I. Primary Franchise & Secondary Franchise distinguished.
PRIMARY/CORPORATE/GENERAL FRANCHISE
I. Definition and DIstinction
A. - the RIGHT GRANTED TO A GROUP OF
INDIVIDUALS To Exist And Act As A
Corporation.
- the Right or Privilege GRANTED to
INDIVIDUALS by the State TO BE and
ACT as a corporation AFTER ITS
INCORPORATION. Thus, it vests in the
Individuals (who compose the corpo.),
NOT in the corporation itself.
B. GR: Exempts Ind’l from Ind’l liability for
CORPORATE DEBTS.
EX’N: Unless otherwise especially
provided.
SECONDARY/SPECIAL FRANCHISE
A. – the RIGHT GRANTED TO A
CORPORATION To Exercise Certain
Powers And Privileges.
- the FRANCHISE TO EXERCISE Powers
and Privileges GRANTED TO SUCH
CORPORATION, TO THE BUSINESS FOR
WHICH IT WAS CREATED, including
those (a) Conferred FOR PURPOSES OF
PUBLIC BENEFIT, such as the power of
eminent domain and other powers and
privileges enjoyed by public utilities.
- the PRIVILEGE TO OPERATE As a Public
Utility AFTER the CORPORATION HAS
ALREADY COME INTO BEING. Thus, it
vests upon the Corporation (as a
whole), NOT in the individuals who
compose the corporation.
B. Only QUASI-PUBLIC CORPORATIONS or
those Affected with PUBLIC INTEREST =
given the Power to institute
CONDEMNATION PROCEEDINGS
(against owners of private property).
Thus, To Grant the Right of Eminent
Domain to PURELY PRIVATE ENTITIES =
UNLAWFUL = for it is Using the right to
take property FOR PRIVATE USE.
C. The Constitution does not
prohibit the mere formation of a public
utility corporation without the required
proportion of capital. What it does
prohibit is the granting of a franchise or
other form of authorization for the
operation of a public utility to a
corporation already in existence but
without the requisite proportion of
Filipino capital (sixty per centum of the
capital of which is owned by citizens of
the Philippines x x x." (1935 Consti,
Article XIV, Sec. 5) (People vs. Quasha,
93 Phil. 333 [1935].)
II. Transferability of franchise
A. INALIENABLE in Nature. Thus, IT IS PART
OF The Corporation and CANNOT BE
SOLD OR ASSIGNED; Otherwise, A
Corporation Would be CREATED
WITHOUT THE CONSENT OF THE
LEGISLATURE. (Memphis, etc., RRC vs.
Railroad Comrs., 112 U.S. 609, 28 L. ed.
837.)
B. It May Be CONVEYED PROVIDED THERE
IS EXPRESS LEGISLATIVE AUTHORITY to
do so. (J.R.S. vs. Imperial Insurance Co.,
Inc., 11 SCRA 634 [1964].)
A. the Franchise VESTED IN THE
CORPORATION ITSELF.
B. - May Ordinarily BE CONVEYED OR
MORTGAGED UNDER A GENERAL
POWER GRANTED TO a Corporation TO
DISPOSE OF ITS PROPERTY, EXCEPT such
franchises as those CHARGED WITH A
PUBLIC USE. Thus, if the Corporation is
a Public Utility, its FRANCHISE CAN
ONLY BE SOLD SUBJECT TO THE PRIOR
APPROVAL AND AUTHORIZATION OF
the (now defunct) Public Service
Commission.
- Even if the franchise is SOLD UNDER
EXECUTION, such APPROVAL of the
Public Service Commission is STILL
NECESSARY. (Raymundo vs. Luneta
Motor Co., 58 Phil. 880 [1933].)
- In the absence of such approval in
the transfer of the property covered
by the franchise, the TRANSFEROR
OR GRANTEE continues to be
responsible under the franchise in
relation to the Commission and to
the public. The TRANSFEREE holds
the property as agent for the
registered owner as far as the law is
concerned. ("Y" Transit Co., Inc. vs.
National Labor Relations
Commission, 229 SCRA 508 [1994].)
C. GR: Subject to LEVY and SALE ON
EXECUTION, TOGETHER WITH ALL THE
PROPERTY NECESSARY FOR the
ENJOYMENT thereof.
EX’N: However, where the JUDGMENT
DOES NOT CONTAIN ANY SPECIAL
DECREE MAKING THE FRANCHISE OF A
PRIVATE CORPORATION ANSWERABLE
FOR its JUDGMENT DEBT, the
INCLUSION of said corporation's
franchise (e.g., to operate a messenger
as delivery service), trade name and
capital stocks in the execution sale of its
properties Has NO JUSTIFICATION and
SUCH SALE SHOULD BE SET ASIDE
insofar as it authorizes such levy and
 sale. (J.R.S. Business Corp. vs. Imperial
Insurance, Inc., supra.)

J. 3 Steps in the creation (and organization) of a corporation.

1.) Promotion;
2.) Incorporation (Sec. 10.); and
3.) Formal organization and commencement of business operations (see Sec. 22.)

J1. Promotion

a. NOT a legal BUT A BUSINESS TERM, usefully summing up in a single word, a number of
BUSINESS OPERATIONS peculiar to the commercial world BY WHICH A COMPANY IS
GENERALLY BROUGHT INTO EXISTENCE.
b. Formation And Organization of a Corporation = Brought generally AT THE INSTANCE &
UNDER THE SUPERVISION of One Or More so called "Promoters." (see Sec. 4.), OR By
the INCORPORATORS THEMSELVES without getting the services of so-called promoters.
c. Activity on the part of such persons is NOT, strictly speaking, a FORMAL PART of the
ORGANIZATION Of A Corporation, as it occurs INDEPENDENTLY OUTSIDE THE
CORPORATE FORM.
d. Upon incorporation => Board Of Directors To PASS A RESOLUTION RATIFYING THE
CONTRACTS entered into by the Incorporators with the Promoters.

e. Promoters of corporation.
- AGENTS of the Incorporators;
- one Who, Alone Or With Others, TAKES IT UPON HIMSELF TO ORGANIZE A CORPORATION:
to procure the necessary legislation, where that is necessary; to procure the necessary
subscribers to the Articles Of Incorporation, where the corporation is organized UNDER
GENERAL LAWS; to see that the necessary document is presented to the proper office to be
recorded and the certificate of incorporation issued; and GENERALLY, TO "Float The
Company."
- "One Who ACTS in the FORMATION, ESTABLISHMENT, AND CONTROL of a Company PRIOR
TO the Incorporation And the Assumption Of Control by the Board Of Directors."
- AKA the "projectors," "agents," "stewards," or "trustees".

f. 3 Stages in corporate promotion.

1. Discovery - REPRESENTS a NEW PRODUCT OR SERVICE, OR,
- the PROMOTER may SIMPLY ORGANIZE ANOTHER COMPANY in an EXISTING
LINE OF BUSINESS;
2. Investigation – second phase
- INVOLVES ANALYSIS of NEEDS (financial, management, plant, material &
labor) And a DECISION WHETHER the ESTIMATED EARNINGS JUSTIFY the
EFFORT;
3. Assembly – last stage/phase
- CONSISTS OF BRINGING TOGETHER the PROPERTY, MONEY, AND PERSONNEL
(PMP) INTO AN ORGANIZATION.
 - Here, Promoter MUST HAVE SOME ASSURANCE OF CONTROL lest THIRD
PARTIES DEPRIVE HIM of the FRUITS OF HIS EFFORTS. Control may cover such items, for
example, as patents, leases, options on property, and contracts for services.
The extent of his rewards and the manner of obtaining them may sometimes be subject to
question.

g. Nature of relations of promoters.

1. To Corporation
- UNIQUE relation to Corporations that DOES NOT LEGALLY EXIST Or has JUST BEEN CREATED
- NOT IN ANY SENSE TRUSTEES NOR THE AGENTS of the corporation BEFORE IT COMES INTO
EXISTENCE, for there cannot be an agency unless there is a principal; ONLY AFTER it HAS
BEEN FORMED PROVIDED THERE IS ASSENT (express or implied) on the part of the
corporation.
- However, it is WELL-SETTLED that THEY OCCUPY A FIDUCIARY OR QUASI-TRUST RELATION
TOWARD the Corporation WHEN IT COMES INTO EXISTENCE,
And TOWARD the SUBSCRIBERS PRIOR TO ITS ORGANIZATION, as long as they are acting as
PROMOTERS.
 FIDUCIARY OR QUASI-TRUST RELATION: IMPOSES UPON THE PROMOTER TO ACT IN
GOOD FAITH IN ALL DEALINGS in behalf of the corporation TO PROTECT the
Corporation FROM DISHONEST PROMOTERS.
- Example of Violation: Promoter SECRETLY ACQUIRES property which HE KNOWS the
Corporation WILL ACQUIRE and THEN SELLS IT TO THE CORPORATION At A SECRET PROFIT.

2. To Subscribers Or Corporators.
- CANNOT be Agents of the Corporation before it is formed, BUT they MAY BE AGENTS OF the
SUBSCRIBERS OR CORPORATORS.
- Agency is a contract. Hence, it is ESSENTIAL that THERE IS AN AGREEMENT to this effect.
- Even When There Is NO AGENCY, the RELATION BETWEEN the Promoters and Subscribers Or
Corporators is ONE OF TRUST AND CONFIDENCE, so AS TO IMPOSE UPON THE FORMER the
DUTY TO ACT IN PERFECT GOOD FAITH And IN THE INTEREST OF ALL the subscribers and
corporators.
- Subscribers for Stock in a proposed corporation DO NOT, WITHOUT AGREEMENT TO SUCH
EFFECT, BECOME PARTNERS WITH THE PROMOTERS of it. Also, ABSENCE OF ANY SHOWING
of such CONTRACT, said stockholders CANNOT BE HELD PERSONALLY LIABLE FOR the
COMPENSATION CLAIMED BY PROMOTERS FOR SERVICES PERFORMED BY THEM In the
Organization of the Corporation.

3. Inter se.
- A partnership can be created, as between the parties themselves, ONLY BY MUTUAL
AGREEMENT, and, therefore, promoters DO NOT BECOME PARTNERS AS BETWEEN
THEMSELVES, in the ABSENCE of such agreement.
- But such A RELATION MAY, OF COURSE, BE CREATED BY AGREEMENT OF THE PARTIES, in
WHICH CASE it is GOVERNED BY THE GENERAL PRINCIPLES OF THE LAW OF PARTNERSHIP.
- Unimportant to determine whether the relationship is a Partnership or a Mere Joint
Venture since in both cases, the SAME legal rules and principles APPLY.
- Each member is BOUND TO THE SAME SCRUPULOUS GOOD FAITH TOWARD his fellow
members as though all were partners, and each has the RIGHT TO DEMAND FROM THE
OTHERS THE UTMOST GOOD FAITH in everything.
h. Liability of corporation for promotion fees.
1. GR.: — In the ABSENCE of character or statutory provisions, a CORPORATION IS NOT
LIABLE TO ITS PROMOTERS in respect FOR ANY PAYMENT IN SERVICES RENDERED OR
EXPENSES INCURRED before its incorporation in promoting it, UNLESS AFTER ITS
INCORPORATION IT EXPRESSLY AGREES TO MAKE SUCH PAYMENT OR from the other facts
the COURT CAN INFER A NEW CONTRACT TO REIMBURSE.
- MORE Reasonable, to hold services performed or expenses incurred PRIOR to organization of a
corporation = GRATUITOUS