TITLE I: GEN.

PROVISIONS

7.

Repeals all laws & parts of law in conflict & inconsistent w/ the
Code

Sec. 1: Title of the Code

Historical background of the Corporation Code
Sec. 2: Corporation Defined
Date of approval: May 1, 1980
Corporation
Embodied in: Batas Pambansa Blg. 68
- artificial being created by operation of law, having the right of
Succeeds: Act No. 1459
succession and the powers, attributes, and properties expressly
Known as: Corporation Code of the Philippines
authorized by law or incident to its existence
Seeks to establish a new concept of business corporations so that they
are not merely entities established for private gains but effective
Attributes of a corp.:
partners of the natl govt in spreading the benefits of capitalism
1. Artificial being
for social & economic devt of the Phil.
2. Created by operation of law
3. Has the right of succession
Scope of the Code:
1. Provides for the inc., org., and regulation of the private corp., both 4. Has only the powers, attributes, and properties expressly authorized
by law or incident to its existence
stock & non-stock, including educational & religious corps.
2. Defines their power & provides for their dissolution
3. Fixes the duties & liab. of directors/trustees & officers
4. Declares the rights & liab. of SH/members
5. Prescribes the conditions under w/c corp. including foreign corp.
may transact business
6. Provide penalties for violation of the Code

Consequence of legal concept of corp.:

1. A corp. is not liable for the debts of its SH, & the latter are not
individually liable for the corporates debts
2. It may acquire & possess property of all kinds, as well as incur
obli. And bring civil & criminal actions in its own name in the
same manner as a natural person
3. Property conveyed to or acquired by the corp. is in law the
property of the corp. itself as a distinct legal entity & not that of
the SH/members
4. All contracts entered into in its name by its regular appointed
officers & agents are the contracts of the corp. & not those of
the members/SH
5. A tax exemption granted to a corp. cannot be extended to
include the div. paid by such corp. to its SH if such div. are not
exempted from tax
6. A corp. has no personality to bring an action for & in behalf of
its SH/members for the purpose of recovering property w/c
belongs to said SH/members in their personal capacities
7. A corp. remains unchanged & unaffected in its identity by
changes in its individual membership

Corporation as an artificial personality

A corporation is a legal or juridical person w/ a personality separate

& apart from its individual members/SH who, as natural persons,
are merged in the corporate body

Disregarding fiction of corporate entity

A corp. is a legal entity or a person in law, distinct from the persons
composing it a legal theory introduced for purposes of
convenience & to promote the ends of justice (fiction of corporate
entity)
Where the fiction of corporate entity is being used as a cloak or cover
for fraud or illegality, this fiction will be disregarded & the
individuals composing it will be treated as identical (doctrine of
piercing the veil of corporate entity)
Liability will attach directly to the officers & SH
Even if fraud is established, it is not sufficient to justify the piercing
of the corporate fiction where it is not sought to hold the officers &
SH personally liable for corporate debt
Instances where fiction is disregarded
1. A corp. functions for the benefit of a single person
Entity is but an alter ego of the business conduit of the owner &
the property of the corp. may be considered the property of the
controlling individual
The mere fact that one or more corps. Are owned & controlled
by a single SH or by another corp. is now of itself sufficient
ground for disregarding separate corporate entities
2. The corp. is a mere instrumentality of the individual SH
Latter must individually answer for corporate obli.

3. A domestic of Phil. corp. is controlled by aliens

Its nationality shall be deemed that of the controlling SH thereof
during wartime
Control test in determining the nationality of a private corp.
4. A corp. is organized by an insolvent debtor to defraud his creditors
He transfers his properties to it in furtherance of such fraudulent
purpose
Mere amendment of the art. of inc. changing the name of the
corp. is not an indication to evade payment by one corp. of its
obli. to another
5. A subsidiary company is created by a parent company merely as an
agency of the latter
SH or officers of the two corp. are substantially the same or their
system of operations is unified
Parent company assumes complete control of the operation of its
subsidiarys business
Two corp. are sister comp., operation under one single mgt.
6. A corp. is formed by a person for the purpose of evading his
individual contract
7. A corp. is dissolved & its assets are transferred to another corp. to
avoid a financial liab. Of the first corp.

Corp. cannot come into existence by mere agreement of the parties as

in the case of business partnerships
They require special authority or grant from the State
Exception is corp. by prescription
Right of succession
A corp. has a capacity of continuous existence irrespective of the
death, w/drawal, insolvency, or incapacity of the ind. SH/members
& regardless of the transfer of their interest or shares of stock
1. Life of a corp. is limited to the pd. of time stated in the art. of
inc. not exceeding 50 yrs.
2. Corp. created by special laws have the right of succession for
the term provided in the laws creating them
Distinctions b/w a part. & corp.:
6. Manner of creation
Part. mere agreement of the parties
Corp. law or by operation of law
7. Number of incorporators
Part. - may be organized by only 2 persons
Corp. requires at least 5 incorporators

1. Transferability of interest
8. Commencement of juridical personality
Part. a partner cannot transfer his interest in the part.
Part. commences juridical personality from the moment of the
Corp. a SH has the right to transfer
execution of the contract of part.
Corp. begins to have corporate existence & juridical
2. Term of existence
Part. established for any pd. of time stipulated by the partners
personality only from the date of the issuance of the cert. of inc.
by the SEC
Corp. may not be formed for a term in excess of 50 yrs.
9. Powers
extendible to not more than 50 yrs. in any one instance
Part. may exercise any power authorized by the partners
3. Firm name
Corp. can exercise only the powers expressly granted by law
Part. required by law to add the word Ltd. to its name
or implied from those granted or incident to its existence
Corp. may adopt any firm name provided it is not identical to
10. Mgt.
any registered firm name
Part. every partner is an agent of the part.
4. Dissolution
Corp. power to do business & manage its affairs is vested in
Part. may be dissolved at any time by will of any partner
the BOD
Corp. can only be dissolved w/ the consent of the State
11. Effect of mismgt.
5. Laws w/c govern
Part. partner as such can sue a co-partner who mismanages
Part. Civil Code
Corp. suit against a member of the BOD who mismanages
Corp. Corp. Code
must be in the name of the corp.
12. Right of succession
Advantages of a business corp.:
Part. no right of succession
1. Legal capacity to act as a legal unit
Corp. has right of succession
2. Has continuity of existence
3. Credit is strengthened by such continuity of existence
13. Extent of liab. to third persons
4. Mgt. is centralized in the BOD
Part. partners are liable personally & subsidiarily
Corp. SH are liable only to the extent of their investment

5. Creation, org., mgt., & dissolution are standardized as they are

governed under one gen. inc. law
6. Makes feasible gigantic fin. enterprises
7. SH have limited liab.
8. They are not gen. agents of the business
9. Shares of stocks can be transferred w/o the consent of other SH
Disadvantages of a business corp.:
1. Relatively complicated in formation
2. Entails relatively high cost of formation & operation
3. Credit is weakened by the ltd. liab. of the SH
4. Ordinarily lack of personal element in view of the transferability of
stocks
5. Greater degree of govtal control & supervision than in any other
form of business org.
6. SHs voting rights have become theoretical particularly in large
corps. because of the use of proxies & widespread ownership
7. SH have little voice in the conduct of the business
8. Mgt. & control are separate from ownership

3. As to whether they are for charitable purposes or not:

a. Eleemosynary corp.
- Established for charitable purposes
b. Civil corp.
- Established for business or profit
4. As to state or country under or by whose laws they have been
created:
a. Domestic corp.
- Incorporated under the laws of the Phil.
b. Foreign corp.
- Formed, organized, or existing under any laws other than
those of the Phil.
5. As to their legal right to corporate existence:
a. De jure
- Corp. existing in fact & law
b. De facto
- Corp. existing in fact but not in law
6. As to whether they are open to the public or not:
a. Close
- Limited to selected persons or members of a family
b. Open
- Open to any person who may wish to become a SH/member

Sec. 3: Classes of Corp.

Classification of corps. under the Code:
1. Stock
Ordinary business cop. created and operated for the purpose of
making a profit w/c may be distributed in the form of dividends
to SH on the basis of their invested capital
2. Non-stock
Do not issue stock & are created not for profit by for the public
good & welfare
Other classifications of corps:
1. As to number of persons who compose them:
a. Corporate aggregate
- Consisting of more than one member/corporator
b. Corporate sole
- Religious corp. w/c consists of one member/corporator only
& his successors
2. As to whether they are for religious purpose or not:
a. Ecclesiastical corp.
- Organized for religious purposes
b. Lay corp.
- Organized for purposes other than for religion

7. As to their relation to another corp.:

a. Parent/Holding
- Related to another corp. that is has the power either, directly
or indirectly to, elect the majority of the directors of such
other corp.
b. Subsidiary
- Related to another corp. that the majority of its directors can
be elected either, directly or indirectly, by such other corp.
8. As to whether they are corps. in a true sense or only in a limited
sense:
a. True
- Exists by statutory authority
b. Quasi-corp.
- Exists w/o formal legislative grant
i.
Corp. by prescription
- Has exercised corporate powers for an indefinite pd. w/o
interference on the part of the sovereign power and w/c,
by fiction of law, is given the status of a corp.
i.
Corp. by estoppel
- In reality is not a corp., either de jure or de facto, because
it is so defectively formed, but is considered a corp. in
relation to those only who, by reason of their acts or
admissions, are precluded from asserting that it is not a
corp.

9. As to whether they are for public or private purpose:

a. Public
- Formed/organized for the govt of a portion of the State
b. Private
- Formed for some private purpose, benefit, or end
Test of distinction b/w public & private corp.:
1. Public corp. provinces, cities, municipalities, and barangays
2. Private corp.:
a. Govt-owned or controlled corp.
- Owned or controlled by the govt directly through a parent
corp. or subsidiary, to the extent of at least a majority of its
OCS
b. Quasi-public corp.
- Those w/c have accepted from the State the grant of a
franchise or contract involving the rendition or performance
of some public duties, or service, but w/c are organized for
profit
Sec. 4: Corp. created by special laws or charters
The enactment of a special act creating a private corp. is subject to
the constitutional limitation that such corp. shall be owned or
controlled by the govt or any subdivision or instrumentality

Three other classes:

1. Promoters
Persons who bring about or cause to bring about the formation
& org. of a corp. by bringing together the incorporators or the
persons interested in the enterprise, procuring subscriptions or
capital for the corp.
2. Subscribers
Persons who have agreed to take & pay for original, unissued
shares of corp. formed or to be formed
3. Underwriter
Person who has:
Agreed to buy at stated terms an entire issue of securities or a
substantial part
Guaranteed the sale of an issue by agreement to buy from the
issuing party any unsold portion at a stated price
Agreed to use his best efforts to market all or part of an
issue
Offered for sale sock he has purchased from a controlling
stockholder

Reasons for restriction:

1. Chiefly to prevent the granting of special privileges to one body of
men w/o giving all others the right to obtain them in the same
conditions
2. Partly to prevent bribery & corruption of the legislature
Sec. 5: Corporators &incorporators, SH & members
Components of a corp.:
1. Corporators
Those who compose the corp., whether SH/members
Includes incorporators, SH, members
2. Incorporators
Corporators mentioned in the art. of inc. as originally forming &
composing the corp. & who executed & signed the art. of inc.
3. SH
Owners of shares of stock in a stock corp.
4. Members
Corporators of a corp. w/c has no capital stock
- Included corporators of a stock corp. who do not own capital
stock

Sec. 6: Classification of shares

SH of non-voting shares shall be entitled to vote on the ff. matters:
1. Amendment of the art. of inc.
2. Adoption & amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge, or other disposition of
all or substantially all of the corporate property
4. Incurring, creating or increasing bonded indebtedness
5. Increase/decrease of capital stock
6. Merger or consolidation of the corp. w/ another corp.
7. Investment of corporate funds in another corp. or business in
accordance w/ this Code
8. Dissolution of the corp.
Doctrine of equality of shares
- Each share shall be in all respect equal to every other share
Capital stock
- Amt. fixed in the art. of inc., to be subscribed & paid in by the SH of
a corp.
- Limits the max amt. or number of each class that may be issued by
the corp. w/o formal amendment of the art. of inc.
a. Authorized capital stock
- Synonymous w/ capital stock where the shares of the corp.
have par value

Limitations/restrictions imposed by law regarding the issuance of no

par value share:
1. Banks, trust companies, insurance companies & bldg. & loan
assoc. shall not be permitted to issue no par value shares
2. Preferred shares of stock may be issued only w/ a stated par value
3. Shares issued w/o par value shall be deemed fully paid &nonassessable & the holder of such shares shall not be liable to the corp.
or to its creditor
4. Shares w/o par value may not be issued for a consideration less
than the value of P5.00/share
5. The entire consideration received by the corp. for its no par value
shares shall be treated as capital & shall not be available for
distribution as div.
Advantages of par value shares:
1. Easily sold as the public is more attracted to buy this kind of
shares
2. Greater protection to creditors
3. Unlikelihood of sale of subsequently issued shares at a lower price
4. Unlikelihood of the distribution of div. that are only ostensible
profits
Disadvantages of par value shares:
1. Subscribers are liable to corporate creditors for their unpaid
subscription

2. Stated FV of the share is not an accurate criterion of its true value

Advantages of no par value shares:
1. Issued as fully paid & non-assessable
2. Price is flexible
3. Low-priced stocks enjoy wider distribution
4. Tell no untruth concerning the value of the SH's contribution
5. Stock div. are more easily issued thereby simplifying acctng.
procedure
Disadvantages of no par value shares:
1. Legalize large issues of stock for property
2. Conceal the money/property represented by the shares
3. Promote issuance of watered stock
4. Lesser protection to creditors
Kinds of preferred shares:
1. Preferred shares as to assets
- Gives the holder preference in the distribution of the assets of the
corp. in case of liquidation
2. Preferred shares as to div.
- Holder is entitled to receive div. on said share at fixed rates before
any div. at all are paid to common SH

Limitations regarding issuance of preferred shares:

1. Preferred shares deprived of voting rights are still entitled to vote
only on matters enumerated in sec. 6
2. Preferred shares may be given preference in the distribution of the
corp. assets/div.
3. Preferred shares may be issued only with a stated PV
4. BOD may fix the terms & conditions of preferred shares only
when so authorized by the art. of inc. & shall be effective only upon
filing a cert. w/ the SEC

4. Non-participating
- Entitles the holder to receive the stipulated preferred div. & no
more
5. Cumulative-participating
- Combo of the cumulative share & participating share
- Holder is entitled not only to div. in arrears but also after
receiving his preferred share of dividends, to part. w/ the holders
of common stock in the remaining profit

Kinds of preferred shares as to div.

1. Cumulative
- Entitles the holder not only to the payment of current div. but also
to div. in arrears
2. Non-cumulative
- Share w/c entitles the holder to the payment of current div. only
in preference to common SH
3. Participating
- Gives the holder not only the right to receive the stipulated div. at
the preferred rate but also to participate w/ the holders of the
common shares in the remaining profits pro rata after the
common shares have been paid the amt. of the stipulated div. at
the same preferred rate

Sec. 7: Founder's shares

Founder's shares
- issued to the organizers & promoters of a corp. in consideration of
some supposed right/property
1. Special rights & privileges
- may be given special rights & privileges not enjoyed by the
owners of other stocks
2. Exclusive right to vote & be voted
- Right must be for a limited pd. not exceeding 5 yrs. & must be
approved by the SEC

Sec. 8: Redeemable shares

Sec. 9: Treasury shares

Redeemable/callable shares
- Redeemable at a fixed date or at the option of either the issuing
corp. or the SH at a certain redemption price
1. When redeemable shares may be issued
- Issued only when expressed so provided in the art. of inc.
2. Redemption regardless of existence of unrestricted RE
- They may be taken up or purchased by the corp., regardless of
the existence of unrestricted RE in the books of the corp.
3. Where corp. insolvent
- Rights of the holders of redeemable shares should be deemed
subordinate to the rights of corporate creditors
4. Terms & conditions
- stated not only in the art. of inc. but also in the cert. of stock
representing said shares
5. Voting rights
- may be deprived of voting rights in the art. of inc., unless
otherwise provided in the Code

Treasury shares
- Lawfully issued by the corp. & fully paid for & later reacquired by
it either by purchase, redemption, donation, forfeiture, or other
lawful means