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Kinds of corporation

1. Stock corporation- dividends are received by the
stockholders as return of investment.
2. Non-stock corporation- organized for charitable
purposes and civic investments

The articles of incorporation are binding within
the period of 6 months.

The general rule is that a corporation is vested
by law with a personality separate and distinct
from the persons composing it, including its
officers as well as from that of any other legal
entity to which it may be related.

Accordingly, corporate officers acting within the
scope of their authority are not personally liable
for damages or labor claims of its employees,
unless it is alleged and shown that such officers
deliberately and maliciously designed to evade
the financial obligation of the corporation to its
employees, or used the corporate fiction as a
means to perpetrate an illegal act or as a vehicle
for the evasion of existing obligations, the
circumvention of statutes, or to confuse the
legitimate issues, in which case the separate
corporate personality is disregarded.

The by-laws are the governing rules and
regulations of the corporation.

The members should not be less than 5 but not
more than 15.

It should be registered at the Securities and
Exchange Commission (SEC).

In order that the SEC can take cognizance of a
case, the controversy (INTRACORPORATE
CONTROVERSY) must pertain to any of the
following relationships:
1. between the corporation, partnership or
association and the public
2. Between the corporation, partnership or
association and its stockholders, partners,
members, or officers.
3. between the corporation, partnership, or
association and the state in so far as its
franchise, permit or license to operate is
concerned
4. among stockholders, partners or associates
themselves

The SEC is vested with the jurisdiction,
supervision and control over all corporations
which are enfranchised to act as corporate
entities. The fact that a corporation which
requires a license or permit from another
government agency does not restrict such
supervision.

The corporation continues to be vested with
legal personality until it is dissolved according to
law and SEC continues to have jurisdiction over
it.

Meetings of the directors must be personal while
stockholders meeting, proxy voting is allowed

Any natural person can become incorporators
except under the Rural Banking Act in relation
to the Development Cooperative Law. But a
corporation can become a subscriber of a
corporation.

Composition of articles of incorporation

1. Name
Must not be misleading
Must not be a name of a past
president
Must not be in resemblance with the
Phil flag
2. Name of incorporators
3. address of incorporators

The incorporators are the original signatories of
the corporation
The capital of the corporation has no limit but
must not be less than Php 5,000.00.

Differentiate Corporators from Incorporators

INCORPORATORS CORPORATORS
Signatory of Articles
Stockholder of stock
corporation or member of
non-stock corporation
Do not cease to be such
Cease to be such if they are
no longer stockholders
Number is limited to 5 to
15
No restriction as to
number
Must have contractual
capacity
May be such through his
guardian

Temporary Officers

1. President- must be a stockholder of the
corporation
2. Secretary- may not be a stockholder
3. Treasurer- may not be a stockholder

Contribution

1. money
The general rule is that a check is not allowed
except if it is a managers check or cashiers
check
2. services
The general rule is that it is allowed except if it is
for future services
3. valuables
It should be with something of value and must
be appraised by a committee to determine its
value

The treasurers affidavit should be 25% of capital
actually subscribed and 25% of it is already paid.

The lifetime of a corporation is 50 yrs and must be
renewed on the 45
th
year.

An advantage of a corporation is that it can obtain
loans from banks.

The certificate of incorporation is issued by the SEC
as a proof of the existence of a duly registered legal
and organized corporation.

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The meeting of stockholders shall always be at the
principal office of the corporation and held annually.

The Board of Directors is only entitled of per diem
unless denied by the stockholders.

The President, secretary and treasurer are entitled to
a salary that should be duly approved by the
stockholders provided they do not exceed 10% of the
net income before income tax.

From the issuance of certificate of incorporation
within 2 yrs, they must elect their officers from the
start of their business.

NOTA BENE:

1. A corporation cannot donate to a political body
2. The government cannot organize a private
corporation but can create a corporation like the
PNB, Summit Bank and Land Bank of the
Philippines.

DOCTRINES OF CORPORATION LAW

Piercing the veil of a corporate entity

An agreement to organize a corporation is valid
for 6 months and no one can withdraw without the
consent of another.

If the corporation was organized to commit
fraud, to avoid any liability, hence the corporation
and the stockholders are one and the same person.

The general rule is that the death of the
stockholders is not the death of the corporation
except when the corporation is considered as one,
therefore the death of the stockholder is also the
death of the corporation.

Factors that may justify piercing the corporate veil
1. stock ownership by one or common
ownership of both corporations
2. identity of directors and officers
3. manner of keeping corporate books and
records
4. methods of conducting business

Go Kong Wei Doctrine

A director cannot be elected in two (2)
corporations, where the business of the two (2)
corporations is similar.

genosssenshaft theory - a theory holding that
corporation's existence does not depend on the
consent of the state. it remains a legal entity
despite lack of consent and concession there
from.

A corporation is independent from Governmental
control, rules and regulations

Capital Stock

There is no maximum capital of the corporation, but
the minimum is five thousand pesos ( Php
5,000.00). 25% of the capital stock must be
subscribed and 25% of the subscribed capital must
be fully paid (treasurers affidavit).




Trust Fund Doctrine

It is the obligation of the officers of the
corporation to protect the fund of the corporation for
the benefit of the stockholders and the creditors

Examples of cases involving Trust Fund Doctrine

a. When the corporation releases or condones
payment of the unpaid subscription
b. When there is payment of dividends without
unrestricted earnings
c. When properties are transferred in fraud of
creditors
d. When properties are disposed or undue
preference is given to some creditors even if the
corporation is insolvent

Preferred Creditors

1. taxes for the government
2. creditors of the corporation
3. stockholders

De Jure Corporation

A corporation duly organized in accordance with law
is a de jure corporation

De Facto Corporation

The following are instances of a De facto Corporation

1. a corporation with defect
2. the SEC issued a certificate of incorporation
even if the incorporators are insufficient
3. the corporation is not authorized
4. the treasurers affidavit is not correct

Note: Only the government can question the de facto
government for which the Office of the Solicitor General
will issue a quo warranto proceeding

De jure vs. de facto

De jure De facto
One created in strict or
substantial conformity
with the statutory
requirements for
incorporation
One which actually exists
for all practical purposes
as a corporation but which
has no legal right to
corporate existence as
against the State
Right to exist cannot be
successfully attacked even
in a direct proceeding by
the state
Right to exist can be
successfully attacked in a
direct proceeding by the
state


Doctrine of Corporate opportunity

The doctrine states that if there is presented to a
corporate officer or director a business opportunity
for which the corporation is financially able to
undertake, is from its nature in line with the
corporations business and is of practical advantage
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expectancy, and by embracing the opportunity, the
self interest of the officer or director will be
brought into conflict with that of the corporation, the
law will not permit him to seize the opportunity for
himself.

Corporation by Estoppel

One, which has been issued a certificate of
registration, but is considered a corporation by
estoppel precluding either the person behind, or
third parties dealing with it to deny its corporate
existence. It is also known as ostensible corporation

Solutio indebiti- unjust enrichment
Negotiorium gestio-unauthorized management

Voting trust agreement

a voting trust is a trust created by agreement
between a group of stockholders and the trustee or
by a group of identical agreements between
individual stockholders and a common trustee,
whereby it is provided that for a term of five years, or
for a period contingent upon a certain event, or until
the agreement is terminated, control over the stock
owned by such stockholders, either for certain
purposes or for all purposes, is lodged in the trustee,
either with or without a reservation to the owners, or
persons designated by them, of the power 6to direct
how such control shall be used.

The law simply provides that a voting trust
agreement in writing whereby one or more
stockholders of a corporation consent to transfer his
or her shares to a trustee in order to vest in the latter
voting for other rights pertaining to said shares for a
period not exceeding five (5) years upon the
fulfillment of statutory conditions specified in the
agreement. The five year period may be extended in
cases where the voting trust is executed pursuant to
a loan agreement whereby the period is made
contingent upon full payment of the loan

Voting rights in a corporation

It is a fundamental rule that a stockholder
acquires voting rights only when the shares of stock
to be voted are registered in his name in the
corporate books. An unrecorded transferee cannot
enjoy the status of a stockholder, he cannot vote nor
be voted for, and he will not be entitled to dividends

Intra-vires Lawful act of the corporation

Powers of a corporation

a. Express those expressly authorized by
the Corporation Code and other laws,
and its Articles of incorporation or
charter
- enumerated powers (to sue and be
sued, to collect or acquire property)

b. Implied powers those that can be
inferred from or necessary for the
exercise of the express powers
- those agreed upon

c. Incidental/inherent Powers those that
are incidental to the existence of the
corporation
- same as express powers

Note: there are express powers that are
incidental powers like the power to acquire
property.

A corporation can exercise not only powers
expressly conferred upon it by its charter but also
those that may be reasonably necessary or proper to
promote the interest or welfare of the corporation.

If the act is one which is lawful in itself, and not
otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary
to the promotion of those ends, is a substantial, and
not in a remote and fanciful sense, it may fairly be
considered within the charter powers. The test is
whether the act is in direct and immediate
furtherance of the corporations business, fairly
incident to the express powers and necessary to their
exercise. If so, the corporation has the power to do
it; if otherwise, not.

Ultra-vires Acts outside the powers of the
corporation
Kinds

1. void per se (illegal act)- void abinitio
2. voidable- valid until annulled\ four (4) years
prescription

3 stages of voidable ultra vires acts

1. executory on both sides
2. executory on one side/executed on other
side
3. already executed by both parties

Kinds of Ultra Vires Acts

1. executory on both sides this could be set
aside.
2. Executor on one side and executed on the
other side if the corporation has already
received the benefits, it must honor the
contract
3. Executed on both sides if both parties have
already benefited, both should honor a
contract

Nationality of a Corporation(Grandfathers Rule)

The citizenship of a private corporation registered in
the Philippines is determined by the citizenship of
the controlling stockholders, in accordance of the
control test.
It is also the place of incorporation or where the or
where the corporation is organized.

Control test

In times of war, the corporations in the Philippines
are controlled by the enemies

Kinds of shares/stocks

1. par value share- the amount is written in the
certificate of stock
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2. no par value share- the amount of share is not
included, but should not be less than Php 5.00

3. treasury share- reacquired by the corporation
from a stockholder by donation, when the
shares are delinquent, when the corporation
buys the share to make it even

4. redeemable share- there is a stipulation in the
contract
-When there is one contract, the latter provision
prevails

5. Founders share- it is good for 5 years.
-given to the founders of the corporation

Distinction of share of stock and certificate of stock


Watered stock

Watered stock is those issued not in exchange
for its equivalent either in cash, property, share,
stock dividends, or services; thus, the issuances
of such stocks are prohibited.
These include stocks:
a. Issued without consideration (bonus
share)
b. Issued as fully paid when the
corporation has received a lesser sum of
money than its par or issued
value(discounted share)
c. Issued for consideration other than
actual cash (i.e. property or services),
the fair valuation of which is less than its
par or issued value
d. Issued as stock dividend when there are
no sufficient retained earnings or
surplus to justify

Note: Directors or officers who consented to its
issuance is solidarily liable to the corporation for the
difference in value

Stock and transfer books are the responsibility of the
secretary who is in-charge of transferring shares for
which he must file a surety bond to protect the
stockholders.

A corporation by prescription is a corporation that
need not to be registered because they already
existed before the effectivity of the corporation code,
they antedated the corporation code (churches)

A subscription contract is executed when a person
buys a stock/share for which it stipulates the terms
of payment.

A call resolution is a resolution demanding the
payment of the balance of the subscription contract.

To validate the buying of a share of stock, the
owner/seller must surrender the certificate of stock
to the buyer. The buyer must go to the stock and
transfer clerk of the corporation to cancel the
certificate of stock in the name of the seller and the
stock and transfer clerk must issue another stock
certificate in the name of the buyer.

Baltazar Doctrine- if a stockholder has not fully paid
his share, the corporation will only issue a certificate
of sock equivalent to the amount paid. However, this
doctrine is no longer in effect, the SEC will only
serve or issue a certificate of stock until the shares
are fully paid.

Doctrine of equality of shares

It provides that 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.

Vote required in board resolution
1. majority vote as a general rule
2. all other vote, 2/3 vote

one-man corporation- one man controls the
corporation in terms of voting in the following:
1. extension of corporate life
2. investment in other corporation
3. merger
4. consolidation
5. dissolution

The Board of Directors is the governing body of the
corporation composed of 15 members.

Only natural persons can become incorporators
exception is the Rural Bank Act in relation to the
Cooperative Development Act for which the
cooperative can borrow money from the rural bank,
therefore, the rural bank may become an
incorporator.

Requirements for corporation
1. not less than 5 persons but not more than 15
2. agreement is good for 6 months
3. articles of incorporation
4. by laws
5. treasurers affidavit

Proxy Voting

It is not allowed in meeting of directors but it is
allowed in stockholders annual meeting, it is also
allowed if there is an SPA

Rights of a stockholder

1. to receive dividends
Share of stock Certificate of stock
Unit of interest in a
corporation
Evidence of the
holders ownership of
the stock and of his
right as a shareholder
and up to the extent
specified therein
It is an incorporeal or
intangible property
It is concrete and
tangible
It may be issued by the
corporation even if the
subscription is not
fully paid
May only be issued
only if the
subscription is fully
paid
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2. to inspect the books of the corporation-
there must be no conflict of interest, under
doctrine of corporate opportunity
3. to sell his shares without consent of others-
delectus personae

Kinds of dividends

1. cash dividend- mandatory if there is an
excess of 100% on net surplus
2. stock dividends- not taxable
A call resolution to pay subscription must be enacted
by the Board of Directors

The declaration of dividends can be revoked by the
Board of Directors if it is not yet announce to the
stockholders.

If the dividends are deposited in a bank, the
resolution cannot be revoked.

A foreigner can be a stockholder in a nationalized
corporation provided that the shares shall be 60%
Filipino and 40% foreigner.

Election of Board of Directors- cumulative voting is
mandatory in the election

Qualifications:
1. legal age
2. have knowledge in corporation law

Disqualifications:

1. conviction of a crime involving moral
turpitude and the penalty is more than 6 years
2. Violation of corporation code in 5 years
prior to the election.

Under the doctrine of cumulative voting, the shares
of stockholders shall be multiplied to the number of
candidates to determine how many votes a
stockholder will have.

A corporation is not entitled to moral damages
except in violations of the intellectual property law
where the Philippines is a member.

Kinds of Damages

1. moral
2. liquidated
3. nominal
4. actual
5. exemplary

Pre-emptive right is the right of first refusal, the
stockholder sells his shares first to co-stockholders
before selling to the public

Appraisal right is the right of the stockholder to
determine the price of his share. If there is a conflict
in the decision, they shall form a 3-man committee
to determine the price, the decision of the 3-man
committee is final.

A close corporation is a family corporation
composed of the members of the family, non-
member of the family is not allowed(20 members)

An open corporation is a corporation for which the
shares of stock are open to the public.

A religious sole is a corporation formed by head of
churches. A corporation sole can buy land in the
Philippines because it is owned by the head of the
church.

A foreign company must register to the SEC in order
to validly do business in the Philippines.

A religious sole/religious corporation cannot sell
their property without the approval from the RTC,
except, when approved by their parish church, to
protect the rights of the members of the church

Foreign Corporation

1. A foreign corporation must secure a license
and appoint a resident agent before it is
allowed to do business in the Philippines
2. There is a contract of reciprocity between
the Philippines and the country where the
corporation was organized.
3. That with respect to Intra- corporate
Controversy, the law of the foreign
corporation where it is organized shall
govern.
4. In stockholders meeting, all preferred and
common stockholders should be notified to
vote, although as a general rule, a preferred
stockholder is not entitled to vote.

Can all the stockholder in a corporation be foreigners?

Yes, except in fully or partly nationalized
corporations. For example, a manufacturer that exports
all its products can be wholly-owned by foreigners

What are the fully and partly nationalized corporations?

1. Where no foreign stockholder is allowed.

a. Mass Media except recording (Art
XVI, Sec 11, Constitution)
b. Retail trade enterprises with paid-
up capital of less than US$ 2.5
Million (Sec 5, RA No 8762)
c. Private security agencies (Sec 4, RA
No 5487)
d. Small scale mining(Sec 3, RA No
7076)
e. Utilization of natural resources (Art
XII, Sec 2, Constitution)
f. Cockpits (Sec 5, PD 449)
g. Manufacture, repair, stockpiling
and/or distribution of nuclear
weapons (Art II, Sec 8, Constitution)
h. Manufacture of firecrackers and
other pyrotechnic devices (Sec 5, RA
No 7183)

2. Up to twenty percent (20%) foreign equity

a. Private radio communications
network (RA No 3846)

3. Up to twenty-five percent (25%) foreign
equity

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a. Private Recruitment, whether local
or overseas employment (Art 27, PD
No 442)
b. Construction and repair of locally
funded works (Sec 1, CA 541)

4. up to forty percent (40%) foreign equity

a. Exploration, development and
utilization of natural resources (Art
XII, Sec 2, Constitution)
b. Realty companies and other
corporations that own private lands
(Art XII, Sec 7, Constitution)
c. Operation and management of
public Utilities (Art XII, Sec 11,
Constitution)
d. Culture, production, milling,
processing, trading except retail of
rice and corn and by-products (Sec
5, PD No 194; Sec 15, RA No 8762
e. Adjustment companies (Sec 323, PD
No 612)
f. Sauna and steam bath bathhouses,
massage clinics and similar
activities (RA No 7042)

5. up to sixty percent (60%) foreign equity

a. Financing companies (Sec 6, RA No
5980, as amended by RA No 8556)
b. Investment houses (Sec 5, PD No
129, as amended by RA No 8366)

Foreign Corporation power to sue and be sued

a. Suit by a foreign corporation the foreign
corporation transacting business in the
Philippines without a license to do business shall
not be permitted to maintain or intervene in any
court or administrative agency.
b. Suit against a Foreign Corporation Any foreign
corporation transacting business in the
Philippines whether or not with a license, may
be sued against/before Philippine Courts or
administrative tribunals on any valid cause of
action recognized under Philippine Laws
(Doctrine of Quasi- Estoppel by acceptance of
benefits)\

Kinds of Suit

1. Class Suit there are many stockholders
who have the same problem, but a few of
them can file the suit in their behalf
2. Individual Suit a stockholder whose right
have been violated
3. Derivative suit the officers and directors
are the ones liable, hence any stockholder
can sue in behalf of the corporation

Remedies in a corporation

1. Rehabilitation- if the corporation cannot pay the
obligations on time, it should file in court a case
of rehabilitation
2. Conservatorship- there is mismanagement in the
corporation; the SEC will assign/appoint a
conservator to manage the corporation and to
have a better management. The period for
conservatorship shall be 0ne (1) year, the
corporation shall pay the expenses of the
conservator
3. Receivership when the corporation is bankrupt
and cannot pay its debts, the SEC will assign an
administrator or receiver to collect all the assets
and debts owning in the corporation to pay the
debtors.

An interlocking directorate is a person who is a
directorate in two corporations with more than 20%
of outstanding capital

The general rule is that an interlocking director
cannot engage into a contract between the
corporation except when it is approved by the board
via a 2/3 vote in favor for which the interlocking
director shall not participate.

Directors, officers, stockholders and related interest
cannot borrow from their own corporation except
when there is approval by the Board of Directors
where the borrowers inhibit themselves and there
must be approval from the SEC.

Removal of a Director (Grounds)

1. any ground provided
2. removed by 2/3 vote of the outstanding
capital stocks
3. there must be a meeting for the removal
4. the director sought to be removed must be
duly notified

Executive Committee is delegated by the Board of
Directors of their powers and duties (e.g.
repeal/adoption of bylaws, removal of directors,
declaration of cash dividends

Kinds of Franchise

1. Primary franchise- the law authorizing the
formation of a corporation(the corporation
code
2. Secondary franchise- the moment a
corporation is organized, it enjoys some
powers. These powers are called secondary
franchise

A merger is the absorption of a corporation of
another corporation. It is allowed provided that the
debts of the corporation are absorbed by the
absorbing corporation.

A consolidation is the joining together of two or
more corporations. It is allowed provided that the
debts of the corporations are not extinguished.

The merger of air and land transport is prohibited.

Liabilities of officers/directors of a corporation

1. conflict of interest
2. engage in business in competition with the
corporation
3. entering in illegal/unlawful contract

The officers/directors are solidarily liable to the
stockholders in approving unlawful/illegal contracts.

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The remedy of an officer/director is to write to the
President of the corporation thru the SEC stating his
objection to the contract.

When there is no meeting in the corporation a
petition must be filed to the SEC to become an acting
president for the purpose of conducting a meeting.






2 kinds of stockholder

1. Preferred stockholder- an investor of the
corporation. Not entitled to vote, when the
corporation is dissolved, return of investment is
first given to the preferred stockholder
2. common stockholder- with voting rights

both are required to vote in the following instances:

1. dissolution of corporation (2/3)
2. merger/consolidation
3. shortening or extending corporate life
4. management contract
5. investment of funds
6. amendments of incorporation

the membership to a non-stock corporation is non-
transferable

a non-stock school can demand an increase in
tuition fees but it cannot be used to increase the per
diem of the Board of Directors but can be used for
the improvement if facilities and increase in the
wages of teachers.

Grounds for dissolution

1. violation of corporation code
2. insolvency
3. shortening of corporation code(corporate life)

Stages of dissolution

1. dissolution- upon filing of petition, the
corporation shall cease its business operation
(It cannot transact business anymore)
a) voluntary- the stockholders pass a
resolution thru the BOD to
dissolve/shorten the life of the
corporation
b) involuntary- upon petition of 3
creditors/upon order for violation of
corporation code(failure to submit
annual report, failure to keep record of
book of corporation)

2. Liquidation- 5 years period of liquidation-the
SEC shall appoint a receiver who shall collect the
debts and assets of the corporation. (to recover
debts due to the corporation)
3. Winding-up all obligations of the corporation
have been settled
4. Distribution of the assets of preferred
stockholders

A corporation must organize (elect officers) within 3
years and transact business within 5 years, otherwise its
franchise will be cancelled by the SEC.

The corporation code is a penal law as provided for
in Sec 144. A share of stock is a chattel and if foreclosed
must be redeemed before its foreclosure

In case of non-stock corporation

1. scheme/schedule of distribution of assets
2. if a scheme is not made, the assets of the
corporation shall be given to the municipality
where the corporation holds its principal office

Cuentas in participation- not registered, two or more
persons are partners but only one appears as owner
and is the one liable
Watered stock- the consideration given is below the
value of the shares of stock or consideration is over
valued
In case of overvalued consideration, the one who
issued the certificate and the buyer is liable solidarily
for claims of creditors and other stockholders.

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