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COMPONENTS OF A CORPORATION
CORPORATE OFFICERS – president (who shall be the director), treasurer, secretary, and/or
compliance officer.
SUBSCRIBER – persons who have agreed to take and pay for original, unissued shares of a
corporation formed or to be formed
UNDERWRITER – a person who guarantees on firm commitment and/or declared best effort
basis the distribution and sale of securities of any kind by another company (Ex: investment
banker)
PROMOTER – a person who brings about or cause to bring about the formation and
organization of a corporation (Ex: founder or organizer)
PAR VALUE SHARES – shares with a value fixed in the AOI and the certificate of stock
OVER-ISSUED SHARE – a stock or share issued in excess of the authorized capital stock
(NOTE: such issuance is void0
CONVERTIBALE SHARE – a share that is convertible by the stockholder from one class to
another class at a certain price and within a certain period
FOUNDERS’ SHARE – shares classified as such in the AOI which may be given certain rights
and privileges not enjoyed by the owners of other stocks
REDEEMABLE SHARES – are shares usually preferred, which by their terms are redeemable
at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a
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certain redemption price. (IN A SENSE, a repurchase for cancellation) (So, once redeemed are
retired, unless otherwise provided by the AOI)
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.
INCORPORATORS
- There must be at least 15 incorporators
- Each in must have at least 1 share of the capital stock
NOTE: licensed professional and professional partnerships are not allowed to organize as a
corporation, unless otherwise provided under special laws
EXISTENCE OF A CORPORATION
- Perpetual or no limit, unless the AOI provides for a specific period
- If with a specific term, it may be extended or shortened. After the expiration of the term,
the corporation shall cease to exist and is dissolved ipso facto.
- If the term expired, the corporation may apply for its revival. A certificate of revival of
corporate existence shall be issued, giving it perpetual existence, unless it applied for a
specific term.
SEE: Section 13 – Contents of the Articles of Incorporation; and Section 14 – Form of Articles
of Incorporation
AOI – defines the character of the corporation and the contractual relationships between:
(Three-fold nature of the AOI)
a) the State and the corporation;
b) the stockholders and the State; and
c) between the corporation and its stockholder.
Purpose clause – this will confer, as well as limits, the powers which a corporation may
exercise. Any act beyond its powers is known as ultra vires act.
ULTRA VIRES ACT – an act outside or beyond corporate powers, including those that may
ostensibly be within such powers but are, by general or special laws, prohibited or declared
illegal.
- Act as one outside the powers conferred by the Code or by the AOI, or beyond what is
necessary or incidental to the exercise of the powers so conferred.
SEE: Section 41
Paid-up capital – is that portion of the authorized capital stock which has been both
subscribed and paid.
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- if not substantially in accordance with the form prescribed in Section 13 and 14;
- purpose/s is/are patently unconstitutional, illegal, immoral or contrary to government
rules and regulations;
- certification concerning the amount of capital stock subscribed and/or paid is false; and
- the required percentage of Filipino ownership of the capital stock under existing laws or
the constitution has not been complied with (100%, 80-20%, 60-40%, etc.)
NOTE: It shall not be automatically disproved. the SEC shall give a reasonable time within
which to modify the objectionable portions of the AOI.
It is the Certificate of Incorporation that gives juridical personality to a corporation and
places it under the jurisdiction of the SEC.
A corporation commences its corporate existence and juridical personality and is
deemed incorporated from the date the SEC issues a COI under its official seal.
NOTE: If a corporation does not formally organize and commence its business within 5 years
from the date of its incorporation, its COI shall be deemed revoked as of the day following the
end of 5 years.
If a corporation commenced its business but subsequently becomes inoperative for 5
consecutive years, the SEC may place it under delinquent status (BUT after notice and
hearing). The delinquent corporation shall have a period of 2 years to resume operations and
comply with all the requirements prescribed by the SEC. A SEC Order shall be issued to lift the
delinquent status.
BUSINESS JUDGMENT RULE – contracts intra vires entered into by the BOD are binding
upon the corporation. The court will not interfere unless such contracts are so unconscionable
(unreasonable) and oppressive.
BOD/BOT
- exercise the corporate powers, conduct all business, and control all properties of the
corporation
- director shall be elected for a term of 1 year; trustee – term not exceeding 3 years
- director must own at least 1 share of stock; trustee must be a member
- they shall hold office until a successor shall qualify
- they must be of legal age and capacitated
- they must be at all times be in good faith. In case of mismanagement, a stockholder or
member may sue on behalf of the corporation. This remedy is known as derivative suit.
- BOD (Section 22) is not the same with corporate officers (these are positions stated in
the by-laws) (Section 24)
- During election, owners of majority of the outstanding capital stock (for stock corp) or
members entitled to vote (for non-stock corp), must be present. It is by ballot, if
requested. They may vote through remote communication (videoconferencing,
teleconferencing) or in absentia.
- For stock corp., they may vote as many as the shares they hold (BUT no delinquent
stock shall be voted). For non-stock corp., 1 vote:1 candidate
OUTSTANDING CAPITAL STOCK – the total shares of stock issued under binding
subscription contracts to subscribers or stockholders, whether fully or partially paid, except
treasury shares.
BY-LAWS – signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members abd directors and officers with relation thereto and among themselves in their
relation to it.
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NOTE: 2 or more positions may be held concurrently by the same person, except that no one
shall act as president and secretary or as a president and treasurer at the same time.
NOTE: they may be removed by a 2/3 vote. It may be with or without cause. (SEE: Section 27)
Any vacancy may be filled by a majority vote
EMERGECNY BOD – when the vacancy prevents the remaining directors from constituting a
quorum and emergency action is required to prevent grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may be temporarily filled from among the officers of
the corporation by unanimous vote of the remaining directors/trustees. (Corp. must notify the
SEC)
NOTE: No compensation of BOD/BOT, except for reasonable per diem, if fixed by by-laws, or
granted by the majority of members or stockholders representing at least a majority of the
OCS.
They shall not participate in the determination of their own per diems or compensation.
(Conflict of interest).
LIMIT: in no case shall the total yearly compensation of directors exceed 10% of the net
income before income tax of the corp. during the preceding year.
Corporations vested with public interest shall submit to their shareholders and the
commission, an annual report of the total compensation of each of their directors/trustees.
ERROR IN BUSINESS JUDGMENT – if the cause of the losses is merely error in business
judgment, not amounting to bad faith or negligence, directors and/or officers are not liable.
(mismanagement and resulting losses are not enough)
INTERLOCKING DIRECTORS – these are members of the BOD in a certain corporation who
are also directors in another corporation
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NOTE: If the interest of the interlocking directors in one corporation is substantial and his
interest in the other corporation/s is merely nominal, he shall be subject to the provisions of
Section 31 insofar as the latter corporation/s are concerned.
REMEDY: ratification (formal approval). By a vote of the stockholders representing at least 2/3
of the OCS
EXECITVE COMMITTEE – it is a body created by the by-laws and composed of not less than
3 members of the board which, subject to the statutory limitations, has all the authority of the
BOD to the extent provided in the by-laws.
BOD may create special committees of temporary or permanent nature and determine
the members’ term, composition, compensation, powers, and responsibilities.
SEE: Section 35 – Corporate powers and capacity
NOTE: No foreign corporation shall give donations in aid of any political party or candidate or
for purposes of partisan political activity. There is no similar prohibitions as regards domestic
corporation.
Appraisal right – a stockholder who dissented and voted against the proposed corporate
action, may choose to get out of the corporation by demanding payment of the fair market
value of his shares.
NOTE: In case of shortening or extension of corporate term, any dissenting stockholder may
exercise his appraisal right.
NOTE: the requirements for the power to incur, create, increase bonded indebtedness is also
the same with the power to increase or decrease of capital stock.
Non-stock corporation may incur, create or increase bonded indebtedness when
approved by a majority of the BOT and of at least 2/3 of the members in a meeting duly called
for the purpose.
The bonds issued should be registered with SEC.
PURPOSE: the purpose of pre-emptive right is to enable the shareholder to retain his
proportionate control in the corporation.
Pre-emptive right must be exercised within the period stated in the AOI or the by-laws.
The Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not prejudice the creditors of the assignor.
The determination of whether or not the sale involves all or substantially all of the
corporation’s properties and assets must be computed based on its net asset value, as shown
in its latest financial statements.
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would be rendered incapable of continuing the business or accomplishing the purpose for
which it was incorporated.
FRACTIONAL SHARES – are shares which are less than one share.
RETAINED EARNINGS – the accumulated profits realized out of normal and continuous
operations of the business after deducting therefrom distributions to stockholders and transfers
to capital or other accounts.
UNRESTRICTED RETAINED EARNINGS – the retained earnings which have not been
reserved or set aside by the BOD for some corporate purpose.
DIVIDENDS – corporate profits set aside, declared, and ordered to be paid by the directors for
distribution among stockholders at a fixed time.
NOTE: as a rule, stock corporations are prohibited from retaining surplus profits in excess of
100% of their paid-up capital stock
MEETINGS
- Kinds: special or regular
- 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 after April 15 of every year as determined by
the BOD/T
- Written notice must be sent to stockholders or members at least 21 days prior to the
meeting, unless a different period is required. It must be sent through e-mail and such
other manner
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- In case of postponement, written notice must be sent 2 weeks prior to the date of the
meeting
- Chairman/President shall preside
NOTE: the right to vote of stockholders or members may be exercised in person, through a
proxy, or when so authorized in the by-laws, through remote communication or in absentia.
STOCK AND TRANSFER BOOK – it records the names and addresses of all stockholders
arranged alphabetically, the installments paid and unpaid on all stock for which subscription
has been made, and the date of payment thereof; of every alienation, sale and transfer of
stock, the date and to whom made; and such other entries as may be prescribed by law.
NOTE: Regular meetings of the BOD/T shall be held monthly, unless otherwise is provided.
Special meetings may be held at any time upon the call of the president
VALID CORPORATE ACT – every decision reached by at least a majority of the directors or
trustees constituting a quorum shall be valid as a corporate act.
NOTE: 5 year period may be extended in cases where the voting trust is executed pursuant to
a loan agreement whereby the period is made contingent upon full payment of the loan.
DERIVATIVE SUIT – an action brought by minority shareholders in the name of the corporation
to redress wrongs committed against it, for which the directors refuse to sue.
NOTE: stocks shall not be issued for a consideration less than the par or issued price thereof.
HOWEVER, it does not prohibit a corporation from issuing stocks for a consideration above the
par or issued price.
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WATERED STOCK – stock issued for a consideration less than the par or issued price thereof
or in any other form other than cash valued in excess of its fair value.
- It refers only to original issue of shares but not a subsequent transfer of such shares by
the corporation.
- Director shall be held liable to the corporation and/or creditor
CERTIFICATE OF STOCK – evidence of the holder’s ownership of the stock and of his right
as a shareholder
UNPAID CLAIM – any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from any
other transaction
MERGER – a union whereby one or more existing corporations are absorbed by another
corporation that survives and continues the combined business.
CONSOLIDATION – a union of two or more existing entities to form a new entity called the
consolidated corporation
STOCK CORPORATION – have capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or allocations of the surplus profits on the
basis of the shares held.
NOTE: - any profit it may obtain as an incident to its operation shall, whenever necessary or
proper, be used for the furtherance of the purpose/s for which it was organized.
- Non-transferability of membership
- To terminate member/s, it only needs notice and opportunity to be heard
- Maximum of 15 trustees (holds office for not more than 3 years)
CLOSE CORPORATION
RIGHT TO FIRST REFUSAL – the stockholder who wants to sell his shares to any third
person must first offer it either to the corporation or to the other existing stockholders usually
under the same terms and conditions.
SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS
- For non-stock, the BOT shall not be less than 5 nor more than 15 provided that the
number of trustees shall be in multiples of 5 (either 5, 10 or 15)
- For stock, the BOD shall not be less than 5 and not more than 15
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- The term of office of 1/5 of their number shall expire every year, unless otherwise
provided
RELIGIOUS CORPORATIONS
- May be incorporated by 1 or more persons
- Classified as: corporation sole and religious societies
- CORPORATION SOLE – one formed by the chief archbishop, bishop, priest, minister,
rabii or other presiding elder of a religious denomination, sect, or church, for the
purpose of administering or managing, as trustees, the affairs, properties and
temporalities of such religious denomination, sect or church.
NOTE: a corporation sole may sell or mortgage real property held by it by obtaining an
order for that purpose from the RTC of the province where the property is located.
(unless they have their own rules)
- CORPORATION AGGREGATE – is one formed for the same purpose as corporation
sole.
DISSOLUTION
- Voluntarily or involuntarily made
VOLUNTARY
- By the vote of BOD/T and resolution adopted by the stockholders or members where no
creditors are affected
- Judgment of the SEC after hearing for voluntary dissolution where creditors are affected
- Amending the AOI to shorten corporate term
- In case of a corporation sole, by submitting to the SEC a verified declaration of the
dissolution for approval
- Merger or consolidation
INVOLUNTARY
- Expiration of term
- Legislative enactment
- Lawful court order
- Failure to formalize and commence business within 5 years
- It subsequently becomes inoperative for at least 5 consecutive years
- By order of SEC on the ground of existing laws
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FOREIGN CORPORATIONS
- One 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/State
- Must first obtain a license and a certificate
- The by-laws, though originating from a foreign jurisdiction/country, are valid and
effective in the Philippines
- It shall be bound by all laws, rules and regulations applicable to domestic corporations
of the same class
- One or more foreign corporations authorizes to transact business in the Philippines may
merge or consolidate with any domestic corporation/s if permitted under Philippine laws
and by the law of its incorporation
RESIDENT AGENT – an individual residing in the Philippines and must be of good moral
character and of sound financial standing
- A domestic corporation lawfully transacting business in the Philippines and must
likewise be of sound financial standing and must show proof that it is in good standing
as certified by the SEC
AS TO PURPOSE
PUBLIC PRIVATE
Organized for the government of a portion of Formed for some private purpose, benefit or
the State for the general good and welfare end
GOVERNMENT-OWNED OR
QUASI-PUBLIC CORPORATION
CONTROLLED CORPORATION
A private corporation which has accepted
Owned by the government directly or through
from the State the grant of franchise or
its instrumentalities either wholly, or, where
contract involving the performance of public
applicable as in the case of stock
duties but which is organized for profit (EX:
corporation, to the extent of 51% of its capital
electric, water, and transportation
stock
companies)
AS TO LEGAL RIGHT TO CORPORATE EXISTENCE
DE JURE DE FACTO
Created in strict or substantial conformity The due incorporation of any corporation
with the mandatory requirements for claiming in good faith to be a corporation
incorporation and the right of which to exist under the Code, and its right to exercise
as a corporation cannot be successfully corporate powers, shall not be inquired into
attacked or questioned by any party even in collaterally in any private suit to which such
a direct proceeding for that purpose by the corporation may be a party. Such inquiry
State may be made by the Solicitor General.
BY ESTOPPEL BY PRESCRIPTION
All persons who assume to act as a
corporation knowing it to be without authority One which has exercised corporate powers
to do so shall be liable as general partners for an indefinite period without interference
for all debts, liabilities and damages incurred on the part of the government
or arising as a result thereof
AS TO LAWS OF INCORPORATION
DOMESTIC FOREIGN
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