ARTICLES

INCORPORATION

The document prepared by the persons establishing a

corporation and filed with the SEC containing the matters
required by the Code.
Significance: 1. The issuance of a certificate of incorporation
signals the birth of the corporation’s juridical personality;
2. It is an essential requirement for the existence of a corporation,
even a de facto one.
 ARTICLES
INCORPORATION

Contents: (Sec. 13) 1. name of corporation;

2. purpose/s, indicating the primary and secondary purposes (non-stock
corp cannot add a purpose that would contradict its nature);
3. place of principal office;
4. term of existence (if not perpetual);
5. names, citizenship and residences of incorporators;
6. Number of directors or trustees (not more than 15);
7. names, nationalities, and residences of the persons who shall act as
directors or trustees until the first regular ones are elected and qualified;
 ARTICLES
INCORPORATION

8. If it be a stock corporation, the amount of its authorized capital stock,

number of shares into which it is divided, the par value of each, names,
nationalities, and residence addresses of the original subscribers,
amount subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par value, if
applicable;

9. if non-stock, the amount of capital, the names, nationalities,

residences, and amount contributed by each,
10. Such other matters consistent with law and which the incorporators
may deem necessary and convenient.
 AMENDMENT OF
ARTICLES OF
INCORPORATION

1. It must be for legitimate purpose and not contrary to other

provisions of the RCCP and special laws
2. It must be approved by the majority vote of the board of
directors or trustees
3. There must be a vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock corporation, the vote or
written assent of a least two-thirds (2/3) of the members
 AMENDMENT OF
ARTICLES OF
INCORPORATION
5. The original and amended articles together shall contain all
provisions required by law to set out in the Articles of
Incorporation. The amendments to the Articles of
Incorporation shall be indicated by underscoring the change
or changes made.
6. A copy of the amended articles shall be duly certified under
oath by the corporate secretary and a majority of the
directors or trustees, stating the fact that the amendment or
amendments have been duly approved by the required vote
of the stockholders or members. The amended articles with
the certification shall be submitted to the SEC
7. The amendment must be approved by the SEC.
 NON-AMENDABLE FACTS
IN THE ARTICLES OF
INCORPORATION
Those matters referring to facts existing as of the date of the
incorporation such as:
1. Names of incorporators
2. Names of original subscribers to the capital stock of the
corporation and their subscribed and paid up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of a non-stock
corporation;
5. Date and place of execution of the articles of incorporation;
6. Witnesses to the signing and acknowledgment of the articles.
 GROUNDS FOR REJECTION OF
ARTICLES OF INCORPORATION OR
AMENDMENT THERETO (Section
16)

1. The articles or its amendment is not substantially in

accordance with the form prescribed
2. The purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and
regulations
3. The certification concerning the amount of capital stock
subscribed and/or paid is false and
4. The required percentage of ownership of the capital stock to
be owned by Filipino citizens has not been complied with
 GROUNDS FOR REJECTION OF
ARTICLES OF INCORPORATION OR
AMENDMENT THERETO (Section
16)

1. The duty of the SEC to approve an application for registration

is ministerial provided that all the requirements of law are
complied with. The SEC must approve the Articles of Inc. if
the applicant has substantially complied with the
requirements of the RCCP.
2. The articles of inc or any amendment thereto may be rejected
if the certification incorporated therein concerning the
amount of capital stock subscribed and/or paid is false. The
irregularity cannot be determined just by looking at the
articles of inc, it has to be investigated with a time to correct
after disapproval.
 GROUNDS FOR SUSPENSION
OR REVOCATION OF
CERTIFICATE OF REGISTRATION
(Pres. Decree No. 902-A)

1. Fraud in procuring its certificate of incorporation

2. Serious misrepresentation as to what the corporation can do
or is doing to the great prejudice of, or damage to, the
general public
3. Refusal to comply with or defiance of a lawful order of the
SEC restraining the commission of acts which would amount
to a grave violation of its franchise
4. Continuous inoperation for a period of at least 5 years
5. Failure to file the by-laws within the required period 6. Failure
to file required reports
 Corporate Name (Sec. 17)

SEC. 17. Corporate name. – No corporate name shall be allowed by the

Commission if it is not distinguishable from that already reserved or
registered for the use of another corporation, or if such name is already
protected by law, or when its use is contrary to existing law, rules and
regulations.
A name is not distinguishable even if it contains one or more of the
following:
(a) The word “corporation”, “company”, “incorporated”, “limited”,
“limited liability”, or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word
or phrase.
 Corporate Name (Sec. 17)

The Commission, upon determination that the corporate name is: (1)
not distinguishable from a name already reserved or registered for the
use of another corporation; (2) already protected by law; or (3)
contrary to law, rules and regulations, may summarily order the
corporation to immediately cease and desist from using such name and
require the corporation to register a new one. The Commission shall
also cause the removal of all visible signages, marks, advertisements,
labels, prints and other effects bearing such corporate name. Upon the
approval of the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name.
If the corporation fails to comply with the Commission’s order, the
Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or
criminally liable under this Code and other applicable laws and/or
revoke the registration of the corporation.
 Corporate Name (Sec. 17)

1. A Corporation cannot use a name that belongs to another even as a

trade name. If any corporation could assume at pleasure as an
unregistered trade name, the name of another corporation, this
practice would result to confusion and open the door to frauds and
evasions and difficulties of administration and supervision.
2. A corporation seeking to prevent another corporation from using its
name must prove that:
1. The corporation has acquired a prior right over the use of such corporate name
and
2. It is any of the cases mentioned in sec. 17 of the RCCP, that is: a) name is not
distinguishable from that already reserved or registered for the use of another
corporation; or b) the name is already protected by law, or; c) use of the name
is contrary to existing law, rules and regulations.
 Corporate Name (Sec. 17)

1. If SEC finds the name of a corporation is not distinguishable from a

name already reserved or registered for the use of another
corporation or is already protected by law or is contrary to law, rules
and regulations:
1. Reject the articles of inc.
2. Summarily order the corporation to cease and desist from using such
name
3. Summarily order the corporation to register a new name and amend its
articles of incorporation bearing the new name
4. Cause the removal of all visible siganages, marks, and advertisements,
labels, prints and other effects bearing such corporate name
 Corporate Name (Sec. 17)
1. Distinguishability Test – The RRCP adopts the distinguishability test
with respect to corporate names. This test was adopted as part of
the reform to enhance the ease of doing business. Ex. Previously you
cannot register XYZ Dream network because a of a previous
corporation with the name XYZ Dream Hospital. Under the RCCP, you
can do so, because one of the key words is different, that is network
and hospital.
2. Prior right – The right to exclusive use of corporate name with
freedom from infringement by similarity is determined by priority of
adoption. A corporation that is incorporated and adopts a corporate
name earlier acquires a prior right over the use of the corporate
name.
3. Dominancy Test – Under the Intellectual Property Code, there will be
infringement if the mark contains the dominant feature of the mark
of a trademark belonging to another which also applies to corporate
names.
 Corporate Name (Sec. 17)
4. Doctrine of Secondary meaning – Originated in trademark law finds
application and has been extended to corporate names. A work or
phrase, which is originally incapable of exclusive and appropriation
because the word or phrase is geographic or otherwise descriptive,
might nevertheless have been used for so long and so exclusively by
one producer with reference to an article and the purchasing public
has considered the work or phrase as associated to his product.
5. Priority of Adoption Rule – The corporation that first adopts a
corporation name has the right thereto and a subsequent
corporation cannot use the same name. A corporation may likewise
be directed to change name in accordance with the undertaking that
it submitted to the SEC together with its Articles of Incorporation.
Even a foreign corporation may sue a domestic corporation to
prevent the latter from using its name.
6. Name should include corp. or inc. to distinguish from other business
organizations.
 Corporate Existence (Sec. 18)

SEC. 18. Registration, Incorporation and Commencement of Corporate

Existence. – A person or group of persons desiring to incorporate shall
submit the intended corporate name to the Commission for verification.
If the Commission finds that the name is distinguishable from a name
already reserved or registered for the use of another corporation, not
protected by law and not contrary to law, rules and regulations, the
name shall be reserved in favor of the incorporators. The incorporators
shall then submit their articles of incorporation and bylaws to the
Commission.
If the Commission finds that the submitted documents and information
are fully compliant with the requirements of this Code, other relevant
laws, rules and regulations, the Commission shall issue the certificate of
incorporation.
 Corporate Existence (Sec. 18)

A private corporation organized under this Code commences its

corporate existence and juridical personality from the date the
Commission issues the certificate of incorporation under its official seal
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body 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.
 Corporate Existence (Sec. 18)

Certificate of Incorporation – The issuance of the certificate of

incorporation by the SEC marks the commencement of the corporate
term of corporations incorporated under the RCCP. The certificate of
incorporation is therefore an indispensable requirement before
corporate life can ensue.
There is no corporation to speak of prior to an entity’s incorporation and
no contract entered into before incorporation can bind the corporation.
 De Facto Corporation (Sec. 19)

SEC. 19. 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.
De facto corporation requisites:
a. The existence of a valid law under which it may be incorporated;
b. A bona fide attempt in good faith to incorporate under such law
c. Actual use or exercise in good faith of corporate powers; and
d. Issuance of a certificate of incorporation by the SEC as a minimum
requirement of continued good faith.
 Corporation by Estoppel
(Sec. 20)

SEC. 20. 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 its lack
of corporate personality as a defense. Anyone who assumes an
obligation to an ostensible corporation as such cannot resist
performance thereof on the ground that there was in fact no corporation.
 Corporation by Estoppel
(Sec. 20)

Corporation by Estoppel – one who assumes an obligation to an

ostensible corporation as such cannot resist performance thereof on the
ground that there was in fact no corporation.

Liable as General Partners – Those who assume to act as a corporation

knowing it to be without authority to do so shall be liable as general
partners. Therefore, they are liable beyond their investment. Their
personal properties may be made to answer for what is purportedly a
corporate debt of the non-existent corporation.
 Effect of non-use of corporate
charter (Sec. 21)

SEC. 21. Effects of Non-Use of Corporate Charter and Continuous

Inoperation. – If a corporation does not formally organize and commence
its business within five (5) years from the date of its incorporation, its
certificate of incorporation shall be deemed revoked as of the day
following the end of the five-year period.
However, if a corporation has commenced its business but subsequently
becomes inoperative for a period of at least five (5) consecutive years,
the Commission may, after due notice and hearing, place the corporation
under delinquent status.
 Effect of non-use of corporate
charter (Sec. 21)

A delinquent corporation shall have a period of two (2) years to resume

operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall
issue an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation’s certificate
of incorporation.
The Commission shall give reasonable notice to, and coordinate with
the appropriate regulatory agency prior to the suspension or
revocation of the certificate of incorporation of companies under their
special regulatory jurisdiction.
 Effect of non-use of corporate
charter (Sec. 21)

Conditions Subsequent to incorporation involves 3 violations:

1. Failure to organized within 5 years from incorporation
2. Failure to commence business within 5 years from incorporation
3. Becoming continuously inoperative for a period of at least 5
consecutive years
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS
(Sec. 22)

SEC. 22. The Board of Directors or Trustees of a Corporation;

Qualification and Term. – Unless otherwise provided in this Code, the
board of directors or trustees shall exercise the corporate powers,
conduct all business, and control all properties of the corporation.
Directors shall be elected for a term of one (1) year from among the
holders of stocks registered in the corporation’s books, while trustees
shall be elected for a term not exceeding three (3) years from among the
members of the corporation. Each director and trustee shall hold office
until the successor is elected and qualified. A director who ceases to own
at least one (1) share of stock or a trustee who ceases to be a member of
the corporation shall cease to be such.
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS
(Sec. 22)
The board of the following corporations vested with public interest
shall have independent directors constituting at least twenty percent
(20%) of such board:
a. Corporations covered by Section 17.2 of Republic Act No. 8799,
otherwise known as “The Securities Regulation Code,” namely
those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least Fifty
million pesos (P50,000,000.00) and having two hundred (200) or
more holders of shares, with at least one hundred (100) shares of a
class of its equity shares;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged
in money service business, pre-need, trust and insurance
companies, and other financial intermediaries; and
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS
(Sec. 22)

c. Other corporations engaged in business vested with public interest similar to

the above, as may be determined by the Commission, after taking into account
relevant factors which are germane to the objective and purpose of requiring
the election of an independent director, such as the extent of minority
ownership, type of financial products or securities issued or offered to
investors, public interest involved in the nature of business operations, and
other analogous factors.
An independent director is a person who, apart from shareholdings and fees
received from the corporation, is independent of management and free from
any business or other relationship which could, or could reasonably be
perceived to materially interfere with the exercise of independent judgment in
carrying out the responsibilities as a director.
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS
(Sec. 22)

Independent directors must be elected by the shareholders present or entitled

to vote in absentia during the election of directors. Independent directors shall
be subject to rules and regulations governing their qualifications,
disqualifications, voting requirements, duration of term and term limit,
maximum number of board memberships and other requirements that the
Commission will prescribe to strengthen their independence and align with
international best practices.
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS
(Sec. 22)
1. For a stock corporation, ownership of at least 1 share capital stock
of the corporation in his own name, and if he ceases to own at least
one share in his own name, he automatically ceases to be a director.
2. A He must not have been convicted by final judgment within 5
years:
a) of an offense punishable by imprisonment for a period exceeding 6 years or a
violation of this code and SRC (RA 8799).
b) Found administratively liable for any offense involving fraud acts and
c) By a foreign court or equivalent foreign regulatory authority for acts,
violations or misconduct similar to those enumerated in paragraphs (a) and
(b) above.
Without prejudice to qualifications or disqualifications which the
commission, the primary regulatory agency, or the PCC may impose in
its promotion of good corporate governance or as a sanction in its
admin proceedings.
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS

3. Only natural persons can be elected directors/trustees. Other

qualifications as may be prescribed in the by-laws of the
corporation or any other special law. Ex. Directors of banks
with additional requirements from BSP. RA 6713 Code of
Conduct and Ethical Standards for Public Officials and
Employees which prohibits public offers from being employed
in private enterprise.
4. Must be of legal age
 BOARD OF DIRECTORS/
TRUSTEES: QUALIFICATIONS

Director can be re-elected unless disqualified by the Articles of

Incorporation or By-laws.

Hold-over - If no election is held, the directors and offices shall

hold-over until their successors are elected. This rule o \n hold-
over applies to a going concern where there is no break in the
exercise of the duties of the officers and directors.
 CORPORATE OFFICERS

1. President – must be a director;

2. Treasurer – may or may not be a director; as a matter of
sound corporate practice, must be a resident
3. Secretary – need not be a director unless required by the by-
laws; must be a resident and citizen of the Philippines; and
4. Such other officers as may be provided in the by-laws.

CORPORATE OFFICER Position is provided for in the by-laws or

under the Corporation Code - RTC has jurisdiction in case of labor
dispute
CORPORATE EMPLOYEE Employed by the action of the managing
officer of the corporation - NLRC has jurisdiction in case of labor
dispute
 BUSINESS JUDGMENT RULE

What is Business Judgment Rule?

A resolution or transaction pursued within the corporate powers

and business operations of the corporation, and passed in good
faith by the board of directors, is valid and binding, and generally
the courts have no authority to review the same and substitute
their own judgment, even when the exercise of such power may
cause losses to the corporation or decrease the profits of a
department. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)
 BUSINESS JUDGMENT RULE

Consequences:
a. Resolutions and transactions entered into by the Board within
the powers of the corporation cannot be reversed by the courts
not even on the behest of the stockholders.
b. Directors and officers acting within such business judgment
cannot be held personally liable for such acts. (Philippine
Corporate Law, Cesar Villanueva, 2001 ed.)
 BOARD OF DIRECTORS/
TRUSTEES AS REPOSITORY OF
CORPORATE POWERS
GENERAL RULE: The corporate powers of the corporation shall be
exercised, all business conducted and all property of such corporation
controlled and held by the board of directors or trustees. (Sec. 22)
Except:
1. In case of an Executive Committee duly authorized in the by-laws;
2. In case of a contracted manager which may be an individual, a
partnership, or another corporation. Note: In case the contracted
manager is another corporation, the special rule in Sec. 43 applies.

3. In case of close corporations, the stockholders may manage the

business of the corporation instead by a board of directors, if the
articles of incorporation so provide.
 Independent Directors (Sec. 22)

1. For the purpose of good governance requires a corporation vested

with public interest to have atleast 20% independent directors.
What are these businesses? Banks, Quasi Banks, pawnshops,
financial institutions, insurance, or any other businesses similar or
as may be determined by the SEC.
2. An independent director is a person who, apart from
shareholdings and fees received from the corporation, is
independent of management and free from any business or other
relationship which could or could reasonably be perceived to
materially interfere with the exercise of independent judgment in
carrying out the responsibilities as a director.
 BOARD OF DIRECTORS/
TRUSTEES AS REPOSITORY OF
CORPORATE POWERS

The power to purchase real property is vested in the board of

directors or trustees. While a corporation may appoint agents to
negotiate for the purchase of real property needed by the
corporation, the final say will have to be with the board, whose
approval will finalize the transaction. A corporation can only
exercise its powers and transact its business through its board of
directors and through its officers and agents when authorized by a
board resolution or by its by-laws. (Spouses Constantine Firme vs.
Bukal Enterprises and Development Corporation, G.R. No. 146608,
October, 23, 2003)
 LIMITATIONS ON POWERS
OF BOARD OR
DIRECTORS/TRUSTEES

1. Limitations imposed by the Constitution, statutes, articles of

incorporation or by-laws.
2. Cannot perform constituent or those involving fundamental
changes in the corporation requiring the approval of stockholders
or members.
3. Cannot exercise powers not possessed by the corporation. (The
Corporation Code of the Philippines Annotated, Hector de Leon,
2002 ed.)
 NATURE OF POWERS OF
BOARD OF
DIRECTORS/TRUSTEES

a. Under the Theory of Original Power, the powers of the board of

directors or trustees are ORIGINAL and UNDELEGATED. The
stockholders or members do not confer, nor can they revoke those
powers.
b. They are DERIVATIVE only in the sense of being received from
the State in the act of incorporation.
 THREE-FOLD DUTIES OF
DIRECTORS:
1. Duty of Obedience
To direct the affairs of the corporation only in accordance with the
purposes for which it was organized.
Legal Basis: The directors or trustees and officers to be elected
shall perform the duties enjoined on them by law and the by-laws
(Sec. 24)
2. Duty of Diligence
Legal Basis: Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of
the corporation shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons (Sec. 30)
 THREE-FOLD DUTIES OF
DIRECTORS:

3. Duty of Loyalty
Legal Basis: Directors or trustees who acquire any pecuniary or
personal interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages
resulting therefrom. (Sec. 31)
When a director or trustee attempts to acquire or acquires in
violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him in confidence
as to which equity imposes a liability upon him to deal in his own
behalf, he shall be liable as trustee for the corporation and must
account for all the profits which otherwise would have accrued to
the corporation (Sec. 31, 2nd par.)