CORPORATION An artificial being created by operation of law having the right of s

uccession, and the powers, attributes and properties expressly authorized by law
and incident to its existence (Sec. 2). I. THEORIES ON FORMATION OF A CORPORATI
ON
a. )ue process (Al2e!t v. 3nive!sity "u2lishing, Inc.
(/ SCRA 04 4(.656) b. E'ual &rotection of the law (S7ith, Bell + Co. v. 1ativida
d, 4' "hil. (/6 4(.(.6) c. &rotection against unreasonable searches and seizures
(Stonehill v. *io8no, 2' SCRA /0/ 4(.696)
*owever, it is not entitled to certai
n constitutional rights such as political rights or purely personal rights not o
nly because it is an artificial being but also because it is a mere creature of
law (Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.). a
. +ight against self(incrimination (Bataan Shi#ya!d v. "CGG, (5' SCRA 4(.096). /
Mora* &ama+es A corporation is not entitled to moral damages because it has no
feelings, no emotions, no senses (ABS;CB1 vs. Cou!t o A##eals, G.R. 1o. (206.',
-an. 2(, (...).
#n <ili#inas B!oadcasting vs. Ago ,ed., however, it was held tha
t a juridical person such as a corporation can validly complain for libel or any
other form of defamation and claim for moral damages "he SC had rationated that
Art ,,-. %/0 does not 'ualify whether the plaintiff is a natural or a juridical
person (<ili#inas B!oadcasting vs. Ago ,edical Cente!;Bicol, et. al., 440 SCRA
4(/). 0 "ia)i*ity for torts A corporation is liable whenever a tortuous act is c
ommitted by an officer or agent under the express direction or authority of the
stoc$holders or members acting as a body, or, generally, from the directors as t
he governing body ("1B vs. CA, 0/ SCRA 2/9 4(.906). 1. "ia)i*ity for Crimes Sinc
e a corporation is a mere legal fiction, it cannot be held liable for a crime co
mmitted by its officers since it does not have the essential element of malice,
except if by express provision of law, the corporation is held criminally liable
1 #n such case the responsible officers would be criminally liable ("eo#le vs. T
an Boon =ong, 54 "hil. 6'9 4(./'6). TESTS TO &ETERMINE NATIONA"IT% OF CORPORATIO
NS 2. Incorporation Test 2 determined by the state of incorporation, regardless
of the nationality of its stoc$holders 2 &omici*e Test 2 determined by the state
where it is domiciled "he domicile of a corporation is the place fixed by the l
aw creating or recognizing it1 in the absence thereof, it shall be understood to
be the place where its legal representation is established or where it exercise
its principal functions (A!t. 5(, 1CC) 3 Contro* Test 2 determined by the natio
nality of the controlling stoc$holders or members "his test is applied in times
of war Also $nown as the 3A+"#4E "ES"
1. Concession Theory 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 (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242).
Tayag
rejects the Genossenscha t Theo!y which treats a corporation as the reality of th
e group as a social and legal entity, independent of state recognition and conce
ssion ! 2. Theory of corporate enterprise or economic unit "he corporation is no
t merely an artificial being, but more of an aggregation of persons doing busine
ss, or an underlying business unit ("hili##ine Co!#o!ate $a%, Cesa! &illanueva,
2''( ed.). "he theory draws its vitality from the fact that it is not legal fict
ion alone that creates a corporate entity but also the consent of those who will
form the corporation to engage in a common venture or business for profit II. A
TTRI !TES OF A CORPORATION
1. #t is an artificial being with separate and distinct
personality
2. #t is created by operation of law 3. #t enjoys the right of succession 4. #t
has the powers, attributes and properties expressly
authorized by law or incident to its existence ARTIFICIA" EIN# $ITH SEPARATE PER
SONA"IT% &OCTRINE OF SEPARATE PERSONA"IT% A corporation is a legal or juridical
person with a personality separate and apart from its individual stoc$holders or
members and from any other legal entity to which it may be connected % The Co!#

o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6
ed.). Conse'uences( 1. "ia)i*ity for acts or contracts "he general rule is that
obligations incurred by a corporation, acting through its authorized agents are
its sole liabilities Similarly, a corporation may not generally, be made to ans
wer for acts or liabilities of its stoc$holders or members or those of the legal
entities to which it may be connected and vice versa (C!eese vs. CA, ./ SCRA 40
/). 2. Ri+ht to )rin+ actions #t may bring civil and criminal actions in its own
name in the same manner as natural persons (A!t. 46, 1CC). 3. Ri+ht to ac'uire
an, possess property &roperty conveyed to or ac'uired by the corporation is in l
aw the property of the corporation itself as a distinct legal entity and not tha
t of the stoc$holders or members % A!t. 44(/), 1CC). 4. Ac'uisition of court of
-uris,iction Service of summons may be made on the president, general manager, c
orporate secretary, treasurer or in(house counsel (Sec. ((, Rule (4, Rules o Cou
!t). 5. Chan+es in in,i.i,ua* mem)ership Corporation remains unchanged and unaff
ected in its identity by changes in its individual membership (The Co!#o!ation C
ode o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.). 6. Entit*ement to co
nstitutiona* +uaranties
Corporations are entitled to certain constitutional righ
ts
4Phi*ippine Nationa*5 un,er the Forei+n In.estment Act of 2112 6R.A. No. /7829(
a. a corporation organized under &hilippine laws of which 567 of the capital sto
c$ outstanding and entitled to vote is owned and held by 8ilipino citizens1 b a
corporation organized abroad and registered as doing business in the &hilippines
under the Corporation Code of which -667 of the capital stoc$s entitled to vote
belong to 8ilipinos *owever, it provides that where a corporation and its non(8
ilipino stoc$holders own stoc$s in a SEC( registered enterprise, at least 567 of
the capital stoc$ outstanding and entitled to vote of 2oth corporations and at
least 567 of the members of the board of directors of 2oth corporations must be
8ilipino citizens 6,ou)*e :7; ru*e9
1

Note( "he law applies the control test both with respect to the ownership of sha
res entitled to vote and the membership in the board of directors &OCTRINE OF PI
ERCIN# THE <EI" OF CORPORATE ENTIT%
"he doctrine that a corporation is a legal e
ntity distinct from the persons composing is a theory introduced for purposes of
convenience and to serve the ends of justice 9ut when the veil of corporate fic
tion is used as a shield to defeat public convenience, justify wrong, protect fr
aud, or defend a crime, this fiction shall be disregarded and the individuals co
mposing it will be treated identically (C!u> vs. *alisay, (52 SCRA 409 4(.096).
3hen directors and officers are unable to compensate
a party for a personal obligation, it is far(fetched to allege that a corporatio
n is perpetuating fraud or promoting injustice, and thereby could be held liable
for the personal obligations of its directors and officers by piercing the corp
orate veil (<!ancisco ,oto!s, Inc. vs. CA, G.R. 1o. (''0(2, -une 25, (...). C*as
sification( 1. Frau, Cases
3hen the corporate identity is used to justify wrong,
to commit fraud, or to defend a crime
"here is always an element of malice or e
vil motive in fraud cases E*ements( a "here must have been fraud or evil motive
in the affected transaction and the mere proof of control of the corporation by
itself would not authorize piercing b. "he main action should see$ for the enfor
cement of pecuniary claims pertaining to the corporation against corporate offic
ers or stoc$holders, or vice( versa1 and c. "he corporate entity has been used i
n the perpetration of the fraud or in justification of wrong, or to escape perso
nal liability
"he doctrine re'uires the court to see through the
protective shroud which exempts its stoc$holders from liabilities that they ordi
narily would be subject to, or distinguishes a corporation from a seemingly sepa
rate one, were it not for the existing corporate fiction ($i7 vs. CA, /2/ SCRA (
'2).
#n any cases where the separate corporate identity is
disregarded, the corporation will be treated merely as an association of persons
and the stoc$holders or members will be considered as the corporation, that is,
liability will attach personally or directly to the officers and stoc$holders (
37ali vs. Cou!t o A##eals, (0. SCRA 52. 4(..'6). *owever, mere ownership by a si
ngle stoc$holder or by another corporation of all or nearly all of the capital s
toc$ of a corporation is not of itself sufficient ground for disregarding the se
parate corporate personality (37ali vs. Cou!t o A##eals, (0. SCRA 52. 4(..'6) "h
e doctrine aims to protect the interest of innocent third person dealing with th
e corporation
2. A*ter E+o Cases 6or Con,uit Cases9
8raud is not an element in these cases but
that the
stoc$holders or those who compose the corporation did not treat the corporation
as a separate entity but only as part of the property or business of an individu
al or group of individuals or another corporation Pro)ati.e factors a Stoc$ owne
rship by one or common ownership of both corporations1 b #dentity of directors a
nd officers1 c "he manner of $eeping corporate boo$s and records1 and d 4ethods
of conducting the business (Conce#t Builde!s, Inc. v. 1$RC, 259 SCRA (4. 4(..66)
. Four Po*icy ases in Piercin+( a. Even when the controlling stoc$holder or mana
ging officer intends consciously to do no evil, the use of the corporation as an
alter ego is in direct violation of a central corporate law principle of treati
ng the corporation as a separate juridical entity from its members and stoc$hold
ers1 b. #f the stoc$holders do not respect the separate entity, others cannot al
so be expected to be bound by the separate juridical entity1 c. Applies even whe
n there are no monetary claims sought to be enforced against the stoc$holders or
officers of the corporation1 d. 3hen the underlying business enterprise does no
t really change and only the medium by which that business enterprise is changed
Instrumenta*ity or A*ter E+o Ru*e 3hen one corporation is so organized and cont
rolled and its affairs are conducted so that it is in fact a mere instrumentalit

y or adjunct of the other, the fiction of the corporate entity to the instrument
ality may be disregarded (Conce#t Builde!s Inc. vs. 1$RC, 259 SCRA (4. 4(..66).
Test( 1. Control, not mere majority or complete stoc$ control, but complete domi
nion, not only of finances but of policy and business in respect to the transact
ion attac$ed so that the corporate entity as to this transaction had at the time
no separate mind, will, or existence of its own1 2. Such control must have been
used by the defendant to commit fraud or wrong in

C*assification of facts on =hich corporate entity may )e ,isre+ar,e,( 1. Avoidan

ce of redress of fraud1 2. &revention of evasion of statute or law1 3. &reventio
n of evasion of contract1 4. #nternal corporate dealings disregarding corporate
entity where third persons are not involved1 5. Corporation agencies or instrume
ntalities of undisclosed principals
"hese enumerations are not exclusive and som
etimes two or more of these elements concur Nature an, Conse'uences of Piercin+
&octrine ("hili##ine Co!#o!ate $a%, Cesa! &illanueva, 2''( ed.)( 1. has on*y res
-u,icata effect> 2. to pre.ent frau, or =ron+ an, not a.ai*a)*e for other purpo
ses> "he doctrine could not be employed by a corporation to complete its claims
against another corporation and cannot therefore be employed by the claimant who
does not appear to be the victim of any wrong or fraud (T!ade!s Royal Ban8 vs.
CA 26. SCRA 6'( 4(..96). 3. essentia**y a -u,icia* prero+ati.e on*y "o pierce th
e veil of corporate fiction being a power belonging to the courts, a sheriff who
has ministerial duty to enforce a final and executory decision cannot pierce th
e veil of corporate fiction by enforcing the decision against the stoc$holders w
ho are not parties to the action (C!u> vs. *alisay, (52 SCRA 409 4(.096). 4. mus
t )e sho=n to )e necessary an, =ith factua* )asis
"o disregard the separate juri
dical personality of a corporation, the wrongdoing must be clearly and convincin
gly established, it cannot be presumed ($u?u!ia )o7es, Inc. v. CA, /'2 SCRA /(5
4(...6).
2

contravention of plaintiff:s legal rights1 and

PO$ERS@ ATTRI !TES AN& PROPERTIES THEOR% OF SPECIA" CAPACITIES?"IMITE& CAPACIT%
&OCTRINE
<o corporation under the Code, shall possess or exercise any corporate
power, except those conferred by law, its Articles of #ncorporation, those impli
ed from express powers and those as are necessary or incidental to the exercise
of the powers so conferred "he corporation:s capacity is limited to such express
, implied and incidental powers (Revie%e! in Co77e!cial $a%, -ose R. Sundiang +
Ti7oteo A:uino, 2''5 ed.).
#f the act of the corporation is not one of those exp
ress, implied or incidental powers, the act is ult!a vi!es. (Revie%e! in Co77e!c
ial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.). III. C"ASSIFICATIONS OF C
ORPORATIONS
3. "he aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of (Conce#t Builde!s Inc.
vs. 1$RC, 259 SCRA (4. 4(..66).
3. E'uity cases
3hen piercing the corporate fiction is necessary to
achieve justice or e'uity "he dumping ground! where no fraud or alter ego circums
tances can be culled to warrant piercing
CREATE& % OPERATION OF "A$ &OCTRINE OF CORPORATE ENTIT%
A corporation comes into
existence upon the issuance of the certificate of incorporation (Sec. (.) "hen
and only then will it ac'uire a juridical personality to sue and be sued, enter
into contracts, hold or convey property or perform any legal act, in its own nam
e (Co!#o!ation Code o the "hili##ines, Ru2en C. $adia, 2''( @d.).
Corporations c
annot come into existence by mere agreement of the parties as in the case of bus
iness partnerships "hey re'uire special authority or grant from the State "his p
ower is exercised by the State through the legislature, either by a special inco
rporation law or charter which directly creates the corporation or by means of a
general corporation law under which individuals desiring to be and act as a cor
poration may incorporate %The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $
eon + )ecto! ,. *e $eon, -!., 2''6 ed.). FRANCHISES OF CORPORATION 2. Primary or
corporate franchise?#enera* franchise "he right or privilege granted by the Sta
te to individuals to exist and act as a corporation after its incorporation 2. S
econ,ary or specia* franchise "he special right or privilege conferred upon an e
xisting corporation to the business for which it was created e.g. use of the str
eets of a municipality to lay pipes or trac$s, or operation of a public utility
or a messenger and express delivery service PRIMAR% +efers to the franchise of b
eing or existing as a corporation ;ested in individuals compose corporation the
who the SECON&AR% +efers to the exercise of right or privilege e.g public utilit
y or telecommunication franchise ;ested in the corporation after its incorporati
on and not upon the individuals who compose the corporation 4ay be sold or trans
ferred under a general power granted to a corporation to a corporation to dispos
e of its properties1 may also be subject to sale on execution or levy
1.
a
b. 2. a. b. 3. b. 4.
As to or+aniAers( pu)*ic B by State only1 or pri.ate B by private persons alone
or with the State As to functions( pu)*ic C government of a portion of the State
1 or pri.ate B usually for profit(ma$ing functions As to +o.ernin+ *a=(
a. pu)*ic B Special =aws and =ocal >overnment
Code1 or pri.ate B =aw on &rivate Corporations As to *e+a* status(
a. ,e -ure corporation 2 corporation created in strict
or substantial conformity with the mandatory statutory re'uirements for incorpor

ation and the right of which to exist as a corporation cannot be successfully at

tac$ed or 'uestioned by any party even in a direct proceeding for that purpose b
y the state1 or ,e facto corporation 2 organized with a colorable compliance wit
h the re'uirements of a valid law and its existence cannot be in'uired collatera
lly but such in'uiry may be made by the Solicitor >eneral in a :uo %a!!anto proc
eeding %Sec. 2').
"he only difference between a de facto corporation and a de ju
re corporation is that a de jure corporation can successfully resist a suit brou
ght by the State challenging its existence1 a de facto corporation cannot sustai
n its right to exist as against the State corporation )y estoppe* 2 group of per
sons that assumes to act as a corporation $nowing it to be without authority to
do so, and enters into a transaction with a third person on the strength of such
appearance #t cannot be permitted to deny its existence in an action under said
transaction (Sec. 2(). #t is neither de jure nor de facto corporation )y prescr
iption 2 one which has exercised corporate powers for an indefinite period witho
ut interference on the part of the sovereign power, e.g. +oman Catholic Church A
s to eDistence of stocEs(
b.
c
Cannot be sold or transferred, in the absence of legislative authority to do so
"his is because it is inseparable from the corporation itself
d
RI#HT OF S!CCESSION #t is the capacity to have continuity of existence despite t
he changes on the persons who compose it "hus, the personality continues despite
the change of stoc$holder, members, board members or officers (Revie%e! in Co77
e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.).
5.
a. stocE corporation 2 a corporation which has
capital stoc$ divided into shares and is authorized to distribute to holders of
such shares, dividends or allotments of the surplus profits on the basis of the
shares held (Sec. /)1 or 8or a stoc$ corporation to exist, the above re'uisites
must be complied with for even if there is

b.
a statement of capital stoc$, the corporation is still not a stoc$ corporation i
f dividends are not supposed to be declared, i.e. there is no distribution of re
tained earning (CIR vs. Clu2 <ili#ino, Inc. de Ce2u, 5 SCRA /2(). nonCstocE corp
oration 2 a corporation which does not issue stoc$s nor distribute dividends to
their members (Sec. 09) As to *a=s of incorporation( ,omestic corporation 2 corp
oration formed, organized or existing under &hilippine laws1 or forei+n corporat
ion 2 a corporation formed, organized or existing under any laws other than thos
e of the &hilippines and whose laws allow 8ilipino citizens and corporation to d
o business in its own country or state
CONCEPT OF #OIN# P! "IC AN& #OIN# PRI<ATE A corporation is deemed to be going pub
lic! when it decides to list its shares in the stoc$ exchange "hese include corp
orations that will ma$e initial public offering of its shares A corporation is s
aid to be going private! when it would restrict the shareholders to a certain gro
up #n a sense, these also include closed and closely held corporation ("hili##in
e Co!#o!ate $a% Co7#endiu7, Ti7oteo A:uino, 2''6 ed.) ONECMAN CORPORATION A corp
oration wherein all or substantially all of the stoc$s is held directly or indir
ectly by one person *owever, it should still follow the formal re'uirements of a
corporation %e.g. number of incorporators, board of directors composed of stoc$
holders owning shares in a nominal capacity0 in order to validly enjoy the attri
butes of the corporation, so as to avoid the application of the doctrine of pier
cing the veil of corporate entity
6. a. b.
7. As to =hether they are open to the pu)*ic or not( a. open 2 one which is open
to any person who may b.
wish to become a stoc$holder or member thereto1 or c*ose ( those whose shares of
stoc$ are held by limited number of persons li$e the family or other closely($n
it group %The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,.
*e $eon, -!., 2''6 ed.)
IV. CORPORATION
PARTNERSHIP
&ISTIN#!ISHE&
FROM
0 As to re*ationship of mana+ement an, contro*( a. ho*,in+ corporation ( it is o
ne which controls another as a subsidiary by the power to elect management #t is
one that holds stoc$s in other companies for purposes of control rather than fo
r mere investment b su)si,iary corporation 2 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 #t is always controlled1 or c. affi*iate 2
one related to another by owning or being owned by common management or by a lo
ng(term lease of its properties or other control device #t may be the controlled
or controlling corporation, or under common control1 or d parent an, su)si,iary
corporation 2 3hen a corporation has a controlling financial interest in one or
more corporations , the one having control is the parent corporation, and the o
thers are the subsidiary corporations ("hili##ine Co!#o!ate $a%, Cesa! &illanuev
a, 2''( ed.).
9. As to num)er of persons =ho compose them(
a b a++re+ate corporation 2 a corporation consisting of more than one person or
member1 or corporation so*e 2 a corporation consisting of only one person or mem
ber1 a special form of corporation usually associated with the clergy

27 As to =hether they are for re*i+ious purposes or not( a ecc*esiastica* corpor

ation 2 one organized for religious purposes1 or b *ay corporation 2 one organiz
ed for a purpose other than for religion
11.
As to =hether they are for charita)*e purposes or not( a. e*eemosynary corporati
on 2 one established for or devoted to charitable purposes or those supported by
charity1 or b. ci.i* corporation 2 one established for business or profit
PARTNERSHIP CORPORATION 2. Creation Created by mere Created by law or by agreeme
nt of the operation of law parties 2. Num)er of incorporators 4ay be organized b
y +e'uires at least at least two persons five incorporators %except a corporatio
n sole0 3. Commencement of -uri,ica* persona*ity Ac'uires juridical Ac'uires jur
idical personality from the personality from the moment of execution date of iss
uance of of the contract of the certificate of partnership incorporation by the
Securities and Exchange Commission 8. Po=ers &artnership Corporation can may exe
rcise any exercise only the power authorized by powers expressly the partners gr
anted by law or %provided it is not implied from those contrary to law, granted
or incident morals, good to its existence customs, public order, public policy0
F. Mana+ement 3hen management is "he power to do not agreed upon, business and e
very partner is an manage its affairs is agent of the vested in the board partne
rship of directors or trustees :. Effect of mismana+ement A partner as such can
"he suit against a sue a co(partner who member of the mismanages board of direct
ors or trustees who mismanages must be in the name of the corporation /. Ri+ht o
f succession &artnership has no Corporation has right of succession right of suc
cession 0. EDtent of *ia)i*ity to thir, persons &artners are liable Stoc$holders
are personally and liable only to the subsidiarily extent of the shares
4

%sometimes solidarily0 subscribed by them for partnership debts to third persons

1. Transfera)i*ity of interest &artner cannot Stoc$holder has transfer his inte
rest in generally the right to the partnership so as transfer his shares to ma$e
the without prior consent transferee a partner of the other without the stoc$ho
lders unanimous consent because corporation of all the existing is not based on
this partners because the principle partnership is based on the principle of del
ectus #e!sona!u7 27. Term of eDistence &artnership may be Corporation may not es
tablished for any be formed for a term period of time in excess of ?6 stipulated
by the years extendible to partners not more than ?6 years in any one instance
22. Firm name =imited partnership is Corporation may re'uired by law to adopt an
y name add the word =td ! to provided it is not the its name same as or similar t
o any registered firm name 22. &isso*ution 4ay be dissolved at Can only be any t
ime by any or all dissolved with the of the partners consent of the State 23. #o
.ernin+ "a= >overned by the >overned by the <CC Corporation Code <. A&<ANTA#ES A
N& &ISA&<ANTA#ES OF A !SINESS CORPORATION (The Co!#o!ation Code o the "hili##ine
s Annotated, )ecto! de $eon, 2''2 ed.) A&<ANTA#ES 1. has a legal capacity to act
and contract as a distinct unit in its own name 2. continuity of existence 3. i
ts credit is strengthened by its continuity of existence 4. centralized manageme
nt in the board of directors 5. its creation, management, organization and disso
lution are standardized as they are governed under one general incorporation law
6. limited liability 7. shareholders are not the general agents of the business
8. transferability of shares &ISA&<ANTA#ES 1. complicated in formation and mana
gement 2. high cost of formation and operations 3. its credit is wea$ened by the
limited liability feature 4. lac$ of personal element 5. greater degree of gove
rnmental supervision 6. management and control are separated from ownership 7. S
toc$holders have little voice in the conduct of the business
<I. COMPONENTS OF A CORPORATION 2. Corporators 2 those who compose a corporation
, whether as stoc$holders or members 2. Incorporators ( those mentioned in the A
rticles of #ncorporation as originally forming and composing the corporation, ha
ving signed the Articles and ac$nowledged the same before a notary public "hey h
"here is only one set o
ave no powers beyond those vested in them by the statute
f incorporators, hence, they will remain to be such incorporators up to the term
ination of the life of the corporation Gua*ifications( a. natural person1 b. not
less than ? but not more than -?1 c. of legal age1 d. majority must be resident
s of the &hilippines1 and e. each must own or subscribe to at least one share (S
ec. ('). >E<E+A= +@=EA Bnly natural persons can be incorporators ECCE&"#B<A 3hen
otherwise allowed by law, e.g , +ural 9an$s Act of -..,, where incorporated coo
peratives are allowed to be incorporators of rural ban$s Note( *owever, it is un
deniable that corporations can be corporators 3. StocEho*,ers 2 owners of shares
of stoc$ in a stoc$ corporation 8. Mem)ers 2 corporators of a corporation which
has no capital stoc$ INCORPORATORS signatory to the Articles of #ncorporation a
it acco7#li1 accomplished fact %the Articles of #ncorporation cannot be amended
to replace them0 number is limited to ?(-? must have contractual capacity CORPOR
ATORS stoc$holder %stoc$ corporation0 or member %non(stoc$ corporation0 they may
cease to be such if they subse'uently lose their shareholdings no restriction a
s to number may be such through a guardian
OTHER COMPONENTS 2. Promoter ( A person who, acting alone or with others, ta$es
initiative in founding and organizing the business or enterprise of the issuer a
nd receives consideration therefor (Sec. /, R.A. 09..).
*e is an agent of the in
corporators but not of the corporation Contracts by the promoter for and in beha
lf of a proposed corporation generally bind only him, subject to and to the exte
nt of his representations, and not the corporation, unless and until after these
contracts are ratified, expressly or impliedly, by its 9oard of )irectorsD"rust
ees (Cagayan <ishing *evelo#7ent Co., Inc. v. Sandi8o, 65 "hil. 22/). 2. Su)scri
)er 2 A person who has agreed to ta$e and pay for original and unissued shares o
f a corporation formed or to be formed 3 !n,er=riter 2 A person who guarantees o
n a firm commitment andD or declared best effort basis the distribution and sale
of securities of any $ind by another company (Sec. /, R.A. 09..). <II. C"ASSIFI

CATION OF SHARES
1. Common shares 5

"he basic class of stoc$ ordinarily and usually issued

without extraordinary rights and privileges, and the owners thereof are entitled
to a pro rata share in the profits of the corporation and in its assets upon di
ssolution and, li$ewise, in the management of its affairs without preference or
advantage whatsoever Common shares or stoc$s represent the residual ownership in
terest in the corporation Common shares have complete voting rights "hey cannot
be deprived of said rights except as provided by law

expressly provided for in the articles of incorporation1 b "he terms and conditi
ons affecting said shares must be stated both in the articles of incorporation a
nd in the certificates of stoc$ representing such shares1 c +edeemable shares ma
y be deprived of voting rights in the articles of incorporation, unless otherwis
e provided in the Code
+edeemable shares may be redeemed, regardless of
the existence of unrestricted retained earnings (Sec. 0), provided that the corp
oration has, after such redemption, sufficient assets in its boo$s to cover debt
s and liabilities inclusive of capital stoc$ +edemption may not be made where th
e corporation is insolvent or if such redemption would cause insolvency ot inabi
lity of the corporation to meet its debts as they mature Such limitation is base
d on the principle that corporate assets are a trust fund for creditors 3hen red
eemable shares are reac'uired, the same shall be considered retired and no longe
r issuable unless otherwise provided for in the Articles of #ncorporation Note(
8or tax purposes, there are cases when redemption of shares is considered a sche
me to circumvent the tax conse'uences of cash dividends *ence, the amounts recei
ved by the shareholders shall be treated as cash dividends because proceeds of r
edemption in such a case is additional wealth and not merely a return of the cap
ital ("hili##ine Co!#o!ate $a% Co7#ediu7, Ti7oteo A:uino, 2''6 ed.).
2. Preferre, shares
Shares with a stated par value which entitle the holder
thereof to certain preferences over the holders of common stoc$ "he preference m
ay be %a0 as to asset1 or %b0 as to dividends1 or %c0 as may be determined by th
e board of directors when so authorized to do so (The Co!#o!ation Code o the "hi
li##ines, ). *e $eon, 2''2 ed.). Purpose( "o induce more persons to subscribe fo
r shares of a corporation &referred shareholders are not creditors of the corpor
ation Eet all preferred stoc$ contracts are, fundamentally attempts to endow cer
tain owners with rights analogous to creditor rights and statutes and court deci
sions on this matter have been concerned, primarily, with the length to which th
e preferred stoc$ contract can go in extending creditor rights to stoc$holder "h
e reason why there is an effort to extend such right is to ma$e preferred shares
attractive to investors for they can remain as such and at the same time enjoy
certain advantages that are available to creditors ("hili##ine Co!#o!ate $a% Co7
#ediu7, Ti7oteo A:uino, 2''6 ed.). "imitations( a #f deprived of voting rights,
it shall still be entitled to vote on matters enumerated in Section 6, #a!. 6 b
&reference must not be violative of the Code c 4ay be issued only with a stated
par value d "he board of directors may fix the terms and conditions only when so
authorized by the articles of incorporation and such terms and conditions shall
be effective upon filing a certificate thereof with the SEC Hin,s( a Cumulative
2 one which entitles he owner thereof to payment not only of current dividends
but also bac$ dividends not previously paid whether or not during the past years
dividends were declared or paid b <on(cumulative 2 one which grants the holders
of such shares only to the payment of current dividends but not bac$ dividends
when and if dividends are paid to the extent agreed upon before any other stoc$h
olders are paid the same c &articipating ( one which entitles the shareholder to
participate with the common shares in excess distribution at some predetermined
or at a fixed ratio as may be determined d <on(participating A one which entitl
es the shareholder thereof to receive the stipulated preferred dividends and no
more e Cumulative participating 2 share which is a combination of the cumulative

share and participating share

4. Treasury shares
Shares of stoc$ which have been issued and fully paid
for, but subse'uently reac'uired by the issuing corporation by purchase, redempt
ion, donation or through some other lawful means (Sec. .). "reasury shares are n
ot retired shares "hey do not form revert to the unissued shares of the corporat
ion but are regarded as property ac'uired by the corporation which may be reissu
ed or resold at a price to be fixed by the 9oard of )irectors (S@C Rules Gove!ni
ng Redee7a2le and T!easu!y Sha!es, CC" 1o. (;(.02). #f purchased from stoc$holde
rsA "he transaction in effect is a return to the stoc$holders of the value of th
eir investment in the company and a reversion of the shares to the corporation "
he corporation must have surplus profits with which to buy the shares so that th
e transaction will not cause an impairment of the capital #f ac'uired by donatio
n from the stoc$holdersA "he act would amount to a surrender of their stoc$ with
out getting bac$ their investments that are instead, voluntarily given to the co
rporation "reasury shares need not be sold at par or issued value but may be sol
d at the best price obtainable, provided it is reasonable 3hen treasury shares a
re sold below its par or issued value, there can be no watering of stoc$ because
such watering contemplates an original issuance of shares "reasury shares have
no voting rights as long as they remain in treasury %uncalled and subject to rei
ssue0 (Sec. 59) Reason( A corporation cannot in any proper sense be a stoc$holde
r in itself and e'ual distribution of voting rights will be effectively lost <ei
ther are treasury shares entitled to dividends or assets because dividends canno
t be declared by a corporation to itself "reasury shares may be declared as prop
erty dividend to be issued out of the retained earnings previously used to suppo
rt their ac'uisition provided that the amount of the retained earnings has not b
een subse'uently impaired by losses

3. Re,eema)*e shares
Shares of stoc$s issued by the corporation which said
corporation can purchase or ta$e up from their holders as expressly provided for
in the articles of incorporation and certificate of stoc$ representing said sha
res at a fixed date or at the option of the issuing corporation or the stoc$hold
er or both at a certain redemption price "imitations( a +edeemable shares may be
issued only when

5. Foun,ersI shares
Shares classified as such in the articles if incorporation and issued to organiz
ers and promoters of a corporation in consideration of some supposed right or pr
operty such as special preference in voting rights and dividend payments 9ut if
an exclusive right to vote and be voted for as director is granted, this privile
ge is subject to approval by the SEC, and cannot exceed ? years from the date of
approval (Sec. 9).
d
which is less than its par or issued value #ssued as stoc$ dividend when there a
re no sufficient retained earnings to justify it
11. Par .a*ue shares
Shares with a value fixed in the articles of incorporation and the certificates
of stoc$ A&<ANTA#ES Easily sold as the public is more attracted t buy this $ind
of share >reater protection to creditors @nli$elihood of sale of subse'uently is
sued shares at a lower price @nli$elihood of distribution of dividends that are
only ostensible profits 22. No par .a*ue shares Shares having no par value but h
ave issued value stated in the certificate or articles of incorporation A&<ANTA#
ES #ssued as fully paid and non( assessable, &rice is flexible Enjoy wider distr
ibution because of it being low(priced "ell no untruth concerning the value of t
he stoc$holder:s contribution 4ore easily issued, thereby simplifying accounting
procedures &ISA&<ANTA#ES =egalizes issuance of large stoc$ for property Conceal
money or property represented by the shares &romote the issuance of watered sto
c$ =esser protection creditors to &ISA&<ANTA#ES Subscribers are liable to the co
rporate creditors for their unpaid subscription "he stated value of the share is
not an accurate criterion of its true value
Shares with a right to vote
@nder the code, whenever a vote is
6. <otin+ shares
necessary to
approve a particular corporate act, such vote refers only to stoc$s with voting
rights except in certain cases when even non(voting shares may also vote (Sec. 6
, #a!. 6 and last #a!.).
7. NonC.otin+ shares Shares without right to vote
"he law only authorizes the de
nial of voting rights in
the case of redeemable shares and preferred shares, provided that there shall al
ways be a class or series of shares which have complete voting rights "hese rede
emable and preferred shares, when such voting rights are denied, shall neverthel
ess be entitled to vote on the following fundamental mattersA Fey ( 6A2 SI2 MI&9
a. amendment of Articles of #ncorporation b. adoption and amendment of by(laws1
c. sale or disposition of all or substantially all of corporate property1 d. in
curring, creating or increasing bonded indebtedness1 e. increase or decrease of
capital stoc$ f. merger or consolidation of capital stoc$ g. investments of corp
orate funds in another corporation or another business purpose1 and h. corporate
,issolution

8. Share in escro=
Share subject to an agreement by virtue of which the
share is deposited by the grantor or his agent with a third person to be $ept by
the escrow agent until the performance of a certain condition or he happening o
f a certain event contained in the agreement (Cannon v. )andley, (2 "hil. /(5).
"he escrow deposit ma$es the depository a trustee under an express trust (A!ticl
es (44' and (44( o the 1e% Civil Code).

9. O.erCissue, stocE

Stoc$ issued in excess of the authorized capital stoc$ #t is also $nown as s#u!i
ous stoc8 #ts issuance is considered null and void
10. $atere, stocE
A stoc$ issued not in exchange for its e'uivalent value
either in cash, property, share, stoc$ dividends, or services 3ater! in the stoc$
represents the difference between the fair mar$et value at the time of the issu
ance of the stoc$ and the par or issued value of said stoc$ 9oth par and no par
stoc$s can thus be watered stoc$s #t includes stoc$sA a #ssued without considera
tion (2onus sha!e) b #ssued as fully paid when the corporation has received a le
sser sum of money than its par or issued value (discount sha!e) c #ssued for a c
onsideration other than actual cash such as property or services, the fair valua
tion of
"imitations( ( <o par value shares cannot have an issued price of less than &? 6
61 ( "he entire consideration for its issuance constitutes capital so that no pa
rt of it should be distributed as dividends1 ( "hey cannot be issued as preferre
d stoc$s1 ( "hey cannot be issued by )an$s, trust companies, insurance companies
, public utilities and )uilding and loan association 6 PICT 91 ( "he articles of
incorporation must state the fact that it issued no par value shares as well as
the number of said shares1 ( Bnce issued, they are deemed fully paid and non( a
ssessable (Sec. 6).
12. Street certificate
A stoc$ certificate endorsed by the registered holder in blan$ and the transfere
e can command its transfer to his name from the issuing corporation

13. Con.erti)*e share

A share that is changeable by the stoc$holder from one class to another at a cer
tain price and within a certain period
7

28. Fractiona* share A share with a value of less than one full share G $HEN C"A
SSIFICATION OF SHARES MA% E MA&E %The Co!#o!ation Code o the "hili##ines, )ecto!
S. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.)( 1. y the incorporators 2 "he cl
asses and number of shares which a corporation shall issue are first determined
by the incorporators as stated in the articles of incorporation filed with the S
EC , y the oar, of &irectors an, the StocEho*,ers 2 After the corporations comes
into existence, they may be altered by the board of directors and the stoc$hold
ers by amending the articles of incorporation pursuant to Sec -5
A corporation m
ay issue such classes or series of shares as the prospects and needs of its busi
ness may re'uire 8urthermore, it may classify its shares for the purpose of insu
ring compliance with constitutional or legal re'uirements (Sec. 6, #a!. 4).
Shar
es may also be issued in different classes to create preferences or to deny or g
rant certain rights e g voting or non(voting shares &OCTRINE OF EG!A"IT% OF SHAR
ES C3here the articles of incorporation do not provide for any distinction of th
e shares of stoc$, all shares issued by the corporation are presumed to be e'ual
and enjoy the same rights and privileges and are also subject to the same liabi
lities (Sec. 6, #a!. 5). &EFINITION OF TERMSEFINITION O -. Capita* StocE or "e+a
* StocE or State, Capita* ( "he amount fixed in the corporate charter to be subs
cribed and paid in cash, $ind or property at the organization of the corporation
or afterwards and upon which the corporation is to conduct its operation , Capi
ta* 2 "he value of the actual property or estate of the corporation whether in m
oney or property #ts net worth %or stoc$holder:s e'uity0 is its assets less its
liabilities G AuthoriAe, Capita* StocE ( "he capital stoc$ divided into shares H
Su)scri)e, Capita* StocE( "he total amount of the capital stoc$ subscribed whet
her fully paid or not ? Outstan,in+ Capita* StocE ( "he portion of the capital s
toc$ issued to subscribers, whether fully paid or partially paid %as long as the
re is a binding subscription contract0 except treasury stoc$s (Sec. (/9). 5 !nis
sue, Capita* StocE 2 "he portion of the capital stoc$ that is not issued or subs
cribed #t does not vote and draws no dividends / "e+a* Capita* ( "he amount e'ua
l to the aggregate par value andDor issued value of the outstanding capital stoc
$ I State, Capita* 2 "he capital stoc$ divided into no par value shares . Pai,Cu
p Capita* 2 "he amount paid by the stoc$holders on subscriptions from unissued s
hares of the corporation <III. FORMATION AN& OR#ANIJATION OF CORPORATION PRI<ATE
c. &ayment of filing and publication fees d. #ssuance by the SEC of the certific
ate of
incorporation Forma* Or+aniAation an, Commencement of the Transaction of usiness
"hese are conditions subse'uent, which may be satisfied by substantial complian
ce in order that a corporation may legally continue as such Forma* or+aniAation(
a. Adoption of 9y(=aws and filing of the same with the SEC1 b. Election of boar
d of directorsDtrustees, and officers1 c. Establishment of principal office1 d.
&roviding for subscription and payment of capital stoc$
ARTIC"ES OF INCORPORATION 6AI9 "he document prepared by the persons establishing
a corporation and filed with the SEC containing the matters re'uired by the Cod
e "he Articles of #ncorporation have been described as one that defines the char
ter of the corporation, and the contractual relationships between the State and
the corporation, the stoc$holder and the State, and between the corporation and
its stoc$holders ($anu>a v. CA GR 1o.(/(/.4, ,a!ch 20, 2''5). Si+nificance( - "h
e issuance of a certificate of incorporation signals the birth of the corporatio
n:s juridical personality1 , #t is an essential re'uirement for the existence of
a corporation, even a de facto one Contents (Sec. (4)( 2. Corporate Name (Sec.
(0) "he corporation ac'uires juridical personality under the name stated in the
certificate of incorporation #t is the name of the corporation which identifies
and distinguishes it from other corporations, firms or entities
A corporation:s
right to use its corporate and trade name is a property right, a right in !e7 wh
ich it may assert or protect against the whole world in the same manner as it ma
y protect its tangible property against trespass or conversion ("hili#s @?#o!t B
.&. vs. CA, 2'6 SCRA 459). Statutory *imitation( "he proposed name must not beA
a. identical1 or b. deceptively or confusingly similar to that of any existing c

orporation or to any other name already protected by law1 or c. patently decepti

ve, confusing or contrary to law Reme,ies of corporation =hose name has )een a,o
pte, )y another( 1. #njunction 2. )e(registration
A corporation can change the name originally selected
by it after complying with the formalities prescribed by law, to witA amendment
of the articles of incorporation and filing of the amendment with the SEC (Sec.
(6). An authorized change in the name of the corporation, whether effected by a
special act or under a general law, has no more effect upon its identity as a co
rporation than a change of name of natural person upon his identity #t does not
affect the property, rights, or liabilities of the corporation, nor lessen or ad
d to its obligations #t is in no sense a new corporation, nor the successor of t
he original corporation #t is the same corporation with a different name and its
character is in
STEPS IN THE CREATION OF A CORPORATION - Promotion 2 A promoter is a person who,
acting alone or with others, ta$es initiative in founding and organizing the bu
siness or enterprise of the issuer and receives consideration therefor (Sec. /.(
', SRC) 2. Incorporation Steps( a. )rafting and execution of Articles of #ncorpo
ration by the incorporators and other documents re'uired for registration of the
corporation b. 8iling with the SEC of the articles of incorporation

no respect changed (Re#. "lante!s Ban8 vs. CA, 2(6 SCRA 9/0). 2. Purpose C*ause
Si+nificance( a A person who intends to invest his money in the business corpora
tion will $now where and in what $ind of business or activity his money will be
invested1 b. "he directors and the officers of the corporation will $now within
what scope of business they are authorized to act1 and c. A third person who has
dealings with the corporation may $now by perusal of the articles whether the t
ransaction or dealing he has with the corporation is within the authority of the
corporation or not "imitations( a. &urpose or purposes must be lawful1 b. &urpo
se or purposes must be stated with sufficient clarity1 c. #f there is more than
one purpose, the primary as well as the secondary purpose must be specified1 and
d. &urposes must be capable of being lawfully combined
A corporation the primar
y object of which is without statutory authority can have no lawful existence, e
ven though some of its declared purposes may be lawful 3. Principa* Office "he a
rticles of incorporation must state the place where the principal office of the
corporation is to be established or located, which place must be within the &hil
ippine (Sec. (4 4/6). Purpose( "o fix the residence of the corporation in a defi
nite place, instead of allowing it to be ambulatory (Boung Auto Su##ly Co. vs. C
A, 22/ SCRA 69'). #t is now re'uired by the SEC that all corporations and partne
rships applying for registration should state in their Articles of #ncorporation
the specific address of their principal office, which shall include, if feasibl
e, the strict number1 street name1 barangay1 city or municipality1 and specific
residence address of each incorporator, stoc$holder, director or trustee in line
with the full disclosure re'uirement of existing laws (S@C Ci!c. 1o. /, Se!ies
o 2''6).

creation of a new corporation % The Co!#o!ation Code o the "hili##ines, )ecto! S

. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.) "he expiration of the term for whi
ch the corporation was created does not, however, produce its immediate dissolut
ion for all purposes (Sec. (22). &OCTRINE OF RE"ATION OR RE"ATIN# ACH &OCTRINE "
he filing and recording of a certificate of extension after the term cannot rela
te bac$ to the date of the passage of the resolution of the stoc$holders to exte
nd the life of the corporation *owever, the doctrine of relations applies if the
failure to file the application for extension within the term of the corporatio
n is due to the neglect of the officer with whom the certificate is re'uired to
be filed or to a wrongful refusal on his part to receive it ("hili##ine Co!#o!at
e $a% Co7#ediu7, Ti7oteo A:uino, 2''6 ed.)
F :
Incorporators (See &I. Co7#onents o a Co!#o!ation) &irectors an, Trustees "he 9o
ard of )irectors is the governing body in a stoc$ corporation while 9oard of "ru
stees is the governing body in a non(stoc$ corporation "hey exercise the powers
of the corporation (Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uin
o, 2''5 ed.). Matters re'uire, to )e state, in the AI( a. a statement of the nam
es, nationalities and residences of the incorporating directors or the persons w
ho shall act as such until the first regular directors or trustees are duly elec
ted and 'ualified in accordance with the law b. the number of directors or trust
ees, which shall not be less than ? but not more than -? EDceptions( - education
al corporations registered as non( stoc$ corporation whose number of trustees th
ough not less than five and not more than fifteen should be divisible by five1 a
nd , in close corporation where all the stoc$holders are considered as members o
f the board of directors thereby effectively allowing twenty members in the boar
d (Co!#o!ation Code o the "hili##ines,Ru2en C. $adia, 2''( ed.). /. Capita*iAati
on Matters re'uire, to )e state, in the AI( a. the amount of its authorized capi
tal stoc$ in lawful money of the &hilippines1 b. the number of shares and $ind o
f shares into which it is divided1 c. in case the shares are par value shares, t
he par value of each1 d. the names, nationalities and residences of the original
subscribers1 e. the amount subscribed and paid by each on his subscription1 f.

sworn statement of the treasurer elected by the subscribers showing that at leas
t ,?7 of the authorized capital stoc$ of the corporation has been subscribed1 g.
sworn statement of the treasurer elected by the subscribers showing that at lea
st ,?7 of the total subscription has been fully paid to him in actual cash andDo
r in property the fair valuation of which is e'ual to at least ,?7 of the said s
ubscription1 and h. sworn statement of the treasurer elected by the subscribers
showing that such paid(up capital being not less that five thousand pesos

8. Term of EDistence (Sec. (()

"he corporation shall exist for the term specifie
d in the articles of incorporation not exceeding ?6 years, unless sooner legally
dissolved or unless its registration is revo$ed upon any of the grounds provide
d by law "he corporate life may be reduced or extended by amendment of the artic
les of incorporation by complying with the procedural re'uirements laid down in
Sec G/ "he extension of corporate term is subject to the following limitationsA
a. "he term shall not exceed ?6 years in any one instance1 b. "he amendment is e
ffected before the expiration of the corporate term of existence, for after diss
olution by expiration of the corporation term there is no more corporate life to
extend (Alha72!a Ciga! vs. S@C, 24 SCRA 26.). c. "he extension cannot be made e
arlier than ? years prior to the expiration date unless there are justifiable re
asons therefore as may be determined by the SEC
"he mere extension of the corpor
ate term of existence made before the expiration of the original term constitute
s a continuation of the old, and not the
9

CAPITA" STOCH REG!IREMENT G@1@RA$ R3$@C <o minimum authorized capital stoc$ as l
ong as the paid(up capital is not less than &?,666 66 @DC@"TIE1SC - as provided
for by special law a. &rivate )evelopment 9an$s ( &H4 for class A ( &,4 for clas
s 9 ( &-4 for class C b. #nvestment Companies 2 paid up at least &?6,666,666 c.
Savings and =oan Corporation 2 to be fixed by the 4onetary 9oard, but not less t
han &-66" d. 8inancing Companies &aid upA ( &-64 for 4etro 4anila and other -st
class city ( &?4 for other classes of cities ( &, ? 4 for others 4 e #nsurance c
ompanies 1. #nsurance 9ro$er 2 &,?6,666 66 2. >eneral Agent 2 & ,?6,666 66 G +ei
nsurance 9ro$er 2 & 6 ? 4 , provided that at least ,?7 of the authorized capital
stoc$ has been subscribed and at least ,?7 of the total subscription must be pa
id(up FI"IPINO PERCENTA#E O$NERSHIP REG!IREMENT No Forei+n E'uity 1. 4ass 4edia
except recording (A!t. D&I, Sec. (( o the ConstitutionF "!esidential ,e7o!andu7
dated '4 ,ay (..4) 2. &ractice of all professions G +etail trade enterprises wit
h paid(up capital of less than @SJ,,?66,666(Sec. 5 o RA 0962) H Cooperatives %Ch
. III, A!t. 26 o RA 6./0) ? &rivate Security Agencies (Sec. 4 o RA 5409) 5 Small
(scale 4ining (Sec. / o RA 9'96) / @tilization of 4arine +esources in archipelag
ic waters, territorial sea, and exclusive economic zone as well as small(scale u
tilization of natural resources in rivers, la$es, bays, and lagoons (A!t. DII, S
ec. 2 o the Constitution) I Bwnership, operation and management of coc$pits (Sec
. 5 o "* 44.) . 4anufacture, repair, stoc$piling andDor distribution of nuclear
weapons (A!t. II, Sec. 0 o the Constitution) -6 4anufacture, repair, stoc$piling
andDor distribution of biological, chemical and radiological weapons and anti(p
ersonnel mines (&a!ious t!eaties to %hich the "hili##ines is a signato!y and con
ventions su##o!ted 2y the "hili##ines) 11. 4anufacture of firecrac$ers and other
pyrotechnic devices (Sec. 5 o RA 9(0/) !p to T=enty Percent 627;9 Forei+n E'uit
y - &rivate radio communications networ$ (RA /046) !p to T=entyCFi.e Percent 62F
;9 Forei+n E'uity &rivate recruitment, whether for local or overseas employment
(A!t. 29 o "* 442) , Contracts for the construction and repair of locally(funded
public wor$s (Sec. ( o CA 54(, $EI 6/') exceptA a. infrastructureDdevelopment p
rojects covered in +A //-I1 and b. projects which are foreign funded or assisted
and re'uired to undergo international competitive bidding (Sec. 2a o RA 99(0) G
Contracts for the construction of defense(related structures (Sec. ( o CA 54()
!p to Thirty Percent 637;9 Forei+n E'uity - Advertising (A!t. D&I, Sec. (( o the
Constitution) !p to Forty Percent 687;9 Forei+n E'uity Exploration, development
and utilization of natural resources (A!t. DII, Sec. 2 o the Constitution) , Bw
nership of private lands (A!t. DII, Sec. 9 o the ConstitutionF Ch. 5, Sec. 22 o
CA (4(F Sec. 4 o RA .(02) G Bperation and management of public utilities (A!t. D
II, Sec. (( o the ConstitutionF Sec. (6 o CA (46) H BwnershipDestablishment and
administration of educational institutions (A!t. DI&, Sec. 4 o the Constitution)
? Culture, production, milling, processing, trading excepting retailing, of ric
e and corn and ac'uiring, by barter, purchase or otherwise, rice and corn and th
e by(products thereof (Sec. 5 o "* (.4FSec. (5 o RA 0962 5 Contracts for the sup
ply of materials, goods and commodities to government(owned or controlled corpor
ation, company, agency or municipal corporation (Sec. ( o RA 5(0/) / &roject &ro
ponent and 8acility Bperator of a 9B" project re'uiring a public utilities franc
hise (A!t. DII, Sec. (( o the ConstitutionF Sec. 2a o RA 99(0) I Bperation of de
ep sea commercial fishing vessels (Sec. 29 o RA 055') . Adjustment Companies (Se
c. /2/ o "* 6(2 as a7ended 2y "* (0(4) -6 Bwnership of condominium units where t
he common areas in the condominium project are co( owned by the owners of the se
parate units or owned by a corporation (Sec. 5 o RA 4926) !p to SiDty Percent 6:
7;9 Forei+n E'uity - 8inancing companies regulated by the Securities and Exchang
e Commission (Sec. 6 o RA 5.0' as a7ended 2y RA 0556) , #nvestment houses regula
ted by the SEC (Sec. 5 o "* (2. as a7ended 2y RA 0/66) 0 Shares of StocE (See DI
II. Stoc8s and Stoc8holde!s)
A corporation commences to have juridical pe
COMMENCEMENT OF CORPORATE EKISTENCE
rsonality and legal existence only from the moment the SEC issues to the incorpo
rators a certificate of incorporation under its official seal
#t is the certific
ate of incorporation that gives juridical personality to a corporation and place

d it under the jurisdiction of the commission

#n the case of religious corporati
ons, the Code does not re'uire the SEC to issue a certificate of incorporation #
n fact, Sec --, clearly states that from and after the filing with the Commissio
n of the articles of incorporation, the chief archbishop shall become a corporat
ion sole "he issuance of the articles calls the corporation into being but it is
not really ready to do business until it is organized "he corporation must form
ally organized and commence the transaction of its business or the construction
of its wor$s within two years from the date of its incorporation or, otherwise,
its corporate powers shall cease and it shall be deemed dissolved (Sec. 22.) AME
N&MENT OF ARTIC"ES OF INCORPORATION Proce,ure( 1. +esolution by at least a major
ity of the board of directors or trustees1 2. ;ote or written assent of the stoc
$holders representing at least ,DG of the outstanding capital stoc$ s or ,DG of
the members in case of non(stoc$ corporations 3. Submission and filing with the
SEC ofA a the original and amended articles together
10

b
c
containing all the provisions re'uired by law to be set out in the articles of i
ncorporation Such articles, as amended, shall be indicated by underscoring the c
hange or changes made1 a copy thereof, duly certified under oath by the corporat
e secretary and a majority of the directors or trustees stating the fact that su
ch amendments have been duly approved by the re'uired vote of the stoc$holders o
r members1 and a favorable recommendation of the appropriate government agency c
oncerned if re'uired by law
"imitations( - "he amendment of any provision or matters stated in the articles
of incorporation is not allowed when it will be contrary to the provisions or re
'uirement prescribed by the Code or by special law or changes any provision in t
he articles of incorporation stating an accomplished fact1 , #t must be for legi
timate purposes1 G #t must be approved by the re'uired vote of the board of dire
ctors or trustees and the stoc$holders or members1 H "he original articles and a
mended articles together must contain all provisions re'uired by law to be set o
ut in the articles of incorporation1 ? Such articles, as amended, must be indica
ted by underscoring the changes made, and a copy thereof duly certified under oa
th by the corporate secretary and a majority of the directors or trustees statin
g that the amendments have been duly approved by the re'uired vote of the stoc$h
olders or members must be submitted to the SEC1 5 "he amendments shall ta$e effe
ct only upon their approval by the SEC1
*owever, express approval is not indispe
nsable "his is because the amendment shall also ta$e effect from the date of fil
ing with the said Commission if it is not acted upon by the Commission within 5
months from the date of filing for a cause not attributable to the corporation /
#f the corporation is governed by special law, the amendments must be accompani
ed by a favorable recommendation of the appropriate government agency1 I <o righ
t or remedy in favor of or against any corporation, its stoc$holders, members, d
irectors, trustees, or officers, nor any liability incurred by any such corporat
ion, stoc$holders, members, directors, trustees, or officers, shall be removed o
r impaired either by the subse'uent dissolution of said corporation or by any su
bse'uent amendment or repeal of this Code or of any part thereof (Section (45 o
the Co!#o!ation Code). Facts not su)-ect to amen,ments( 1. <ames of incorporator
s1 2. <ames of original subscribers to the capital stoc$ of the corporation and
their subscribed and paid up capital1 3. "reasurer elected by the original subsc
ribers1 4. 4embers who contributed to the initial capital of a non( stoc$ corpor
ation1 5. )ate and place of execution of the articles of incorporation1 6. 3itne
sses to the signing and ac$nowledgment of the articles #roun,s for Re-ection of
the Artic*es of Incorporation or Amen,ment thereto (Sec. (9) - "hat the articles
of incorporation or any amendment thereto is not substantially in accordance wi
th the form prescribed therein1 , "hat the purpose or purposes of the corporatio
n are patently unconstitutional, illegal, immoral, or contrary to government rul
es and regulations1 G "hat the "reasurer:s Affidavit concerning the amount of
capital stoc$ subscribed andDor paid is false1 H "hat the re'uired percentage of
ownership of the capital stoc$ to be owned by citizens of the &hilippines has n
ot been complied with as re'uired by existing laws or the constitution "hese gro
unds are not exclusive 9efore rejecting the Articles of #ncorporation or its ame
ndments, the SEC should give the incorporators reasonable time within which to c
orrect or modify the objectionable portions of the articles or amendments
Any de
cision of the Commission rejecting the articles of incorporation or disapproving
any amendment thereto is appealable by petition for review to the Court of Appe
als in accordance with the pertinent provisions of the +ules of Court All the gr
ounds enumerated in Section -/ can be determined on the basis of the Articles of
incorporation itself and the other re'uired documents >enerally, if the Article
s of #ncorporation and its supporting documents are in order, the SEC has no rec
ourse but to issue the Certificate of #ncorporation ("hili##ine Co!#o!ate $a% Co

7#ediu7, Ti7oteo A:uino, 2''6 ed.). #roun,s for Suspension or Re.ocation of Cert
ificate of Re+istration ("!es. *ec!ee 1o. .'2;A) - 8raud in procuring its certif
icate of incorporation , Serious misrepresentation as to what the corporation ca
n do or is doing to the great prejudice of, or damage to, the general public G +
efusal to comply with or defiance of a lawful order of the SEC restraining the c
ommission of acts which would amount to a grave violation of its franchise H Con
tinuous inoperation for a period of at least ? years ? 8ailure to file the by(la
ws within the re'uired period 5 8ailure to file re'uired reports EFFECTS OF NONC
!SE OF CORPORATE CHARTER (Sec. 22)
#f a corporation does not formally organize a
nd commence the transaction of its business or the construction of its wor$s wit
hin , years from the date of incorporation, its corporate powers cease and the c
orporation shall be deemed dissolved #f a corporation has commenced transaction
of its business but subse'uently becomes continuously inoperative for a period o
f at least ? years, the same shall be a ground for the suspension or revocation
of its corporate franchise or certificate of incorporation
#f the non(use of cor
porate charter or continuous inoperation of a corporation is due to causes beyon
d its control as found by the Commission, the effects mentioned shall not ta$e p
lace &E FACTO CORPORATION A corporation which actually exists for all practical
purposes as a corporation but which has no legal right to corporate existence as
against the State #t is one which has not complied with all the re'uirements ne
cessary to be a de jure corporation but has complied sufficiently to be accorded
corporate status as against third parties although not against the state Re'uis
ites( 1. "he existence of a valid law under which it may be incorporated1 2. A b
ona fide attempt in good faith to incorporate under such law1 3. Actual use or e
xercise in good faith of corporate powers1 and 4. #ssuance of a certificate of i
ncorporation by the SEC as a minimum re'uirement of continued good faith
#n the case of a de facto corporation, the only way in
which its corporate existence can be 'uestioned is in a direct proceeding by the
State, brought for that
11

purpose &rivate individuals cannot raise the objection in such a case, either di
rectly or indirectly, and nobody can raise the objection collaterally %The Co!#o
!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6
ed.) Such a corporation is practically as good as a de jure corporation #t is de
emed to have a substantial legal existence and ordinarily, in its relation with
all persons except the State, has the same powers and is subject to the same lia
bilities, duties and responsibilities, as a corporation de jure, and is bound by
all such acts as it might rightfully perform if it were a corporation de jure %
The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, !., 2''6 ed.) "he officers and directors of a de facto corporation are subject t
o all the liabilities and penalties attending to officers and directors duly cho
sen by a corporation de jure, including the liability under the criminal law, an
d their acts are binding when such acts would be within the power of such office
rs if the corporation were one de jure %The Co!#o!ation Code o the "hili##ines,
)ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.).
without voting rights in the board (G!ace Ch!istian )igh School v. CA 20( SCRA (
// Ecto2e! 2/, (..9). , A majority of the directorsDtrustees must be residents o
f the &hilippines (Sec. 2/). G *e must not have been convicted by final judgment
of an offense punishable by imprisonment for a period exceeding 5 years or a vi
olation of the Corporation Code, committed within five years from the date of hi
s election (Sec. 29). H Bnly natural persons can be elected directorsDtrustees
#
n case of corporate stoc$holders or members, their representation in the board c
an be achieved by ma$ing their individual representatives trustees of the shares
or membership to ma$e them stoc$holdersDmembers of record ? Bther 'ualification
s as may be prescribed in the by( laws of the corporation 5 4ust be of legal age
E*ection of oar, Mem)ers (Secs. 24; 25) STOCH NONCSTOCH CORPORATION CORPORATION
Bwners of a majority A majority of the of the outstanding members entitled to c
apital stoc$, in vote, in person or by person or by their proxy, if allowed in i
ts authorized articles of representative as incorporation or by( such by written
proxy, laws, must be present must be present at in the election the election of
the directors Cumulative voting is Cumulative voting is mandatory1 a matter gen
erally not of right granted by available unless law to each allowed by the stoc$
holder with articles of voting rights incorporation or by( laws, since each memb
er is entitled only to one vote Metho,s of <otin+ (Sec. 24) 1. Strai+ht <otin+ B
every stoc$holder may vote such number of shares for as many persons as there a
re directors to be elected 2. Cumu*ati.e <otin+ for One Can,i,ate B a stoc$holde
r is allowed to concentrate his votes and give one candidate as many votes as th
e number of directors to be elected multiplied by the number of his shares shall
e'ual 3. Cumu*ati.e <otin+ )y &istri)ution B by this method, a stoc$holder may
cumulate his shares by multiplying also the number of his shares by the number o
f directors to be elected and distribute the same among as many candidates as he
shall see fit Cumulative voting being a statutory right, a corporation is witho
ut power to deprive the stoc$holders of its use or even restrict the right to vo
te to only one way or method A stoc$holder may or may not exercise the right as
he shall see fit (S@C E#inion, Ect. 2', (.64).
#n electing directors by cumulati
ve voting, the total number of votes cast by a stoc$holder shall not exceed the
number of shares owned by him as shown in the boo$s of the corporation multiplie
d by the whole number of directors to be elected 4embers of non(stoc$ corporatio
ns may cast as many votes as there are trustees to be elected but may cast not m
ore than one vote for one candidate "his is the manner of voting in non( stoc$ c
orporations unless otherwise provided in the articles of incorporation
CORPORATION % ESTOPPE" An unincorporated association which represented itself to
be a corporation will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation ,

liabilities and damages incurred or arising as a result thereof

A corporation by
estoppel has no real existence in law #t is neither a de jure nor a de facto co
rporation, but is a mere fiction existing for the particular case, and vanishing
where the element of estoppel is absent #t exists only between the persons who
misrepresented their status and the parties who relied on the misrepresentation
#ts existence may be attac$ed by any third party except where the attac$ing part
y is estopped to treat the entity other than as a corporation All persons not st
oc$holders or members who assume to act as a corporation $nowing it to be withou
t authority to do so shall be liable as general partners for all debts, liabilit
ies, and damages incurred or arising as a result thereof (Sec.2(). 3hen any such
ostensible corporation is sued on any transaction entered by it as a corporatio
n or on any tort committed by it as such, it shall not be allowed to use as a de
fense its lac$ of corporate personality (Sec. 2(). A third party who, $nowing an
association to be unincorporated, nonetheless treated it as a corporation and r
eceived benefits from it, may be barred from denying its corporate existence in
a suit brought against the alleged corporation ($i7 Tong $i7 vs. "hil. <ishing G
ea! Indust!ies, Inc. /(9 SCRA 920). IK. OAR& OF &IRECTORS AN& TR!STEES
Gua*ifications( - 8or a stoc$ corporation, ownership of at least - share capital
stoc$ of the corporation in his own name, and if he ceases to own at least one
share in his own name, he automatically ceases to be a director (Sec. 2/). 8or a
non(stoc$ corporation, only members of the corporation can be elected to the 9o
ard of "rustees
#n order to be eligible as a director, what is material is the l
egal title to, not beneficial ownership of the stoc$s appearing on the boo$s of
the corporation A person who does not own a stoc$ at time of his election or app
ointment does not dis'ualify him as a director if he becomes a shareholder befor
e assuming the duties of his office
A person who is not a stoc$holder cannot be
a director, but he can be an e? o icio member
12

"imitations on the E*ection of &irectors?Trustees - At any meeting of stoc$holde

r or members called for the election of directors or trustees, there must be pre
sent either in person or by representative authorized to act by written proxy, t
he owners of the majority of the outstanding capital stoc$ or majority of the me
mbers entitled to vote , "he election must be by ballot if re'uested by any voti
ng member or stoc$holder G A stoc$holder cannot be deprived in the articles of i
ncorporation or in the by(laws of his statutory right to use any of the methods
of voting in the election of directors H <o delin'uent stoc$ shall be voted ? "h
e candidates receiving the highest number of votes shall be declared elected A m
ajority vote is not necessary *owever, it is necessary that there is a 'uorum An
d in the absence thereof, election shall be considered invalid (S@C E#inion). "i
mitations on the StocEho*,erLs Ri+ht to <ote 1. 3here the articles of incorporat
ion provides for classification of shares pursuant to Sec 5, non(voting shares a
re not entitled to vote except as provided for in the last paragraph of Sec 5 2.
&referred or redeemable shares may be deprived of the right to vote unless othe
rwise provided in the Code 3. 8ractional shares of stoc$ cannot be voted 4. "rea
sury shares have no voting rights as long as they remain in the treasury 5. *old
ers of stoc$ declared delin'uent by the board of directors for unpaid subscripti
on are not entitled to vote or to representation at any stoc$holder:s meeting 6.
A transferee of stoc$ cannot vote if his transfer is not registered in the stoc
$ and transfer boo$ of the corporation Term of Office (Sec. 2/) "he directors or
trustees shall serve for a term of one year and until their successors are elec
ted and 'ualified #f no election is conducted or no 'ualified candidate is elect
ed, they shall continue to act as such in a hold(over capacity until an election
is held and a 'ualified candidate is so elected 6HO"&CO<ER PRINCIP"E9 (Co!#o!at
ion Code o the "hili##ines, Ru2en C. $adia, 2''( ed.). Guorum Re'uirement in oar
, Meetin+s (Sec. 25) @nless the articles of incorporation or the by(laws provide
for a greater majority, a majority of the number of directors or trustees as fi
xed in the articles of incorporation shall constitute a 'uorum for the transacti
on of corporate business, and every decision of at least a majority of the direc
tors or trustees present at a meeting at which there is a 'uorum shall be valid
as a corporate act, except for the election of officers which shall re'uire the
vote of a majority of all the members of the board Remo.a* of &irectors or Trust
ees (Sec. 20) "he law does not specify cases for removal of a director or truste
e nor even re'uire that removal should be for sufficient cause or reason *owever
, the incumbent directors or trustees cannot be removed merely by replacing a ne
w set of directors or trustees Re'uisites( - "he removal should ta$e place at a
regular or special meeting duly called for the purpose1 2. "he director or trust
ee can only be removed by at least ,DG of the outstanding capital stoc$ or of th
e members entitled to vote1 3. "here must be a previous notice to stoc$holders o
r members of the corporation of the intention to propose such removal at the mee
ting 4. "he removal without cause may not be used to deprive minority stoc$holde
rs or members of the right to representation to which they may be entitled under
Sec ,H of the Code
"here is no need to follow the procedure under Section
,I if the director is dis'ualified 9y operation of law, such director is dis'ual
ified to act as director thereby creating vacancies in the 9oard 4ere declaratio
n of the dis'ualification as the cause of the vacancy is sufficient (S@C E#inion
, <e2!ua!y /, (..2). "he meeting must be called by the secretary on order of the
president or on the written demand of the stoc$holders representing a majority
of the outstanding capital stoc$ or majority members entitled to vote "he law al
so provides that should the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or if there is no secret
ary, the call for the meeting may be addressed directly to the stoc$holders or m
embers by any stoc$holder or member of the corporation signing the demand

<acancies in the oar, (Sec. 2.) A vacancy in the office of director or trustee o
ther than by removal or by expiration of term may be filled as followsA y the st
ocEho*,ers or mem)ers( a #f the vacancy results from the removal by the stoc$hol
ders or members or the expiration of term1 b. #f the vacancy occurs other than b
y removal or by expiration of term, such as death, resignation, abandonment, or
dis'ualification, if the remaining directors or trustees do not constitute a 'uo
rum for the purpose of filling the vacancy1 c. #f the vacancy may be filled by t
he remaining directors or trustees but the board refers the matter to stoc$holde
rs or members1 or d. #f the vacancy is created by reason of an increase in the n
umber of directors or trustees 2. y the mem)ers of the oar, B if still constitut
ing a 'uorum, at least a majority of them are empowered to fill any vacancy occu
rring in the board other than by removal by the stoc$holders or members or by ex
piration of term Compensation of oar, Mem)ers (Sec. /') G@1@RA$ R3$@A )irectors
are not entitled to receive any compensation except for reasonable per diems @DC
@"TIE1SC - 3hen their compensation is fixed in the by(laws , 3hen granted by the
vote of stoc$holders representing at least a majority of the outstanding capita
l stoc$ at a regular or special meeting G 3hen they are also officers of the cor
poration
"he only limitation in the granting of compensation is that the amount
to be given shall not exceed -67 of the net income before income tax of the corp
oration during the preceding year CORPORATE OFFICERS &resident 2 must be a direc
tor and he may not be concurrently the treasurer or secretary , "reasurer 2 may
or may not be a director1 as a matter of sound corporate practice, must be a res
ident G Secretary 2 need not be a director unless re'uired by the by(laws1 must
be a resident and citizen of the &hilippines1 and H Such other officers as may b
e provided in the by(laws CORPORATE OFFICER &osition is provided for in the by(l
aws or under the Corporation Code +"C has jurisdiction in case of labor dispute
CORPORATE EMP"O%EE Employed by the action of the managing officer of the corpora
tion <=+C has jurisdiction in case of labor disputes
13

Authority of Officers is +enera**y ,eri.e, from( 1. =aw 2. 9y(laws 3. Authorizat

ion from the 9oard, either expressly or impliedly by habit, custom or ac'uiescen
ce in the general course of business (Inte!;Asia Invest7ent Indust!ies v. CA GR
no. (25990, -une (', 2''/). EDtent of Po=ers or Authority of Corporate Officers
- "he authority which he has by virtue of his office1 , "he authority which is e
xpressly conferred upon him or is incidental to the effectualness of such expres
s authority1 G As to third persons dealing with him without notice of any restri
ction thereof, the authority which the corporation holds the officer out as poss
essing or is estopped to deny H "he nature of the corporate business must also b
e ta$en into consideration1 and ? "he nature act of an officer though originally
unauthorized may become binding upon the corporation by a subse'uent ratificati
on (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.).
@DC@"TIE1SC 1. #n case of an Executive Committee duly authorized in the by(laws1
2. #n case of a contracted manager which may be an individual, a partnership, o
r another corporation Note( #n case the contracted manager is another corporatio
n, the special rule in Sec HH applies G #n case of close corporations, the stoc$
holders may directly manage the business of the corporation instead, if the arti
cles of incorporation so provide
"he power to purchase real property is vested in the
board of directors or trustees 3hile a corporation may appoint agents to negotia
te for the purchase of real property needed by the corporation, the final say wi
ll have to be with the board, whose approval will finalize the transaction A cor
poration can only exercise its powers and transact its business through its boar
d of directors and through its officers and agents when authorized by a board re
solution or by its by(laws (S#ouses Constantine <i!7e vs. Bu8al @nte!#!ises and
*evelo#7ent Co!#o!ation, G.R. 1o. (466'0, Ecto2e! 2/, 2''/). "imitations on Po=e
rs of oar, of &irectors?Trustees( =imitations imposed by the Constitution, statu
tes, articles of incorporation or by(laws , #t cannot perform constituent or tho
se acts which involve fundamental changes in the corporation which re'uire the a
pproval of its stoc$holders or members G #t cannot exercise powers not possessed
by the corporation (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de
$eon, 2''2 ed.).
"he corporate powers conferred upon the board of directors usu
ally refer only to the ordinary business transactions of the corporation and doe
s not extend beyond the management of ordinary corporate affairs nor beyond the
limits of its authority (S@C E#inion, ,ay 2, (..4). Nature of po=ers of )oar, of
,irectors or trustees (The Co!#o!ation Code o the "hili##ines Annotated, )ecto!
de $eon, 2''2 ed.) - @nder the "heory of Briginal &ower, the powers of the boar
d of directors or trustees are B+#>#<A= and @<)E=E>A"E) "he stoc$holders or memb
ers do not confer, nor can they revo$e those powers , "hey are )E+#;A"#;E only i
n the sense of being received from the State in the act of incorporation !SINESS
M!&#MENT R!"E Courts cannot underta$e to control the discretion of the board of
directors about administrative matters as to which they have the legitimate pow
er of action, and contracts intra vires entered into by the board of directors a
re binding upon the corporation and courts will not interfere unless such contra
cts are so unconscionable and oppressive as to amount to a wanton destruction of
the rights of the minority (Ga72oa vs. &icto!iano, .' SCRA 4'). Conse'uences( +esolutions and transactions entered into by the 9oard within the powers of the
corporation cannot be reversed by the courts not even on the behest of the stoc
$holders , )irectors and officers acting within such business judgment cannot be
held personally liable for such acts ("hili##ine Co!#o!ate $a%, Cesa! &illanuev
a, 2''( ed.). "IA I"IT% OF &IRECTORS@ TR!STEES AN& OFFICERS ThreeCfo*, &uties of
&irectors ("hili##ine Co!#o!ate $a%, Cesa! &illanueva, 2''( ed.) 1. &uty of O)e
,ience "o direct the affairs of the corporation only in accordance with the purp
oses for which it was organized
#t is a familiar doctrine that if a corporation $nowingly
permits one of it officers, or any other agent, to act within the scope of an ap
parent authority, it holds him out to the public as possessing the power to do t

hose acts1 and thus, the corporation will, as against anyone who has in good fai
th dealt with it through such agent, be estopped from denying the agent:s author
ity ($a#u; $a#u <oundation Inc., vs. Cou!t o A##eals, et al., G.R. 1o. (26''6, anua!y 2., 2''4). &OCTRINE OF APPARENT A!THORIT%
#f a corporation, $nowingly per
mits one of its officers, or any other agent, to act within the scope of an appa
rent authority, it holds him out to the public as in possession of the power to
do those acts, and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent:s au
thority
Apparent authority is derived not merely from practice #ts existence may
be ascertained throughA 1. the general manager in which the corporation holds o
ut an officer or agent as having the power to act or, in other words the apparen
t authority to act in general, with which it clothes him1 or 2. the ac'uiescence
in his acts of a particular nature, with actual or constructive $nowledge there
of, within or beyond the scope of his ordinary powers (Inte!;Asia Invest7ent Ind
ust!ies, Inc. vs. CA, G.R. 1o. (25990, -une (', 2''/). OAR& OF &IRECTORS?TR!STEE
S AS REPOSITOR% OF CORPORATE PO$ERS G@1@RA$ R3$@C "he corporate powers of the co
rporation shall be exercised, all business conducted and all property of such co
rporation controlled and held by the board of directors or trustees (Sec. 2/). S
ection ,G of the Corporation Code expressly provides that all corporate powers s
hall be exercised by the board Kust as natural person may authorize another to d
o certain acts in its behalf, so may the board validly delegate some of its func
tions to individual officer or agents Absent such valid delegation, the rule is
that the declarations of an individual director relating to the affairs of the c
orporation, but not in the course of, or connected with the performance of autho
rized duties of such director, are held not binding on the corporation (A< Realt
y + *evGt v. *iesel7an <!eight Se!vices GR 1o.(((440, -anua!y (6, 2''2).
14

2.
G

asis( "he directors or trustees and officers to be elected shall perform the dut
ies enjoined on them by law and the by(laws (Sec. 25). &uty of &i*i+ence )irecto
rs and officers are re'uired to exercise due care in the performance of their fu
nctions asis( )irectors or trustees who willfully and $nowingly vote for or asse
nt to patently unlawful acts of the corporation or who are guilty of gross negli
gence or bad faith in directing the affairs of the corporation shall be liable j
ointly and severally for all damages resulting therefrom suffered by the corpora
tion, its stoc$holders or members and other persons (Sec. /(). &uty of "oya*ty "
he director or officer owes loyalty and allegiance to the corporationLa loyalty
that is undivided and an allegiance that is influenced by no consideration other
than the welfare of the corporation asis( )irectors or trustees who ac'uire any
pecuniary or personal interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting theref
rom (Sec. /(). 3hen a director or trustee attempts to ac'uire or ac'uires in vio
lation of his duty, any interest adverse to the corporation in respect of any ma
tter which has been reposed in him in confidence as to which e'uity imposes a li
ability upon him to deal in his own behalf, he shall be liable as trustee for th
e corporation and must account for all the profits which otherwise would have ac
crued to the corporation (Sec. /(, #a!. 2) 3here a director, by virtue of his of
fice, ac'uires for himself a business opportunity which should belong to the cor
poration, thereby obtaining profits which should belong to the corporation, he m
ust account to the latter for all such profits by refunding the same (Sec. /4) %
)BC"+#<E B8 CB+&B+A"E B&&B+"@<#"E0. 3hile both the second paragraph of Section /
( and Section /4 covers the same subject matter which is business opportunity, t
hey differ in the following senseA SECTION 38 Bnly applicable directors to

it1 or %,0 he is negligent in not discovering or acting to prevent it (Co!#o!ati

on Code o the "hili##ines, Ru2en C. $adia, 2''( @d.). Par. 1 of Sec. 31 applies
to directors or trustees "he erring directorDtrustee shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stoc$holders or members and other persons Par. 2 of Sec. 31 applies to directors
, trustees, or officers who attempts to ac'uire or ac'uires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which ha
s been reposed in him in confidence *e shall be liable as a trustee for the corp
oration and must account for the profits which otherwise would have accrued to t
he corporation
Reme,ies in case of Mismana+ement - +eceivership1 , #njunction, if the act has n
ot yet been done1 G )issolution if the abuse amounts to a ground for the institu
tion of a :uo %a!!anto proceeding but the Solicitor >eneral refuses to act1 and
H )erivative suit or complaint filed with SEC Specia* Ru*es on Contracts entere,
into )y &irectors?Trustees or Officers 2. Contracts of Se*fC,ea*in+ &irectors@
Trustees or Officers (Sec. /2)
Self(dealing directors, trustees or officers are
those who personally contract with the corporation in which they are directors,

trustees, or officers
Such contracts are ;B#)A9=E, at the option of the corporat
ion unlessA a. "he presence of such directorDtrustee in the board meeting approv
ing the contract was not necessary to constitute a 'uorum for such meeting1 b. "
he vote of such directorDtrustee in the board meeting approving the contract was
not necessary for the approval of the contract1 c. "he contract is fair and rea
sonable under the circumstances1 d. #n the case of an officer, there was previou
s authorization by the board of directors
Although not all conditions are presen
t, the corporation may elect not to attac$ or 'uestion the validity of the contr
act, without prejudice, however, to the liability of the directorDtrustee for da
mages under Sec G 3here any of the first two conditions is absent, said contract
may be ratified by the vote of the stoc$holders representing at least ,DG of the
outstanding capital stoc$ or ,DG of the members in a meeting called for the pur
pose, provided that full disclosure of the adverse interest of the directorD tru
stee involved is made at such meeting and the contract is fair and reasonable 2
Contracts of InterC*ocEin+ &irectors (Sec. //)
Contracts entered into between co
rporations with interloc$ing directors %interest of said directors is substantial
!, i e exceeding ,67 of the outstanding capital stoc$0
#nterloc$ing directorship
by itself is not prohibited under the Corporation Code *owever, the by(laws may
contain provisions that disallow interloc$ing directorship
A contract between ,
or more corporations having interloc$ing directors shall not be invalidated on
that ground alone "hese contracts are valid, provided thatA a "he contract is no
t fraudulent1 and b "he contract is fair and reasonable under the circumstances
#f the interloc$ing director:s interest in one corporation or corporations is nom
inal! %not exceeding ,67 of the outstanding capital stoc$0, then all the conditi
ons prescribed in Sec. /2 on self(dealing directors must be
SECTION 32@ 2n, para+raph Applicable to directors, trustees and officers )oes no
t allow ratification of a transaction by a self( dealing directors, trustees or
officers
Allows the ratification of a transaction by a dealing directors, i.e. by the vot
es of stoc$holders representing ,DG of the outstanding capital stoc$
Persona* "ia)i*ity of &irectors G@1@RA$ R3$@C )irectors and officers are not sol
idarily liable with the corporation @DC@"TIE1SA #n the following cases, personal
liability may be incurred by directors and trustees, or in appropriate cases, t
he officers of the corporation, when theyL 1. 3illfully and $nowingly vote for a
nd assent to patently unlawful acts of the corporation1 (Sec. /() 2. Are guilty
of gross negligence or bad faith in directing the affairs of the corporation1 (S
ec. /() 3. Ac'uire any personal or pecuniary interest in conflict of their duty1
(Sec. /() 4. Consent to the issuance of watered stoc$s, or, having $nowledge th
ereof, fails to file objections with the secretary1 (Sec. 65) 5. Agree or stipul
ate in a contract to hold himself personally liable with the corporation1 or 6.
9y virtue of a specific provision of law
A director is not liable for misconduct of co(directors or
other officers unless %-0 he connives or participates in
15

3.

present with respect to the corporation in which he has nominal interest &octrin
e of Corporate Opportunity (Sec. /4) "his is consistent with the duty of loyalty
of a director L which mandates that he should not give preference to his own am
elioration by ta$ing the opportunity of the corporation App*ica)i*ity( @nless hi
s act is ratified, a director shall refund to the corporation all the profits he
realizes on a business opportunity which 1. the corporation is financially able
to underta$e1 2. from its nature, is in line with corporations business and is
of practical advantage to it1 and 3. the corporation has an interest or a reason
able expectancy "he rule shall be applied notwithstanding the fact that the dire
ctor ris$ed his own funds in the venture A business opportunity ceases to be cor
porate opportunity and transforms to personal opportunity where the corporation
refuses or is definitely no longer able to avail itself of the opportunity (S@C
E#inion, ,a!ch 4, (.02).
Man,atory corporate +o.ernance ru*es are necessary for 2 main reasons( 1. "o ove
rcome the collective action problem resulting from the dispersion among stoc$hol
ders, and 2. "o ensure that the interests of all relevant constituencies are rep
resented K. CORPORATE PO$ERS Hin,s( - EDpress B those expressly authorized by th
e Corporation Code and other laws, and its Articles of #ncorporation or Charter
, Inci,enta* B those that are incidental to the existence of the corporation G I
mp*ie, B those that can be inferred from or necessary for the exercise of the ex
press powers Classification of #mplied &owers a Acts in the usual course of busi
ness b. Acts to protect debts owing to the corporation c. Acts which involve emb
ar$ing in a different business usually to collect debts out of profits d. Acts t
o protect or aid employees e. Acts to increase business (The Co!#o!ation Code o
the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.) #enera* Po=ers an, Capacity
(Sec. /6) 1. "o sue and be sued1 2. Bf succession1 3. "o adopt and use of corpo
rate seal1 4. "o amend its Articles of #ncorporation1 5. "o adopt its by(laws1 6
. 8or stoc$ corporationsA issue and sell stoc$s to subscribers and treasury stoc
$s1 for non(stoc$ corporationsA admit members1 7. "o purchase, receive, ta$e or
grant, hold, convey, sell, lease, pledge, mortgage and deal with real and person
al property, securities and bonds 8. "o enter into merger or consolidation1 9. "
o ma$e reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civic or similar purposes, provided that no donation is given to any
%i0 political party, %ii0 candidate and %iii0 partisan political activity 10. "
o establish pension, retirement, and other plans for the benefit of its director
s, trustees, officers and employees 11. "o exercise other powers essential or ne
cessary to carry out its purposes Other Po=ers 2. EDtension ?Shortenin+ of Corpo
rate Term (Sec. /9) Proce,ure( a Approval by a majority vote of the board of dir
ectorsDtrustees b 3ritten notice of the proposed action and the time and place o
f meeting shall be served to each stoc$holder or member either by mail or person
al service c +atification by the stoc$holders representing at least ,DG of the o
utstanding capital stoc$ or ,DG of the members in case of non(stoc$ corporations
EKEC!TI<E COMMITTEE (Sec. /5) A body created by the by(laws and composed of some
members of the board which, subject to the statutory limitations, has all the a
uthority of the board to the extent provided in the board resolution or by(laws
(The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.). Pu
rpose( "he Code allows the creation of such because the 9oard may not readily fa
ce the contingency of confronting urgent matters which re'uires its attention 4u
st be provided for in the by laws and composed of not less than G members of the
board appointed by the board
"he executive committee has all the authority of t
he board to the extent provided for in the resolution of the board or in the by
laws 4ay act by a majority vote of all of its members
#ts decisions are not subj
ect to appeal to the board *owever, if the resolution of the Executive Committee
is invalid i e not one of the powers conferred to it0, it may be ratified by th

e board (S@C E#inion).

#f the executive committee is not validly constituted, th
e members thereof may be considered as de facto officers (S@C E#inion). "imitati
ons on the Po=ers of the EDecuti.e Committee #t cannot act on the followingA 1.
4atters needing stoc$holder approval1 2. 8illing up of board vacancies1 3. Amend
ment, repeal or adoption of by(laws1 4. Amendment or repeal of any resolution of
the 9oard which by its express terms is not amendable or repealable1 and ? Cash
dividend declaration CO&E OF CORPORATE #O<ERNANCE App*ica)i*ity( "he Code of Co
rporate >overnance shall be applicable toA 1. Corporations whose securities are
registered or listed1 2. Corporations which are grantees of permitsDlicenses and
secondary franchise from the Commission1 and 3. &ublic companies Corporate #o.e
rnance( A system whereby shareholders, creditors and other sta$eholders of a cor
poration ensure that management enhances the value of the corporation as it comp
etes in an increasingly global mar$et place
4ay be used as
corporation Such
of incorporation
der may exercise

16

a means to voluntarily dissolve a

voluntary dissolution may be effected by amending the articles
to shorten the corporate term (Sec. (2'). A dissenting stoc$hol
his appraisal right

2
Po=er to Increase or &ecrease Capita* StocE (Sec. /0) $ays of Increasin+ Authori
Ae, Capita* StocE( a 9y increasingDdecreasing the number of shares and retaining
the par value1 b 9y increasingDdecreasing the par value of existing shares with
out increasingDdecreasing the number of shares1 c 9y increasingDdecreasing the n
umber of shares and increasingDdecreasing the par value Reasons for Increasin+ C
apita* StocE( a "o generate more wor$ing capital b "o have more shares with whic
h to pay for ac'uisition of more assets c "o have extra shares to meet the re'ui
rement for deduction of stoc$ dividend (Ba! Revie% ,ate!ials in Co77e!cial $a%,
-o!ge ,i!avite, 2''2 ed.). Too*s a.ai*a)*e to the StocEho*,ers to Rep*enish Capi
ta* a Additional subscription to shares of stoc$ of the corporation by stoc$hold
ers or by investors1 b Advances by the stoc$holders to the corporation1 c &aymen
t of unpaid subscription by the stoc$holders1 and d =oans from third persons Re'
uirements( a. Approval by the majority vote of the board of directors1 b. +atifi
cation by the stoc$holders holding or representing at least ,DG of the outstandi
ng capital stoc$ at a meeting duly called for that purpose1 c. &rior written not
ice of the proposed increase or decrease of the capital stoc$ indicating the tim
e and place of meeting addressed to each stoc$holder must be made either by mail
or personal service1 d. A certificate in duplicate signed by a majority of the
directors of the corporation, countersigned by the chairman and the secretary of
the stoc$holders meeting1 e. #n case of increase in capital stoc$, ,?7 of such
increased capital must be subscribed and that at least ,?7 of the amount subscri
bed must be paid either in cash or property1 f. #n case of decrease in capital s
toc$, the same must not prejudice the right of the creditors1 g. 8iling of the c
ertificate with the SEC1 and h. Approval thereof by the SEC
8. Se**@ ,ispose@ *ease@ encum)er a** or su)stantia**y a** of corporate assets (
Sec. 4') Re'uirements( a Approval by the majority vote of the board of directors
1 b +atification by the stoc$holders holding or representing at least ,DG of the
outstanding capital stoc$ at a meeting duly called for that purpose1 c &rior wr
itten notice of the proposed increase or decrease of the capital stoc$ indicatin
g the time and place of meeting addressed to each stoc$holder must be made eithe
r by mail or personal service1 d "he sale of the assets shall be subject to the
provisions of existing laws on illegal combinations and monopolies1 and e Any di
ssenting stoc$holder shall have the option to exercise his appraisal right f "he
vote of the majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by Sec H6 in the c
ase of non(stoc$ corporations where there are no members with voting rights
Sale
or other disposition shall be deemed to cover su)stantia**y a** the corporate a
ssets ifA a the corporation would be rendered incapable of continuing the busine
ss1 or b accomplishing the purpose for which it was incorporated <B ratificatory
vote from stoc$holdersDmembers is neededA a. if it is necessary in the usual an
d regular course of business b. if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of the remaining bu
siness F. Po=er to ac'uire o=n shares (Sec. 4() Instances( a "o eliminate fracti
onal shares out of stoc$ dividends b "o collect or compromise indebtedness to th
e corporation, arising out of unpaid subscription, in a delin'uency sale and to
purchase delin'uent shares sold during said sale c "o pay dissenting or withdraw
ing stoc$holders d "o ac'uire treasury shares e +edeemable shares regardless of
existence of retained earnings f "o effect a decrease of capital stoc$ g #n clos
e corporations, when there is a deadloc$ in the management of the business Note(
#n letters a(c, there must be unrestricted retained earnings :. In.est corporat
e fun,s in another corporation or )usiness en+a+e, in purpose other than primary
purpose (Sec. 42) "he other purposes for which the funds may be invested must b
e among those enumerated as secondary purposes and must further comply with the
re'uirements of Section H,
#nvestment of funds includes not only investment of m
oney but also investment of property of the corporation *owever, the SEC imposes
the following re'uirementsA a. "hat the property is not presently used by the c
ompany and the leasing is not made on a regular basis1 b. "hat by leasing the pr

operty1 it will ma$e it productive instead of allowing them to remain idle1 c. "
here is no express restrictions in the articles of incorporation or by(laws1 d.
=easing is not used as a scheme to prejudice corporate creditors or result in th
e infringement of the "rust 8und )octrine1 and
3
Po=er to Incur@ Create or Increase on,e, In,e)te,ness (Sec. /0) Corporate )on, C
an obligation to pay a definite sum of money at a future time at fixed rate of
interest, whether secured or unsecured, evidenced by a written debt instrument c
alled a bond or debenture Re'uirements( Same with the power to increase or decre
ase capital stoc$
ON&E& IN&E TE&NESS Secured by a mortgage on corporate property %"hili##ine Co!#o
!ate $a%, Cesa! &illanueva, 2''( ed.)
&E ENT!RE Serial obligations or notes issued on the basis of the general credit
of the corporation *ence, they are not bonded indebtedness
17

e. Compliance with the re'uirements of Section H,

("hili##ine Co!#o!ate $a% Co7#endiu7, Ti7oteo A:uino, 2''6 ed.) Re'uirements( a
+esolution by the majority of the board of directors or trustees1 b +esolution b
y the stoc$holders representing at least ,DG of the outstanding capital stoc$ or
,DG of the members in case of non(stoc$ corporation1 c "he ratification must be
made at a meeting duly called for the purposes1 and d &rior written notice of t
he proposed investment and the time and place of the meeting shall be made, addr
essed to each stoc$holder or member by mail or by personal service Any dissentin
g stoc$holder shall have appraisal right A corporation is not allowed to engage
in a business distinct from those enumerated in the articles of incorporation wi
thout amending the purpose clause of said article Re'uirements( a +esolution by
the majority of the 'uorum of the board of directors or trustees1 b Approval of
stoc$holders representing at least ,DG of the outstanding capital stoc$ at a reg
ular or special meeting duly called for the purpose in case of stoc$ dividend G@
1@RA$ R3$@C Stoc$ corporations are prohibited from retaining surplus profits in
excess of -667 of their paid(in capital stoc$ @DC@"TIE1SC a 3hen justified by de
finite corporate expansion projects approved by the board of directors b 3hen th
e corporation is prohibited under any loan agreement with any financial institut
ion or creditor from declaring dividends without itsDhis consent and such consen
t has not yet been secured c 3hen it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as whe
n there is a need for special reserve for probable contingencies &istri)ution of
&i.i,en,s( G@1@RA$ R3$@C )ividends can only be declared and paid out of actual
and bona fide unrestricted retained earnings S"@CIA$ R3$@SC a >ain from real pro
perty 3here a corporation sold its real property, which is not being used for bu
siness, at a gain, the income derived therefrom may be availed of for dividend d
istribution b +evaluation Surplus #ncrease in the value of a fixed asset as a re
sult of its revaluation is not retained earning *owever, increase in the value o
f fixed assets as a result of revaluation (HRevaluation su!#lusI) may be declare
d as cash or stoc$ dividends provided that the companyA i *as sufficient income
from operations from which the depreciation on the appraisal increase was charge
d ii *as no deficit at the time the depreciation on the appraisal increase was c
harged to operations1 and iii Such depreciation on appraisal increase previously
charged to operations has not been impaired by losses (S@C E#inion, Ect. 2, (.0
( and ,a!ch (., (..2). c &aid(in Surplus )ividends can be declared out of the am
ount received in excess of the par value of shares (H#aid;in su!#lusI) whenA i "
hey be declared only as stoc$ dividends and not cash1 ii <o creditors are prejud
iced1 and iii "here is no impairment of capital Note( @nli$e par value shares, w
hen no par value shares are sold at a premium, the entire consideration paid is
considered capital1 hence the same cannot be declared as dividends d +eduction s
urplus "here is such where surplus arises from the reduction of the par value of
the issued shares of stoc$ "hey can be available for dividend declaration provi
ded that the rules on paid(in surplus are complied with e.g. )ividends can be de
clared out of capital only in two instancesA - li'uidating dividends1 and , divi
#t permits corporations sole
dends from investments in wasting asset corporation
ly or principally engaged in the exploitation of wasting assets! to distribute th
e net proceeds derived from exploitation of their holdings such as mines, oil we
lls, patents and leaseholds, without

/. Po=er to ,ec*are ,i.i,en,s out of unrestricte, retaine, earnin+s (Sec. 4/)

+E
"A#<E) EA+<#<>S M ASSE"S 2 =#A9#=#"#ES A<) =E>A= CA&#"A= @<+ES"+#C"E) 2 if the r
etained earnings have not been reserved or set aside by the board of directors f
or some corporate purpose
)#;#)E<)S 2 Corporate profits set aside, declared, and
ordered to be paid by the directors for distribution among shareholders at a fi
xed time Forms( a. Cash b. &roperty c. Stoc$ 3hile cash dividends due on delin'u
ent shares can be applied to the payment of the unpaid balance, stoc$ dividends
cannot be applied as payment for unpaid subscription Stoc$ dividends shall be wi
thheld from the delin'uent stoc$holder until his unpaid subscription is fully pa

id
"he right to dividend is based on duly recorded stoc$holdings, accordingly, t
he corporation is prohibited from declaring dividends in favor of non(stoc$holde
rs As a rule, dividends among stoc$holders of the same class must always be pro
rata e'ual and without discrimination and regardless of the time when the shares
were ac'uired
)eclaration of dividends is discretionary upon the board )ividend
s are payable only when there are profits earned by the corporation and as a gen
eral rule, even if there are existing profits, the 9oard of )irectors has the di
scretion to determine whether or not dividends are declared (Re#u2lic "lante!s B
an8 vs. Agana, 26. SCRA (), subject to the rule on non( retention of retained ea
rnings in excess of -667 of paid(in(capital
)ividends cannot be declared out of
the capital except in the case of wasting assets corporation or those corporatio
ns solely or principally engaged in the exploitation of wasting assets to distri
bute the net proceeds derived from exploitation of their holdings such as mines,
oil wells, patents and leaseholds, without allowance or reduction for depletion
(Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.).
Stoc
$holders at the time of declaration are entitled to dividends )ividends declared
before the transfer of shares belong to the transferor and those declared after
the transfer belongs to the transferee (S@C E#inion, -uly (5, (..4). Even unpai
d subscribers are entitled to dividends, as well as owners of delin'uent shares
18

e
f
g
h
allowance or deduction for depletion. Sale of "reasury Shares &rofits realized f
rom sale of treasury shares are part of capital and cannot be declared as cash o
r stoc$ dividend as purchase and sale of such shares are regarded as contraction
s and expansions of paid(in capital #ndebtedness 4oney cannot be borrowed for th
e payment of dividends because indebtedness is not a retained earning of the cor
poration Corporate earnings which have not yet been received even though they co
nsist in money which is due cannot be included in the profits out of which divid
ends may be paid #nterim income G@1@RA$ R3$@C "here can be no dividend declarati
on for profits in a fiscal year that has not yet expired @DC@"TIE1SA - the amoun
t of dividend involved would not be impaired by losses during the remaining peri
od of the year1 , the projected income for the remaining period shall be submitt
ed to the SEC, and G should the company sustain losses during the remaining peri
od, the dividends should be refunded (S@C E#inion, Ect 22, (.94 and -uly 24, (..
(). CASH &I<I&EN&S #nvolves a disbursement to the stoc$holders of accumulated ea
rnings , 3hen declared and paid becomes the absolute property of the stoc$holder
and cannot be reached by creditors of the corporation in the absence of fraud G
)eclared only by the board of directors at its discretion STOCH &I<I&EN&S - )oe
s not involve any disbursement of funds , Since it is still part of corporate pr
operty, may be reached by corporate creditors
c d
stoc$ from their subscriptions1 3here it has transferred the corporate property
in fraud of its creditors1 and 3here the corporation is insolvent
Co.era+e of the TF&( a #f the corporation is solvent, the "8) extends to the cap
ital stoc$ represented by the corporation:s legal capital b #f the corporation i
s insolvent, the "8) extends to the capital stoc$ of the corporation as well as
all of its property and assets EDceptions to the TF&( "he Code allows distributi
on of corporate capital only in these instancesA a. Amendment of Articles of #nc
orporation to reduce authorized capital stoc$1 b. &urchase of +edeemable shares
by the corporation regardless of existence of unrestricted retained earnings1 c.
)issolution and eventual li'uidation of the corporation1 d. #n close corporatio
n, when there should be a deadloc$ and the SEC orders the payment of the apprais
ed value of the stoc$holder:s share (Sec. ('4). 0. Po=er to enter into mana+emen
t contract (Sec. 44) Mana+ement Contract B any contract whereby a corporation un
derta$es to manage or operate all or substantially all of the business of anothe
r corporation, whether such contracts are called service contracts, operating ag
reements or otherwise
Sec. 44 refers only to a management contract with
another corporation *ence, it does not apply to management contracts entered int
o by a corporation with natural persons Re'uirements( a Approval by a majority o
f the 'uorum of the board of directors b +atification by the stoc$holders owning
at least majority of the outstanding capital stoc$ or the members of both the m
anaging and the managed corporations, at a meeting duly called for the purpose c
Approval by the stoc$holders of the managed corporation owning at least ,DG of
the total outstanding capital stoc$ entitled to vote, or by at least ,DG of the
members in the case of a non(stoc$ corporationA i where a stoc$holderDs represen
ting the same interest of both the managing and the managed corporations own or
control more than -DG of the total outstanding capital stoc$ entitled to vote of
the managing corporation1 B+ ii where a majority of the members of the board of

directors of the managing corporation also constitute a majority of the members

of the board of directors of the managed corporation "he period must not be lon
ger than ? years for any term except those contracts which relate to the explora
tion, development, exploitation or utilization of natural resources that may be
entered into for such periods as may be provided by pertinent laws or regulation
s A management contract cannot delegate entire supervision and control over the
officers and business of a corporation to another as this will contravene Sec ,G
H )oes not increase the corporate capital ? #ts declaration creates a debt from
the corporation to each of its stoc$holders
G )eclared by the board with the concurrence of the stoc$holders representing at
least ,DG of the outstanding capital stoc$ at a regularDspecial meeting H Corpo
rate capital is increased ? <o debt is created by its declaration
TR!ST F!N& &OCTRINE "he subscribed capital stoc$ of the corporation is a trust f
und for the payment of debts of the corporation which the creditors have the rig
ht to loo$ up to satisfy their credits, and which the corporation may not dissip
ate "he creditors may sue the stoc$holders directly for the latter:s unpaid subs
cription App*ication of the TF&( a 3here the corporation has distributed its cap
ital among the stoc$holders without providing for the payment of creditors1 b 3h
ere it had released the subscribers to the capital

19

9.
, 4anagement com( pany must always be subject to the superior power of the board
to give specific directions from time to time or to recall the delegation of ma
nagerial power (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon
, 2''2 ed.) Po=er to ,eny preCempti.e ri+ht (Sec. /.F <o! u!the! discussion, see
DIII. Stoc8s and Stoc8holde!s) "he corporation can only deny pre(emptive right
if the articles of incorporation or amendment thereto denies such right )enial o
f pre(emptive right extends to shares issued in good faith in exchange for prope
rty needed for
EKEC!TI<E COMMITTEE - #ts creation must be provided for in the by(laws , A gover
ning body which functions as the board itself %The Co!#o!ation Code o the "hili#
#ines Annotated, )ecto! de $eon, 2''2 ed.)
MANA#EMENT CONTRACT - Express power of a corporation
corporate purposes or in payment of previously contracted debts
10. Po=er to amen, Artic*es of Incorporation (See &III.
<o!7ation and E!gani>ation o a "!ivate Co!#o!ation)
20

CORPORATION An artificial being created by operation of law having the right of

succession, and the powers, attributes and properties expressly authorized by la
w and incident to its existence (Sec. 2). I. THEORIES ON FORMATION OF A CORPORAT
ION
a. )ue process (Al2e!t v. 3nive!sity "u2lishing, Inc.
(/ SCRA 04 4(.656) b. E'ual &rotection of the law (S7ith, Bell + Co. v. 1ativida
d, 4' "hil. (/6 4(.(.6) c. &rotection against unreasonable searches and seizures
(Stonehill v. *io8no, 2' SCRA /0/ 4(.696)
*owever, it is not entitled to certai
n constitutional rights such as political rights or purely personal rights not o
nly because it is an artificial being but also because it is a mere creature of
law (Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.). a
. +ight against self(incrimination (Bataan Shi#ya!d v. "CGG, (5' SCRA 4(.096). /
Mora* &ama+es A corporation is not entitled to moral damages because it has no
feelings, no emotions, no senses (ABS;CB1 vs. Cou!t o A##eals, G.R. 1o. (206.',
-an. 2(, (...).
#n <ili#inas B!oadcasting vs. Ago ,ed., however, it was held tha
t a juridical person such as a corporation can validly complain for libel or any
other form of defamation and claim for moral damages "he SC had rationated that
Art ,,-. %/0 does not 'ualify whether the plaintiff is a natural or a juridical
person (<ili#inas B!oadcasting vs. Ago ,edical Cente!;Bicol, et. al., 440 SCRA
4(/). 0 "ia)i*ity for torts A corporation is liable whenever a tortuous act is c
ommitted by an officer or agent under the express direction or authority of the
stoc$holders or members acting as a body, or, generally, from the directors as t
he governing body ("1B vs. CA, 0/ SCRA 2/9 4(.906). 1. "ia)i*ity for Crimes Sinc
e a corporation is a mere legal fiction, it cannot be held liable for a crime co
mmitted by its officers since it does not have the essential element of malice,
except if by express provision of law, the corporation is held criminally liable
1 #n such case the responsible officers would be criminally liable ("eo#le vs. T
an Boon =ong, 54 "hil. 6'9 4(./'6). TESTS TO &ETERMINE NATIONA"IT% OF CORPORATIO
NS 2. Incorporation Test 2 determined by the state of incorporation, regardless
of the nationality of its stoc$holders 2 &omici*e Test 2 determined by the state
where it is domiciled "he domicile of a corporation is the place fixed by the l
aw creating or recognizing it1 in the absence thereof, it shall be understood to
be the place where its legal representation is established or where it exercise
its principal functions (A!t. 5(, 1CC) 3 Contro* Test 2 determined by the natio
nality of the controlling stoc$holders or members "his test is applied in times
of war Also $nown as the 3A+"#4E "ES"
1. Concession Theory 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 (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242).
Tayag
rejects the Genossenscha t Theo!y which treats a corporation as the reality of th
e group as a social and legal entity, independent of state recognition and conce
ssion ! 2. Theory of corporate enterprise or economic unit "he corporation is no
t merely an artificial being, but more of an aggregation of persons doing busine
ss, or an underlying business unit ("hili##ine Co!#o!ate $a%, Cesa! &illanueva,
2''( ed.). "he theory draws its vitality from the fact that it is not legal fict
ion alone that creates a corporate entity but also the consent of those who will
form the corporation to engage in a common venture or business for profit II. A
TTRI !TES OF A CORPORATION
1. #t is an artificial being with separate and distinct
personality
2. #t is created by operation of law 3. #t enjoys the right of succession 4. #t
has the powers, attributes and properties expressly
authorized by law or incident to its existence ARTIFICIA" EIN# $ITH SEPARATE PER
SONA"IT% &OCTRINE OF SEPARATE PERSONA"IT% A corporation is a legal or juridical
person with a personality separate and apart from its individual stoc$holders or
members and from any other legal entity to which it may be connected % The Co!#

o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6
ed.). Conse'uences( 1. "ia)i*ity for acts or contracts "he general rule is that
obligations incurred by a corporation, acting through its authorized agents are
its sole liabilities Similarly, a corporation may not generally, be made to ans
wer for acts or liabilities of its stoc$holders or members or those of the legal
entities to which it may be connected and vice versa (C!eese vs. CA, ./ SCRA 40
/). 2. Ri+ht to )rin+ actions #t may bring civil and criminal actions in its own
name in the same manner as natural persons (A!t. 46, 1CC). 3. Ri+ht to ac'uire
an, possess property &roperty conveyed to or ac'uired by the corporation is in l
aw the property of the corporation itself as a distinct legal entity and not tha
t of the stoc$holders or members % A!t. 44(/), 1CC). 4. Ac'uisition of court of
-uris,iction Service of summons may be made on the president, general manager, c
orporate secretary, treasurer or in(house counsel (Sec. ((, Rule (4, Rules o Cou
!t). 5. Chan+es in in,i.i,ua* mem)ership Corporation remains unchanged and unaff
ected in its identity by changes in its individual membership (The Co!#o!ation C
ode o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.). 6. Entit*ement to co
nstitutiona* +uaranties
Corporations are entitled to certain constitutional righ
ts
4Phi*ippine Nationa*5 un,er the Forei+n In.estment Act of 2112 6R.A. No. /7829(
a. a corporation organized under &hilippine laws of which 567 of the capital sto
c$ outstanding and entitled to vote is owned and held by 8ilipino citizens1 b a
corporation organized abroad and registered as doing business in the &hilippines
under the Corporation Code of which -667 of the capital stoc$s entitled to vote
belong to 8ilipinos *owever, it provides that where a corporation and its non(8
ilipino stoc$holders own stoc$s in a SEC( registered enterprise, at least 567 of
the capital stoc$ outstanding and entitled to vote of 2oth corporations and at
least 567 of the members of the board of directors of 2oth corporations must be
8ilipino citizens 6,ou)*e :7; ru*e9
1

Note( "he law applies the control test both with respect to the ownership of sha
res entitled to vote and the membership in the board of directors &OCTRINE OF PI
ERCIN# THE <EI" OF CORPORATE ENTIT%
"he doctrine that a corporation is a legal e
ntity distinct from the persons composing is a theory introduced for purposes of
convenience and to serve the ends of justice 9ut when the veil of corporate fic
tion is used as a shield to defeat public convenience, justify wrong, protect fr
aud, or defend a crime, this fiction shall be disregarded and the individuals co
mposing it will be treated identically (C!u> vs. *alisay, (52 SCRA 409 4(.096).
3hen directors and officers are unable to compensate
a party for a personal obligation, it is far(fetched to allege that a corporatio
n is perpetuating fraud or promoting injustice, and thereby could be held liable
for the personal obligations of its directors and officers by piercing the corp
orate veil (<!ancisco ,oto!s, Inc. vs. CA, G.R. 1o. (''0(2, -une 25, (...). C*as
sification( 1. Frau, Cases
3hen the corporate identity is used to justify wrong,
to commit fraud, or to defend a crime
"here is always an element of malice or e
vil motive in fraud cases E*ements( a "here must have been fraud or evil motive
in the affected transaction and the mere proof of control of the corporation by
itself would not authorize piercing b. "he main action should see$ for the enfor
cement of pecuniary claims pertaining to the corporation against corporate offic
ers or stoc$holders, or vice( versa1 and c. "he corporate entity has been used i
n the perpetration of the fraud or in justification of wrong, or to escape perso
nal liability
"he doctrine re'uires the court to see through the
protective shroud which exempts its stoc$holders from liabilities that they ordi
narily would be subject to, or distinguishes a corporation from a seemingly sepa
rate one, were it not for the existing corporate fiction ($i7 vs. CA, /2/ SCRA (
'2).
#n any cases where the separate corporate identity is
disregarded, the corporation will be treated merely as an association of persons
and the stoc$holders or members will be considered as the corporation, that is,
liability will attach personally or directly to the officers and stoc$holders (
37ali vs. Cou!t o A##eals, (0. SCRA 52. 4(..'6). *owever, mere ownership by a si
ngle stoc$holder or by another corporation of all or nearly all of the capital s
toc$ of a corporation is not of itself sufficient ground for disregarding the se
parate corporate personality (37ali vs. Cou!t o A##eals, (0. SCRA 52. 4(..'6) "h
e doctrine aims to protect the interest of innocent third person dealing with th
e corporation
2. A*ter E+o Cases 6or Con,uit Cases9
8raud is not an element in these cases but
that the
stoc$holders or those who compose the corporation did not treat the corporation
as a separate entity but only as part of the property or business of an individu
al or group of individuals or another corporation Pro)ati.e factors a Stoc$ owne
rship by one or common ownership of both corporations1 b #dentity of directors a
nd officers1 c "he manner of $eeping corporate boo$s and records1 and d 4ethods
of conducting the business (Conce#t Builde!s, Inc. v. 1$RC, 259 SCRA (4. 4(..66)
. Four Po*icy ases in Piercin+( a. Even when the controlling stoc$holder or mana
ging officer intends consciously to do no evil, the use of the corporation as an
alter ego is in direct violation of a central corporate law principle of treati
ng the corporation as a separate juridical entity from its members and stoc$hold
ers1 b. #f the stoc$holders do not respect the separate entity, others cannot al
so be expected to be bound by the separate juridical entity1 c. Applies even whe
n there are no monetary claims sought to be enforced against the stoc$holders or
officers of the corporation1 d. 3hen the underlying business enterprise does no
t really change and only the medium by which that business enterprise is changed
Instrumenta*ity or A*ter E+o Ru*e 3hen one corporation is so organized and cont
rolled and its affairs are conducted so that it is in fact a mere instrumentalit

y or adjunct of the other, the fiction of the corporate entity to the instrument
ality may be disregarded (Conce#t Builde!s Inc. vs. 1$RC, 259 SCRA (4. 4(..66).
Test( 1. Control, not mere majority or complete stoc$ control, but complete domi
nion, not only of finances but of policy and business in respect to the transact
ion attac$ed so that the corporate entity as to this transaction had at the time
no separate mind, will, or existence of its own1 2. Such control must have been
used by the defendant to commit fraud or wrong in

C*assification of facts on =hich corporate entity may )e ,isre+ar,e,( 1. Avoidan

ce of redress of fraud1 2. &revention of evasion of statute or law1 3. &reventio
n of evasion of contract1 4. #nternal corporate dealings disregarding corporate
entity where third persons are not involved1 5. Corporation agencies or instrume
ntalities of undisclosed principals
"hese enumerations are not exclusive and som
etimes two or more of these elements concur Nature an, Conse'uences of Piercin+
&octrine ("hili##ine Co!#o!ate $a%, Cesa! &illanueva, 2''( ed.)( 1. has on*y res
-u,icata effect> 2. to pre.ent frau, or =ron+ an, not a.ai*a)*e for other purpo
ses> "he doctrine could not be employed by a corporation to complete its claims
against another corporation and cannot therefore be employed by the claimant who
does not appear to be the victim of any wrong or fraud (T!ade!s Royal Ban8 vs.
CA 26. SCRA 6'( 4(..96). 3. essentia**y a -u,icia* prero+ati.e on*y "o pierce th
e veil of corporate fiction being a power belonging to the courts, a sheriff who
has ministerial duty to enforce a final and executory decision cannot pierce th
e veil of corporate fiction by enforcing the decision against the stoc$holders w
ho are not parties to the action (C!u> vs. *alisay, (52 SCRA 409 4(.096). 4. mus
t )e sho=n to )e necessary an, =ith factua* )asis
"o disregard the separate juri
dical personality of a corporation, the wrongdoing must be clearly and convincin
gly established, it cannot be presumed ($u?u!ia )o7es, Inc. v. CA, /'2 SCRA /(5
4(...6).
2

contravention of plaintiff:s legal rights1 and

PO$ERS@ ATTRI !TES AN& PROPERTIES THEOR% OF SPECIA" CAPACITIES?"IMITE& CAPACIT%
&OCTRINE
<o corporation under the Code, shall possess or exercise any corporate
power, except those conferred by law, its Articles of #ncorporation, those impli
ed from express powers and those as are necessary or incidental to the exercise
of the powers so conferred "he corporation:s capacity is limited to such express
, implied and incidental powers (Revie%e! in Co77e!cial $a%, -ose R. Sundiang +
Ti7oteo A:uino, 2''5 ed.).
#f the act of the corporation is not one of those exp
ress, implied or incidental powers, the act is ult!a vi!es. (Revie%e! in Co77e!c
ial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.). III. C"ASSIFICATIONS OF C
ORPORATIONS
3. "he aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of (Conce#t Builde!s Inc.
vs. 1$RC, 259 SCRA (4. 4(..66).
3. E'uity cases
3hen piercing the corporate fiction is necessary to
achieve justice or e'uity "he dumping ground! where no fraud or alter ego circums
tances can be culled to warrant piercing
CREATE& % OPERATION OF "A$ &OCTRINE OF CORPORATE ENTIT%
A corporation comes into
existence upon the issuance of the certificate of incorporation (Sec. (.) "hen
and only then will it ac'uire a juridical personality to sue and be sued, enter
into contracts, hold or convey property or perform any legal act, in its own nam
e (Co!#o!ation Code o the "hili##ines, Ru2en C. $adia, 2''( @d.).
Corporations c
annot come into existence by mere agreement of the parties as in the case of bus
iness partnerships "hey re'uire special authority or grant from the State "his p
ower is exercised by the State through the legislature, either by a special inco
rporation law or charter which directly creates the corporation or by means of a
general corporation law under which individuals desiring to be and act as a cor
poration may incorporate %The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $
eon + )ecto! ,. *e $eon, -!., 2''6 ed.). FRANCHISES OF CORPORATION 2. Primary or
corporate franchise?#enera* franchise "he right or privilege granted by the Sta
te to individuals to exist and act as a corporation after its incorporation 2. S
econ,ary or specia* franchise "he special right or privilege conferred upon an e
xisting corporation to the business for which it was created e.g. use of the str
eets of a municipality to lay pipes or trac$s, or operation of a public utility
or a messenger and express delivery service PRIMAR% +efers to the franchise of b
eing or existing as a corporation ;ested in individuals compose corporation the
who the SECON&AR% +efers to the exercise of right or privilege e.g public utilit
y or telecommunication franchise ;ested in the corporation after its incorporati
on and not upon the individuals who compose the corporation 4ay be sold or trans
ferred under a general power granted to a corporation to a corporation to dispos
e of its properties1 may also be subject to sale on execution or levy
1.
a
b. 2. a. b. 3. b. 4.
As to or+aniAers( pu)*ic B by State only1 or pri.ate B by private persons alone
or with the State As to functions( pu)*ic C government of a portion of the State
1 or pri.ate B usually for profit(ma$ing functions As to +o.ernin+ *a=(
a. pu)*ic B Special =aws and =ocal >overnment
Code1 or pri.ate B =aw on &rivate Corporations As to *e+a* status(
a. ,e -ure corporation 2 corporation created in strict
or substantial conformity with the mandatory statutory re'uirements for incorpor

ation and the right of which to exist as a corporation cannot be successfully at

tac$ed or 'uestioned by any party even in a direct proceeding for that purpose b
y the state1 or ,e facto corporation 2 organized with a colorable compliance wit
h the re'uirements of a valid law and its existence cannot be in'uired collatera
lly but such in'uiry may be made by the Solicitor >eneral in a :uo %a!!anto proc
eeding %Sec. 2').
"he only difference between a de facto corporation and a de ju
re corporation is that a de jure corporation can successfully resist a suit brou
ght by the State challenging its existence1 a de facto corporation cannot sustai
n its right to exist as against the State corporation )y estoppe* 2 group of per
sons that assumes to act as a corporation $nowing it to be without authority to
do so, and enters into a transaction with a third person on the strength of such
appearance #t cannot be permitted to deny its existence in an action under said
transaction (Sec. 2(). #t is neither de jure nor de facto corporation )y prescr
iption 2 one which has exercised corporate powers for an indefinite period witho
ut interference on the part of the sovereign power, e.g. +oman Catholic Church A
s to eDistence of stocEs(
b.
c
Cannot be sold or transferred, in the absence of legislative authority to do so
"his is because it is inseparable from the corporation itself
d
RI#HT OF S!CCESSION #t is the capacity to have continuity of existence despite t
he changes on the persons who compose it "hus, the personality continues despite
the change of stoc$holder, members, board members or officers (Revie%e! in Co77
e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.).
5.
a. stocE corporation 2 a corporation which has
capital stoc$ divided into shares and is authorized to distribute to holders of
such shares, dividends or allotments of the surplus profits on the basis of the
shares held (Sec. /)1 or 8or a stoc$ corporation to exist, the above re'uisites
must be complied with for even if there is

b.
a statement of capital stoc$, the corporation is still not a stoc$ corporation i
f dividends are not supposed to be declared, i.e. there is no distribution of re
tained earning (CIR vs. Clu2 <ili#ino, Inc. de Ce2u, 5 SCRA /2(). nonCstocE corp
oration 2 a corporation which does not issue stoc$s nor distribute dividends to
their members (Sec. 09) As to *a=s of incorporation( ,omestic corporation 2 corp
oration formed, organized or existing under &hilippine laws1 or forei+n corporat
ion 2 a corporation formed, organized or existing under any laws other than thos
e of the &hilippines and whose laws allow 8ilipino citizens and corporation to d
o business in its own country or state
CONCEPT OF #OIN# P! "IC AN& #OIN# PRI<ATE A corporation is deemed to be going pub
lic! when it decides to list its shares in the stoc$ exchange "hese include corp
orations that will ma$e initial public offering of its shares A corporation is s
aid to be going private! when it would restrict the shareholders to a certain gro
up #n a sense, these also include closed and closely held corporation ("hili##in
e Co!#o!ate $a% Co7#endiu7, Ti7oteo A:uino, 2''6 ed.) ONECMAN CORPORATION A corp
oration wherein all or substantially all of the stoc$s is held directly or indir
ectly by one person *owever, it should still follow the formal re'uirements of a
corporation %e.g. number of incorporators, board of directors composed of stoc$
holders owning shares in a nominal capacity0 in order to validly enjoy the attri
butes of the corporation, so as to avoid the application of the doctrine of pier
cing the veil of corporate entity
6. a. b.
7. As to =hether they are open to the pu)*ic or not( a. open 2 one which is open
to any person who may b.
wish to become a stoc$holder or member thereto1 or c*ose ( those whose shares of
stoc$ are held by limited number of persons li$e the family or other closely($n
it group %The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,.
*e $eon, -!., 2''6 ed.)
IV. CORPORATION
PARTNERSHIP
&ISTIN#!ISHE&
FROM
0 As to re*ationship of mana+ement an, contro*( a. ho*,in+ corporation ( it is o
ne which controls another as a subsidiary by the power to elect management #t is
one that holds stoc$s in other companies for purposes of control rather than fo
r mere investment b su)si,iary corporation 2 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 #t is always controlled1 or c. affi*iate 2
one related to another by owning or being owned by common management or by a lo
ng(term lease of its properties or other control device #t may be the controlled
or controlling corporation, or under common control1 or d parent an, su)si,iary
corporation 2 3hen a corporation has a controlling financial interest in one or
more corporations , the one having control is the parent corporation, and the o
thers are the subsidiary corporations ("hili##ine Co!#o!ate $a%, Cesa! &illanuev
a, 2''( ed.).
9. As to num)er of persons =ho compose them(
a b a++re+ate corporation 2 a corporation consisting of more than one person or
member1 or corporation so*e 2 a corporation consisting of only one person or mem
ber1 a special form of corporation usually associated with the clergy

27 As to =hether they are for re*i+ious purposes or not( a ecc*esiastica* corpor

ation 2 one organized for religious purposes1 or b *ay corporation 2 one organiz
ed for a purpose other than for religion
11.
As to =hether they are for charita)*e purposes or not( a. e*eemosynary corporati
on 2 one established for or devoted to charitable purposes or those supported by
charity1 or b. ci.i* corporation 2 one established for business or profit
PARTNERSHIP CORPORATION 2. Creation Created by mere Created by law or by agreeme
nt of the operation of law parties 2. Num)er of incorporators 4ay be organized b
y +e'uires at least at least two persons five incorporators %except a corporatio
n sole0 3. Commencement of -uri,ica* persona*ity Ac'uires juridical Ac'uires jur
idical personality from the personality from the moment of execution date of iss
uance of of the contract of the certificate of partnership incorporation by the
Securities and Exchange Commission 8. Po=ers &artnership Corporation can may exe
rcise any exercise only the power authorized by powers expressly the partners gr
anted by law or %provided it is not implied from those contrary to law, granted
or incident morals, good to its existence customs, public order, public policy0
F. Mana+ement 3hen management is "he power to do not agreed upon, business and e
very partner is an manage its affairs is agent of the vested in the board partne
rship of directors or trustees :. Effect of mismana+ement A partner as such can
"he suit against a sue a co(partner who member of the mismanages board of direct
ors or trustees who mismanages must be in the name of the corporation /. Ri+ht o
f succession &artnership has no Corporation has right of succession right of suc
cession 0. EDtent of *ia)i*ity to thir, persons &artners are liable Stoc$holders
are personally and liable only to the subsidiarily extent of the shares
4

%sometimes solidarily0 subscribed by them for partnership debts to third persons

1. Transfera)i*ity of interest &artner cannot Stoc$holder has transfer his inte
rest in generally the right to the partnership so as transfer his shares to ma$e
the without prior consent transferee a partner of the other without the stoc$ho
lders unanimous consent because corporation of all the existing is not based on
this partners because the principle partnership is based on the principle of del
ectus #e!sona!u7 27. Term of eDistence &artnership may be Corporation may not es
tablished for any be formed for a term period of time in excess of ?6 stipulated
by the years extendible to partners not more than ?6 years in any one instance
22. Firm name =imited partnership is Corporation may re'uired by law to adopt an
y name add the word =td ! to provided it is not the its name same as or similar t
o any registered firm name 22. &isso*ution 4ay be dissolved at Can only be any t
ime by any or all dissolved with the of the partners consent of the State 23. #o
.ernin+ "a= >overned by the >overned by the <CC Corporation Code <. A&<ANTA#ES A
N& &ISA&<ANTA#ES OF A !SINESS CORPORATION (The Co!#o!ation Code o the "hili##ine
s Annotated, )ecto! de $eon, 2''2 ed.) A&<ANTA#ES 1. has a legal capacity to act
and contract as a distinct unit in its own name 2. continuity of existence 3. i
ts credit is strengthened by its continuity of existence 4. centralized manageme
nt in the board of directors 5. its creation, management, organization and disso
lution are standardized as they are governed under one general incorporation law
6. limited liability 7. shareholders are not the general agents of the business
8. transferability of shares &ISA&<ANTA#ES 1. complicated in formation and mana
gement 2. high cost of formation and operations 3. its credit is wea$ened by the
limited liability feature 4. lac$ of personal element 5. greater degree of gove
rnmental supervision 6. management and control are separated from ownership 7. S
toc$holders have little voice in the conduct of the business
<I. COMPONENTS OF A CORPORATION 2. Corporators 2 those who compose a corporation
, whether as stoc$holders or members 2. Incorporators ( those mentioned in the A
rticles of #ncorporation as originally forming and composing the corporation, ha
ving signed the Articles and ac$nowledged the same before a notary public "hey h
"here is only one set o
ave no powers beyond those vested in them by the statute
f incorporators, hence, they will remain to be such incorporators up to the term
ination of the life of the corporation Gua*ifications( a. natural person1 b. not
less than ? but not more than -?1 c. of legal age1 d. majority must be resident
s of the &hilippines1 and e. each must own or subscribe to at least one share (S
ec. ('). >E<E+A= +@=EA Bnly natural persons can be incorporators ECCE&"#B<A 3hen
otherwise allowed by law, e.g , +ural 9an$s Act of -..,, where incorporated coo
peratives are allowed to be incorporators of rural ban$s Note( *owever, it is un
deniable that corporations can be corporators 3. StocEho*,ers 2 owners of shares
of stoc$ in a stoc$ corporation 8. Mem)ers 2 corporators of a corporation which
has no capital stoc$ INCORPORATORS signatory to the Articles of #ncorporation a
it acco7#li1 accomplished fact %the Articles of #ncorporation cannot be amended
to replace them0 number is limited to ?(-? must have contractual capacity CORPOR
ATORS stoc$holder %stoc$ corporation0 or member %non(stoc$ corporation0 they may
cease to be such if they subse'uently lose their shareholdings no restriction a
s to number may be such through a guardian
OTHER COMPONENTS 2. Promoter ( A person who, acting alone or with others, ta$es
initiative in founding and organizing the business or enterprise of the issuer a
nd receives consideration therefor (Sec. /, R.A. 09..).
*e is an agent of the in
corporators but not of the corporation Contracts by the promoter for and in beha
lf of a proposed corporation generally bind only him, subject to and to the exte
nt of his representations, and not the corporation, unless and until after these
contracts are ratified, expressly or impliedly, by its 9oard of )irectorsD"rust
ees (Cagayan <ishing *evelo#7ent Co., Inc. v. Sandi8o, 65 "hil. 22/). 2. Su)scri
)er 2 A person who has agreed to ta$e and pay for original and unissued shares o
f a corporation formed or to be formed 3 !n,er=riter 2 A person who guarantees o
n a firm commitment andD or declared best effort basis the distribution and sale
of securities of any $ind by another company (Sec. /, R.A. 09..). <II. C"ASSIFI

CATION OF SHARES
1. Common shares 5

"he basic class of stoc$ ordinarily and usually issued

without extraordinary rights and privileges, and the owners thereof are entitled
to a pro rata share in the profits of the corporation and in its assets upon di
ssolution and, li$ewise, in the management of its affairs without preference or
advantage whatsoever Common shares or stoc$s represent the residual ownership in
terest in the corporation Common shares have complete voting rights "hey cannot
be deprived of said rights except as provided by law

expressly provided for in the articles of incorporation1 b "he terms and conditi
ons affecting said shares must be stated both in the articles of incorporation a
nd in the certificates of stoc$ representing such shares1 c +edeemable shares ma
y be deprived of voting rights in the articles of incorporation, unless otherwis
e provided in the Code
+edeemable shares may be redeemed, regardless of
the existence of unrestricted retained earnings (Sec. 0), provided that the corp
oration has, after such redemption, sufficient assets in its boo$s to cover debt
s and liabilities inclusive of capital stoc$ +edemption may not be made where th
e corporation is insolvent or if such redemption would cause insolvency ot inabi
lity of the corporation to meet its debts as they mature Such limitation is base
d on the principle that corporate assets are a trust fund for creditors 3hen red
eemable shares are reac'uired, the same shall be considered retired and no longe
r issuable unless otherwise provided for in the Articles of #ncorporation Note(
8or tax purposes, there are cases when redemption of shares is considered a sche
me to circumvent the tax conse'uences of cash dividends *ence, the amounts recei
ved by the shareholders shall be treated as cash dividends because proceeds of r
edemption in such a case is additional wealth and not merely a return of the cap
ital ("hili##ine Co!#o!ate $a% Co7#ediu7, Ti7oteo A:uino, 2''6 ed.).
2. Preferre, shares
Shares with a stated par value which entitle the holder
thereof to certain preferences over the holders of common stoc$ "he preference m
ay be %a0 as to asset1 or %b0 as to dividends1 or %c0 as may be determined by th
e board of directors when so authorized to do so (The Co!#o!ation Code o the "hi
li##ines, ). *e $eon, 2''2 ed.). Purpose( "o induce more persons to subscribe fo
r shares of a corporation &referred shareholders are not creditors of the corpor
ation Eet all preferred stoc$ contracts are, fundamentally attempts to endow cer
tain owners with rights analogous to creditor rights and statutes and court deci
sions on this matter have been concerned, primarily, with the length to which th
e preferred stoc$ contract can go in extending creditor rights to stoc$holder "h
e reason why there is an effort to extend such right is to ma$e preferred shares
attractive to investors for they can remain as such and at the same time enjoy
certain advantages that are available to creditors ("hili##ine Co!#o!ate $a% Co7
#ediu7, Ti7oteo A:uino, 2''6 ed.). "imitations( a #f deprived of voting rights,
it shall still be entitled to vote on matters enumerated in Section 6, #a!. 6 b
&reference must not be violative of the Code c 4ay be issued only with a stated
par value d "he board of directors may fix the terms and conditions only when so
authorized by the articles of incorporation and such terms and conditions shall
be effective upon filing a certificate thereof with the SEC Hin,s( a Cumulative
2 one which entitles he owner thereof to payment not only of current dividends
but also bac$ dividends not previously paid whether or not during the past years
dividends were declared or paid b <on(cumulative 2 one which grants the holders
of such shares only to the payment of current dividends but not bac$ dividends
when and if dividends are paid to the extent agreed upon before any other stoc$h
olders are paid the same c &articipating ( one which entitles the shareholder to
participate with the common shares in excess distribution at some predetermined
or at a fixed ratio as may be determined d <on(participating A one which entitl
es the shareholder thereof to receive the stipulated preferred dividends and no
more e Cumulative participating 2 share which is a combination of the cumulative

share and participating share

4. Treasury shares
Shares of stoc$ which have been issued and fully paid
for, but subse'uently reac'uired by the issuing corporation by purchase, redempt
ion, donation or through some other lawful means (Sec. .). "reasury shares are n
ot retired shares "hey do not form revert to the unissued shares of the corporat
ion but are regarded as property ac'uired by the corporation which may be reissu
ed or resold at a price to be fixed by the 9oard of )irectors (S@C Rules Gove!ni
ng Redee7a2le and T!easu!y Sha!es, CC" 1o. (;(.02). #f purchased from stoc$holde
rsA "he transaction in effect is a return to the stoc$holders of the value of th
eir investment in the company and a reversion of the shares to the corporation "
he corporation must have surplus profits with which to buy the shares so that th
e transaction will not cause an impairment of the capital #f ac'uired by donatio
n from the stoc$holdersA "he act would amount to a surrender of their stoc$ with
out getting bac$ their investments that are instead, voluntarily given to the co
rporation "reasury shares need not be sold at par or issued value but may be sol
d at the best price obtainable, provided it is reasonable 3hen treasury shares a
re sold below its par or issued value, there can be no watering of stoc$ because
such watering contemplates an original issuance of shares "reasury shares have
no voting rights as long as they remain in treasury %uncalled and subject to rei
ssue0 (Sec. 59) Reason( A corporation cannot in any proper sense be a stoc$holde
r in itself and e'ual distribution of voting rights will be effectively lost <ei
ther are treasury shares entitled to dividends or assets because dividends canno
t be declared by a corporation to itself "reasury shares may be declared as prop
erty dividend to be issued out of the retained earnings previously used to suppo
rt their ac'uisition provided that the amount of the retained earnings has not b
een subse'uently impaired by losses

3. Re,eema)*e shares
Shares of stoc$s issued by the corporation which said
corporation can purchase or ta$e up from their holders as expressly provided for
in the articles of incorporation and certificate of stoc$ representing said sha
res at a fixed date or at the option of the issuing corporation or the stoc$hold
er or both at a certain redemption price "imitations( a +edeemable shares may be
issued only when

5. Foun,ersI shares
Shares classified as such in the articles if incorporation and issued to organiz
ers and promoters of a corporation in consideration of some supposed right or pr
operty such as special preference in voting rights and dividend payments 9ut if
an exclusive right to vote and be voted for as director is granted, this privile
ge is subject to approval by the SEC, and cannot exceed ? years from the date of
approval (Sec. 9).
d
which is less than its par or issued value #ssued as stoc$ dividend when there a
re no sufficient retained earnings to justify it
11. Par .a*ue shares
Shares with a value fixed in the articles of incorporation and the certificates
of stoc$ A&<ANTA#ES Easily sold as the public is more attracted t buy this $ind
of share >reater protection to creditors @nli$elihood of sale of subse'uently is
sued shares at a lower price @nli$elihood of distribution of dividends that are
only ostensible profits 22. No par .a*ue shares Shares having no par value but h
ave issued value stated in the certificate or articles of incorporation A&<ANTA#
ES #ssued as fully paid and non( assessable, &rice is flexible Enjoy wider distr
ibution because of it being low(priced "ell no untruth concerning the value of t
he stoc$holder:s contribution 4ore easily issued, thereby simplifying accounting
procedures &ISA&<ANTA#ES =egalizes issuance of large stoc$ for property Conceal
money or property represented by the shares &romote the issuance of watered sto
c$ =esser protection creditors to &ISA&<ANTA#ES Subscribers are liable to the co
rporate creditors for their unpaid subscription "he stated value of the share is
not an accurate criterion of its true value
Shares with a right to vote
@nder the code, whenever a vote is
6. <otin+ shares
necessary to
approve a particular corporate act, such vote refers only to stoc$s with voting
rights except in certain cases when even non(voting shares may also vote (Sec. 6
, #a!. 6 and last #a!.).
7. NonC.otin+ shares Shares without right to vote
"he law only authorizes the de
nial of voting rights in
the case of redeemable shares and preferred shares, provided that there shall al
ways be a class or series of shares which have complete voting rights "hese rede
emable and preferred shares, when such voting rights are denied, shall neverthel
ess be entitled to vote on the following fundamental mattersA Fey ( 6A2 SI2 MI&9
a. amendment of Articles of #ncorporation b. adoption and amendment of by(laws1
c. sale or disposition of all or substantially all of corporate property1 d. in
curring, creating or increasing bonded indebtedness1 e. increase or decrease of
capital stoc$ f. merger or consolidation of capital stoc$ g. investments of corp
orate funds in another corporation or another business purpose1 and h. corporate
,issolution

8. Share in escro=
Share subject to an agreement by virtue of which the
share is deposited by the grantor or his agent with a third person to be $ept by
the escrow agent until the performance of a certain condition or he happening o
f a certain event contained in the agreement (Cannon v. )andley, (2 "hil. /(5).
"he escrow deposit ma$es the depository a trustee under an express trust (A!ticl
es (44' and (44( o the 1e% Civil Code).

9. O.erCissue, stocE

Stoc$ issued in excess of the authorized capital stoc$ #t is also $nown as s#u!i
ous stoc8 #ts issuance is considered null and void
10. $atere, stocE
A stoc$ issued not in exchange for its e'uivalent value
either in cash, property, share, stoc$ dividends, or services 3ater! in the stoc$
represents the difference between the fair mar$et value at the time of the issu
ance of the stoc$ and the par or issued value of said stoc$ 9oth par and no par
stoc$s can thus be watered stoc$s #t includes stoc$sA a #ssued without considera
tion (2onus sha!e) b #ssued as fully paid when the corporation has received a le
sser sum of money than its par or issued value (discount sha!e) c #ssued for a c
onsideration other than actual cash such as property or services, the fair valua
tion of
"imitations( ( <o par value shares cannot have an issued price of less than &? 6
61 ( "he entire consideration for its issuance constitutes capital so that no pa
rt of it should be distributed as dividends1 ( "hey cannot be issued as preferre
d stoc$s1 ( "hey cannot be issued by )an$s, trust companies, insurance companies
, public utilities and )uilding and loan association 6 PICT 91 ( "he articles of
incorporation must state the fact that it issued no par value shares as well as
the number of said shares1 ( Bnce issued, they are deemed fully paid and non( a
ssessable (Sec. 6).
12. Street certificate
A stoc$ certificate endorsed by the registered holder in blan$ and the transfere
e can command its transfer to his name from the issuing corporation

13. Con.erti)*e share

A share that is changeable by the stoc$holder from one class to another at a cer
tain price and within a certain period
7

28. Fractiona* share A share with a value of less than one full share G $HEN C"A
SSIFICATION OF SHARES MA% E MA&E %The Co!#o!ation Code o the "hili##ines, )ecto!
S. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.)( 1. y the incorporators 2 "he cl
asses and number of shares which a corporation shall issue are first determined
by the incorporators as stated in the articles of incorporation filed with the S
EC , y the oar, of &irectors an, the StocEho*,ers 2 After the corporations comes
into existence, they may be altered by the board of directors and the stoc$hold
ers by amending the articles of incorporation pursuant to Sec -5
A corporation m
ay issue such classes or series of shares as the prospects and needs of its busi
ness may re'uire 8urthermore, it may classify its shares for the purpose of insu
ring compliance with constitutional or legal re'uirements (Sec. 6, #a!. 4).
Shar
es may also be issued in different classes to create preferences or to deny or g
rant certain rights e g voting or non(voting shares &OCTRINE OF EG!A"IT% OF SHAR
ES C3here the articles of incorporation do not provide for any distinction of th
e shares of stoc$, all shares issued by the corporation are presumed to be e'ual
and enjoy the same rights and privileges and are also subject to the same liabi
lities (Sec. 6, #a!. 5). &EFINITION OF TERMSEFINITION O -. Capita* StocE or "e+a
* StocE or State, Capita* ( "he amount fixed in the corporate charter to be subs
cribed and paid in cash, $ind or property at the organization of the corporation
or afterwards and upon which the corporation is to conduct its operation , Capi
ta* 2 "he value of the actual property or estate of the corporation whether in m
oney or property #ts net worth %or stoc$holder:s e'uity0 is its assets less its
liabilities G AuthoriAe, Capita* StocE ( "he capital stoc$ divided into shares H
Su)scri)e, Capita* StocE( "he total amount of the capital stoc$ subscribed whet
her fully paid or not ? Outstan,in+ Capita* StocE ( "he portion of the capital s
toc$ issued to subscribers, whether fully paid or partially paid %as long as the
re is a binding subscription contract0 except treasury stoc$s (Sec. (/9). 5 !nis
sue, Capita* StocE 2 "he portion of the capital stoc$ that is not issued or subs
cribed #t does not vote and draws no dividends / "e+a* Capita* ( "he amount e'ua
l to the aggregate par value andDor issued value of the outstanding capital stoc
$ I State, Capita* 2 "he capital stoc$ divided into no par value shares . Pai,Cu
p Capita* 2 "he amount paid by the stoc$holders on subscriptions from unissued s
hares of the corporation <III. FORMATION AN& OR#ANIJATION OF CORPORATION PRI<ATE
c. &ayment of filing and publication fees d. #ssuance by the SEC of the certific
ate of
incorporation Forma* Or+aniAation an, Commencement of the Transaction of usiness
"hese are conditions subse'uent, which may be satisfied by substantial complian
ce in order that a corporation may legally continue as such Forma* or+aniAation(
a. Adoption of 9y(=aws and filing of the same with the SEC1 b. Election of boar
d of directorsDtrustees, and officers1 c. Establishment of principal office1 d.
&roviding for subscription and payment of capital stoc$
ARTIC"ES OF INCORPORATION 6AI9 "he document prepared by the persons establishing
a corporation and filed with the SEC containing the matters re'uired by the Cod
e "he Articles of #ncorporation have been described as one that defines the char
ter of the corporation, and the contractual relationships between the State and
the corporation, the stoc$holder and the State, and between the corporation and
its stoc$holders ($anu>a v. CA GR 1o.(/(/.4, ,a!ch 20, 2''5). Si+nificance( - "h
e issuance of a certificate of incorporation signals the birth of the corporatio
n:s juridical personality1 , #t is an essential re'uirement for the existence of
a corporation, even a de facto one Contents (Sec. (4)( 2. Corporate Name (Sec.
(0) "he corporation ac'uires juridical personality under the name stated in the
certificate of incorporation #t is the name of the corporation which identifies
and distinguishes it from other corporations, firms or entities
A corporation:s
right to use its corporate and trade name is a property right, a right in !e7 wh
ich it may assert or protect against the whole world in the same manner as it ma
y protect its tangible property against trespass or conversion ("hili#s @?#o!t B
.&. vs. CA, 2'6 SCRA 459). Statutory *imitation( "he proposed name must not beA
a. identical1 or b. deceptively or confusingly similar to that of any existing c

orporation or to any other name already protected by law1 or c. patently decepti

ve, confusing or contrary to law Reme,ies of corporation =hose name has )een a,o
pte, )y another( 1. #njunction 2. )e(registration
A corporation can change the name originally selected
by it after complying with the formalities prescribed by law, to witA amendment
of the articles of incorporation and filing of the amendment with the SEC (Sec.
(6). An authorized change in the name of the corporation, whether effected by a
special act or under a general law, has no more effect upon its identity as a co
rporation than a change of name of natural person upon his identity #t does not
affect the property, rights, or liabilities of the corporation, nor lessen or ad
d to its obligations #t is in no sense a new corporation, nor the successor of t
he original corporation #t is the same corporation with a different name and its
character is in
STEPS IN THE CREATION OF A CORPORATION - Promotion 2 A promoter is a person who,
acting alone or with others, ta$es initiative in founding and organizing the bu
siness or enterprise of the issuer and receives consideration therefor (Sec. /.(
', SRC) 2. Incorporation Steps( a. )rafting and execution of Articles of #ncorpo
ration by the incorporators and other documents re'uired for registration of the
corporation b. 8iling with the SEC of the articles of incorporation

no respect changed (Re#. "lante!s Ban8 vs. CA, 2(6 SCRA 9/0). 2. Purpose C*ause
Si+nificance( a A person who intends to invest his money in the business corpora
tion will $now where and in what $ind of business or activity his money will be
invested1 b. "he directors and the officers of the corporation will $now within
what scope of business they are authorized to act1 and c. A third person who has
dealings with the corporation may $now by perusal of the articles whether the t
ransaction or dealing he has with the corporation is within the authority of the
corporation or not "imitations( a. &urpose or purposes must be lawful1 b. &urpo
se or purposes must be stated with sufficient clarity1 c. #f there is more than
one purpose, the primary as well as the secondary purpose must be specified1 and
d. &urposes must be capable of being lawfully combined
A corporation the primar
y object of which is without statutory authority can have no lawful existence, e
ven though some of its declared purposes may be lawful 3. Principa* Office "he a
rticles of incorporation must state the place where the principal office of the
corporation is to be established or located, which place must be within the &hil
ippine (Sec. (4 4/6). Purpose( "o fix the residence of the corporation in a defi
nite place, instead of allowing it to be ambulatory (Boung Auto Su##ly Co. vs. C
A, 22/ SCRA 69'). #t is now re'uired by the SEC that all corporations and partne
rships applying for registration should state in their Articles of #ncorporation
the specific address of their principal office, which shall include, if feasibl
e, the strict number1 street name1 barangay1 city or municipality1 and specific
residence address of each incorporator, stoc$holder, director or trustee in line
with the full disclosure re'uirement of existing laws (S@C Ci!c. 1o. /, Se!ies
o 2''6).

creation of a new corporation % The Co!#o!ation Code o the "hili##ines, )ecto! S

. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.) "he expiration of the term for whi
ch the corporation was created does not, however, produce its immediate dissolut
ion for all purposes (Sec. (22). &OCTRINE OF RE"ATION OR RE"ATIN# ACH &OCTRINE "
he filing and recording of a certificate of extension after the term cannot rela
te bac$ to the date of the passage of the resolution of the stoc$holders to exte
nd the life of the corporation *owever, the doctrine of relations applies if the
failure to file the application for extension within the term of the corporatio
n is due to the neglect of the officer with whom the certificate is re'uired to
be filed or to a wrongful refusal on his part to receive it ("hili##ine Co!#o!at
e $a% Co7#ediu7, Ti7oteo A:uino, 2''6 ed.)
F :
Incorporators (See &I. Co7#onents o a Co!#o!ation) &irectors an, Trustees "he 9o
ard of )irectors is the governing body in a stoc$ corporation while 9oard of "ru
stees is the governing body in a non(stoc$ corporation "hey exercise the powers
of the corporation (Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uin
o, 2''5 ed.). Matters re'uire, to )e state, in the AI( a. a statement of the nam
es, nationalities and residences of the incorporating directors or the persons w
ho shall act as such until the first regular directors or trustees are duly elec
ted and 'ualified in accordance with the law b. the number of directors or trust
ees, which shall not be less than ? but not more than -? EDceptions( - education
al corporations registered as non( stoc$ corporation whose number of trustees th
ough not less than five and not more than fifteen should be divisible by five1 a
nd , in close corporation where all the stoc$holders are considered as members o
f the board of directors thereby effectively allowing twenty members in the boar
d (Co!#o!ation Code o the "hili##ines,Ru2en C. $adia, 2''( ed.). /. Capita*iAati
on Matters re'uire, to )e state, in the AI( a. the amount of its authorized capi
tal stoc$ in lawful money of the &hilippines1 b. the number of shares and $ind o
f shares into which it is divided1 c. in case the shares are par value shares, t
he par value of each1 d. the names, nationalities and residences of the original
subscribers1 e. the amount subscribed and paid by each on his subscription1 f.

sworn statement of the treasurer elected by the subscribers showing that at leas
t ,?7 of the authorized capital stoc$ of the corporation has been subscribed1 g.
sworn statement of the treasurer elected by the subscribers showing that at lea
st ,?7 of the total subscription has been fully paid to him in actual cash andDo
r in property the fair valuation of which is e'ual to at least ,?7 of the said s
ubscription1 and h. sworn statement of the treasurer elected by the subscribers
showing that such paid(up capital being not less that five thousand pesos

8. Term of EDistence (Sec. (()

"he corporation shall exist for the term specifie
d in the articles of incorporation not exceeding ?6 years, unless sooner legally
dissolved or unless its registration is revo$ed upon any of the grounds provide
d by law "he corporate life may be reduced or extended by amendment of the artic
les of incorporation by complying with the procedural re'uirements laid down in
Sec G/ "he extension of corporate term is subject to the following limitationsA
a. "he term shall not exceed ?6 years in any one instance1 b. "he amendment is e
ffected before the expiration of the corporate term of existence, for after diss
olution by expiration of the corporation term there is no more corporate life to
extend (Alha72!a Ciga! vs. S@C, 24 SCRA 26.). c. "he extension cannot be made e
arlier than ? years prior to the expiration date unless there are justifiable re
asons therefore as may be determined by the SEC
"he mere extension of the corpor
ate term of existence made before the expiration of the original term constitute
s a continuation of the old, and not the
9

CAPITA" STOCH REG!IREMENT G@1@RA$ R3$@C <o minimum authorized capital stoc$ as l
ong as the paid(up capital is not less than &?,666 66 @DC@"TIE1SC - as provided
for by special law a. &rivate )evelopment 9an$s ( &H4 for class A ( &,4 for clas
s 9 ( &-4 for class C b. #nvestment Companies 2 paid up at least &?6,666,666 c.
Savings and =oan Corporation 2 to be fixed by the 4onetary 9oard, but not less t
han &-66" d. 8inancing Companies &aid upA ( &-64 for 4etro 4anila and other -st
class city ( &?4 for other classes of cities ( &, ? 4 for others 4 e #nsurance c
ompanies 1. #nsurance 9ro$er 2 &,?6,666 66 2. >eneral Agent 2 & ,?6,666 66 G +ei
nsurance 9ro$er 2 & 6 ? 4 , provided that at least ,?7 of the authorized capital
stoc$ has been subscribed and at least ,?7 of the total subscription must be pa
id(up FI"IPINO PERCENTA#E O$NERSHIP REG!IREMENT No Forei+n E'uity 1. 4ass 4edia
except recording (A!t. D&I, Sec. (( o the ConstitutionF "!esidential ,e7o!andu7
dated '4 ,ay (..4) 2. &ractice of all professions G +etail trade enterprises wit
h paid(up capital of less than @SJ,,?66,666(Sec. 5 o RA 0962) H Cooperatives %Ch
. III, A!t. 26 o RA 6./0) ? &rivate Security Agencies (Sec. 4 o RA 5409) 5 Small
(scale 4ining (Sec. / o RA 9'96) / @tilization of 4arine +esources in archipelag
ic waters, territorial sea, and exclusive economic zone as well as small(scale u
tilization of natural resources in rivers, la$es, bays, and lagoons (A!t. DII, S
ec. 2 o the Constitution) I Bwnership, operation and management of coc$pits (Sec
. 5 o "* 44.) . 4anufacture, repair, stoc$piling andDor distribution of nuclear
weapons (A!t. II, Sec. 0 o the Constitution) -6 4anufacture, repair, stoc$piling
andDor distribution of biological, chemical and radiological weapons and anti(p
ersonnel mines (&a!ious t!eaties to %hich the "hili##ines is a signato!y and con
ventions su##o!ted 2y the "hili##ines) 11. 4anufacture of firecrac$ers and other
pyrotechnic devices (Sec. 5 o RA 9(0/) !p to T=enty Percent 627;9 Forei+n E'uit
y - &rivate radio communications networ$ (RA /046) !p to T=entyCFi.e Percent 62F
;9 Forei+n E'uity &rivate recruitment, whether for local or overseas employment
(A!t. 29 o "* 442) , Contracts for the construction and repair of locally(funded
public wor$s (Sec. ( o CA 54(, $EI 6/') exceptA a. infrastructureDdevelopment p
rojects covered in +A //-I1 and b. projects which are foreign funded or assisted
and re'uired to undergo international competitive bidding (Sec. 2a o RA 99(0) G
Contracts for the construction of defense(related structures (Sec. ( o CA 54()
!p to Thirty Percent 637;9 Forei+n E'uity - Advertising (A!t. D&I, Sec. (( o the
Constitution) !p to Forty Percent 687;9 Forei+n E'uity Exploration, development
and utilization of natural resources (A!t. DII, Sec. 2 o the Constitution) , Bw
nership of private lands (A!t. DII, Sec. 9 o the ConstitutionF Ch. 5, Sec. 22 o
CA (4(F Sec. 4 o RA .(02) G Bperation and management of public utilities (A!t. D
II, Sec. (( o the ConstitutionF Sec. (6 o CA (46) H BwnershipDestablishment and
administration of educational institutions (A!t. DI&, Sec. 4 o the Constitution)
? Culture, production, milling, processing, trading excepting retailing, of ric
e and corn and ac'uiring, by barter, purchase or otherwise, rice and corn and th
e by(products thereof (Sec. 5 o "* (.4FSec. (5 o RA 0962 5 Contracts for the sup
ply of materials, goods and commodities to government(owned or controlled corpor
ation, company, agency or municipal corporation (Sec. ( o RA 5(0/) / &roject &ro
ponent and 8acility Bperator of a 9B" project re'uiring a public utilities franc
hise (A!t. DII, Sec. (( o the ConstitutionF Sec. 2a o RA 99(0) I Bperation of de
ep sea commercial fishing vessels (Sec. 29 o RA 055') . Adjustment Companies (Se
c. /2/ o "* 6(2 as a7ended 2y "* (0(4) -6 Bwnership of condominium units where t
he common areas in the condominium project are co( owned by the owners of the se
parate units or owned by a corporation (Sec. 5 o RA 4926) !p to SiDty Percent 6:
7;9 Forei+n E'uity - 8inancing companies regulated by the Securities and Exchang
e Commission (Sec. 6 o RA 5.0' as a7ended 2y RA 0556) , #nvestment houses regula
ted by the SEC (Sec. 5 o "* (2. as a7ended 2y RA 0/66) 0 Shares of StocE (See DI
II. Stoc8s and Stoc8holde!s)
A corporation commences to have juridical pe
COMMENCEMENT OF CORPORATE EKISTENCE
rsonality and legal existence only from the moment the SEC issues to the incorpo
rators a certificate of incorporation under its official seal
#t is the certific
ate of incorporation that gives juridical personality to a corporation and place

d it under the jurisdiction of the commission

#n the case of religious corporati
ons, the Code does not re'uire the SEC to issue a certificate of incorporation #
n fact, Sec --, clearly states that from and after the filing with the Commissio
n of the articles of incorporation, the chief archbishop shall become a corporat
ion sole "he issuance of the articles calls the corporation into being but it is
not really ready to do business until it is organized "he corporation must form
ally organized and commence the transaction of its business or the construction
of its wor$s within two years from the date of its incorporation or, otherwise,
its corporate powers shall cease and it shall be deemed dissolved (Sec. 22.) AME
N&MENT OF ARTIC"ES OF INCORPORATION Proce,ure( 1. +esolution by at least a major
ity of the board of directors or trustees1 2. ;ote or written assent of the stoc
$holders representing at least ,DG of the outstanding capital stoc$ s or ,DG of
the members in case of non(stoc$ corporations 3. Submission and filing with the
SEC ofA a the original and amended articles together
10

b
c
containing all the provisions re'uired by law to be set out in the articles of i
ncorporation Such articles, as amended, shall be indicated by underscoring the c
hange or changes made1 a copy thereof, duly certified under oath by the corporat
e secretary and a majority of the directors or trustees stating the fact that su
ch amendments have been duly approved by the re'uired vote of the stoc$holders o
r members1 and a favorable recommendation of the appropriate government agency c
oncerned if re'uired by law
"imitations( - "he amendment of any provision or matters stated in the articles
of incorporation is not allowed when it will be contrary to the provisions or re
'uirement prescribed by the Code or by special law or changes any provision in t
he articles of incorporation stating an accomplished fact1 , #t must be for legi
timate purposes1 G #t must be approved by the re'uired vote of the board of dire
ctors or trustees and the stoc$holders or members1 H "he original articles and a
mended articles together must contain all provisions re'uired by law to be set o
ut in the articles of incorporation1 ? Such articles, as amended, must be indica
ted by underscoring the changes made, and a copy thereof duly certified under oa
th by the corporate secretary and a majority of the directors or trustees statin
g that the amendments have been duly approved by the re'uired vote of the stoc$h
olders or members must be submitted to the SEC1 5 "he amendments shall ta$e effe
ct only upon their approval by the SEC1
*owever, express approval is not indispe
nsable "his is because the amendment shall also ta$e effect from the date of fil
ing with the said Commission if it is not acted upon by the Commission within 5
months from the date of filing for a cause not attributable to the corporation /
#f the corporation is governed by special law, the amendments must be accompani
ed by a favorable recommendation of the appropriate government agency1 I <o righ
t or remedy in favor of or against any corporation, its stoc$holders, members, d
irectors, trustees, or officers, nor any liability incurred by any such corporat
ion, stoc$holders, members, directors, trustees, or officers, shall be removed o
r impaired either by the subse'uent dissolution of said corporation or by any su
bse'uent amendment or repeal of this Code or of any part thereof (Section (45 o
the Co!#o!ation Code). Facts not su)-ect to amen,ments( 1. <ames of incorporator
s1 2. <ames of original subscribers to the capital stoc$ of the corporation and
their subscribed and paid up capital1 3. "reasurer elected by the original subsc
ribers1 4. 4embers who contributed to the initial capital of a non( stoc$ corpor
ation1 5. )ate and place of execution of the articles of incorporation1 6. 3itne
sses to the signing and ac$nowledgment of the articles #roun,s for Re-ection of
the Artic*es of Incorporation or Amen,ment thereto (Sec. (9) - "hat the articles
of incorporation or any amendment thereto is not substantially in accordance wi
th the form prescribed therein1 , "hat the purpose or purposes of the corporatio
n are patently unconstitutional, illegal, immoral, or contrary to government rul
es and regulations1 G "hat the "reasurer:s Affidavit concerning the amount of
capital stoc$ subscribed andDor paid is false1 H "hat the re'uired percentage of
ownership of the capital stoc$ to be owned by citizens of the &hilippines has n
ot been complied with as re'uired by existing laws or the constitution "hese gro
unds are not exclusive 9efore rejecting the Articles of #ncorporation or its ame
ndments, the SEC should give the incorporators reasonable time within which to c
orrect or modify the objectionable portions of the articles or amendments
Any de
cision of the Commission rejecting the articles of incorporation or disapproving
any amendment thereto is appealable by petition for review to the Court of Appe
als in accordance with the pertinent provisions of the +ules of Court All the gr
ounds enumerated in Section -/ can be determined on the basis of the Articles of
incorporation itself and the other re'uired documents >enerally, if the Article
s of #ncorporation and its supporting documents are in order, the SEC has no rec
ourse but to issue the Certificate of #ncorporation ("hili##ine Co!#o!ate $a% Co

7#ediu7, Ti7oteo A:uino, 2''6 ed.). #roun,s for Suspension or Re.ocation of Cert
ificate of Re+istration ("!es. *ec!ee 1o. .'2;A) - 8raud in procuring its certif
icate of incorporation , Serious misrepresentation as to what the corporation ca
n do or is doing to the great prejudice of, or damage to, the general public G +
efusal to comply with or defiance of a lawful order of the SEC restraining the c
ommission of acts which would amount to a grave violation of its franchise H Con
tinuous inoperation for a period of at least ? years ? 8ailure to file the by(la
ws within the re'uired period 5 8ailure to file re'uired reports EFFECTS OF NONC
!SE OF CORPORATE CHARTER (Sec. 22)
#f a corporation does not formally organize a
nd commence the transaction of its business or the construction of its wor$s wit
hin , years from the date of incorporation, its corporate powers cease and the c
orporation shall be deemed dissolved #f a corporation has commenced transaction
of its business but subse'uently becomes continuously inoperative for a period o
f at least ? years, the same shall be a ground for the suspension or revocation
of its corporate franchise or certificate of incorporation
#f the non(use of cor
porate charter or continuous inoperation of a corporation is due to causes beyon
d its control as found by the Commission, the effects mentioned shall not ta$e p
lace &E FACTO CORPORATION A corporation which actually exists for all practical
purposes as a corporation but which has no legal right to corporate existence as
against the State #t is one which has not complied with all the re'uirements ne
cessary to be a de jure corporation but has complied sufficiently to be accorded
corporate status as against third parties although not against the state Re'uis
ites( 1. "he existence of a valid law under which it may be incorporated1 2. A b
ona fide attempt in good faith to incorporate under such law1 3. Actual use or e
xercise in good faith of corporate powers1 and 4. #ssuance of a certificate of i
ncorporation by the SEC as a minimum re'uirement of continued good faith
#n the case of a de facto corporation, the only way in
which its corporate existence can be 'uestioned is in a direct proceeding by the
State, brought for that
11

purpose &rivate individuals cannot raise the objection in such a case, either di
rectly or indirectly, and nobody can raise the objection collaterally %The Co!#o
!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6
ed.) Such a corporation is practically as good as a de jure corporation #t is de
emed to have a substantial legal existence and ordinarily, in its relation with
all persons except the State, has the same powers and is subject to the same lia
bilities, duties and responsibilities, as a corporation de jure, and is bound by
all such acts as it might rightfully perform if it were a corporation de jure %
The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, !., 2''6 ed.) "he officers and directors of a de facto corporation are subject t
o all the liabilities and penalties attending to officers and directors duly cho
sen by a corporation de jure, including the liability under the criminal law, an
d their acts are binding when such acts would be within the power of such office
rs if the corporation were one de jure %The Co!#o!ation Code o the "hili##ines,
)ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.).
without voting rights in the board (G!ace Ch!istian )igh School v. CA 20( SCRA (
// Ecto2e! 2/, (..9). , A majority of the directorsDtrustees must be residents o
f the &hilippines (Sec. 2/). G *e must not have been convicted by final judgment
of an offense punishable by imprisonment for a period exceeding 5 years or a vi
olation of the Corporation Code, committed within five years from the date of hi
s election (Sec. 29). H Bnly natural persons can be elected directorsDtrustees
#
n case of corporate stoc$holders or members, their representation in the board c
an be achieved by ma$ing their individual representatives trustees of the shares
or membership to ma$e them stoc$holdersDmembers of record ? Bther 'ualification
s as may be prescribed in the by( laws of the corporation 5 4ust be of legal age
E*ection of oar, Mem)ers (Secs. 24; 25) STOCH NONCSTOCH CORPORATION CORPORATION
Bwners of a majority A majority of the of the outstanding members entitled to c
apital stoc$, in vote, in person or by person or by their proxy, if allowed in i
ts authorized articles of representative as incorporation or by( such by written
proxy, laws, must be present must be present at in the election the election of
the directors Cumulative voting is Cumulative voting is mandatory1 a matter gen
erally not of right granted by available unless law to each allowed by the stoc$
holder with articles of voting rights incorporation or by( laws, since each memb
er is entitled only to one vote Metho,s of <otin+ (Sec. 24) 1. Strai+ht <otin+ B
every stoc$holder may vote such number of shares for as many persons as there a
re directors to be elected 2. Cumu*ati.e <otin+ for One Can,i,ate B a stoc$holde
r is allowed to concentrate his votes and give one candidate as many votes as th
e number of directors to be elected multiplied by the number of his shares shall
e'ual 3. Cumu*ati.e <otin+ )y &istri)ution B by this method, a stoc$holder may
cumulate his shares by multiplying also the number of his shares by the number o
f directors to be elected and distribute the same among as many candidates as he
shall see fit Cumulative voting being a statutory right, a corporation is witho
ut power to deprive the stoc$holders of its use or even restrict the right to vo
te to only one way or method A stoc$holder may or may not exercise the right as
he shall see fit (S@C E#inion, Ect. 2', (.64).
#n electing directors by cumulati
ve voting, the total number of votes cast by a stoc$holder shall not exceed the
number of shares owned by him as shown in the boo$s of the corporation multiplie
d by the whole number of directors to be elected 4embers of non(stoc$ corporatio
ns may cast as many votes as there are trustees to be elected but may cast not m
ore than one vote for one candidate "his is the manner of voting in non( stoc$ c
orporations unless otherwise provided in the articles of incorporation
CORPORATION % ESTOPPE" An unincorporated association which represented itself to
be a corporation will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation ,

liabilities and damages incurred or arising as a result thereof

A corporation by
estoppel has no real existence in law #t is neither a de jure nor a de facto co
rporation, but is a mere fiction existing for the particular case, and vanishing
where the element of estoppel is absent #t exists only between the persons who
misrepresented their status and the parties who relied on the misrepresentation
#ts existence may be attac$ed by any third party except where the attac$ing part
y is estopped to treat the entity other than as a corporation All persons not st
oc$holders or members who assume to act as a corporation $nowing it to be withou
t authority to do so shall be liable as general partners for all debts, liabilit
ies, and damages incurred or arising as a result thereof (Sec.2(). 3hen any such
ostensible corporation is sued on any transaction entered by it as a corporatio
n or on any tort committed by it as such, it shall not be allowed to use as a de
fense its lac$ of corporate personality (Sec. 2(). A third party who, $nowing an
association to be unincorporated, nonetheless treated it as a corporation and r
eceived benefits from it, may be barred from denying its corporate existence in
a suit brought against the alleged corporation ($i7 Tong $i7 vs. "hil. <ishing G
ea! Indust!ies, Inc. /(9 SCRA 920). IK. OAR& OF &IRECTORS AN& TR!STEES
Gua*ifications( - 8or a stoc$ corporation, ownership of at least - share capital
stoc$ of the corporation in his own name, and if he ceases to own at least one
share in his own name, he automatically ceases to be a director (Sec. 2/). 8or a
non(stoc$ corporation, only members of the corporation can be elected to the 9o
ard of "rustees
#n order to be eligible as a director, what is material is the l
egal title to, not beneficial ownership of the stoc$s appearing on the boo$s of
the corporation A person who does not own a stoc$ at time of his election or app
ointment does not dis'ualify him as a director if he becomes a shareholder befor
e assuming the duties of his office
A person who is not a stoc$holder cannot be
a director, but he can be an e? o icio member
12

"imitations on the E*ection of &irectors?Trustees - At any meeting of stoc$holde

r or members called for the election of directors or trustees, there must be pre
sent either in person or by representative authorized to act by written proxy, t
he owners of the majority of the outstanding capital stoc$ or majority of the me
mbers entitled to vote , "he election must be by ballot if re'uested by any voti
ng member or stoc$holder G A stoc$holder cannot be deprived in the articles of i
ncorporation or in the by(laws of his statutory right to use any of the methods
of voting in the election of directors H <o delin'uent stoc$ shall be voted ? "h
e candidates receiving the highest number of votes shall be declared elected A m
ajority vote is not necessary *owever, it is necessary that there is a 'uorum An
d in the absence thereof, election shall be considered invalid (S@C E#inion). "i
mitations on the StocEho*,erLs Ri+ht to <ote 1. 3here the articles of incorporat
ion provides for classification of shares pursuant to Sec 5, non(voting shares a
re not entitled to vote except as provided for in the last paragraph of Sec 5 2.
&referred or redeemable shares may be deprived of the right to vote unless othe
rwise provided in the Code 3. 8ractional shares of stoc$ cannot be voted 4. "rea
sury shares have no voting rights as long as they remain in the treasury 5. *old
ers of stoc$ declared delin'uent by the board of directors for unpaid subscripti
on are not entitled to vote or to representation at any stoc$holder:s meeting 6.
A transferee of stoc$ cannot vote if his transfer is not registered in the stoc
$ and transfer boo$ of the corporation Term of Office (Sec. 2/) "he directors or
trustees shall serve for a term of one year and until their successors are elec
ted and 'ualified #f no election is conducted or no 'ualified candidate is elect
ed, they shall continue to act as such in a hold(over capacity until an election
is held and a 'ualified candidate is so elected 6HO"&CO<ER PRINCIP"E9 (Co!#o!at
ion Code o the "hili##ines, Ru2en C. $adia, 2''( ed.). Guorum Re'uirement in oar
, Meetin+s (Sec. 25) @nless the articles of incorporation or the by(laws provide
for a greater majority, a majority of the number of directors or trustees as fi
xed in the articles of incorporation shall constitute a 'uorum for the transacti
on of corporate business, and every decision of at least a majority of the direc
tors or trustees present at a meeting at which there is a 'uorum shall be valid
as a corporate act, except for the election of officers which shall re'uire the
vote of a majority of all the members of the board Remo.a* of &irectors or Trust
ees (Sec. 20) "he law does not specify cases for removal of a director or truste
e nor even re'uire that removal should be for sufficient cause or reason *owever
, the incumbent directors or trustees cannot be removed merely by replacing a ne
w set of directors or trustees Re'uisites( - "he removal should ta$e place at a
regular or special meeting duly called for the purpose1 2. "he director or trust
ee can only be removed by at least ,DG of the outstanding capital stoc$ or of th
e members entitled to vote1 3. "here must be a previous notice to stoc$holders o
r members of the corporation of the intention to propose such removal at the mee
ting 4. "he removal without cause may not be used to deprive minority stoc$holde
rs or members of the right to representation to which they may be entitled under
Sec ,H of the Code
"here is no need to follow the procedure under Section
,I if the director is dis'ualified 9y operation of law, such director is dis'ual
ified to act as director thereby creating vacancies in the 9oard 4ere declaratio
n of the dis'ualification as the cause of the vacancy is sufficient (S@C E#inion
, <e2!ua!y /, (..2). "he meeting must be called by the secretary on order of the
president or on the written demand of the stoc$holders representing a majority
of the outstanding capital stoc$ or majority members entitled to vote "he law al
so provides that should the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or if there is no secret
ary, the call for the meeting may be addressed directly to the stoc$holders or m
embers by any stoc$holder or member of the corporation signing the demand

<acancies in the oar, (Sec. 2.) A vacancy in the office of director or trustee o
ther than by removal or by expiration of term may be filled as followsA y the st
ocEho*,ers or mem)ers( a #f the vacancy results from the removal by the stoc$hol
ders or members or the expiration of term1 b. #f the vacancy occurs other than b
y removal or by expiration of term, such as death, resignation, abandonment, or
dis'ualification, if the remaining directors or trustees do not constitute a 'uo
rum for the purpose of filling the vacancy1 c. #f the vacancy may be filled by t
he remaining directors or trustees but the board refers the matter to stoc$holde
rs or members1 or d. #f the vacancy is created by reason of an increase in the n
umber of directors or trustees 2. y the mem)ers of the oar, B if still constitut
ing a 'uorum, at least a majority of them are empowered to fill any vacancy occu
rring in the board other than by removal by the stoc$holders or members or by ex
piration of term Compensation of oar, Mem)ers (Sec. /') G@1@RA$ R3$@A )irectors
are not entitled to receive any compensation except for reasonable per diems @DC
@"TIE1SC - 3hen their compensation is fixed in the by(laws , 3hen granted by the
vote of stoc$holders representing at least a majority of the outstanding capita
l stoc$ at a regular or special meeting G 3hen they are also officers of the cor
poration
"he only limitation in the granting of compensation is that the amount
to be given shall not exceed -67 of the net income before income tax of the corp
oration during the preceding year CORPORATE OFFICERS &resident 2 must be a direc
tor and he may not be concurrently the treasurer or secretary , "reasurer 2 may
or may not be a director1 as a matter of sound corporate practice, must be a res
ident G Secretary 2 need not be a director unless re'uired by the by(laws1 must
be a resident and citizen of the &hilippines1 and H Such other officers as may b
e provided in the by(laws CORPORATE OFFICER &osition is provided for in the by(l
aws or under the Corporation Code +"C has jurisdiction in case of labor dispute
CORPORATE EMP"O%EE Employed by the action of the managing officer of the corpora
tion <=+C has jurisdiction in case of labor disputes
13

Authority of Officers is +enera**y ,eri.e, from( 1. =aw 2. 9y(laws 3. Authorizat

ion from the 9oard, either expressly or impliedly by habit, custom or ac'uiescen
ce in the general course of business (Inte!;Asia Invest7ent Indust!ies v. CA GR
no. (25990, -une (', 2''/). EDtent of Po=ers or Authority of Corporate Officers
- "he authority which he has by virtue of his office1 , "he authority which is e
xpressly conferred upon him or is incidental to the effectualness of such expres
s authority1 G As to third persons dealing with him without notice of any restri
ction thereof, the authority which the corporation holds the officer out as poss
essing or is estopped to deny H "he nature of the corporate business must also b
e ta$en into consideration1 and ? "he nature act of an officer though originally
unauthorized may become binding upon the corporation by a subse'uent ratificati
on (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.).
@DC@"TIE1SC 1. #n case of an Executive Committee duly authorized in the by(laws1
2. #n case of a contracted manager which may be an individual, a partnership, o
r another corporation Note( #n case the contracted manager is another corporatio
n, the special rule in Sec HH applies G #n case of close corporations, the stoc$
holders may directly manage the business of the corporation instead, if the arti
cles of incorporation so provide
"he power to purchase real property is vested in the
board of directors or trustees 3hile a corporation may appoint agents to negotia
te for the purchase of real property needed by the corporation, the final say wi
ll have to be with the board, whose approval will finalize the transaction A cor
poration can only exercise its powers and transact its business through its boar
d of directors and through its officers and agents when authorized by a board re
solution or by its by(laws (S#ouses Constantine <i!7e vs. Bu8al @nte!#!ises and
*evelo#7ent Co!#o!ation, G.R. 1o. (466'0, Ecto2e! 2/, 2''/). "imitations on Po=e
rs of oar, of &irectors?Trustees( =imitations imposed by the Constitution, statu
tes, articles of incorporation or by(laws , #t cannot perform constituent or tho
se acts which involve fundamental changes in the corporation which re'uire the a
pproval of its stoc$holders or members G #t cannot exercise powers not possessed
by the corporation (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de
$eon, 2''2 ed.).
"he corporate powers conferred upon the board of directors usu
ally refer only to the ordinary business transactions of the corporation and doe
s not extend beyond the management of ordinary corporate affairs nor beyond the
limits of its authority (S@C E#inion, ,ay 2, (..4). Nature of po=ers of )oar, of
,irectors or trustees (The Co!#o!ation Code o the "hili##ines Annotated, )ecto!
de $eon, 2''2 ed.) - @nder the "heory of Briginal &ower, the powers of the boar
d of directors or trustees are B+#>#<A= and @<)E=E>A"E) "he stoc$holders or memb
ers do not confer, nor can they revo$e those powers , "hey are )E+#;A"#;E only i
n the sense of being received from the State in the act of incorporation !SINESS
M!&#MENT R!"E Courts cannot underta$e to control the discretion of the board of
directors about administrative matters as to which they have the legitimate pow
er of action, and contracts intra vires entered into by the board of directors a
re binding upon the corporation and courts will not interfere unless such contra
cts are so unconscionable and oppressive as to amount to a wanton destruction of
the rights of the minority (Ga72oa vs. &icto!iano, .' SCRA 4'). Conse'uences( +esolutions and transactions entered into by the 9oard within the powers of the
corporation cannot be reversed by the courts not even on the behest of the stoc
$holders , )irectors and officers acting within such business judgment cannot be
held personally liable for such acts ("hili##ine Co!#o!ate $a%, Cesa! &illanuev
a, 2''( ed.). "IA I"IT% OF &IRECTORS@ TR!STEES AN& OFFICERS ThreeCfo*, &uties of
&irectors ("hili##ine Co!#o!ate $a%, Cesa! &illanueva, 2''( ed.) 1. &uty of O)e
,ience "o direct the affairs of the corporation only in accordance with the purp
oses for which it was organized
#t is a familiar doctrine that if a corporation $nowingly
permits one of it officers, or any other agent, to act within the scope of an ap
parent authority, it holds him out to the public as possessing the power to do t

hose acts1 and thus, the corporation will, as against anyone who has in good fai
th dealt with it through such agent, be estopped from denying the agent:s author
ity ($a#u; $a#u <oundation Inc., vs. Cou!t o A##eals, et al., G.R. 1o. (26''6, anua!y 2., 2''4). &OCTRINE OF APPARENT A!THORIT%
#f a corporation, $nowingly per
mits one of its officers, or any other agent, to act within the scope of an appa
rent authority, it holds him out to the public as in possession of the power to
do those acts, and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent:s au
thority
Apparent authority is derived not merely from practice #ts existence may
be ascertained throughA 1. the general manager in which the corporation holds o
ut an officer or agent as having the power to act or, in other words the apparen
t authority to act in general, with which it clothes him1 or 2. the ac'uiescence
in his acts of a particular nature, with actual or constructive $nowledge there
of, within or beyond the scope of his ordinary powers (Inte!;Asia Invest7ent Ind
ust!ies, Inc. vs. CA, G.R. 1o. (25990, -une (', 2''/). OAR& OF &IRECTORS?TR!STEE
S AS REPOSITOR% OF CORPORATE PO$ERS G@1@RA$ R3$@C "he corporate powers of the co
rporation shall be exercised, all business conducted and all property of such co
rporation controlled and held by the board of directors or trustees (Sec. 2/). S
ection ,G of the Corporation Code expressly provides that all corporate powers s
hall be exercised by the board Kust as natural person may authorize another to d
o certain acts in its behalf, so may the board validly delegate some of its func
tions to individual officer or agents Absent such valid delegation, the rule is
that the declarations of an individual director relating to the affairs of the c
orporation, but not in the course of, or connected with the performance of autho
rized duties of such director, are held not binding on the corporation (A< Realt
y + *evGt v. *iesel7an <!eight Se!vices GR 1o.(((440, -anua!y (6, 2''2).
14

2.
G

asis( "he directors or trustees and officers to be elected shall perform the dut
ies enjoined on them by law and the by(laws (Sec. 25). &uty of &i*i+ence )irecto
rs and officers are re'uired to exercise due care in the performance of their fu
nctions asis( )irectors or trustees who willfully and $nowingly vote for or asse
nt to patently unlawful acts of the corporation or who are guilty of gross negli
gence or bad faith in directing the affairs of the corporation shall be liable j
ointly and severally for all damages resulting therefrom suffered by the corpora
tion, its stoc$holders or members and other persons (Sec. /(). &uty of "oya*ty "
he director or officer owes loyalty and allegiance to the corporationLa loyalty
that is undivided and an allegiance that is influenced by no consideration other
than the welfare of the corporation asis( )irectors or trustees who ac'uire any
pecuniary or personal interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting theref
rom (Sec. /(). 3hen a director or trustee attempts to ac'uire or ac'uires in vio
lation of his duty, any interest adverse to the corporation in respect of any ma
tter which has been reposed in him in confidence as to which e'uity imposes a li
ability upon him to deal in his own behalf, he shall be liable as trustee for th
e corporation and must account for all the profits which otherwise would have ac
crued to the corporation (Sec. /(, #a!. 2) 3here a director, by virtue of his of
fice, ac'uires for himself a business opportunity which should belong to the cor
poration, thereby obtaining profits which should belong to the corporation, he m
ust account to the latter for all such profits by refunding the same (Sec. /4) %
)BC"+#<E B8 CB+&B+A"E B&&B+"@<#"E0. 3hile both the second paragraph of Section /
( and Section /4 covers the same subject matter which is business opportunity, t
hey differ in the following senseA SECTION 38 Bnly applicable directors to

it1 or %,0 he is negligent in not discovering or acting to prevent it (Co!#o!ati

on Code o the "hili##ines, Ru2en C. $adia, 2''( @d.). Par. 1 of Sec. 31 applies
to directors or trustees "he erring directorDtrustee shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stoc$holders or members and other persons Par. 2 of Sec. 31 applies to directors
, trustees, or officers who attempts to ac'uire or ac'uires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which ha
s been reposed in him in confidence *e shall be liable as a trustee for the corp
oration and must account for the profits which otherwise would have accrued to t
he corporation
Reme,ies in case of Mismana+ement - +eceivership1 , #njunction, if the act has n
ot yet been done1 G )issolution if the abuse amounts to a ground for the institu
tion of a :uo %a!!anto proceeding but the Solicitor >eneral refuses to act1 and
H )erivative suit or complaint filed with SEC Specia* Ru*es on Contracts entere,
into )y &irectors?Trustees or Officers 2. Contracts of Se*fC,ea*in+ &irectors@
Trustees or Officers (Sec. /2)
Self(dealing directors, trustees or officers are
those who personally contract with the corporation in which they are directors,

trustees, or officers
Such contracts are ;B#)A9=E, at the option of the corporat
ion unlessA a. "he presence of such directorDtrustee in the board meeting approv
ing the contract was not necessary to constitute a 'uorum for such meeting1 b. "
he vote of such directorDtrustee in the board meeting approving the contract was
not necessary for the approval of the contract1 c. "he contract is fair and rea
sonable under the circumstances1 d. #n the case of an officer, there was previou
s authorization by the board of directors
Although not all conditions are presen
t, the corporation may elect not to attac$ or 'uestion the validity of the contr
act, without prejudice, however, to the liability of the directorDtrustee for da
mages under Sec G 3here any of the first two conditions is absent, said contract
may be ratified by the vote of the stoc$holders representing at least ,DG of the
outstanding capital stoc$ or ,DG of the members in a meeting called for the pur
pose, provided that full disclosure of the adverse interest of the directorD tru
stee involved is made at such meeting and the contract is fair and reasonable 2
Contracts of InterC*ocEin+ &irectors (Sec. //)
Contracts entered into between co
rporations with interloc$ing directors %interest of said directors is substantial
!, i e exceeding ,67 of the outstanding capital stoc$0
#nterloc$ing directorship
by itself is not prohibited under the Corporation Code *owever, the by(laws may
contain provisions that disallow interloc$ing directorship
A contract between ,
or more corporations having interloc$ing directors shall not be invalidated on
that ground alone "hese contracts are valid, provided thatA a "he contract is no
t fraudulent1 and b "he contract is fair and reasonable under the circumstances
#f the interloc$ing director:s interest in one corporation or corporations is nom
inal! %not exceeding ,67 of the outstanding capital stoc$0, then all the conditi
ons prescribed in Sec. /2 on self(dealing directors must be
SECTION 32@ 2n, para+raph Applicable to directors, trustees and officers )oes no
t allow ratification of a transaction by a self( dealing directors, trustees or
officers
Allows the ratification of a transaction by a dealing directors, i.e. by the vot
es of stoc$holders representing ,DG of the outstanding capital stoc$
Persona* "ia)i*ity of &irectors G@1@RA$ R3$@C )irectors and officers are not sol
idarily liable with the corporation @DC@"TIE1SA #n the following cases, personal
liability may be incurred by directors and trustees, or in appropriate cases, t
he officers of the corporation, when theyL 1. 3illfully and $nowingly vote for a
nd assent to patently unlawful acts of the corporation1 (Sec. /() 2. Are guilty
of gross negligence or bad faith in directing the affairs of the corporation1 (S
ec. /() 3. Ac'uire any personal or pecuniary interest in conflict of their duty1
(Sec. /() 4. Consent to the issuance of watered stoc$s, or, having $nowledge th
ereof, fails to file objections with the secretary1 (Sec. 65) 5. Agree or stipul
ate in a contract to hold himself personally liable with the corporation1 or 6.
9y virtue of a specific provision of law
A director is not liable for misconduct of co(directors or
other officers unless %-0 he connives or participates in
15

3.

present with respect to the corporation in which he has nominal interest &octrin
e of Corporate Opportunity (Sec. /4) "his is consistent with the duty of loyalty
of a director L which mandates that he should not give preference to his own am
elioration by ta$ing the opportunity of the corporation App*ica)i*ity( @nless hi
s act is ratified, a director shall refund to the corporation all the profits he
realizes on a business opportunity which 1. the corporation is financially able
to underta$e1 2. from its nature, is in line with corporations business and is
of practical advantage to it1 and 3. the corporation has an interest or a reason
able expectancy "he rule shall be applied notwithstanding the fact that the dire
ctor ris$ed his own funds in the venture A business opportunity ceases to be cor
porate opportunity and transforms to personal opportunity where the corporation
refuses or is definitely no longer able to avail itself of the opportunity (S@C
E#inion, ,a!ch 4, (.02).
Man,atory corporate +o.ernance ru*es are necessary for 2 main reasons( 1. "o ove
rcome the collective action problem resulting from the dispersion among stoc$hol
ders, and 2. "o ensure that the interests of all relevant constituencies are rep
resented K. CORPORATE PO$ERS Hin,s( - EDpress B those expressly authorized by th
e Corporation Code and other laws, and its Articles of #ncorporation or Charter
, Inci,enta* B those that are incidental to the existence of the corporation G I
mp*ie, B those that can be inferred from or necessary for the exercise of the ex
press powers Classification of #mplied &owers a Acts in the usual course of busi
ness b. Acts to protect debts owing to the corporation c. Acts which involve emb
ar$ing in a different business usually to collect debts out of profits d. Acts t
o protect or aid employees e. Acts to increase business (The Co!#o!ation Code o
the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.) #enera* Po=ers an, Capacity
(Sec. /6) 1. "o sue and be sued1 2. Bf succession1 3. "o adopt and use of corpo
rate seal1 4. "o amend its Articles of #ncorporation1 5. "o adopt its by(laws1 6
. 8or stoc$ corporationsA issue and sell stoc$s to subscribers and treasury stoc
$s1 for non(stoc$ corporationsA admit members1 7. "o purchase, receive, ta$e or
grant, hold, convey, sell, lease, pledge, mortgage and deal with real and person
al property, securities and bonds 8. "o enter into merger or consolidation1 9. "
o ma$e reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civic or similar purposes, provided that no donation is given to any
%i0 political party, %ii0 candidate and %iii0 partisan political activity 10. "
o establish pension, retirement, and other plans for the benefit of its director
s, trustees, officers and employees 11. "o exercise other powers essential or ne
cessary to carry out its purposes Other Po=ers 2. EDtension ?Shortenin+ of Corpo
rate Term (Sec. /9) Proce,ure( a Approval by a majority vote of the board of dir
ectorsDtrustees b 3ritten notice of the proposed action and the time and place o
f meeting shall be served to each stoc$holder or member either by mail or person
al service c +atification by the stoc$holders representing at least ,DG of the o
utstanding capital stoc$ or ,DG of the members in case of non(stoc$ corporations
EKEC!TI<E COMMITTEE (Sec. /5) A body created by the by(laws and composed of some
members of the board which, subject to the statutory limitations, has all the a
uthority of the board to the extent provided in the board resolution or by(laws
(The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.). Pu
rpose( "he Code allows the creation of such because the 9oard may not readily fa
ce the contingency of confronting urgent matters which re'uires its attention 4u
st be provided for in the by laws and composed of not less than G members of the
board appointed by the board
"he executive committee has all the authority of t
he board to the extent provided for in the resolution of the board or in the by
laws 4ay act by a majority vote of all of its members
#ts decisions are not subj
ect to appeal to the board *owever, if the resolution of the Executive Committee
is invalid i e not one of the powers conferred to it0, it may be ratified by th

e board (S@C E#inion).

#f the executive committee is not validly constituted, th
e members thereof may be considered as de facto officers (S@C E#inion). "imitati
ons on the Po=ers of the EDecuti.e Committee #t cannot act on the followingA 1.
4atters needing stoc$holder approval1 2. 8illing up of board vacancies1 3. Amend
ment, repeal or adoption of by(laws1 4. Amendment or repeal of any resolution of
the 9oard which by its express terms is not amendable or repealable1 and ? Cash
dividend declaration CO&E OF CORPORATE #O<ERNANCE App*ica)i*ity( "he Code of Co
rporate >overnance shall be applicable toA 1. Corporations whose securities are
registered or listed1 2. Corporations which are grantees of permitsDlicenses and
secondary franchise from the Commission1 and 3. &ublic companies Corporate #o.e
rnance( A system whereby shareholders, creditors and other sta$eholders of a cor
poration ensure that management enhances the value of the corporation as it comp
etes in an increasingly global mar$et place
4ay be used as
corporation Such
of incorporation
der may exercise

16

a means to voluntarily dissolve a

voluntary dissolution may be effected by amending the articles
to shorten the corporate term (Sec. (2'). A dissenting stoc$hol
his appraisal right

2
Po=er to Increase or &ecrease Capita* StocE (Sec. /0) $ays of Increasin+ Authori
Ae, Capita* StocE( a 9y increasingDdecreasing the number of shares and retaining
the par value1 b 9y increasingDdecreasing the par value of existing shares with
out increasingDdecreasing the number of shares1 c 9y increasingDdecreasing the n
umber of shares and increasingDdecreasing the par value Reasons for Increasin+ C
apita* StocE( a "o generate more wor$ing capital b "o have more shares with whic
h to pay for ac'uisition of more assets c "o have extra shares to meet the re'ui
rement for deduction of stoc$ dividend (Ba! Revie% ,ate!ials in Co77e!cial $a%,
-o!ge ,i!avite, 2''2 ed.). Too*s a.ai*a)*e to the StocEho*,ers to Rep*enish Capi
ta* a Additional subscription to shares of stoc$ of the corporation by stoc$hold
ers or by investors1 b Advances by the stoc$holders to the corporation1 c &aymen
t of unpaid subscription by the stoc$holders1 and d =oans from third persons Re'
uirements( a. Approval by the majority vote of the board of directors1 b. +atifi
cation by the stoc$holders holding or representing at least ,DG of the outstandi
ng capital stoc$ at a meeting duly called for that purpose1 c. &rior written not
ice of the proposed increase or decrease of the capital stoc$ indicating the tim
e and place of meeting addressed to each stoc$holder must be made either by mail
or personal service1 d. A certificate in duplicate signed by a majority of the
directors of the corporation, countersigned by the chairman and the secretary of
the stoc$holders meeting1 e. #n case of increase in capital stoc$, ,?7 of such
increased capital must be subscribed and that at least ,?7 of the amount subscri
bed must be paid either in cash or property1 f. #n case of decrease in capital s
toc$, the same must not prejudice the right of the creditors1 g. 8iling of the c
ertificate with the SEC1 and h. Approval thereof by the SEC
8. Se**@ ,ispose@ *ease@ encum)er a** or su)stantia**y a** of corporate assets (
Sec. 4') Re'uirements( a Approval by the majority vote of the board of directors
1 b +atification by the stoc$holders holding or representing at least ,DG of the
outstanding capital stoc$ at a meeting duly called for that purpose1 c &rior wr
itten notice of the proposed increase or decrease of the capital stoc$ indicatin
g the time and place of meeting addressed to each stoc$holder must be made eithe
r by mail or personal service1 d "he sale of the assets shall be subject to the
provisions of existing laws on illegal combinations and monopolies1 and e Any di
ssenting stoc$holder shall have the option to exercise his appraisal right f "he
vote of the majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by Sec H6 in the c
ase of non(stoc$ corporations where there are no members with voting rights
Sale
or other disposition shall be deemed to cover su)stantia**y a** the corporate a
ssets ifA a the corporation would be rendered incapable of continuing the busine
ss1 or b accomplishing the purpose for which it was incorporated <B ratificatory
vote from stoc$holdersDmembers is neededA a. if it is necessary in the usual an
d regular course of business b. if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of the remaining bu
siness F. Po=er to ac'uire o=n shares (Sec. 4() Instances( a "o eliminate fracti
onal shares out of stoc$ dividends b "o collect or compromise indebtedness to th
e corporation, arising out of unpaid subscription, in a delin'uency sale and to
purchase delin'uent shares sold during said sale c "o pay dissenting or withdraw
ing stoc$holders d "o ac'uire treasury shares e +edeemable shares regardless of
existence of retained earnings f "o effect a decrease of capital stoc$ g #n clos
e corporations, when there is a deadloc$ in the management of the business Note(
#n letters a(c, there must be unrestricted retained earnings :. In.est corporat
e fun,s in another corporation or )usiness en+a+e, in purpose other than primary
purpose (Sec. 42) "he other purposes for which the funds may be invested must b
e among those enumerated as secondary purposes and must further comply with the
re'uirements of Section H,
#nvestment of funds includes not only investment of m
oney but also investment of property of the corporation *owever, the SEC imposes
the following re'uirementsA a. "hat the property is not presently used by the c
ompany and the leasing is not made on a regular basis1 b. "hat by leasing the pr

operty1 it will ma$e it productive instead of allowing them to remain idle1 c. "
here is no express restrictions in the articles of incorporation or by(laws1 d.
=easing is not used as a scheme to prejudice corporate creditors or result in th
e infringement of the "rust 8und )octrine1 and
3
Po=er to Incur@ Create or Increase on,e, In,e)te,ness (Sec. /0) Corporate )on, C
an obligation to pay a definite sum of money at a future time at fixed rate of
interest, whether secured or unsecured, evidenced by a written debt instrument c
alled a bond or debenture Re'uirements( Same with the power to increase or decre
ase capital stoc$
ON&E& IN&E TE&NESS Secured by a mortgage on corporate property %"hili##ine Co!#o
!ate $a%, Cesa! &illanueva, 2''( ed.)
&E ENT!RE Serial obligations or notes issued on the basis of the general credit
of the corporation *ence, they are not bonded indebtedness
17

e. Compliance with the re'uirements of Section H,

("hili##ine Co!#o!ate $a% Co7#endiu7, Ti7oteo A:uino, 2''6 ed.) Re'uirements( a
+esolution by the majority of the board of directors or trustees1 b +esolution b
y the stoc$holders representing at least ,DG of the outstanding capital stoc$ or
,DG of the members in case of non(stoc$ corporation1 c "he ratification must be
made at a meeting duly called for the purposes1 and d &rior written notice of t
he proposed investment and the time and place of the meeting shall be made, addr
essed to each stoc$holder or member by mail or by personal service Any dissentin
g stoc$holder shall have appraisal right A corporation is not allowed to engage
in a business distinct from those enumerated in the articles of incorporation wi
thout amending the purpose clause of said article Re'uirements( a +esolution by
the majority of the 'uorum of the board of directors or trustees1 b Approval of
stoc$holders representing at least ,DG of the outstanding capital stoc$ at a reg
ular or special meeting duly called for the purpose in case of stoc$ dividend G@
1@RA$ R3$@C Stoc$ corporations are prohibited from retaining surplus profits in
excess of -667 of their paid(in capital stoc$ @DC@"TIE1SC a 3hen justified by de
finite corporate expansion projects approved by the board of directors b 3hen th
e corporation is prohibited under any loan agreement with any financial institut
ion or creditor from declaring dividends without itsDhis consent and such consen
t has not yet been secured c 3hen it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as whe
n there is a need for special reserve for probable contingencies &istri)ution of
&i.i,en,s( G@1@RA$ R3$@C )ividends can only be declared and paid out of actual
and bona fide unrestricted retained earnings S"@CIA$ R3$@SC a >ain from real pro
perty 3here a corporation sold its real property, which is not being used for bu
siness, at a gain, the income derived therefrom may be availed of for dividend d
istribution b +evaluation Surplus #ncrease in the value of a fixed asset as a re
sult of its revaluation is not retained earning *owever, increase in the value o
f fixed assets as a result of revaluation (HRevaluation su!#lusI) may be declare
d as cash or stoc$ dividends provided that the companyA i *as sufficient income
from operations from which the depreciation on the appraisal increase was charge
d ii *as no deficit at the time the depreciation on the appraisal increase was c
harged to operations1 and iii Such depreciation on appraisal increase previously
charged to operations has not been impaired by losses (S@C E#inion, Ect. 2, (.0
( and ,a!ch (., (..2). c &aid(in Surplus )ividends can be declared out of the am
ount received in excess of the par value of shares (H#aid;in su!#lusI) whenA i "
hey be declared only as stoc$ dividends and not cash1 ii <o creditors are prejud
iced1 and iii "here is no impairment of capital Note( @nli$e par value shares, w
hen no par value shares are sold at a premium, the entire consideration paid is
considered capital1 hence the same cannot be declared as dividends d +eduction s
urplus "here is such where surplus arises from the reduction of the par value of
the issued shares of stoc$ "hey can be available for dividend declaration provi
ded that the rules on paid(in surplus are complied with e.g. )ividends can be de
clared out of capital only in two instancesA - li'uidating dividends1 and , divi
#t permits corporations sole
dends from investments in wasting asset corporation
ly or principally engaged in the exploitation of wasting assets! to distribute th
e net proceeds derived from exploitation of their holdings such as mines, oil we
lls, patents and leaseholds, without

/. Po=er to ,ec*are ,i.i,en,s out of unrestricte, retaine, earnin+s (Sec. 4/)

+E
"A#<E) EA+<#<>S M ASSE"S 2 =#A9#=#"#ES A<) =E>A= CA&#"A= @<+ES"+#C"E) 2 if the r
etained earnings have not been reserved or set aside by the board of directors f
or some corporate purpose
)#;#)E<)S 2 Corporate profits set aside, declared, and
ordered to be paid by the directors for distribution among shareholders at a fi
xed time Forms( a. Cash b. &roperty c. Stoc$ 3hile cash dividends due on delin'u
ent shares can be applied to the payment of the unpaid balance, stoc$ dividends
cannot be applied as payment for unpaid subscription Stoc$ dividends shall be wi
thheld from the delin'uent stoc$holder until his unpaid subscription is fully pa

id
"he right to dividend is based on duly recorded stoc$holdings, accordingly, t
he corporation is prohibited from declaring dividends in favor of non(stoc$holde
rs As a rule, dividends among stoc$holders of the same class must always be pro
rata e'ual and without discrimination and regardless of the time when the shares
were ac'uired
)eclaration of dividends is discretionary upon the board )ividend
s are payable only when there are profits earned by the corporation and as a gen
eral rule, even if there are existing profits, the 9oard of )irectors has the di
scretion to determine whether or not dividends are declared (Re#u2lic "lante!s B
an8 vs. Agana, 26. SCRA (), subject to the rule on non( retention of retained ea
rnings in excess of -667 of paid(in(capital
)ividends cannot be declared out of
the capital except in the case of wasting assets corporation or those corporatio
ns solely or principally engaged in the exploitation of wasting assets to distri
bute the net proceeds derived from exploitation of their holdings such as mines,
oil wells, patents and leaseholds, without allowance or reduction for depletion
(Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.).
Stoc
$holders at the time of declaration are entitled to dividends )ividends declared
before the transfer of shares belong to the transferor and those declared after
the transfer belongs to the transferee (S@C E#inion, -uly (5, (..4). Even unpai
d subscribers are entitled to dividends, as well as owners of delin'uent shares
18

e
f
g
h
allowance or deduction for depletion. Sale of "reasury Shares &rofits realized f
rom sale of treasury shares are part of capital and cannot be declared as cash o
r stoc$ dividend as purchase and sale of such shares are regarded as contraction
s and expansions of paid(in capital #ndebtedness 4oney cannot be borrowed for th
e payment of dividends because indebtedness is not a retained earning of the cor
poration Corporate earnings which have not yet been received even though they co
nsist in money which is due cannot be included in the profits out of which divid
ends may be paid #nterim income G@1@RA$ R3$@C "here can be no dividend declarati
on for profits in a fiscal year that has not yet expired @DC@"TIE1SA - the amoun
t of dividend involved would not be impaired by losses during the remaining peri
od of the year1 , the projected income for the remaining period shall be submitt
ed to the SEC, and G should the company sustain losses during the remaining peri
od, the dividends should be refunded (S@C E#inion, Ect 22, (.94 and -uly 24, (..
(). CASH &I<I&EN&S #nvolves a disbursement to the stoc$holders of accumulated ea
rnings , 3hen declared and paid becomes the absolute property of the stoc$holder
and cannot be reached by creditors of the corporation in the absence of fraud G
)eclared only by the board of directors at its discretion STOCH &I<I&EN&S - )oe
s not involve any disbursement of funds , Since it is still part of corporate pr
operty, may be reached by corporate creditors
c d
stoc$ from their subscriptions1 3here it has transferred the corporate property
in fraud of its creditors1 and 3here the corporation is insolvent
Co.era+e of the TF&( a #f the corporation is solvent, the "8) extends to the cap
ital stoc$ represented by the corporation:s legal capital b #f the corporation i
s insolvent, the "8) extends to the capital stoc$ of the corporation as well as
all of its property and assets EDceptions to the TF&( "he Code allows distributi
on of corporate capital only in these instancesA a. Amendment of Articles of #nc
orporation to reduce authorized capital stoc$1 b. &urchase of +edeemable shares
by the corporation regardless of existence of unrestricted retained earnings1 c.
)issolution and eventual li'uidation of the corporation1 d. #n close corporatio
n, when there should be a deadloc$ and the SEC orders the payment of the apprais
ed value of the stoc$holder:s share (Sec. ('4). 0. Po=er to enter into mana+emen
t contract (Sec. 44) Mana+ement Contract B any contract whereby a corporation un
derta$es to manage or operate all or substantially all of the business of anothe
r corporation, whether such contracts are called service contracts, operating ag
reements or otherwise
Sec. 44 refers only to a management contract with
another corporation *ence, it does not apply to management contracts entered int
o by a corporation with natural persons Re'uirements( a Approval by a majority o
f the 'uorum of the board of directors b +atification by the stoc$holders owning
at least majority of the outstanding capital stoc$ or the members of both the m
anaging and the managed corporations, at a meeting duly called for the purpose c
Approval by the stoc$holders of the managed corporation owning at least ,DG of
the total outstanding capital stoc$ entitled to vote, or by at least ,DG of the
members in the case of a non(stoc$ corporationA i where a stoc$holderDs represen
ting the same interest of both the managing and the managed corporations own or
control more than -DG of the total outstanding capital stoc$ entitled to vote of
the managing corporation1 B+ ii where a majority of the members of the board of

directors of the managing corporation also constitute a majority of the members

of the board of directors of the managed corporation "he period must not be lon
ger than ? years for any term except those contracts which relate to the explora
tion, development, exploitation or utilization of natural resources that may be
entered into for such periods as may be provided by pertinent laws or regulation
s A management contract cannot delegate entire supervision and control over the
officers and business of a corporation to another as this will contravene Sec ,G
H )oes not increase the corporate capital ? #ts declaration creates a debt from
the corporation to each of its stoc$holders
G )eclared by the board with the concurrence of the stoc$holders representing at
least ,DG of the outstanding capital stoc$ at a regularDspecial meeting H Corpo
rate capital is increased ? <o debt is created by its declaration
TR!ST F!N& &OCTRINE "he subscribed capital stoc$ of the corporation is a trust f
und for the payment of debts of the corporation which the creditors have the rig
ht to loo$ up to satisfy their credits, and which the corporation may not dissip
ate "he creditors may sue the stoc$holders directly for the latter:s unpaid subs
cription App*ication of the TF&( a 3here the corporation has distributed its cap
ital among the stoc$holders without providing for the payment of creditors1 b 3h
ere it had released the subscribers to the capital

19

9.
, 4anagement com( pany must always be subject to the superior power of the board
to give specific directions from time to time or to recall the delegation of ma
nagerial power (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon
, 2''2 ed.) Po=er to ,eny preCempti.e ri+ht (Sec. /.F <o! u!the! discussion, see
DIII. Stoc8s and Stoc8holde!s) "he corporation can only deny pre(emptive right
if the articles of incorporation or amendment thereto denies such right )enial o
f pre(emptive right extends to shares issued in good faith in exchange for prope
rty needed for
EKEC!TI<E COMMITTEE - #ts creation must be provided for in the by(laws , A gover
ning body which functions as the board itself %The Co!#o!ation Code o the "hili#
#ines Annotated, )ecto! de $eon, 2''2 ed.)
MANA#EMENT CONTRACT - Express power of a corporation
corporate purposes or in payment of previously contracted debts
10. Po=er to amen, Artic*es of Incorporation (See &III.
<o!7ation and E!gani>ation o a "!ivate Co!#o!ation)
20

CORPORATION An artificial being created by operation of law having the right of

succession, and the powers, attributes and properties expressly authorized by la
w and incident to its existence (Sec. 2). I. THEORIES ON FORMATION OF A CORPORAT
ION
a. )ue process (Al2e!t v. 3nive!sity "u2lishing, Inc.
(/ SCRA 04 4(.656) b. E'ual &rotection of the law (S7ith, Bell + Co. v. 1ativida
d, 4' "hil. (/6 4(.(.6) c. &rotection against unreasonable searches and seizures
(Stonehill v. *io8no, 2' SCRA /0/ 4(.696)
*owever, it is not entitled to certai
n constitutional rights such as political rights or purely personal rights not o
nly because it is an artificial being but also because it is a mere creature of
law (Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.). a
. +ight against self(incrimination (Bataan Shi#ya!d v. "CGG, (5' SCRA 4(.096). /
Mora* &ama+es A corporation is not entitled to moral damages because it has no
feelings, no emotions, no senses (ABS;CB1 vs. Cou!t o A##eals, G.R. 1o. (206.',
-an. 2(, (...).
#n <ili#inas B!oadcasting vs. Ago ,ed., however, it was held tha
t a juridical person such as a corporation can validly complain for libel or any
other form of defamation and claim for moral damages "he SC had rationated that
Art ,,-. %/0 does not 'ualify whether the plaintiff is a natural or a juridical
person (<ili#inas B!oadcasting vs. Ago ,edical Cente!;Bicol, et. al., 440 SCRA
4(/). 0 "ia)i*ity for torts A corporation is liable whenever a tortuous act is c
ommitted by an officer or agent under the express direction or authority of the
stoc$holders or members acting as a body, or, generally, from the directors as t
he governing body ("1B vs. CA, 0/ SCRA 2/9 4(.906). 1. "ia)i*ity for Crimes Sinc
e a corporation is a mere legal fiction, it cannot be held liable for a crime co
mmitted by its officers since it does not have the essential element of malice,
except if by express provision of law, the corporation is held criminally liable
1 #n such case the responsible officers would be criminally liable ("eo#le vs. T
an Boon =ong, 54 "hil. 6'9 4(./'6). TESTS TO &ETERMINE NATIONA"IT% OF CORPORATIO
NS 2. Incorporation Test 2 determined by the state of incorporation, regardless
of the nationality of its stoc$holders 2 &omici*e Test 2 determined by the state
where it is domiciled "he domicile of a corporation is the place fixed by the l
aw creating or recognizing it1 in the absence thereof, it shall be understood to
be the place where its legal representation is established or where it exercise
its principal functions (A!t. 5(, 1CC) 3 Contro* Test 2 determined by the natio
nality of the controlling stoc$holders or members "his test is applied in times
of war Also $nown as the 3A+"#4E "ES"
1. Concession Theory 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 (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242).
Tayag
rejects the Genossenscha t Theo!y which treats a corporation as the reality of th
e group as a social and legal entity, independent of state recognition and conce
ssion ! 2. Theory of corporate enterprise or economic unit "he corporation is no
t merely an artificial being, but more of an aggregation of persons doing busine
ss, or an underlying business unit ("hili##ine Co!#o!ate $a%, Cesa! &illanueva,
2''( ed.). "he theory draws its vitality from the fact that it is not legal fict
ion alone that creates a corporate entity but also the consent of those who will
form the corporation to engage in a common venture or business for profit II. A
TTRI !TES OF A CORPORATION
1. #t is an artificial being with separate and distinct
personality
2. #t is created by operation of law 3. #t enjoys the right of succession 4. #t
has the powers, attributes and properties expressly
authorized by law or incident to its existence ARTIFICIA" EIN# $ITH SEPARATE PER
SONA"IT% &OCTRINE OF SEPARATE PERSONA"IT% A corporation is a legal or juridical
person with a personality separate and apart from its individual stoc$holders or
members and from any other legal entity to which it may be connected % The Co!#

o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6
ed.). Conse'uences( 1. "ia)i*ity for acts or contracts "he general rule is that
obligations incurred by a corporation, acting through its authorized agents are
its sole liabilities Similarly, a corporation may not generally, be made to ans
wer for acts or liabilities of its stoc$holders or members or those of the legal
entities to which it may be connected and vice versa (C!eese vs. CA, ./ SCRA 40
/). 2. Ri+ht to )rin+ actions #t may bring civil and criminal actions in its own
name in the same manner as natural persons (A!t. 46, 1CC). 3. Ri+ht to ac'uire
an, possess property &roperty conveyed to or ac'uired by the corporation is in l
aw the property of the corporation itself as a distinct legal entity and not tha
t of the stoc$holders or members % A!t. 44(/), 1CC). 4. Ac'uisition of court of
-uris,iction Service of summons may be made on the president, general manager, c
orporate secretary, treasurer or in(house counsel (Sec. ((, Rule (4, Rules o Cou
!t). 5. Chan+es in in,i.i,ua* mem)ership Corporation remains unchanged and unaff
ected in its identity by changes in its individual membership (The Co!#o!ation C
ode o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.). 6. Entit*ement to co
nstitutiona* +uaranties
Corporations are entitled to certain constitutional righ
ts
4Phi*ippine Nationa*5 un,er the Forei+n In.estment Act of 2112 6R.A. No. /7829(
a. a corporation organized under &hilippine laws of which 567 of the capital sto
c$ outstanding and entitled to vote is owned and held by 8ilipino citizens1 b a
corporation organized abroad and registered as doing business in the &hilippines
under the Corporation Code of which -667 of the capital stoc$s entitled to vote
belong to 8ilipinos *owever, it provides that where a corporation and its non(8
ilipino stoc$holders own stoc$s in a SEC( registered enterprise, at least 567 of
the capital stoc$ outstanding and entitled to vote of 2oth corporations and at
least 567 of the members of the board of directors of 2oth corporations must be
8ilipino citizens 6,ou)*e :7; ru*e9
1

Note( "he law applies the control test both with respect to the ownership of sha
res entitled to vote and the membership in the board of directors &OCTRINE OF PI
ERCIN# THE <EI" OF CORPORATE ENTIT%
"he doctrine that a corporation is a legal e
ntity distinct from the persons composing is a theory introduced for purposes of
convenience and to serve the ends of justice 9ut when the veil of corporate fic
tion is used as a shield to defeat public convenience, justify wrong, protect fr
aud, or defend a crime, this fiction shall be disregarded and the individuals co
mposing it will be treated identically (C!u> vs. *alisay, (52 SCRA 409 4(.096).
3hen directors and officers are unable to compensate
a party for a personal obligation, it is far(fetched to allege that a corporatio
n is perpetuating fraud or promoting injustice, and thereby could be held liable
for the personal obligations of its directors and officers by piercing the corp
orate veil (<!ancisco ,oto!s, Inc. vs. CA, G.R. 1o. (''0(2, -une 25, (...). C*as
sification( 1. Frau, Cases
3hen the corporate identity is used to justify wrong,
to commit fraud, or to defend a crime
"here is always an element of malice or e
vil motive in fraud cases E*ements( a "here must have been fraud or evil motive
in the affected transaction and the mere proof of control of the corporation by
itself would not authorize piercing b. "he main action should see$ for the enfor
cement of pecuniary claims pertaining to the corporation against corporate offic
ers or stoc$holders, or vice( versa1 and c. "he corporate entity has been used i
n the perpetration of the fraud or in justification of wrong, or to escape perso
nal liability
"he doctrine re'uires the court to see through the
protective shroud which exempts its stoc$holders from liabilities that they ordi
narily would be subject to, or distinguishes a corporation from a seemingly sepa
rate one, were it not for the existing corporate fiction ($i7 vs. CA, /2/ SCRA (
'2).
#n any cases where the separate corporate identity is
disregarded, the corporation will be treated merely as an association of persons
and the stoc$holders or members will be considered as the corporation, that is,
liability will attach personally or directly to the officers and stoc$holders (
37ali vs. Cou!t o A##eals, (0. SCRA 52. 4(..'6). *owever, mere ownership by a si
ngle stoc$holder or by another corporation of all or nearly all of the capital s
toc$ of a corporation is not of itself sufficient ground for disregarding the se
parate corporate personality (37ali vs. Cou!t o A##eals, (0. SCRA 52. 4(..'6) "h
e doctrine aims to protect the interest of innocent third person dealing with th
e corporation
2. A*ter E+o Cases 6or Con,uit Cases9
8raud is not an element in these cases but
that the
stoc$holders or those who compose the corporation did not treat the corporation
as a separate entity but only as part of the property or business of an individu
al or group of individuals or another corporation Pro)ati.e factors a Stoc$ owne
rship by one or common ownership of both corporations1 b #dentity of directors a
nd officers1 c "he manner of $eeping corporate boo$s and records1 and d 4ethods
of conducting the business (Conce#t Builde!s, Inc. v. 1$RC, 259 SCRA (4. 4(..66)
. Four Po*icy ases in Piercin+( a. Even when the controlling stoc$holder or mana
ging officer intends consciously to do no evil, the use of the corporation as an
alter ego is in direct violation of a central corporate law principle of treati
ng the corporation as a separate juridical entity from its members and stoc$hold
ers1 b. #f the stoc$holders do not respect the separate entity, others cannot al
so be expected to be bound by the separate juridical entity1 c. Applies even whe
n there are no monetary claims sought to be enforced against the stoc$holders or
officers of the corporation1 d. 3hen the underlying business enterprise does no
t really change and only the medium by which that business enterprise is changed
Instrumenta*ity or A*ter E+o Ru*e 3hen one corporation is so organized and cont
rolled and its affairs are conducted so that it is in fact a mere instrumentalit

y or adjunct of the other, the fiction of the corporate entity to the instrument
ality may be disregarded (Conce#t Builde!s Inc. vs. 1$RC, 259 SCRA (4. 4(..66).
Test( 1. Control, not mere majority or complete stoc$ control, but complete domi
nion, not only of finances but of policy and business in respect to the transact
ion attac$ed so that the corporate entity as to this transaction had at the time
no separate mind, will, or existence of its own1 2. Such control must have been
used by the defendant to commit fraud or wrong in

C*assification of facts on =hich corporate entity may )e ,isre+ar,e,( 1. Avoidan

ce of redress of fraud1 2. &revention of evasion of statute or law1 3. &reventio
n of evasion of contract1 4. #nternal corporate dealings disregarding corporate
entity where third persons are not involved1 5. Corporation agencies or instrume
ntalities of undisclosed principals
"hese enumerations are not exclusive and som
etimes two or more of these elements concur Nature an, Conse'uences of Piercin+
&octrine ("hili##ine Co!#o!ate $a%, Cesa! &illanueva, 2''( ed.)( 1. has on*y res
-u,icata effect> 2. to pre.ent frau, or =ron+ an, not a.ai*a)*e for other purpo
ses> "he doctrine could not be employed by a corporation to complete its claims
against another corporation and cannot therefore be employed by the claimant who
does not appear to be the victim of any wrong or fraud (T!ade!s Royal Ban8 vs.
CA 26. SCRA 6'( 4(..96). 3. essentia**y a -u,icia* prero+ati.e on*y "o pierce th
e veil of corporate fiction being a power belonging to the courts, a sheriff who
has ministerial duty to enforce a final and executory decision cannot pierce th
e veil of corporate fiction by enforcing the decision against the stoc$holders w
ho are not parties to the action (C!u> vs. *alisay, (52 SCRA 409 4(.096). 4. mus
t )e sho=n to )e necessary an, =ith factua* )asis
"o disregard the separate juri
dical personality of a corporation, the wrongdoing must be clearly and convincin
gly established, it cannot be presumed ($u?u!ia )o7es, Inc. v. CA, /'2 SCRA /(5
4(...6).
2

contravention of plaintiff:s legal rights1 and

PO$ERS@ ATTRI !TES AN& PROPERTIES THEOR% OF SPECIA" CAPACITIES?"IMITE& CAPACIT%
&OCTRINE
<o corporation under the Code, shall possess or exercise any corporate
power, except those conferred by law, its Articles of #ncorporation, those impli
ed from express powers and those as are necessary or incidental to the exercise
of the powers so conferred "he corporation:s capacity is limited to such express
, implied and incidental powers (Revie%e! in Co77e!cial $a%, -ose R. Sundiang +
Ti7oteo A:uino, 2''5 ed.).
#f the act of the corporation is not one of those exp
ress, implied or incidental powers, the act is ult!a vi!es. (Revie%e! in Co77e!c
ial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.). III. C"ASSIFICATIONS OF C
ORPORATIONS
3. "he aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of (Conce#t Builde!s Inc.
vs. 1$RC, 259 SCRA (4. 4(..66).
3. E'uity cases
3hen piercing the corporate fiction is necessary to
achieve justice or e'uity "he dumping ground! where no fraud or alter ego circums
tances can be culled to warrant piercing
CREATE& % OPERATION OF "A$ &OCTRINE OF CORPORATE ENTIT%
A corporation comes into
existence upon the issuance of the certificate of incorporation (Sec. (.) "hen
and only then will it ac'uire a juridical personality to sue and be sued, enter
into contracts, hold or convey property or perform any legal act, in its own nam
e (Co!#o!ation Code o the "hili##ines, Ru2en C. $adia, 2''( @d.).
Corporations c
annot come into existence by mere agreement of the parties as in the case of bus
iness partnerships "hey re'uire special authority or grant from the State "his p
ower is exercised by the State through the legislature, either by a special inco
rporation law or charter which directly creates the corporation or by means of a
general corporation law under which individuals desiring to be and act as a cor
poration may incorporate %The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $
eon + )ecto! ,. *e $eon, -!., 2''6 ed.). FRANCHISES OF CORPORATION 2. Primary or
corporate franchise?#enera* franchise "he right or privilege granted by the Sta
te to individuals to exist and act as a corporation after its incorporation 2. S
econ,ary or specia* franchise "he special right or privilege conferred upon an e
xisting corporation to the business for which it was created e.g. use of the str
eets of a municipality to lay pipes or trac$s, or operation of a public utility
or a messenger and express delivery service PRIMAR% +efers to the franchise of b
eing or existing as a corporation ;ested in individuals compose corporation the
who the SECON&AR% +efers to the exercise of right or privilege e.g public utilit
y or telecommunication franchise ;ested in the corporation after its incorporati
on and not upon the individuals who compose the corporation 4ay be sold or trans
ferred under a general power granted to a corporation to a corporation to dispos
e of its properties1 may also be subject to sale on execution or levy
1.
a
b. 2. a. b. 3. b. 4.
As to or+aniAers( pu)*ic B by State only1 or pri.ate B by private persons alone
or with the State As to functions( pu)*ic C government of a portion of the State
1 or pri.ate B usually for profit(ma$ing functions As to +o.ernin+ *a=(
a. pu)*ic B Special =aws and =ocal >overnment
Code1 or pri.ate B =aw on &rivate Corporations As to *e+a* status(
a. ,e -ure corporation 2 corporation created in strict
or substantial conformity with the mandatory statutory re'uirements for incorpor

ation and the right of which to exist as a corporation cannot be successfully at

tac$ed or 'uestioned by any party even in a direct proceeding for that purpose b
y the state1 or ,e facto corporation 2 organized with a colorable compliance wit
h the re'uirements of a valid law and its existence cannot be in'uired collatera
lly but such in'uiry may be made by the Solicitor >eneral in a :uo %a!!anto proc
eeding %Sec. 2').
"he only difference between a de facto corporation and a de ju
re corporation is that a de jure corporation can successfully resist a suit brou
ght by the State challenging its existence1 a de facto corporation cannot sustai
n its right to exist as against the State corporation )y estoppe* 2 group of per
sons that assumes to act as a corporation $nowing it to be without authority to
do so, and enters into a transaction with a third person on the strength of such
appearance #t cannot be permitted to deny its existence in an action under said
transaction (Sec. 2(). #t is neither de jure nor de facto corporation )y prescr
iption 2 one which has exercised corporate powers for an indefinite period witho
ut interference on the part of the sovereign power, e.g. +oman Catholic Church A
s to eDistence of stocEs(
b.
c
Cannot be sold or transferred, in the absence of legislative authority to do so
"his is because it is inseparable from the corporation itself
d
RI#HT OF S!CCESSION #t is the capacity to have continuity of existence despite t
he changes on the persons who compose it "hus, the personality continues despite
the change of stoc$holder, members, board members or officers (Revie%e! in Co77
e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.).
5.
a. stocE corporation 2 a corporation which has
capital stoc$ divided into shares and is authorized to distribute to holders of
such shares, dividends or allotments of the surplus profits on the basis of the
shares held (Sec. /)1 or 8or a stoc$ corporation to exist, the above re'uisites
must be complied with for even if there is

b.
a statement of capital stoc$, the corporation is still not a stoc$ corporation i
f dividends are not supposed to be declared, i.e. there is no distribution of re
tained earning (CIR vs. Clu2 <ili#ino, Inc. de Ce2u, 5 SCRA /2(). nonCstocE corp
oration 2 a corporation which does not issue stoc$s nor distribute dividends to
their members (Sec. 09) As to *a=s of incorporation( ,omestic corporation 2 corp
oration formed, organized or existing under &hilippine laws1 or forei+n corporat
ion 2 a corporation formed, organized or existing under any laws other than thos
e of the &hilippines and whose laws allow 8ilipino citizens and corporation to d
o business in its own country or state
CONCEPT OF #OIN# P! "IC AN& #OIN# PRI<ATE A corporation is deemed to be going pub
lic! when it decides to list its shares in the stoc$ exchange "hese include corp
orations that will ma$e initial public offering of its shares A corporation is s
aid to be going private! when it would restrict the shareholders to a certain gro
up #n a sense, these also include closed and closely held corporation ("hili##in
e Co!#o!ate $a% Co7#endiu7, Ti7oteo A:uino, 2''6 ed.) ONECMAN CORPORATION A corp
oration wherein all or substantially all of the stoc$s is held directly or indir
ectly by one person *owever, it should still follow the formal re'uirements of a
corporation %e.g. number of incorporators, board of directors composed of stoc$
holders owning shares in a nominal capacity0 in order to validly enjoy the attri
butes of the corporation, so as to avoid the application of the doctrine of pier
cing the veil of corporate entity
6. a. b.
7. As to =hether they are open to the pu)*ic or not( a. open 2 one which is open
to any person who may b.
wish to become a stoc$holder or member thereto1 or c*ose ( those whose shares of
stoc$ are held by limited number of persons li$e the family or other closely($n
it group %The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,.
*e $eon, -!., 2''6 ed.)
IV. CORPORATION
PARTNERSHIP
&ISTIN#!ISHE&
FROM
0 As to re*ationship of mana+ement an, contro*( a. ho*,in+ corporation ( it is o
ne which controls another as a subsidiary by the power to elect management #t is
one that holds stoc$s in other companies for purposes of control rather than fo
r mere investment b su)si,iary corporation 2 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 #t is always controlled1 or c. affi*iate 2
one related to another by owning or being owned by common management or by a lo
ng(term lease of its properties or other control device #t may be the controlled
or controlling corporation, or under common control1 or d parent an, su)si,iary
corporation 2 3hen a corporation has a controlling financial interest in one or
more corporations , the one having control is the parent corporation, and the o
thers are the subsidiary corporations ("hili##ine Co!#o!ate $a%, Cesa! &illanuev
a, 2''( ed.).
9. As to num)er of persons =ho compose them(
a b a++re+ate corporation 2 a corporation consisting of more than one person or
member1 or corporation so*e 2 a corporation consisting of only one person or mem
ber1 a special form of corporation usually associated with the clergy

27 As to =hether they are for re*i+ious purposes or not( a ecc*esiastica* corpor

ation 2 one organized for religious purposes1 or b *ay corporation 2 one organiz
ed for a purpose other than for religion
11.
As to =hether they are for charita)*e purposes or not( a. e*eemosynary corporati
on 2 one established for or devoted to charitable purposes or those supported by
charity1 or b. ci.i* corporation 2 one established for business or profit
PARTNERSHIP CORPORATION 2. Creation Created by mere Created by law or by agreeme
nt of the operation of law parties 2. Num)er of incorporators 4ay be organized b
y +e'uires at least at least two persons five incorporators %except a corporatio
n sole0 3. Commencement of -uri,ica* persona*ity Ac'uires juridical Ac'uires jur
idical personality from the personality from the moment of execution date of iss
uance of of the contract of the certificate of partnership incorporation by the
Securities and Exchange Commission 8. Po=ers &artnership Corporation can may exe
rcise any exercise only the power authorized by powers expressly the partners gr
anted by law or %provided it is not implied from those contrary to law, granted
or incident morals, good to its existence customs, public order, public policy0
F. Mana+ement 3hen management is "he power to do not agreed upon, business and e
very partner is an manage its affairs is agent of the vested in the board partne
rship of directors or trustees :. Effect of mismana+ement A partner as such can
"he suit against a sue a co(partner who member of the mismanages board of direct
ors or trustees who mismanages must be in the name of the corporation /. Ri+ht o
f succession &artnership has no Corporation has right of succession right of suc
cession 0. EDtent of *ia)i*ity to thir, persons &artners are liable Stoc$holders
are personally and liable only to the subsidiarily extent of the shares
4

%sometimes solidarily0 subscribed by them for partnership debts to third persons

1. Transfera)i*ity of interest &artner cannot Stoc$holder has transfer his inte
rest in generally the right to the partnership so as transfer his shares to ma$e
the without prior consent transferee a partner of the other without the stoc$ho
lders unanimous consent because corporation of all the existing is not based on
this partners because the principle partnership is based on the principle of del
ectus #e!sona!u7 27. Term of eDistence &artnership may be Corporation may not es
tablished for any be formed for a term period of time in excess of ?6 stipulated
by the years extendible to partners not more than ?6 years in any one instance
22. Firm name =imited partnership is Corporation may re'uired by law to adopt an
y name add the word =td ! to provided it is not the its name same as or similar t
o any registered firm name 22. &isso*ution 4ay be dissolved at Can only be any t
ime by any or all dissolved with the of the partners consent of the State 23. #o
.ernin+ "a= >overned by the >overned by the <CC Corporation Code <. A&<ANTA#ES A
N& &ISA&<ANTA#ES OF A !SINESS CORPORATION (The Co!#o!ation Code o the "hili##ine
s Annotated, )ecto! de $eon, 2''2 ed.) A&<ANTA#ES 1. has a legal capacity to act
and contract as a distinct unit in its own name 2. continuity of existence 3. i
ts credit is strengthened by its continuity of existence 4. centralized manageme
nt in the board of directors 5. its creation, management, organization and disso
lution are standardized as they are governed under one general incorporation law
6. limited liability 7. shareholders are not the general agents of the business
8. transferability of shares &ISA&<ANTA#ES 1. complicated in formation and mana
gement 2. high cost of formation and operations 3. its credit is wea$ened by the
limited liability feature 4. lac$ of personal element 5. greater degree of gove
rnmental supervision 6. management and control are separated from ownership 7. S
toc$holders have little voice in the conduct of the business
<I. COMPONENTS OF A CORPORATION 2. Corporators 2 those who compose a corporation
, whether as stoc$holders or members 2. Incorporators ( those mentioned in the A
rticles of #ncorporation as originally forming and composing the corporation, ha
ving signed the Articles and ac$nowledged the same before a notary public "hey h
"here is only one set o
ave no powers beyond those vested in them by the statute
f incorporators, hence, they will remain to be such incorporators up to the term
ination of the life of the corporation Gua*ifications( a. natural person1 b. not
less than ? but not more than -?1 c. of legal age1 d. majority must be resident
s of the &hilippines1 and e. each must own or subscribe to at least one share (S
ec. ('). >E<E+A= +@=EA Bnly natural persons can be incorporators ECCE&"#B<A 3hen
otherwise allowed by law, e.g , +ural 9an$s Act of -..,, where incorporated coo
peratives are allowed to be incorporators of rural ban$s Note( *owever, it is un
deniable that corporations can be corporators 3. StocEho*,ers 2 owners of shares
of stoc$ in a stoc$ corporation 8. Mem)ers 2 corporators of a corporation which
has no capital stoc$ INCORPORATORS signatory to the Articles of #ncorporation a
it acco7#li1 accomplished fact %the Articles of #ncorporation cannot be amended
to replace them0 number is limited to ?(-? must have contractual capacity CORPOR
ATORS stoc$holder %stoc$ corporation0 or member %non(stoc$ corporation0 they may
cease to be such if they subse'uently lose their shareholdings no restriction a
s to number may be such through a guardian
OTHER COMPONENTS 2. Promoter ( A person who, acting alone or with others, ta$es
initiative in founding and organizing the business or enterprise of the issuer a
nd receives consideration therefor (Sec. /, R.A. 09..).
*e is an agent of the in
corporators but not of the corporation Contracts by the promoter for and in beha
lf of a proposed corporation generally bind only him, subject to and to the exte
nt of his representations, and not the corporation, unless and until after these
contracts are ratified, expressly or impliedly, by its 9oard of )irectorsD"rust
ees (Cagayan <ishing *evelo#7ent Co., Inc. v. Sandi8o, 65 "hil. 22/). 2. Su)scri
)er 2 A person who has agreed to ta$e and pay for original and unissued shares o
f a corporation formed or to be formed 3 !n,er=riter 2 A person who guarantees o
n a firm commitment andD or declared best effort basis the distribution and sale
of securities of any $ind by another company (Sec. /, R.A. 09..). <II. C"ASSIFI

CATION OF SHARES
1. Common shares 5

"he basic class of stoc$ ordinarily and usually issued

without extraordinary rights and privileges, and the owners thereof are entitled
to a pro rata share in the profits of the corporation and in its assets upon di
ssolution and, li$ewise, in the management of its affairs without preference or
advantage whatsoever Common shares or stoc$s represent the residual ownership in
terest in the corporation Common shares have complete voting rights "hey cannot
be deprived of said rights except as provided by law

expressly provided for in the articles of incorporation1 b "he terms and conditi
ons affecting said shares must be stated both in the articles of incorporation a
nd in the certificates of stoc$ representing such shares1 c +edeemable shares ma
y be deprived of voting rights in the articles of incorporation, unless otherwis
e provided in the Code
+edeemable shares may be redeemed, regardless of
the existence of unrestricted retained earnings (Sec. 0), provided that the corp
oration has, after such redemption, sufficient assets in its boo$s to cover debt
s and liabilities inclusive of capital stoc$ +edemption may not be made where th
e corporation is insolvent or if such redemption would cause insolvency ot inabi
lity of the corporation to meet its debts as they mature Such limitation is base
d on the principle that corporate assets are a trust fund for creditors 3hen red
eemable shares are reac'uired, the same shall be considered retired and no longe
r issuable unless otherwise provided for in the Articles of #ncorporation Note(
8or tax purposes, there are cases when redemption of shares is considered a sche
me to circumvent the tax conse'uences of cash dividends *ence, the amounts recei
ved by the shareholders shall be treated as cash dividends because proceeds of r
edemption in such a case is additional wealth and not merely a return of the cap
ital ("hili##ine Co!#o!ate $a% Co7#ediu7, Ti7oteo A:uino, 2''6 ed.).
2. Preferre, shares
Shares with a stated par value which entitle the holder
thereof to certain preferences over the holders of common stoc$ "he preference m
ay be %a0 as to asset1 or %b0 as to dividends1 or %c0 as may be determined by th
e board of directors when so authorized to do so (The Co!#o!ation Code o the "hi
li##ines, ). *e $eon, 2''2 ed.). Purpose( "o induce more persons to subscribe fo
r shares of a corporation &referred shareholders are not creditors of the corpor
ation Eet all preferred stoc$ contracts are, fundamentally attempts to endow cer
tain owners with rights analogous to creditor rights and statutes and court deci
sions on this matter have been concerned, primarily, with the length to which th
e preferred stoc$ contract can go in extending creditor rights to stoc$holder "h
e reason why there is an effort to extend such right is to ma$e preferred shares
attractive to investors for they can remain as such and at the same time enjoy
certain advantages that are available to creditors ("hili##ine Co!#o!ate $a% Co7
#ediu7, Ti7oteo A:uino, 2''6 ed.). "imitations( a #f deprived of voting rights,
it shall still be entitled to vote on matters enumerated in Section 6, #a!. 6 b
&reference must not be violative of the Code c 4ay be issued only with a stated
par value d "he board of directors may fix the terms and conditions only when so
authorized by the articles of incorporation and such terms and conditions shall
be effective upon filing a certificate thereof with the SEC Hin,s( a Cumulative
2 one which entitles he owner thereof to payment not only of current dividends
but also bac$ dividends not previously paid whether or not during the past years
dividends were declared or paid b <on(cumulative 2 one which grants the holders
of such shares only to the payment of current dividends but not bac$ dividends
when and if dividends are paid to the extent agreed upon before any other stoc$h
olders are paid the same c &articipating ( one which entitles the shareholder to
participate with the common shares in excess distribution at some predetermined
or at a fixed ratio as may be determined d <on(participating A one which entitl
es the shareholder thereof to receive the stipulated preferred dividends and no
more e Cumulative participating 2 share which is a combination of the cumulative

share and participating share

4. Treasury shares
Shares of stoc$ which have been issued and fully paid
for, but subse'uently reac'uired by the issuing corporation by purchase, redempt
ion, donation or through some other lawful means (Sec. .). "reasury shares are n
ot retired shares "hey do not form revert to the unissued shares of the corporat
ion but are regarded as property ac'uired by the corporation which may be reissu
ed or resold at a price to be fixed by the 9oard of )irectors (S@C Rules Gove!ni
ng Redee7a2le and T!easu!y Sha!es, CC" 1o. (;(.02). #f purchased from stoc$holde
rsA "he transaction in effect is a return to the stoc$holders of the value of th
eir investment in the company and a reversion of the shares to the corporation "
he corporation must have surplus profits with which to buy the shares so that th
e transaction will not cause an impairment of the capital #f ac'uired by donatio
n from the stoc$holdersA "he act would amount to a surrender of their stoc$ with
out getting bac$ their investments that are instead, voluntarily given to the co
rporation "reasury shares need not be sold at par or issued value but may be sol
d at the best price obtainable, provided it is reasonable 3hen treasury shares a
re sold below its par or issued value, there can be no watering of stoc$ because
such watering contemplates an original issuance of shares "reasury shares have
no voting rights as long as they remain in treasury %uncalled and subject to rei
ssue0 (Sec. 59) Reason( A corporation cannot in any proper sense be a stoc$holde
r in itself and e'ual distribution of voting rights will be effectively lost <ei
ther are treasury shares entitled to dividends or assets because dividends canno
t be declared by a corporation to itself "reasury shares may be declared as prop
erty dividend to be issued out of the retained earnings previously used to suppo
rt their ac'uisition provided that the amount of the retained earnings has not b
een subse'uently impaired by losses

3. Re,eema)*e shares
Shares of stoc$s issued by the corporation which said
corporation can purchase or ta$e up from their holders as expressly provided for
in the articles of incorporation and certificate of stoc$ representing said sha
res at a fixed date or at the option of the issuing corporation or the stoc$hold
er or both at a certain redemption price "imitations( a +edeemable shares may be
issued only when

5. Foun,ersI shares
Shares classified as such in the articles if incorporation and issued to organiz
ers and promoters of a corporation in consideration of some supposed right or pr
operty such as special preference in voting rights and dividend payments 9ut if
an exclusive right to vote and be voted for as director is granted, this privile
ge is subject to approval by the SEC, and cannot exceed ? years from the date of
approval (Sec. 9).
d
which is less than its par or issued value #ssued as stoc$ dividend when there a
re no sufficient retained earnings to justify it
11. Par .a*ue shares
Shares with a value fixed in the articles of incorporation and the certificates
of stoc$ A&<ANTA#ES Easily sold as the public is more attracted t buy this $ind
of share >reater protection to creditors @nli$elihood of sale of subse'uently is
sued shares at a lower price @nli$elihood of distribution of dividends that are
only ostensible profits 22. No par .a*ue shares Shares having no par value but h
ave issued value stated in the certificate or articles of incorporation A&<ANTA#
ES #ssued as fully paid and non( assessable, &rice is flexible Enjoy wider distr
ibution because of it being low(priced "ell no untruth concerning the value of t
he stoc$holder:s contribution 4ore easily issued, thereby simplifying accounting
procedures &ISA&<ANTA#ES =egalizes issuance of large stoc$ for property Conceal
money or property represented by the shares &romote the issuance of watered sto
c$ =esser protection creditors to &ISA&<ANTA#ES Subscribers are liable to the co
rporate creditors for their unpaid subscription "he stated value of the share is
not an accurate criterion of its true value
Shares with a right to vote
@nder the code, whenever a vote is
6. <otin+ shares
necessary to
approve a particular corporate act, such vote refers only to stoc$s with voting
rights except in certain cases when even non(voting shares may also vote (Sec. 6
, #a!. 6 and last #a!.).
7. NonC.otin+ shares Shares without right to vote
"he law only authorizes the de
nial of voting rights in
the case of redeemable shares and preferred shares, provided that there shall al
ways be a class or series of shares which have complete voting rights "hese rede
emable and preferred shares, when such voting rights are denied, shall neverthel
ess be entitled to vote on the following fundamental mattersA Fey ( 6A2 SI2 MI&9
a. amendment of Articles of #ncorporation b. adoption and amendment of by(laws1
c. sale or disposition of all or substantially all of corporate property1 d. in
curring, creating or increasing bonded indebtedness1 e. increase or decrease of
capital stoc$ f. merger or consolidation of capital stoc$ g. investments of corp
orate funds in another corporation or another business purpose1 and h. corporate
,issolution

8. Share in escro=
Share subject to an agreement by virtue of which the
share is deposited by the grantor or his agent with a third person to be $ept by
the escrow agent until the performance of a certain condition or he happening o
f a certain event contained in the agreement (Cannon v. )andley, (2 "hil. /(5).
"he escrow deposit ma$es the depository a trustee under an express trust (A!ticl
es (44' and (44( o the 1e% Civil Code).

9. O.erCissue, stocE

Stoc$ issued in excess of the authorized capital stoc$ #t is also $nown as s#u!i
ous stoc8 #ts issuance is considered null and void
10. $atere, stocE
A stoc$ issued not in exchange for its e'uivalent value
either in cash, property, share, stoc$ dividends, or services 3ater! in the stoc$
represents the difference between the fair mar$et value at the time of the issu
ance of the stoc$ and the par or issued value of said stoc$ 9oth par and no par
stoc$s can thus be watered stoc$s #t includes stoc$sA a #ssued without considera
tion (2onus sha!e) b #ssued as fully paid when the corporation has received a le
sser sum of money than its par or issued value (discount sha!e) c #ssued for a c
onsideration other than actual cash such as property or services, the fair valua
tion of
"imitations( ( <o par value shares cannot have an issued price of less than &? 6
61 ( "he entire consideration for its issuance constitutes capital so that no pa
rt of it should be distributed as dividends1 ( "hey cannot be issued as preferre
d stoc$s1 ( "hey cannot be issued by )an$s, trust companies, insurance companies
, public utilities and )uilding and loan association 6 PICT 91 ( "he articles of
incorporation must state the fact that it issued no par value shares as well as
the number of said shares1 ( Bnce issued, they are deemed fully paid and non( a
ssessable (Sec. 6).
12. Street certificate
A stoc$ certificate endorsed by the registered holder in blan$ and the transfere
e can command its transfer to his name from the issuing corporation

13. Con.erti)*e share

A share that is changeable by the stoc$holder from one class to another at a cer
tain price and within a certain period
7

28. Fractiona* share A share with a value of less than one full share G $HEN C"A
SSIFICATION OF SHARES MA% E MA&E %The Co!#o!ation Code o the "hili##ines, )ecto!
S. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.)( 1. y the incorporators 2 "he cl
asses and number of shares which a corporation shall issue are first determined
by the incorporators as stated in the articles of incorporation filed with the S
EC , y the oar, of &irectors an, the StocEho*,ers 2 After the corporations comes
into existence, they may be altered by the board of directors and the stoc$hold
ers by amending the articles of incorporation pursuant to Sec -5
A corporation m
ay issue such classes or series of shares as the prospects and needs of its busi
ness may re'uire 8urthermore, it may classify its shares for the purpose of insu
ring compliance with constitutional or legal re'uirements (Sec. 6, #a!. 4).
Shar
es may also be issued in different classes to create preferences or to deny or g
rant certain rights e g voting or non(voting shares &OCTRINE OF EG!A"IT% OF SHAR
ES C3here the articles of incorporation do not provide for any distinction of th
e shares of stoc$, all shares issued by the corporation are presumed to be e'ual
and enjoy the same rights and privileges and are also subject to the same liabi
lities (Sec. 6, #a!. 5). &EFINITION OF TERMSEFINITION O -. Capita* StocE or "e+a
* StocE or State, Capita* ( "he amount fixed in the corporate charter to be subs
cribed and paid in cash, $ind or property at the organization of the corporation
or afterwards and upon which the corporation is to conduct its operation , Capi
ta* 2 "he value of the actual property or estate of the corporation whether in m
oney or property #ts net worth %or stoc$holder:s e'uity0 is its assets less its
liabilities G AuthoriAe, Capita* StocE ( "he capital stoc$ divided into shares H
Su)scri)e, Capita* StocE( "he total amount of the capital stoc$ subscribed whet
her fully paid or not ? Outstan,in+ Capita* StocE ( "he portion of the capital s
toc$ issued to subscribers, whether fully paid or partially paid %as long as the
re is a binding subscription contract0 except treasury stoc$s (Sec. (/9). 5 !nis
sue, Capita* StocE 2 "he portion of the capital stoc$ that is not issued or subs
cribed #t does not vote and draws no dividends / "e+a* Capita* ( "he amount e'ua
l to the aggregate par value andDor issued value of the outstanding capital stoc
$ I State, Capita* 2 "he capital stoc$ divided into no par value shares . Pai,Cu
p Capita* 2 "he amount paid by the stoc$holders on subscriptions from unissued s
hares of the corporation <III. FORMATION AN& OR#ANIJATION OF CORPORATION PRI<ATE
c. &ayment of filing and publication fees d. #ssuance by the SEC of the certific
ate of
incorporation Forma* Or+aniAation an, Commencement of the Transaction of usiness
"hese are conditions subse'uent, which may be satisfied by substantial complian
ce in order that a corporation may legally continue as such Forma* or+aniAation(
a. Adoption of 9y(=aws and filing of the same with the SEC1 b. Election of boar
d of directorsDtrustees, and officers1 c. Establishment of principal office1 d.
&roviding for subscription and payment of capital stoc$
ARTIC"ES OF INCORPORATION 6AI9 "he document prepared by the persons establishing
a corporation and filed with the SEC containing the matters re'uired by the Cod
e "he Articles of #ncorporation have been described as one that defines the char
ter of the corporation, and the contractual relationships between the State and
the corporation, the stoc$holder and the State, and between the corporation and
its stoc$holders ($anu>a v. CA GR 1o.(/(/.4, ,a!ch 20, 2''5). Si+nificance( - "h
e issuance of a certificate of incorporation signals the birth of the corporatio
n:s juridical personality1 , #t is an essential re'uirement for the existence of
a corporation, even a de facto one Contents (Sec. (4)( 2. Corporate Name (Sec.
(0) "he corporation ac'uires juridical personality under the name stated in the
certificate of incorporation #t is the name of the corporation which identifies
and distinguishes it from other corporations, firms or entities
A corporation:s
right to use its corporate and trade name is a property right, a right in !e7 wh
ich it may assert or protect against the whole world in the same manner as it ma
y protect its tangible property against trespass or conversion ("hili#s @?#o!t B
.&. vs. CA, 2'6 SCRA 459). Statutory *imitation( "he proposed name must not beA
a. identical1 or b. deceptively or confusingly similar to that of any existing c

orporation or to any other name already protected by law1 or c. patently decepti

ve, confusing or contrary to law Reme,ies of corporation =hose name has )een a,o
pte, )y another( 1. #njunction 2. )e(registration
A corporation can change the name originally selected
by it after complying with the formalities prescribed by law, to witA amendment
of the articles of incorporation and filing of the amendment with the SEC (Sec.
(6). An authorized change in the name of the corporation, whether effected by a
special act or under a general law, has no more effect upon its identity as a co
rporation than a change of name of natural person upon his identity #t does not
affect the property, rights, or liabilities of the corporation, nor lessen or ad
d to its obligations #t is in no sense a new corporation, nor the successor of t
he original corporation #t is the same corporation with a different name and its
character is in
STEPS IN THE CREATION OF A CORPORATION - Promotion 2 A promoter is a person who,
acting alone or with others, ta$es initiative in founding and organizing the bu
siness or enterprise of the issuer and receives consideration therefor (Sec. /.(
', SRC) 2. Incorporation Steps( a. )rafting and execution of Articles of #ncorpo
ration by the incorporators and other documents re'uired for registration of the
corporation b. 8iling with the SEC of the articles of incorporation

no respect changed (Re#. "lante!s Ban8 vs. CA, 2(6 SCRA 9/0). 2. Purpose C*ause
Si+nificance( a A person who intends to invest his money in the business corpora
tion will $now where and in what $ind of business or activity his money will be
invested1 b. "he directors and the officers of the corporation will $now within
what scope of business they are authorized to act1 and c. A third person who has
dealings with the corporation may $now by perusal of the articles whether the t
ransaction or dealing he has with the corporation is within the authority of the
corporation or not "imitations( a. &urpose or purposes must be lawful1 b. &urpo
se or purposes must be stated with sufficient clarity1 c. #f there is more than
one purpose, the primary as well as the secondary purpose must be specified1 and
d. &urposes must be capable of being lawfully combined
A corporation the primar
y object of which is without statutory authority can have no lawful existence, e
ven though some of its declared purposes may be lawful 3. Principa* Office "he a
rticles of incorporation must state the place where the principal office of the
corporation is to be established or located, which place must be within the &hil
ippine (Sec. (4 4/6). Purpose( "o fix the residence of the corporation in a defi
nite place, instead of allowing it to be ambulatory (Boung Auto Su##ly Co. vs. C
A, 22/ SCRA 69'). #t is now re'uired by the SEC that all corporations and partne
rships applying for registration should state in their Articles of #ncorporation
the specific address of their principal office, which shall include, if feasibl
e, the strict number1 street name1 barangay1 city or municipality1 and specific
residence address of each incorporator, stoc$holder, director or trustee in line
with the full disclosure re'uirement of existing laws (S@C Ci!c. 1o. /, Se!ies
o 2''6).

creation of a new corporation % The Co!#o!ation Code o the "hili##ines, )ecto! S

. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.) "he expiration of the term for whi
ch the corporation was created does not, however, produce its immediate dissolut
ion for all purposes (Sec. (22). &OCTRINE OF RE"ATION OR RE"ATIN# ACH &OCTRINE "
he filing and recording of a certificate of extension after the term cannot rela
te bac$ to the date of the passage of the resolution of the stoc$holders to exte
nd the life of the corporation *owever, the doctrine of relations applies if the
failure to file the application for extension within the term of the corporatio
n is due to the neglect of the officer with whom the certificate is re'uired to
be filed or to a wrongful refusal on his part to receive it ("hili##ine Co!#o!at
e $a% Co7#ediu7, Ti7oteo A:uino, 2''6 ed.)
F :
Incorporators (See &I. Co7#onents o a Co!#o!ation) &irectors an, Trustees "he 9o
ard of )irectors is the governing body in a stoc$ corporation while 9oard of "ru
stees is the governing body in a non(stoc$ corporation "hey exercise the powers
of the corporation (Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uin
o, 2''5 ed.). Matters re'uire, to )e state, in the AI( a. a statement of the nam
es, nationalities and residences of the incorporating directors or the persons w
ho shall act as such until the first regular directors or trustees are duly elec
ted and 'ualified in accordance with the law b. the number of directors or trust
ees, which shall not be less than ? but not more than -? EDceptions( - education
al corporations registered as non( stoc$ corporation whose number of trustees th
ough not less than five and not more than fifteen should be divisible by five1 a
nd , in close corporation where all the stoc$holders are considered as members o
f the board of directors thereby effectively allowing twenty members in the boar
d (Co!#o!ation Code o the "hili##ines,Ru2en C. $adia, 2''( ed.). /. Capita*iAati
on Matters re'uire, to )e state, in the AI( a. the amount of its authorized capi
tal stoc$ in lawful money of the &hilippines1 b. the number of shares and $ind o
f shares into which it is divided1 c. in case the shares are par value shares, t
he par value of each1 d. the names, nationalities and residences of the original
subscribers1 e. the amount subscribed and paid by each on his subscription1 f.

sworn statement of the treasurer elected by the subscribers showing that at leas
t ,?7 of the authorized capital stoc$ of the corporation has been subscribed1 g.
sworn statement of the treasurer elected by the subscribers showing that at lea
st ,?7 of the total subscription has been fully paid to him in actual cash andDo
r in property the fair valuation of which is e'ual to at least ,?7 of the said s
ubscription1 and h. sworn statement of the treasurer elected by the subscribers
showing that such paid(up capital being not less that five thousand pesos

8. Term of EDistence (Sec. (()

"he corporation shall exist for the term specifie
d in the articles of incorporation not exceeding ?6 years, unless sooner legally
dissolved or unless its registration is revo$ed upon any of the grounds provide
d by law "he corporate life may be reduced or extended by amendment of the artic
les of incorporation by complying with the procedural re'uirements laid down in
Sec G/ "he extension of corporate term is subject to the following limitationsA
a. "he term shall not exceed ?6 years in any one instance1 b. "he amendment is e
ffected before the expiration of the corporate term of existence, for after diss
olution by expiration of the corporation term there is no more corporate life to
extend (Alha72!a Ciga! vs. S@C, 24 SCRA 26.). c. "he extension cannot be made e
arlier than ? years prior to the expiration date unless there are justifiable re
asons therefore as may be determined by the SEC
"he mere extension of the corpor
ate term of existence made before the expiration of the original term constitute
s a continuation of the old, and not the
9

CAPITA" STOCH REG!IREMENT G@1@RA$ R3$@C <o minimum authorized capital stoc$ as l
ong as the paid(up capital is not less than &?,666 66 @DC@"TIE1SC - as provided
for by special law a. &rivate )evelopment 9an$s ( &H4 for class A ( &,4 for clas
s 9 ( &-4 for class C b. #nvestment Companies 2 paid up at least &?6,666,666 c.
Savings and =oan Corporation 2 to be fixed by the 4onetary 9oard, but not less t
han &-66" d. 8inancing Companies &aid upA ( &-64 for 4etro 4anila and other -st
class city ( &?4 for other classes of cities ( &, ? 4 for others 4 e #nsurance c
ompanies 1. #nsurance 9ro$er 2 &,?6,666 66 2. >eneral Agent 2 & ,?6,666 66 G +ei
nsurance 9ro$er 2 & 6 ? 4 , provided that at least ,?7 of the authorized capital
stoc$ has been subscribed and at least ,?7 of the total subscription must be pa
id(up FI"IPINO PERCENTA#E O$NERSHIP REG!IREMENT No Forei+n E'uity 1. 4ass 4edia
except recording (A!t. D&I, Sec. (( o the ConstitutionF "!esidential ,e7o!andu7
dated '4 ,ay (..4) 2. &ractice of all professions G +etail trade enterprises wit
h paid(up capital of less than @SJ,,?66,666(Sec. 5 o RA 0962) H Cooperatives %Ch
. III, A!t. 26 o RA 6./0) ? &rivate Security Agencies (Sec. 4 o RA 5409) 5 Small
(scale 4ining (Sec. / o RA 9'96) / @tilization of 4arine +esources in archipelag
ic waters, territorial sea, and exclusive economic zone as well as small(scale u
tilization of natural resources in rivers, la$es, bays, and lagoons (A!t. DII, S
ec. 2 o the Constitution) I Bwnership, operation and management of coc$pits (Sec
. 5 o "* 44.) . 4anufacture, repair, stoc$piling andDor distribution of nuclear
weapons (A!t. II, Sec. 0 o the Constitution) -6 4anufacture, repair, stoc$piling
andDor distribution of biological, chemical and radiological weapons and anti(p
ersonnel mines (&a!ious t!eaties to %hich the "hili##ines is a signato!y and con
ventions su##o!ted 2y the "hili##ines) 11. 4anufacture of firecrac$ers and other
pyrotechnic devices (Sec. 5 o RA 9(0/) !p to T=enty Percent 627;9 Forei+n E'uit
y - &rivate radio communications networ$ (RA /046) !p to T=entyCFi.e Percent 62F
;9 Forei+n E'uity &rivate recruitment, whether for local or overseas employment
(A!t. 29 o "* 442) , Contracts for the construction and repair of locally(funded
public wor$s (Sec. ( o CA 54(, $EI 6/') exceptA a. infrastructureDdevelopment p
rojects covered in +A //-I1 and b. projects which are foreign funded or assisted
and re'uired to undergo international competitive bidding (Sec. 2a o RA 99(0) G
Contracts for the construction of defense(related structures (Sec. ( o CA 54()
!p to Thirty Percent 637;9 Forei+n E'uity - Advertising (A!t. D&I, Sec. (( o the
Constitution) !p to Forty Percent 687;9 Forei+n E'uity Exploration, development
and utilization of natural resources (A!t. DII, Sec. 2 o the Constitution) , Bw
nership of private lands (A!t. DII, Sec. 9 o the ConstitutionF Ch. 5, Sec. 22 o
CA (4(F Sec. 4 o RA .(02) G Bperation and management of public utilities (A!t. D
II, Sec. (( o the ConstitutionF Sec. (6 o CA (46) H BwnershipDestablishment and
administration of educational institutions (A!t. DI&, Sec. 4 o the Constitution)
? Culture, production, milling, processing, trading excepting retailing, of ric
e and corn and ac'uiring, by barter, purchase or otherwise, rice and corn and th
e by(products thereof (Sec. 5 o "* (.4FSec. (5 o RA 0962 5 Contracts for the sup
ply of materials, goods and commodities to government(owned or controlled corpor
ation, company, agency or municipal corporation (Sec. ( o RA 5(0/) / &roject &ro
ponent and 8acility Bperator of a 9B" project re'uiring a public utilities franc
hise (A!t. DII, Sec. (( o the ConstitutionF Sec. 2a o RA 99(0) I Bperation of de
ep sea commercial fishing vessels (Sec. 29 o RA 055') . Adjustment Companies (Se
c. /2/ o "* 6(2 as a7ended 2y "* (0(4) -6 Bwnership of condominium units where t
he common areas in the condominium project are co( owned by the owners of the se
parate units or owned by a corporation (Sec. 5 o RA 4926) !p to SiDty Percent 6:
7;9 Forei+n E'uity - 8inancing companies regulated by the Securities and Exchang
e Commission (Sec. 6 o RA 5.0' as a7ended 2y RA 0556) , #nvestment houses regula
ted by the SEC (Sec. 5 o "* (2. as a7ended 2y RA 0/66) 0 Shares of StocE (See DI
II. Stoc8s and Stoc8holde!s)
A corporation commences to have juridical pe
COMMENCEMENT OF CORPORATE EKISTENCE
rsonality and legal existence only from the moment the SEC issues to the incorpo
rators a certificate of incorporation under its official seal
#t is the certific
ate of incorporation that gives juridical personality to a corporation and place

d it under the jurisdiction of the commission

#n the case of religious corporati
ons, the Code does not re'uire the SEC to issue a certificate of incorporation #
n fact, Sec --, clearly states that from and after the filing with the Commissio
n of the articles of incorporation, the chief archbishop shall become a corporat
ion sole "he issuance of the articles calls the corporation into being but it is
not really ready to do business until it is organized "he corporation must form
ally organized and commence the transaction of its business or the construction
of its wor$s within two years from the date of its incorporation or, otherwise,
its corporate powers shall cease and it shall be deemed dissolved (Sec. 22.) AME
N&MENT OF ARTIC"ES OF INCORPORATION Proce,ure( 1. +esolution by at least a major
ity of the board of directors or trustees1 2. ;ote or written assent of the stoc
$holders representing at least ,DG of the outstanding capital stoc$ s or ,DG of
the members in case of non(stoc$ corporations 3. Submission and filing with the
SEC ofA a the original and amended articles together
10

b
c
containing all the provisions re'uired by law to be set out in the articles of i
ncorporation Such articles, as amended, shall be indicated by underscoring the c
hange or changes made1 a copy thereof, duly certified under oath by the corporat
e secretary and a majority of the directors or trustees stating the fact that su
ch amendments have been duly approved by the re'uired vote of the stoc$holders o
r members1 and a favorable recommendation of the appropriate government agency c
oncerned if re'uired by law
"imitations( - "he amendment of any provision or matters stated in the articles
of incorporation is not allowed when it will be contrary to the provisions or re
'uirement prescribed by the Code or by special law or changes any provision in t
he articles of incorporation stating an accomplished fact1 , #t must be for legi
timate purposes1 G #t must be approved by the re'uired vote of the board of dire
ctors or trustees and the stoc$holders or members1 H "he original articles and a
mended articles together must contain all provisions re'uired by law to be set o
ut in the articles of incorporation1 ? Such articles, as amended, must be indica
ted by underscoring the changes made, and a copy thereof duly certified under oa
th by the corporate secretary and a majority of the directors or trustees statin
g that the amendments have been duly approved by the re'uired vote of the stoc$h
olders or members must be submitted to the SEC1 5 "he amendments shall ta$e effe
ct only upon their approval by the SEC1
*owever, express approval is not indispe
nsable "his is because the amendment shall also ta$e effect from the date of fil
ing with the said Commission if it is not acted upon by the Commission within 5
months from the date of filing for a cause not attributable to the corporation /
#f the corporation is governed by special law, the amendments must be accompani
ed by a favorable recommendation of the appropriate government agency1 I <o righ
t or remedy in favor of or against any corporation, its stoc$holders, members, d
irectors, trustees, or officers, nor any liability incurred by any such corporat
ion, stoc$holders, members, directors, trustees, or officers, shall be removed o
r impaired either by the subse'uent dissolution of said corporation or by any su
bse'uent amendment or repeal of this Code or of any part thereof (Section (45 o
the Co!#o!ation Code). Facts not su)-ect to amen,ments( 1. <ames of incorporator
s1 2. <ames of original subscribers to the capital stoc$ of the corporation and
their subscribed and paid up capital1 3. "reasurer elected by the original subsc
ribers1 4. 4embers who contributed to the initial capital of a non( stoc$ corpor
ation1 5. )ate and place of execution of the articles of incorporation1 6. 3itne
sses to the signing and ac$nowledgment of the articles #roun,s for Re-ection of
the Artic*es of Incorporation or Amen,ment thereto (Sec. (9) - "hat the articles
of incorporation or any amendment thereto is not substantially in accordance wi
th the form prescribed therein1 , "hat the purpose or purposes of the corporatio
n are patently unconstitutional, illegal, immoral, or contrary to government rul
es and regulations1 G "hat the "reasurer:s Affidavit concerning the amount of
capital stoc$ subscribed andDor paid is false1 H "hat the re'uired percentage of
ownership of the capital stoc$ to be owned by citizens of the &hilippines has n
ot been complied with as re'uired by existing laws or the constitution "hese gro
unds are not exclusive 9efore rejecting the Articles of #ncorporation or its ame
ndments, the SEC should give the incorporators reasonable time within which to c
orrect or modify the objectionable portions of the articles or amendments
Any de
cision of the Commission rejecting the articles of incorporation or disapproving
any amendment thereto is appealable by petition for review to the Court of Appe
als in accordance with the pertinent provisions of the +ules of Court All the gr
ounds enumerated in Section -/ can be determined on the basis of the Articles of
incorporation itself and the other re'uired documents >enerally, if the Article
s of #ncorporation and its supporting documents are in order, the SEC has no rec
ourse but to issue the Certificate of #ncorporation ("hili##ine Co!#o!ate $a% Co

7#ediu7, Ti7oteo A:uino, 2''6 ed.). #roun,s for Suspension or Re.ocation of Cert
ificate of Re+istration ("!es. *ec!ee 1o. .'2;A) - 8raud in procuring its certif
icate of incorporation , Serious misrepresentation as to what the corporation ca
n do or is doing to the great prejudice of, or damage to, the general public G +
efusal to comply with or defiance of a lawful order of the SEC restraining the c
ommission of acts which would amount to a grave violation of its franchise H Con
tinuous inoperation for a period of at least ? years ? 8ailure to file the by(la
ws within the re'uired period 5 8ailure to file re'uired reports EFFECTS OF NONC
!SE OF CORPORATE CHARTER (Sec. 22)
#f a corporation does not formally organize a
nd commence the transaction of its business or the construction of its wor$s wit
hin , years from the date of incorporation, its corporate powers cease and the c
orporation shall be deemed dissolved #f a corporation has commenced transaction
of its business but subse'uently becomes continuously inoperative for a period o
f at least ? years, the same shall be a ground for the suspension or revocation
of its corporate franchise or certificate of incorporation
#f the non(use of cor
porate charter or continuous inoperation of a corporation is due to causes beyon
d its control as found by the Commission, the effects mentioned shall not ta$e p
lace &E FACTO CORPORATION A corporation which actually exists for all practical
purposes as a corporation but which has no legal right to corporate existence as
against the State #t is one which has not complied with all the re'uirements ne
cessary to be a de jure corporation but has complied sufficiently to be accorded
corporate status as against third parties although not against the state Re'uis
ites( 1. "he existence of a valid law under which it may be incorporated1 2. A b
ona fide attempt in good faith to incorporate under such law1 3. Actual use or e
xercise in good faith of corporate powers1 and 4. #ssuance of a certificate of i
ncorporation by the SEC as a minimum re'uirement of continued good faith
#n the case of a de facto corporation, the only way in
which its corporate existence can be 'uestioned is in a direct proceeding by the
State, brought for that
11

purpose &rivate individuals cannot raise the objection in such a case, either di
rectly or indirectly, and nobody can raise the objection collaterally %The Co!#o
!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6
ed.) Such a corporation is practically as good as a de jure corporation #t is de
emed to have a substantial legal existence and ordinarily, in its relation with
all persons except the State, has the same powers and is subject to the same lia
bilities, duties and responsibilities, as a corporation de jure, and is bound by
all such acts as it might rightfully perform if it were a corporation de jure %
The Co!#o!ation Code o the "hili##ines, )ecto! S. *e $eon + )ecto! ,. *e $eon, !., 2''6 ed.) "he officers and directors of a de facto corporation are subject t
o all the liabilities and penalties attending to officers and directors duly cho
sen by a corporation de jure, including the liability under the criminal law, an
d their acts are binding when such acts would be within the power of such office
rs if the corporation were one de jure %The Co!#o!ation Code o the "hili##ines,
)ecto! S. *e $eon + )ecto! ,. *e $eon, -!., 2''6 ed.).
without voting rights in the board (G!ace Ch!istian )igh School v. CA 20( SCRA (
// Ecto2e! 2/, (..9). , A majority of the directorsDtrustees must be residents o
f the &hilippines (Sec. 2/). G *e must not have been convicted by final judgment
of an offense punishable by imprisonment for a period exceeding 5 years or a vi
olation of the Corporation Code, committed within five years from the date of hi
s election (Sec. 29). H Bnly natural persons can be elected directorsDtrustees
#
n case of corporate stoc$holders or members, their representation in the board c
an be achieved by ma$ing their individual representatives trustees of the shares
or membership to ma$e them stoc$holdersDmembers of record ? Bther 'ualification
s as may be prescribed in the by( laws of the corporation 5 4ust be of legal age
E*ection of oar, Mem)ers (Secs. 24; 25) STOCH NONCSTOCH CORPORATION CORPORATION
Bwners of a majority A majority of the of the outstanding members entitled to c
apital stoc$, in vote, in person or by person or by their proxy, if allowed in i
ts authorized articles of representative as incorporation or by( such by written
proxy, laws, must be present must be present at in the election the election of
the directors Cumulative voting is Cumulative voting is mandatory1 a matter gen
erally not of right granted by available unless law to each allowed by the stoc$
holder with articles of voting rights incorporation or by( laws, since each memb
er is entitled only to one vote Metho,s of <otin+ (Sec. 24) 1. Strai+ht <otin+ B
every stoc$holder may vote such number of shares for as many persons as there a
re directors to be elected 2. Cumu*ati.e <otin+ for One Can,i,ate B a stoc$holde
r is allowed to concentrate his votes and give one candidate as many votes as th
e number of directors to be elected multiplied by the number of his shares shall
e'ual 3. Cumu*ati.e <otin+ )y &istri)ution B by this method, a stoc$holder may
cumulate his shares by multiplying also the number of his shares by the number o
f directors to be elected and distribute the same among as many candidates as he
shall see fit Cumulative voting being a statutory right, a corporation is witho
ut power to deprive the stoc$holders of its use or even restrict the right to vo
te to only one way or method A stoc$holder may or may not exercise the right as
he shall see fit (S@C E#inion, Ect. 2', (.64).
#n electing directors by cumulati
ve voting, the total number of votes cast by a stoc$holder shall not exceed the
number of shares owned by him as shown in the boo$s of the corporation multiplie
d by the whole number of directors to be elected 4embers of non(stoc$ corporatio
ns may cast as many votes as there are trustees to be elected but may cast not m
ore than one vote for one candidate "his is the manner of voting in non( stoc$ c
orporations unless otherwise provided in the articles of incorporation
CORPORATION % ESTOPPE" An unincorporated association which represented itself to
be a corporation will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation ,

liabilities and damages incurred or arising as a result thereof

A corporation by
estoppel has no real existence in law #t is neither a de jure nor a de facto co
rporation, but is a mere fiction existing for the particular case, and vanishing
where the element of estoppel is absent #t exists only between the persons who
misrepresented their status and the parties who relied on the misrepresentation
#ts existence may be attac$ed by any third party except where the attac$ing part
y is estopped to treat the entity other than as a corporation All persons not st
oc$holders or members who assume to act as a corporation $nowing it to be withou
t authority to do so shall be liable as general partners for all debts, liabilit
ies, and damages incurred or arising as a result thereof (Sec.2(). 3hen any such
ostensible corporation is sued on any transaction entered by it as a corporatio
n or on any tort committed by it as such, it shall not be allowed to use as a de
fense its lac$ of corporate personality (Sec. 2(). A third party who, $nowing an
association to be unincorporated, nonetheless treated it as a corporation and r
eceived benefits from it, may be barred from denying its corporate existence in
a suit brought against the alleged corporation ($i7 Tong $i7 vs. "hil. <ishing G
ea! Indust!ies, Inc. /(9 SCRA 920). IK. OAR& OF &IRECTORS AN& TR!STEES
Gua*ifications( - 8or a stoc$ corporation, ownership of at least - share capital
stoc$ of the corporation in his own name, and if he ceases to own at least one
share in his own name, he automatically ceases to be a director (Sec. 2/). 8or a
non(stoc$ corporation, only members of the corporation can be elected to the 9o
ard of "rustees
#n order to be eligible as a director, what is material is the l
egal title to, not beneficial ownership of the stoc$s appearing on the boo$s of
the corporation A person who does not own a stoc$ at time of his election or app
ointment does not dis'ualify him as a director if he becomes a shareholder befor
e assuming the duties of his office
A person who is not a stoc$holder cannot be
a director, but he can be an e? o icio member
12

"imitations on the E*ection of &irectors?Trustees - At any meeting of stoc$holde

r or members called for the election of directors or trustees, there must be pre
sent either in person or by representative authorized to act by written proxy, t
he owners of the majority of the outstanding capital stoc$ or majority of the me
mbers entitled to vote , "he election must be by ballot if re'uested by any voti
ng member or stoc$holder G A stoc$holder cannot be deprived in the articles of i
ncorporation or in the by(laws of his statutory right to use any of the methods
of voting in the election of directors H <o delin'uent stoc$ shall be voted ? "h
e candidates receiving the highest number of votes shall be declared elected A m
ajority vote is not necessary *owever, it is necessary that there is a 'uorum An
d in the absence thereof, election shall be considered invalid (S@C E#inion). "i
mitations on the StocEho*,erLs Ri+ht to <ote 1. 3here the articles of incorporat
ion provides for classification of shares pursuant to Sec 5, non(voting shares a
re not entitled to vote except as provided for in the last paragraph of Sec 5 2.
&referred or redeemable shares may be deprived of the right to vote unless othe
rwise provided in the Code 3. 8ractional shares of stoc$ cannot be voted 4. "rea
sury shares have no voting rights as long as they remain in the treasury 5. *old
ers of stoc$ declared delin'uent by the board of directors for unpaid subscripti
on are not entitled to vote or to representation at any stoc$holder:s meeting 6.
A transferee of stoc$ cannot vote if his transfer is not registered in the stoc
$ and transfer boo$ of the corporation Term of Office (Sec. 2/) "he directors or
trustees shall serve for a term of one year and until their successors are elec
ted and 'ualified #f no election is conducted or no 'ualified candidate is elect
ed, they shall continue to act as such in a hold(over capacity until an election
is held and a 'ualified candidate is so elected 6HO"&CO<ER PRINCIP"E9 (Co!#o!at
ion Code o the "hili##ines, Ru2en C. $adia, 2''( ed.). Guorum Re'uirement in oar
, Meetin+s (Sec. 25) @nless the articles of incorporation or the by(laws provide
for a greater majority, a majority of the number of directors or trustees as fi
xed in the articles of incorporation shall constitute a 'uorum for the transacti
on of corporate business, and every decision of at least a majority of the direc
tors or trustees present at a meeting at which there is a 'uorum shall be valid
as a corporate act, except for the election of officers which shall re'uire the
vote of a majority of all the members of the board Remo.a* of &irectors or Trust
ees (Sec. 20) "he law does not specify cases for removal of a director or truste
e nor even re'uire that removal should be for sufficient cause or reason *owever
, the incumbent directors or trustees cannot be removed merely by replacing a ne
w set of directors or trustees Re'uisites( - "he removal should ta$e place at a
regular or special meeting duly called for the purpose1 2. "he director or trust
ee can only be removed by at least ,DG of the outstanding capital stoc$ or of th
e members entitled to vote1 3. "here must be a previous notice to stoc$holders o
r members of the corporation of the intention to propose such removal at the mee
ting 4. "he removal without cause may not be used to deprive minority stoc$holde
rs or members of the right to representation to which they may be entitled under
Sec ,H of the Code
"here is no need to follow the procedure under Section
,I if the director is dis'ualified 9y operation of law, such director is dis'ual
ified to act as director thereby creating vacancies in the 9oard 4ere declaratio
n of the dis'ualification as the cause of the vacancy is sufficient (S@C E#inion
, <e2!ua!y /, (..2). "he meeting must be called by the secretary on order of the
president or on the written demand of the stoc$holders representing a majority
of the outstanding capital stoc$ or majority members entitled to vote "he law al
so provides that should the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or if there is no secret
ary, the call for the meeting may be addressed directly to the stoc$holders or m
embers by any stoc$holder or member of the corporation signing the demand

<acancies in the oar, (Sec. 2.) A vacancy in the office of director or trustee o
ther than by removal or by expiration of term may be filled as followsA y the st
ocEho*,ers or mem)ers( a #f the vacancy results from the removal by the stoc$hol
ders or members or the expiration of term1 b. #f the vacancy occurs other than b
y removal or by expiration of term, such as death, resignation, abandonment, or
dis'ualification, if the remaining directors or trustees do not constitute a 'uo
rum for the purpose of filling the vacancy1 c. #f the vacancy may be filled by t
he remaining directors or trustees but the board refers the matter to stoc$holde
rs or members1 or d. #f the vacancy is created by reason of an increase in the n
umber of directors or trustees 2. y the mem)ers of the oar, B if still constitut
ing a 'uorum, at least a majority of them are empowered to fill any vacancy occu
rring in the board other than by removal by the stoc$holders or members or by ex
piration of term Compensation of oar, Mem)ers (Sec. /') G@1@RA$ R3$@A )irectors
are not entitled to receive any compensation except for reasonable per diems @DC
@"TIE1SC - 3hen their compensation is fixed in the by(laws , 3hen granted by the
vote of stoc$holders representing at least a majority of the outstanding capita
l stoc$ at a regular or special meeting G 3hen they are also officers of the cor
poration
"he only limitation in the granting of compensation is that the amount
to be given shall not exceed -67 of the net income before income tax of the corp
oration during the preceding year CORPORATE OFFICERS &resident 2 must be a direc
tor and he may not be concurrently the treasurer or secretary , "reasurer 2 may
or may not be a director1 as a matter of sound corporate practice, must be a res
ident G Secretary 2 need not be a director unless re'uired by the by(laws1 must
be a resident and citizen of the &hilippines1 and H Such other officers as may b
e provided in the by(laws CORPORATE OFFICER &osition is provided for in the by(l
aws or under the Corporation Code +"C has jurisdiction in case of labor dispute
CORPORATE EMP"O%EE Employed by the action of the managing officer of the corpora
tion <=+C has jurisdiction in case of labor disputes
13

Authority of Officers is +enera**y ,eri.e, from( 1. =aw 2. 9y(laws 3. Authorizat

ion from the 9oard, either expressly or impliedly by habit, custom or ac'uiescen
ce in the general course of business (Inte!;Asia Invest7ent Indust!ies v. CA GR
no. (25990, -une (', 2''/). EDtent of Po=ers or Authority of Corporate Officers
- "he authority which he has by virtue of his office1 , "he authority which is e
xpressly conferred upon him or is incidental to the effectualness of such expres
s authority1 G As to third persons dealing with him without notice of any restri
ction thereof, the authority which the corporation holds the officer out as poss
essing or is estopped to deny H "he nature of the corporate business must also b
e ta$en into consideration1 and ? "he nature act of an officer though originally
unauthorized may become binding upon the corporation by a subse'uent ratificati
on (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.).
@DC@"TIE1SC 1. #n case of an Executive Committee duly authorized in the by(laws1
2. #n case of a contracted manager which may be an individual, a partnership, o
r another corporation Note( #n case the contracted manager is another corporatio
n, the special rule in Sec HH applies G #n case of close corporations, the stoc$
holders may directly manage the business of the corporation instead, if the arti
cles of incorporation so provide
"he power to purchase real property is vested in the
board of directors or trustees 3hile a corporation may appoint agents to negotia
te for the purchase of real property needed by the corporation, the final say wi
ll have to be with the board, whose approval will finalize the transaction A cor
poration can only exercise its powers and transact its business through its boar
d of directors and through its officers and agents when authorized by a board re
solution or by its by(laws (S#ouses Constantine <i!7e vs. Bu8al @nte!#!ises and
*evelo#7ent Co!#o!ation, G.R. 1o. (466'0, Ecto2e! 2/, 2''/). "imitations on Po=e
rs of oar, of &irectors?Trustees( =imitations imposed by the Constitution, statu
tes, articles of incorporation or by(laws , #t cannot perform constituent or tho
se acts which involve fundamental changes in the corporation which re'uire the a
pproval of its stoc$holders or members G #t cannot exercise powers not possessed
by the corporation (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de
$eon, 2''2 ed.).
"he corporate powers conferred upon the board of directors usu
ally refer only to the ordinary business transactions of the corporation and doe
s not extend beyond the management of ordinary corporate affairs nor beyond the
limits of its authority (S@C E#inion, ,ay 2, (..4). Nature of po=ers of )oar, of
,irectors or trustees (The Co!#o!ation Code o the "hili##ines Annotated, )ecto!
de $eon, 2''2 ed.) - @nder the "heory of Briginal &ower, the powers of the boar
d of directors or trustees are B+#>#<A= and @<)E=E>A"E) "he stoc$holders or memb
ers do not confer, nor can they revo$e those powers , "hey are )E+#;A"#;E only i
n the sense of being received from the State in the act of incorporation !SINESS
M!&#MENT R!"E Courts cannot underta$e to control the discretion of the board of
directors about administrative matters as to which they have the legitimate pow
er of action, and contracts intra vires entered into by the board of directors a
re binding upon the corporation and courts will not interfere unless such contra
cts are so unconscionable and oppressive as to amount to a wanton destruction of
the rights of the minority (Ga72oa vs. &icto!iano, .' SCRA 4'). Conse'uences( +esolutions and transactions entered into by the 9oard within the powers of the
corporation cannot be reversed by the courts not even on the behest of the stoc
$holders , )irectors and officers acting within such business judgment cannot be
held personally liable for such acts ("hili##ine Co!#o!ate $a%, Cesa! &illanuev
a, 2''( ed.). "IA I"IT% OF &IRECTORS@ TR!STEES AN& OFFICERS ThreeCfo*, &uties of
&irectors ("hili##ine Co!#o!ate $a%, Cesa! &illanueva, 2''( ed.) 1. &uty of O)e
,ience "o direct the affairs of the corporation only in accordance with the purp
oses for which it was organized
#t is a familiar doctrine that if a corporation $nowingly
permits one of it officers, or any other agent, to act within the scope of an ap
parent authority, it holds him out to the public as possessing the power to do t

hose acts1 and thus, the corporation will, as against anyone who has in good fai
th dealt with it through such agent, be estopped from denying the agent:s author
ity ($a#u; $a#u <oundation Inc., vs. Cou!t o A##eals, et al., G.R. 1o. (26''6, anua!y 2., 2''4). &OCTRINE OF APPARENT A!THORIT%
#f a corporation, $nowingly per
mits one of its officers, or any other agent, to act within the scope of an appa
rent authority, it holds him out to the public as in possession of the power to
do those acts, and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent:s au
thority
Apparent authority is derived not merely from practice #ts existence may
be ascertained throughA 1. the general manager in which the corporation holds o
ut an officer or agent as having the power to act or, in other words the apparen
t authority to act in general, with which it clothes him1 or 2. the ac'uiescence
in his acts of a particular nature, with actual or constructive $nowledge there
of, within or beyond the scope of his ordinary powers (Inte!;Asia Invest7ent Ind
ust!ies, Inc. vs. CA, G.R. 1o. (25990, -une (', 2''/). OAR& OF &IRECTORS?TR!STEE
S AS REPOSITOR% OF CORPORATE PO$ERS G@1@RA$ R3$@C "he corporate powers of the co
rporation shall be exercised, all business conducted and all property of such co
rporation controlled and held by the board of directors or trustees (Sec. 2/). S
ection ,G of the Corporation Code expressly provides that all corporate powers s
hall be exercised by the board Kust as natural person may authorize another to d
o certain acts in its behalf, so may the board validly delegate some of its func
tions to individual officer or agents Absent such valid delegation, the rule is
that the declarations of an individual director relating to the affairs of the c
orporation, but not in the course of, or connected with the performance of autho
rized duties of such director, are held not binding on the corporation (A< Realt
y + *evGt v. *iesel7an <!eight Se!vices GR 1o.(((440, -anua!y (6, 2''2).
14

2.
G

asis( "he directors or trustees and officers to be elected shall perform the dut
ies enjoined on them by law and the by(laws (Sec. 25). &uty of &i*i+ence )irecto
rs and officers are re'uired to exercise due care in the performance of their fu
nctions asis( )irectors or trustees who willfully and $nowingly vote for or asse
nt to patently unlawful acts of the corporation or who are guilty of gross negli
gence or bad faith in directing the affairs of the corporation shall be liable j
ointly and severally for all damages resulting therefrom suffered by the corpora
tion, its stoc$holders or members and other persons (Sec. /(). &uty of "oya*ty "
he director or officer owes loyalty and allegiance to the corporationLa loyalty
that is undivided and an allegiance that is influenced by no consideration other
than the welfare of the corporation asis( )irectors or trustees who ac'uire any
pecuniary or personal interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting theref
rom (Sec. /(). 3hen a director or trustee attempts to ac'uire or ac'uires in vio
lation of his duty, any interest adverse to the corporation in respect of any ma
tter which has been reposed in him in confidence as to which e'uity imposes a li
ability upon him to deal in his own behalf, he shall be liable as trustee for th
e corporation and must account for all the profits which otherwise would have ac
crued to the corporation (Sec. /(, #a!. 2) 3here a director, by virtue of his of
fice, ac'uires for himself a business opportunity which should belong to the cor
poration, thereby obtaining profits which should belong to the corporation, he m
ust account to the latter for all such profits by refunding the same (Sec. /4) %
)BC"+#<E B8 CB+&B+A"E B&&B+"@<#"E0. 3hile both the second paragraph of Section /
( and Section /4 covers the same subject matter which is business opportunity, t
hey differ in the following senseA SECTION 38 Bnly applicable directors to

it1 or %,0 he is negligent in not discovering or acting to prevent it (Co!#o!ati

on Code o the "hili##ines, Ru2en C. $adia, 2''( @d.). Par. 1 of Sec. 31 applies
to directors or trustees "he erring directorDtrustee shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stoc$holders or members and other persons Par. 2 of Sec. 31 applies to directors
, trustees, or officers who attempts to ac'uire or ac'uires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which ha
s been reposed in him in confidence *e shall be liable as a trustee for the corp
oration and must account for the profits which otherwise would have accrued to t
he corporation
Reme,ies in case of Mismana+ement - +eceivership1 , #njunction, if the act has n
ot yet been done1 G )issolution if the abuse amounts to a ground for the institu
tion of a :uo %a!!anto proceeding but the Solicitor >eneral refuses to act1 and
H )erivative suit or complaint filed with SEC Specia* Ru*es on Contracts entere,
into )y &irectors?Trustees or Officers 2. Contracts of Se*fC,ea*in+ &irectors@
Trustees or Officers (Sec. /2)
Self(dealing directors, trustees or officers are
those who personally contract with the corporation in which they are directors,

trustees, or officers
Such contracts are ;B#)A9=E, at the option of the corporat
ion unlessA a. "he presence of such directorDtrustee in the board meeting approv
ing the contract was not necessary to constitute a 'uorum for such meeting1 b. "
he vote of such directorDtrustee in the board meeting approving the contract was
not necessary for the approval of the contract1 c. "he contract is fair and rea
sonable under the circumstances1 d. #n the case of an officer, there was previou
s authorization by the board of directors
Although not all conditions are presen
t, the corporation may elect not to attac$ or 'uestion the validity of the contr
act, without prejudice, however, to the liability of the directorDtrustee for da
mages under Sec G 3here any of the first two conditions is absent, said contract
may be ratified by the vote of the stoc$holders representing at least ,DG of the
outstanding capital stoc$ or ,DG of the members in a meeting called for the pur
pose, provided that full disclosure of the adverse interest of the directorD tru
stee involved is made at such meeting and the contract is fair and reasonable 2
Contracts of InterC*ocEin+ &irectors (Sec. //)
Contracts entered into between co
rporations with interloc$ing directors %interest of said directors is substantial
!, i e exceeding ,67 of the outstanding capital stoc$0
#nterloc$ing directorship
by itself is not prohibited under the Corporation Code *owever, the by(laws may
contain provisions that disallow interloc$ing directorship
A contract between ,
or more corporations having interloc$ing directors shall not be invalidated on
that ground alone "hese contracts are valid, provided thatA a "he contract is no
t fraudulent1 and b "he contract is fair and reasonable under the circumstances
#f the interloc$ing director:s interest in one corporation or corporations is nom
inal! %not exceeding ,67 of the outstanding capital stoc$0, then all the conditi
ons prescribed in Sec. /2 on self(dealing directors must be
SECTION 32@ 2n, para+raph Applicable to directors, trustees and officers )oes no
t allow ratification of a transaction by a self( dealing directors, trustees or
officers
Allows the ratification of a transaction by a dealing directors, i.e. by the vot
es of stoc$holders representing ,DG of the outstanding capital stoc$
Persona* "ia)i*ity of &irectors G@1@RA$ R3$@C )irectors and officers are not sol
idarily liable with the corporation @DC@"TIE1SA #n the following cases, personal
liability may be incurred by directors and trustees, or in appropriate cases, t
he officers of the corporation, when theyL 1. 3illfully and $nowingly vote for a
nd assent to patently unlawful acts of the corporation1 (Sec. /() 2. Are guilty
of gross negligence or bad faith in directing the affairs of the corporation1 (S
ec. /() 3. Ac'uire any personal or pecuniary interest in conflict of their duty1
(Sec. /() 4. Consent to the issuance of watered stoc$s, or, having $nowledge th
ereof, fails to file objections with the secretary1 (Sec. 65) 5. Agree or stipul
ate in a contract to hold himself personally liable with the corporation1 or 6.
9y virtue of a specific provision of law
A director is not liable for misconduct of co(directors or
other officers unless %-0 he connives or participates in
15

3.

present with respect to the corporation in which he has nominal interest &octrin
e of Corporate Opportunity (Sec. /4) "his is consistent with the duty of loyalty
of a director L which mandates that he should not give preference to his own am
elioration by ta$ing the opportunity of the corporation App*ica)i*ity( @nless hi
s act is ratified, a director shall refund to the corporation all the profits he
realizes on a business opportunity which 1. the corporation is financially able
to underta$e1 2. from its nature, is in line with corporations business and is
of practical advantage to it1 and 3. the corporation has an interest or a reason
able expectancy "he rule shall be applied notwithstanding the fact that the dire
ctor ris$ed his own funds in the venture A business opportunity ceases to be cor
porate opportunity and transforms to personal opportunity where the corporation
refuses or is definitely no longer able to avail itself of the opportunity (S@C
E#inion, ,a!ch 4, (.02).
Man,atory corporate +o.ernance ru*es are necessary for 2 main reasons( 1. "o ove
rcome the collective action problem resulting from the dispersion among stoc$hol
ders, and 2. "o ensure that the interests of all relevant constituencies are rep
resented K. CORPORATE PO$ERS Hin,s( - EDpress B those expressly authorized by th
e Corporation Code and other laws, and its Articles of #ncorporation or Charter
, Inci,enta* B those that are incidental to the existence of the corporation G I
mp*ie, B those that can be inferred from or necessary for the exercise of the ex
press powers Classification of #mplied &owers a Acts in the usual course of busi
ness b. Acts to protect debts owing to the corporation c. Acts which involve emb
ar$ing in a different business usually to collect debts out of profits d. Acts t
o protect or aid employees e. Acts to increase business (The Co!#o!ation Code o
the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.) #enera* Po=ers an, Capacity
(Sec. /6) 1. "o sue and be sued1 2. Bf succession1 3. "o adopt and use of corpo
rate seal1 4. "o amend its Articles of #ncorporation1 5. "o adopt its by(laws1 6
. 8or stoc$ corporationsA issue and sell stoc$s to subscribers and treasury stoc
$s1 for non(stoc$ corporationsA admit members1 7. "o purchase, receive, ta$e or
grant, hold, convey, sell, lease, pledge, mortgage and deal with real and person
al property, securities and bonds 8. "o enter into merger or consolidation1 9. "
o ma$e reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civic or similar purposes, provided that no donation is given to any
%i0 political party, %ii0 candidate and %iii0 partisan political activity 10. "
o establish pension, retirement, and other plans for the benefit of its director
s, trustees, officers and employees 11. "o exercise other powers essential or ne
cessary to carry out its purposes Other Po=ers 2. EDtension ?Shortenin+ of Corpo
rate Term (Sec. /9) Proce,ure( a Approval by a majority vote of the board of dir
ectorsDtrustees b 3ritten notice of the proposed action and the time and place o
f meeting shall be served to each stoc$holder or member either by mail or person
al service c +atification by the stoc$holders representing at least ,DG of the o
utstanding capital stoc$ or ,DG of the members in case of non(stoc$ corporations
EKEC!TI<E COMMITTEE (Sec. /5) A body created by the by(laws and composed of some
members of the board which, subject to the statutory limitations, has all the a
uthority of the board to the extent provided in the board resolution or by(laws
(The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon, 2''2 ed.). Pu
rpose( "he Code allows the creation of such because the 9oard may not readily fa
ce the contingency of confronting urgent matters which re'uires its attention 4u
st be provided for in the by laws and composed of not less than G members of the
board appointed by the board
"he executive committee has all the authority of t
he board to the extent provided for in the resolution of the board or in the by
laws 4ay act by a majority vote of all of its members
#ts decisions are not subj
ect to appeal to the board *owever, if the resolution of the Executive Committee
is invalid i e not one of the powers conferred to it0, it may be ratified by th

e board (S@C E#inion).

#f the executive committee is not validly constituted, th
e members thereof may be considered as de facto officers (S@C E#inion). "imitati
ons on the Po=ers of the EDecuti.e Committee #t cannot act on the followingA 1.
4atters needing stoc$holder approval1 2. 8illing up of board vacancies1 3. Amend
ment, repeal or adoption of by(laws1 4. Amendment or repeal of any resolution of
the 9oard which by its express terms is not amendable or repealable1 and ? Cash
dividend declaration CO&E OF CORPORATE #O<ERNANCE App*ica)i*ity( "he Code of Co
rporate >overnance shall be applicable toA 1. Corporations whose securities are
registered or listed1 2. Corporations which are grantees of permitsDlicenses and
secondary franchise from the Commission1 and 3. &ublic companies Corporate #o.e
rnance( A system whereby shareholders, creditors and other sta$eholders of a cor
poration ensure that management enhances the value of the corporation as it comp
etes in an increasingly global mar$et place
4ay be used as
corporation Such
of incorporation
der may exercise

16

a means to voluntarily dissolve a

voluntary dissolution may be effected by amending the articles
to shorten the corporate term (Sec. (2'). A dissenting stoc$hol
his appraisal right

2
Po=er to Increase or &ecrease Capita* StocE (Sec. /0) $ays of Increasin+ Authori
Ae, Capita* StocE( a 9y increasingDdecreasing the number of shares and retaining
the par value1 b 9y increasingDdecreasing the par value of existing shares with
out increasingDdecreasing the number of shares1 c 9y increasingDdecreasing the n
umber of shares and increasingDdecreasing the par value Reasons for Increasin+ C
apita* StocE( a "o generate more wor$ing capital b "o have more shares with whic
h to pay for ac'uisition of more assets c "o have extra shares to meet the re'ui
rement for deduction of stoc$ dividend (Ba! Revie% ,ate!ials in Co77e!cial $a%,
-o!ge ,i!avite, 2''2 ed.). Too*s a.ai*a)*e to the StocEho*,ers to Rep*enish Capi
ta* a Additional subscription to shares of stoc$ of the corporation by stoc$hold
ers or by investors1 b Advances by the stoc$holders to the corporation1 c &aymen
t of unpaid subscription by the stoc$holders1 and d =oans from third persons Re'
uirements( a. Approval by the majority vote of the board of directors1 b. +atifi
cation by the stoc$holders holding or representing at least ,DG of the outstandi
ng capital stoc$ at a meeting duly called for that purpose1 c. &rior written not
ice of the proposed increase or decrease of the capital stoc$ indicating the tim
e and place of meeting addressed to each stoc$holder must be made either by mail
or personal service1 d. A certificate in duplicate signed by a majority of the
directors of the corporation, countersigned by the chairman and the secretary of
the stoc$holders meeting1 e. #n case of increase in capital stoc$, ,?7 of such
increased capital must be subscribed and that at least ,?7 of the amount subscri
bed must be paid either in cash or property1 f. #n case of decrease in capital s
toc$, the same must not prejudice the right of the creditors1 g. 8iling of the c
ertificate with the SEC1 and h. Approval thereof by the SEC
8. Se**@ ,ispose@ *ease@ encum)er a** or su)stantia**y a** of corporate assets (
Sec. 4') Re'uirements( a Approval by the majority vote of the board of directors
1 b +atification by the stoc$holders holding or representing at least ,DG of the
outstanding capital stoc$ at a meeting duly called for that purpose1 c &rior wr
itten notice of the proposed increase or decrease of the capital stoc$ indicatin
g the time and place of meeting addressed to each stoc$holder must be made eithe
r by mail or personal service1 d "he sale of the assets shall be subject to the
provisions of existing laws on illegal combinations and monopolies1 and e Any di
ssenting stoc$holder shall have the option to exercise his appraisal right f "he
vote of the majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by Sec H6 in the c
ase of non(stoc$ corporations where there are no members with voting rights
Sale
or other disposition shall be deemed to cover su)stantia**y a** the corporate a
ssets ifA a the corporation would be rendered incapable of continuing the busine
ss1 or b accomplishing the purpose for which it was incorporated <B ratificatory
vote from stoc$holdersDmembers is neededA a. if it is necessary in the usual an
d regular course of business b. if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of the remaining bu
siness F. Po=er to ac'uire o=n shares (Sec. 4() Instances( a "o eliminate fracti
onal shares out of stoc$ dividends b "o collect or compromise indebtedness to th
e corporation, arising out of unpaid subscription, in a delin'uency sale and to
purchase delin'uent shares sold during said sale c "o pay dissenting or withdraw
ing stoc$holders d "o ac'uire treasury shares e +edeemable shares regardless of
existence of retained earnings f "o effect a decrease of capital stoc$ g #n clos
e corporations, when there is a deadloc$ in the management of the business Note(
#n letters a(c, there must be unrestricted retained earnings :. In.est corporat
e fun,s in another corporation or )usiness en+a+e, in purpose other than primary
purpose (Sec. 42) "he other purposes for which the funds may be invested must b
e among those enumerated as secondary purposes and must further comply with the
re'uirements of Section H,
#nvestment of funds includes not only investment of m
oney but also investment of property of the corporation *owever, the SEC imposes
the following re'uirementsA a. "hat the property is not presently used by the c
ompany and the leasing is not made on a regular basis1 b. "hat by leasing the pr

operty1 it will ma$e it productive instead of allowing them to remain idle1 c. "
here is no express restrictions in the articles of incorporation or by(laws1 d.
=easing is not used as a scheme to prejudice corporate creditors or result in th
e infringement of the "rust 8und )octrine1 and
3
Po=er to Incur@ Create or Increase on,e, In,e)te,ness (Sec. /0) Corporate )on, C
an obligation to pay a definite sum of money at a future time at fixed rate of
interest, whether secured or unsecured, evidenced by a written debt instrument c
alled a bond or debenture Re'uirements( Same with the power to increase or decre
ase capital stoc$
ON&E& IN&E TE&NESS Secured by a mortgage on corporate property %"hili##ine Co!#o
!ate $a%, Cesa! &illanueva, 2''( ed.)
&E ENT!RE Serial obligations or notes issued on the basis of the general credit
of the corporation *ence, they are not bonded indebtedness
17

e. Compliance with the re'uirements of Section H,

("hili##ine Co!#o!ate $a% Co7#endiu7, Ti7oteo A:uino, 2''6 ed.) Re'uirements( a
+esolution by the majority of the board of directors or trustees1 b +esolution b
y the stoc$holders representing at least ,DG of the outstanding capital stoc$ or
,DG of the members in case of non(stoc$ corporation1 c "he ratification must be
made at a meeting duly called for the purposes1 and d &rior written notice of t
he proposed investment and the time and place of the meeting shall be made, addr
essed to each stoc$holder or member by mail or by personal service Any dissentin
g stoc$holder shall have appraisal right A corporation is not allowed to engage
in a business distinct from those enumerated in the articles of incorporation wi
thout amending the purpose clause of said article Re'uirements( a +esolution by
the majority of the 'uorum of the board of directors or trustees1 b Approval of
stoc$holders representing at least ,DG of the outstanding capital stoc$ at a reg
ular or special meeting duly called for the purpose in case of stoc$ dividend G@
1@RA$ R3$@C Stoc$ corporations are prohibited from retaining surplus profits in
excess of -667 of their paid(in capital stoc$ @DC@"TIE1SC a 3hen justified by de
finite corporate expansion projects approved by the board of directors b 3hen th
e corporation is prohibited under any loan agreement with any financial institut
ion or creditor from declaring dividends without itsDhis consent and such consen
t has not yet been secured c 3hen it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as whe
n there is a need for special reserve for probable contingencies &istri)ution of
&i.i,en,s( G@1@RA$ R3$@C )ividends can only be declared and paid out of actual
and bona fide unrestricted retained earnings S"@CIA$ R3$@SC a >ain from real pro
perty 3here a corporation sold its real property, which is not being used for bu
siness, at a gain, the income derived therefrom may be availed of for dividend d
istribution b +evaluation Surplus #ncrease in the value of a fixed asset as a re
sult of its revaluation is not retained earning *owever, increase in the value o
f fixed assets as a result of revaluation (HRevaluation su!#lusI) may be declare
d as cash or stoc$ dividends provided that the companyA i *as sufficient income
from operations from which the depreciation on the appraisal increase was charge
d ii *as no deficit at the time the depreciation on the appraisal increase was c
harged to operations1 and iii Such depreciation on appraisal increase previously
charged to operations has not been impaired by losses (S@C E#inion, Ect. 2, (.0
( and ,a!ch (., (..2). c &aid(in Surplus )ividends can be declared out of the am
ount received in excess of the par value of shares (H#aid;in su!#lusI) whenA i "
hey be declared only as stoc$ dividends and not cash1 ii <o creditors are prejud
iced1 and iii "here is no impairment of capital Note( @nli$e par value shares, w
hen no par value shares are sold at a premium, the entire consideration paid is
considered capital1 hence the same cannot be declared as dividends d +eduction s
urplus "here is such where surplus arises from the reduction of the par value of
the issued shares of stoc$ "hey can be available for dividend declaration provi
ded that the rules on paid(in surplus are complied with e.g. )ividends can be de
clared out of capital only in two instancesA - li'uidating dividends1 and , divi
#t permits corporations sole
dends from investments in wasting asset corporation
ly or principally engaged in the exploitation of wasting assets! to distribute th
e net proceeds derived from exploitation of their holdings such as mines, oil we
lls, patents and leaseholds, without

/. Po=er to ,ec*are ,i.i,en,s out of unrestricte, retaine, earnin+s (Sec. 4/)

+E
"A#<E) EA+<#<>S M ASSE"S 2 =#A9#=#"#ES A<) =E>A= CA&#"A= @<+ES"+#C"E) 2 if the r
etained earnings have not been reserved or set aside by the board of directors f
or some corporate purpose
)#;#)E<)S 2 Corporate profits set aside, declared, and
ordered to be paid by the directors for distribution among shareholders at a fi
xed time Forms( a. Cash b. &roperty c. Stoc$ 3hile cash dividends due on delin'u
ent shares can be applied to the payment of the unpaid balance, stoc$ dividends
cannot be applied as payment for unpaid subscription Stoc$ dividends shall be wi
thheld from the delin'uent stoc$holder until his unpaid subscription is fully pa

id
"he right to dividend is based on duly recorded stoc$holdings, accordingly, t
he corporation is prohibited from declaring dividends in favor of non(stoc$holde
rs As a rule, dividends among stoc$holders of the same class must always be pro
rata e'ual and without discrimination and regardless of the time when the shares
were ac'uired
)eclaration of dividends is discretionary upon the board )ividend
s are payable only when there are profits earned by the corporation and as a gen
eral rule, even if there are existing profits, the 9oard of )irectors has the di
scretion to determine whether or not dividends are declared (Re#u2lic "lante!s B
an8 vs. Agana, 26. SCRA (), subject to the rule on non( retention of retained ea
rnings in excess of -667 of paid(in(capital
)ividends cannot be declared out of
the capital except in the case of wasting assets corporation or those corporatio
ns solely or principally engaged in the exploitation of wasting assets to distri
bute the net proceeds derived from exploitation of their holdings such as mines,
oil wells, patents and leaseholds, without allowance or reduction for depletion
(Revie%e! in Co77e!cial $a%, -ose R. Sundiang + Ti7oteo A:uino, 2''5 ed.).
Stoc
$holders at the time of declaration are entitled to dividends )ividends declared
before the transfer of shares belong to the transferor and those declared after
the transfer belongs to the transferee (S@C E#inion, -uly (5, (..4). Even unpai
d subscribers are entitled to dividends, as well as owners of delin'uent shares
18

e
f
g
h
allowance or deduction for depletion. Sale of "reasury Shares &rofits realized f
rom sale of treasury shares are part of capital and cannot be declared as cash o
r stoc$ dividend as purchase and sale of such shares are regarded as contraction
s and expansions of paid(in capital #ndebtedness 4oney cannot be borrowed for th
e payment of dividends because indebtedness is not a retained earning of the cor
poration Corporate earnings which have not yet been received even though they co
nsist in money which is due cannot be included in the profits out of which divid
ends may be paid #nterim income G@1@RA$ R3$@C "here can be no dividend declarati
on for profits in a fiscal year that has not yet expired @DC@"TIE1SA - the amoun
t of dividend involved would not be impaired by losses during the remaining peri
od of the year1 , the projected income for the remaining period shall be submitt
ed to the SEC, and G should the company sustain losses during the remaining peri
od, the dividends should be refunded (S@C E#inion, Ect 22, (.94 and -uly 24, (..
(). CASH &I<I&EN&S #nvolves a disbursement to the stoc$holders of accumulated ea
rnings , 3hen declared and paid becomes the absolute property of the stoc$holder
and cannot be reached by creditors of the corporation in the absence of fraud G
)eclared only by the board of directors at its discretion STOCH &I<I&EN&S - )oe
s not involve any disbursement of funds , Since it is still part of corporate pr
operty, may be reached by corporate creditors
c d
stoc$ from their subscriptions1 3here it has transferred the corporate property
in fraud of its creditors1 and 3here the corporation is insolvent
Co.era+e of the TF&( a #f the corporation is solvent, the "8) extends to the cap
ital stoc$ represented by the corporation:s legal capital b #f the corporation i
s insolvent, the "8) extends to the capital stoc$ of the corporation as well as
all of its property and assets EDceptions to the TF&( "he Code allows distributi
on of corporate capital only in these instancesA a. Amendment of Articles of #nc
orporation to reduce authorized capital stoc$1 b. &urchase of +edeemable shares
by the corporation regardless of existence of unrestricted retained earnings1 c.
)issolution and eventual li'uidation of the corporation1 d. #n close corporatio
n, when there should be a deadloc$ and the SEC orders the payment of the apprais
ed value of the stoc$holder:s share (Sec. ('4). 0. Po=er to enter into mana+emen
t contract (Sec. 44) Mana+ement Contract B any contract whereby a corporation un
derta$es to manage or operate all or substantially all of the business of anothe
r corporation, whether such contracts are called service contracts, operating ag
reements or otherwise
Sec. 44 refers only to a management contract with
another corporation *ence, it does not apply to management contracts entered int
o by a corporation with natural persons Re'uirements( a Approval by a majority o
f the 'uorum of the board of directors b +atification by the stoc$holders owning
at least majority of the outstanding capital stoc$ or the members of both the m
anaging and the managed corporations, at a meeting duly called for the purpose c
Approval by the stoc$holders of the managed corporation owning at least ,DG of
the total outstanding capital stoc$ entitled to vote, or by at least ,DG of the
members in the case of a non(stoc$ corporationA i where a stoc$holderDs represen
ting the same interest of both the managing and the managed corporations own or
control more than -DG of the total outstanding capital stoc$ entitled to vote of
the managing corporation1 B+ ii where a majority of the members of the board of

directors of the managing corporation also constitute a majority of the members

of the board of directors of the managed corporation "he period must not be lon
ger than ? years for any term except those contracts which relate to the explora
tion, development, exploitation or utilization of natural resources that may be
entered into for such periods as may be provided by pertinent laws or regulation
s A management contract cannot delegate entire supervision and control over the
officers and business of a corporation to another as this will contravene Sec ,G
H )oes not increase the corporate capital ? #ts declaration creates a debt from
the corporation to each of its stoc$holders
G )eclared by the board with the concurrence of the stoc$holders representing at
least ,DG of the outstanding capital stoc$ at a regularDspecial meeting H Corpo
rate capital is increased ? <o debt is created by its declaration
TR!ST F!N& &OCTRINE "he subscribed capital stoc$ of the corporation is a trust f
und for the payment of debts of the corporation which the creditors have the rig
ht to loo$ up to satisfy their credits, and which the corporation may not dissip
ate "he creditors may sue the stoc$holders directly for the latter:s unpaid subs
cription App*ication of the TF&( a 3here the corporation has distributed its cap
ital among the stoc$holders without providing for the payment of creditors1 b 3h
ere it had released the subscribers to the capital

19

9.
, 4anagement com( pany must always be subject to the superior power of the board
to give specific directions from time to time or to recall the delegation of ma
nagerial power (The Co!#o!ation Code o the "hili##ines Annotated, )ecto! de $eon
, 2''2 ed.) Po=er to ,eny preCempti.e ri+ht (Sec. /.F <o! u!the! discussion, see
DIII. Stoc8s and Stoc8holde!s) "he corporation can only deny pre(emptive right
if the articles of incorporation or amendment thereto denies such right )enial o
f pre(emptive right extends to shares issued in good faith in exchange for prope
rty needed for
EKEC!TI<E COMMITTEE - #ts creation must be provided for in the by(laws , A gover
ning body which functions as the board itself %The Co!#o!ation Code o the "hili#
#ines Annotated, )ecto! de $eon, 2''2 ed.)
MANA#EMENT CONTRACT - Express power of a corporation
corporate purposes or in payment of previously contracted debts
10. Po=er to amen, Artic*es of Incorporation (See &III.
<o!7ation and E!gani>ation o a "!ivate Co!#o!ation)
20