KAIRA MARIE B. CARLOS
RANADA
Part I
REVISED CORPORATION CODE
I. INTRODUCTION
1. General
2. Kinds of Business Organization
SOLE PROPRIETORSHIP
MANGILA VS CA
A sole proprietorship does not possess a juridical
personality separate and distinct from the
personality of the owner of the enterprise. The law
merely recognizes the existence of a sole
proprietorship as a form of business organization
conducted for profit by a single individual and
requires its proprietor or owner to secure licenses
and permits, register its business name, and pay
taxes to the national government. The law does not
vest a separate legal personality on the sole
proprietorship or empower it to file or defend an
action in court.
Doctrine: Unlike a corporation, a sole proprietorship
does not possess a juridical personality separate and
distinct from the personality of the owner of the
enterprise.
PARTNERSHIP
MENDIOLA vs CA
A partnership, the members become co-owners of
what is contributed to the firm capital and of all
property that may be acquired thereby and through
the efforts of the members.
The court held that on the basis of the evidence, an
employer-employee relationship is present in the
case at bar. The elements to determine the existence
of an employment relationship are: (a) the selection
and engagement of the employee; (b) the payment
of wages; (c) the power of dismissal; and (d) the
employer's power to control the employee's
conduct. The most important element is the
employer's control of the employee's conduct, not
only as to the result of the work to be done, but also
as to the means and methods to accomplish it.
JM TUASON VS BOLANOS
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Though a corporation has no power to enter into a
partnership, it may nevertheless enter into a joint
venture with another where the nature of that
venture is in line with the business authorized by its
charter.
it may nevertheless enter into a joint venture with
another where the nature of that venture is in line
with the business authorized by its charter. In the
present case, there is no showing that indicated the
venture in which the Appellee is represented by
Gregorio Araneta, Inc as its managing partner is not
in line with the corporate business of either of them.
JOINT VENTURE
AURBACK VS SANITARY WARES
MANUFACTURING CORPORATION
The rule is that whether the parties to a particular
contract have thereby established among
themselves a joint venture or some other relation
depends upon their actual intention which is
determined in accordance with the rules governing
the interpretation and construction of contracts.
The legal concept of a joint venture is of common
law origin. It has no precise legal definition but it
has been generally understood to mean an
organization formed for some temporary purpose.
It is in fact hardly distinguishable from the
partnership, since their elements are similar
community of interest in the business, sharing of
profits and losses, and a mutual right of control. The
main distinction cited by most opinions in common
law jurisdictions is that the partnership
contemplates a general business with some degree
of continuity, while the joint venture is formed for
the execution of a single transaction, and is thus of a
temporary nature. A joint venture is a form of
partnership and should thus be governed by the
law of partnerships. The Supreme Court has
however recognized a distinction between these
two business forms, and has held that although a
corporation cannot enter into a partnership contract,
it may however engage in a joint venture with
others.
Partnership contemplates a general business with
some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and
is thus of a temporary nature. A joint venture is a
KAIRA MARIE B. CARLOS
form of partnership and should thus be governed
by the law of partnerships.
Partnership vs Joint Venture
A joint venture is an agreement between two parties
to enter into a commercial undertaking. It may fall
under a partnership with a limited purpose. Under
Philippine law, a joint venture is a form of
partnership and should thus be governed by the
laws of partnership. [Aurbach v. Sanitary Wares
Manufacturing Corp, G.R. No. 75875]
Historical Background
Definition – A corporation is an artificial being
(juridical person) created by operation of law,
having the right of succession and the powers,
attributes and properties expressly authorized by
law or incident to its existence.
Corporation as an artificial being
LBC Express vs. CA (236 SCRA 602)
GENERAL RULE: A juridical person like a
corporation is not allowed to recover Moral
damages based on Art. 2217 of the Civil Code
because it only covers moral damages which
include physical and mental injuries.
- A corporation has no feelings, no emotions, and no
senses; therefore, it cannot experience physical
suffering and mental anguish.
Filipinas Broadcasting vs. Ago Medical Center
(GR No. 141954, January 17, 2005) –
EXCEPTION: A juridical person like a corporation
is allowed to recover Moral damages based Art.
2219(7) of the Civil Code because it covers moral
damages on cases involving libel, slander or any
other form of defamation.
- A corporation can validly complain for libel or any
other form of defamation to recover moral damages
because Art. 353 of the Revised Penal Code define
libel as public and malicious imputations tending to
cause dishonor, discredit, or contempt of a natural
or juridical person.
ONG vs CA
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Liability of directors, officers, employees, or other
officials or persons for violations committed by a
corporation.
This is because the Corporation cannot by itself
transact business or sign document, it being an
artificial person. It has to accomplish these through
its agents. A corporation has a personality separate
and distinct from those acting on its behalf. In the
fulfillment of its purpose, the corporation by
necessity has to employ persons to act on its
behalf.”
“Being a mere artificial person, the law recognizes
the impossibility of imposing the penalty of
imprisonment on the corporation itself. For this
reason, it is the officers or employees or other
persons whom the law holds responsible
Advantages of the corporate form of business
The advantages of incorporation are so well
understood that it seems almost superfluous to
enumerate them, (see Sec. 2.) Nevertheless, it may
be useful to mention here only its chief advantages
as stated by a well-known authority.
First, through the process of incorporation, any
number of persons may unite in a single enterprise
without using their own names, without difficulty
or inconvenience, and with the valuable right to
contract, to sue and be sued, to hold or convey
property in the corporate name, and to act as a legal
unit.
Second, an individual stockholder may invest in the
corporate enterprise as much or as little as he sees
fit, without risking more, and, in the absence of
statutes to the contrary, this is the limit of his
liability, since stockholders are not personally liable
for the debts of the corporation. They can transfer
their shares without the consent of the other
stockholders.
Third, the rights and obligations of a corporation
are not affected by the death or change of the
individual members, but the corporate business
continues uninterrupted and unaffected so long as
the corporate entity continues. Its credit is
strengthened by such continuity of existence.
KAIRA MARIE B. CARLOS
Fourth, the modern corporation makes great
undertakings feasible since it enables many
individuals to cooperate in order to furnish the
large amounts of capital necessary to finance the
gigantic enterprises of modern times, (see 1
Fletcher, p. 42.) The resulting large-scale enterprise
may be more efficient, thus lowering the costs of
production. (C.L. James, Principles of Economics,
supra, p. 46.)
Disadvantages of a business corporation.
They are as follows:
(1) The corporation is relatively complicated in
formation and management;
(2) It entails relatively high cost of formation and
operations;
(3) Its credit is weakened by the limited liability of
the stockholders;
(4) There is ordinarily lack of personal element in
view of the transferability of shares;
(5) There is a greater degree of governmental
control and supervision than in any other forms of
business organization;
(6) In large corporations, management and control
are separated from ownership;
(7) The stockholders' voting rights have become
theoretical particularly in large corporations
because of the use of proxies and widespread
ownership; and
(8) The stockholders have little voice in the conduct
of the business.
DISTINCTION BETWEEN A CORPORATION
AND PARTNERSHIP
In the Philippines, the only types of business
organization provided by law are the partnership
(Arts. 1767-1806, Civil Code.) and the corporation.
No prohibition, however, exists for the other forms.
As distinguished from corporations, the other types
of business organization are unincorporated.
GOVERNMENT POWERS
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Corporation having the rights of succession and the
powers, attributes and properties authorized by law
and incidental to its existence
Based on the Doctrine of Limited Capacity, a
corporation can only perform acts expressly
authorized by law and incidental to its existence.
Section 36 of the Corporation Code confers the
following powers and attributes to a corporation:
1. to sue and be sued in its corporate name;
2. of succession by its corporate name within the
term of its existence states in its articles of
incorporation and certificate of incorporation;
3. to adopt and use a corporate seal;
4. to amend its articles of incorporation in
accordance with the Corporation Code;
5. to adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with the Corporation Code;
6. for stock corporations, to issue or sell stocks to its
subscribers in accordance with the Corporation
Code; for non-stock corporations, to admit
members;
7. to trade or deal with real and personal properties
including securities and bonds of other corporations
subject to the restrictions prescribed by its articles of
incorporation, bylaws, certificate of stock, the law
and the Constitution;
8. to enter into merger or consolidation with other
corporations;
9. to make reasonable donations except in aid of any
political activity;
10. to establish retirement plans for the benefit of its
directors, trustees, officers and employees; and, 11.
to exercise powers essential or necessary to carry
out its purpose(s) as stated in its articles of
incorporation.
Nationality of Corporations
The nationality of a corporation serves as a legal
basis for subjecting an enterprise or its activities to
the laws, the economic and fiscal powers, and the
various social and financial policies of the State to
which it is supposed to belong. [SEC OGC Opinion
No. 22-07]
KAIRA MARIE B. CARLOS
Place of Incorporation Test
Under the incorporation theory, a corporation is a
national of the country under whose laws it is
organized or incorporated.
Domestic corporations – organized and governed
under and by Philippine laws.
Foreign corporations – one formed, organized or
existing under laws other than those of the
Philippines’ and whose laws allow Filipino citizens
and corporations to do business in its own country
or State. It shall have the right to transact business
in the Philippines after obtaining a license for that
purpose. [Sec. 140]
While the incorporation test serves as the primary
test under Philippine jurisdiction, other tests such as
the Control Test and the Grandfather Rule must
also be applied in determining compliance with the
provisions of the Constitution and of other laws on
nationality requirements. [SEC OGC Opinion No.
11-42]
CONTROL TEST VS GRANDFATHER RULE
The nationality of the private corporation is
determined by the citizenship of the controlling
stockholders.
Under the “liberal” Control Test, there is no need to
further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation
since a corporation which is at least 60% Filipino-
owned is considered as Filipino. [Narra Nickel
Mining & Development Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, April
21, 2014]
Absent any doubt, the Control Test shall be used in
determining the nationality of a corporation
specially in cases where foreign ownership
restrictions apply. [SEC OGC Opinion No. 16-19]
Control Test is applied in the following:
 Exploitation of natural resources - Only Filipino
citizens or corporations whose capital stock is at
least 60% owned by Filipinos can qualify to exploit
natural resources. [Sec. 2, Art. XII, Const.]
 Public Utilities - No franchise, certificate or any
other form of authorization for the operation of a
public utility shall be granted, except to citizens of
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AUSL CORPORATION LAW- ATTY. J. RANADA
the Philippines or to corporations or associations
organized under the laws of the Philippines at least
60% of whose capital is owned by such citizens.
[Sec. 11, Art. XII, Const.]
 Mass Media (100%) - “The ownership and
management of mass media shall be limited to
citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and
managed by such citizens.” [Sec. 11, Art. XVI,
Const.]
 Advertising industry (70%) – “Only Filipino
citizens or corporations or associations at least
seventy per centum of the capital of which is owned
by such citizens shall be allowed to engage in the
advertising industry.” [Sec. 11, Art. XVI, Const.]
 Any industry or activity where foreign ownership
is prohibited or restricted under the Foreign
Investment Negative List
The "control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art.
XII of the 1987 Constitution, entitled to undertake
the exploration, development and utilization of the
natural resources of the Philippines. When in the
mind of the Court, there is doubt, based on the
attendant facts and circumstances of the case, in the
60-40 Filipino equity ownership in the corporation,
then it may apply the "grandfather rule."
GAMBOA vs TEVES
THE GAMBOA RULINGS
2011 Gamboa Ruling
The term "capital" in Sec. 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the
present case only to common shares, and not to the
total outstanding capital stock [common and non-
voting preferred shares].
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which
have been assigned or transferred to aliens, cannot
be considered held by Philippine citizens or
KAIRA MARIE B. CARLOS
Philippine nationals. [Gamboa v. Teves, G.R. No.
176579 (2011)]
2012 Gamboa Ruling
In 2012, the Supreme Court reversed its ruling,
stating now that:
The term “capital” is not limited to voting shares
since the constitutional requirement of at least 60%
Filipino ownership applies not only to voting
control of the corporation, but also to the beneficial
ownership of the corporation. It is therefore
imperative that such requirement apply uniformly
and across the board to all classes of shares,
regardless of nomenclature and category,
comprising the capital of a corporation.
Preferred shares, denied the right to vote in the
election of directors, are still entitled to vote on the
eight specific corporate matters underSec. 6. of the
Corporation Code. [Note: Still Sec. 6 under the RCC]
Thus, the 60-40 ownership requirement in favor of
Filipino citizens must apply separately to each class
of shares, whether common, preferred non-voting,
preferred voting or any other class of shares.
[Gamboa v. Teves, G.R. No. 176579 (2012)]
2017 Gamboa Ruling (Roy III v Herbosa)
However, in 2017, the Supreme Court explained its
ruling in the 2012 Gamboa decision. It stated that
the resolution of the 2012 Gamboa resolution,
specifically its dispositive portion, did not modify
the 2011 Gamboa decision.
The Supreme Court clarified that the Gamboa
Decision already held, in no uncertain terms, that
what the Constitution requires is full and legal
beneficial ownership of 60% of the outstanding
capital stock, coupled with 60% of the voting rights
must rest in the hands of Filipino nationals. Thus,
for purposes of determining compliance with the
constitutional or statutory ownership, the required
percentage of Filipino ownership shall be applied to
both the (a) total number of outstanding shares of
stock entitled to vote in the election of directors; and
(b) the total number of outstanding shares of stock,
whether or not entitled to vote. [Jose M. Roy III v.
Chairperson Teresita Herbosa, G.R. No. 207246
(2017)]
SEC Memorandum Circular No. 8 dated 20 May
2013
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AUSL CORPORATION LAW- ATTY. J. RANADA
All corporations engaged in identified areas of
activities or enterprises specifically reserved, wholly
or partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws, shall,
at all times, observe the constitutional or statutory
ownership requirement. For purposes of
determining compliance therewith, the required
percentage of Filipino ownership shall be applied to
both:
1. the total number of outstanding shares of stock
entitled to vote in the election of directors; AND
2. the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors. [Sec. 1-2, SEC MC No. 8]
Note: This was the SEC Memorandum that was put
in question in the Roy III v. Herbosa case, and
subsequently upheld by the Court as constitutional.
Grandfather Rule
The Grandfather Rule is a method of determining
the nationality of a corporation, which is owned in
part by another corporation, by breaking down the
equity structure of the shareholder corporation. [de
Leon]
The Grandfather Rule is applied if doubt exists as to
the locus of the “beneficial ownership” and
“control” of a corporation, even if the 60-40 Filipino
to foreign equity ratio is apparentlymet by the
subject or investee corporation. [Narra Nickel
Mining & Development Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, April
21, 2014]
It involves the computation of Filipino ownership of
a corporation in which another corporation, of
partly-Filipino andpartly-foreign equity, owns
capital stock. The percentage of shares held by the
second corporation in the first is multiplied by the
latter’s own Filipino equity, and the product of
these percentages is determined to be the ultimate
Filipino ownership of the subsidiary corporation.
The Grandfather Rule must be applied to accurately
determine the actual participation, both direct and
indirect, of foreigners in a corporation engaged in a
nationalized activity or business. [SEC Opinion re:
Silahis Int’l Hotel (1987)]
“Doubt”
KAIRA MARIE B. CARLOS
"Doubt" refers to various indicia that the "beneficial
ownership" and "control" of the corporation do not
in fact reside in Filipino shareholders, but in foreign
stakeholders. The following are indicators of doubt:
a. That the foreign investors provide practically all
the funds for the joint investment undertaken by
these Filipino businessmen and their foreign
partner;
b. That the foreign investors undertake to provide
practically all the technological support for the joint
venture;
c. That the foreign investors, while being minority
stockholders, manage the company and prepare all
economic viability studies. [Narra Nickel Mining
and Dev.v Redmont)
The Grandfather Rule applies only when the 60-40
Filipino foreign equity ownership is in doubt (i.e. in
cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60%
Filipino stockholdings [or 59%] invests in another
joint venture corporation, which is either 60-40%
Filipino-alien or the 59% less Filipino). [Narra
Nickel Mining and Dev. Corp v. Redmont
Consolidated Mines Corp., G.R. No. 195580 (2014)]
Successive Application of the Tests
The Control Test can be applied jointly with the
Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized
economic activities. They are not incompatible
ownership-determinant methods that can only be
applied alternative to each other.
The Grandfather Rule, standing alone, should NOT
be used to determine the Filipino ownership and
control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized
activities.
Hence, it is only when there is doubt, based on the
Control Test, that the Grandfather Rule is applied.
i. If the subject corporation’s Filipino
equity falls below the threshold 60%, the
corporation is immediately considered
foreign-owned, in which case, the need
to resort to the Grandfather Rule
disappears.
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AUSL CORPORATION LAW- ATTY. J. RANADA
ii. If a corporation that complies with the
60-40 Filipino to foreign equity
requirement, it can be considered a
Filipino corporation, and if there is no
doubt as to who has the “beneficial
ownership” and “control” of the
corporation, there is no need for the
application of the Grandfather Rule.
iii. However, if there is doubt as to who
has the “beneficial ownership” and
“control” of the corporation (e.g. the
Filipino-Owned corporation subscribed
to 60% of the capital and the foreign
corporation subscribed to 40%, but the
subscription of the former is only
nominally paid-up and such corporation
entered into a financial assistance
agreement with the foreign owned
corporation), the application of the
grandfather rule is necessary. [Narra
Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp.,
G.R. No. 195580 (2015)]
III. CLASSIFICATION OF CORPORATIONS
1. Stock vs. Non-Stock
Collector vs. Club Filipino de Cebu (5 SCRA 312);
Sec. 3 of the Corporation Code – A stock
corporation exists when its articles of incorporation
provide that: (1) its capital stock is divided into
shares; and, (2) it is authorized to distribute
dividends or surplus profits to the holders such
shares. All other corporations are non-stock.
Difference as to Stock Holders Meeting
A stock corporation is authorized to hold its
stockholders meeting only within the city or
municipality where its principal office is located; on
the other hand, a non-stock corporation can hold its
stockholders meeting anywhere in the Philippines
provided it is expressed in their by-laws (if not
expressed, the provisions governing stock
corporation applies per Sec. 87(2) of the Corporation
Code).
Note: Metro Manila is considered as one single City
or Municipality per Sec. 51 of the Corporation Code.
Difference as to Manner of Voting
KAIRA MARIE B. CARLOS
In a stock corporation, the manner of voting is
cumulative voting. Neither its Articles of
Incorporation nor its By-Law cannot deny from its
stockholders the right to vote cumulatively based
the number of their respective outstanding shares.
Cumulative Voting is a matter of right given to
stockholders by virtue of Sec. 24 of the Corporation
Code; on the other hand, in a non-stock corporation,
the manner of voting is straight voting. Its members
are entitled to cast only one vote per candidate
unless its articles of incorporation or bylaws allow
cumulative voting.
2. Created by special law
PNOC-EDC vs. NLRC (201 SCRA 487);
Sec. 4 of the Corporation Code – A corporation
created by special law (or special charter) is
governed by the law creating it, and its employment
contracts are subject to the Civil Service Law. On
the other hand, a corporation organized under the
General Corporation Law is governed by the
Corporation Code, and its employment contracts
are subject to the provisions of the Labor Code.
3. Public vs. Private
National Coal Corp. vs. CIR (146 SCRA 583)
A public corporation is one organized under a
special law the purpose of which is to further the
general good and welfare; on the other hand, a
private corporation is one organized either under a
special law or the general corporation law the
purpose of which is for some private purpose. The
mere fact that the Government happens to be the
majority stockholder of a corporation does not make
it a public corporation. The law must express that a
corporation is not covered by the corporation law
being a public corporation.
4. Ecclesiastical & Lay - one organized for religious
purposes. Under the Code, religious corporations
are classified into corporations sole and religious
societies. one organized for a purpose other than for
religion. Lay corporations, in turn, may be either
eleemosynary or civil.
5. Aggregate & Sole – A - a corporation consisting
of more than one member or corporator. S- a special
form of corporation usually associated with the
clergy. Under the Code, it is a religious which
consists of one member or corporator only and his
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successors, such as a bishop. (Sec. 110.) All other
corporations must be corporation aggregate, that is,
they must be formed by "not less than five (5)"
persons.
A corporation aggregate does not become a
corporation sole by the mere fact that its shares of
stock become vested in one person because the
shares may again be transferred or sold by the
holder to others. In the meantime, however, the
holder and the corporation may be treated as the
same.
6. Close & Open - one which is limited to selected
persons or members of a family. one which is open
to any person who may wish to become a
stockholder or member thereto.
7. Domestic & Foreign - one incorporated under the
laws of the Philippines; or one formed, organized,
or existing under any laws other than those of the
Philippines. It includes multinational corporations
created under the laws of another State, (see Sec.
123.) For tax purposes, a foreign corporation is
further classified into resident or non-resident.
8. Parent/Holding, Subsidiaries & Affiliates – P -
one which is so related to another corporation that it
has the power, either directly or indirectly, to elect
the majority of the directors of such other
corporation;
S - one which is so related to another corporation
that the majority of its directors can be elected either
directly or indirectly by such other corporation. It is
one in which another corporation17 owns at least a
majority of the shares and thus has control.
A - one related to another by owning or being
owned by common management or by a long term
lease of its properties or other control device. An
affiliation exists between a holding or parent
company and its subsidiary, or between two
corporations owned or controlled by a third.
MARICALUM MINING CORP VS
FLORENTINO
A parent or holding company is a corporation
which owns or is organized to own a substantial
portion of another company's voting shares of stock
enough to control or influence the latter's
management, policies or affairs thru election of the
latter's board of directors or otherwise. In other
KAIRA MARIE B. CARLOS
words, a "holding company" is organized and is
basically conducting its business by investing
substantially in the equity securities of another
company for the purposes of controlling their
policies and "holding" them in a conglomerate or
umbrella structure along with other subsidiaries.
A holding company may be held liable for the acts
of its subsidiary only when it is adequately proven
that: a) there was control over the subsidiary; (b)
such control was used to protect a fraud (or gross
negligence amounting to bad faith) or evade an
obligation; and c) fraud was the proximate cause of
another's existing injury. Further, an employee is
duly-burdened to prove the crucial test or factor of
control through substantial evidence in order to
establish the existence of an employment
relationship-especially as against an unaffiliated
corporation alleged to be exercising control.
A subsidiary company's separate corporate
personality may be disregarded only when the
evidence shows that such separate personality was
being used by its parent or holding corporation to
perpetrate a fraud or evade an existing obligation.
Concomitantly, employees of a corporation have no
cause of action for labor-related claims against
another unaffiliated corporation, which does not
exercise control over them.
In this case, complainants have not successfully
proven that G Holdings fraudulently exercised its
control over Maricalum Mining to fraudulently
evade any obligation. They also fell short of proving
that G Holdings had exercised operational control
over the employees of Sipalay Hospital.
9. Public & Private - or those formed or organized
for the government of a portion of the State for the
general good and welfare; or (b) Private
corporations or those formed for some private
purpose, benefit, or end; it may be either a stock or
non-stock corporation, government-owned or -
controlled corporation or quasi-public corporation.
The true test is the purpose of the corporation. If the
corporation is created by the State as its own agency
or instrumentality for political or public purpose
connected with the administration of government,
then it is a public corporation. If not, it is a private
corporation notwithstanding that it is created to
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AUSL CORPORATION LAW- ATTY. J. RANADA
promote public good, interest, or convenience
although the whole, or substantially the whole
interest in the corporation, belongs to the State.
10. Quasi – Public - private corporations which
have accepted from the State the grant of franchise
or contract involving the performance of public
duties but which are organized for profit. They have
been defined also as corporations private in
ownership but having an appropriate franchise
from the state. They are a private corporation that
perform
11. De jure vs. De facto – The reckoning point in
determining whether a corporation is De Jure or De
Facto is the moment of incorporation (that is, upon
the issuance of certificate of incorporation posing
the question: has the corporation substantially
complied with the requirements of incorporation or
not? Whichever the answer, as long as it has been
incorporated in good faith (not being a corporation
by estoppel, or one which has not intended to be
duly incorporated prior to corporate transactions)
then its corporate personality cannot be questioned
and necessarily will not be stripped of its corporate
rights and privileges unless the government does
so, through a quo warranto (requiring a person,
natural or juridical, to show, by what warrant, how
come they are holding or exercising their office or
franchise) proceeding initiated by the Solicitor
General when they failed to justify thereon the
validity of their incorporation.
FELICIANO VS COA
DOCTRINE:
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 and existing laws mandate COA
to audit all government agencies, including
government-owned and controlled corporations
(“GOCCs”) with original charters.
12. Corporations by Estoppel
Estoppel – a bar which precludes a person from
denying or asserting anything contrary to that
KAIRA MARIE B. CARLOS
which has been established as the truth by his own
deed or representation, either express or implied.
[de Leon] A
partner by estoppel is a person who, by words
spoken or written or by conduct: (1) represents
himself as a partner or (2) consents to another
representing him to anyone as a partner –
a. In an existing partnership; or
b. With one or more persons not actual partners
[par. 1, Art. 1825, NCC].
Corporation by estoppel – Where a group of
persons misrepresent themselves as a corporation,
they are subsequently estopped from claiming lack
of corporate life in order to avoid liability. Also, a
third party who had dealt with an unincorporated
association as a corporation is precluded from
denying its corporate existence on a suit brought by
the alleged corporation on the contract.
ONE PERSON CORPORATION
- Is a corporation with a single stockholder,
who may be a natural person, a trust, or an
estate.
CORPORATIONS VESTED WITH PUBLIC
INTEREST
1. Requirement that there must be an
independent director (sec 22)
2. Right of Stockholders/members to vote in
the election of directors/trustees through
remote communication or in absentia in
corporations vested with public interest,
notwithstanding the absence of a provision
in by-laws of such corporations. ( sec 23)
3. Requirements that a compliance officer is
elected by the Board
4. Requirement to submit to the shareholders
and to the EC an annual report of the total
compensation of each of the directors or
trustees.
5. Additional requirement is imposed for self-
dealing directors --- material contracts shall
be approved by at least two-thirds of the
entire membership of the board
6. In Sec. 177, corporations vested with public
interest shall submit to the SEC in addition,
a director or trustee compensation report
and a director or trustee appraisal or
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AUSL CORPORATION LAW- ATTY. J. RANADA
performance report and the standards or
criteria used to assess each director or
trustee.
7. Under Sec. 73, the SEC may require stock
corporations which transfer and/or trade
stocks in secondary markets to have an
independent transfer agent.
IV: FORMATION AND ORGANIZATION
1. Process of Incorporation
2. Contents of Articles of Incorporation
The Articles of Incorporation must contain:
(a) Corporate Name;
(b) Purpose Clause;
(c) Principal Office;
(d) Corporate Term if the corporation has
not elected perpetual existence;
(e) Incorporators;
(f) Trustees/Directors;
(g) For stock corporations:
1. The authorized capital stock,
2. Number of shares into which it is divided,
3. The par value of each share,
4. Names, nationalities, and residence
addresses of the original subscribers,
5. Amount subscribed and paid by each on
the subscription, and
6. A statement that some or all of the shares
are without par value, if applicable
(h) For nonstock corporations:
1. Amount of its capital,
2. The names, nationalities, and
3. Residence addresses of the contributors,
and
4. Amount contributed by each
(i) Other matters (including arbitration
agreement pursuant to Sec. 181). [Sec. 13]
a. PREFATORY PARAGRAPH
b. CORPORATE NAME
Red Line Transport vs. Rural Transit (60 Phil 549)
- A corporation cannot assume the name of another
corporation as its trade name. There is no law that
empowers the Public Service Commission or any
court to authorize such usage. - The creation and
continued existence of a corporation requires a
certification of a distinctive name. Section 11 of the
Corporation Law states that “the persons signing
the articles of incorporation and their associates and
successors shall constitute a body politic and
KAIRA MARIE B. CARLOS
corporate, under the name stated in the certificate”.
Moreover, corporations can exercise its power of
succession only by its corporate name (Sec. 13). This
signifies that a corporate name is essential to the
existence of a corporation as it is only authorized
(by law) to transact business only by its name. It
cannot change its name except in the manner
provided by the Corporation Law.
There is no law that nor may the Public Service
Commission or any court authorize a corporation to
expressly or impliedly assume another name which
was not appropriated to it; more so if it was
appropriated for another corporation because the
latter is expressly set apart for it and protected by
law as well. If any corporation could assume at its
pleasure, as an unregistered trade name, a corporate
name of another corporation, such practice would
result in confusion, frauds and evasions, and
difficulties of administration and supervision.
Universal Mills vs. Universal Textile Mills (78 SCRA
62)
- Under the test of reasonable care and observation,
there is similarity between corporate names if it
arouses any degree of confusion in the mind of the
public which could mislead even the customers,
whether existing or prospective. Lyceum of the
Philippines vs. CA (219 SCRA 610) - The corporate
names of private respondent institutions are not
"identical with or deceptively or confusingly
similar" to that of the petitioner institution since the
circumstance involved has effectively precluded by
the appending of geographic names to the word
"Lyceum." - Taking up the etymological backdrop of
the word "Lyceum", it has been associated with
schools and other institutions providing public
lectures and concerts and public discussions. Today,
the word "Lyceum" generally refers to a school or
an institution of learning. It is not unnatural to use
this word to designate an entity which is organized
and operating as an educational institution. - It is
claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in
relation to petitioner. For the application of the
doctrine of secondary meaning, there must be
evidences to prove that the business has continued
for so long a time that it acquired a good will of
considerable value such that its articles and produce
have acquired a well-known reputation, and
confusion will result by the use of the disputed
name. Philipps Export B.V. vs. CA (206 SCRA 457) -
The statutory prohibition on identical or similar
corporate names provided by Section 18 of the
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AUSL CORPORATION LAW- ATTY. J. RANADA
Corporation Code requires two matters which must
be proven, namely: (1) that the complainant
corporation acquired a prior right over the use of
such corporate name; and (2) the proposed name is
either: (a) Identical; or (b) Deceptively or
confusingly similar to that of any existing
corporation or to any other name already protected
by law; or , (c) patently deceptive, confusing or
contrary to existing law. - Proof of actual confusion
or deception of the public need not be shown. It
suffices that confusion is probably or likely to occur.
For example, proof of belonging to same or identical
line of business is enough.
SEC Memorandum Circular No. 21, Series of 2013
Omnibus Guidelines and Procedures on the Use of
Corporate and Partnership Names SEC
Memorandum Circular No. 8, Series of 2013
Amendment on the Guidelines and Procedures on
the Use of Corporate and Partnership Names
c. Purpose Clause
A corporation only has such powers as are
expressly granted by law and the AOI. The purpose
clause confers and limits the powers that a
corporation may exercise.
 Must indicate the specific PRIMARY and
SECONDARY purposes if there are more than one
purpose; a non-stock corporation may not include a
purpose which would contradict or change its
nature as such. [Sec. 13 (b)]
 Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules and
regulations. [Sec. 16 (b)]  Must not be for the
purpose of practicing a profession. [Sec. 10]
Prohibited Purposes and Activities
A corporation may not be formed for the purpose of
practicing a profession like law, medicine or
accountancy. [Sec. 10]
The RCC prohibits to foreign corporations from
giving donations in aid of any political party or
candidate or for purposes of partisan political
activity”. [Sec. 35(i)]
Reasons for requiring purpose clause: (a) investor
will know what line of business he will be risking
his money on; (b) Ultra vires doctrine; (c) third
persons dealing with corporation can determine if
the corporation can enter into a transaction.
[Campos]
KAIRA MARIE B. CARLOS
d. Principal Office Address
The principal office establishes the residence of a
corporation, which is important in determining the
venue in an action by or against the corporation.
1. Must be within the Philippines [Sec. 13 (c)];
2. Articles of Incorporation must specify both
province or city or town where it is located;
3. All corporations and partnerships applying for
registration with the SEC should state in their
Articles of Incorporation or Articles of Partnership
the following:
a. Specific address of their principal office, which
shall include, if feasible, the street number, street
name, barangay, city or municipality, and if
applicable, the name of the building, number of the
building, and name or number of the room or unit;
and
b. Specific residence address of each incorporator,
stockholder, director, trustee or partner. [SEC
Memorandum Circular No. 6, s. 2016, Sec. 1]
4. For foreign corporations, the principal office
address in the country of incorporation, the specific
address of the resident agent, the present directors
and officers, and the specific location where it will
hold office in the Philippines, shall be indicated.
[SEC Memorandum Circular No. 6, s. 2016, Sec. 2]
The residence of a corporation is the place where its
principal office is located, as stated in its Articles of
Incorporation.
 Thus, the proper venue is not the actual principal
office but that stated in its Articles of Incorporation.
 A corporation has no residence in the same sense
in which the term is applied to a natural person
SEC Memorandum Circular No. 6, Series of 2016
Omnibus Guidelines on Principal Office Address;
Address of each Incorporator, Director, Trustee or
Partner
e. Term of Existence
SEC Memorandum Circular No. 21, Series of 2014
Guidelines Governing the Computation of
Corporate Term
Perpetual existence
General Rule: The Revised Corporation Code
provides that a corporation shall have perpetual
existence. The AOIs of existing corporations shall be
deemed amended to reflect their perpetual term.
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AUSL CORPORATION LAW- ATTY. J. RANADA
Exception: The AOIs of corporations created under
the effectivity of this Code provide for a specific
period. [Sec 11]
A corporation already existing upon effectivity of
the RCC may opt out of the rule on perpetual
existence by:
i. Obtaining the vote of its stockholders
representing majority of the
Outstanding Capital Stock, without
prejudice to the appraisal right of
dissenting stockholders
ii. Notifying the Commission that it elects
to retain its specific corporate term, as
provided in its AOI. [Herbosa, 2019]
It is presumed that shareholders, when they
incorporated, assented to the perpetual character of
their contract. Their corporate relations will only
end upon agreement between or among the
prescribed number of shareholders or involuntarily
upon the court’s or the SEC’s determination.
Extending or shortening the corporate term
General Rule:
If a corporation wishes to extend its corporate term,
it may amend its AOI at least 3 years prior to the
expiration of its term. Previously, such change
should be made at least 5 years prior to the
expiration. [Sec. 11]
Exception: When there exists justifiable reasons for
an earlier extension, to be determined by the SEC.
Requisites: A private corporation may extend or
shorten its term as stated in the articles of
incorporation when –
1. Approved by a majority vote of the board of
directors or trustees, and
2. 2. Ratified at a meeting by the stockholders
or members representing at least two-thirds
(2/3) of the outstanding capital stock or of
its members Note: In case of extension of
corporate term, a dissenting stockholder
may exercise the right of appraisal [Sec. 36]
Revival of Corporate Existence
Corporations with an expired term upon the
effectivity of the RCC, may apply with the SEC for
revival of its corporate existence.
Upon approval by the SEC, it will then issue a
certificate of revival giving it perpetual existence,
with all its rights and privileges, and subject to all
KAIRA MARIE B. CARLOS
its duties, debts and liabilities prior to revival,
unless it requests for a limited term. [Sec. 11]
This benefit does not extend to corporations whose
dissolution was decreed by the SEC or the courts.
Should the controlling stockholders or members
wish to file the application, they must represent the
prescribed number of stockholders or members the
application for voluntary dissolution (i.e. at least
2/3 of OCS/membership). Dissenting stockholders
may not exercise their appraisal right. [Herbosa,
2019]
f. Incorporators - persons who, acting
alone or with others, take initiative in
founding and organizing the business or
enterprise of the issuer and receives
consideration therefor. [Sec. 3.10, RA
8799, The Securities Regulation Code]
the promoter binds himself personally
and assumes the responsibility of
looking to the proposed corporation for
reimbursement.
g. Directors/Trustees
h. Capitalization
- SHARES OF STOCK AND
CLASSIFICATION
Nature of Shares of Stock Shares of stock are units
into which the capital stock is divided. A share of
stock represents interest of the holder thereof to
participate in the management of the corporation, to
share proportionally in the profits of the business
and, upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have been
paid. [Campos]
Classes of Shares of Stock
The shares in stock corporations may be divided
into classes or series of shares, or both. The rights,
privileges, or restrictions, and the stated par value
of the class or series of shares must be indicated in
the Articles of Incorporation. [Sec. 6]
General Rule: No share may be deprived of voting
rights [Sec. 6]
Exceptions
 Preferred non-voting shares
 Redeemable shares,
 Provided by the Code (e.g. Treasury shares)
There shall always be a class/series of shares which
have COMPLETE VOTING RIGHTS. [Sec. 6]
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AUSL CORPORATION LAW- ATTY. J. RANADA
DOCTRINE OF EQUALITY OF SHARES
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise provided in
the Articles of Incorporation and stated in the
certificate of stock.
- PURPOSE OF THE CLASSFICATION
-
Note: The capital of Non stock Corporations is
called contributions. While Stock Corporation has
authorized capital stock, Non-Stock Corporation
has total contribution. As to voting rights, while
Stock Corporation derive it by classification of
shares under the condition that there shall always
be a class of shares which have complete voting
rights (but it is the general rule that no share may be
deprived of voting rights except "preferred" or
"redeemable" shares, unless otherwise provided in
B.P. 68), on the other hand, Non-Stock Corporations
do not derive voting rights from classification of
shares since its capital is not divided into shares but
it do so by broadening, limiting or denying voting
rights through its Articles of Incorporation or By-
Laws (meaning it may allow cumulative voting
through itsA.O.I. or By-Laws although it is not
generally allowed by default of the same). As to
distribution of capital and/or income to
corporators, while Stock Corporations derive its
authority to do so by classifying its shares
designating its par-value and, distributing its
earnings by declaration of dividends (distribution of
capital only happens in cases of dissolution after
payments of debts and liabilities, or when the
corporation resolved to decrease its capital stock,
and in other cases which may be allowed [in the
future in case of amendment] by B.P. 68
 Common vs. Preferred Shares
Stocks which are given, by the issuing corporation:
1. Preference in dividends
2. Preference in the distribution of assets of the
corporation in case of liquidation, or
3. Preference in both dividends and distribution, or
4. Such other preferences as may be stated in the
Articles of Incorporation which do not violate the
Corporation Code
KAIRA MARIE B. CARLOS
Note: Preferred shares may be issued only with a
stated par value. [Sec. 6]
Unless the right to vote is clearly withheld, a
preferred stockholder would have such right as it is
an incident to stock ownership. The Board of
Directors may fix the terms and conditions only
when so authorized by the Articles of Incorporation
and such terms and conditions shall be effective
upon filing a certificate thereof with the SEC
Kinds of Preferred Shares
1. Preferred Shares as to Assets vs. Preferred Shares
as to Dividends
2. Cumulative vs. Non-Cumulative
3. Participating vs. Non-participating
Shares as to Dividends
a. Preferred shares as to assets –gives the holder
preference in the distribution of the assets of the
corporation in case of liquidation.
b. Preferred shares as to dividends - 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.
Cumulative vs. Non-cumulative
In the absence of any express stipulation, preferred
stocks are deemed cumulative.
a. Cumulative - regardless of lack of profits in any
given year, and lack of declaration of dividends, the
arrears for such year have to be paid to the
preferred stocks in a subsequent year (once profits
are made) before any dividends can be paid to the
common stocks.
b. Non-Cumulative – entitlement to receipt of
dividends essentially depends on declaration of
such; types:
(i) Discretionary – right to dividends in a particular
year depends on the discretion of the board, even if
the corporation has profits.
(ii) Mandatory – a positive duty is imposed to
declare preferred dividends every year that profits
are earned.
(iii) Earned cumulative or dividend credit – board
has discretion not to declare dividends, even if there
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AUSL CORPORATION LAW- ATTY. J. RANADA
were profits in a certain year; however, once the
board decides that dividends will be declared, the
preferred stockholders have a right to arrears in
dividends for the years when there were profits but
no dividend was declared.
Participating and Non-participating
Unless otherwise provided, preferred stocks are
non-participating.
a. Participating - those which, after getting their
fixed dividend preference, share with common
stocks the rest of the dividends.
b. Non-participating - those which, after getting
their fixed dividend preference, have no more right
to share in the remaining dividends with the
common stocks.
COMMON SHARES
A common stock represents the residual ownership
interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary
rights or privileges and entitles the shareholder to a
pro rata division of profits.” [CIR v. CA, 301 SCRA
152 (1999)]
The owners thereof are entitled to management (via
exclusive right to vote) of the corporation and to
equal pro-rata division of profits.
 Par vs. Nopar Shares
Par Value Shares - These are shares with a stated or
fixed value set out in the Articles of Incorporation,
which remains the same regardless of the
profitability of the corporation. This gives rise to
financial stability, and is the reason why banks,
trust corporations, insurance companies and
building and loan associations must always be
organized with par value shares.
Par value is minimum issue price of such share in
the Articles of Incorporation which must be stated
in the certificate. [Sec 61]
No par value shares These are shares without a
stated value in the AOI. They are without nominal
value. They may be issued for the amount
stipulated in the AOI, or fixed by the Board. [Sec 61]
 Voting vs. Non-voting Shares –
KAIRA MARIE B. CARLOS
Voting Rights: No share may be deprived of
voting rights except "preferred" or "redeemable"
shares.
Non-Voting Shares are not entitled to vote. The law
only authorizes the denial of voting rights in the
case of redeemable shares and preferred shares,
provided that there shall always be a class or series
of shares which have complete voting rights.
 Founders' Shares
are shares classified as such in the AOI, which are
given certain rights and privileges not enjoyed by
the owners of other stocks. These may be given
special preference in voting rights and dividend
payments.
Founder’s shares given the exclusive right to vote
and be voted for are not allowed to exercise that
right in violation of the AntiDummy Law and the
Foreign Investment Act.
 Redeemable Shares - 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
 Treasury Shares – are reacquired shares of
stocks issued and fully paid for. To
reacquire means the stockholder s owning
such shares of stock transferred it back to
the corporation by means of purchase,
redemption, donation or other lawful
means. Treasury shares have meaningful
connection with Appraisal Rights. The
corporation may reissue it at their option.
Treasury Shares are not required to be
classified in the Articles of Incorporation.
- Capital requirements
No minimum capital requirement Under the Old
Corporation Code (CC), at least 25% of the
authorized capital stock as stated in the AOI must
be subscribed at the time of incorporation, and at
least 25% of the total subscription must be paid
upon subscription [Sec 13, CC].
Section 13 has been removed in the Revised
Corporation Code, thus removing such minimum
capital requirements [Sec 12]. However, the increase
in capital remains subject to the 25% subscription
and 25% payment of subscription rule [Sec. 37]
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AUSL CORPORATION LAW- ATTY. J. RANADA
- Restrictions and Preferences
Executive Order No. 184 Tenth Foreign Investment
Negative List
i. No-transfer Clause
If the foreign shareholdings of a landholding
corporation exceed 40%, it is not the foreign
stockholders’ ownership of the shares which is
adversely affected but the capacity of the
corporation to own land – that is, the corporation
becomes disqualified to own land. No law
disqualifies a person from purchasing shares in a
landholding corporation even if the latter will
exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land.
j. Treasurer
who has been chosen by the pre-incorporation
subscribers/members to receive on behalf of the
corporation, all subscriptions /contributions paid
by them See SEC Memorandum Circular No. 26, s.
2019
may or may not be a director; must be a resident
Note: Any 2 or more positions may be held
concurrently by the same person, EXCEPT that no
one shall act as president and secretary or as
president and treasurer at the same time, unless
otherwise allowed in the Code. [Sec 24]
k. Undertaking to Change Name
SEC Memorandum Circular No. 8, Series of
2012
A private corporation organized under the
RCC commences its corporate existence and
juridical personality from the date the SEC
issues the certificate of incorporation under
its official seal.
Undertaking to change the corporate name
in case there is another person or entity with
same or similar name that was previously
registered (unless already incorporated in
the Articles of Incorporation)
l. Acknowledgment
m. Treasurer's Affidavit - A treasurer’s
affidavit is required in an increase of
capital stock, not in a decrease in capital
stock.
KAIRA MARIE B. CARLOS
3. Grounds for Disapproval
a. Does not substantially comply with form
prescribed
b. Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
c. The certification concerning the amount of capital
stock subscribed and/or paid is false
d. Required percentage of ownership of Filipino
citizens has not been complied with when required
by existing laws or the Constitution. [Sec. 16]
SEC shall give the incorporators reasonable time to
correct or modify objectionable portions of the
articles or amendment
4. Commencement of Corporate Existence -
ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC Effect: Commencement
of corporate existence and juridical personality.
[Sec. 18]
Certificate of Incorporation will be issued if:
a. SEC is satisfied that all legal requirements have
been complied with; AND
b. There are no reasons for rejecting or disapproving
the AOI.
It is only upon such issuance that the corporation
acquires juridical personality. [Sec. 18]
Should it be subsequently found that the
incorporators were guilty of fraud in procuring the
certificate of incorporation, the same may be
revoked by the SEC, after proper notice and
hearing.
Cagayan Fishing vs. Sandiko (65 Phil 233)
5. Defectively-formed corporations
a. De facto corporations
Where all the requisites of a de facto corporation are
present, then the defectively formed corporation
will have the status of a de jure corporation in all
cases brought by or against it, except only as to the
State in a direct proceeding
b. Corporation by Estoppel
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AUSL CORPORATION LAW- ATTY. J. RANADA
If any of the requisites are absent, then the estoppel
doctrine may be applied only if any of the parties is
estopped from defending:
a. The defendant association is estopped from
defending on the ground of its lack of capacity to be
sued, or
b. The defendant third party had dealt with the
plaintiff as a corporation and is deemed to have
admitted its existence.
6. Organization and Commencement of Business
a. corporate organization
b. Commencement of Business Transaction
In an isolated transaction, there is no intent on the
part of the foreign corporation to engage in a
progressive pursuit of the purpose of a business
transaction.
General Rule:
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines;
Exception: but such may be sued or proceeded
against before Philippine courts or administrative
tribunals on any valid cause of action recognized
under Philippine laws. [Sec. 150, RCC]
V. CORPORATE CHARTER AND ITS
AMENDMENTS
1. The Corporate Charter
a. Corporate Entity Theory The corporation has a
separate and distinct personality from its directors
or trustees and its corporate officers. Thus, the latter
group cannot be held personally liable for acts done
under the corporate veil for and on behalf of the
corporation and vice versa. Ownership of stock is
not a sufficient ground for disregarding the separate
corporate personality.
Neither is the corporation liable for the personal
acts of its directors, trustees and corporate officers
for acts done in their own name except when third
party transactions involve properties belonging to
the corporation (in which the corporation may
cross-claim against its d/t/c.o).
KAIRA MARIE B. CARLOS
Nor a corporation may bring an action for and on
behalf of its stockholders or members for subject-
matters belonging in the personal capacities of the
latter absent any showing of interest by the former.
Generally, the corporate veil may not be pierced;
however, under the following exceptional
circumstances coupled with sufficient proof, the
directors, trustees, and the corporate officers may be
held personally liable for their acts solidarily with
the corporation and they cannot seek cover under
the corporate veil:
1. When the corporation is used in the following
badges of fraud: a. as a shield to further (any
wrongdoings or) an end subversive of justice;
b. for purposes not intended by the law that created
it; c. to defeat public convenience, to justify a
wrong, to protect fraud, or to defend a crime;
d. to perpetuate fraud or to confuse legitimate
issues; e. to circumvent the law or to perpetuate
deception;
f. to be an alter ego, to be an adjunct business
conduit for the sole benefit of the stockholders. (like
a holding company who has no purpose but to hold
the profits of its member corporations – but the law
allows holding companies to a certain degree [see
corporation code]).
or in short, if the corporation is used for: (1)
fraudulent, unfair, or illegal purpose; and, (2) when
the majority of the directors took advantage of the
corporate personality as a protective shield for any
wrongdoing.
2. When there is a stipulation in the third party
contract to the effect that the d/t/c.o expressly
binds itself (themselves) solidarily with the
corporation.
3. When the corporation is a corporation by estoppel
(wherein the persons acting or purporting to act on
behalf of an ostensible corporate entity cannot deny
the its existence whether it is proven or not and
their personal properties may be made to answer
for the purported corporate debt of such
nonexistent corporation);
Provided that, the third party has no knowledge of
the defect.
Corporation by Estoppel, does it have a veil? How
about corporations in its preparatory stage of
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AUSL CORPORATION LAW- ATTY. J. RANADA
incorporation? There is no Veil when there is No
Corporation. All persons working together in the
preparatory stage of a corporation is personally
liable for its obligations.
A General partner is one who partakes in the
control of the business of their partnership
(company) who is bound by the obligations thereof
(pro rata with all their property after all partnership
assets have been exhausted) for the contracts the
partnership has entered into or as represented by
him on behalf of the partnership.
NON-USE OF CORPORATE CHARTER [Sec 21; Sec
138(a)]
If a corporation fails to formally organize and
commence the transaction of its business or
construction of its works within 5 years, its
certificate of incorporation shall be deemed
revoked, its corporate powers shall cease and the
corporation shall be deemed dissolved [Sec. 21].
Sulo ng Bayan vs. Araneta (72 SCRA 347) –
Absent any showing of interest, a corporation has
no personality to bring an action for and in behalf of
its stockholders or members for the purpose of
recovering property which belongs to said
stockholders or members in their personal
capacities.
- It is a doctrine well-established and obtains both
at law and in equity that a corporation is a distinct
legal entity to be considered as separate and apart
from the individual stockholders or members who
compose it, and is not affected by the personal
rights, obligations and transactions of its
stockholders or members. The property of the
corporation is its property and not that of the
stockholders, as owners, although they have
equities in it
- Properties registered in the name of the
corporation are owned by it as an entity separate
and distinct from its members. 5 Conversely, a
corporation ordinarily has no interest in the
individual property of its stockholders unless
transferred to the corporation, "even in the case of a
one-man corporation.
Caram vs. CA (151 SCRA 372)
- All persons who assume to act as a corporation
shall be personally liable for any obligations
KAIRA MARIE B. CARLOS
contracted by the ostensible corporation
(corporation by estoppel). In contrast, a bona fide
corporation shall have a separate and distinct
personality from its (in)corporators.
- Those who were involved in the initial steps or
preparatory stages of the incorporation of a
corporation or those who purported to act as a
corporation shall be personally liable for the
services it contracted with third parties for the
benefit they obtained therefrom.
- Persons who promote and those have put the
pieces together in order to create a corporation or in
order to purport an ostensible one are deemed to be
persons who are involved in the initial steps of
incorporation and has substantial control over its
management. They are to be held personally liable
during such preparatory stage since the juridical
entity has yet to be born or has been purportedly
born only.
- Mere financiers or investors whose interest was to
be invited and who were in fact persuaded have no
personal liability as they do not have a control over
the management affairs (they are like limited
partners).
Rustan Pulp and Paper Mills vs. CA (214 SCRA 665)
- the President and Manager of a corporation who
entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to
that effect due to the personality of the corporation
being separate and distinct from the person
composing it.
Cruz vs. Dalisay (152 SCRA 482)
- The tenor of the NLRC judgment and the
implementing writ is clear enough. It directed
Qualitrans Limousine Service, Inc. to reinstate the
discharged employees and pay them full
backwages. Respondent, however, chose to "pierce
the veil of corporate entity" usurping a power
belonging to the court and assumed improvidently
that since the complainant is the owner/president
of Qualitrans Limousine Service, Inc., they are one
and the same. It is a well-settled doctrine both in
law and in equity that as a legal entity, a
corporation has a personality distinct and separate
from its individual stockholders or members. The
mere fact that one is president of a corporation does
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AUSL CORPORATION LAW- ATTY. J. RANADA
not render the property he owns or possesses the
property of the corporation, since the president, as
individual and the corporation are separate entities.
Palay Inc. vs. Clave (124 SCRA 638)
- On the issue of personal liability of petitioner
President, with the corporation, to jointly and
severally refund the respondent, it is basic to note
that a corporation is invested by law with a
personality separate and distinct from the persons
composing it as well as from that of any legal entity
to which it may be related. As a general rule, a
corporation may not be made to answer for acts or
liabilities of its stockholders or those legal entities to
which it may be connected and VICE VERSA. -
However, the veil of corporate fiction may be
pierced when it is used in the following badges of
fraud:
1) as a shield to further (any wrongdoings or) an
end subversive of justice;
2) for purposes not intended by the law that created
it; 3) to defeat public convenience, to justify a
wrong, to protect fraud, or to defend a crime;
4) to perpetuate fraud or to confuse legitimate
issues;
5) to circumvent the law or to perpetuate deception;
6) to be an alter ego, to be an adjunct business
conduit for the sole benefit of the stockholders.
- Sufficient proof must exist that the corporation
was used to defraud others. Any stockholder cannot
be made personally liable just because he “appears
to be the controlling stockholder”. Mere ownership
by a single stockholder or by another corporation is
not of itself sufficient ground for disregarding the
separate corporate personality.
Soriano vs. CA (174 SCRA 195)
- In determining personal liability of corporate
officers / directors: the general rule is that a
corporation has a separate and distinct personality
from its directors and officers; the exception is that
the protective mantle of the corporation’s separate
and distinct personality can be pierced, and liability
attaches directly to its officers and/or members
stockholders, when the corporation is used for: (1)
fraudulent, unfair, or illegal purpose; and, (2) when
the majority of the directors took advantage of the
KAIRA MARIE B. CARLOS
corporate personality as a protective shield for any
wrongdoing. Burden of proof is on the party
alleging the purpose of defrauding and usage of the
corporate veil as a protective shield for any
wrongdoing.
2. Piercing the Veil of Corporate Fiction
A corporation will be looked upon as a legal entity
as a general rule, and until sufficient reason to the
contrary appears but when the notion of legal entity
is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard
the corporation as an association of persons.
Piercing the veil of corporate entity is an equitable
remedy developed to address situations where the
separate corporate personality of a corporation is
abused or used for wrongful purposes.
Effect of Piercing the Corporate Veil The
corporation will be considered as a mere association
of persons. Thus, the liability will directly attach to
the stockholders or to the other corporation. [China
Banking v. DyneSem, G.R. No. 149237 (2006)]
For the juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and
convincingly established, and cannot be presumed.
Grounds for Application of the Doctrine
The veil of separate corporate personality may be
lifted/pierced:
1. When such personality is used to defeat public
convenience, to justify wrong, to protect fraud or
defend crime, or as a shield to confuse the
legitimate issues;
2. When the corporation is merely an adjunct, a
business conduit or an alter ego of another
corporation; or
3. Where the corporation is so organized and
controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit
or adjunct of another corporation; or
4. When the corporation is used as a cloak or cover
for fraud or illegality, or to work injustice, or
5. Where necessary to achieve equity or for the
protection of the creditors.
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AUSL CORPORATION LAW- ATTY. J. RANADA
The Court has pierced the veil of corporate fiction
when it was used:
1. To defraud the government of taxes due it;
2. To evade payment of civil liability;
3. By a corporation which is merely a conduit or
alter ego of another corporation;
4. To evade compliance with contractual
obligations;
5. To evade financial obligation to its employees;
6. To ward off a judgment credit;
7. To avoid inclusion of corporate assets as part of
the estate of the decedent; and
8. To cover up an otherwise blatant violation of the
prohibition against forum shopping
Test in Determining Applicability
The doctrine has been applied in the following
contexts:
1. When the liability belongs to the
corporations but the plaintiff seeks to hold
the individual liable. Mere controlling
interest is not enough.
2. Where the liability is personal to the
individual and he seeks to evade it by
hiding behind a corporate vehicle. The veil
of corporate fiction must be pierced where
the main purpose informing the corporation
was to evade the incorporator’s subsidiary
civil liability resulting from the conviction of
one of his employees.
3. The instrumentality or alter ego rule
a. Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;
b. 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 plaintiffs’
legal rights; and
KAIRA MARIE B. CARLOS
c. The aforesaid control and breach of duty
must proximately cause the injury or unjust
loss complained of.
a. General Concept
Palacio vs. Fely Transportation Co. (5 SCRA 1011)
- Generally, a corporation or a company has a
separate and distinct personality from its members
or incorporators. However, if it was proved that the
fiction of corporate entity was used as a protective
shield for evasive purposes or to further an end
subversive of justice, the above rule cannot be
invoked by its members or incorporators and that
the said group would be liable jointly and solidarily
with the corporation. - The fact that the subsequent
sale was done for evasive purposes was
strengthened due to the failure of the defendant
corporation to prove that it has other property than
the jeep (AC687). - The evidence, testimonial or
anywise, would prove that the corporation was
used by its incorporators or members as a shield to
protect their end which is subversive of justice.
Burden of proof lies on the one who alleges the
same.
b. When not justified
3. Amendment of Corporate Charter
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.
4. Special Amendments
5. Provisions subject to Amendments
a. Change in 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
Phil. First Insurance vs. Hartigan (74 SCRA 2520)
- A Corporation effectively changes its name only
after "a copy of the articles of incorporation as
amended, duly certified to be correct by the
president and the secretary of the corporation and a
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AUSL CORPORATION LAW- ATTY. J. RANADA
majority of the board of directors or trustees” has
been filed with the SEC Commissioner; only from
the time of such filing, that "the corporation shall
have the same powers and be subject to the same
liabilities as if such amendment had been embraced
in the original articles of incorporation."
- A Corporation should still conduct its business
under the original name until it has filed the
amended articles of incorporation with the SEC
Commission; it can only legally acquire the
amended name after the filing was done.
- Thereafter, prior causes of action transpiring
during the usage of the original name should be
filed by the corporation under its new name to
enforce its rights existing at the time the change was
made. - The change in the name of a corporation is
not a deprivation of its right to bring an action for a
cause which transpired when it bore its former
name.
b. Corporate Term
Alhambra Cigar vs. SEC (24 SCRA 269)
- The corporate term lasts only for 50 years; but it
may be extend for a one-time extension of another
50 years.
- When a corporate is undergoing liquidation
process due to its dissolution, it will have a
statutory period of 3 years for the sole purpose of
settling and winding up its corporate affairs
including prosecution of actions in relation with its
prior contracts and obligations. Its existence and
juridical personality to further transact business
with third persons ceases.
VI. BOARD OF DIRECTORS / TRUSTEES
Doctrine of Centralized Management
BOARD IS SEAT OF CORPORATE POWERS
General Rule: 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.
Holdover Principle
Upon failure of a quorum at any meeting of the
stockholders or members called for an election, the
directorate naturally holds over and continues to
function until another directorate is chosen and
KAIRA MARIE B. CARLOS
qualified. Each director and trustee shall hold office
until the successor is elected and qualified. [Sec. 22]
1. Powers of the Board
a. Classification of Powers
Ramirez vs. Orientalist (38 Phil 634)
- Section 28 of the Corporation Law states that
corporate power shall be exercised, and all
corporate business conducted by the board of
directors. This provision was not intended to confer
an independent power unto any members of the
board to enter into a contract binding upon a
corporation without the authority of the Board of
Directors itself; this is a formal requirement that the
board of directors has to meet before it can exercise
its power to enter into a contract. However, the
power to enter into a corporate contract vested with
the Board of Directors does not necessitate a
conduct of a formal vote before a contractual
liability can be attached to it; means other than
formal expression of its will can create contractual
liability. If it appears that a member of the board
acted and signed on behalf of the corporation,
binding himself as the latter’s guarantor, to enter
into a contract involving matters with utmost
importance, the authority of the acting agent shall
be binding even if there is an allegation that no
actual authority was given provided that it is shown
by way if usage that the corporation has observed
giving implied consent in the customary of its
business transactions.
b. Qualifications and Disqualifications
Tenure
Directors – Term of 1 year from among the holders
of stocks registered in the corporation’s books. [Sec.
22] Trustees – Term not exceeding 3 years from
among the members of the corporation.
Term- Time during which the officer may claim to
hold the office as of right, and fixes the interval after
which the several incumbents shall succeed one
another
TENURE - The period within which the director
actually holds office, including the holdover period
after the end of his term
Qualifications
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AUSL CORPORATION LAW- ATTY. J. RANADA
a. Director: Must own at least one (1) share of stock.
Trustee: Must be a member of the corporation.
 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. [Sec. 22]
 In order to be eligible as a director, what is
material is the legal title to, not beneficial ownership
of, the stock as appearing on the books of the
corporation. [Lee v. CA, G.R. No. 93695 (1992)]
b. Must be a natural person, of legal age, possess
full legal capacity
c. Must not be convicted by final judgment of an
offense punishable by imprisonment for a period
exceeding 6 years [Sec. 26]
d. Other qualifications as may be prescribed in the
by-laws of the corporation
Disqualifications
A person shall be disqualified from being a director,
trustee, or officer of any corporation if, within five
(5) years prior to the election or appointment as
such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a
period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”;
(b) Found administratively liable for any offense
involving fraud acts;
(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. [Sec. 26]
2. Election and Voting
Number of Directors and Trustees Directors: Not
more than fifteen (15) Trustees: May be more than
fifteen (15) [Sec. 13 and 91]
The RCC removed the minimum number of
directors which stood at five (5) under the old code.
[
Methods of Voting
KAIRA MARIE B. CARLOS
(1) Straight voting - Every stockholder may vote
such number of shares for as many persons as there
are directors to be elected
(2) Cumulative voting for one candidate - A
stockholder is allowed to concentrate his votes and
give one candidate as many votes as the number of
directors to be elected multiplied by the number of
his shares shall equal
(3) Cumulative voting by distribution- A
stockholder may cumulate his shares by
multiplying the number of his shares by the number
of directors to be elected and distribute the same
among as many candidates as he shall see fit.
Quorum
At all elections of directors or trustees, there must
be present, either in person or through a
representative authorized to act by written proxy:
(1) Stock Corporations: The owners of majority of
the outstanding capital stock
(2) Non-Stock Corporations: A majority of the
members entitled to vote. [Sec. 23]
It is necessary that there be a quorum. An election
without quorum is invalid.
3. Validity and Binding Effects of Actions of
Corporate Officers
When Binding:
ONLY from date of issuance of SEC of a
certification that the by-laws are not inconsistent
with the Code [Sec. 45] Pending such approval, they
cannot bind stockholders or corporation.
Effect on third parties:
Mere internal rules among stockholders cannot
affect or prejudice 3rd persons who deal with the
corporation unless they have knowledge of the
same
4. Removal and Filling up of vacancies
REMOVAL - General Rule: Any Director or Trustee
of a corporation may be removed from office, with
or without cause. [Sec. 27] Exception: If the director
was elected by the minority, there must be cause for
removal because the minority may not be deprived
of the right to representation to which they may be
entitled to under Sec. 23 of the Code.
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AUSL CORPORATION LAW- ATTY. J. RANADA
Requisites for Removal
Must take place either at a regular meeting or
special meeting of the stockholders or members
called for the purpose; 2) A special meeting for the
purpose of removing directors or trustees must be
called by The secretary
FILLING OF VACANCIES
Ways which the filling of a vacancy may occur:
(1) Expiration of term;
(2) Removal;
(3) Grounds other than the above, but the remaining
directors can constitute a quorum.
(4) Grounds other than the above, but the remaining
directors cannot constitute a quorum for the
purpose of filling the vacancy;
(5) By reason of an increase in the number of
directors or trustees
5. Compensation of Directors
Central Cooperative Exchange vs. Tibe (33 SCRA
593)
6. Liability Corporate Officers -
7. Three-fold Duty of Directors - duty of obedience,
duty of diligence, and duty of loyalty.
1) Duty of Obedience - shall direct the affairs of the
corporation only in accordance with the purposes
for which it was organized.
2) Duty of Diligence - shall not willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or act in bad faith or with
gross negligence in directing the affairs of the
corporation.
3) Duty of Loyalty - shall not acquire any personal
or pecuniary interest in conflict with their duty as
such directors or trustees. [Strategic Alliance
Development Corp v. Radstock Secu
8. Self-Dealing Directors - A contract of the
corporation with (1) one or more of its directors,
trustees, officers or their spouses and relatives
within the fourth civil degree of consanguinity or
affinity is voidable, at the option of such
corporation. [Sec. 31]
KAIRA MARIE B. CARLOS
9. Interlocking Directors - Interlocking directors are
persons who serve as member of the board of
directors of two or more competing corporations or
corporations engaged in practically the same kind
of business
10. Derivative Suit - A suit brought by a stockholder
for and on behalf of the corporation for its
protection from the wrongful acts committed by the
directors/trustees of the corporation, when the
stockholder finds that he has no redress because the
directors/trustees, are the ones vested by law to
decide whether or not to sue.
11. Executive Committee
VII. CORPORATE POWERS AND AUTHORITY
A corporation has:
i. Express Powers – such powers as are
expressly granted by law and its articles
of incorporation;
ii. Implied Powers – those reasonably
necessary to accomplish its purposes, as
stated in the AoI
iii. Incidental Powers – those which may be
incident to its existence as a juridical
entity
The Theory of General Capacity states that a
corporation is said to hold such powers as are not
prohibited or withheld from it by general law.
1. Classifications of Corporate Power (Sec 35)
General Powers; Theory of General Capacity
Every corporation has the power and capacity:
(a) To sue and be sued in its corporate name; (
b) To have perpetual existence;
- Unless the certificate of incorporation provides
otherwise
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in
accordance with the provisions of this Code;
(e) To adopt bylaws, and to amend or repeal the
same in accordance with this Code;
- Must not contrary to law, morals or public policy
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AUSL CORPORATION LAW- ATTY. J. RANADA
(f) In case of stock corporations: To issue or sell
stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and In
case of non-stock corporations: To admit members
to the corporation;
(g) To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage, and otherwise deal
with such real and personal property, including
securities and bonds of other corporations;
- As the transaction of the lawful business of the
corporation may reasonably and necessarily require
- Subject to the limitations prescribed by law and
the Constitution
(h) To enter, with natural and juridical persons, into
a:
i. Partnership, (Note: New in the RCC)
ii. Joint venture, (Note: New in the RCC)
iii. Merger,
iv. Consolidation, or
v. Any other commercial agreement
(i) To make reasonable donations, including those
for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
- Provided, That no foreign corporation shall give
donations in aid of any political party or candidate
or for purposes of partisan political activity;
- Note: Under OLD Corporation Code, both
domestic and foreign corporations were prohibited
from giving donations in aid of any political party
or candidate or for purposes of partisan political
activity.
(j) To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers, and
employees; and
(k) To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
[Sec. 35]
l. implied powers
those reasonably necessary to accomplish its
purposes, as stated in its articles of incorporation;
and
KAIRA MARIE B. CARLOS
Note: Such implied powers are deemed to exist
because of the following provisions –
 “Except such as are necessary or incidental to the
exercise of the powers so conferred”
m. power to extend/shorten corporate term
A private corporation may extend or shorten its
term as stated in the articles of incorporation. [Sec.
36]
Perpetual existence under the RCC applies to
existing corporations. AOIs shall be deemed
amended to reflect its perpetual term, unless the
corporation elects to retain its limited term
When Exercised
Period to extend the corporate term has been
reduced by the RCC to three years before
expiration. When the term expires, it is not ipso
facto dissolved but may apply for a revival of its
corporate existence.
Exercise of Appraisal Right
In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal
under the conditions provided in this Code. [Sec.
36]
An extension of corporate term actually novates the
corporate contract with each shareholder by
extending the corporate relationship beyond the
original term.
n. Power to Increase / Decrease the Authorized
Capital Stock; Incur / Create Bonded Indebtedness
A corporation may increase or decrease its capital
stock or incur, create or increase any bonded
indebtedness. [Sec. 37]
Power to Increase or Decrease Capital Stock An
increase or decrease of the capital stock amends the
underlying contractual relationships between and
among members of the corporation. Aside from the
requisites in Sec. 37, when the capital stock is
increased or decreased, the provisions of Sec. 15 on
the amendment of the articles of incorporation must
also be complied with. [Villanueva]
“Bonded indebtedness” are long term debts of the
corporation, secured by mortgage on real or
personal property of the corporation, which are:
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AUSL CORPORATION LAW- ATTY. J. RANADA
 Structured in denominated units of indebtedness
 Intended to eventually circulate within the
investing public as securities, representing units of
investment
o. Power to Deny Pre-emptive Rights
The preferential right of shareholders to subscribe
to all issues or disposition of shares of any class in
proportion to their present shareholdings. [Sec 38]
The purpose of preemptive right is to enable the
shareholder to retain his proportionate control in
the corporation and to retain his equity in the
surplus.
General Rule: All shareholders of a stock
corporation have the preemptive right to subscribe
to all issues or disposition of shares of any class, in
proportion to their respective shareholdings.
Exception: If such right is denied by the AOI or an
amendment thereto.
Denial of preemptive right
The AOI may deny pre-emptive right. It may also
be denied when circumstances call for its denial,
specifically when:
 Shares to be issued are to comply with laws
requiring stock offerings or minimum stock
ownership by the public; [Sec. 38]
 Shares to be issued are in good faith with the
approval of the stockholders representing 2/3 of the
OCS in exchange for property needed for corporate
purposes; [Sec. 38]
 Shares to be issued are issued in payment of
previously contracted debts; [Sec. 38]
 In case the right is denied in the AOI;
 Waiver of the right by the stockholder.
p. Power to Sell / Dispose of Assets
A corporation may sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and
assets:
 For such consideration as its board of directors or
trustees may deem expedient, which may be:
- Money
- Stocks
KAIRA MARIE B. CARLOS
- Bonds, or
- Other instruments for the payment of money or
- Other property or consideration
 Subject to the provisions of Republic Act No.
10667, otherwise known as “Philippine Competition
Act”, and other related laws.
Requisite: A majority vote of its board of directors
or trustees
q. Power to Acquire Own Shares
The power of a corporation to acquire its own
shares A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate
corporate purpose or purposes.
This corporate power does not need shareholder’s
approval. Discretion solely rests on the board,
subject to the existence of unrestricted retained
earnings (“URE”) and for a legitimate corporate
purpose/s.
Unrestricted Retained Earnings
The accumulated profits and gains realized out of
the normal and continuous operations of the
company AFTER deducting therefrom:
a. Distributions to stockholders and
b. Transfers to capital stock or other accounts,
and
NOT appropriated by its Board of Directors for
corporate expansion projects or programs:
NOT covered by a restriction for dividend
declaration under a loan agreement; and
NOT required to be retained under special
circumstances obtaining in the corporation such as
when there is a need for a special reserve for
probable contingencies.
The corporation may only acquire its own stocks in
the presence of URE.
r. Power to Declare Dividends
A corporation is deemed to have the power to
declare dividends. So long as the corporation has
capital stock and there is no prohibition in its
Articles of Incorporation or in its by-laws for it to
declare dividends, such corporation is a stock
corporation
Page | 24
AUSL CORPORATION LAW- ATTY. J. RANADA
I. TYPES
II. WHEN AND TO WHOM IT IS VESTED
s. Power to Enter into Management Contracts
Any contract whereby a corporation undertakes to
manage or operate all or substantially all of the
business of another corporation, whether such
contracts are called service contracts, operating
agreements or otherwise.
This refers only to a management contract with
another corporation and does not apply to
management contracts entered into by a corporation
with natural persons. Corollary to this, management
contract with a natural person need not comply
with the requisites of Sec. 43.
2. ULTRA VIRES ACTS
a. Consequences: on the Corporation, on the
immediate parties, on the stockholders
Those acts which a corporation is not empowered to
do or perform because they are outside or beyond
the express and implied powers conferred by its
Articles of Incorporation or by the Revised
Corporation Code, or not necessary or incidental to
the exercise of the powers so conferred.
Types of Ultra Vires Acts
a. Acts done beyond the powers of the corporation
as provided in the law or its articles of
incorporation;
b. Ultra Vires acts of officers and not of the
corporation c. Acts or contracts, which are per se
illegal as being contrary to law. [Villanueva]
VIII. BY- LAWS
Re: regulations, ordinances, rules or laws adopted
by an association or corporation for its internal
governance, including rules for routine matters
such as calling meetings
May be done either:
1. Prior to incorporation - approved and signed by
all the incorporators and submitted to SEC together
with Articles of Incorporation; or
2. After incorporation - The requirement of
adoption of by-laws one (1) month after receipt of
KAIRA MARIE B. CARLOS
the notice of issuance of certificate of incorporation
has been deleted in the RCC. [Sec. 45]
IX. MEETINGS
1. Stockholders' / Members' Meeting
2. Directors' / Trustees' Meeting
3. Right to Vote and Manner of Voting
a. Proxy and other representative voting
Stockholders and members may vote in
person or by proxy in all meetings. [Sec.
57]
The word “proxy” may be understood
in two ways:
(1) First, it may refer to the person duly
authorized by a stockholder to vote in
his behalf in a stockholder’s meeting.
(2) Secondly, it may refer to the
document which evidences this
authority. [CAMPOS]
Right to Issue a Proxy
The right to issue a proxy is vested with public
interest when it comes to stock corporations.
• Although it may be regulated under
the bylaws, it cannot be denied, since it
is an aspect of ownership interest of
stockholders.
• However, the right of members to vote
by proxy may be denied under the
articles of incorporation or bylaws of a
non-stock corporation. [Sec. 88;
CAMPOS]
Requisites for a Valid and Enforceable Proxy:
1. It must be in writing;
2. Signed by the stockholder or member of record;
and 3. Filed with the corporation before the
scheduled meeting with the Corporate Secretary.
[Sec. 57]
Period of Effectivity
Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended.
No proxy shall be valid and effective for a period
longer than five (5) years at any one time. [Sec. 57]
Procedural Matters Relating to Proxies:
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AUSL CORPORATION LAW- ATTY. J. RANADA
1. “Proxy solicitation” involves the securing and
submission of proxies, while “proxy validation”
concerns the validation of such secured and
submitted proxies;
IX. STOCK and STOCKHOLDERS
1. Subscription Contract:
Subscription Agreements Any contract for the
acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall
be deemed a subscription contract. This is
notwithstanding the fact that the parties may refer
to it as a purchase or some other contract. [Sec. 59]
Nature of Subscription Contracts
A subscription contract is indivisible. Consequently,
where stocks were subscribed and part of the
subscription contract price was not paid, the whole
subscription shall be considered delinquent, and not
only the shares which correspond to the amount not
paid.
Nevertheless, holders of subscribed shares not fully
paid, which are not delinquent, shall have all the
rights of a stockholder. [Sec. 71]
Characteristics
There can be a subscription only with reference to
unissued shares of the Authorized Capital Stock
(ACS), in the following cases:
1. The original issuance of the ACS at the time of
incorporation.
2. The opening, during the life of the corporation, of
the portion of the original ACS previously unissued;
or 3. The increase in ACS achieved through a formal
amendment of the Articles and registration thereof
with the SEC [Villanueva]
Status as Shareholder
One may become a stockholder in a corporation in
either of two ways:
1. By SUBSCRIPTION to shares before or after
incorporation
 becomes a stockholder upon acceptance of
the corporation of his offer to subscribe
KAIRA MARIE B. CARLOS
whether the consideration is fully paid or
not
2. By acquisition of already issued shares
 from an existing stockholder
 purchase of TREASURY SHARES from the
corporation
Types of Subscription Contracts
1. Pre-incorporation subscription - It is a
subscription for shares of stock of a corporation still
to be formed. 2. Post-incorporation subscription -
Entered into after incorporation. [Sundiang Sr. &
Aquino, 2009]
2. Pre-incorporation Subscription
Rules on Pre-Incorporation Subscription General
Rule: A pre-incorporation subscription is
IRREVOCABLE:
For a period of at least 6 months from the date of
subscription;
Exceptions
(1) All of the other subscribers consent to the
revocation, or
(2) The incorporation fails to materialize within
6 months or within a longer period as may
be stipulated in the contract of subscription
After the submission of the Articles of Incorporation
to the SEC. [Sec. 60]
Interest on Unpaid Subscription
General Rule: A stockholder is NOT liable to pay
interest on his unpaid subscription. He is not
considered a corporate debtor for the unpaid
amount of his subscription. [Herbosa, 2019]
Exception: If expressly stipulated in the subscription
contract. [Sec 65]
3. Certificates of Stock and their Transfer
Stock transfer agent
A stock transfer agent is one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation. The stock transfer agent shall be
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AUSL CORPORATION LAW- ATTY. J. RANADA
allowed to operate in the Philippines upon
securing a license from the Commission.
4. Forged and Unauthorized Transfers
5. Issuance of Stock Certificates
Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Consideration for the issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, which must
be:
i. Actually received by the corporation; and
ii. Necessary or convenient for its use and
lawful purposes
iii. At a fair valuation equal to the par or issued
value of the stock issued;
(c) Labor performed for or services actually
rendered to the corporation;
(d) Previously incurred indebtedness of the
corporation;
e) Amounts transferred from unrestricted
retained earnings to stated capital;
(f) Outstanding shares exchanged for stocks in
the event of reclassification or conversion;
(g) Shares of stock in another corporation;
and/or (h) Other generally accepted form of
consideration. [Sec. 61]
Invalid Consideration
The following cannot be exchanged for the
issuance of shares of stock: [Sec. 61]
(1) Promissory notes
(2) Future service In case a subscription contract
contemplates unlawful consideration exchanged
for shares of stock:
 The subscription contract would be valid and
binding on both the corporation and subscriber
 But the provision on such unlawful
consideration is deemed void, such that the
subscription agreement would be construed to
be for cash, and the unpaid amount treated as
part of subscription receivables
KAIRA MARIE B. CARLOS
It would not be in consonance with the trust
fund doctrine to consider the subscription
contract void. [Villanueva]
Valuation of Consideration
Where the consideration is other than actual
cash, or consists of intangible property, the
valuation thereof shall initially be determined
by the stockholders or the board of directors,
subject to the approval of the Commission. [Sec.
61]
6. Watered Stocks - Shares issued as fully paid
when in truth no consideration is paid, or
the consideration received is known to be
less than the par value or issued value of the
shares. [Sec. 64]
Watered stocks can either be par or no par value
shares. A watered stock is a stock issued in
exchange for:
(a)A consideration less than its par value or
issued price; and
(b)A non-cash consideration valued in excess of
its fair value. [Herbosa, 2019]
Watered stocks include the following:
Issued without consideration (bonus share)
Issued as fully paid when the corporation has
received less sum of money than its par or
issued value (discounted share)
7. Enforcement and Payment of Unpaid
Subscriptions – stockholder is not liable to
pay interest on his unpaid subscription.
8. Effects of Delinquency
Generally, delinquency suspends the rights of a
subscriber, except the right to receive dividends
(1)No delinquent stock shall be voted for
(2)No delinquent stock shall be entitled to vote
or to representation at any stockholders’
meeting. (3)Delinquent stock shall be subject to
delinquency sale.
A subscriber acquires all the rights of a
shareholder at the point of subscription. His
political and economic rights are not impaired
by the fact that he has unpaid subscription.
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AUSL CORPORATION LAW- ATTY. J. RANADA
• Delinquency suspends the rights of a
subscriber, except the right to receive dividends.
• The dividends corresponding to such shares,
if any, shall be applied against the unpaid
amount. [Herbosa, 2019].
9. Rights of Unpaid Shares
10. Lost or Destroyed Certificates
No action may be brought against any
corporation which shall have issued a certificate
of stock in lieu of that which is lost, stolen or
destroyed pursuant to the procedure provided
by law, except in cases of fraud, bad faith, or
negligence on the part of the corporation and its
officers. (Sec. 72, RCC)
When Applicable If the certificates are:
1. Lost
2. Stolen, or
3. Destroyed
When Not Applicable
1. Available but just worn out (SEC Opinion
dated July 13, 1993, Aquino page 671)
2. Certificate was never issued to the
shareholder because it was not delivered by the
corporation
3. Corporation itself lost the certificates before
delivery (SEC Opinion dated December 4, 1986
Aquino page 671)
Procedure
1. Affidavit
Registered owner shall execute and file
affidavit providing details about the shares
represented by the lost certificate and the
circumstances regarding its loss/destruction
(Sec. 72(1), RCC)
2. Verification
Corporation shall verify the affidavit and
other information and evidence with the
books of the corporation (Sec. 72(2), RCC)
3. Publication
Corporation shall publish a notice in a
newspaper of general circulation in the
KAIRA MARIE B. CARLOS
place where the corporation has its principal
office, once a week for three consecutive
weeks at the expense of the registered
owner of the certificate of stock that has
been lost, stolen or destroyed
4. One-Year Waiting Period
There shall be a waiting period of one year
from the date of the last publication during
which a contest can be interposed
5. Contest
If a contest has been presented to the
corporation or if an action is pending in
court regarding the ownership of the
certificate of stock which has been lost,
stolen, or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
suspended until the final decision by the
court regarding the ownership of said
certificate of stock
6. Replacement
If there is no contest within the one-year
period, the corporation shall then replace
the certificate. The replacement of the
certificate can only be made before the
expiration of the one-year period if a bond is
posted.
In case the registered owner files a bond or
other security in lieu thereof as may be
required, effective for a period of one year,
for such amount and in such form and with
such sureties as may be satisfactory to the
Board of Directors, a new certificate in lieu
of one lost, stolen, or destroyed may be
issued even before the expiration of the one-
year period.
Contents of Notice
1. Name of the corporation
2. Name of the registered owner of the
certificate
3. Serial number of the certificate
4. Number of shares represented by the
certificate
5. After the expiration of one year from the
date of the last publication, if no contest has
been presented to the corporation regarding
the certificate of stock, the right to make
such contest shall be barred and the
corporation shall cancel in its books the
certificate of stock which has been lost,
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AUSL CORPORATION LAW- ATTY. J. RANADA
stolen, or destroyed and issue in lieu thereof
a new certificate of stock.
Enforcement and Payment of Unpaid
Subscriptions
When insolvency supervenes, all unpaid
subscriptions become at once due and
enforceable. No demand is necessary. The
corporation has two remedies against the
subscriber to the corporate shares, namely
a. to sell the stock for the account of the
delinquent subscriber, and
b. to bring a legal action against him for the
amount due
It is settled that a stockholder is personally
liable for the financial obligations of a
corporation to the extent of his unpaid
subscription.
3. DISPOSITION AND ENCUMBRANCE
OF SHARES
a. SALE OF SHARES
Registration of transfer
No transfer, however, shall be valid, except
between the parties until the transfer is
recorded in the books of the corporation
showing the names of the parties to the
transaction, the date of the transfer, the
number of the certificate or certificates and
the number of shares transferred. (Sec. 62,
RCC)
Recording of alienation of shares
1. To enable the corporation to know at all
times their actual stock holders;
2. To afford the corporation the opportunity
to object or refuse its consent to the transfer
in case it has any claim against the stock;
and
3. To avoid fictitious and fraudulent transfer
Sale of partially paid shares
No shares of stock against which the
corporation holds any unpaid claim shall be
transferrable in the books of the corporation.
KAIRA MARIE B. CARLOS
(Sec. 62, RCCP) Because partially paid
shares are not covered yet by a stock
certificate, and as such, there is no certificate
which can be endorsed and delivered to the
transferee as required by Section 62 of the
RCC, the subscriber, as the owner of the
shares, may assign his right to the contract
of subscription in favor of the assignee.
A corporation may refuse to acknowledge
and register a sale or assignment of shares
which are not fully paid, and may continue
to hold the original subscriber liable on the
payment of the subscription. However, the
above principle in Section 62 cannot be
utilized by the corporation to refuse to
recognize ownership over pledged shares
purchased at public auction. The term
“unpaid claims” refers to “any unpaid
claims arising from unpaid subscription,
and not to any indebtedness which a
subscriber or stockholder may owe the
corporation arising from any other
transactions.
Sale of a portion of shares not fully paid;
prohibition
Under the doctrine of invisibility of
subscription contract, a stockholder who has
not paid the full amount of his subscription
cannot transfer part of his subscription in
view of the indivisible nature of a
subscription contract. The reason behind the
principle of disallowing transfer of not fully
paid subscription to several transferee is
that it would be difficult to determine
whether or not the partial payments made
should be applied as full payment for the
corresponding number of shares which can
only be covered by such payment or as
proportional payment to each and all of the
entire number of subscribed shares, and it
would be difficult to determine the unpaid
balance to be assumed by each transferee
11. Rights and Liabilities of Stockholders
Stockholder are liable in the same way as
stockholders of a de jure corporation. They are
liable only to the extent of their subscription to
the corporation.
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AUSL CORPORATION LAW- ATTY. J. RANADA
Those liable as general partners are persons
who assume themselves to be a corporation
when they have no legal authority to do so.
Stockholders are liable as general partners for
all debts, liabilities and damages incurred.
XI. CORPORATE BOOKS AND RECORDS
1. Books and Records to be Kept
Every corporation shall keep and carefully
preserve at its principal office all
information including but not limited to:
■ Articles of incorporation and by-laws and
all their amendments;
■ Current ownership structure and voting
rights of corporation
■ Names and addresses of all members of
BOD/trustees and the executive officers
■ Record of all business transactions
■ Record of resolutions of BOD/Trustees
and of stockholders/members
■ Copies of latest reportorial requirements
submitted to the Commission; and
■ Minutes of all meetings of
stockholders/members or of BOD/trustees.
Stock Corporations [Sec. 73] Stock
corporations must also keep:
Books that record all business transactions
of the corporation which shall include
contract, memoranda, journals, ledgers, etc;
Minute book for meetings of the
stockholders/members; Minute book for
meetings of the board/trustees;
• A record of all stocks in the names of the
stockholders alphabetically arranged;
• The installments paid and unpaid on all
stocks for which subscription has been
made, and the date of payment of any
installment;
• A statement of every alienation, sale or
transfer of stock made, the date thereof, by
and to whom made; and
• Such other entries as the by-laws may
prescribe
NOTE: The duty to keep these books is
imperative and mandatory. The stockholder
can likewise inspect the financial statements
of the corporation [Sec. 73].
KAIRA MARIE B. CARLOS
Stock and transfer book, which shall
contain:
- The trustee may exercise the rights of
inspection of all corporate books and
records
2. Right of Inspection
Requirements for the exercise of the right of
inspection [Sec. 74] It must be exercised at
reasonable hours on business days
 The inspecting or reproducing party shall remain
bound by confidentiality rules under prevailing
laws, such as the rules on trade secrets or processes
under the Intellectual Property Code, Data Privacy
Act, and the Securities Regulation Code.
Directors of a corporation have the unqualified right
to inspect the books and records of the corporation
at all reasonable times.
• The right of inspection is not to be denied on the
ground that the director or shareholder is on
unfriendly terms with the officers of the corporation
whose records are sought to be inspected.
XII. MERGER AND CONSOLIDATION
1. Requirements and Procedure
Requires approval by:
a. Majority of each of the BOD/BOT of the
constituent corporations of the plan of merger or
consolidation; and
b. At least 2/3 of the outstanding capital
stock/membership of each corporation at separate
corporate meetings duly called.
Amendments to the plan of the merger or
consolidation also requires approval by majority
vote of each of the BOD and 2/3 vote of the
outstanding capital stock/membership of each
corporation voting separately. Includes all
stockholders with or without voting rights.
Merger or consolidation does not become effective
by mere agreement of the constituent corporations.
The approval of the SEC is required
2. Effects
As enumerated in the RCC, the following are the
legal effects of merger/consolidation:
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AUSL CORPORATION LAW- ATTY. J. RANADA
1. The constituent corporations shall become a
single corporation which, in case of merger, shall be
the surviving corporation designated in the plan of
merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of
consolidation;
2. The separate existence of the constituent
corporations shall cease, except that of the surviving
or the consolidated corporation;
3. The surviving or the consolidated corporation
shall possess all the rights, privileges, immunities,
and powers and shall be subject to all the duties and
liabilities of a corporation organized under this
Code; 4. The surviving or the consolidated
corporation shall possess all the rights, privileges,
immunities and franchises of each constituent
corporation; and all real or personal property, all
receivables due on whatever account, including
subscriptions to shares and other choses in action,
and every other interest of, belonging to, or due to
each constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or
deed; and
5. The surviving or consolidated corporation shall
be responsible for all the liabilities and obligations
of each constituent corporation as though such
surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or
against any constituent corporation may be
prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or
liens upon the property of such constituent
corporations shall not be impaired by the merger or
consolidation.
Although in a merger, there is dissolution of the
absorbed corporations, there is no winding up of
their affairs, because the surviving corporation
automatically acquires all their rights, privileges,
powers and liabilities.
3. Philippine Competition Act (RA 10667) and its
Implementing Rules and Regulations
Acquisition, defined
Acquisition of Property
A corporation sole may:
KAIRA MARIE B. CARLOS
(1) Purchase and hold real estate and personal
property for its church,charitable, benevolent, or
educational purposes; and
(2) Receive bequests or gifts for such purposes. [Sec.
111, RCC]
Merger, defined
in existence while the others are dissolved
[Sec.75]. Mergers may be horizontal
(between competing firms), vertical (if a
corporation acquires another which uses or
distributes its products) or conglomerate
(neither competing nor related in the chain
of production or distribution). [Campos]
Consolidation - a new corporation is
created, and consolidating corporations are
extinguished [Sec.75].
Rules on Mergers & Acquisitions (Sections 16-23)
Thresholds for Compulsory Notification
Prohibited Mergers & Acquisitions
Exemptions from Prohibited Mergers & – One where no part of the income is
Acquisitions
XIII. APPRAISAL RIGHT
1. Definition; when exercised
The right to withdraw from the corporation and
demand payment of the fair value of the shares after
dissenting from certain corporate acts involving
fundamental changes in corporate structure. [Sec.
80]
2. Requirements and Procedure
Requirements for Exercise of Appraisal Right [Sec.
81 & 85]
a. Stockholder must have voted against the
corporate act.
b. Stockholder must make a written demand on the
corporation within 30 days after the vote was taken
for payment of the fair value of his shares.
o Failure to make demand within such period shall
be deemed waiver of the appraisal right.
c. Stockholder must submit his certificate of stock to
the corporation for notation within 10 days after
demand for payment.
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AUSL CORPORATION LAW- ATTY. J. RANADA
o Otherwise, right to appraisal may be terminated at
the option of corporation.
Who is Entitled to Exercise
A prejudiced stockholder who dissented in the
meeting where the proposal was approved. Mere
silence or abstention does not suffice. The
stockholder must have voted against the corporate
action. [Villanueva]
3. Effect
4. When Right ceases
5. Cost of appraisal
Amount Paid to Dissenting Stockholder The
amount paid to the stockholder is the fair value of
his shares as of the day prior to the date on which
the vote was taken, excluding any appreciation or
depreciation in anticipation of the corporate action.
[Sec. 81]
XIV. NON-STOCK CORPORATIONS
1. Definition; Purpose
distributable as dividends to its members,
trustees, or officers, subject to the provisions
of the Code on dissolution. [Sec. 86] It is not
organized for profit.
2. Membership and Voting Rights
3. Trustees and Officers
4. 4. Other references:
SEC Memorandum Circular No. 8, Series of
2006 Revised Guidelines on Foundations
SEC Memorandum Circular No. 4, Series of
2013 Amendment of Part I (4) (A) & (B) of
SRC Rule 68, as amended 3. Religious
Societies
SEC Memorandum Circular No. 10, Series of
2016 Guidelines on the Issuance of
Certificate on the Nationality of Non-Stock
Corporations
XV. CLOSE CORPORATIONS
1. Definition; Permissive Provisions
One whose articles of incorporation
provide that:
KAIRA MARIE B. CARLOS
1. All issued stock, exclusive of treasury
shares, shall be held by persons not
exceeding 20;
2. All issued stock shall be subject to one
or more specified restrictions on
transfer; and
3. The corporation shall not list in any
stock exchange or make any public
offering of any of its stock of any class.
Any corporation may be incorporated as
a close incorporation, except:
1. Mining or oil companies;
2. Stock exchanges;
3. Banks;
4. Insurance companies;
5. Public utilities;
6. Educational institutions; and
7. Corporations declared to be vested
with public interest. [Sec. 95]
2. Effects of Breach of Qualifying
Provisions
Subject to certain requirements, the person
to whom stock is issued or transferred shall
be conclusively presumed to have notice of
the fact of the breach of the ff. qualifying
conditions:
(a) Eligibility of Stockholder
(b) Number of Stockholders of Record
(c) Stock Transfer Restrictions [Sec. 98 (a)-
(c), RCC]
NOTE: The term “transfer” as used in Sec.
98, is not limited to a transfer for value (Sec
98)
3. Stockholders' Agreement
4. When Board Meeting Not Necessary
5. Pre-Emptive Right
6. Deadlocks
A deadlock is a situation when the directors
or stockholders are so divided on the
management of the corporation’s business
and affairs that:
(1) The votes required for a corporate action
cannot be obtained;
(2) With the consequence that the business
and affairs of the corporation can no longer
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AUSL CORPORATION LAW- ATTY. J. RANADA
be conducted to the advantage of the
stockholders generally. [Sec. 103, RCC]
Effect of the Existence of a Deadlock
General Rule: The SEC, upon written
petition by any stockholder, shall have the
power to arbitrate the dispute.
Exception: Contrary provision in the close
corporation’s articles of incorporation,
bylaws, or stockholders’ agreement. [Sec.
103, RCC]
7. Withdrawal of Stockholders / Dissolution
– the change in the relation of the partners
caused by any partner ceasing to be
associated in the carrying on of the business.
It is different from the winding-up of the
business. [Art. 1828, NCC] It does not
terminate the partnership, which continues
until the winding up of partnership affairs is
completed. [Art. 1829, NCC]
XVI. SPECIAL CORPORATIONS
1. Educational Corporations
2. Religious Corporations
a. Corporation Sole
i. Filling up of Vacancies
ii. Dissolution
3. Religious Societies
4. One Person Corporation (OPC)
5. Corporations Vested with Public Interest
XVII. DISSOLUTION AND WINDING UP
Note: The dissolution of a partnership must
not be understood in the absolute and strict
sense so that at the termination of the object
for which it was created, the partnership is
extinguished. [Testate Estate of Mota v.
Serra, G.R. No. L22825 (1925)]
Winding up – the actual process of settling
the partnership business or affairs after
dissolution. It involves collection and
distribution of partnership assets, payment
of debts, and determination of the value of
KAIRA MARIE B. CARLOS
the interest of the partners in the
partnership.
Termination – the point in time when all
partnership affairs are completely wound
up and finally settled. It signifies the end of
the partnership life. [de Leon]
1. Methods of Dissolution
Causes of Dissolution
Without Violation of the Agreement
Between the Partners
1. By the termination of the definite term or
particular undertaking specified in the
agreement;
2. By the express will of any partner, who
must act in good faith, when no definite
term or particular is specified;
3. By the express will of all the partners who
have not assigned their interests or suffered
them to be charged for their separate debts,
either before or after the termination of any
specified term or particular undertaking;
4. By the expulsion of any partner from the
business bona fide in accordance with such
a power conferred by the agreement
between the partners. [Art. 1830(1), NCC]
a. Expiration of Corporate Term
b. Voluntary Dissolution
i. Where no creditors are affected
ii. Where creditors are affected
c. Shortening of Corporate Term
d. Involuntary Dissolution
BY EXPIRATION OF CORPORATE TERM
The RCC provides that a corporation shall
have perpetual existence. The AOIs of
existing corporations shall be deemed
amended to reflect their perpetual term. The
exception is when the AOIs of corporations
created under the effectivity of this Code
provide for a specific period [Sec 11].
An existing corporation may opt out of the
rule on perpetual existence by notifying the
Commission, provided it was approved by
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AUSL CORPORATION LAW- ATTY. J. RANADA
shareholders, and without prejudice to the
appraisal right of dissenting stockholders.
When such term has expired, a petition for
revival of corporate existence may be filed.
[Divina]
Grounds for Dissolution
(a) Non-use of corporate charter;
(b) Continuous inoperation of a corporation;
(c) Upon receipt of a lawful court order
dissolving the corporation;
(d) Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
(e) Upon finding by final judgment that the
corporation:
(1) Was created for the purpose of
committing, concealing or aiding the
commission of securities violations,
smuggling, tax evasion, money laundering,
or graft and corrupt practices;
(2) Committed or aided in the commission
of securities violations, smuggling, tax
evasion, money laundering, or graft and
corrupt practices, and its stockholders knew;
and
(3) Repeatedly and knowingly tolerated the
commission of graft and corrupt practices or
other fraudulent or illegal acts by its
directors, trustees, officers, or employees.
2. Effects of Dissolution
3. Liquidation and Winding Up
RIGHTS OF PARTNERS IN CASE OF
DISSOLUTION
Each partner may have:
1. The partnership property applied to
discharge the partnership liabilities; and
2. The surplus applied in cash to the net
amount owing to the respective partners.
This is a right as against his co-partners and
all partners claiming through them in
respect of their interests in the partnership.
KAIRA MARIE B. CARLOS
It cannot be availed if there is an agreement
to the contrary. [Art. 1837 (1), NCC]
Doctrine of Marshaling of Assets
When partnership property and the
individual properties of the partners are in
possession of a court for distribution:
1. Partnership creditors have priority on
partnership property;
2. Separate creditors have priority on
individual property, saving the rights of lien
of secured creditors; 3. Anything left from
either shall be applied to satisfy the other.
[Art. 1839(8), NCC]
XVIII. FOREIGN CORPORATIONS
2. Modes of Entry
3. Application of License
4. Resident Agent
5. Effect of Doing Business Without a
License
6. Capacity to Sue
7. Laws Governing Foreign Corporations
8. Amendment of the License
A foreign corporation shall obtain an
amended license in the event it changes its
corporate name, or desires to pursue other
or additional purposes in the Philippines.
Said amendment may be made by
submitting an application with the
Commission, endorsed by the appropriate
government agency. [Sec. 148, RCC]
8. Merger / Consolidation
Consolidation - a new corporation is
created, and consolidating corporations are
extinguished [Sec.75].
Constituent Corporations – the parties to a
merger or consolidation
Consolidated Corporation - The new single
corporation created through consolidation
9. Revocation of License
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AUSL CORPORATION LAW- ATTY. J. RANADA
Grounds for revocation of license:
 Failure to file its annual report or pay any
fees as required by this Code;
Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
 Failure, after change of its resident agent
or address, to submit to the Commission a
statement of such change as required by this
Title;
 Failure to submit to the Commission an
authenticated copy of any amendment to its
articles of incorporation or bylaws or of any
articles of merger or consolidation within
the time prescribed by this Title;
 A misrepresentation of any material
matter in any application, report, affidavit
or other document submitted by such
corporation pursuant to this Title;
 Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivisions;
 Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized under
its license;
 Transacting business in the Philippines as
agent of or acting on behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
 Any other ground as would render it unfit
to transact business in the Philippines. [Sec.
151, RCC]
11. Withdrawal of License
12. Securities Deposit
XIV. MISCELLANEOUS PROVISIONS
1. Investigations, Offenses, Penalties
2. Arbitration for Corporations
PART 2 PRESIDENTIAL DECREE 902-A
I. Devices or Schemes Amounting to
Fraud
II. Intra-Corporate Controversies
KAIRA MARIE B. CARLOS AUSL CORPORATION LAW- ATTY. J. RANADA

III. Title III: Registration of Securities

IV. Title VII: Prohibitions on Fraud,
Manipulation and Insider Trading
V. Title VIII: Registration of Securities
Market Professionals
VI. Title IX: Exchanges and other
Securities Trading Markets

Consent Doctrine

The legal standing of foreign corporations in the

host state is founded on international law on the
basis of consent, whether implied or express.

 A corporation can exercise none of the functions

and privileges conferred by its charter in another
State or country except by the comity and consent of
such State or country. [DE LEON]

 Under Philippine law, the condition is that it must

obtain a license to do business in the Philippines
[CAMPOS].

Jurisprudential Tests of “Doing Business In The

Philippines”

1. Twin Characterization Test

Continuity Test: Doing business implies a

continuity of commercial dealings and
arrangements, or performance of acts
normally incidental to the purpose and
object of the organization. Substance Test:
Doing business implies that a foreign
corporation is continuing the body or
substance of the enterprise of business for
which it was organized [Agilent
Technologies v Integrated Silicon
Technology, G.R. No. 154618 (2004)]

2. Contract Test: A foreign corporation is

doing business in the Philippines if the
contracts entered into by the foreign
corporation or by an agent acting under the
control and direction of the foreign
corporation are consummated in the
Philippines [Pacific Vegetable Oil v.
Singson, G.R. No. L-7917 (1955)].

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