BLAR101

ARTICLES OF INCORPORATION (AI)

 DEFINITION:
-the document prepared by the persons establishing a
corporation and filed with the SEC containing the matters
required by he Corporation Code.
-defines the charter of the corporation and the contractual
relationships between the State and the corporation, the
stockholder and the State, and between the Corporation and
its stockholders.
 SIGNIFICANCE:
1. The issuance of the certificate of incorporation signals
the birth of the corporation’s juridical personality;
2. It is an essential requirement for the existence of a
corporation.
 CONTENTS:
1. Corporate Name – the corporation acquires
juridical personality under the name stated in the
certificate of incorporation. It is the name of the
corporation which identifies and distinguishes it
from other corporations, firms or entities.
2. Purpose Clause-there can be primary and
secondary purposes
 Limitations:
1. Must be lawful;
2. Stated with sufficient clarity;
3. If there is more than one purpose, the primary as
well as the secondary purpose must be specified;
4. Purposes must be capable of being lawfully
combined.
3. Principal office
-the AI must state the place where the principal office is to be
established or located, which place must be within the
Philippines
-must state the
4. Term of existence
-the corporate life may be reduced or extended by amendment of
the AI
 Limitations:
1. The term shall not exceed 50 years in any one instance;
2. The amendment is effected before the expiration of the
corporate term of existence for after dissolution by expiration
of the corporate term there is no more corporate life to
extend;
3. The extension cannot be made earlier than 5 years prior to
the expiration date unless there are justifiable reasons
therefore as determined by the SEC;
5. Incorporators (Section 5)
6. Directors and Trustees
-The board of directors is the governing body in a stock corporation while
the board of trustees is the governing body for a non-stock corporation.
 Matters required to be stated in the AI:
a. Statement of the names, nationalities and residences of the
incorporating directors and must show that at least majority of the
incorporators are residents of the Philippines;
b. The number of directors, trustees which shall not be less than 5 but
not more than 15.
 Exceptions:
a. Educational corporations registered as non-stock corporation whose
number of trustees though not less than 5 and not more than 15
should be divisible by 5;
b. In close corporations where all the stockholders are consirdered as
members of the board of directors thereby effectively allowing
twenty members in the board.
c. The incorporating directors or trustees shall hold office until their
successors are duly elected and qualified;
d. Must own at least 1 share of the capital stock of the corporation of
which he is a director
7. Capitalization
a. The number of shares and kind of shares in to which it is
divided;
b. The amount of the authorized capital stock in lawful
money of the Philippines;
c. In case the shares are par value shares, the par value of
each;
d. The names, nationalities and residences of the original
subscribers;
e. The amount subscribed and paid by each on his
subscription;
f. Sworn statement of the treasurer elected by the subscribers
showing that at least 25% of the authorized capital stock
has been subscribed and that at least 25% of the
subscribed capital stock has been paid
 SECTION 16: AMENDMENT OF THE AI
 CORPORATE CHARTER- an instrument or authority from the
sovereign power bestowing the right or privilege to be an act as a
corporation.
 PROCEDURE IN AMENDING AI:
1. Resolution by at least majority of the BoD/BoT;
2. Vote or written assent of the stockholders representing at least 2/3
of the OCS/members;
3. Submission and filing with the SEC
 SECTION 17. GROUNDS FOR REJECTION OF THE AI OR
AMENDMENT THERETO
1. That the AI or any amendment thereto is not substantially in
accordance with the form prescribed;
2. That the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution;
3. That the Treasurer’s Affidavit concerning the amount of the capital
stock subscribed and or paid is false;
4. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules.
 SECTION 18. CORPORATE NAME
-the right to use its corporate and trade name is a property right (a right
in rem)
 Statutory Limitations: the proposed name shall not be:
1. identical;
2. Deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law;
3. Patently deceptive, confusing or contrary to law.
 SECTION 19. COMMENCEMENT OF CORPORATE EXISTENCE
-a corporation commence to have juridical personality and legal
existence only from the moment the SEC issues to the incorporators a
CERTIFICATE OF INCORPORATION under its official seal.
 SECTION 20. DE FACTO CORPORATIONS
-a corporation which actually exists for all practical purposes as a
corporation but which has no legal right to corporate existence as
against the State.
-it is one which has not complied with all the requirements necessary to
be a de jure corporation but has complied sufficiently to be accorded
corporate status as against third parties although not against the State.
 REQUISITES:
1. The existence of a valid law under which it may be incorporated;
2. A bona fide attempt in good faith to incorporate under such law. Thus, issuance of a
CERTIFICATE OF INCORPORATION is a minimum requirement.
3. Actual use or exercise in good faith of corporate powers;
4. It must act in good faith;
 SECTION 21. CORPORATION BY ESTOPPEL
-has no real existence in law
-neither a de jure or de facto but a mere fiction existing for a particular case
-an unincorporated association which represented itself to be a corporation will be estopped from
denying its corporate capacity in a suit against it by a third person who relied in good faith on such
representation, liabilities and damages incurred or arising as a result thereof.
-when a corporation is sued on any transaction, it cannot be allowed to use as a defense its lack of
corporate personality
 SECTION 22. EFFECTS OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS
INOPERATION OF A CORPORATION
1. If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within
two 92) years from the date of its incorporation, its corporate
powers cease and the corporation shall be deemed dissolved.
2. If a corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period for at
least five 95) years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of incorporation.
BOARD of DIRECTORS/TRUSTEES/OFFICERS
 SECTION 23. BOARD OF DIRECTORS AND TRUSTEES
 QUALIFICATIONS:
1. STOCK CORPORATIONS-ownership of at least 1 share of
the capital stock of the corporation in his own name; for
NON-STOCK CORPORATIONS-only members of the
corporation can be elected to the Board of Trustees
2. A majority of the directors/trustees must be residents of the
Philippines;
3. Must have not been convicted by final judgment of an
offense punishable by imprisonment for a period exceeding
6 years, or a violation of the Corporation Code committed
within 5 years from the date of his election;
4. Only natural persons can be elected as directors or trustees;
5. Must be of legal age;
6. Other qualifications as maybe prescribed in special laws or
regulations or in the by-laws of the corporation.
 TERM OF OFFICE
-shall serve for a term of one year and until their successors are elected
and qualified
 HOLDOVER PRINCIPLE
-if no election is conducted or no qualified candidate is elected, they shall
continue to act as such in a hold-over capacity until an election is held
and a qualified candidate is so elected
 SECTION 24. ELECTION OF DIRECTORS OR TRUSTEES

STOCK CORPORATION NON-STOCK CORPORATION

PRESENCE DURING ELECTION
-OWNERS OF A MAJORITY OF THE
OCS
MANNER OF VOTING
-CUMULATIVE VOTING IS
MANDATORY
-MAJORITY OF THE MEMBERS
ENTITLED TO VOTE
-CUMULATIVE VOTING IS NOT
GENERALLY AVAILABLE UNLESS
ALLOWED BY THE AI
 METHODS OF VOTING
1. STRAIGHT VOTING-every SH may vote such
number of shares for as many persons as there are
directors to be elected;
2. CUMULATIVE VOTING FOR ONE CANDIDATE
-a SH is allowed to concentrate his vote and give one
candidate as many votes as the number of directors to be
elected multiplied by the number of his share shall equal
3. CUMULATIVE VOTING BY DISTRIBUTION
-a SH may cumulate his shares by multiplying also the
number of his shares by the number of directors to be
elected and distribute the same among as many
candidates as he shall see fit.
 SELF-DEALING DIRECTORS,TRUSTEES AND OFFICERS
-those who personally contract with the corporation in which they are
directors, trustees or officers
 Such contracts are VOIDABLE, at the option of the corporation
UNLESS:
1. The presence of such director/trustee in the board meeting
approving the contract was NOT necessary to constitute a quorum
for such meeting;
2. The vote of such director/trustee in the board meeting approving
the contract was NOT necessary for the approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of an officer, there was previous authorization by the board
of directors.
 Where any of the first two conditions is absent, said contract may be
ratified by the vote of the SHs representing at least 2/3 of the OCS or
2/3 of the members in a meeting duly called for the purpose,
provided that full disclosure of the adverse interest of the
director/trustee involved is made at such meeting and the contract
is fair and reasonable.
 INTERLOCKING DIRECTORS
-one,some or all of the directors in one corporation is/are a director in
another corporation.
 Contracts are VALID, provided that:
1. The contract is not fraudulent; and
2. The contract is fair and reasonable under the circumstances.
 But if the interlocking director’s interest in one corporation or corporations
is “substantial” (exceeding 20% of the OCS),then all the conditions
prescribed in Sec.32 mustbe present with the corporation in which he has
nominal interest.
 EXECUTIVE COMMITTEE
-a body created by the by-laws and composed of not less than 3 members of
the board which, subject to the statutory limitations, has all the authority of
the board to the extent provided in the board resolution or the by-laws.
 Limitations: It cannot act on the ff:
1. Matters needing SH approval;
2. Filling up vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the Board which by express
terms is not amendable or repealable; and
5. Cash dividend declaration.
 BY-LAWS
 DEFINITION:
-rules of action adopted by the corporation for its internal
government and for the regulation of conduct, and prescribe the
rights and duties of its stockholders or members towards itself and
among themselves in reference to the management of its affairs
 When there is conflict between the AI and the By-Laws, which
shall prevail?
- The AI. The By-laws are subordinate to the Ai as well as to the
Corporation Code and other related statutes.
 Required votes in the adoption of the By-Laws:
1. Adopted PRIOR to incorporation-signed and approved by ALL
the incorporators and filed with the SEC together with the AI;
2. Adopted and filed AFTER incorporation(which must be within 1
month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC) –affirmative vote of the
SH representing at least majority of the OCS, or of at least
majority of the members
 Requisites of a valid by-laws:
1. Must not be contrary to law nor with the Corporation
Code;
2. Must not be contrary to morals or public policy;
3. Must not impair obligations and contracts;
4. Must be general and uniform in their operation and not
directed against particular individuals;
5. Must be consistent with the charter or AI; and
6. Must be reasonable, not arbitrary or oppressive.
 Are third persons absolutely not bound by the
corporation’s by-laws?
-generally, by-laws have no extra-corporate force and are not
in the nature of legislative enactments so far as thir persons
are concerned. However, a third party with actual notice of
the by-laws may expressly exclude the by-laws so that his
contract will not be affected;otherwise, he is bound thereby.
 POWERS OF THE CORPORATION
 KINDS:
1. EXPRESS-those expressly authorized by the Corporation
Code and other laws,and its Articles of Incorporation or
Charter;
2. INCIDENTAL-those that are incidental to the existence of
the corporation;
3. IMPLIED-those that can be inferred from or necessary for
the exercise of the express powers.
 Section 37. Extension/shortening of Corporate term
 Procedure:
1. Approval by a majority vote of the BOD/BoT;
2. Written notice of the proposed action and the time and place
of meeting shall be served to each SH/member;
3. Ratification by the SH representing 2/3 of the OCS/2/3 of the
members.
 Appraisal right is available to a dissenting SH
 Sec.38. Power to increase/decrease Capital Stock
 Ways:
1. By increasing/decreasing the number of shares and
retaining the par value;
2. By increasing/decreasing the par value and retaining the
number of shares;
3. By increasing/decreasing the number of shares and
increasing/decreasing the par value
 Limitations:
1. A corporation cannot lawfully decrease its capital stock if
such decrease will have the effect of relieving existing
subscribers from the obligation of paying for their unpaid
subscriptions without a valuable consideration for such
release;
2. Cannot issue stock in excess of their amount limited by
its AI;
3. Must follow the conditions and manner provided by law.
 Sec.39. Power to deny pre-emptive right
 Pre-emptive right-the preferential right of SHs to subscribe to all
issues or disposition of shares of any class in proportion to their
present shareholdings.
 Whenever the capital stock of a corporation is increased and new
shares of stock are issued, the new issue must be offered first to the
stockholders who are such at the time the increase was made in
proportion to their existing shareholdings.
 INSTANCES WHEN PRE-EMPTIVE RIGHT IS NOT AVAILABLE:
1. Shares to be issued to comply with laws requiring stock offering or
minimum public ownership;
2. Does not apply to shares that are being reoffered by the corporation
after they were initially offered together with all the shares;
3. Shares issued in good faith in exchange for property needed for
corporate purposes;
4. Shares issued in payment of previously contracted debts;
5. In cases the right is denied by the AI; and
6. Waiver of the right by the SH.