CHAPTER 6

ARTICLES OF INCORPORATION

Contractual Significance of Articles of Incorporation

Registration of Articles of Incorporation
Examination and Approval/Disapproval by SEC
Special Rules for Banks
Grounds for Disapproval of Articles of Incorporation
Contents of Articles of Incorporation
Treasurer's Affidavit
Other Documentary Requirements
Corporate Name
Guidelines on Corporate Names
Change of Corporate Name
Purpose Clause
Investment in Non-Primary Purpose Activities
Rule on Interpretation of Purpose Clauses
Principal Place of Business
Residence of Corporation
Service of Process Upon a Corporation
Corporate Term
Commencement of Corporate Existence
Incorporating Stockholders or Members
Capital Structure at Registration
Subscription and Paid-up Requirements
Issuance of Par Value Shares of Stock
Amendments to Articles of Incorporation

——

CONTRACTUAL SIGNIFICANCE OF ARTICLES OF INCORPORATION

The contractual significance of the articles of incorporation in Corporate
Law is discussed in Chapter 5 on Corporate Contract Law, which looks at its
significance as the basic contract document in Corporate Law, defining the
charter of the corporation, and the contractual relationships between the State
and the corporation, the stockholders and the State, and between the
corporation and its stockholders.1
The reverence which both the law and the courts have accorded to the
articles of incorporation as the basic corporate contract is manifested by the

1
Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
 2

strict rules to be followed in its registration and the manner by which any portion
thereof may be amended. Nevertheless, it is pointed out in the discussions in
that chapter that the limiting effects of provisions of the articles of incorporation
on corporate contracts with the public, has been tempered by the Supreme
Court by the manner is has applied the ultra vires doctrine.
The purpose of the present chapter is really to discuss more the
mechanical features of adopting and amending the articles of incorporation and
to look into its basic provisions.

REGISTRATION OF ARTICLES OF INCORPORATION

The articles of incorporation do not become binding as the charter of the
corporation unless they has been filed with and registered by the SEC.2
In the case of articles of incorporation of special types of corporations,
such as banks, public utilities, insurance companies, etc., they will not be
registered by the SEC unless said articles are accompanied by a favorable
recommendation from the appropriate agencies supervising such special types
of corporations, to the effect that the articles are in accordance with the law.

1. Examination and Approval/Disapproval by SEC

Upon filing of the articles of incorporation, the SEC will examine whether
the provisions thereof are in accordance with law. If the articles of incorporation
are not in conformity with law, SEC shall give the incorporators reasonable time
within which correct or modify the objectionable portions.3
After examination, upon satisfaction of all legal requirements, SEC issues
the certificate of incorporation. Only then shall the corporation have a personality
separate and distinct from its stockholders or members. However, the approval
of the articles of incorporation and issuance of the certificate of registration does
not preclude the SEC, if it later finds that the incorporators were guilty of fraud in
procuring the certificate of incorporation, from revoking the same subject to
proper hearing.
Pres. Decree 902-A gives the SEC, after consultation with the Board of
Investments (BOI), National Economic Development Administration (NEDA), or
other appropriate government agencies, the power to refuse or deny application
for registration of any corporation, if its establishment, organization or operation
will not be consistent with the declared national economic policies.4
The implication under Pres. Decree 902-A is that the SEC may look
beyond the terms of the articles of incorporation, and may refuse registration
although the articles of incorporation may contain lawful purposes, if other

2
Sec. 14, Corporation Code
3
Sec. 17, Corporation Code.
4
Sec. 6(k), Pres. Decree 902-A.
 3

circumstances show that the applicant's establishment or operation may run

counter to the nation's economic policies.

2. Special Rule for Banks

Section 14 of the General Banking Law of 20005 expressly provides that
the SEC shall not register the articles of incorporation of any bank, or any
amendment thereto, unless accompanied by a certificate of authority issued by
the Monetary Board, under its seal. Such certificate shall not be issued unless
the Monetary Board is satisfied from the evidence submitted to it that: (a) All
requirements of existing laws and regulations to engage in the business for
which the applicant is proposed to be incorporated have been complied with; (b)
The public interest and economic conditions, both general and local, justify the
authorization; and (c) The amount of capital, the financing, organization,
direction and administration, as well as the integrity and responsibility of the
organizers and administrators, reasonably assure the safety of deposits and the
public interest.
In addition, Section 81 of the Law provides expressly that the SEC shall
not register the articles unless accompanied by a certificate of authority issued
by the Bangko Sentral ng Pilipinas (BSP).

3. Grounds for Disapproval of

Articles of Incorporation
Under Section 17 of the Corporation Code, the SEC may reject the
articles of incorporation or disapprove any amendment thereto if the same is not
in compliance with the requirements of the Code, provided that the SEC shall
give the incorporators reasonable time within which to correct or modify the
objectionable portions of the articles or amendment.
The following are grounds for such rejection or disapproval by the SEC of
the articles of incorporation:

(a) The articles of incorporation or any amendment

thereto is not substantially in accordance with the
form prescribed by law;
(b) The purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;
(c) The Treasurer's Affidavit concerning the amount
of capital stock subscribed and/or paid is false;
(d) The percentage of ownership of the capital stock
to be owned by citizens of the Philippines has not

5
Rep. Act 8791.
 4

been complied with as required by existing laws

or the Constitution.

CONTENTS OF ARTICLES OF INCORPORATION

Section 14 of the Corporation Code provides that all corporations
organized thereunder shall file with the SEC articles of incorporation in any of
the official languages, duly signed and acknowledged by all the incorporators,
containing substantially the following matters:

(a) Name of the corporation;

(b) Purpose clauses, and should distinguish the
primary purpose from the secondary purposes,
should the corporation have more than one
purpose; a non-stock corporation shall not include
a purpose which would change or contradict its
nature;
(c) Place of principal office within the Philippines;
(d) Term of existence;
(e) Names, nationalities and residences of the
incorporators;
(f) Number of directors or trustees (between 5 to 15);
(g) Names, nationalities and residences of the
persons who shall act as directors or trustees until
the first regular directors or trustees are duly
elected and qualified; and
(h) If stock corporation, amount of authorized capital
stock, number of shares, par value or no par value
shares, original subscribers, amounts subscribed
and paid by each.

The basic contents of the articles of incorporation are considered by law

to be so important and jurisdictional that Section 15 of the Corporation Code
provides for the basic form of articles of incorporation.

1. Treasurer's Affidavit
The SEC shall not accept articles of incorporation of a stock corporation
unless accompanied by a sworn statement by the Treasurer that at least twenty-
five percent (25%) of the total capital stock authorized is subscribed and at least
twenty-five percent (25%) of such have been fully paid in cash or property—fair
valuation of which is equal to at least twenty-five percent (25%) of the said
subscription. Such paid-up capital shall be no less than P5,000.00.
 5

The twenty-five percent (25%) subscription requirement under Section 38

of the Corporation Code refers to the total subscription and not to individual
subscription and regardless of the class of shares.6

2. Other Documentary Requirements

SEC Guidelines require that a bank certificate covering the deposit of the
paid-up capital, in accordance with a prescribed form under oath by a
responsible official of the bank, must accompany the incorporation papers.7
In addition, a letter of authority authorizing the SEC to examine not only
the bank deposit but also the corporations books of accounts and supporting
records to determine the existence and utilization of the paid-up capital stock
must also be submitted. The letter of authority shall be binding upon the
corporation even if there is a change of corporate officers.8
Even when evidence is presented that the payments effected for the paid-
up capital of a corporation were actually borrowed from the certifying bank, the
SEC held that the bank would have no authority to demand payment from the
corporation for the loans given to the individual incorporators. The SEC held that
a corporation has a personally separate and distinct from that of each of the
stockholders, and for that matter the property belonging to a corporation cannot
be attached or held answerable for the debts of the stockholders thereof, and
that the stockholders are liable personally for their own obligations. The SEC
held:

Otherwise stated, the debt of a stockholder is not the

debt of the corporation of which he is a stockholder; and
conversely, the debt of the corporation is not the debt of the its
stockholders. The loan agreement between the borrowers and
the creditor bank is a private contract between them of which
the proposed corporation is not a party. The moment the
borrowed money was contributed as payment to subscriptions
and upon incorporation, the ownership thereof is transferred to
the new corporation. Accordingly, upon the issuance by the
SEC of the certificate of incorporation, the corporation, being
then the owner of the funds, can already withdraw and
disburse the same for the operation of its business; and the
borrower stockholders cannot, as a matter of right, demand for
the return of the funds invested to answer their liability to the
creditor Bank nor can they demand that the corporation to pay
their debts.9

6
SEC Opinion, 18 April 1995, XXIX SEC QUARTERLY BULLETIN 41 (No. 3, Sept. 1995).
7
Sec. 1, SEC GUIDELINES FOR THE VERIFICATIONS OF THE PAID-UP CAPITAL (CASH) OF
CORPORATIONS (1976).
8
Sec. 2, ibid.
9
SEC Opinion, 8 October 1993, XXVIII SEC QUARTERLY BULLETIN 24 (No. 1, March 1994),
citing Wise Co., Inc. v. Man Sung Lung, 69 Phil. 308 (1940).
 6

The SEC also requires that incorporators are required to submit a written
undertaking to change their partnership or corporate name in case there is
another person, firm or entity with a prior right to the use of the said name or one
similar to it.10

CORPORATE NAME
The incorporators "constitute a body politic and corporate under the name
stated in the certificate."11 A corporation has the power "of succession by its
corporate name."12 The name of a corporation is therefore essential to its
existence; it cannot change its name except in the manner provided by the
statute; by that name alone is it authorized to transact business;13 and it is by
that name that a corporation can sue and be sued, and perform all other legal
acts.
Since the corporate name is the main practical means of identifying
corporation from its members or stockholders, and other entities, the
Corporation Code does not allow a corporation to adopt a name identical or
deceptively or confusingly similar or to any other name already protected by law
or which is patently deceptive, confusing or contrary to existing laws.14
In Red Line Trans. v. Rural Transit,15 it was held that a corporation may
use another name as a business or brand name, but a corporation cannot use
another corporation's name because it will only confuse the public. The name of
the corporation is essential to its existence.
In Laureano Investment and Development Corp. v. Court of Appeals,16it
was held that a corporation has no right to intervene in a suit using a name other
than its registered name, and if the corporation legally and truly wanted to
intervene, it should have used its corporate name as the law requires and not
another name which it had not registered.
Nevertheless, the Supreme Court has held that there would be no denial
of due process when a corporation is sued and judgment is rendered against it

10
SEC GUIDELINES IN THE APPROVAL OF CORPORATE AND PARTNERSHIP NAMES (1977).
11
Section 19, Corporation Code.
12
Ibid.
13
Red Line Transportation Co v. Rural Transit Co., 60 Phil. 549 (1934).
14
Sec. 18, Corporation Code.
For as long as the corporation is still existing, regardless of whether or not it is in
operation, its corporate name cannot again be used by any other group. This is clear from the
provision of Section 18 of the Corporation Code which provides that no corporate name may be
allowed by the SEC that is identical or deceptively or confusingly similar to that of “any existing
corporation.” SEC Opinion, 21 September 1993, XXVIII SEC QUARTERLY BULLETIN 7 (No. 1,
March 1994).
15
60 Phil. 549 (1934).
16
272 SCRA 253 (1997).
 7

under its unregistered trade name, holding that “[a] corporation may be sued
under the name by which it makes itself known to its workers.17

1. Guidelines on Corporate Names

The SEC Revised Guidelines18 provides for the following policies on the
use of corporate names aimed at safeguarding public interest and avoiding
future conflicts, thus:

1. The corporate name shall contain the word “Corporation” or its

abbreviation “Corp.” or “Incorporated”, or “Inc.”.
The partnership name shall contain the word “Company”
or “Co.”. For limited partnership, the word “Limited” or “Ltd.”
shall be included. In case of professional partnership, the word
“Company” need not be used.
2. Terms descriptive of a business in the name shall he indicative
of the primary purpose. If there are two (2) descriptive terms,
the first shall refer to the primary purpose and the second shall
refer to one of the secondary purposes.
3. The name shall not be identical, misleading or confusingly
similar to one already registered by another corporation or
partnership with the Commission or a sole proprietorship
registered with the Department of Trade and Industry (DTI).
If the proposed name is similar to the name of a
registered firm, the proposed name must contain at least one
distinctive word different from the name of the company
already registered.
4. Business or tradename of any firm which is different from its
corporate or partnership name shall be indicated in the. articles
of Incorporation or partnership of said firm.
5. Tradename or trademark duly registered with the Intellectual
Property Office (IPO) can not be used as part of a corporate or
partnership name without the consent of the owner of such
tradename or trademark.
6. lf the name or surname of a person is used as part of a
corporate or partnership name, the consent of said person or
his heirs must be submitted except if that person is a
stockholder, member, partner or a declared national hero. If

17
Pison-Arceo Agricultrual and Development Corp. v. NLRC, 87 SCAD 175, 279 SCRA
312 (1997).
18
SEC Memorandum No. 14, Series of 2000 (24 October 2000).
 8

such person can not be identified or non-existent, an

explanation for the use of such name shall be required.
7. The meaning of initials in the name shall be disclosed in writing
by the registrant.
8. Name containing a term descriptive of a business different from
the business of a registered company whose name also bears
similar term(s) used by the former may be allowed.
9. The name should not be patently deceptive, confusing or
contrary to existing laws.
10. The name which contains a word identical to a word in a
registered name shall not be allowed if such word is coined or
already appropriated by a registered firm, regardless of the
number of the different words in the proposed name, unless
there is consent from the registered firm or this firm is one of
the stockholders or partners of the entity to be registered.
11. The name of an internationally known foreign corporation or
one similar to it may not be used by a domestic corporation
without the consent of the former.
12. The term “Philippines” when used as part of the name of a
subsidiary corporation of a foreign corporation shall be in
parenthesis: i.e. “(Philippines)” or “(Phil.)”.
13. The foIlowing words shall not he used as part of a corporate or
partnership names:
(a) As provided by special laws:
(i) “Finance”, “Financing” or “Finance and Investment”
by corporations or partnerships not engaged in the
financing business (R.A. 5980, as amended)
(ii) “Engineer”, “Engineering” or “Architects” as part of
the corporate name (R.A. 546 and R.A; 1582)
(iii)“Bank”, “Banking”, “Banker”, “Building and Loan
Association”, “Savings and Loan Association”, “Trust
Corporation”, “Trust Company” or words of similar
import by corporations or associations not engaged
in banking business,. (R.A. 337, as amended)
(iv) “United Nations” in full or abbreviated form can not
be part of a corporate or partnership name (R.A. 266)
(v) “Bonded” for corporations or partnerships with
unlicensed warehouse (RA 245)
 9

(b) As a matter of policy:

(i) “Investment(s)” by corporations or partnerships not
organized as investment house, investment company
or a holding company.
(ii) “National” by all stock corporations arid partnership.
(iii)“Asean”, “Calabarzon” and “Philippines 2000”.
14. The name of a dissolved firm shall not be allowed to be used
by other firms within three (3) years after the approval of the
dissolution of the corporation by the Commission, unless
allowed by the last stockholders representing at least majority
of the outstanding capital stock of the dissolved firm.
15. Registrant corporations or partnership shall submit a letter
undertaking to change their corporate or partnership name in
case another person or firm has acquired a prior right to the
use of the said firm name or the same is deceptively or
confusingly similar to one already registered unless this
undertaking is already included as one of the provisions of the
articles of incorporation or partnership of the registrant.

2. Change of Corporate Name

Although a corporation has the power to change its name by following the
procedure laid down by law, the change of name of a corporation does not result
in its dissolution. Philippine First Insurance Co. v. Hartigan,19 held that the
changing of the name of a corporation is no more than creation of a corporation
than the changing of the name of a natural person is the begetting of a natural
person. The act, in both cases, would seem to be what the language which we
use to designate it imports—a change of name and not a change of being.
The amendment of the corporate name in the articles of incorporation and
its approval by the SEC no longer requires another amendment to the old
corporate names appearing in the by-laws of the corporation.20

PURPOSE CLAUSE
The significance of the purpose clause in the articles of incorporation is
that it confers, as well as limits, the powers which a corporation may exercise.
The purpose clause must specify which is the corporation's primary purpose and

19
34 SCRA 252 (1970).
20
SEC Opinion, 2 October 1986, XX SEC QUARTERLY BULLETIN 40 (Nos. 3 & 4, Sept. &
Dec., 1986).
 10

which are the secondary purpose. The secondary purpose or purposes need not
be related to the main purpose.
Some of the other reasons for indicating purpose in the charter of the
corporation are so that:

(a) Prospective investors shall know the kind of

business the corporation deals with;

(b) Management shall know the limits of its actions;

(c) A third-party can know whether his dealing with

the corporation are with corporate functions and
powers.

The indication of the primary purpose of the corporation is necessary for

the administrative supervision and monitoring of the State, as it can determine
which particular agency shall have jurisdiction over the operations of the
corporation.
In Uy Suiliong v. Director of Commerce,21 it was held that statements of
primary purpose is to protect shareholders so they will know the main path of
business of the corporation and they may file derivative suits if corporation
deviate from the primary purpose.
The purpose of a corporation must be lawful. If patently illegal, the articles
of incorporation shall be rejected by the SEC. If purpose stated in the articles of
incorporation is lawful, SEC cannot ask for other purpose other than those
stated, hence mandamus will lie to compel SEC to issue certificate of
incorporation, unless under declared policies, the SEC may need to regulate
certain lawful purposes or activities in consonance with declared national
economic policies.22
In Palting v. San Jose Petroleum, Inc.,23 the Supreme Court considered
the provisions in the articles of incorporation of a corporate entity that allowed
the directors and officers immunity from any claims against the corporation even
in cases of self-dealings, as being against Philippine corporate policies:

These provisions are in direct opposition to our

corporation law and corporate practices in this country.
These provisions alone would outlaw any corporation
locally organized or doing business in this jurisdiction.
Consider the unique and unusual provision that no
contract or transaction between the company and any
other association or corporation shall be affected except
in case of fraud, by the fact that any of the directors or

21
40 Phil. 541 (1919).
22
Sec. 6(k)7, Pres. Decree 90-2A.
23
18 SCRA 924 (1966).
 11

officers of the company may be interested in or are

directors or officers of such other association or
corporation; and that none of such contracts or
transactions of this company with any person or persons,
firms, association or corporation shall be affected by the
fact that any director or officer of this company is a party
to or has an interest in such contract or transaction or has
any connection with such person or persons, firms,
associations or corporation; and that any and all persons
who may become directors or officers of this company are
hereby relieved of all responsibility which they would
otherwise incur by reason of any contract entered into
which this company either for their own benefit, or for the
benefit of any person, firm, association or corporation in
which they may be interested.24

The Court held that the impact of the questioned provisions of the articles
of incorporation upon the traditional fiduciary relationship between the directors
and the stockholders of a corporation would be too obvious to escape notice by
those who are called upon to protect the interest of investors. The Court found
that the provisions would authorize the directors and officers of the company to
do anything, short of actual fraud, with the affairs of the corporation even to
benefit themselves directly or other persons or entities in which they are
interested, and with immunity because of the advance condonation or relief from
responsibility by reason of such acts.
Asuncion v. De Yriarte,25 held that when on the face of the articles of
incorporation presented for registration it is shown that it is organized for a
purpose contrary to law or public policy, the same may be denied outright
registration. In Asuncion where the purpose in the articles of incorporation
sought to take possession and control of municipal property within a barrio and
administer the same exclusively for the benefit of the residents of the barrio, said
articles of incorporation showed the object of the incorporation to be unlawful in
that it sought to deprive the municipality in which the barrio was situated of its
property and its citizens of the right of enjoying the same and would, if permitted,
disrupt and destroy the government of the municipalities of the State and
abrogate the laws relating to the formation and government of municipalities.
The articles were denied outright registration.
Asuncion held also that although the duties of the official concerned
happened to be ministerial, it does not necessarily follow that he may not, in the
administration of his office, determine question of law. It is his duty to determine
whether the objects of the corporation as expressed in the articles of
incorporation are lawful pursuant to the then Corporation Law. And just because
the articles of incorporation are perfect in form, it does not mean that the division
of the archives must accept and register them and issue the corresponding

24
Ibid, at pp. 942-943.
25
28 Phil. 67 (1914).
 12

certificate of incorporation no matter as what the corporation's purpose is. It is

not only the right but also the duty of the appropriate government agency to
determine the lawfulness of the objects and purpose of the corporation before it
issues a certificate of incorporation.

1. Investment in Non-Primary Purpose Activities

Under Section 42 of the Corporation Code, a private corporation may
invest its funds in any other corporation or business or for any purposes other
than the primary purpose for which it was organized, when approved by a
majority of the board of directors or trustees and ratified by the stockholders
represented at least two-thirds (2/3) of the outstanding capital stock, or by at
least two-thirds (2/3) of the members in case of non-stock corporations, at a
stockholder's of members’ meeting duly called for the purpose.
Written notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally;
however, any dissenting stockholders shall have appraisal right.26
Also, where the investment by the corporation is reasonably necessary to
accomplish its primary purposes as stated in the articles of incorporation, the
approval of the stockholders on members shall not be necessary.27

2. Rule of Interpretation of Purpose Clauses

The SEC has ruled that the rules governing the construction of charters of
corporations are, for the most part, the same as those which govern the
construction and interpretation of statutes, contracts and other written
instruments.28
The SEC held that it is a general rule that when the charter of a
corporation confers certain enumerated powers on the corporation, it is to be
construed as including incidental powers reasonably necessary to the proper
exercise of the enumerated powers and as excluding all other non-enumerated
powers; and that if the powers are expressly enumerated in details “such
specification by implication excludes all other powers or rights, except such
incidental or subordinate rights and powers as may be necessary to an exercise
of the powers and rights expressly given.”29 The specification of certain powers
operates as a limitation on such objects as are embodied therein and is an
implied prohibition of the exercise of other instinct powers.30 Furthermore,
express powers cannot be enlarged by implication; thus, it was held that the
26
Sec. 42, Corporation Code.
27
Ibid.
28
SEC Opinion, 26 January 1994, XXVIII SEC QUARTERLY BULLETIN 46 (No. 2, June 1994),
citing 7A FLETCHER, Sec. 3640, and 6 FLETCHER CYC. CORP., Sec. 2483.
29
Ibid.
30
Ibid.
 13

general language of a charter following a recitation of specific power is

construed and confined within the limitations of the specific power named.31

PRINCIPAL PLACE OF BUSINESS

The principal place of business of a corporation must be indicated in its
articles of incorporation. Although the corporation may hold office in a place
other the place indicated in the articles of incorporation, for jurisdictional
purpose, the place indicated in the articles of incorporation is binding.

1. Residence of Corporation
Article 51 of the Civil Code provides that "when the law creating or
recognizing them, or any other provision does not fix the domicile of juridical
persons, the same shall be understood to be the place where their legal
representation is established or where they exercise their principal functions."
Clavecilla Radio System v. Antillon,32 held that the residence of a
corporation is the place where its principal office is established; it can be sued in
that place, not in the place where its branch office is located.
A corporation in a metaphysical sense is a resident of the place where its
principal office is located as stated in the articles of incorporation and cannot be
allowed to file a personal action in a place other than that place.33
Sy v. Tyson Enterprises, Inc.,34 held that the residence of the President
for purposes of venue and service of summons is not the residence of the
corporation because a corporation has a personality separate and distinct from
that of its officers and stockholders.
For purposes of venue in intra-corporate suits, under Section 1, Rule 1 of
the Interim Rules of Procedure for Intra-corporate Controversies, when the
articles of incorporation indicate that the principal place of business is “Metro
Manila,” as allowed under Section 51 of the Corporation Code, then the action
must be filed in the city or municipality where the head office is actually located.

2. Service of Process Upon a Corporation

Under Section 11, Rule 14 of the 1997 Rules of Civil Procedure of the
Philippines, if the defendant in a suit is a corporation organized under the laws
of the Philippines, service may be made on the President, general manager,
secretary, treasurer, or in-house counsel.

31
Ibid.
32
19 SCRA 379 (1967).
33
Young Auto Supply Co v. Court of Appeals, 223 SCRA 670, 42 SCAD 673 (1993).
34
119 SCRA 367 (1982).
 14

In one case35, the Supreme Court noted that the rationale of all rules for
service of process on corporation is that service must be made on a
representative so integrated with the corporation sued as to make it a priori
supposable that he will realize his responsibilities and know what he should do
with any legal papers served on him. It then held that service of summons upon
the assistant general manager has served the purpose of the law.

CORPORATE TERM
Section 11 of the Corporation Code provides that a corporation shall exist
for a period not exceeding fifty (50) years from the date of incorporation unless
sooner dissolved or unless said period is extended.
The corporate term, as originally stated in the articles of incorporation,
may be extended for period not exceeding fifty (50) years in any single instance
by an amendment in the articles of incorporation, provided that no extension can
be made earlier than five (5) years prior to the original or subsequent expiry date
unless there are justifiable reasons for an earlier extension.36
The corporation may virtually have a perpetual lifespan renewable every
fifty years. The limit of a fifty-year term emphasizes the contractual nature of the
corporation: people would be discourage to invest if it lasted forever;
management would theoretically be more honest—a renewal of the corporate
term would be a vote of confidence by the stockholders or members.
Benguet Consolidated Mining Co. v. Pineda,37 discussed the importance
of the corporate term as it is co-terminous with its possession of an independent
legal personality, distinct from that of its component members: "The State and
its officers also have an obvious interest in the term of life of associations, since
the conferment of juridical capacity upon them during such period is a privilege
that is derived from statute. . . And the State is naturally interest that this
privilege be enjoyed only under the conditions and not beyond the period that it
sees fit to grant; and, particularly, that it be not abused in fraud and to the
detriment of other parties; and for this reason it has been ruled that ‘the
limitation (of corporate existence) to a definite period is an exercise of control in
the interest of the public.’"38

1. Commencement of Corporate Existence

Section 19 of the Corporation Code provides that a private corporation
commences to have corporate existence and juridical personality and is deemed
incorporated from the date the SEC issues a certificate of incorporation under its
official seal; and thereupon the incorporators, stockholders or members and
their successors shall constitute a body politic and corporate under the name

35
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
36
Sec. 11, Corporation Code.
37
98 Phil. 711 (1956).
38
Ibid, at p. 719, citing Smith v. Eastwood Wire Manufacturing Co., 43 Atl. 568.
 15

stated in the articles of incorporation for the period of the time mentioned
therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law.

INCORPORATING STOCKHOLDERS OR MEMBERS

Section 10 of the Corporation Code provides that any number of natural
persons not less than five (5) but not more fifteen (15), all of legal age and
majority of whom are residents of the Philippines, may form a private corporation
for any lawful purpose.
Only natural persons can be incorporators. However, the law does not
preclude corporations and partnership from becoming stockholders or members
as long as they are not incorporators.39 The issue has been raised before on
what is the need for legislating that incorporators must be natural persons, and it
was held then that:40

From this premise, it was easy to give vitality to the

ancestral abhorrence of corporations. Judges could not
imagine why a corporation which “has no soul to be
damned, and no body to be kicked” should be empowered
to incorporate other corporation. The strongest statement
of this fear is found in Schwab v. Potter Co. [194 N.Y. 409,
416] as follows: “’Artificial persons,’ without brain or body,
existing only on paper through legislative command and
incapable of thought or action except through natural
persons, can not create other ’artificial persons,’ and those,
others still, until the line is so extended and the capital
stock so duplicated and reduplicated, as to result in
confusion and fraud.' The logic is unassailable once the
premise is accepted. The “fiction" theory of corporate
personality invades this area of the law. This is hardly the
occasion to discuss a subject that has engaged the
attention of scholars and philosophers for many centuries
now. It is sufficient at this time to remark that the judges
have done a good job of confusing the means with the
ends. The problem of business life are better solved by
pragmatism or empiricism than by slavish loyalty to
concept formulations. Once we are cognizant that behind
the premise was the policy of inhibiting corporations, now
gone or nearly so, we shall no longer hesitate to substitute

39
Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399, 460-461 (1929).
40
Navarro, Two Points of Reform of Philippine Corporation Law, 35 PHIL. L. J. 598. "Not
much light is shed by writers and court decisions on the policy of the doctrine as stated in the
beginning. Historically, if credence be given to Kyd, the spectacle of one corporation being inside
another would be nothing new." (at p. 682).
 16

a different premise and thus arrive at a contrary

conclusion.41

The same author posited that the power to hold stock in other
corporations was not conferred or implied under the old practice. The holding
company was impossible. It was against this background that courts also held
that corporations could not themselves be incorporators. And although
corporations are now generally empowered by general laws to own stocks in
other corporations, we still carry to this day a relic of the past. The principle we
are discussing, thus, draws support exclusively from the "fiction" theory of
corporate personality.42 The same author further said:

. . . Besides, the use of dummy incorporators is quite

general, for the law attaches little or no importance to
incorporators. Their function is extremely ceremonial. As
Fletcher says: "Corporators are mere instruments of the
law for purposes of preliminary organization. The moment
that is accomplished, the amount required as capital is
paid in, the necessary certificate signed, and the charter
granted, they are functi officio, or, more accurately, they
may then become stockholders. They exist before
stockholders come in, corporators cease to be."43

In practice, the SEC would allow the incorporation of a corporation which

would have as original stockholder in the articles of incorporation, as long as the
minimum number of individual incorporators appear. In one opinion, the SEC
has posited that both domestic and foreign corporations, if allowed by their
charters, may be initial subscribers to the capital stock of a corporation, but their
subscription will not be considered in the computation of the 25% requirement
for incorporation.44 The SEC also requires that the subscription of corporations
to the capital stock of a corporation in the process of incorporation be fully paid
due to their limited liability capacity;45 but after incorporation, corporations may
subscribe without having to fully pay their subscription under the premise that
the risk of insolvency no longer exist at that point.46
The Corporation Code maintains the requirement that at least five (5)
individuals must be incorporators of a corporation for perhaps a more practical
reason. Our jurisdiction recognizes the existence of promoter's contracts, or
contracts entered into on behalf of a corporation still in the process of
organization. Indeed, transactions may already be pursued with the parties

41
Ibid, at p. 683.
42
Ibid, at p. 684.
43
Ibid.
44
SEC Opinion, 23 May 1967, SEC FOLIO 1960-1976, at p. 284; Also, SEC Opinion, 14
November 1978.
45
SEC Opinion, 23 May 1967, SEC FOLIO 1960-1976, at p. 284.
46
SEC Opinion, 29 June 1976, SEC FOLIO 1960-1976, at p. 936.
 17

aware that the corporation is still under registration proceedings. If anything

goes wrong with the incorporation process, and there may have been liabilities
created at the time of incorporation, then the existence of five individual
incorporators allows the public or injured party to run after the persons who
cannot hide behind a corporate fiction or who can avail of limited liability
features. In addition, there must still indeed be individuals, who can be held
criminally liable, for acts done relating to incorporation process. Such remedies
would be unavailing or would be meaningless if the incorporators are
themselves juridical entities.
If only two incorporators are residents of the Philippines a corporation still
exists—a de facto corporation provided that at least five (5) incorporators must
sign the articles of incorporation.47 This however does not prevent the existence
of the so-called one-man corporation, where business is actually owned by one
individual, it is still possible for him to incorporate by giving nominal ownership of
only one share of stock to each of 4 other persons—this is not necessarily
illegal. There is no general requirement of Philippine citizenship only a majority
of the incorporators must be residents of the Philippines. However, there are
some areas of business and industry wherein ownership is reserved, wholly or
partially to Filipinos, e.g., public utilities (60%), retail trade (100%), exploitation
of natural resources (60%), advertising industry (70%), and mass media (100%).
An incorporator will always retain his status as the incorporator of the
corporation because such status is acquired by the mere fact of being one of the
persons who originally composed the corporation. He may cease to be a
stockholder or a member, he may lose all his rights and interest in the
corporation, but he will always be known as the incorporator. The articles of
incorporation cannot therefore be amended to delete the name of an
incorporator and substitute it with that of another, the latter not being an
incorporator.48

CAPITAL STRUCTURE AT REGISTRATION

The articles of incorporation must state the amount of its authorized
capital stock and the number of shares into which it is divided. Under Section 12
of the Corporation Code, stock corporation incorporated shall not be required to
have any minimum authorized capital stock except as otherwise specifically
provided for by special law, and provided that the paid-up capital cannot be
lower than P5,000.00.
In normal practice, SEC will not allow a corporation to be organized with
P5,000 minimum paid-up capital because it is too thinly capitalized. More likely
SEC would require a higher paid-up amount for incorporation. SEC can do this
because as an administrative body it can make rules.

47
SEC Opinion, 11 October 1971, SEC FOLIO 1960-1976, at p. 495.
48
SEC Opinion, 7 January 1974, VIII SEC QUARTERLY BULLETIN 21 ( No. I, Jan. 1974).
 18

Maximum capitalization is required to be indicated to protect the

stockholders—limits the issuance of the capital stock and extent of voting power
or capacity of a stockholder. The limitation of the maximum capitalization of the
corporation is also important in delineating the pre-emptive rights of
stockholders to future issuances of shares of stock.
The right of incorporation must not be confused with the ability of
operation. Our law, as amended, is not concerned with how much capital a
business corporation should have in its possession before it could lawfully
operate, except in certain kinds of private corporations like banks and insurance
companies. As held by one author, "except in corporations which directly affect
public interest, our law merely requires that 20% "of the entire number" of the
authorized shares must be subscribed and 25% of the subscription paid . . . But
certainly, the law could not require beforehand how much capital a private
corporation should have for its business, because this problem properly belongs
to the business judgment of those in charge of the management. . . Anyway, the
Corporation Law (Section 19) expressly provides that if an incorporated
corporation fails to organize itself and commence the operation of its business
within two years from the date of incorporation, then its corporate powers shall
cease. it is evidence therefore that the law is not particular about the minimum
amount of capital which every incorporated corporation must have for purposes
of operation. It merely fixes the minimum number of authorized shares to be
subscribed and paid for purposes of incorporation. That the general
incorporation law does not intend to fix the minimum amount of capital for
operational purposes is quite understandable, because this problem belongs
exclusively to the business judgment of the incorporators and the directors. . ."49

SUBSCRIPTION AND PAID-UP REQUIREMENTS

Section 13 of the Corporation Code provides that at least twenty-five
percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at least
twenty-five percent (25%) of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract
of subscription without need of call, or in the absence of a fixed date or dates,
upon call by the board of directors, provided that in no case shall the paid-up
capital be less than P5,000.00.
"Capital Stock" is the amount fixed in the articles of corporation procured
to be subscribed and paid-in. It is settled that shares issued in excess of the
authorized capital stocks are void.

49
Guevarra, The Right of Incorporation Under Philippine Incorporation Law, 33 PHIL. L.J.
349 (1958).
 19

"Outstanding Capital Stock" is the total shares of stock issued to

subscribers or stockholders, whether or not fully or partially paid (as long as
there is a binding subscription agreement), except treasury shares.50
"Subscribed Capital Stock" is that portion of the capital stock subscribed
(i.e., procured to be paid) whether or not fully paid.
"Subscription" is the mutual agreement of the corporation and subscriber
to take and pay for the stock a corporation.
According to one author,51 the weight of authority in the United States
supports the view that the purpose of the legislature in requiring a certain
percentage of the authorized capital stock to be subscribed before incorporation
is to give assurance to the public that may deal with the new corporation that it is
actually able to operate and undertake to do business and to meet obligations
as they arise from the start of its operation.
In a leading case in the Supreme Court of the United States, Burke v.
52
Smith, it was held that the purpose of such a requisition is, that the state may
be assured of the successful prosecution of the work, and that creditors of the
company may have, to the extent, at least, of the required subscription, the
means of obtaining satisfaction for their claims.
It was posited that it should be the policy of the law not to unduly restrict
the incorporation of business corporations; as long as the purpose is lawful, the
right to engage in legitimate business should not be unduly restrained. "It is not
within the contemplation of the general incorporation law to discourage
incorporation of business corporations with small capital. Fraud is not
necessarily associated with small capital. On the contrary, it is in big, moneyed
corporation where fraud could easily be committed through the adoption of
various corporate devices. In the absence of fraud in the incorporation of a
corporation, every legitimate business enterprise should be allowed to flourish to
promote the economic salvation of the country. Unless the law clearly and
unequivocably provides otherwise, and unless public policy clearly dictates to
the contrary, incorporation should be the rule rather than the exception."53

1. Issuance of Par Value Shares of Stock

"Par Value Share" is one in the certificate of stock of which appears an
amount in pesos as the nominal value of shares. Such par value must be stated
in the articles of incorporation and par share cannot be issued at less than such
par value, which can be changed only by an amendment of the articles of
incorporation.

50
Sec. 137, Corporation Code.
51
Guevarra, The Right of Incorporation under the Philippine Incorporation Law, 33 PHIL.
L.J. 349,350 (1958), quoting from SEC Order, dated 2 January 1958.
52
16 Wall., U.S. 390, 21 L. Ed. 361 (1873).
53
Guevarra, The Right of Incorporation Under the Philippine Incorporation Law, 33 PHIL.
L.J. 349, 357 (1958).
 20

If no par value shares will be issued by the corporation, such fact must be
stated in the articles, and the consideration of their issuance cannot be less than
the issued value, which in turn cannot be less than five pesos for each.
The consideration for which no-par value shares may be issued is
referred to as its "issued value," may be fixed in any of three ways:

(a) By the articles of incorporation;54

(b) By the board of directors when so authorized by
said articles or by the by-laws;55 or
(c) By the stockholders representing at least a
majority of the outstanding capital stock.56

Some corporations cannot issue no-par value shares: banks, public

utilities, insurance companies, building and loan associations.57 The reason
behind such a prohibition is there are certain businesses or activities vested with
public interests and proper accountability is served if nominal amounts are
assigned to their shares which would be the basis of their capital structure.

AMENDMENTS TO ARTICLES OF INCORPORATION

Section 16 of the Corporation Code provides that unless otherwise
prescribed by the Code or by special laws, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written sent of
the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended, shall be indicated by underscoring the change or changes made, and
a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of stockholders or
members, shall be submitted to the SEC.58
The amendments shall take effect upon their approval by the SEC, or in
case the SEC fails to act on the application, within six months from the date of
filing for a cause not attributable to the corporation.59

54
Sec. 62, Corporation Code.
55
Ibid.
56
Ibid.
57
Sec. 6, Corporation Code.
58
Sec. 16, Corporation Code.
59
Ibid.
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