Law on Corporation

Created Dec. 17, 2018 by M.A.Z. Jose

Sec. 1. Title of the Code. – This Code shall be known as “The Corporation Coder of the
Philippines”.

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.

Definition
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.

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

Similarities between a partnership and a corporation

1. Juridical personality separate and distinct from the individuals composing it.
2. Act only through its agents.
3. Composed of an aggregate of individuals.
4. Distribute profits to those who contribute to capital.
5. May be organized only when there is a law authorizing it.
6. Subject to income tax.

Distinctions between a partnership and a corporation

Point of
Comparison Partnership Corporation

Manner of
Creation By mere agreement of the parties By law or operation of law

Requires at least five (5)

Number of Parties By a minimum of two (2) persons incorporators

From the date of the issuance

Commence-ment of the certificate of incorporation
of Juridical Generally from the moment of of the Securities and Exchange
Personality execution of the contract Commission (SEC)

May exercise powers authorized by

partners provided the same are not
contrary to law, morals, good Can exercise only the powers
customs, public policy or public expressly granted by law or
Powers order. incident to its existence.

When it is not agreed upon, each

partner is an agent of the It is vested in the board of
Management partnership directors or trustees.

Right of
Succession No right of succession Possesses right of succession

Partners (except limited

partners) are liable personally Stockholders are liable only to the
and subsidiarity for extent of their investments as
Extent of Liability partnership debts to third represented by the shares subscribed
to Third Persons persons. by them.

Transferability of A partner cannot transfer A stockholder has the right to transfer

interest interest so as to make a his shares without the prior consent of
 partner without the consent of
all other existing partners. the other stockholders.

May be established for any May not be formed for a term in

period of time stipulated by excess of 50 years extendible to not
Term of existence the partners. more than 50 years.

A corporation may adopt a firm name

A limited partnership is provided it is not identical or
required to add the word ‘Ltd.’ deceptively similar to any registered
Firm name to its name. firm name or contrary to existing laws.

May be dissolved at any time

by the will of any or all May only be dissolved with the
Dissolution partners. consent of the state.

Governing Laws Civil Code Corporation Code

Advantages of a corporate form of business organizations

1. The capacity to hold property, to contract, to sue and be sued as a legal unit or distinct entity.
2. Exemption of shareholders from individual liability.
3. Continuity of existence in spite of death or changes of members.
4. Transferability of shares.
5. Centralized management under a board of directors.
6. Standardized methods of organization, management and finance for the protection of
shareholders and creditors under statutory regulations.

Disadvantages of a corporate form of business organizations

1. The limited liability of the stockholders serves to limit the credit available to the corporation.
2. The transferability of shares permits the uniting of incompatible and conflicting interests in
one enterprise.
3. The minority stockholders are usually subservient to the wishes of the majority.
4. In big corporations, the stockholders’ voting rights have become largely theoretical because
of widespread ownership, lukewarmness and disinterest in management, inertia, and
inaccessible meeting places.
5. In large corporations, management and control has been separated from ownership.
6. By and large corporations are subject to governmental restrictions, controls, and report
requirements not imposed on other forms of business organizations.
7. Corporate sphere of activity is limited in the transaction of its business to the state of the
organization.
8. The corporate form involves “double taxation” on corporation income.

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 shares held are stock corporations. All other corporations are non-stock
corporations.

Other kinds of corporations

1. Quasi-corporations – from the word “quasi”, meaning “as if”, are entities that are not
absolutely corporations but are considered as if they were. Eg. Public boards created by law
2. Quasi-public – are entities engaged in rendering basic services of such public importance as
to entitle them to certain privileges like eminent domain or use of public property. Eg. Electric,
gas, water and telephone companies.
3. Government-owned or controlled – are entities organized by the government or corporations
of which the government is a majority stockholder. Eg. Philippine Air Lines
4. Domestic – one incorporated under Philippine laws.
5. Foreign – one formed, organized, or existing under any laws other than those of the
Philippines.
6. Corporation aggregate – one composed of more than one member or corporator.
7. Corporation sole – consists of one member or corporator and his successors.
8. Religious corporations, sole or aggregate – organized, either as sole or aggregate, to
administer properties of the church.
9. Ecclesiastical – organized for religious purposes.
10. Lay – organized for a purpose other than religious
11. Eleemosynary – organized for charitable purposes.
12. Civil – are those than ecclesiastical and eleemosynary, whether public or private.
13. Close – one wherein all the outstanding stock is owned by the persons who are active in
management and conduct of the business.
14. Open – one in which all the members or corporations have a vote in the election of the
directors and other officers.
15. Multi-national – one having been created or organized in one state conducts business or
activities across national boundaries and but subject to the legal sanctions of the countries in
which they operate.
16. Non-profit – organized without contemplation of gains, profits or dividends to their members
on invested capital.
17. De Jure – one created in strict or substantial conformity with the statutory requirements for
incorporation and whose right to exist as a corporation cannot be successfully attacked even in
a direct proceeding for that purpose by the State.

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.

Sec. 5. Corporators and incorporators, stockholders, and members. – Corporators are

those who compose a corporation, whether as stockholders or 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 stock-holders or shareholders. Corporators in a

non-stock corporation are called members.

Components of a Corporation
1. Corporators – are those who composed a corporation, whether as stockholders of members.
The term includes incorporators, stockholders or members.
2. Incorporators – are those stockholders or members mentioned in the articles of incorporation
as originally forming and composing the corporation and who are signatories thereof.
3. Stockholders or shareholders – are those corporators in a stock corporation.
4. Members – are those corporators in a non-stock corporation.
5. Promoters – is a self-constituted organizer who finds an enterprise or venture and helps to
attract investors, form a corporation and launch it in business, all with a view to promotion
profits.
Promotion – is the act of procuring the initial finances and the making of all preparations
necessary to launch a corporation.

Activities of a promoter
1. The discovery and investigation of a promising business opportunity.
2. The formulation of business and financial plans.
3. Assembling the enterprise by negotiations and obtaining some control over the subject matter
by option or contracts made on behalf of the proposed corporation or on his own credit.
4. The making of arrangements for financing the enterprise and the floatation of securities.
5. Arrange tactful and painless methods for getting his own reward for the task of promotion out
of the prospective investors and for reimbursement for his expenses, contracts, and services
without frightening away those who are expected to provide the funds.

General rule: A corporation is not bound by any agreement made by a promoter.

Exception to the rule: Unless and until the corporation approves the agreement.

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.
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.

Definition
A “stock” or share of stock is one of the units into which the capital stock has been divided. It
represents the interest or right that the holder of the stock or stockholder has in the corporation.

A stock certificate certifies that one is a holder or owner of a certain number of shares of stock
in the corporation. It is a mere documentary evidence of the holder’s ownership of shares and a
convenient instrument for the transfer of title.
Classes or series of shares of stock subject to restrictions
1. Shares shall not be deprived of voting rights except preferred or redeemable shares but non-
voting shares must still be entitles to vote on matters specified in the last paragraph of Section 6
like matters relating to amendment of the articles of incorporation and dissolution of the
corporation.
2. Where non-voting shares are provided for there must always be a class or series of shares
with complete voting rights.
3. Banks, trust companies, insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of stock.
4. Preferred shares of stock which may be given preference in the distribution of assets in case
of liquidation and distribution of dividends or other preferences may be issued only with stated
par value.
5. The terms and conditions of preferred shares or series thereof may be fixed by the board of
directors only when authorized by the articles of incorporation the effectivity thereof shall be
reckoned from the filing of certificate with the SEC.
6. Shares without par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share.
7. Unless otherwise provided by law the rights, privileges or restrictions on classes or series of
shares must be stated in the articles of incorporation and in the stock certificates.

Classes or series of shares

1. Voting and Non-Voting Shares;

General rule: Every member of a non-stock corporation and every legal owner of shares in a
stock corporation, has a right to be present and vote at all corporate meetings.

Exception to the rule: Unless there is a stipulation in contrary.

2. Par Value and No-Par Value Shares

Par value is the given fixed or definite value of a share in the articles of incorporation.
3. Common and Preferred Shares. Preferred shares of stock may be: (a) preferred as to assets;
(b) preferred as to dividends. Preferred as to dividends may either be cumulative or non-
cumulative, or participating or non-participating
4. Promotion Shares – are such stocks issued to those who may originally own the mining
ground or valuable rights connected therewith, in consideration of their deeding the same to the
mining company when the company is incorporated, or it may mean such stock as is issued to
promoters.
5. Shares of Escrow – are shares subject to an escrow agreement, that is, an agreement under
which the shares are deposited by the grantor or his agent with a third person, to be delivered
by the depositary to the vendee or subscriber only upon the happening of certain conditions.
6. Founder’s Shares;
7. Redeemable “Callable” Shares;
8. Treasury Shares;
9. Other shares classified to comply with constitutional or legal requirements.

Instances when non-voting shares may vote

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 of business in accordance with the
Corporation Code; and
8. Dissolution of the corporation.

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.

Definition
Founders’ shares, generally common stock, are given to the founders or promoters of a
corporation in payment of money expended or services rendered in the promotion of it.
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.

Definition
Redeemable (“Callable”) shares of stock which are usually preferred are frequently issued
subject to redemption at the option of either the corporation, the stockholder, or both, at a
definite price representing premium above the amount originally paid.

Sinking fund refers to a fund set-up by the corporation where cash is gradually set aside in order
to accumulate the amount necessary to meet the redemption price of redeemable shares of
specified dates in the future.

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. (n)

Definition
Treasury shares are owned by the corporation having been reacquired by the issuing
corporation by “purchase, redemption, donation or through some other lawful means.” It has no
voting rights or rights as to dividends or distributions.