Chapter III Formation/Organization

Who may form a corporation? Section 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a) Incorporators: SHs or members mentioned in the AOI as originally forming and composing the corporation and who are signatories thereof Corporators: all SHs or members, whether incorporators or those joining the corporation after incorporation Every incorporator must be a stockholder Section 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a) 1. Must be natural persons Only natural persons can be incorporators o Excluding partnerships and other corporations But partnerships and other corporations can be stockholders in another corporation as long as they are not incorporators thereof (El Hogar case) 3.

Reason for 5 incorporator requirement: if anything goes wrong if the incorporation process, and liabilities created at the time of incorporation, then the existence of 5 allows the public or injured party to run after the persons

Residence requirement; citizenship requirement only in certain areas No general requirement of RP citizenship Some areas of industry and business are limited/reserved for Filipino citizens o Public utilities o Retail trade o Banks o Investment houses o Savings and loan associations o Schools o Other areas Congress may by law provide Where more than 40% of outstanding capital is to be owned or controlled by aliens: written authorization must first be sought with the BOI before registration with the SEC

4.

Restrictions on stock ownership of closely-knit groups Sensitive areas where ownership by a close-knit group may be detrimental to the public interest o Ex. Banksno bank may be licensed to operate if equity of one person or persons related to each other within the 3rd degree of consanguinity/affinity exceed 20% of bank voting stock

2.

At least five (5) incorporators, but not more than 15 At least 5 incorporators must sign the AOI If only 2 incorporators are residents of the RP, a corporation still existsa de facto corporation, provided o At least 5 incorporators must sign the AOI One-man corporations: owner can still incorporate by giving nominal ownership of one share of stock each to four other persons (legal) Incorporator will always retain his status as incorporator of the corporation

Section 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business

interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry. o Stock ownership in close corporations may be limited by the AOI ifo members of the same family or group

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; -- x X x -Steps in Formation of Corporation 1. Promotional stage Promoter, Defn: one who brings together persons who become interested in enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formulation of the corporation Securities Regulation Code: promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business of the issuer and receives consideration therefor o He formulates the necessary initial business and financial plans

If necessary, buys the rights and property which the business may need; with the understanding that once formed, he shall take over the same o Promoters may also be incorporators o Revised securities act sec 2 Code: before incorporation, o at least 25% authorized capital stock should be subscribed o at least 25% of subscribed stock is paid-in if initial capital requirements cannot be met, then promoters have to promote the business so other persons could invest shares of stock cannot be sold publicly unless they are first registered with the SEC SEC requires disclosure of all pertinent information regarding: o purposes, o character and nature of business, o financial position, o financial responsibility of directors and officers, o nature of shares to be issued Must appear in a registration statement o Filed with the SEC o Published in 2 newspapers of gen. circulation o Once a week for 2 consecutive weeks If all requirements are complete, SEC issues an order making registration effective SEC grants corporation a permit to offer securities for sale o

2. Articles of Incorporation; drafting AOI: constitute the charter of the corporation. It is the contract between the corporation and its SHs as well as the agreement among SHs Basic contract document in Corporate Law o Defines the charter of the corporation o Defines contractual relationships between and among: State and corporation SHs and State Corporation and SHs AOI does not become binding unless they have been filed with the registered by the SEC Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange

Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which

the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: ARTICLES OF INCORPORATION OF __________________________ (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines; AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be "_____________________, INC. or CORPORATION"; SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is located in the City/Municipality of ________________________, Province of _______________________, Philippines;

FOURTH: That the term for which said corporation is to exist is _____________ years from and after the date of issuance of the certificate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME NATIONALITY RESIDENCE ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ SIXTH: That the number of directors or trustees of the corporation shall be _______; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: NAME NATIONALITY RESIDENCE ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ SEVENTH: That the authorized capital stock of the corporation is ______________________ (P___________) PESOS in lawful money of the Philippines, divided into __________ shares with the par value of ____________________ (P_____________) Pesos per share.

(In case all the share are without par value): That the capital stock of the corporation is ______________ shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of _____________ shares of which ______________ shares are of the par value of _________________ (P____________) PESOS each, and of which _________________ shares are without par value. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber Nationality No of Shares Amount Subscribed Subscribed _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ _________________ __________ ____________ ____________ NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber Amount Subscribed Total Paid-In _________________ ___________________ _______________ _________________ ___________________ _______________ _________________ ___________________ _______________ _________________ ___________________ _______________

_________________ ___________________ _______________ (Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That _____________________ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this __________ day of ________________, 19 ______ in the City/Municipality of ____________________, Province of ________________________, Republic of the Philippines. _______________________ _______________________ _______________________ _______________________

_______________________ _______________________ (Notarial Acknowledgment) TREASURER'S AFFIDAVIT REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF ) I, ____________________, being duly sworn, depose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ____________________ (Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of ___________________ Province of _____________________, this _______ day of ___________, 19 _____; by __________________ with Res. Cert. No. ___________ issued at _______________________ on ____________, 19 ______ NOTARY PUBLIC

________________________________ My commission expires on (Names and signatures of the incorporators) _________, 19 _____ SIGNED IN THE PRESENCE OF:

Doc. No. _________; Page No. _________; Book No. ________; Series of 19____ (7a) Contents of AOI (Sec 14) (1) Corporate name Name is essential to corporate existence It is through the name that the corporation can sue and be sued and perform all legal acts Code does not allow the corporation to adopt a name identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or which is patently deceptive, confusing, or contrary to existing laws If name is legally permissible the SEC allow the parties to reserve it for a reasonable period Code requires a corporation to append the word Corporation or Inc. to its chosen name A corporation should transact business only in its corporate name Can amend the name provided it is done in accordance with the procedure laid down by the Code for amendments of AOI and approval by SEC of the change in corporate name Once approved SEC issues an amended certificate of incorporation under the corporations new name Change of name does not result in dissolution

corporate name is unlawful and may be removed under the Corpo Code. H: Yes. The corporations right to use its corporate name is a property right, a right in rem which it may assert and protect against the world. A name is secularly important as necessary to the very existence of a corporation. Its name is one of its attributes, an element of its existence, and essential to its identity. GR: each corp must have a name by which it is to sue and be sued and do all legal acts. A corp acquires its name by choice and need not select a name identical with or similar to one already appropriated. To come under the application of Sec 18 of the Corpo Code, 2 requisites must be proven: (1) corp has a prior right over the use of the name, or; (2) proposed name is either identical or deceptively/confusingly similar, or; (3) it is patently deceptive, confusing or contrary to existing law. The right to exclusive use of corporate name is determined by priority of adoption. Philips was incorporated on 1956 and Standard only 2 years later. In determining the existence of confusing similarity in corporate names, the test is w/n the similarity is such as to mislead a person using ordinary care and discrimination. A reading of the names of Philips and its subsidiary companies indicate that Philips is indeed a dominant word in that all companies affiliated with the principal corp are known in the RP. Given also Standards primary purpose, nothing could prevent it from dealing in the same line of business of electrical devices, products, or supplies which fall under its primary purposes. Standards use also tends to show its intention to ride on the popularity and established goodwill of Philips. Furthermore, because Philips is a trademark or trade name registered as far back as 1922, they have the exclusive right to use the name free from infringement by similarity. Lyceum of the Phils. v CA (219 S 610). Lyceum of the Philippines Inc sues all academic institutions it could find having the corporate name Lyceum. SEC rules against Lyceum and upheld by the CA. I: W/n use of word Lyceum in its corporate name has been for such length of time and with such exclusivity as to have been associated with Lyceum of RP. H: Lyceum is not entitled to a legally enforceable exclusive right to use the word Lyceum in its corporate name. (1) corporate names of the other Lyceums not identical with, or deceptively or confusingly similar to Lyceum of the RP. Confusion and deception are precluded by the appending of the geographic name after Lyceum. (2) Lyceum the word is as generic in character as the word university. But Lyceum of RPs use of the word Lyceum in its corporate name has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. In fact Western Lyceum used the word 17 years before Lyceum of RP. (3) even if Western Lyceum is deemed to have lost its rights under the original registration which was never restored when destroyed by fire, the point was merely to emphasize that the word has already been used previously and is not exclusive to Lyceum of RP.

Philips Export BV v CA (206 S 457). Philips of the Netherlands files an action with the SEC to delete the name Philips from the corporate name of Standard Philips Company. Standard refuses, and Philips sought an injunction to enjoin Standards from the use if the name Philips. SEC Hearing Officer dismisses Philips petition, arguing that Sec 18 of Corpo Code is only applicable when the corporate names are identical. SEC en banc affirms HOs decision; corporate names contain at least two different words and rules out confusion. CA dismisses Philips petition, saying that Standards products are unrelated and do not compete with Philips products and would not mislead consumers. I: W/N Standards use of the word Philips in its

PC Javier and Sons v CA. H: From the foregoing documents, it cannot be denied that petitioner corporation was aware of First Summa Savings and Mortgage Bank's change of corporate name to PAIC Savings and Mortgage Bank, Inc. Knowing fully well of such change, petitioner corporation has no valid reason not to pay because the IGLF loans were applied with and obtained from First Summa Savings and Mortgage Bank. First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same bank to which petitioner corporation is indebted. A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. (2) Purpose clause Confers as well as limits the powers which a corporation may exercise Sec 45: corporate powers: o Expressly granted by law and the AOI o Incidental to conferred powers o Reasonably necessary to accomplish its purposes and incidental to its existence Must specify primary and secondary purposes o Secondary purpose need not be related to the main purpose Three reasons for requiring a purpose clause in the AOI o So that a prospective SH contemplating an investment shall know within what lines of business his money is to be risked o So that management may know within what lines of business it is authorized to act o So that anyone who deals with the corporation may ascertain w/n a contract or transaction is within the general authority of management Sec 14(2): a corporation can have as many purposes as it may wish to include in its AOI, subject to the ff conditions: a) The AOI must specify which is the primary purpose and which are the secondary purposes (need not be related) b) For corporations governed by special laws or covered by special provisions in the Code: can have only ONE purpose peculiar to them and no other (ex educational corporations cannot engage in export and import) c) Purpose(s) must be lawful NEDA has the power to refuse or deny the application for registration of any corporation if not

consistent with the declared national economic policies A corporation cannot be formed for the purpose of practicing a profession Non-stock corporations:

Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) Investment in activities not within its primary purpose o Sec 42: allowed provided Approved by majority of Board Ratified by 2/3 of outstanding capital stock o Exception: where reasonably necessary to accomplish primary purposes, SHs approval not necessary Interpretation of purpose clauses o GR: construed as including incidental powers reasonably necessary to the proper exercise of the powers enumerated in the AOI o Detailed specification of powers enumerated, by implication, excludes all other powers or rights Except incidental or subordinate powers and rights necessary to an exercise of powers expressly given (3) Place of Principal office of the corporation Residence of the corporation Must be within the Philippines Specify city or town where located (4) Term of existence Not to exceed 50 years from date of incorporation o extendible for a period not exceeding 50 years by amendment to AOI o no extension made earlier than 5 years before original or subsequent expiry date exception: justifiable reasons

Section 11. Corporate term. - 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 periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (6) (5) Names, nationalities, and residencies of the Incorporators and directors; Names, nationalities, and residencies of the incorporators, and directors or trustees who will act as such until the first regular directors/trustees are elected o AOI must also name the treasurer chosen by the preincorporation subscribers (6) Number of directors or trustees; qualifications Number of directors: not less than 5, not more than 15 o For non-stock: can exceed 15 trustees o Merger of banks: total number of directors of the merged banks (may exceed 15) o Educational non-stock: multiples of 5 Code is SILENT on amendment of AOI to increase number of directors to more than 15 Incorporators must own at least one share of capital stock Directors must own at least one share of stock of a corporation of which he is a director In non-stock corps, a trustee must be a member thereof Aliens may be directors, but only in such number proportional to their allowable participation in the capital of an entity

the amounts subscribed and paid by each; subscription; payment Sec 12: corporations shall not be required to have any minimum authorized capital stock except where provided by special law In normal practice, SEC will not allow incorporation for P5000 minimum paid-up capital Maximum capitalization is needed to protect SHs Capital stock, defn: the amount fixed in the articles of incorporation to be subscribed and paid in or secured to be paid in by the shareholders, at the organization of the corporation or afterwards Outstanding Capital Stock: total shares of stock issued to subscribers or SHs, whether or not fully or partially paid except treasury shares Subscribed Capital Stock: portion of capital stock subscribed (i.e. procured to be paid) whether or not fully paid Subscription, defn: mutual agreement of the subscribers to take and pay for the stock of a corporation o AOI must show: the names, nationalities, and residencies of the original subscribers, the amount subscribed, and how much is paid thereon o Sec 13: at least 25% of authorized capital stock, at least 25% of total subscription to be paid upon subscription o for non-stock: minimum authorized capital stock not required, but subject to Sec 13

(7)

Names, nationalities and residencies of persons acting as directors/trustees until the 1st regular directors/trustees are duly elected and qualified

Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - 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 (25%) per cent 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 for payment by the board of directors: Provided, however, That in no case shall the paidup capital be less than five Thousand (P5,000.00) pesos. (n) Paid-up capital at time of incorporation must be in cash deposited in a bank or property Pre-incorporation subscription: amount which each incorporator or SH agrees to contribute to a proposed corporation

(8) Amount of authorized capital stock, number of shares par value or no-par value, original subscribers and

Embodied in an agreement which takes and pays for the original unissued shares of a corporation formed or to be formed (Delpher)

3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16) Issuance of no par value must be reflected in the AOI o Consideration cannot be less than issued valuecannot be less than 5 pesos (9) Treasurers Affidavit SEC shall not accept AOI unless accompanied by a sworn statement by the Treasurer that: o at least 25% of TOTAL authorized capital stock has been subscribed o at least 25% of subscribed and authorized capital stock has been fully paid-up

Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no preincorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n

Par value share: appears in the stock certificate specifiying the amount in pesos as the nominal value of the shares appearing in the certificate of stock o Must be stated in the AOI o Cannot be issued at less than stipulated par value o Can only be changed by amendment in the AOI Sec 62: Consideration for no par value shares issued is the issued value, to be fixed in the ff ways: o AOI o By the BOD when authorized by the AOI or BLs o SHs representing at least a majority of outstanding capital stock

Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder 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. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of nopar stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded

indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Treasurer must make sworn statement that minimum requirements of subscription and payment have been complied with o If false, AOI disapproved or certificate of registration revoked (10) Other matters

AOI may include other matters not inconsistent with law, such as:

10

o o o o

classes of shares into which shares of stock have been divided Preferences of and restrictions on any class Denial of voting rights on certain shares or pre-emptive right of SHs Prohibition against transfer of stock which would reduce ownership to less than required minimum for wholly or partially nationalized businesses/industries Close corporations

owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Code allows a close corporation to provide in its AOI special provisions which would exclude it from the operation of some of the requirements and prohibition imposed on corporations in general, and in effect make it an incorporated partnership (Sec 97)

(11)

A corporation will be governed by Title XII on Close Corporations only if its articles provide for certain specific matters TITLE XII - CLOSE CORPORATIONS

Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.

3. Filing of articles; payment of fees AOI and treasurers affidavit filed with the SEC and corresponding fees paid Failure to file AOI will prevent due incorporation and will not give rise to juridical personality and will not even be a de facto corporation

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for

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4. Examination of articles; approval or rejection by SEC Upon receipt the SEC shall examine the AOI to determine conformity with law If not, SEC must give the incorporators reasonable time within which to correct or modify objectionable portions Grounds for rejection by the SEC: 1) AOI or any amendment thereto is not substantially in accordance with the prescribed form 2) Purpose(s) are patently unconstitutional, illegal, immoral or contrary to government rules/regulations 3) Treasurers Affidavit concerning the amount of capital stock paid or subscribed is false 4) Required percentage of ownership to be owned by Filipino citizens has not been complied with SEC may, after consultation with BOI and NEDA, reject or deny registration if not consistent with the declared national economic policies SEC decision appealable to CA

o o o

WRITTEN ASSENT of SHs representing at least 2/3 of OCS or 2/3 members of non-stock entitled to vote Without prejudice to appraisal right of dissenting SH Unless otherwise provided in the Code or special law

AOI: Contractual implications AOI is the contract between the three (3) parties: o State and corporation o Stockholders and State o Corporation and stockholders

Defectively incorporated entities; De jure corporation

5. Issuance of certificate of incorporation It is only upon issuance of the certificate of incorporation that the corporation acquires a juridical personality distinct and separate from its members or SHs, with power to sue and be sued and to perform all other legal acts Corporation DEEMED incorporated from the date SEC issues the certificate of incorporation

Not every defect precludes a de jure corporation; as long as the mandatory requirements for incorporation are substantially complied with, a corporation de jure will be formed A de jure corporations due incorporation cannot be successfully attacked even in quo warranto proceedings

De facto corporations Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n) If there is no substantial compliance with the mandatory requirements for incorporation, a corporation be deemed to exist as a person distinct and separate from its members or SHs if all of the ff are present: (1) there must be an apparently valid statute (2) there has been colorable compliance with the legal requirements in GF (3) there has been user of corporate powers i.e. transaction of business in some way as if it were a corporation if all are met by the defectively formed corporation, it will be considered a de facto corporation

Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n) 6. Amendment of AOI Sec 16: any provision may be amended by: o majority vote of the Board of Directors AND

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the due incorporation of a de facto corp cannot be collaterally attacked either by the State or by private individuals such incorporation must be attacked by the State through a quo warranto proceeding where requirements for a de jure or de facto corporation are not present, then the associates may be held liable as partners for obligations of the alleged corporation o unless estoppel can apply (Sec 21)

as though it were never passed, an operative fact which cannot justly be ignored. But a corporation created under a statute declared void it is given life by other valid acts or in the constitution itself. The color of authority requisite to the organization of a de facto municipal corporation may be: (1) an unconstitutional law, upheld for a time or not yet declared void, provided a warrant for its creation is found in some other valid law or recognition of its existence by the general laws or the constitution. (2) there can be no de facto municipal corporation unless either directly or potentially such a de jure corporation is authorized by some legislative fiat (3) there can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face (4) there can be no de facto corporation created to take the place of an existing de jure corporation.
3. Substantial or colorable compliance Difficult to ascertain when compliance with the legal requirements is substantial or only colorable or less than colorable In Hall v Piccio, unless certificate of incorporation has been issued, there can be no de facto corporation While in the process of incorporation, there can be no substantial nor colorable compliance, and thus no de facto corporation (Cagayan Fishing v Sandiko)

1. User of corporate powers A slight evidence of conducting business is deemed sufficient It is not necessary that the dealings between the parties should be on a corporate basis Ex. Buying a lot and constructing and leasing a building will constitute sufficient user of corporate powers 2. Law subsequently declared void GR: there can be no de facto corporation under a statute subsequently declared unconstitutional Exception: where the corporation in GF did all that is required under the statute to form a valid corporation

Municipality of Malabang v Benito. Balindog, mayor of Malabang,

files an action to nullify EO 386 which created the municipality of Balabagan, of which the mayor is Benito. They invoke SCs ruling in Pelaez v Audito General declaring as unconstitutional RA2370 or the Barrio Charter Act and Sec 68 of the Administrative Code for being a statutory denial of the Presidents authority to create a new barrio and for being an undue delegation of legislative powers, respectively. Benito counters that Pelaez does not apply to them because the municipality of Balabagan is a de facto corporation, having been created under the color of statute before it was declared unconstitutional, and as a de facto corporation, its existence cannot be collaterally attacked. H: Balabagan is neither a de facto nor a de jure corporation. The true basis for denying to a corporation de facto status is the absence of any legislative act giving life to its creation. An unconstitutional act is not a law; it confers no rights, it imposes no duties, it affords no protection, it creates no office. EO 386 thus created no office, although acts done by the office are not exactly a nullity. The EO is as inoperative legally

Harrill v Davis. Davis, Mann, R. Davis, and Knight agreed to take specified shares in a $10000 enterprise for the purpose of building a cotton gin and carrying on the business of buying, ginning, and selling cotton and to organize a corporation for this purpose. They did business with Harrill, buying material and procure labor and build their cotton gin. They purchased lumber and other materials from Harrill after the gin was completed and after they commence operations. As a result, they incurred indebtedness of over $5000, $4700 of which were incurred before they had filed their articles of incorporation. During all this time, the four treated themselves as a corporation, and so did Harrill. H: They did not become a corporation de jure just because they failed to file their articles of incorporation. Nor did they become a corporation de facto before they filed the articles to such an extent as to exempt them from individual liability because they did not before that time secure any color of legal organization as a corporation under an charter or enabling act; they

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were liable individually as partners for that part of the claim falling prior to the filing of the articles. Hall v Piccio. The Halls, Browns, Chapman and Abella signed and acknowledged articles of incorporation of the Far Eastern Lumber and Commercial Co Inc. Pending action on the articles, the Browns, Chapman, and Abella sued the Halls in the TC to dissolve what they call an unregistered partnership because of bitter dissension, mismanagement, and fraud. Hall questions the jurisdiction of the TC over their dispute. Judge Piccio then ordered the dissolution of the partnership and appointed a receiver. The Halls filed a counterbond to discharge the receiver which was denied by Piccio. I: W/N the TC had jurisdiction over the case, considering Far Eastern Lumber was a de facto corporation which can only be dissolved in a quo warranto proceeding in accordance with the Corpo Law. W/N the Browns, upon signing the articles of inc, are estopped from claiming that it is not a corporation. H: (1) the rule on de facto corps are not applicable to the case. Not having obtained the certificate of incorporation, Far Eastern Lumber and even it stockholders cannot claim in GF to be a corporation. It is the issuance of the certificate of incorporation that calls a corporation into being. The immunity of collateral attack is granted to corps claiming in GF to be a corporation. Furthermore, the corporation is not a party to the suit, it being a litigation bet stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jure corp may be terminated in a private suit between the stockholders without need for interference by the State. The petitioners also have their remedy by appealing the order of dissolution at the proper time. (2) Far Eastern not being a de facto corp, the principle of corporation by estoppel doesnt also apply. The complaining partners have not represented themselves that they were incorporated, and nobody was led to believe anything to his prejudice and damage. Corporation by Estoppel In corporation by estoppel, a party is precluded or estopped from denying corporate existence May apply to a third party or the alleged corporation

On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. (n)

When a 3rd person entered into a contract with an association which represented itself a corporation, the association will be estopped from denying its corporate personality if sued by the 3rd party When a 3rd person who dealt with an unincorporated association as a corporation may be precluded from denying its corporate existence if sued by the alleged corporation, even if he did not know about the defective incorporation When business associates fraudulently misrepresent the existence of a corporation, and a 3rd party contracts without knowledge of the defective incorporation, the 3rd person may sue the associates as general partners o If the business associates and the 3rd person in the above example had no knowledge of the defective incorporation, then the 3rd person cannot hold the associates liable as partners (i.e. personally liable) Estoppel also applies even in a case where the alleged corporation did not deal with the plaintiff suing on a tort Difference bet de facto and estoppel: o where all requisites of a de facto corporation are present, it will have the status of de jure o But if any of the requisites is absent, then estoppel may be applied only if any of the parties is estopped from defending

Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

ABC v Standard Products. Asia Bank is the creditor of Standard Products Co. It seeks to recover the balance due on a promissory note issued by the latter iao P24736.47. TC ruled IFO Asia Bank. Standard appeals, contending that ABC failed to prove affirmatively the corporate existence of Standard. H: GRin the absence of fraud, a person who contracted with an association in such a way as to recognize and admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of such contract or dealing, unless its existence is attacked for causes arising since making the contract or other dealings. Standard already recognized the corporate existence of Asia Bank by making a promissory note in its favor and making partial payments, and is thus estopped from denying its corporate existence. Cranson v Intl Business Machines. Cranson invested in a new business corp to be created. He purchased and received stock certificates. The business was conducted as if it were a corporation through corporate bank accounts, corporate books

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etc. Cranson was also elected President of the corporation and all transactions made by him was for the account and as officer of the corporation. However, the articles of incorporation which had been acknowledged and signed prior to May 1 1964 were only filed on Nov 24 1961. During that time, the Bureau purchased 8 typewriters from IBM, and partials payments had already been made. On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation and that Albion Cranson was a partner in the business and thus personally liable for the debts, IBM sued Cranson for the balance due on electric typewriters purchased by the Bureau. I: W/N an officer of a defectively incorporated corporation may be subjected to personal liability under the circumstances of the case. H: No. The doctrine of de facto corporations applies only on (1) existence of a law authorizing incorporation (2) effort in GF to incorporate (3) actual user or exercise of corporate powers. The doctrine of estoppel to deny corporate existence is generally employed where the person seeking to hold the officer personally liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit its existence as a corporate body. It has been generally held that where there had been a failure to comply with a requirement which the law declared to be a condition precedent to the existence of a corporation, the corporation was not a legal entity and was therefore precluded from suing or being sued as such. Substantial compliance with the formalities of corporation law, which are condition precedent to corporate existence, was not only necessary for the creation of a corporation de jure, but was also a prerequisite to the existence of a de facto corporation or a corporation by estoppel. The doctrine of estoppel cannot be successfully invoked unless the corporation has at least a de facto existence, and a de facto corporation cannot be recognized in violation of a positive law. There is a broad distinction between those acts made necessary by statute as a prerequisite to the exercise of corporate powers and those acts required of individuals seeking incorporation. On the other hand, where the corporation has obtained legal existence but has failed to comply with a condition subsequent to corporate existence, the Court has held that such nonperformance afforded the State the right to institute proceedings for the forfeiture of the charter, but that such neglect or omission could never be set up by the corporation itself, or by its members and stockholders, as a defense to an action to enforce their liabilities. It is clear that when a defect in the incorporation process resulted from a failure to comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a creditor to estop the corporation, or the members or stockholders thereof, from denying its corporate existence. Where the parties had assumed corporate existence and dealt with each other on that basis, the Court will apply the estoppel doctrine on the theory that the parties by recognizing the organization as a corporation were thereafter prevented from raising a question as to its corporate existence. Where there is a concurrence of the three elements necessary for the application of the de facto corporation doctrine there exists an entity which is a corporation de jure against all persons but the State. On the other hand, the estoppel theory is applied only to the facts of each particular case and may be invoked even where there is no corporation de

facto. Thus in the case, IBM dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, it is thus estopped from asserting that the Bureau was not incorporated at the time the typewriters were purchased. Cranson is therefore not personally liable for the balance of the purchase price of the typewriters. Salvatierra v Garlitos, et. al. Salvatierra entered into a lease contract with the Phil. Fibers Producers Co. Inc, allegedly a corporation duly organized and registered under the laws of RP, with Refuerzo as its president. Among the obligations in the contract were: period of lease is 10 years; land would be planted with kenaf, ramie, or other crops; the lessor would be entitled to 30% of net income and lessee should declare at the earliest possible time the income derived therefrom. PFP failed to fulfill the obligations and Salvatierra sued the corp and Refuerzo in the RTC for an accounting, rescission and damages. TC granted her petition, but Refuerzo countered that decision was void with respect to him, there being no allegation as to his personal liability and that while he was a signatory to the contract, he did so in his capacity as president. TC granted his motion and released all properties levied by its earlier judgment. Salvatierra appealed, claiming that her failure to allege his personal liability was because all this time she was under the impression that the PFP represented by Refuerzo was a duly registered corporation, but a subsequent inquiry with the SEC revealed otherwise. H: GRa person who contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such dealing but this doctrine may not be held to be applicable where fraud takes a part in the transaction. A stockholder cannot be held liable for any financial obligation by the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. This is because such unincorporated association is incompetent to act and appropriate for itself the powers and attributes of a corporation and cannot create agents or confer authority. Thus those who act or purport to act as its representatives or agents do so without authority and at their own risk. Considering that Refuerzo was the moving spirit behind the consummation of the lease agreement by acting as the representative of PFP, his liability cannot be limited or restricted to that imposed upon corporate shareholders. In acting in behalf of a corporation he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights if any arising out of the transaction. Chaing Kai Shek School v CA (172 S 389). Elementary schoolteacher Fausto Oh, a teaching in the Chiang Kai Shek School in Sorsogon for 33 years, was summarily dismissed from the school. In her suit against the school she demanded separation pay, SSS benefits, and damages. She impleaded the other officials of the school. TC dismissed the complaint but was reversed by the CA which held the school liable, but not the school officials. I: W/N a school that has not been incorporated may be sued by reason alone of its long continued existence. H: School may be sued. The school is

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governed by Act 2706 as amended by CA 180. Having recognized by the government, it was under obligation to incorporate under the Corporation Law within 90 days from recognition. Although in existence since 1932, it had never made any attempt to incorporate, and thus cannot invoke its own noncompliance with the law to immunize it from Ohs complaint. Having contracted with Oh for 32 years while representing itself as possessed of juridical personality, the school is now estopped from denying such personality. LBC Express, Inc. v CA (236 S 602). Carloto, President of Rural Bank of Labason, was instructed to fly to Manila to meet with BSP officials on the payment plan for rediscounting of its obligations. He requested his sister to send P1000 as pocket money for the trip and include some rediscounting papers through the petitioner LBCs Dipolog Office. The documents however, arrived at Carlotos residence but without the cash. Despite follow-up, the cash was only received after a month and after his scheduled trip to Manila. LBC claims Carloto was not at home upon delivery and as a result the money was returned to LBC Dipolog. Carloto claims that because of the delay in sending the money he failed to submit the required papers and his bank was made to pay a P32000 fine. He then sued LBC for damages, in his personal capacity, with the Rural Bank as one of the plaintiffs. TC ruled ifo Carloto and the Rural Bank. I: W/N the Rural Bank of Labason should be awarded moral damages. H: No. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no sense; therefore, it cannot experience physical suffering and mental aguish. Mental suffering can only be experienced by one having a nervous system and it flows from real ills, sorrows, and all griefs of lifeall of which cannot be suffered by the corporation. Lozano v delos Santos (274 S452). Case involves a dispute between two leaders of jeepney associations. Lozano is president of Kapatirang Mabalacat-Angeles JDA or KAMAJDA while Anda is president of the Samahang Angeles-Mabalacat JODA or SAMAJODA. The two organizations merged to form the Unified Angeles-Mabalacat JODA or UMJODA. Lozano and Anda ran for president of the new organization and Lozano won. Anda protested, alleging fraud and refused to recognize the results of the election. Anda also continued collecting dues from the members of the SAMAJODA despite several demands to desist. Lozano sues Anda in the TC, but Anda claims TC has no jurisdiction, only the SEC. MCTC rules ifo of Lozano, but was reversed upon appeal by the RTC, which held the dispute to be intracorporate. I: W/N the SEC or the TC has jurisdiction over the dispute. H: Not intracorporate; SEC has no jurisdiction. The jurisdiction of the SEC is determined by two elements: (1) status or relationship of the parties, which must arise out of intracorporate or partnership relations between the parties (2) nature of the question which is the subject of the controversy, which requires that the dispute be intrinsically connected with the regulation of the

corporation/association or deal with the internal affairs of the corporation. There is no intracorporate dispute between the parties in this case, because it arose out of their plan to consolidate their associations, which is still a proposal and has not yet been approved by the SEC nor has the articles been submitted. Consolidation only becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. Thus the KAMAJDA and the SAMAJODA are two separate entities, and the dispute of the parties in the case is not within any of the associations mentioned. It is between members of separate and distinct associations. The doctrine of incorporation by estoppel advance by Anda is also not applicable, which is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form corporations and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation and who have knowledge that it is not incorporated, there is no corporation by estoppel. Lim Tong Lim v Phil. Fishing Gear Industries, Inc (317 S 728). In behalf of Ocean Quest Fishing Corporation, Chua and Yao entered into a contract for the purchase of fishing nets from Phil Fishing Gear Industries Inc. Lim Tong Lim was their joint venture partner but was not a signatory to the agreement. Chua and Yao failed to pay for the nets; and PFGI sued them and included Lim Tong Lim in their capacities as general partners, on the allegation that Ocean Quest was a nonexistent corporation upon inquiry with the SEC, and moved to attach their properties. Lim filed a counterclaim and crossclaim and moved for the lifting of the writ. TC ruled ifo PFGI, holding that a partnership existed between the three. CA affirmed the TC ruling and held that Lim is a partner of Chua and Yao and is liable as such for the payment of the nets. Lim appeals, claiming he did directly participate in the negotiations and was not even a signatory to the agreement, and was merely a lessor and not a partner. I: Is Lim a partner? H: Yes. It is clear that Chua Yao and Lim together set up the fishing business, buying boats and financed by a loan from Lims brother. The compromise agreement reveals the intention to divide the excess/loss from proceeds of the sale of the boats. The boats, financed by borrowed money, fell under the common fund which indicates the existence of a partnership relation between the three. I: Is Ocean Quest a corporation by estoppel, exonerating Lim from liability? H: No. The doctrine of estoppel applies only to the alleged corporation and to the third party. As to the alleged corporation, if it represents itself to be a corporation, will be estopped from denying it corporate capacity in a suit against it by a third person who relied in GF on such representation. As to the third party who, having an association to be incorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. Lim definitely benefited from the use of the nets inside the FB Lourdes, which was found to be an asset of the partnership. Although it was never legally formed for unknown reasons, under the law on corporation by estoppel, those acting in behalf of a

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corporation and those benefited by it, knowing it to be without valid existence, are held to be liable as general partners. Although it is also true that Lim did not directly act in behalf of the corporation, since he reaped the benefits of the contract entered into by Chua and Yao with whom he had an existing relationship, he is covered by the doctrine of corporation by estoppel. Intl Express Travel v CA (343 S 674). Kahn is the president of the Phil Football Federation. He contracted with the International Express Travel for the travel arrangements for the football team to compete in the SEA Games in KL, including matches in China and Australia. Amount due to the travel agent reached P449654.83, of which P176467.50 were paid. Kahn also paid P50000 from his personal funds. The remaining balance being unsatisfied, the travel agent sued Kahn both in his personal and official capacity as well as the Federation in the RTC. Kahn claims he merely acted as agent for the Federation, and that the Federation being a corporation, he should not be liable. CA overrules TC and exonerates Kahn, while recognizing the corporate existence of the Federation. I: Is the Federation a corporation? If not, is it at least a corporation by estoppel? H: No. Although the Federation derives its existence from RA 3135 or the Charter of the Phil Amatuer Athletic Assoc and PD 604 which recognized the juridical existence of national sports associations, such corporate status does not automatically take effect by the mere passage of the laws. This is because before the corporation may acquire juridical personality, the State must give its consent either in a special law or a general enabling act. The laws cited merely recognized the existence of the associations and provided the manner by which they acquire juridical personality. Such entity must first be recognized by the accrediting organization (PAAF and the Dept of Youth and Sports Devt. The bylaws presented by Kahn does not prove that the Federation has indeed been recognized and accredited. Thus, Kahn, falling under a person acting or purporting to act in behalf of the corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into as its agent. It also does not fall under a corporation by estoppel, which was mistakenly applied by Kahn. It applies only to a third party when he tries to escape liability on a contract from which he had benefited on the irrelevant ground of defective incorporation. Loyola Grand Villas Homeowners south Assoc Inc (South Assoc) v CA (276 S 681). LGVHAI is the association of homeowners and residents of the Loyola Grand Villas, duly registered with the HIGC as the sole homeowners assoc in the LGV, but did not file its corporate by-laws promptly. When it did attempt to file, 2 other assoc were already in existencethe North Assoc and the South Assoceach with 5 registered homeowners who were also incorporators and officers thereof. HIGC claims the LGVHAI has been automatically dissolved for its failure to file its corporate by-laws and non-user of the corporate charter. LGVHAI files a complaint with the HIGC, which the latter recognizes in its ruling and revokes the certificates of registration of the North and South Assoc. South appeals to Appeals Board of HIGC, and upon dismissal,

appeals with CA. CA dismisses appeal, holding that although the Corpo Code does not provide for automatic dissolution of the corporation as a result of delay in filing of bylaws, the SEC has the power to suspend or revoke certificates of registration, one of the grounds of which is failure to file by-laws. But since there was no showing the LGVHAIs registration was validly revoked, it continued to be the recognized assoc in LGV. I: W/N LGVHAIs failure to file its by-laws within the period prescribed by the Corpo Code had the effect of automatically dissolving the corporation? H: No. Sec 46 requiring filing of bylaws reveals the legislative intent to attach a directory, not a mandatory, meaning of the word must. By-laws may be necessary for the government of the corporation but these are merely subordinate to the articles of incorporation as well as to the Corpo Code and related statutes. In some cases, the by laws were considered unnecessary to corporate existence or to the valid exercise of corporate powers. The failure to exercise the power will be ascribed to mere non-action and will no render void any acts of the corporation which are otherwise valid. There can also be no automatic dissolution without notice and compliance with the requirements of due process. The Court also stressed that substantial compliance are mere conditions subsequent and not prerequisites for acquisition of corporate responsibility.

Internal Organization of Corporation 1. By-laws Contractual significance

By-laws are the product of the agreement of the SH or members and establish the rules for the internal government of the corporation By-laws are subordinate to the AOI, Corpo code and the related statutes If by-laws are inconsistent with any of these, it has no binding effect Power to adopt and amend by-laws is an inherent power of every corporation (Gokongwei case) Unlike AOI, are meant to be an intramural document to govern the relationship between and among members of a corporate family Intended for the protection of the corporation and prescribes regulations, not restrictions GR: although the power to adopt by-laws is an inherent right, the by-laws cannot contravene the law (El Hogar case)

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Validity or reasonableness of the by-laws is a question of law (Gokongwei case) Provisions of AOI prevail over the by-laws Board of Liquidators vs. Kalaw: it is possible for an express provision of the by-law to be violated and the board may, in certain corporate actions, bind the corporation despite it being contrary to the by-laws o Whether through board action or authorization or through ratificatory act of the SHs, so long as there is corporate approval through the board, be it implied or express, it is valid to bind the corporation GR: 3rd persons are not bound by the by-aws o Exception: where they have actual or constructive knowledge o

approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)

Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: -- x X x -5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code -- x X x -TITLE V - BY LAWS Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be

Requisites of by-laws: (1) By-law provisions cannot contravene law (2) By-law provisions cannot contravene the AOI (3) By-laws must be reasonable and cannot discriminate Procedure for Adoption of by-laws (Sec. 46): Within one (1) month after receipt of official notice of issuance of certificate of incorporation o Loyola Grand villas case: Sec 46 is merely directory, and thus failure to file by-laws within the period does not imply the demise of the corporation, but is a mere ground for the SEC to revoke the certificate It may also de adopted and filed prior to incorporation o must be approved, signed by all incorporators and filed with the SEC together with the articles vote required to adopt: at least majority of outstanding capital stock or members of non-stock corp signed by SHs and kept in principal office certified copy filed with SEC attached to AOI becomes effective only upon issuance of the SEC certification Code allows adoption and filing of by-laws even prior to incorporation, but must be approved by ALL incorporators and submitted to the SEC together with the AOI

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By-laws may be submitted within one (1) month after receipt of notice of issuance of the certificate of incorporation o Failure to do so may result in suspension or revocation of certificate SEC may disapprove by-laws which are inconsistent with law Sec 46 provides clearly that in ALL cases, the by-laws shall be effective only upon issuance by the SEC of a certification that these are not inconsistent with law Once approved by the SEC, by-laws will bind the corporation, and all SHs and members including those who voted against the adoption

9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) Sec 47 enumerates matters which may be included in the bylaws By-laws may provide for the time, place and manner of directors meetings By-laws may provide for time and manner of SH meetings (place of SH meeting is fixed by law at the principal office of the corporation Code requires the by-laws provide for at least three (3) officers: o President o Secretary o Treasurer o Additional officers

Basic Contents of By-Laws: Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws;

Other matters that may be included in by-laws: designation of time when voting rights may be exercised by SH of record (24) (b) providing for additional officers (25) (c) provisions for compensation of directors (30) (d) creation of an executive committee (35) (e) date of annual meeting or provisions for a special meeting of SHs/members (50 & 53) (f) quorum on meetings of SHs/members (52) (g) providing for presiding officer at meetings of directors/trustees and of SHs/members (54) (h) procedure for issuance of stock certificates (63) (i) providing for interest on unpaid subscriptions (66) (j) entries to be made in stock and transfer book (74) (k) providing for meetings of members outside the principal office (24) Other matters that may be included in either the AOI or the by-laws: (a) (b) (c) (d) cumulative voting in non-stock corporations higher quorum for valid board meeting limiting, broadening or denial of right to vote and voting by proxy, for non-stock corporations transferability of membership in non-stock corps (a)

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(e) termination of membership in non-stock corps (f) manner of election and term of office of trustees and officers in non-stock corps (g) manner of distribution of assets in non-stock corps upon dissolution (h) staggered board in educational institutions Matters that must appear in BOTH AOI and BLs: (a) restrictions on right to transfer shares in close corporations (98) Matters that CANNOT be in the by-laws: (a) classification of shares and preferences to preferred shares (b) founders shares (c) redeemable shares (d) purposes of the corporation (e) corporate term of existence (f) capitalization of stock corporations (g) corporate name (h) denial of pre-emptive rights Amendments to By-Laws Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of twothirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by

the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) who can amend by-laws: o owners of at least a majority of outstanding capital stock or members of non-stock corp 2/3 of outstanding capital stock or members may delegate to the board the power to amend or repeal by-laws o only then can the board amend by majority vote In the Kalaw case, the SC held that contract entered into without strict compliance with the by-laws may, due to long acquiescence and usage, be binding on the corporation, which may be deemed to have waived such compliance. In the Fleischer, since by-laws operate merely as internal rules among SHs, they cannot affect or prejudice 3rd persons who deal with the corporation, unless they have knowledge of the same

Fleischer v Botica Nolasco. Fleischer was the owner and transferee, for valuable consideration, of 5 shares of stock of the Botica Nolasco Corp, transferred to him by the original owner. The Corporation however invokes Article 12 of its corporate by-laws, which effectively gives the corporation a preferential right of the shares in question. It claims it has a preferential right to buy the shares from the original owner. When Fleischer requested Botica to register his shares, the latter refused, and Fleischer sues in the TC. TC ruled ifo Fleischer, holding that the questioned Art 12 is in direct conflict with Sec 13 of Act 1459. I: W/N Art 12 of the by-laws of the corporation is in direct conflict with the Corporation Law? H: Yes. The Corpo Law at the time provides in Sec 13 that every corporation has the power to make their own by-laws, provided they are not inconsistent with any existing law, governing among others the transfer of its stock. This section does not contemplate any restriction on how and to whom the shares may be transferred or sold, nor does it suggest any discrimination ifo or against a certain purchaser. The holder of these shares, as owner of personal property, is at liberty to dispose of them to anyone he pleases, without any limitation other than in the general law. Every owner of corporate shares has the same uncontrollable right to alienate them which attaches to the ownership of any other species of property. Furthermore the SC says Sec 13 should be harmonized with Sec 35 of the same law, which requires that shares of capital stock are personal property transferable by delivery of the certificate indorsed by the transferor-owner. For a transfer to be valid, it should be entered into the books of the corporation. GR is that bylaws of a corporation are valid if they are reasonable and calculate to carry into effect the objectives of the corporation, and always within the limits of the charter. They must be subordinate to the Constitution and the laws of the land, must not infringe public policy or be hostile to public welfare, must not disturb vested rights or

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impair obligations of contracts. It cannot take away or abridge the substantial rights of a stockholder. Under the statute authorizing by-laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale. The right of unrestrained transfer of shares inheres in the very nature of a corporation. The right to impose restrictions on transfer of shares must be conferred upon the corporation be the governing statute or by the articles of incorporation. It cannot be done by a by-law without statutory or charter authority. Therefore by-laws or other regulations restraining such transfers, unless derived from statutory authority, would be regarded as impositions in restraint of trade. The by-law in question cannot also have any effect on Fleischer, since he had no knowledge of the by-law when the shares were transferred to him and obtained the same in GF and for value. When no restriction is placed by law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice or wasnt aware. A by-law of a corporation which provides that transfer of stock shall not be valid unless approved by the board for instance, or any other restriction imposed, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons. Mandamus will lie in favor of Fleischer to compel the Treasurer of Botica to register his shares. Govt of Phils. V El Hogar. (for the facts, goto corporate powers section) I: W/n the by-laws of el Hogar, which empowers the board to cancel shares and return to the owner the balance resulting from the liquidation, by a vote of absolute majority of the members. H: The by-law provision is an absolute nullity, since it is in direct conflict with the Code which declares that the board shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or forfeiture of stock. While it is a nullity, it is insufficient to necessitate the involuntary dissolution of the corporation through a quo warranto proceeding. It cannot be enforced even if the directors were to attempt to do so. I: W/n a by-law provision which allows directors to fill vacancies in the directorate by choosing suitable persons from among the SHs to avert a failure of a quorum in SH meetings is valid H: The practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to the personality of individuals chosen by the directors to fill the vacancies in the body.

I: W/n a by-law provision which authorizes the distribution to the directors of el Hogar 5% net profit in proportion to their attendance at board meetings is valid H: The Corporation Law does not undertake to prescribe the rate of compensation for the directors of the corporation. The power to fix compensation is left to the corporation itself, to be determined in its bylaws. Pursuant to this statutory authority, el Hogar has fixed the compensation for its directors in its by-laws. If a mistake has been made, or the rule adopted in the byaws has been found to work harmful results, the remedy is in the hands of the SHs who have the power at any lawful meeting to change the rule. I: W/n 2 by-law provisions which require (1) persons elected to the board be holders of shares with a paid-up value of P5K and (2) that directors who loan from the association waive their right as SHs are valid H: the Code specifically gives power to the corporation to provide in its bylaws for the qualifications of directors, and the requirement of security from them for the proper discharge of the duties of their office, is highly prudent and in conformity with good practice. The code also has safeguards on directors from making loans to themselves, designed to prevent the possibility of looting of the corporation. The by-law provision is consistent with the code on this one. Valid. 2. Election of directors and officers; commencement of business Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. formally organize includes not only adoption of by-laws but also the establishment of the Board of Directors which will administer the affairs of the corporation and exercise its powers

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the AOI names the initial members of the Board who are to act until the 1st set of directors are duly elected and qualified o this interim board can perform the functions of a regular board until the date of the election of directors o once elected, the directors must complete the organization of the corporation by electing the officers

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) after approval of by-laws, and the directors and offices elected, the corporation is ready to commence business it must do so within 2 years from date of incorporation; o otherwise, its corporate powers will cease and will be deemed dissolved

3. Annual financial statements Once organized, a corporation is required to keep proper accounting records and to file financial statements with the SEC annually

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