COMMERCIAL LAW REVIEWER (CORPORATION) |1

I. HISTORICAL BACKGROUND OF PHILIPPINE CORPORATE LAW Corporation Law/Act No. 1459 first corporate statute - April 1, 1906 - Sort of codification of American Corporate Law Corporation Code/Batas Pambansa Blg. 68 - May 1, 1980 - Adopted various corporate doctrines enunciated by the Supreme Court under the old corporation law - Clarified the obligations of corporate directors and officers; expressed in statutory language established principles and doctrines and provided for a chapter on close corporations II. CONCEPT AND ATTRIBUTES OF A CORPORATION CORPORATION (Sec 2, BP 68) - is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. ATTRIBUTES OF A CORPORATION 1) It is an artificial being with separate and distinct personality 2) It is created by operation of law 3) It enjoys the right of succession 4) It has the powers, attributes and properties expressly authorized by law or incident to its existence ARTIFICIAL BEING legal fiction - A juridical person capable of having rights and obligations, with a personality separate and distinct from its members or stockholders. CONSEQUENCES OF SEPARATE PERSONALITY a) Property entitled to own properties in its own name and its properties are not the properties of its stockholders, directors and officers - the properties of its stockholders, directors and officers are not the properties of the corporation - the interest of the stockholders over the properties of the corporation is merely inchoate. b) Obligations can incur obligations and its obligations are not the obligations of its stockholders, directors and officers Obligations of the stockholders, directors and officers are not the obligations of the corporation.

c) Rights rights belonging to the corporation cannot be invoked by the stockholders even if the latter owns substantial majority of the shares in that corporation and rights of the stockholders, directors and officers cannot be invoked by the corporation. d) Constitutional Rights corporations are entitled to certain constitutional rights (rights against unreasonable searches and seizure) - Considered a person under the due process clause - Not entitled to certain constitutional right not only because it is an artificial being but also because it is a mere creature of law e) Torts civilly liable in the same manner as natural persons for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. - Liable when act was committed by the officer or agent under express direction or authority from the stockholders or members acting as a body or generally from the directors as the governing body f) Nationality (Tests) 1. Incorporation test Determined by the state of incorporation, regardless of the nationality of the stockholders. 2. Domiciliary test Determined by the principal place of business of the corporation. 3. Control test Determined by the nationality of the controlling stockholders or members. This test is applied in times of war. 4. Grandfather rule Nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized area.

COMMERCIAL LAW REVIEWER (CORPORATION) |2

DOCTRINE OF CORPORATE ENTITY/ DOCTRINE OF SEPARATE PERSONALITY - It is a wellsettled doctrine that a corporation has a personality distinct and separate from its individual stockholders or members. DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY - It is the doctrine that allows the State to disregard the notion of separate personality of a corporation for justifiable reason/s. This is an exception to the Doctrine of Separate Corporate Entity. ALTER EGO PRINCIPLE Control not mere stock control but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked and must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. Such control must have been used by the defendant to commit a fraud or wrong to perpetuate the violation of a statutory or other positive legal breach of duty, or a dishonest and an unjust act in contravention of the plaintiffs legal right The said control and breach of duty must have proximately caused the injury or unjust loss complained of. (d) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted to justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties. (f) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong. (g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. CREATURE OF LAW CONCESSION THEORY it is a principle in the creation of corporation under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC - the life of the corporation is a concession made by the State FRANCHISES OF CORPORATION 1) Primary, Corporate or general franchises the right to exist as a corporation is vested in the individuals who compose the corporation and not in the corporation itself cannot be transferred without the approval of the Congress 2) Special or Secondary Franchises certain rights and privileges conferred upon existing corporations, such as the right to use the streets of municipality to lay pipes of tracks, erect poles or string wires, or the right to engage in delivery services Vested in the corporation and may ordinarily be conveyed or mortgaged under a general power to a corporation to dispose of its property, except such special or secondary franchises as are charged, with a public use Subject to levy and sale on execution together and including all the property necessary for the enjoyment thereof

TESTS IN DETERMINING APPLICABILITY OF THE PIERCING THE VEIL OF CORPORATE ENTITY 1) Fraud test (When corporate fiction used to justify a wrong, protect fraud of defend crime) 2) Control test 3) Alterego or instrumentality test (or conduit cases) 4) Public convenience or objective test 5) Equity cases/test WHEN PIERCING THE VEIL DOCTRINE IS NOT APPLICABLE (a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other remedies are still available. (b) Piercing is not allowed unless the remedy sought is to make the officer or another corporation peculiarly liable for corporate debts. (c) Piercing is not available when the personal obligations of an individual are sought to be enforced against the corporation.

COMMERCIAL LAW REVIEWER (CORPORATION) |3

RIGHT OF SUCCESSION capacity to have continuity of existence despite the changes on the persons who compose it. - The personality continues despite the change of stockholders, members, board members or officers. POWERS, ATTRIBUTES AND PROPERTIES Theory of Special Capacities/Limited Capacity Doctrine No corporation under this Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred. - The corporations capacity is limited to such express, implied and incidental powers If the act of the incorporation is not one of those express, implied or incidental powers, the act is ultra vires ADVANTAGES OF CORPORATE FORM OF BUSINESS a) The capacity to act as a legal unit b) Limitation of, or exemption from, individual liability of shareholders c) Continuity of existence d) Transferability of shares e) Centralized management of board of directors f) Standardized method of organization and finance DISADVANTAGES OF CORPORATE FORM OF BUSINESS a) More complicated in formation and management b) Higher cost of formation and operation c) Lack of personal element d) Greater governmental control and regulation e) Management and control separate from ownership f) Stockholders have a little voice in the conduct of business CORPORATION vs. PARTNERSHIP (CreNuPowATS) CORPORATION PARTNERSHIP As to Commences only By mere manner of from the issuance agreement creation of a Certificate of Incorporation by the SEC, or, in proper cases, passage of a special law As to number of organizers As to powers Authority of those who compose Transfer of interest At least 5 persons Restricted due to limited personality Stockholders are not agents of the corporation in the absence of express authority Freely transferable without the consent of other stockholders, unless there is a stipulation to the contrary Existence continues even as persons who compose it change At least 2 persons Subject to the agreement of partners Mutual agency between partners Cannot be transferred without the consent of the other partners Death of a partner ends the partnership

Succession

CLASSIFICATION OF PRIVATE CORPORATIONS As to ORGANIZERS 1) Public by State only 2) Private by private persons alone or with the State As to FUNCTION 1) Public government of a portion of a State 2) Private usually for profit-making functions As to GOVERNING LAW 1) Public Special Laws and Local Government Code 2) Private Law on Private Corporations As to LEGAL STATUS 1) De Jure corporation organized in accordance with law 2) De Facto a corporation where there exists a flaw in its incorporation As to EXISTENCE OF STOCKS 1) Stock Corporation a corporation in which capital stock is divided into shares and is authorized to distribute holders thereof and such shares dividends or allotments of the surplus profits on the basis of the shares held 2) Non-stock Corporation a corporation which does not issue stocks and does not distribute dividends to their members

COMMERCIAL LAW REVIEWER (CORPORATION) |4

As to PLACE OF INCORPORATION 1) Domestic formed, organized or existing under Philippine laws 2) Foreign formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state As to MANAGEMENT and CONTROL 1) Subsidiary 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 2) Affiliate a corporation the voting stock of which, to the extent of 50% or less, is owned by a bank or QB or which is related or linked to such institution or intermediary through common stockholders or such factors as may be determined by the MB 3) Holding one which is related to another corporation that it has the power either, directly or indirectly to, elect the majority of the director of such other corporation INVESTMENT COMPANIES QUASI-PUBLIC CORPORATION QUASI CORPORATION one which exist without formal legislative grant LAY CORPORATION one organized for a purpose other than for religion AGGREGATE CORPORATION corporation consisting of more than one member or corporator CORPORATION SOLE religious corporation which consists of one member or corporator only and his successor COMPONENTS OF A CORPORATION 1) Incorporators those mentioned in the articles of incorporation as originally forming and composing the corporation, having signed the articles and acknowledged the same before the notary public. a) They must be natural persons; b) At least five (5) but not more than fifteen (15); c) They must be of Legal Age; d) Majority must be residents of the Philippines; and e) Each must own or subscribe to at least one share. 2) Corporators All the stockholders and members of a corporation including the incorporators who are still stockholders. 3) Stockholders Corporators in a stock corporation 4) Members Corporators in a non-stock corporation 5) Directors and Trustees The Board of Directors is the governing body in a stock corporation while the Board of Trustees is the governing body in a non-stock corporation. 6) Corporate Officers They are the officers who are identified as such in the Corporation Code, the Articles of Incorporation or the Bylaws of the corporation. 7) Promoter A self-constituted organizer who finds an enterprise or venture and helps to attract investors, forms a corporation and launches it in business, all with a view to promotion profits.

REQUISITES OF A CREATION OF A CORPORATION 1) The existence of a valid law under which it may be incorporated 2) Actual use or exercise in good faith of the corporate powers 3) Issuance of a certificate of incorporation by the SEC as a minimum requirement of continued good faith CORPORATION BY ESTOPPEL one which in reality is not a corporation, either de jure or de facto, because it is so defectively formed, but is considered a corporations in relation to those only who, by reason of theirs acts or admissions, are precluded from asserting that it is not a corporation. CORPORATION BR PRESCRIPTION - one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law, is given the status of a corporation ECCLESIASTICAL OR RELIGIOUS CORPORATION - one organized for religious purpose OPEN CORPORATION - one which is open to any person who may which to become a stockholder or member thereto

COMMERCIAL LAW REVIEWER (CORPORATION) |5

CONTENTS OF ARTICLES OF INCORPORATION 1) Name of corporation; 2) Purpose/s, indicating the primary and secondary purposes; 3) Place of principal office; 4) Term which shall not be more than 50 years; 5) Names, citizenship and residences of incorporators; 6) Number, names, citizenships and residences of directors; 7) If stock corporation, amount of authorized capital stock, number of shares; 8) In par value stock corporations, the par value of each share; 9) Number of shares and amounts of subscription of subscribers which shall not be less than 25% of authorized capital stock; 10) Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5000.00 11) Name of treasurer elected by subscribers; 12) If the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. SEC GUIDELINES (CORP NAME) 1) The proposed name is identical or deceptively or confusingly similar to that of any existing corporation 2) Any other name protected by law; or 3) Patently deceptive, confusing or contrary to existing laws. 4) The corporate name shall contain the word Corporation or its abbreviation Corp. or Incorporated, or Inc. 5) The partnership name shall contain the word Company or Co. 6) For limited partnership, the word Limited or Ltd. Shall be included 7) If the name or surname of a person is used as part of a corporate or partnership name, the consent of said person or his heirs must be submitted except if that person is a stockholder, member, partner or a declared national hero. 8) The name of a dissolved firm shall not be allowed to be used by other firms within 3 years after the approval of the dissolution of the corporation by SEC, unless allowed by the last stockholders representing at least majority of the outstanding capital stock of the dissolved firm DOCTRINE OF SECONDARY MEANING - to the effect that a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because it is geographical or otherwise descriptive, may nevertheless be used exclusively by one producer with reference to his article so long as in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. STATUTORY LIMITATIONS (Corp Name) 1) Names which are identical, deceptively or confusingly similar to that of any existing corporation including internationally known foreign corporation through not used in the Philippines; 2) Name already protected by law; 3) Name which is contrary to law, morals or public policy. CHANGE OF CORPORATE NAME - Change of corporate name shall require the approval of the SEC. SEC will issue amended certificate of incorporation under the amended name - Involves an amendment of the Articles, which requires a majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock. - Does not include the non-voting stock. DOCTRINE OF EQUALITY OF SHARES - Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. CLASSES OF SHARES i. Par value - shares with a stated value set out in the AOI. - remains the same regardless of the profitability of the corporation - 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. No Par - classified as such in the AOI, which are
given certain rights and privileges not enjoyed by the owners of other stocks. Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years subject to approval by SEC. 5 year period shall commence from date of approval by SEC.

COMMERCIAL LAW REVIEWER (CORPORATION) |6

ii. Voting Non-voting - Shares which have, generally, no voting rights; except in the following circumstances: o Amendment of the AOI o Adoption and amendment of by-laws o Sale, lease, exchange, other disposition of all or substantially all of the corporate property o Incurring, creating or increasing bonded indebtedness o Increase or decrease of capital stock o Merger and consolidation o Investment of corporate funds in another corporation or business o Dissolution of the corporation iii. Common a stockholder, owner of at least one common share, has the following rights: right to vote at meetings right to dividends right to examine corporate books - most commonly issued - entitles owner to equal pro-rate division of profits after preference Preferred - Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which are not violative of the Corporation Code. iv.
- Those shares, expressly so provided in the AOI, which may be purchased or taken up by the corporation upon the expiration of a fixed period regardless of the existence of unrestricted retained earnings in the books of the corporation and upon such terms and conditions stated in the AOI and in the certificate of stock Redeemable

TREASURERS AFFIDAVIT - The Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twentyfive (25%) percent of such increased capital stock (should be understood as proposed increaseCampos) has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription. AUTHORIZED CAPITAL STOCK the amount fixed in the articles of incorporation to be subscribed and paid by the stockholders. SUBSCRIBED CAPITAL that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not. PAID-UP CAPITAL the portion of the authorized capital stock which has been subscribed and actually paid. OUTSTANDING CAPITAL STOCK the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement. CAPITAL properties and assets of the corporation that are used for its business or operation. GROUNDS FOR REJECTION OF THE AOI 1) If such is not substantially in accordance with the form prescribed 2) The purpose/s of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations 3) The treasurers affidavit concerning the amount of capital stock subscribed and/or paid is false 4) The required percentage of ownership of the capital stock to be owned by Filipino citizens has not been complied with. COMMENCEMENT OF CORPORATE EXISTENCE - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their

Founders those shares classified as such in AOI, which are given in certain rights and privileges not enjoyed by the owners of other stocks. TREASURY shares of stocks which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. - May again be disposed for a reasonable price fixed by the BOD

COMMERCIAL LAW REVIEWER (CORPORATION) |7

successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. AMENDMENT OF THE ARTICLES OF INCORPORATION a) Procedure Majority of the vote of directors or trustees and written assent of the stockholders representing 2/3 of outstanding capital or 2/3 of members of non-stock corporations. b) Effectivity Upon approval of the SEC or if not acted upon by SEC within 6 months from the date of filing provided that delay cannot be attributed to the corporation. c) Congress the passage of statutes amending the Corporation Code or special laws may result in the amendment of the AOI provided that no vested right is impaired. EFFECTS OF NON-USE OF CORPORATE CHARTER 1) Failure to organize and commence business within 2 years from incorporation its corporate powers ceases and the corporation shall be deemed dissolve. 2) Continuous inoperation for at least 5 years ground for the suspension or revocation of corporate franchise or certificate of incorporation (Sec. 22). Note: The above shall not be applicable if it is due to causes beyond the control of the corporation as determined by SEC. ADOPTION AND AMENDMENT OF BY-LAWS a) Original By-laws: 1) May accompany the AOI and SEC wil approve it together with the Articles 2) Filed within 1 month form notice of issuance of certificate of incorporation, in which case it must be (i) approved by stockholders constituting at least a majority of outstanding capital (ii) a copy must be filed with the SEC b) Amendment - May be made by the (1) Stockholders together with the Board, or (2) Board only. 1) Stockholders together with the board: majority of board plus majority of outstanding capital stock. 2) By the Boards delegated by 2/3 of outstanding capital stock or 2/3 of members. 3) BY-LAWS These are regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance. By- laws define the rights and obligations of various officers, persons or groups within the corporate structure and provide rules for routine matters such as calling meetings. Every corporation under this code shall have the power and capacity: to adopt by laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this code These are subordinate to the AOI, Corp Code, and other statutes.

ADOPTION OF BY-LAWS - Every corporation formed under this code must within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC adopt a code of by-laws for its government not inconsistent with this code. May be adopted and filed prior to incorporation, in such case, shall be approved and signed by all incorporators submitted to SEC together with AOI EFFECT OF NON-FILING WITHIN THE PRESCRIBED PERIOD - The Supreme Court held that although the Corporation Code requires the filing of by-laws within one month after the issuance of the Certificate of Incorporation, it does not expressly provide for the consequences of non-filing within the said period. Failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be required by law for an orderly governance and management of corporations but they are not essential to corporate birth. Therefore, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation (Loyola Grand Villas Homeowners Assn v. CA). CONTENTS OF BY-LAWS a) The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; b) The time and manner of calling and conducting regular or special meetings of the stockholders or members; c) The required quorum in meetings of stockholders or members and the manner of voting therein; d) The form for proxies of stockholders and members and the manner of voting them; By laws may not prohibit the use of proxies

COMMERCIAL LAW REVIEWER (CORPORATION) |8

e) The qualifications, duties and compensation of directors or trustees, officers and employees; f) The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; g) The manner of election or appointment and the term of office of all officers other than directors or trustees; h) The penalties for violation of the by-laws; i) In the case of stock corporations, the manner of issuing stock certificates; and j) Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. REQUISITES OF VALID BY-LAWS 1) It must be consistent with the Corporation Code, other pertinent laws and regulations. 2) It must be consistent with the Articles of Incorporation. In case of conflict, the Articles of Incorporation prevails. 3) It must be reasonable and not arbitrary or oppressive. 4) It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations unknown to law. AMENDMENT TO BY-LAWS (Sec. 48, CC) Majority vote of the members of the Board and majority vote of the outstanding capital stock or majority of members, in a meeting duly called for the purpose; or 2/3 of the outstanding capital stock or members may delegate to the BOD the power to amend or repeal any by-laws or adopt new by-laws (such power may be revoked by majority vote only) In all other respects, the procedure for adopting the original by-laws shall be the same in amending or repealing bylaws or adoption of a new set of bylaws BINDING EFFECT OF PROVISIONS OF BY-LAWS 1) As to the Corporation and its components Binding not only upon the corporation but also on its stockholder, members and those having direction, management and control of its affairs. 2) As to Third Persons Not binding unless there is actual knowledge. Third persons are not even bound to investigate the content because they are not bound to investigate the content because they are not bound to know the bylaws which are merely provisions for the government of a corporation and notice to them will not be presumed.