REPUBLIC ACT NO. 11232 THE REVISED CORPORATION CODE OF THE PHILIPPINES | TITLE 1 | GENERAL PROVISIONS DEFINITIONS AND CLASSIFICATIONS SEC. 1. Title of the Code. - This Code shall be known as the “Revised Corporation Code of the Philippines”, ‘The present Revised Corporation Code (RA. No. 11232), took effect on February 23, 2019. 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 incidental to its existence, CORPORATION IS AN ARTIFICIAL BEING A corporation is a juridical entity vested with a legal personality Separate and distinct from those acting for and in its behalf and, in general, from the people comprising it: It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. It is a basic principle in Corporation Law that a corporation has a personality, sti who compose it_ Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it.2 Equally well-settled is the principle that the corporate mask may be Temoved or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.3 Characteristics of a corporation 1 It is an artificial being; 2. Created by operation of law; : iy vs Subc Water and Sewerage Co In, GR No.171626 August, 2014, "Ramen ev and Amon Lacan Ch eal Ch o.3e36 sees ee ‘Pipe nl Bat ae Sug Decleor Rac & ngieerng Company Git No 142936, Ape 17,2002 186TITLE I - GENERAL PROVISIONS 3. It has the right of succession; and 4. It has the powers, attributes, and properties expressly authorized by law or incidental to its existence. Note: The above definition and characteristics refer to private corporation. Is Boy Scouts of the Philippines (BSP) a private corporation? The BSP, which is a corporation created for a public interest or purpose, is subject to the law creating it. The BSP is a public corporation not subject to the test of government ownership or control and economic viability. As presently constituted, the BSP still remains an instrumentality of the national government /tisa public ic is attached to the DECS pursuant to its Charter and the Administrative Code of 1987. It is not a private corporation which is required to be owned or controlled by the government and be economically viable to justify its existence under a special law. The ownership and control test is likewise irrelevant for a public corporation like the BSP. What is government-owned or controlled corporation (GOCC)? "Government-owned or controlled corporation” refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stocks Thus, for an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two requisites must concur before one may be classified as a stock corporation, namely: (A) that it has capital stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and Profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for mon-stock corporations, they must have members and must not distribute any part of their income to said members.6 See {oY Scouts ofthe Philippines vs. Commission on Audit, G.R. No. 177131, June 7, 2011. 1 fection 2 (13) ofthe introductory Provisions af the 1987 Administrative Code. Philippine Fisheries Development Authority vs. CA, etal, GR No. 169836, 187TITLE I - GENERAL PROVISIONS tis clear, therefore, that a corporation is considered a government. owned or -controlled corporation only when the Government directly o; indirectly jor % share of the capits stock. Applying this statutory criterion, the Court ruled in Leyson, Jr. v. Office ofthe Ombudsman: But these jurisprudential rules invoked by petitioner in support of his claim that the CIF companies are government owned and/or controlled ‘Corporations are incomplete without resorting to the definition of government owned or controlled corporation contained in par. (13) Sec2, Introductory Provisions of the Administrative Code of 1987, i.e,, any agency organized as a stock or non-stock corporation vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the government directly or indirectly through its instrumentalities either wholly, or where applicable as in the case of stock corporations to the extent of at least fifty-one (51) percent of its capital ‘stock. The definition mentions three (3) requisites, namely, first, any ‘agency organized as a stock or non-stock corporation; second, vested with functions relating to public needs: whether governmental or proprietary in nature; and, third, owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock, In the present case, all three (3) corporations comprising the CllF companies were organized as stock corporations. The UCPB-CIIF ‘owns 44.10% of the shares of LEGASPI OIL, xx. Obviously, below 51% shares of stock in LEGASPI OIL removes this firm from the definition of a government owned or controlled corporation. x x x The Court thus concludes that the CIIF are, as found by public respondent, private corporations not within the scope of its jurisdiction. Consequently, Radio Philippines Network, Inc. (RPN) was neither a government-owned nor a controlled corporation because of the Governments’ total share in RPNs capital stock being only 32.4%,7 What is “Piercing the Veil of Corporate Fiction” or “Instrumentality" or “Alter Ego" doctrine? It is basic in corporation law that a corporation is a juridical entity vested with 2 legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it, The corporate veil should not and cannot be pierced unless it is clearly established that the ” Antonio M. Carandang vs. Hon Aniano ADeslerto,G.R No. 148076, January 12,2011, 8TITLE I - GENERAL PROVISIONS separate and distinct personality of the corporation was used to justify a wrong, protect fraud, or perpetrate a deception. Factors for the application of the doctrine of piercing the corporate veil In Concept Builders, Inc. v. NLRC, the Court enumerated the possible probative factors of identity which could justify the application of the doctrine of piercing the corporate veil. These are: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books and records; and (4) Methods of conducting the business.’ The burden of proving the presence of any of these probative factors lies with the one alleging it. Elements of piercing the veil of corporate fiction Piercing the veil of corporate fiction may be allowed only if the following elements concur: 1. Control - not mere stock control, but complete domination - not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and 3. The said control and breach of duty must have proximately caused the injury or unjust loss complained of." Problem: U Corp. imported oil products. Later, 0 Corp. was incorporated for the primary purpose of manufacturing, importing, exporting, buying, and selling in oil and gas. U Corp. and 0 Corp. had the same Board of Directors and that 0 Corp. was 100% owned by U Corp. The District Collector of the Port of Manila formally demanded that U Corp. pay the taxes and duties on its oil imports that had arrived, ee * Olongapo City vs. Subic Water and Sewerage Co. Inc. G.R No. 171626, August 6, 2014. *Olongapo City vs, Subic Water and Sewerage Co. Inc, G.R No. 171626, August 6, 2014. +» Philippine National Bank & National Sugar Development Corporation vs, Andrada Electric & Engineering Company, G.R. No. 142936, April 17, 2002. 189TITLE I - GENERAL PROVISIONS Subsequently, the Customs Commissioner directed that U Coy Pay the amount P99,216,580 representing U Corp.'s special duties, VAT and Excise Taxes that it had failed to pay at the time of the rele 17 oil shipments that had arrived. On May 24, 1999, U Corp. conveyed to the Customs Commissioner U Corps willingness to pay only P94,216,580, of which the initial amount of P28,264,974 would be taken from the collectibles of | 0 Corp. from the National Power Corporation, and the balance to be Paid in monthly installments over a period of 3 years to be secured with | corresponding post-dated checks and its future available tax credits, On July 2, 1999, the Customs Commissioner made a final demand for the total liability of P138,060,200 upon U Corp. and ; Also on July 8, 1999, 0 Corp. formally protested the assessment on the ground that it was not the Party liable for the assessed deficiency taxes. Can the Commissioner of Customs lawfully pierce the veil of corporate fiction in order to treat O Corp. as the mere alter ego of U Corp? Answer: There was A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those of the persons composing it as well as from any other legal entity to which it may be related. For this reason, a stockholder is generally not made to answer for the acts or liabilities of the corporation, and vice versa. The separate and distinct personality of the corporation is, however, a mere fiction f ; astieeite may not be used or invoked for ends that subvert the policy and purpose behind its establishment, or intended by law to which the corporation owes its being. This is true particularly when the fiction is used to defeat Public convenience, to justify wrong, to protect fraud, to defend crime, to Confuse legitimate legal or judicial issues, to perpetrate deception, or otherwise to circumvent the law. This is likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In ‘such instances, the veil of corporate entity will be pierced or disregarded with reference to the particular transaction involved, In Philippine National Bank y, Ritratto Group, Inc, the Court has outlined the following circumstances that are useful in the determination of whether a subsidiary is a mere instrumentality of the parent- corporation, viz: ase of it, 1, Control, not mere majority or complete control, but complete domination, nat only of finances but of policy and business practice in respect to the transaction attacked so that the corporate en tity 190TITLE I - GENERAL PROVISIONS as to this transaction had at the time no separate mind, will or existence of its own; 2, Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality, not form, and with how the corporation operated and the individual defendant's relationship to the operation. Consequently, the absence of any one of the foregoing elements disauthorizes the piercing of the corporate veil Indeed, the doctrine of piercing the corporate veil has no application here because the Commissioner of Customs did not establish i or for purposes that would defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception, or otherwise circumvent the law. It is also noteworthy that from the outset the Commissioner of Customs sought to collect the deficiency taxes and duties from U Corp., and that it was only on July 2, 1999 when the Commissioner of Customs sent the demand letter to both U Corp. and O Corp. That was revealing because the failure of the Commissioner of Customs to pursue the remedies against 0 Corp. from the outset manifested that its belated pursuit of O Corp. was only an afterthought.11 Doctrine of piercing the corporate veil should be done with caution The Supreme Court emphasized that the piercing of the veil of corporate fiction is frowned upon and can only be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception. Hence, any application of the doctrine of piercing the corporate vei should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.!* "see Commissioner of Customs vs. Oilink International Corporation, GR. No. 161759, July 2.2014, " Heirs of Fe Tan Uy vs. International Exchange Bank, GR. No. 166282, February 13,2013, 191TITLE I - GENERAL PROVISIONS Examples: The Supreme Court has plerced the corporate vell: 1, To ward off a judgment credit; 2 To avoid inclusion of corporate assets as part of the estate of the decedent, 3. To escape lability arising from a debt; 4. To perpetuate fraud and/or confuse legitimate issues; 5, To promote or to shield unfair objectives; and 6 To cover up an otherwise blatant violation of the prohibition against forum-shopping. Note: Only in these and similar instances may the veil be pierced and disregarded 1 Problem: E Bank granted loans to H Corp. These were made pursuant to the Agreement between E Bank and H Corp. represented by its President and General Manager, C, granting H Corp. a P25 Million-Peso Omnibus Line. The loans were secured by a P9 Million-Peso Real Estate Mortgage executed by G Corp. over several of its properties and a P 25 Million-Peso Surety Agreement signed by Cand his wife, U. ‘Thereafter, H Corp. had an outstanding obligation of P25,420,177 to E Bank. H Corp. defaulted in the payment of its loans prompting E Bank to foreclose on G Corp. Real Estate Mortgage. The mortgaged properties were sold for P12 million during the foreclosure sale leaving an unpaid balance of P 13,420,177. For failure of H Corp. to pay the deficiency, E Bank filed a Complaint for sum of money against H Corp,, C, U, and G Corp. C and H Corp. did not file their respective answers and were declared in default. In her separate answer, U claimed that she was not liable to E Bank because she never executed a surety agreement in favor of E Bank. G Corp., on the other hand, also denies liability, averring that it acted only as a third-party mortgagor and that it was a corporation separate and distinct from H Corp. 1. Can U be held liable to E Bank for the loan obligation of H Corp. as an officer and stockholder of the said corporation? 2. Can G Corp. be held liable for the obligation of H Corp. for being a mere alter ego of the latter? Answer: In this case, U and G Corp. are correct to argue that it was not alleged, much less proven, that U committed an act as an officer of H Corp. that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to U, E Bank did not demand that she be held liable for the obligations of H Corp. because she was a corporate ne Naval bank & Nail Sugar Developme Corporation vs Andrada Electric & Engineering GR No. 542936, Apr 17, 2002 192TITLE I - GENERAL PROVISIONS. officer who committed bad faith or gross negligence in the performance of her duties such that the lifting of the corporate mask would be merited. What the complaint simply stated i, that she, together with her errant husband C, acted as surety of H Corp, a5 evidencs the Surety Agreement which forged. d by her signature on Jater found by the RTC to have been Considering that the only basis for holding U liable for the payment of the loan was proven to be a falsified docurnent, there was no sufficient justification for the RTC to have ruled that U should be held jointly and severally liable to & Bank for the unpaid loan of H Corp At most, U could have been charged with negligence in the performance of her duties as treasurer of f1 Corp. by allowing the company to contract a loan despite its precarious financial position. Furthermore, if it was true, as U and G Corp. claim, that she no longer performed the functions of a treasurer, then she should have formally resigned as treasurer to isolate herself from any liability that could result from her being an off corporation, Nonetheless, these ‘h requires that the negligence of thi icer must be so gross that it could amount to bad faith and must be established by clear and convincing evidence. Gross negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected. Indeed, there is no showing that U committed gross negligence. And in the absence of any of the aforementioned requisites for making a corporate officer, director or stockholder personally liable for the obligations of a corporation, U, as a treasurer and stockholder of H Corp., cannot be made to answer for the unpaid debts of the corporation. Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same. While the conditions for the disregard of the juridical entity may vary, the following are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books and records, and (4) Methods of conducting the business 193‘TITLE | - GENERAL PROVISIONS ‘These factors are unquestionably present in the case of G Com and H Corp, as follows: 4, Both corporations are family corporations of C and his wife U. The other incorporators and shareholders of the two corporations are the brother and sister of C and the sister of U. The other incorporator/shareholder is the daughter of C and U. 2. H Corp. and G Corp, share the same office and practically transact their business from the same place. 3. Cis the President and Chief Operating Officer of both corporations. The promissory notes subject of this complaint are signed by him as H Corp.'s President and General Manager. The third-party real estate mortgage of G Corp. is signed by him for G Corp. to secure the loan obligation of H Corp. with E Bank. The other third-party real estate mortgages which G Corp. executed in favor of the other creditor banks of H Corp. are also assigned by C. 4. The assets of G Corp. and H Corp. are co-mingled. The real properties of G Corp. are mortgaged to secure H Corp.'s obligation with creditor banks, 5. When C "disappeared", G Corp. ceased to operate despite the claim that the other "officers" and stockholders are still around and may be able to continue the business of G Corp, if it were different or distinct from H Corp. which suffered financial set back. Based on the foregoing findings, it was apparent that G Corp. was merely an adjunct of H Corp. and, as such, the legal fiction that it has a separate personality from that of H Corp. should be brushed aside as they ateundeniably, one and the same SUCCESSION (Artificial Successton) The continuation of a corporation's legal status despite changes in ownership or management, 15 POWERS OF A CORPORATION A corporation has no power except those expressly conferred on it by the Corporation Code (or special laws) and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. 6 Weis of Fe Tan Uy vs. International Exchange Bank, GM No, 166202, February 13,2013, see p 1640, Black's Law Dictionary, Tenth EAition. 194TITLE I - GENERAL PROVIS IONS RIGHT OF A CORPORATION TO OWN PROPERTY Property acquired by a corporation Is the property of a corporation and not the property of stockholders or members: Take note that a corporation is a juridical entity vested with a le personality separate and distinct from the people comprising it SEC. 3. Classes of Corporations. ~ Corporations formed or orgs under this Code may be stock or nonstock corporations. 5! corporations are those 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. All other corporations are nonstock corporations. What is a stock corporation? 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. Examples of GOCC organized as stock corporations: Congress has created through special charters several government-owned corporations organized as stock corporations. Prime examples are the Land Bank of the Philippines and the Development Bank of the Philippines. Other government-owned corporations organized as stock corporations under their special charters ure the Philippine Crop Insurance Corporation, Philippine International Trading Corporation, and the Philippine National Bank before it was reorganized as a. stock corporation under the Corporation Code." What is a non-stock corporation? A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers. Provided, that any profit which a non-stock corporation may obtain as an incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations.!” Example of non-stock corporation: St. Luke's Medical Center, Inc. is organized as.a non-stock and non. profit charitable institution.!” hority vs. CA, etal,G.R. No. 155650, July 20, 2006. lon Code of the Philippines we vs. St, Luke's Medical Center, Inc, G.R. No, 195909, September 26, 2012, 195, "see Section 86, Revised Corpor Commissioner of Internal ReTITLE I - GENERAL PROVISIONS Is Manila International Airport Authority (MIAA) a stock or non-stock corporation? InManila International Airport Authority (MIAA) v. Court of Appeals,the Court made a distinction between a GOCC and an instrumentality, Thus: A government-owned or controlled corporation must be “organized as a stock or non-stock corporation." MIAA is not organized @s a stock or non-stock corporation. MIAA is not a stock corporation because it hasno capital stock divided into shares. MIAA has no stockholders or voting shares. XXNX Section 3 of the Corporation Code defines a stock corporation as one whose “capital stock is divided into shares and xxx authorized to distribute to the holders of such shares dividends xxx." MIAA has capital but ‘it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation. MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code (Section 86 of the Revised Corporation Code) defines a non-stock corporation as "one where no part of its income is distributable as dividends to its members, trustees or officers." A non-stock corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from qualifying as a non- stock corporation. xox MIA, a public utility, is organized to operate an international and domestic airport for public use. Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled corporation.!? OTHER CLASSES OF CORPORATION __Asto Purpose Private corporation A corporation formed for some private purpose, benefit or end. Public corporation ‘A corporation organized for the government of a portion of the State for the general good and welfare. Government-owned or controlled corporation ‘A corporation owned by the Quasi-public corporation A private corporation which has Government directly or through its 2 accepted from the State the grant of +» Philippine Fisheries Development Authority vs. CA tal. No, 169836 196TITLE I - GENERAL PROVISIONS | instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least 51% of its capital stock. franchise or contract involving the performance of public duties but which is organized for profit (examples are electric, water, and transportation companies). As to legal right to c ‘orporate existence De jure corporation De facto corporation _ A corporation created in strict or substantial conformity with the mandatory statutory requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the State. The due incorporation of any corporation claiming in good faith to bea 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 Corporation by estoppel Corporation by prescription 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. One which has exercised corporate powers for an indefinite period without interference on the part of the government. As to laws of it incorporation Domestic corporation Foreign corporation A corporation incorporated under the laws of the Philippines. A corporation is 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. ‘ASto whether they are o) en to the public or not | Open corporation Close corporation A corporation which is open to any person who may wish to become a stockholder or member thereto. 19 A close corporation is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20; (2) All the issued stock of all | classes shall be subject to one or ‘7‘TITLE I - GENERAL PROVISIONS more specified restrictions on) transfer; and (3) The corporation | shall not list in any stock exchange | or make any public offering of any | ofits stock of any class. | ement and control Subsidiary corporation A corporation that hold stocks in| A corporation more than 50% of another corporation for purposes of | the voting stock of which is! control. controlled directly or indirectly by | another corporation, — which thereby becomes its parent | corporation. J ons who compose them t Corporation aggregate Corporation sole | = corporation consisting of more | A corporation consisting of only | | than one member. one member for the purpose of administering and managing, as | trustee, the affairs, property and | temporalities of any religious | denomination, sect or church. | F religious purposes or not | Lay corporation | 4 corporation organized for | A corporation organized for a. purpose other than for religi Eleemosynary corporation Civil corporation | A corporation organized for! A corporation organized for charitable purposes. business or profit. 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. General law vs. Special law A corporation is created by operation of law. {t acquires a judicial personality either by special law or « general law. The general law under which a private corporation may be formed or organized is the Corporation Code, the requirements of which must be complied with by those wishing to incorporate Only upon such compliance will the corporation come into bein, and acquire a juridical personality, thus giving rise to its right to exist and ae 198TITLE I - GENERAL PROVISIONS as a legal entity. On the other hand, a government corporation is normally created by special law, referred to often as a charter. 20 Corporations created by special laws or charters Section 16, Article XII of the 1987 Constitution provides: SEC. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government- ‘owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability The Constitution expressly authorizes the legislature to create "government-owned or controlled corporations” through special charters only if these entities are required to meet the twin conditions of common good and economic viability. In other words, Congress has no power to create government-owned or controlled corporations with special charters unless they are made to comply with the two conditions of common good and economic viability. The test of economic viability applies only to government- owned or controlled corporations that perform economic or commercial activities and need to compete in the market place. Being essentially economic vehicles of the State for the common good — meaning for economic development purposes — these government-owned or controlled corporations with special charters are usually organized as stock corporations just like ordinary private corporations. SEC.5. Corporators and Incorporators, Stockholders and Members. - Corporators are those who compose a corporation, whether as stockholders or shareholders in a stock corporation or as members ina nonstock corporation. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Components of a corporation 1. Corporators Those who compose a corporation, whether as stockholders or as members. 2. Incorporators * fea evelopment Corporation Employees Union (BCE) - SENTRO NG DEMOKRATIKONG MANGGAGAWA, po ploy Ak) 7. HOM. VIKA FERRER CALLEJA and BLISS DEVELOPMENT CORPORATION, G R. No. 80887, September 30, ma Maes Savernational hieport Authority vs. CA, etal {8 No, 155650, luly 20, 2006, 199TITLE I - GENERAL PROVISIONS The stockholders or members mentioned in the articles incorporation as originally forming and composing the corporation and who are signatories thereof. 3. Stockholders (shareholders) The owners of shares of stock in a stock corporation. 4. Members The corporators of a non-stock corporation. 5. Board of Directors or Board of Trustees The board of directors is the governing body in a stock Corporation, while the Board of Trustees is the governing body ina hon-stock corporation. 6. Corporate Officers The president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. If the corporation is vested with public interest, the board Shall also elect a compliance officer. 7. Subscribers Persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed. 8. Underwriter A person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another company. A person or entity, especially an investment banker, who guarantees the sale of newly issued securities by purchasing all or part of the shares for resale to the public. 22 9. Promoter Is a person who brings about or cause to bring about the formation and organization of a corporation by: 1. Bringing together the incorporators or the persons interested in the enterprise; 2. Procuring subscriptions or capital for the corporation; and 3. Setting in motion the machinery which leads to the incorporation of the corporation itself, A founder or organizer of a corporation or business venture; one who takes the entrepreneurial initiative in funding or organizing a business enterprise.23 ae Ser ie 2 see p. 1759, Black's Law Dictionary, Tenth Edition, 2 see p. 1408, Blacks Law Dictionary Tenth Edition 200TITLE I - GENERAL PROVISIONS Note: For the purpose of forming a new domestic corporation under the Revised Corporation Code, two (2) or more persons, but not more than fifteen (15), may organize themselves and form a corporation Only a One Person Corporation (OPC) may have a single stockholder, as well as a sole director. Accordingly, its registration must comply with the corresponding separate guidelines on the establishment of an OPC. Note: Each incorporator ofa stock corporation must own, or be a subscriber to, at least one (1) share of the capital stock. Each incorporator of a nonstock corporation must be a member of the corporation. The incorporators may be composed of any combination of natural SEC-registered — partnership/s, SEC-registered domestic corporation/s or association/s as well as foreign corporation/s. Incorporators who are natural persons must be of legal age, and must sign the Articles of Incorporation/Bylaws. Note: Each individual signing the Articles of Incorporation/Bylaws must indicate the capacity upon which he/she is affixing his/her signature thereto. (ie. Incorporator or Representative of XYZ Corp.) An individual designated to sign the Articles of Incorporation/Bylaws on behalf of an incorporator, which is not a natural person, must also indicate the corporate or partnership name of the entity being represented and for whom he/she is executing the Articles of Incorporation/Bylaws.2# SEC. 6. Classification of Shares. - The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock. The shares in stock corporations may be divided into classes or series of shares, or both. 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, That there shall always be a class or series of shares with complete voting rights, ee SEC Memorandum Circular (MC) No, 16, series of 2019, 201TITLE I - GENERAL PROVISIONS Holders of nonvoting shares shall nevertheless be on the following matters: (a) Amendment of the articles of incorporation; { (b) Adoption and amendment of bylaws; (©) Sale, lease, exchange, mortgage, pledge, all or substantially all of the corporate property; (a) Incurring, creating, or increasing bonded indebtedness; (e)_ Increase or decrease of authorized capital stock; (Merger or consolidation of the cor corporation or other corporations; (g) Investment of corporate funds in another corporation or business in accordance with this Code; and (h) Dissolution of the corporation. entitled to voy | or other disposition, poration with another | Except as provided in the i vote required under this Code shall be deemed to refer only to immediately preceding paragraph, the to approve a particular corporate act stocks with voting rights. The shares or series of shares may or may not have a par value: Provided, That banks, trust, insurance, and preneed companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether publicly listed or not, shall notbe permitted to issue no-par value shares of stock. 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 further, That such terms and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission, hereinafter referred to as the “Commission”. Shares of capital stock issued without Par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided, That no-par value shares must be issued for a consideration of at least Five pesos (P5.00) 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. 202TITLE I - GENERAL PROVISIONS A corporation may further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements. Doctrine of equality of shares Each share shall be equal in all respects (rights and liabilities) to every other share except as otherwise provided in the articles of incorporation and stated in the certificate of stock. Who may classify shares? 1. Incorporators It is to be determined by the incorporators by stating it in their articles of incorporation which will be filed with the Securities and Exchange Commission. 2. Board of Directors and stockholders The original classification of shares made by the incorporators which was stated in the articles of incorporation can be amended bya majority vote of the board of directors and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock. What are voting shares? Shares with a right to vote. There shall always be a class or series of shares which have complete voting rights. The Right to Vote in STOCK Corporations The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Qnly stock actually issued and outstanding may be voted. Under Section 6 of the Corporation Code (Also, Section 6, Revised Corporation Code), each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67 of the Code (Now Section 66, Revised Corporation Code). Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders; or, having so passed, have again been purchased by the corporation. These shares are not to be taken into consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and that may be voted. * Paul Lee Tan, etal. vs. Paul Sycip and Merritto Lim, GR. No. 153468, August 17, 2006, 203TITLE I - GENERAL PROVISIONS The Right to Vote in NON-STOCK Corporations In non-stock corporations, the membership. by-laws of the corporation. Each member! less so limited, broadened, or denied in the articles of incorporation or by. laws, We hold that when the principle for determinin i the quorum for stock corporations is applied by analogy to nonstock corporations, \ it 26 voting rights attach b 'n accordance with the law and, shall be entitled to one vote unl Problem: A,B, and C and X, Y and Z are stockholders of M Corp, with the | former holding Class "B" shares and the latter owning Class "A" shares | M Corp. isa domestic corporation. It was organized soi September 1977. At the time of its incorporation, Act No. 14: Corporation Law was still in force and effect, Article VII o original Articles of Incorporation, Exchange Commission (SEC) on Oct: metime in 59, the old | f M Corp's | as approved by the Securities and | ‘ober 26, 1977, reads as follows: SEVENTH. xxx Only holders of Class A shares can have the right to vote and the right to be elected as directors or as corporate officers. On July 31, 1981, Article e VII of the Articles of Incorporation of M Corp. was amended, to read th us: 20x Only holders of Class A shares have the right to vote and the right to be elected as directors or as corporate officers. Axx On September 9, 1992, Article VIL was again amended to provide as follows: og R only holders of Class “A" shares have the right to vote and the right to be elected as directors or as corporate officers, On February 9, 2001, the shareholders of M Corp. held their annual stockholders’ meetin, g and election of directors, During the course of the proceedings, X, citing Article Vil, as amended, declared over the objections of herein A, B, and C, that no Class "B" shareholder was qualified to run or be voted upon as a director, In the past, M Corp. had seen holders of Class “B” shares voted for and serve as members of the corporate board and some Class "B" share owners were in fact nominated 2 Paul Lee al. vs Paul Seip and Merito Lin, Gt No, 153468, august 17,2006 204TITLE I - GENERAL PROVISIONS for election as board members. Nonetheless, X went on to announce that the candidates holding Class "A" shares were the winners of all seats in the corporate board. A, B, and C protested, claiming that Article VII was null and void for depriving them, as Class "B" shareholders, of their right to vote and to be voted upon, in violation of the Corporation Code (Batas Pambansa Big. 68), as amended. May the holders of Class "B" shares of M Corp. be deprived of the right to vote and be voted for as directors in M Corp? Answer: When Article VII of the Articles of Incorporation of M Corp. was amended in 1992, the phrase “ is jc z was inserted in the provision governing the grant of voting powers to Class "A" shareholders. This particular amendment is relevant for it speaks of a law providing for exceptions to the exclusive grant of voting rights to Class "A" stockholders. Which law was the amendment referring to? The determination of which law to apply is necessary. There are two laws being cited and relied upon by the parties in this case. In this instance, the law in force at the time of the 1992 amendment was the Corporation Code (B.P. Big. 68), not the Corporation Law (Act No. 1459), which had been repealed by then. We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At the time of the incorporation of M Corp. in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were explicitly provided for, such that “no share may be tights.” Section 6 of the Corporation Code (Also Section 6, Revised Corporation Code) being deemed written into Article VI! of the Articles of Incorporation of M Corp., it necessarily follows that unless Class "B" shares of M Corp. stocks are clearly categorized to be “preferred” or 'redeemable" shares, the holders of said Class "B" shares may not be deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that Class "B" shares were categorized as either "preferred" or “redeemable” shares. One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the 205TITLE I - GENERAL PROVISIONS ownership of corporate stock, and as such is a Property right. The stockholder cannot be deprived of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through amending the charter, or the by-laws.27 What are non-voting shares? ‘Shares without a right to vote. The law provides that shares classified and issued as preferred or redeemable shares may be deprived of voting right. What is a common stock? A class of stock entitling the holder to vote on corporate matters, to receive dividends after other claims and dividends have been paid (especially to preferred shareholders), and to share in assets upon liquidation. Common stock is often called as capital stock, if it is the corporation's only class of stock outstanding. Also termed ordinary shares? Is one which has no preference and entitles the shareholder to a pro rata division of the profits, if any. The common stock shareholders have complete voting rights. What is a preferred stock? A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends,29 Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. What are redeemable shares? Redeemable shares may be issued by the cory poration when expressly so provided in the articles of incorporation. They m: ay be purchased or taken etal, GH No, 150976, October 18, 2004, Tenth tdition » Republic Planters bank ve Hon. Enrique A Ayana, Sr etal, GA No. 51765, March 3, 19997 6TITLE I - GENERAL PROVISIONS 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. Instances when holders of non-voting shares are allowed to 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 authorized 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. Note: Shares classified both as voting and non-voting shares are entitled to vote in eight instances enumerated above. What are par value shares? Shares with a value fixed in the articles of incorporation and the certificate of stock. What are no par value shares? Shares with no par value. Note: Stocks shall not be issued for a consideration less than the par or issued price thereof. Limitations on no par value shares 1. The no-par value shares must be issued for a consideration of at least P5,00 per share; 2. Itis deemed fully paid and non-assessable; 3. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; 4. It cannot be issued as preferred shares; 5. It cannot be issued by banks, trust, insurance, and preneed companies, Public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public whether publicly listed or not; and 207TITLE I - GENERAL PROVISIONS 6. The articles of incorporation must state the fact that it is issued no Dar value shares as well as the number of said shares, What is promotion/al share? A share issued to promoters or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company, What is share in escrow? A share subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept by the depositary until the performance of certain condition or the happening of ‘@ certain event contained in the agreement. What is fractional share? A share that is less than one full share, What is over-issued stock? It is a stock or share issued in excess of the authorized capital stock. Such issuance is null and void. What is convertible share? A share that is convertible by the stockholder from one class to another class ata certain price and within a certain period. SEC. 7. Founders’ Shares. - Founders’ shares may be given certain rights and privileges not enjoyed by the owners of other stocks. 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 from the date of incorporation: Provided, That such exclusive right shall not be allowed if its exercise will violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known as the “Forei, ign Investments Act of 1991”; and other pertinent laws. What are founders’ shares? Shares classified as such in the articles of incorporation which may be given certain rights and privil leges (eg. dividend payments) not enjoyed by the owners of other stocks. Limitation on founders’ shares The exclusive right to vote and be voted for in the election o1 directors if granted, must be fora limited period not to exceed 5 years from the date of incorporation. 208TITLE I - GENERAL PROVISIONS SEC. 8. Redeemable Shares. - Redeemable shares may be issued by the corporation when expressly provided in the articles of incorporation. They are shares which may be purchased by the corporation from the holders of such shares 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 stated in the articles of incorporation and the certificate of stock representing the shares, subject to rules and regulations issued by the Commission. What are redeemable shares? 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 certain redemption price. A redemption by the corporation of its stock is, in a sense, forcancellation, The present Code allows redemption of shares even if there are no t i ings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. Limitations on redeemable shares 1.It must be expressly provided in the articles of incorporation; 2.The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificate of stock; 3.It may be deprived of voting rights in the articles of incorporation; and 4.Redemption cannot be made if it will cause insolvency of the corporation. What is retained earnings? ; A corporation’s accumulated income after dividends have been distributed. Also termed earned surplus; undistributed profit.*! Kinds of redeemable shares 1. Compulsory The corporation is required to redeem the shares. 2. Optional The corporation is not mandated to redeem the shares. ee % Republic Planters Bank : a ters Bank vs, Hon. Enrique A. Agana, Sr, etal, GR. No. 51765, March 3, 1997, © . 621, Black’s Law Dictionary, Tenth Edition. 209‘TITLE I - GENERAL PROVISIONS Problem: Y Corp. secured a loan from X Bank in tl As part of the proceeds of the loan, preferred shai to X Bank, through its officers B and C. In other the legal tender totaling to the full amount of the X Bank lent such amount partially in the form o| the form of stock certificates, each for 400 shares with a par value of Pj Per share, or for P4,000 each, for a total of P8,000. Said stock certificate were in the name of B and C, who subsequently, however, endorsed b. shares in favor of B. Said certificates of stock bear the following terms and conditions The Preferred Stock shall have the following rights, preference qualifications, and limitations, to wit: he amount of P120,0¢) Tes of stocks were issue words, instead of gi loan which is P120,09 if money and Partially » 1 Of the right to receive a quarterly dividend of 1%, cumulative ar: Participating. 200 200K XXX ch preferred shares may be redeemed, by the system ¢ 2. That suc drawing lots, at any time after 2 years from the date of issue at the Afterwards, Y Corp. proceeded against X Bank and filed Complaint anchored on Y Corp.'s alleged rights to have X Bank redeem the same under the terms and conditions of the stock certificates. X Bank argues that it cannot be compelled to redeem the preferred shares issued to Y Corp. Answer: The redemption therefore is except as otherwise provided ion rests entirely with the without right to either compel or early the type known as “optional”. Thus, in the stock certificate, the redempti corporation and the stockholder is refuse the redemption of its stock. The redemption of said shares cannot be allowed. As pointed out by X Bank, the Central Bank made a finding that said X Bank has been suffering from chronic reserye deficiency, and that such finding resulted in a directive to X Bank Prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors creditors. Redemption of preferred shares was pro valid reason. The directive issued by the Central obviously meant to preserve the status quo, and to ruin of a banking institution that would have ane hibited for a just anc Bank Governor wa prevent the financia resulted in advers 210TITLE I - GENERAL PROVISIONS repercussions, not only to its depositors and creditors, but also to the banking industry as a whole.22 Can redeemable shares be reissued? Redeemable shares, once redeemed are retired unless reissuance is expressly allowed in the articles of incorporation. What is Trust Fund Doctrine? The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation constitute i i This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation. xxx The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the "corporate peace” laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors’ turn to engage in "squabbles and litigations” should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.33 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 through purchase, redemption, donation, or some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. What are 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. a 1; Republic Planters Bank vs. Hon, Enrique A. Agana, Sr, etal, G.R No. 51765, March 3, 1997. Ong Yongetal. vs, David S. Tiu, et.al, GR. No. 144476, April 8, 2003. 2i1TITLE I - GENERAL PROVISIONS Rights that are denied to the treasury shares 1. Voting rights 2. Right to dividends Note: Treasury shares sold below par value are not watered stock because watered stock contemplates an original issuance of shares. What are watered stocks? Stocks 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. Note: Watered stock refers only to original issue of shares but not to a subsequent transfer of such shares by the corporation. Thus, treasury shares may be sold for less than their par or issued value for they have already been issued and paid for. 212