR COLLEGES include any private institutions for teaching, managed by private individuals or corporations
which offer courses of kindergarten, primary, intermediary or secondary instructions or superior courses in vocational, technical,
professional or special schools by which diploma or certificates are to be granted or titles and degrees conferred (Sec. 2, Act No.
2076, as amended by CA 180).

These instructions of learning once recognized by the government as such are mandated by law to be incorporated within 90 days
under the provisions of the Corporation Code and must, perforce, comply with the requirements and procedure laid down
thereunder. (Sec. 5, supra)

Their failure to do so will not immune the educational institution from suit as a corporation (Chang Kai Shek School vs. CA; April 18,
1989, supra)

The SEC, however, shall not act on the incorporation of any educational corporation, unless the provision of Sec. 107 is complied
with:

Sec. 107. Pre-requisites to incorporation. - Except upon favorable

recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution

BOARD OF DIRECTORS/TRUSTEES: or the governing board by any name of an educational institution is similar in number as to
any other corporation except that in case it is non-stock, the number must be in multiples of five (5). As compared to stock
corporation, their number may be within the vicinity of five (5) to fifteen (15).

TERM OF OFFICE: Members of the Board may hold office for five years but they shall be staggered so that 1/5 of their number
shall expire every year. Sec. 108 provides:

Sec. 108. Board of trustees. - Trustees of educational institutions

organized as non-stock corporations shall not be less than five (5) nor more
than fifteen (15): Provided, however, That the number of trustees shall be in
multiples of five (5).

Unless otherwise provided in the articles of incorporation or the by-laws, the

board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by expiration of term shall hold
office for five (5) years. A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and authority of trustees shall be
defined in the by-laws.

For institutions organized as stock corporations, the number and term of

directors shall be governed by the provisions on stock corporations.

CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2, Sec. 4 of Article XIV (Education, Science and Technology,
Arts, Culture and Sports)

Educational institutions, other than those established by religious groups and

mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of which
 is owned by such citizens. The Congress may, however, require increased
Filipino equity participation in all educational institutions. The control and
administration of educational institutions shall be vested in citizens of the
Philippines.

No educational institution shall be established exclusively for aliens and no

group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply to schools
established for foreign diplomatic personnel and their dependents and, unless
otherwise provided by law, for other foreign temporary residents.

Culled from this is that while foreigners may own a maximum of 40% of the capital stock of an educational corporation, not one of
them may sit as a member of the governing board thereof. Neither may they act as an officer with the power of control and
administration of the institution. In effect their ownership of any capital would be limited to “non-controlling” interest.

B. CHAPTER II - RELIGIOUS CORPORATIONS

REGLIGIOUS CORPORATIONS are those composed entirely of spiritual persons, which are created for the furtherance of religion
or perpetuating the rights of the church or for the administration of church or religious work or property.

CLASSES OF RELIGIOUS CORPORATIONS:

Sec. 109. Classes of religious corporations. - Religious corporations may

be incorporated by one or more persons. Such corporations may be classified
into corporations sole and religious societies.

Religious corporations shall be governed by this Chapter and by the general

provisions on non-stock corporations insofar as they may be applicable.

C. CORPORATION SOLE

CORPORATION SOLE: consists of one person only and his successor in some particular station, who are incorporated by law in
order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could
not have had.

PURPOSE OF INCORPORATION AND PERSONS WHO MAY INCORPORATE:

Sec. 110. Corporation sole. - For the purpose of administering and

managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church.

CONTENTS OF THE ARTICLES OF INCORPORATION:

Sec. 111. Articles of incorporation. - In order to become a corporation

sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of
any religious denomination, sect or church must file with the Securities and
Exchange Commission articles of incorporation setting forth the following:

1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding

elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination,
sect or church are not inconsistent with his becoming a corporation sole and
do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
filled, according to the rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
 established and located, which place must be within the Philippines.

The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation.

PROCEDURE FOR THE ORGANIZATION:

Sec. 112. Submission of the articles of incorporation. - The articles of

incorporation must be verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
may be, and accompanied by a copy of the commission, certificate of election
or letter of appointment of such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the
said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the
religious denomination, sect or church theretofore administered or managed
by him as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder shall be held in trust by him as a corporation sole, for the use, purpose,
behalf and sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof.

TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a corporation sole does not require a provision for its term of
existence. For obvious reasons, since a corporation sole is supposed to exist in perpetuity. It may, however, be dissolved in
accordance with Sec. 115 of the Code.

BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified AOI with the SEC and the documents required under
Sec. 112. This serves as an exception to the rule that a corporation acquires juridical personality only upon the issuance of a
certificate of incorporation by the said government agency.

POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the its power to mortgage or sell real properties is, however,
subject to certain restriction, that is, a proper court order must first be secured for that purpose, which is not otherwise imposed in
any other corporation. Intervention of the court may dispensed with only if the rules, regulations and discipline of the religious
denomination, sect or church concerned provide or regulate the manner or method of holding or alienating properties. Sec. 113
provides:

Sec. 113. Acquisition and alienation of property. - Any corporation

sole may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or
gifts for such purposes. Such corporation may sell or mortgage real property
held by it by obtaining an order for that purpose from the Court of First
Instance of the province where the property is situated upon proof made to
the satisfaction of the court that notice of the application for leave to sell or
mortgage has been given by publication or otherwise in such manner and for
such time as said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The application
for leave to sell or mortgage must be made by petition, duly verified, by the
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided,
That in cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and personal property, such rules,
regulations and discipline shall control, and the intervention of the courts
shall not be necessary.

OWNERSHIP OF PROPERTY: does not vest unto the head upon registration of real property in the name of the corporation sole,
such devolving upon the church or congregation acquiring it.

CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does not apply to corporation sole with regards ownership of
real property in its own name. It has thus been held that the Roman Catholic Church of the Philippines, a corporation sole, has no
nationality and that the framers of the Constitution did not have in mind the religious corporation sole when they provided that 60%
of the capital of the corporation acquiring it must be owned by Filipino citizens.

CHARACTER OF THE LAND: at the time of institution of registration proceedings must first be determined before a corporation
sole, or any private corporation for that matter, can acquire the land must first be determined. If it does not form part of public
domain, the constitutional prohibition against its acquisition by private corporation will not apply. Thus, it has likewise been earlier
held that under the Public Land Act, alienable public land may be subject to registration by a possessor if he, personally or through
his predecessors-in-interest, had openly continuously and exclusively possessed the same for 30 years as the same is converted into
private property by mere lapse or completion of the said period.

Chapters
CHAPTER 1: INTRODUCTION

CHAPTER 2: DEFINITION AND ATTRIBUTES

CHAPTER 3: CLASSIFICATION OF CORPORATION

CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS

CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS

CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

CHAPTER 7: CORPORATE POWERS AND AUTHORITY

CHAPTER 8: BY-LAWS

CHAPTER 9: MEETINGS

CHAPTER 10: STOCKS AND STOCKHOLDERS

CHAPTER 11: CORPORATE BOOKS AND RECORDS

CHAPTER 12: MERGER AND CONSOLIDATION

CHAPTER 13: APPRAISAL RIGHT

CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)

CHAPTER 15: CLOSE CORPORATION

CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)

CHAPTER 17: DISSOLUTION (TITLE XIV)

CHAPTER 18: FOREIGN CORPORATIONS

CHAPTER 19: MISCELLANEOUS PROVISIONS (TITLE XVI)

COOPERATIVE CODE OF THE PHILIPPINES
Impt skills: Understanding 30%, Application 50% ,Analyzing 20 %

1 Describe Organization and Registration of Cooperatives

2 Explain Administration

3 Decribe the responsibilities, Rights and Privileges of Cooperatives 4

Explain Capital Property of Funds

5 Exlain Audit, Inquiry and Members' Right to Examine

6 Describe Allocation and Distribution of Funds

7 Enumerate the Types and Categories of Cooperatives

8 Explain merger and consolidation of Cooperatives

9 Explain dissolution of cooperatives

MEETING 1

I.Describe Organization and Registration of Cooperatives

-Purposes

-Objectives and Goals

-Powers and Capacities

-Organization

-Registration

Coops, practically speaking

A cooperative is an autonomous and duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and
aspirations by making equitable contributions to the capital required, patronizing their products and services
and accepting a fair share of the risks and benefits of the undertaking in accordance with universally
accepted cooperative principles.

QUESTION:

-What if all members live in a particular geographical area? Pwede.

-What if all members work for the same employer? Pwede.

*A combination of both of the above

-What if Kapatid mo pero different employers? Pwede??? associational?my mga ganito

 *Our coop code is silent. But what you can do directly you can do indirectly naman.The rules also
allow a person who is a member of the same household as, AND is a member of the same family of, a
member to become a member of a credit union even though they do not share the common bond directly
with the other members.

QUESTION:

-What if A contributes 5%,B contributes 25%, valid?(refer to definition)Yes .

*Equitable means Fair .It doent necessarily mean equal contributions. Good example is financial
status.

-Based on the preceding example,if after 1 year ,the cooperative earned income of 100,

Give A and B 5 php each.Valid?(refer to definition No.

*Fair share dapat

General Concepts

"(1) Voluntary and Open Membership

"(2) Democrative Member Control

"(3) Member Economic Participation -Reserves.not retained earnings

QUESTION:

-Investment of funds?Valid? Yes.

-Labour contribution?Valid?Yes.

-Delivery of ani? Yes.

*Those are actually the 3 types of resource a member can provide.

-What if a member magiinvest and share sa income/loss of the coop without participating sa
decision=making?Valid. No.

*That is not Active Membership.There is no value of having noncommitted members who are not
active.The only way to control the coop is by active membership(i.e., contribution, decision-making,
and sharing in the results). Just like for example in JPIA, XD

"(4) Autonomy and Independence

"(5) Education, Training and Information

"(6) Cooperation Among Cooperatives

(7) Concern for Community

 A.Purposes (to members)

"(1) thrift and savings mobilization

"(2) To generate funds and extend credit

"(3) systematic production and marketing;

"(4) To provide goods and services and other requirements

"(5) To develop expertise and skills

(6) To acquire lands and provide housing benefits

(7) "(7) To insure against losses
(8) To promote and advance the economic, social and educational status
"(9) To establish, own, lease or operate cooperative banks, cooperative wholesale and retail
complexes, insurance and agricultural/industrial processing enterprises, and public markets;

"(10) To coordinate and facilitate the activities of cooperatives;

"(11) To advocate for the cause of the cooperative movements;

"(12) To ensure the viability of cooperatives through the utilization of new technologies;

"(13) To encourage and promote self-help or self-employment as an engine for economic

growth and poverty alleviation; and

B.Objectives and Goals

The primary objective of every cooperative is to help improve the quality of life of its members.
Towards this end, the cooperative shall aim to:

QUESTION:

-Example there is Coop A ,a large coop engaged in processing orange, then coop B,a smaller coop also
processes oranges. They both transact with non-members.Philippine-based.Then Coop A,insecured, sbi kay
B, lets form a federation and we will provide you with enough capital provided you dont process oranges
sa philippines, sbi ni B , okay. Valid?No

* AGAINST A PUBLIC POLICY (see nota bene)

-what if same condition but B will not process oranges sa Luzon ,?valid

*, pwde rin not process oranges in Phils for 3 months . This is partial restraint of trade only which is limited
in scale , therefore a partial enforcement only. Or kaya , A restricts B to protect trade secrets of the
industry. Pwede kasi na kinokopya na pla ng ibang bansa for example yung way of processing to enter the
same amrket, that is also reasonable
 Cooperatives Not in Restraint of Trade. No cooperative or method or act thereof which complies with
this Code shall be deemed a conspiracy or combination in restraint of trade or an illegal monopoly, or an
attempt to lessen competition or fix prices arbitrarily in violation of any laws of the Philippines.

C.Powers and Capacities

"(1) To the exclusive use of its registered name, to sue and be sued;

"(2) succession;

"(3) To amend its articles of cooperation

(4) To adopt bylaws not contrary to law, morals

(5) "(5) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage,
"(6) To enter into division, merger or consolidation,

"(7) To form subsidiary cooperatives and join federations or unions,

"(8) To avail of loans, be entitled to credit and to accept and receive grants, donations and
assistance

"(9) To avail of preferential rights granted to cooperatives and other laws, particularly
those in the grant of franchises to establish, construct, operate and maintain
ferries, wharves, markets or slaughterhouses and to lease public utilities, including
access to extension and on-site research services and facilities related to agriculture and
fishery activities;

"(10) To organize and operate schools

Economic Survey. - submit to the Authority a general statement describing, among others the
structure and purposes of the proposed cooperative: Provided, That the structure and actual staffing
pattern of the cooperative shall include a bookkeeper; Provided, further, That they shall not be allowed
to operate without the necessary personnel and shall also submit an economic survey, indicating therein
the area of operation, the size of membership, and other pertinent data in a format provided by the
Authority.

Liability. A cooperative duly registered under this Code shall have limited liability.

Term. A cooperative shall exist for a period not exceeding fifty (50) years from the date of
registration unless sooner dissolve or unless said period is extended. The cooperative term, as originally
stated in the articles of cooperation, may be extended for periods not exceeding fifty (50) years in any
single instance by an amendment of the articles of cooperation, in accordance with this Code: Provided,
That no extension can be made earlier than five (5) years prior to the original or subsequent expiry
date/dates unless there are justifiable reasons for an earlier extension as may be determined by the
Authority.

Bylaws.
 Each cooperative to be registered under this Code shall adopt bylaws not inconsistent with the
provisions of this Code. The bylaws shall be filed at the same time as the articles of cooperation.

E.Registration

A cooperative formed and organized under this Code acquires juridical personality from the date
the Authority issues a certificate of registration under its official seal. All applications for registration
shall be finally disposed of by the Authority within a period of sixty (60) days from the filing thereof,
otherwise the application is deemed approved, unless the cause of the delay is attributable to the
applicant: Provided, That in case of a denial of the application for registration, an appeal shall lie with the
Office of the President within ninety (90) days from receipt of notice of such denial: Provided, further,
That failure of the Office of the President to act on the appeal within ninety (90) days from the filing
thereof shall mean approval of said application.

Amendment of Articles of Cooperation and Bylaws-may be amended by two-thirds (2/3) vote of

all the members with voting rights, without prejudice to the right of the dissenting members to exercise
their right to withdraw their membership

(Amendments shall be indicated by underscoring or otherwise appropriately indicating the change or

changes made )The amendments shall take effect upon its approval by the authority or within thirty (30)
days from the date of filing thereof if not acted upon by the Authority for a cause not attributable to the
cooperative.

Contracts Executed Prior to Registration and Effects Thereof. Contracts executed between private
persons and cooperatives prior to the registration of the cooperative shall remain valid and binding
between the parties and upon registration of the cooperative. A formal written contract shall be adopted
and made in the cooperative's name or on its behalf prior to its registration

Division of Cooperatives. Any registered cooperative may, by a resolution approved by a vote of

three-fourths (3/4) of all the members with voting rights, present and constituting a quorum, resolve
to divide itself into the two (2) or more cooperatives. The procedure for such division shall be prescribed
in the regulations of the Authority: Provided, That all the requirements set forth in this Code have been
complied with by the new cooperatives: Provided, further, That no division of a cooperative in fraud of
creditors shall be valid.

A.Composition of the General Assembly. members who are entitled to vote under the articles of
cooperation and bylaws of the cooperative

B. Powers of the General Assembly.

highest policymaking body of the cooperative and shall exercise such powers as

"(1) amendments to the articles of cooperation and bylaws;

 "(2) To elect or appoint the members of the board of directors, and to remove them for cause.
However, in the case of the electric cooperatives registered under this Code, election of the members of
the board shall be held in accordance with its bylaws or election guideline of such electric cooperative;
and

"(3) To approve developmental plans of the cooperative. (general assembly may be a three-fourths
(3/4) vote of all its members with voting rights, present and constituting a quorum, delegate some of its
powers to a smaller body of the cooperative)

C.Meetings.

(1) Regular meeting

-annually by the general assembly on a date fixed in the bylaws,

-within ninety (90) days after the close of each fiscal year: Provided, That notice of regular meetings
shall be sent in writing to members

"(2) Special meeting

- any time by a majority vote of the board of directors or as provided for in the bylaws: Provided,
That a notice in writing shall be sent one (1) week prior to the meeting to all members who are entitled
to vote.

Quorum.

- (25%) of all the members entitled to vote,except

-cooperative banks, as provided in Article 99

-electric cooperatives a quorum, unless otherwise provided in the bylaws, (5%) of all the
members entitled to vote.

D.Voting System.

-primary cooperative--1 vote/member

-secondary or tertiary cooperatives--1 basic vote/delegate + extra, not exceed 5

E.Composition and Term of the Board of Directors. Unless otherwise provided in the bylaws,not
less than 5 nor more than fifteen (15) members elected by the general assembly for a term of two (2)
years and shall hold office until their successors are duly elected an qualified, or until duly removed for
caused.

Powers of the Board of Directors. responsible for the strategic planning, direction-setting and
policy-formulation activities of the cooperatives.
 F. Directors.

(1) Any member with right to vote and who possesses all the qualifications and none of the
disqualifications provided

J.Committees of Cooperatives.

(1) The bylaws may create an executive committee

"(2) The bylaws shall provide for the creation of an audit, election, mediation and conciliation,
ethics, and such other committees as may be necessary for the conduct of the affairs of the cooperative.
shall be elected by the general assembly and the rest shall be appointed by the board. The audit
committee shall be directly accountable and responsible to the general assembly. in case of a vacancy in
the committees, may call an election or appoint

K.Functions, Responsibilities and Training Requirements of Directors, Officers and Committee

Members.shall be in accordance with the rules and regulations issued by the Authority.

K.1.Liability of Directors, Officers and Committee Members. Directors, officers and committee
members, who are in bad faith in directing the affairs of the cooperative or acquire any personal or
pecuniary interest in conflict with their duty shall be liable jointly and severally for all damages or
profits resulting therefrom , he shall, as a trustee for the cooperative, be liable for damages and
shall be accountable for double the profits which otherwise would have accrued to the cooperative.

K.2. Compensation.

Same with corpo

K.3Dealings of Directors, Officers, or Committee Members. Same with corpo.

K.4Disloyalty of a Director. A director who, by virtue of his office, acquires for himself an
opportunity which should belong to the cooperative shall be liable for damages and must account for
double the profits that otherwise would have accrued to the cooperative by refunding the same,
unless his act has been ratified by a three-fourths (3/4) vote of all the members with voting rights,
present and constituting a quorum.

K.5 Illegal Use of Confidential Information.

"(a) Liable to compensate the cooperative for the direct losses suffered by the cooperative as a
result of the illegal use of information; and

"(b) Accountable to the cooperative for any direct benefit or advantage received or yet to be
received by him or his associate, as a result of the transaction.
 K.6. Removal. An elective officer may be removed by (3/4) votes of the regular members present
and constituting a quorum, in a regular or special general assembly meeting called for the
purpose. The officer concerned shall be given an opportunity to be heard at said assembly

III.Decribe the responsibilities, Rights and Privileges of Cooperatives

A. Address
B. Books to be Kept Open.
C. Reports.
D. Register of Members as Prima Facie Evidence
E. Probative Value of Certified Copies of Entries.

F.Bonding of Accountable Officers

G. Preference of Claims.

H. Instrument for Salary or Wage Deduction

I.Primary Lien

J.Tax Treatment of Cooperative. (COOP IDNTIFICTION NO.)

K. Tax and Other Exemptions

L.Privileges of Cooperatives.

A. Address. Every cooperative shall have an official postal address to which all notices and
communications shall be sent. Such address and every change thereof shall be registered with the
Authority.
C. Reports.

-regular reports of its program of activities, including those in pursuance of their socio-civic
undertakings, showing their progress and achievements at the end of every fiscal year.

-These reports shall be filed with the Authority within one hundred twenty (120) days from the
end of the calendar year. (Otherwise, fines and penalties )

Failure means the Authority shall, within fifteen (15) days from the expiration of the prescribed
period, send such cooperative a written notice, stating its noncompliance and the commensurate
fines and penalties that will be imposed until such time that the cooperative has complied with the
requirements.

D. Register of Members as Prima Facie Evidence. Any register or list of

members shares kept by any registered cooperative shall be prima facie
evidence of the following particulars entered therein:

"The date on which the name of any person was entered in such register or list of
member; and

"The date on which any such person ceased to be a member.

 E. Probative Value of Certified Copies of Entries.

(1)prima facie evidence of the matters and transactions therein recorded.

"No person or a cooperative is possession of the books of such cooperative shall, in any
legal proceedings to which the cooperative is not a party, be compelled to produce any of the books of
the cooperative, the contents of which can be proved and the matters, transactions and accounts
therein recorded, unless by order of a competent court.

F. Bonding of Accountable Officers. Every director, officer, and employee handling funds,
securities or property on behalf of any cooperative shall be covered by a surety bond to be issued
for a duly registered insurance or bonding company for the faithful performance of their respective
duties and obligations. The board of directors shall determine the adequacy of such bonds.

G. Preference of Claims.

subject to the prior claim of the Authority, any debt due to the cooperative from the member shall constitute
a first lien upon any raw materials, production, inputs, and products produced; or any land, building, facilities,
equipment, goods or services acquired and held, by such member through the proceeds of the loan or credit
granted by the cooperative to him for as long as the same is not fully paid.

H. Instrument for Salary or Wage Deduction.

A member of a cooperative may,execute an instrument in favor of the cooperative authorizing his
employer to deduct from his/her salary or wages, commutation of leave credits and any other
monetary benefits payable to him by the employer and remit such amount as maybe specified in
satisfaction of a debt or other demand due from the member to the cooperative (within ten (10)
days after the end of the payroll month to the cooperative. The employer shall make the deduction
for as long as such debt or other demand remains unpaid by the employee.)(employer mandatory

I.Primary Lien. - upon the capital, deposits or interest of a member for any debt due to the
cooperative from such a member.
Capital Sources.- Cooperatives registered under this Code may derive their capital from any or all of
the following sources:
" Member's share capital;
"Loans and borrowings including deposits;
" Revolving capital which consists of the deferred payment of patronage refunds, or interest on share
capital; and
"Subsidies, donations, legacies, grants, aids and such other assistance from any local or foreign
institution whether public or private

E. Capital Build-Up.- Te bylaws of every cooperative shall be provided for a reasonable and realistic
member capital build-up program to allow the continuing growth of the members' investment in
their cooperative as their economic conditions continue to improve.
 F.Shares.- The term "share" refers to a unit of capital in a primary cooperative the par value of
which may be fixed to any figure not more than One thousand pesos (P1,000.00). The share of
capital of a cooperative is the money paid or required to be paid for the operations of the
cooperative. The method for the issuance of share certificates shall prescribed in its bylaws.

G.Fines. - The bylaws of a cooperative may prescribe a fine on unpaid subscribed share capital.
Provided, that such fine is fair and reasonable under the circumstances.

H. Investment of Capital. - A cooperative may invest its capital in any of the following:

"(a) In shares or debentures or securities of any other cooperative;

"(b) In any reputable bank in the locality, or any cooperative;

"(c) In securities issued or guaranteed by the Government;

"(d) In real state primarily for the use of the cooperative or its members; or

"(e) In any other manner authorized in the bylaws.

I. Revolving Capital. The general assembly of any cooperative may authorize the board of directors
to raise a revolving capital to strengthen its capital structure by deferring the payment of patronage
refunds and interest on share capital or by the authorized deduction of a percentage from the
proceeds of products sold or services rendered, or per unit of product or services handled. The
board of directors shall issue revolving capital certificates with serial number, name, amount, and
rate of interest to be paid and shall distinctly set forth the time of retirement of such certificates
and the amounts to be returned."

V. Exlain Audit, Inquiry and Members' Right to Examine

A.Annual Audit
B.Audit Report.

C. Nonliability for Defamations.

D. Right to Examine.

E. Safety of Records.

A. Annual Audit. subject to an annual financial, performance and social audit. The financial
audit shall be conducted by an external auditor who satisfies all the following qualifications: "(1) He
is independent of the cooperative or any of its subsidiary that he is auditing; and
 B.Audit Report. The auditor shall submit to the board of directors and to the audit committee
the financial audit report

C. Nonliability for Defamations. The auditor is not liable to any person in an action for
defamation based on any act, done, or any statement made by him in good faith in connection with
any matter he is authorized or required to do pursuant to this Code.

D. Right to Examine. during reasonable hours on business days and he may demand, in
writing, for a copy of excerpts from said records without charge except the cost of production. "Any
officer of the cooperative who shall refuse to allow any member of the cooperative to examine and
copy excerpts from its records shall be liable to such member for damages and shall be guilty of an
offense which shall be punishable under Article 140 of this Code: Provided, That if such refusal is
pursuant to a resolution or order of the board of directors, the liability under this article shall be
imposed upon the directors who voted for such refusal: Provided, further, That it shall be a defense
to any action under this article that the member demanding to examine and copy excerpts from the
cooperative records has improperly used any information secured through any prior examination of
the records of such cooperative or was not acting in good faith or for a legitimate purpose in making
his demand.

E. Safety of Records. Every cooperative shall, at its principal office, keep and carefully preserve
the records required by this Code to be prepared and maintained. It shall take all necessary
precaution to prevent its loss, destruction or falsification."

A. Net Surplus. the net surplus of cooperatives shall be determined in accordance with its bylaws.
Every cooperative shall determine its net surplus at the close of every fiscal year and at such other times
as may be prescribed by the bylaws. "Any provision of law to the contrary notwithstanding, the net
surplus shall not be construed as profit but as an excess of payments made by the members for the loans
borrowed, or the goods and services availed by them from the cooperative or the difference of the
rightful amount due to the members for their products sold or services rendered to the cooperative
including other inflows of assets resulting from its other operating activities and which shall be deemed
to have been returned to them if the same is distributed as prescribed herein.

Cooperative Unions. Registered cooperatives and federations at the appropriate levels may organize
or join cooperative unions to represent the interest and welfare of all types of cooperatives at the
provincial, city, regional, and national levels. Cooperative unions may have the following purposes.

UST GOLDEN NOTE

 Promissory notes (PN) – An unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a
sum certain in money to order or to bearer. (Sec. 184)

Bill of exchange (BOE) – An unconditional order in writing addressed by one person to another
signed by the person giving it, requiring the person to whom it is addressed to.

Order instruments

Order promissory note - Prior parties notbound. Forged signature is wholly inoperative (Sec. 23); unless
estoppel sets in with regard prior parties (cut‐off rule). - Subsequent parties bound.

Order bill of exchange - Drawer’s account cannot be charged by the Drawee;

- Drawer has no cause of action against collecting bank, since the duty of the latter is only to payee; -
Drawee can recover from collecting bank;

- Drawer not liable to the collecting bank. Collecting bank bears loss (can recover from person it paid) -
Payee can recover from: Drawer and Collecting bank, but not from Drawee unless with acceptance of the
bill;

Bearer instruments

. Bearer promissory note

- Prior parties liable;

- Forged signatory not liable to party not holder in due course.

Bearer bill of exchange

- Drawee bank liable.

Certificate of deposit – a written acknowledgment by a bank of the receipt of money on deposit on

which the bank promises to pay to the depositor or to him or his order or to some other person or to
him or his order, or to a specified person or bearer, on demand or on a fixed date, often with interest.

2. Bonds – A promise, under seal, to pay money. a. Registered bond – one payable only to the person
whose name appears on the face of the certificate. b. Coupon bond – one to which are attached coupons
which entitle the holder to interest when due.

3. Bank Note – PN of issuing bank payable to bearer on demand and intended to circulate as money.

4. Due Bill ‐ An instrument where one person acknowledges his indebtedness to another 5. Mortgage
Note – an instrument secured by either a real or personal property.

6. Title‐retaining Note – an instrument used to secure the purchase price of goods

7. Collateral Note – it is used when the maker pledges securities to the payee to secure the payment of
the amount of the note
8. Judgment Note – this is a note to which a power of attorney is added enabling the payee to take
judgment against the