A single proprietor may do business under a

CORPORATION LAW
business name, but it does not create an
NOTES identity distinct from the person operating the
business.
Aquino Book
A proprietor who does not register his
PART I – CORPORATIONS business name as required under Act No. 3883
is subject to the following prohibitions:
Introduction to Business Organizations
a. He cannot use or sign the business
1. Types of Business Organizations:
name in connection with his business
a. Sole proprietorship
on any written or printed receipts or
b. Partnerships
any evidence of agreement or other
c. Joint accounts
documents; and
d. Business trusts
b. He cannot exhibit the business name or
e. Joint venture 1
sign thereof in plain view.
f. Cooperative
g. Syndicate It should be noted that a DTI Certificate of
h. Corporations Business Name must be submitted to the BIR
before the latter can issue a Certificate of
 The business organization under the Spanish Registration.
regime, but is not exactly the same as a
corporation, is sociedad anonima. 2.2 Merchant

Art.1, Code of Commerce

2. Sole Proprietorship.
It is a form of business organization with only Merchants are:
one proprietary owner; a single individual
conducts business under his own name or a. Those who, having legal capacity to
under a business name. engage in commerce, habitually devote
In effect, it is an unorganized business owned themselves to it.
by a person. Only his or his agent’s acts may b. The commercial or industrial
bind the business. He is the only one to share companies which may be created in
in the profits. The individual proprietor is the accordance with this code.
only one who is personally liable for business
Art. 4. Persons who possess the following
debts.
qualifications shall have legal capacity to
It is totally dependent upon the life of the
habitually engage in commerce:
sole proprietor. It has no legal personality
separate from its proprietor. a. Having completed the age of twenty-
The only available methods of obtaining one years.
funds are personal contributions of the b. Not being subject to the authority of
proprietor and loans from financial institutions the father or of the mother nor to
or private sources. marital authority.
The registration of a trade name on the name c. Having the free disposition of their
of one person does not necessarily lead to the property
conclusion that the trade name is his/hers
alone, particularly when he/she is married. By 2.3 Disqualifications under the
law, all properties acquired during the Constitution
marriage, whether the acquisition appears to
have been made, contracted or registered in The Constitution prohibits a number of
the name of one or both spouses, is presumed government officers from engaging in business
to be conjugal unless the contrary is or profession, from entering into certain
established. contracts or being financially interested in
specified transactions.
2.1 Business Name.
i. Senators and Congressmen are
A “Business Name” refers to any name that is enjoined not to be directly or indirectly,
different from the true name of an individual interested financially in any contract with,
which is used or signed in connection with or in any franchise or special privilege
his/her business on any written or printed granted by the Government during his
receipts –xxxxx- term of office. –xxxx- [Article 6, Sec. 14]
 e. They both act only through their
ii. The President, Vice-President, agents; and
Members of the Cabinet, and their deputies f. They can be organized only where
or assistants are prohibited, during their there is a law authorizing their
tenure, from practicing any profession, organization.
participate in any business, be financially
interested in any contract or franchise 4. Joint Accounts
granted by the Government –xxxx- [Article
A Joint Account is present when there is an
7, Sec. 13]
arrangement whereby merchants may interest
themselves in the transaction of other
iii. Members of the Constitutional
merchants, contributing thereto the amount of
Commissions are not allowed to engage in
capital they may agree upon, and participating
the practice of any profession or active
in the favorable and unfavorable results thereof
management of any business that may be
in the proportion they may determine. This is
affected by the functions of his office. – 2
also commonly called as “accidental
xxxx- [Article 9, Sec. 2]
partnership”.

iv. The President, Vice-President, 5. Business Trust

Members of the Cabinet, Congress,
Supreme Court and the Constitutional It is a legal relation whereby one person,
Commissions, Ombudsman are prohibited called the “trustor”, conveys a property to
during their tenure form obtaining any another to another for the benefit of a person
loan, guaranty, or other form of financial called the “beneficiary”. The person in whom
accommodation for any business purpose confidence is reposed as regards the property
from any government-owned or controlled is called the “trustee”.
bank. [Article 11, Sec. 16]
6. Joint Venture

v. The Congress shall not, except by Joint Venture is an association of persons

general law, provide for the formation, or companies jointly undertaking some
organization, or regulation of private commercial enterprise; generally all contribute
corporations. GOCCs may be created or assets and share risks.
established by special charters in the
interest of common good and subject to It is the substance rather than the form of
the test of economic viability. [ Art. 12, the agreement that determines if the parties
Sec. 16] entered into a joint venture agreement.

7. Cooperatives

A cooperative is an autonomous and duly

registered association of persons, with a
common bond of interest, who have voluntarily
3. Partnership joined together to achieve their social,
economic, and cultural needs and aspirations
There is a partnership when two or more
by making equitable contributions to the
persons bind themselves to contribute money,
capital required, patronizing their products and
property, or industry to a common fund, with
services and accepting a fair share of the risks
the intention of dividing profits among
and benefits of the undertaking in accordance
themselves.
with universally accepted cooperative
Similarities of partnerships and principles.
corporations:
8. Corporations
a. Both have juridical personality distinct
Its separate personality (under the Doctrine
from their components;
of Separate Personality) and the limited liability
b. Both are groups of persons;
of its components (Limited Liability Rule) make
c. Capitals of both are derived from their
a corporation the most desirable business
components;
organization for many businessmen.
d. There is distribution of profits in stock
corporations and in partnerships;
 The Code is consistent with the mandate
under Art. 12, Sec. 16 of the Constitution for
Five Core Characteristics:
Congress to prescribe all the criteria for the

a. Legal personality; “formation, organization, or regulation” of

b. Limited liability; private corporations in a general law applicable

c. Transferability of shares; to all without discrimination.

d. Delegated management under a board

structure; and  Purpose of Corporate Law

e. Investor ownership. a. Defining the area within which the

parties are free to allocate risk, control
Advantages of Corporations: and profit as they wish; and
b. Prescribing the allocation of these
a. The capacity to act as legal unit;
elements in the absence of express
b. Limitation or exemption from,
agreement.
individual liability of shareholders; 3
c. Continuity of existence; The main group of persons that are affected
d. Transferability of shares; by corporate law includes stockholders,
e. Centralized management of board of directors and officers and creditors.
directors;
f. Professional management;  When the Corporation Code applies

g. Standardized method of organization, suppletorily

and finance; and

General Rule: Corporation Code is the
h. Easy capital generation.
primary law that should be applied in the

Disadvantages of Corporations: regulation of corporations.

a. Prone to Double Taxation; Exceptions:

b. Subject to greater governmental
a. General Banking Law (banks)
regulation and control;
b. Insurance Code (insurance companies)
c. A corporation may be burdened with
an inefficient management if
stockholders cannot organize to
Section 2. – Corporation defined.
oppose management;
d. Limited liability of stockholders may at  Attributes of a Corporation:
times translate into limited liability to a. It is an artificial being;
raise creditor capital; b. It is created by operation of law;
e. It is harder to organize compared to c. It has the right of succession; and
other business organizations; d. It has the powers, attributes expressly
f. It is harder or more complicated to authorized by law or incident to its
maintain and existence.
g. The “owners” or stockholders do not
participate in the day-to-day  Concession Theory
management.
A corporation owes its life to the State and its
birth is purely dependent on the State’s will.

THE CORPORATION CODE OF THE Fletcher: A corporation is not in fact and in

PHILIPPINES reality a person, but the law treats it as thought
it were a person by process of fiction, or by
Batas Pambansa Blg. 68
regarding it as an artificial person distinct and
TITLE I – GENERAL PROVISIONS separate from its individual stockholders.

Definitions and Classifications Opposite theory: Genossenchaft Theory

This is the reality of the group as a social and

legal entity, independent of state recognition
Section 1. – Title of the Code and concession.

 Franchises
 Corporation Code
A corporation is granted by the State the
right to exist by virtue of a primary franchise.
 A franchise is a special privilege conferred by the necessity of perpetual conveyances, for
governmental authority, and which does not purposes of transmitting it.
belong to the citizens of the country generally
as a matter of common right. However, this does not imply corporate
immortality but rather a continuity of existence
For practical purposes, franchises, so far as irrespective of that of its components.
relating to corporations, are divisible into:
 Doctrine of Separate Personality
a. Corporate or general franchises.
A corporation has a personality separate and
- This is the franchise to exist as a distinct from its members.
corporation.
It has a personality separate and distinct from
- This is the right to exist as a
the persons composing it as well as from that
corporation vested in the individuals
of any other entity to which it may be related.
who compose the corporation and not
in the corporation itself, and cannot be  Separate Properties
conveyed in the absence of legislative
4
authority to do so. Because of the separate personality of the
corporation, the properties of the corporation
b. Special or secondary franchises. are not the properties of its shareholders,
members or officers.
- These are certain rights and privileges
conferred upon existing corporations. Properties registered in the name of the
- It can be ordinarily conveyed or corporation are owned by it as an entity
mortgaged under a general power separate and distinct from those who compose
granted to a corporation to dispose of it.
its property.
A stockholder cannot sell, transfer, mortgage
A corporation therefore, is created by or encumber the properties of the corporation
operation of law when it is granted a franchise without proper authority. Similarly, a
either through a special law or it is organized stockholder cannot use any such property to
under a general law. pay for his personal debts.

The general law under which a corporation An action filed by a corporation to recover
can be organized in the Philippines is the the properties of its shareholders or members
Corporation Code. Examples of secondary should be dismissed for failure to state a cause
franchises are those issued by the SEC to of action because the corporation is not the
companies that issue securities. real party in interest.

 Creation by Special Law  Nature of Stockholders’ Interest in

Corporation
The Constitution provides that only GOCC
may be created by special law. The interest of the shareholder in the
properties of the corporation is indirect,
 Contract Theory contingent and inchoate.

Under this theory, incorporation is deemed to The interest of the shareholder on a

involve contracts among the members, particular property becomes actual, direct and
between the members and the corporation, existing only upon liquidation of the assets of
and between the members or the corporation the corporation and the same property is
and the State. assigned to the shareholder concerned.

The interest of each stockholder consists in

Incorporation is a contract between those
the right to a proportionate part of the profits
who compose the corporation and their
whenever dividends are declared by the
contract is governed and evidenced by the
corporation.
Articles of Incorporation.
The stockholders of a corporation are not co-
The State cannot likewise take the life of the owners of the corporation’s assets.
corporation without due process.
 Separate Obligations
 Right of Succession
The obligations of the corporation are not
One of the distinctive features of a the obligations of its shareholders and
corporation is the right of succession that is members and officers and vice-versa.
also known as “perpetual succession”.
The rule is that the directors and officers are
Perpetual Succession is that continuous not personally liable for the obligations of the
existence which enables a corporation to corporation.
manage its affairs, and hold property without
 Limited Liability Rule a. Cases where public convenience may
be defeated, as when corporate fiction
Under this Rule, a stockholder is personally is used for vehicle for the evasion of an
liable for the financial obligations of the existing obligation;
corporation to the extent of his unpaid b. FRAUD cases or when the corporate
subscription. entity is used to justify a wrong, protect
fraud, or defend a crime; and
Remedy
c. Alter Ego cases, where a corporation is
The stockholders who are sought to be made merely a farce since it is a mere alter
liable for their unpaid subscription should be ego or business conduit of a person, or
impleaded. If the stockholders are not where the corporation is so organized
impleaded as defendants, a separate action and controlled and its affairs are so
should be filed against them to enforce any conducted as to make it merely an
judgment obligation. instrumentality, agency, conduit or
adjunct of another corporation.
 Separate Acts
However, legal writers cite three variants within 5
The acts of the stockholders do not bind the the doctrine of piercing the veil of corporation,
corporation unless they are properly namely:
authorized. Similarly, the acts of officers and
directors in their personal capacity cannot be a. Instrumentality Doctrine;
imputed to the corporation. b. Alter Ego Doctrine; and
c. Identity Doctrine.
 Doctrine of Piercing the Veil of Corporate
Fiction

A corporation has a separate personality *at any rate, any classification cannot fully
distinct from its stockholders and from other differentiate one group of cases from other
corporations to which it may be connected. groups of cases. Indeed, there is no rigidity or
exactitude in the application of the doctrine of
It is a fiction created by law with the intent piercing the veil of corporate fiction.
that it should be treated as true. However,
under the Doctrine of Piercing the Veil of Fraud
Corporate Fiction, the corporation’s separate
There is fraud if there is deception that would
juridical personality may be disregarded when
lead an ordinarily prudent person into error
there is an abuse of the corporate form.
after taking the circumstances into account.
Instances when corporate personality may be
 Enriquez Security Services, Inc. vs.
disregarded:
Cabotaje
 When the corporate identity is used to
The veil of corporate fiction was
defeat public convenience, justify wrong,
disregarded because the same was
protect fraud or defend crime.
used to perpetrate injustice or as a
 Where the corporation is a mere alter
vehicle to evade obligations. There was
ego or business conduit of a person.
fraud in this case when the guard was
 Where the corporation is so organized
transferred to a new corporation after
and controlled and its affairs are so
the dissolution of the old corporation,
conducted as to make it merely an
and his length of service with the old
instrumentality, agency, conduit or
corporation was not recognized.
adjunct of another corporation.
 Mendoza vs. Banco Real Development
Mere ownership by a single stockholder or by
Bank
another corporation of all or nearly all of the
capital stock of a corporation is not in itself
The separate corporate personalities of
sufficient ground for disregarding the separate
a mortgagor corporation and a new
corporate personality.
corporation were disregarded because
The mere fact that the businesses of the two it was established that the same
entities are interrelated is not a justification for mortgagor ceased operations and is no
disregarding the separate personalities, absent longer holding office in its principal
sufficient showing that the corporate entity was office. It was established that the
purposely used as a shield to defraud creditors incorporators and controlling
and third persons of their rights. stockholders of the mortgagor
corporation and the new corporation
Classifications are the same.

Instances when the Doctrine is applicable,  Liddle and Co. vs. CIR
according to the SC:
 The doctrine may be applied if the Proof of facts and circumstances must be
government may be deprived of taxes. presented to establish the elements of Fraud
cases and Alter Ego cases.
Alter Ego
Probative factors of identity which will justify
Piercing the Veil is justified under this the application of the doctrine:
doctrine if there is such unity of interest and
ownership that the separate personalities of the a. Stock ownership by one or common
corporation and individual no longer exist. ownership of both corporations;
b. Identity of directors and officers;
 Alter Ego Doctrine was applied to make c. The manner of keeping corporate
the controlling shareholder who is also books and records; and
operations manager, and the d. Methods of conducting the business.
corporation itself, liable for the
obligations of a sole proprietorship.

It is not necessary in Alter Ego cases that the Subsidiary – means a corporation more than
corporation was organized or operated to 50% of the voting stock of which is owned or 6
commit fraud or wrong. controlled directly or indirectly through one or
more intermediaries by another corporation,
In the cases covered by the Alter Ego which thereby become a parent company.
Doctrine, the focus is on reality and not form; if
the same will not be applied, it will result into The SC outlined the circumstances to
inequity. The focus is on how the corporation determine whether the subsidiary is a mere
was operated and the relationship between instrumentality or alter ego of the parent
those who compose the corporation with such corporation:
operation.
a. The parent corporation owns all or
most of the capital stock of the
subsidiary;
b. The parent and subsidiary corporations
have common directors or officers;
Totality of Circumstances Test
c. The parent corporation finances the
The following circumstances indicate the subsidiary;
applicability of the doctrine although it is not d. The parent corporation subscribes to
required that all of the circumstances must all the capital stock of the subsidiary or
concur: otherwise causes its incorporation;
e. The subsidiary has grossly inadequate
a. Commingling of funds and other assets capital.
of the corporation with those of
individual shareholders; Judicial Function
b. Diversion of the corporation’s funds to
Only the courts or administrative tribunals
non-corporate purpose;
like the NLRC can pierce the veil of corporate
c. Failure to maintain corporate minutes
fiction.
or adequate corporate records;
d. Identical equitable ownership in two Jurisdiction over the Alter Ego
entities;
e. Failure to adequately capitalize a The Court requires that the corporation or
corporation for the reasonable risks of person that is sought to be made liable must
corporate undertaking; be impleaded stating that the implication is
f. Absence of separately held corporate two-fold:
assets;
g. Sole ownership of all the stock by one a. The court must first acquire jurisdiction
individual or members of a single over the corporation or corporations
family; involved before its or their separate
h. Use of the same office or business personalities are disregarded; and
location by the corporation and its b. The doctrine of piercing the veil of
individual shareholders; corporate entity can only be raised
i. Employment of the same employees or during a full-blown trial over a cause of
attorney by the corporation and its action duly commenced involving
shareholders; parties duly brought under the
j. Disregard of legal formalities and authority of the court by way of service
failure to maintain proper arm’s length of summons or what passes as such
relationship among activities. service.

Probative Factors Personality Not Abrogated

When the veil of corporate fiction is pierced

in proper cases, the corporate character is not
necessarily abrogated. It continues for ruled that “absent any proof that the individual
legitimate objectives. respondents were notified of the stockholders’
meeting or that they were present during the
The Court’s power is confined to the meeting, the respondents could not have been
transactions involved in the case for the informed of the transaction.
purpose of adjudging the rights and liabilities
of the parties in the case. They have no Nationality and Citizenship
jurisdiction to do more. [Koppel, Inc. vs. Yatco]
The General Rule is that a corporation cannot
Doctrine of Piercing the Veil of Corporate be considered a citizen as the term “citizen” is
Fiction and Limited Liability Rule understood in political law.

Halley vs. Printwell, Inc. The instances when it is important to

determine the nationality of a corporation for
The SC observed that “stockholders of a certain purposes. It has been observed that two
corporation are liable for the debts of the principal tests have been applied for
corporation up to the extent of their unpaid determining if a corporation is foreign or
subscriptions. They cannot invoke the veil of domestic, namely: 7
corporate identity as shield from liability,
because the veil may be lifted to avoid a. The Aggregate Test (The Control Test)
defrauding corporate creditors. – requires looking into the nationality,
domicile, or residence of the
The creditor is allowed to maintain an action individuals who control the
upon any unpaid subscriptions and thereby corporation.
steps into the shoes of the corporation for the
satisfaction of its debt. To make out a prima Full beneficial ownership of the stocks,
facie case in a suit against stockholders of an coupled with voting rights is essential.
insolvent corporation to compel them to
contribute to the payment of its debts by
making good unpaid balances upon their
b. The Entity Test (Place of Incorporation
subscriptions, it is only necessary to establish
Test) – looks to the nation where the
that the stockholders have not in good faith
corporation was incorporated.
paid the par value of the stocks of the
corporation. This is explained in Section 123 of this
Code.
Artificial Being
In public utilities, the Constitution limits
Although it is treated as a separate person,
foreign equity to 40%, “the legal and beneficial
the fact is that a corporation does not have
ownership of 60% of the outstanding capital
physical existence, only artificial.
stock must rest in the hands of Filipinos”.
Primary Rules of Attribution
Ownership of at least 60% of the shares with
An artificial being cannot by itself act and voting rights must pertain to Filipinos. If the
acquire knowledge. Due to the artificial nature requirement will not be imposed, the
of the existence of corporations, corporations corporation will not be “effectively controlled”
can perform physical acts or commit omissions by Filipinos in accordance with Article 12,
only through natural persons. Section 11 of the Constitution.

Attribution of Knowledge Control Test and Grandfather Rule

 Francisco vs GSIS Illustration:

If a Philippine corporation has

Knowledge of facts acquired or
corporate stockholders, how does
possessed by an officer or agent of the
one determine whether such
corporation in the course of his
Philippine corporation is a
employment, and in relation to matters
Philippine national? Two tests
within the scope of his authority, is
have been employed in the
notice to the corporation, whether he
Philippines: (a) the grandfather
communicates such knowledge or not
rule; and (b) the control test.
since a corporation cannot see, or
know, anything except through its
To illustrate how these tests are
officers.
applied, let’s take a Philippine
It is important to note, however, that even if corporation (called “Corporation
knowledge or even an act is properly attributed X”) with the following ownership
to the corporation, it does not follow that all structure:
the stockholders are deemed to have
knowledge of the same fact or act. The SC (a) non-Philippine citizens
own 40% of the capital stock
outstanding and entitled to vote Philippine national since at least
of Corporation X; 60% of its capital stock
outstanding and entitled to vote
(b) another Philippine is held by Corporation Y, which is
corporation (called “Corporation also considered a Philippine
Y”) owns 60% of the capital stock national since at least 60% of its
outstanding and entitled to vote capital stock outstanding and
of Corporation X. entitled to vote is held by
Philippine citizens.
On other hand, Corporation Y has
the following ownership structure:

One exceptional situation where the SC rule

(a) non-Philippine citizens
that a corporation has no nationality is the case
own 40% of the capital stock
of Corporation Sole; the case involved the
outstanding and entitled to vote
Roman Catholic Church but the ruling can also
of Corporation Y;
be applied to other corporations sole.
8
(b) Philippine citizens own Roman Catholic Apostolic
60% of the capital stock Administration of Davao, Inc. vs.
outstanding and entitled to vote Land Registration Commission
of Corporation Y.
The SC categorically declared “the
Let’s also assume that Philippine Roman Catholic Apostolic Church
citizens constitute at least 60% of in the Philippines has no
the members of the board of nationality and that the framers of
directors of each of Corporation X the Constitution did not have in
and Corporation Y. mind the religious corporations
sole when they provided the 60%
requirement.”
If the grandfather rule is applied,
Corporation X will not be deemed Residence
a Philippine national because the
A corporation has no residence in the same
grandfather rule takes into
sense in which the term is applied to a natural
account the direct and indirect
person. This is precisely the reason why it was
foreign equity of foreigners in
ruled that for practical purposes, a corporation
Corporation X (see SEC Opinion
is in a metaphysical sense a resident of the
re: Silahis International Hotel, May
place where its principal office is located as
4, 1987). Applying the
stated in the Articles of Incorporation. (Read
grandfather rule, the direct and
Section 14[3] of this Code)
indirect foreign equity in
Corporation X would be 64%, Tort Liability
calculated at follows:
The liability of corporations may either be
Direct foreign-owned equity in vicarious or direct personal obligation and may
Corporation X – 40% arise out of different sources of obligation.
Thus, the liability of a corporation may be
Indirect foreign owned equity in based on contract.
Corporation X – 24%
Under the primary rule on attribution, the
Under the above scenario, the corporation is liable based on contract if the
foreigners are deemed to have a BOD sanctioned the bread. On the other hand,
24% indirect foreign equity in the direct corporate responsibility may be
Corporation X because foreigners imposed under Article 2176 of NCC.
own 40% of Corporation Y, which
Vicarious liability may be based on quasi-
in turn owns 60% of Corporation
delict under Article 2180 of NCC, delict under
X (i.e., 40% multiplied by 60%
Articles 102 and 104 of RPC.
equals 24%). Thus, under the
grandfather rule, Corporation X is
not qualified to own land.

On the other hand, if the control

test is applied, Corporation X is The Corporate Negligence Doctrine
deemed to be a Philippine imposes several duties on a hospital:
national qualified to own land.
a. To use reasonable care in the
Under the control test,
maintenance of safe and adequate
Corporation X is considered a
facilities and equipment;
 b. To select and retain only competent No criminal action can lie against a
physicians; corporation under the present rules.
c. To oversee as to patient care all Nevertheless, the officers of the corporation
persons who practice medicine within may be held liable.
its walls; and
d. To formulate, adopt, and enforce It is settled that an officer of a corporation
adequate rules and policies to ensure can be held criminally liable for acts or
quality care for its patients. omissions done in behalf of the corporation
only where the law directly requires the
The Doctrine of Corporate Responsibility is corporation to do an act in a given manner and
not limited to hospitals. Thus, direct and the same law makes the person who fails to
primary liability may also be imposed on perform the act in a prescribed manner
schools as separate entities not only based on expressly liable criminally.
contract but also under Article 2176 of NCC.
Before a stockholder may be held criminally
Right to Moral Damages liable for acts committed by the corporation, it
must be shown that he had knowledge of the
The award of moral damages cannot be 9
criminal act committed in the name of the
granted in favor of a corporation because, corporation and that he took part in the same
being an artificial person and having existence or gave his consent to its commission, whether
only in legal contemplation, it has no feelings, by action or inaction.
no emotions and no senses.
Contempt Cases
It cannot therefore, experience physical
suffering and mental anguish, which can be Corporations may be punished for contempt.
experienced only by one having a nervous A corporation and those who are officially
system. [ABS-CBN vs. CA] responsible for the conduct of its affairs may be
punished for contempt in disobeying
The only exception in this rule is when the judgments, decrees, or orders of a court made
corporation has a reputation that is debased, in a case within its jurisdiction.
resulting in its humiliation in the business
realm. [University of the Philippines vs. Dizon] Theory of Special or Limited Capacities

Report of Code Commission: It is believed that The powers of the corporation are given by
the better rule is to disallow award of moral law and it cannot exercise powers that are not
damages to juridical entities like corporations so given.
even for besmirched reputation and defamation.
The award of moral damages is predicated on In fine, the powers of the corporation are
the presence of injury that is incapable of only those that are expressly provided for,
pecuniary estimation like physical suffering, implied powers, and incidental powers.
mental anguish, and other similar injury.

Constitutional Rights
Section 3. – Classes of corporations.
As an artificial being and as a mere creature
of the law, a corporation cannot exercise Section 4. – Corporations created by special
Constitutional rights that are inconsistent with laws or charters.
its nature as a mere artificial being or rights
that are not available because the corporation’s  Corporation Code Classification
life is just a concession of the State. Thus, a
corporation cannot claim that it is entitled to Under Section 3: Stock or Non-Stock
protection of the due process clause for the
protection of “liberty”. Under Section 4: Created by Special Law or
A corporation is entitled to the right against Created under the Corporation Code
unreasonable searches and seizure.
 Classifications in Other Statutes and
It is elementary that the right against self- Jurisprudence
incrimination has no application to juridical
persons. While an individual may lawfully refuse A. As to the number of components:
to answer incriminating questions, unless i. Aggregate Corporation – a corporation
protected by an immunity statute, it does not consisting of more than one member.
follow that a corporation vested with special ii. Corporation Sole – a corporation
privileges and franchises, may refuse to show consisting of only one person or
its hand when charged with an abuse of such member. (Read Sec. 110 of this Code)
privilege.
B. As to functions:
Criminal Liability
i. Public Corporation – a corporation
organized for the government of a
 portion of a State for the purpose of H. As to relationship:
serving general good and welfare. i. Subsidiary – a corporation more than
ii. Private Corporation – a corporation 50% of the voting stock of which is
formed for some private purpose, owned or controlled directly or indirectly
benefit, aim or end. They may be stock or through one or more intermediaries by
non-stock corp. another corporation, which thereby
becomes a parent company.
C. As to the manner of creation: ii. Affiliate – a corporation that directly or
i. By special law – a corporation directly indirectly, through one or more
created by Congress through a special intermediaries, is controlled by, or is
law; must be a GOCC. under the control of another corporation,
ii. By under a General law/Corporation which thereby becomes its parent
Code company.
iii. Corporations by Prescription – was not iii. Parent Corporation – a corporation that
formally organized as such but has been has control over another corporation
duly recognized by immemorial usage as directly or indirectly through one or more
a corp, with rights and duties enforceable intermediaries. 10
under the law.
 Going public and Going private
D. As to Legal Status:
i. De Jure Corporation – a corporation A corporation is deemed to be “going public”
organized in accordance with when it decides to list its shares in the stock
requirements of law. exchange. These include corporations that will
make initial public offering of its shares.
ii. De Facto Corporation – a corporation
A corporation is said to be “going private”
that is formed where there exists a flaw in
when it would restrict the shareholders to a
its incorporation but there is colorable
certain group. In a sense, these also include
compliance with the requirements of law.
closed or closely held corporation.

iii. Corporation by Estoppel – a group of  Corporation by Prescription

persons which holds itself out as a
corporation and enters into a contract The Roman Catholic Church is a corporation
with a third person on the strength of by prescription.
such appearance cannot be permitted to
deny its existence in an action under said  Stock and Non-Stock Corporations
contract.
Requisites of Stock Corporation:

a. capital stock is divided into shares; and

b. authorized to distribute to holders
E. As to existence of stocks:
thereof of such shares or dividends or
i. Stock Corporation – a corporation with
allotments of the surplus profits on the
capital stock is divided into shares and is
basis of the shares held.
authorized to distribute to holders
thereof of such shares or dividends or The issuance of “share certificates” is not, by
allotments of the surplus profits on the itself, proof that the corporation is a stock
basis of the shares held. corporation. The so-called “share certificates”
ii. Non-stock Corporation – a corporation may be nothing more than proof of
that does not issue stocks and does not membership in a non-stock corporation.
distribute dividends to their members.
In the case of non-stock corporations, there
F. As laws of incorporation: must be members and the corporations must
i. Domestic Corporation – formed, not distribute any part of their income to the
organized or existing under Philippine members.
Laws.
ii. Foreign Corporation – F,O,E under any  Public and Private Corporations
laws other than those of the Philippines
GSIS and DBP are private corporations in
and whose laws allow Filipino citizens
corporate law. Similarly, NAPOCOR and those
and corporations to do business in its
operating public utilities are more in the
own country or state.
character of a private corp.
G. Special Types of Corporation under this  Quasi-Public Corporations
Code:
i. Close Corporation – Sec. 96 These are corporations like railroad and canal
ii. Special Corporation –educational and corporations that are engaged in private
religious corporation business affected with public interest.
 GOCCs When the law vests the government
instrumentality with corporate powers, the
Partly governed by RA 10149 (GOCC instrumentality does not become a corporation
Governance Act of 2011). (i.e. Manila International Airport Authority,
University of the Philippines, Bangko Sentral ng
GOCCs may either be:
Pilipinas).
a. With original charter or created by
Instrumentalities fall under the more general
special law; or
term “Government Agency”.
b. Incorporated under the Corporation
Code (also called, Non-Chartered Government Instrumentalities with Corporate
GOCCs). Powers (GICP) are considered GOCC under RA
10149.
The SEC has no jurisdiction over GOCCs
created by special law because they are
primarily governed by their charters. However,
the Corporation Code may apply suppletorily
either by operation of law or through express 11
provisions in the charter. Philippine National Red Cross as Sui Generis

The SC ruled that “not all corporations, which  Dante Liban vs Richard Gordon
are not Government-owned or controlled, are
The PNRC was created through special law
ipso facto to be considered private
and there is no dispute that it is a corporation.
corporations as there exists another distinct
However, it was declared that it is not a
class of corporations or chartered institutions
subdivision, agency or instrumentality of
which are otherwise known as “public
government nor a GOCC or a subsidiary
corporations”.
thereof. However, it does not follow that it is a
Creation through special law private corporation.

Section 16, Article 12 of the Constitution The SC ruled that the structure of the PNRC is
explicitly prohibits the creation or sui generis, being neither strictly private nor
establishment of private corporations through public in nature; it is supposed to be a private
special laws, except GOCCs. institution and at the same time a public
organization in accordance with its
The requirements for the exception, that commitments under the international law.
private corporation can be created through
special law: Thus, the SC ruled that the PNRC is a GOCC
for the purpose of enforcement of labor laws
a. Must be government-owned or and penal statutes.
controlled;
b. The creation must be for a common
good; and
Section 5. – Corporators and incorporators,
c. The creation meets the test of
economic viability. stockholders and members.

The test of economic viability applies only to  Components

GOCCs that perform economic or commercial a. Shareholders or members
activities, and need to compete on the market b. Directors or trustees; and
place. c. Officers.

The above requirements do not apply to Corporators in a stock corp are called
purely public corporations. stockholders/shareholders; in a non-stock corp,
they are called members.
The employees of GOCCs created by special
law or charter are subject to civil service laws.  Incorporators
The Labor Code covers the employees of
There is only one set of Incorporators. The
GOCCs that are created under the Corporation
incorporators appearing as such in the Articles
Code.
of Incorporation will remain to be incorporators
GOCC distinguished from Government up to the termination of the life of the
Instrumentalities corporation.

The SC held that GOCCs should therefore be  Shareholders

distinguished from “government
The shareholders are the holders of shares in
instrumentalities’ which may also be vested
a corporation with interest over the
with corporate powers to perform efficiently
management (control), income (dividends) and
their governmental functions.
assets (share upon liquidation) of the
corporation.
 The shareholders participate in controlling It is a basic class of stock ordinarily and usually
the affairs of the corporation by exercising their issued without extraordinary rights or privileges
right to vote. It was observed that the right to and entitles the shareholder to a pro rata
participate in the control and management is
division of profits.
exercised through the election of members of
the BOD because “it is the BOD that controls or
manages the corporation”. (Heirs of Gamboa  Preferred Shares
vs. Teves)
Preferred stocks are those that entitle the
shareholder to some priority on dividends and
Section 6. – Classification of Shares. asset distribution. Preferred shareholders are
not creditors of the corporation by virtue of the
 Concept of Shares preferred shares.

A share of corporate stock has been

Preferred shareholders are often excluded
defined as the unit into which the proprietary
from any control that is, deprived of the right 12
interests in a corporation are divided.
to vote in the election of directors and on
The shares comprise what is known as the matters, on the theory that the preferred
capital stock. shareholders are merely investors in the
corporation for income in the same manner as
“Capital Stock” consists of all classes of shareholders. (Heirs of Gamboa vs. Teves)
shares issued to stockholders, that is, common
shares as well as preferred shared, which may Considering that preferred shares are
have different rights, privileges or restrictions usually non-voting, inequity may result if the
as stated in the articles of incorporation. board will not declare dividends for a long
period of time.
The classes and number of shares, which a
corporation shall issue, are first determined by
The present Corporation Code provides
the incorporators in the Articles of
that the BOD of a stock corporation may
Incorporation filed with the SEC.
declare dividends only out of unrestricted
 Kinds of Shares retained earnings.

Shares may be classified into: Dividends are, thus payable only when
there are profits earned by the corporation and
a. Common or preferred shares
as a general rule, even if there are existing
b. Voting or non-voting shares
profits, the BOD has the discretion to
c. Par value or no par value shares
determine whether or not dividends are to be
d. Treasury shares
declared.
e. Redeemable shares
f. Founder’s shares
Shareholders, both common and preferred,
Preferred shares may be: are considered risk takers who invest capital in
the business and who can look only to what is
a. Cumulative or non-cumulative left after corporate debts and liabilities are fully
b. Participating or non-participating paid.
c. Preferred as to dividends and/or
preferred as to assets upon
distribution.
Kinds of Preferred Shares
Preferred shares may also be convertible
Most common forms of Preferred Shares:
shares. It was explained in one case that
common shares and preferred shares are part a. Preferred shares as to assets.
of the corporation’s capital stock and that both
A share which gives the holder thereof
stockholders are no different from ordinary preference in the distribution of the
investors who take on the same investment assets of the corporation in case of
risks. liquidation.

 Common Shares b. Preferred shares as to dividends.

A share the holder of which is entitled

Common shares or stocks represent the to receive dividends on said share to
residual ownership interest in the corporation. the extent agreed upon before any
 dividends at all are paid to the holders Par Value Shares are those with fixed value
of the common stock. stated in the Articles of Incorporation and the
share certificate. Par Value is an arbitrary
amount assigned to the share and is expressed
in the certificate covering the share.
Other forms of Preferred Shares:
No Par Value Shares refer to shares without
a. Cumulative – if a dividend is omitted in
such arbitrary amount.
any year, it must be made up in a later
year before any dividend may be paid The issued value or stated value of the shares
on the common in the later year. may be higher than the par value. The BOD is
authorized to fix the amount for which the
b. Non-Cumulative – there is no need to shares shall be subscribed. This is subject to the
make up for undeclared dividends. No condition that the value fixed cannot be below
right survives as to the undeclared par. With respect to no par value shares, the
dividends and the directors do not stated or issued value cannot be less than 5
even have discretion to declare those pesos.
past dividends subsequently. 13
Other values that are commonly associated
c. Participating – entitled to participate with shares of stocks:
with the common shares in excess
a. Market Value – the price at which
distribution.
shares of capital stock is bought and
Share
sold by investors in the market.
d. Non-Participating
b. Book Value – the amount per share
that each shareholder would receive if
the corporation were liquidated
Convertible Shares
without incurring any further expenses
Preferred shares may be stipulated as and if assets were sold and liabilities
convertible into common shares. This feature liquidated at their recorded amounts.
must be stipulated in the Articles of c. Liquidation Value- the amount a
Incorporation. stockholder would receive upon the
dissolution and liquidation of the
Conversion is also subject to the appraisal corporation.
right of dissenting stockholders because d. Redemption Value – the price per share
conversion varies the rights of the stockholders. at which the corporation may redeem
its share.
 Doctrine of Equality of Shares e. Issued (Stated) Value – the selling price
of the shares fixed by the Board or in
Under this Doctrine, all stocks issued by the
the Articles of Incorporation.
corporation are presumed to be equal with the
same privileges and liabilities, provided that the Conditions for the Issuance of No Par Value
Articles of Incorporation is silent on such Shares
differences.
a. Shares of capital stock issued without
Section 6 of Corpo Code requires that the par value shall be deemed fully paid
distinguishing features of the shares must be and non-assessable and the holder of
stated in the Certificate of Stock. such shares shall not be liable to the
corporation or to its creditors in
 Reclassification
respect thereto;
Shares that are originally common shares b. The shares without par value may not
may be reclassified into preferred shares. be issued for a consideration less than
5 pesos per share; and
Reclassification of shares is a legitimate c. The entire consideration received by
exercise of corporate power under the the corporation for its no-par value
Corporation Code. (COCOFED vs. Republic) share shall be treated as capital and
not available for distribution as
 CIR vs CA dividends.

Reclassification of shares does not always Shares that cannot be No-Par Value Shares
bring any substantial alteration in the
subscriber’s proportional interest. But a. Preferred Shares
exchange of shares is different since there b. Shares in Banks
would be shifting of the balance of stock c. Shares in Trust Companies
features like priority in dividend declarations d. Shares in Insurance Companies
or absence of voting rights. e. Shares in Public Utilities; and
f. Shares in Building and Loan
 Par Value and No Par Value Shares Associations.
 b. Not covered by a restriction for
 Voting and Non-Voting Shares dividend declaration under a loan
agreement; and
Under the present law, all shareholders c. Not required to be retained under
regardless of the classification, other than special circumstances obtaining in the
holders of preferred or redeemable shares, are corporation such as when there is a
entitled to vote. need for a special reserve for probable
contingencies.
Memorize exceptions under Section 6 vis-à-
vis voting rights of holders of preferred shares.
 Mandatory Redemption
The issuance of non-voting shares is subject
The records of the Batasang Pambansa show
to the following conditions under Section 6:
the intent to allow mandatory or compulsory
a. Only preferred or redeemable shares redemption.
may be made non-voting shares;
Mandatory redemption is not against public
b. There must remain other shares with
policy. Anybody who acquires mandatory
full voting rights; and 14
redeemable shares is forewarned that the
c. The non-voting shares may still vote in
redeemable shares may be purchased out of
the matters enumerated under Section
capital.
6.
The rules require that all corporations which
have issued redeemable shares with mandatory
Section 7. – Founders’ Shares.
redeemable features to set up and maintain a
“Sinking Fund”.
 Rationale
This fund is a fund set up by the corporation
Founders’ shares are shares that are given
where cash is gradually set aside in order to
to those who helped organize the corporation.
accumulate the amount necessary to meet the
This may be a form of reward to the “founders”.
redemption price of redeemable shares at
The 5-year limit must be observed. After the specified dates in the future.
expiration of the limitation period, founders’
 Effect of Redemption
shares shall have equal rights with the holders
of common shares. Redemption is repurchase or reacquisition of
stock by a corporation which issued the stock
Section 8. – Redeemable Shares.
in exchange for property, whether or not the
 Definition acquired share is cancelled, retired or held in
the treasury.
These are shares of stocks issued by a
corporation which said corporation can Essentially, the corporation gets back some
purchase or take up from their holders as of its stock, distributes cash or property to the
expressly provided for in the articles of shareholder in payment of the stock and
incorporation and certificates of stock continues in business as before.
representing said shares.
If the redeemable shares are considered as
Redeemable shares are usually preferred retired, the authorized capital stock of the
shares. corporation is in effect reduced by the
corresponding number of shares because the
 Unrestricted Retained Earnings not redeemed shares can no longer be issued. The
required Articles of Incorporation must be amended
accordingly.
Redemption of redeemable shares can be
made without the need of unrestricted retained
earnings. In effect, payment may come from
the capital. Section 9. – Treasury Shares.

Unrestricted retained earnings means the  Definition

amount of accumulated profits and gains
realized out of the normal and continuous Treasury shares are issued shares but being
operations of the company after deducting in the treasury, they do not have the status of
therefrom distributions of stockholders and outstanding shares. However, they still
transfers to capital stock or other accounts and represent paid-for-interest in the property of
which is: the corporation.

a. Not appropriated by its BOD for  Stages in the Life of Treasury Shares
corporate expansion programs;
1st Stage: Creation of Treasury Shares
2nd Stage: The rights enjoyed by the TITLE II – INCORPORATION AND
corporation as the holder of the treasury shares ORGANIZATION OF PRIVATE
are restricted. There is no voting right and right CORPORATIONS
to dividends with respect to treasury shares.
 Incorporation – means the performance of
3rd Stage: Disposition of Treasury Shares.
conditions, acts, deeds and writings by
 Limitations: incorporators, and the official acts, certification
a. They may be re-issued or sold again as or records, which give the corporation its
long as the corporation holds them as existence.
treasury shares.
Corporations are creatures of law, and can
b. Treasury shares cannot participate in
only come into existence in the manner
dividends because dividends cannot be
prescribed by law.
declared by the corporation to itself.
c. Treasury shares cannot be represented Effect if not Incorporated
during stockholder’s meetings for
otherwise equal distribution of voting It is only through incorporation and
15
powers among stockholders will be registration with the SEC that private
effectively lost and the directors will be corporations can acquire juridical personality
able to perpetuate their control of the under the Corpo Code. (Read Sec. 19)
corporation.
d. The amount of unrestricted retained However, incorporation is not necessary for
earnings equivalent to the cost of an association to function as a group. In
treasury shares being held shall be addition, incorporation is not necessary for
restricted from being declared and liability to attach under the rule on corporation
issued as dividends. by estoppel. (Read Sec. 21)

Documentary Requirements for Incorporation:

 Nature and Effects
a. For Stock Corporation (in addition to
A treasury share may be common or
the application)
preferred share.
1. Name Verification Slip
Treasury shares are different from the 2. Articles of Incorporation and By-
authorized but unissued share. Treasury shares Laws
do not reduce the number of issued shares or 3. Treasurer’s Affidavit
the amount of stated capital and their “sale” 4. Joint Affidavit of two incorporators
does not increase the number of issued shares undertaking to change the
or amount of stated capital. corporate name if it is already used
by another corporation
The corporation has the option to retire the 5. Additional requirements
treasury shares.
b. For Non-Stock Corporations (in
Treasury shares may be declared as property addition to the application)
dividend to be issued out of the retained 1. Name Verification Slip
earnings previously used to support their 2. Articles of Incorporation and By-
acquisition provided that the amount of the Laws
retained earnings has not been subsequently 3. Joint Affidavit of two incorporators
impaired by losses. undertaking to change the
corporate name if it is already used
Inasmuch as treasury shares are not
by another corporation
considered as outstanding capital stock, the
4. List of members certified by the
corporation is not entitled to any right or
Corporate Secretary unless the
privilege of a shareholder. The reason is that
members are named in the Articles
when a corporation re-acquires its own shares,
of Incorporation
it does not become a subscriber thereof.
5. List of names of contributors or
The BOD is empowered to re-issue the donors and the amounts
treasury shares without the requirement of the contributed or donated, as certified
approval of the shareholders but subject to the by the Treasurer
pre-emptive rights of the latter. 6. Registration Data Sheet
7. Additional requirements

 Organization

A corporation should have full and complete

organization and existence as an entity before
it can enter into any kind of a contract or
transact any business.
 Until organized as authorized by the charter, transferred all his shares to another. Being an
there is no corporation, nor does it possess incorporator is an accomplished fact.
franchises or faculties for it or others to
exercise, until it acquires a complete existence.

Section11. – Corporate term.

Section 10. – Number and qualifications of  Basic Rules

incorporators a. The corporate term is not more than 50
years.
 Incorporators b. The 50-year term may be shortened or
extended.
Basic qualifications: c. The corporation may be dissolved
thereby shortening the term.
a. They must be natural persons;
d. The 50-year period may be extended
b. There must be not less than five but
for another 50 years in any single
not more than fifteen;
instance.
c. They must all be of legal age; 16
e. No extension can be made earlier than
d. The majority must be residents of the
5 years prior to the original or
Philippines; and
subsequent expiry.
e. If the corporation is a stock
corporation, each incorporator must
 State Control
own or be a subscriber of one share.
 Juridical Persons cannot be incorporators as The State is naturally interested that the
provided under Section 10 that the privilege of juridical persons be enjoyed only
incorporators must be natural persons. under the conditions and not beyond the
period that it sees fit to grant.
The incorporators or original directors of a
corporation to be organized can even be  Arbitrary Limitations
nominees of an existing corporation or a single
individual. Unless the existence of the corporation is
renewed or extended by proper proceedings, it
 Number of Incorporators and Shares dies forever.

Minimum of 5 but not more than 15;  Extension of Term

subscriber of at least one share.
Extension must be made within the time and
It is not correct to assume that the manner prescribed by the Code. For instance,
incorporators are always the only original an extension cannot be sought after the
subscribers. They may be so but not in all cases. expiration of the term. There is no more term
to extend in such a case.
While the law limits the number of
incorporators. The law does not limit the Doctrine of Relations
number of original subscribers. Hence,
theoretically, the incorporators may each own The filing and recording of a certificate of
one share and the rest of the shares may be extension after the term cannot relate back to
subscribed originally by other persons. the date of the passage of the resolution of the
stockholders to extend the life of the
 Residence corporation; except when the failure to timely
file an extension is due to the neglect of the
Non-residents may be incorporators because
officer to receive such application.
the law only requires the majority to be
residents of the Philippines. The SEC clarified that the doctrine does not
apply if there was fault or negligence on the
A person is a resident under the Corpo Code
part of the corporation.
if he is physically present with the intention to
remain present therein.

 Citizenship Section 12. – Minimum capital stock

required of stock corporations
There is no requirement that the majority
must be citizens of the Philippines. The rule is Section 13. – Amount of capital stock to be
however subject to the requirements of subscribed and paid for the purposes of
pertinent nationalization laws. incorporation

 Accomplished Fact  Minimum Authorized Capital

An incorporator remains to be an
There is no minimum authorized capital
incorporator even if he will later on cease to be
under the Corporation Code. However, if the
a corporator or shareholder. Thus, he will still
minimum paid-up capital of 5 thousand pesos
be an incorporator even if he already
prescribed under Section 14 is considered, it is  Articles of Incorporation as Charter and
clear that the initial authorized capital cannot Contract
be less than the same amount.
The Articles of Incorporation has been
Important terms:
described as one that defines the charter of the
a. Authorized Capital Stock is the corporation and the contractual relationships
amount fixed in the articles of between the State and the corporation, the
incorporation to be subscribed and stockholders and the State, and between the
paid by the stockholders of the corporation and its stockholders. (Lanuza vs.
corporation. CA)

b. Subscribed Capital is that portion of

The Articles of Incorporation also binds the
the ACS that is covered by subscription
agreements whether fully paid or not. State. The State cannot disregard the
provisions of the Articles without any valid
c. Paid-Up Capital is the amount of reason. It cannot whimsically revoke the Articles 17
outstanding capital stock and of Incorporation.
additional paid-in capital or premium
paid over the par value of the shares.  Substantial Compliance

d. Outstanding Capital Stock refers to The Articles must comply with the form
the total shares of stock issued to prescribed by Articles 14 and 15 of the Code.
subscribers or stockholders, whether or
However, substantial compliance may not
not fully or partially paid except
affect the de jure existence of the corporation.
treasury shares so long as there is a
binding subscription agreement.
Section 14 provides that the Articles must
contain “substantially” the matters indicated
e. Capital includes properties and assets
therein.
of the corporation that are used for its
business or operation.
 Treasurer’s Affidavit

f. Stated Capital is the sum of the par This affidavit relates to the minimum
value of all issued par value shares, the
subscribed capital and the minimum paid-up
entire amount received for no-par
capital. Thus, the treasurer may be made liable
value shares and any amount
transferred by a stock dividend or if the corporation does not comply with the
other corporate action from surplus to requirements of law; he may even be
stated capital. prosecuted for Perjury.

 Special Laws may also impose initial  Name

capitalization requirements.
The SC explained that the very law of their
 Initial Subscribed and Paid-Up Capital creation and continued existence requires each
to adopt and certify a distinctive name.
The requirements of Section 13:
The incorporators constitute a body politic
a. Minimum Subscribed Capital – 25% and corporate under the name stated in the
of Authorized Capital certificate.
b. Minimum Paid-up Capital – 25% of
Subscribed Capital but must not be Before the Articles of Incorporation of the
less than 5 thousand pesos. prospective corporation is drafted, it is
advisable to verify with the SEC if the proposed
However, the subscribers are not name of the corporation is still available for
prevented from paying in full the subscription registration.
price. Exceptionally, subscription of non-
resident foreigners must be fully paid.  Purpose Clause

This clause is important in order to assure

that persons who invest in corporate entities
Section 14. – Contents of the articles of
would be aware of the business the corporation
incorporation.
is designed to engage in.
Section 15. – Forms of Articles of
Incorporation.
 The Primary Purpose must be only one, but SEC Circular requires that corporations must
the Secondary Purposes may be several. Other state in their Articles the specifics of their
purposes not allied or incidental to the Primary principal office which shall include, if feasible,
Purpose should be classified as Secondary the street number, street name, barangay, city
Purposes. or municipality and the specific address of the
incorporator, directors or trustee.
As a General rule, the primary purpose
There is no need to amend the Articles when
determines the classification of the corporation.
the corporations change their principal offices
However, where the corporation actually
from one floor to another of same building.
engages in one of its secondary purposes, it
However, there is a need to amend if the
may also be classified in accordance with the
change of address is from one building to
secondary purposes.
another or from one street to another, even if
within the same municipality or city.

Importance of Principal Office

18
The purpose clause is included in the Articles
in order that: The principal office is considered as the place
of residence of the corporation.
a. The person who intends to invest his
The principal place of business may
money in the business will know where
determine the venue of court cases involving
and in what kind of business or activity
corporations. It may also determine if service of
his money will be invested;
summons and notices was properly made.
b. The directors and officers will be
informed regarding the scope of It is not necessary that all the business of the
business they are authorized to act; corporation be conducted in the principal place
and of business.
c. A third person will be aware if the
transaction he has with the corporation  Term
is within its authority.
If the corporation will not be able to extend
The general limitations imposed on the its corporate term, the remedy is to file new
purpose clause are: Articles of Incorporation and secure a new term

a. It cannot be created or formed for a It has been explained that where the term of
purpose of function of which a corporate a corporation expires but instead of liquidating
body is incapable. its affairs it continues the business in good
b. It cannot be created for a purpose that faith, not knowing that the term has expired,
is contrary to law, morals, or public policy. some courts hold that it may be a de facto
c. It cannot be organized for two or more corporation or as corporation by estoppel.
incompatible purposes.
 Incorporators
d. The corporation may not be organized
for a purpose contrary to its nature.
All incorporators must sign and must
The best proof of the purpose of a subscribe or acknowledge the Articles of
corporation is the Articles. If the purpose stated Incorporation. The Articles is defective if not all
therein is lawful, then the SEC has no authority incorporators acknowledged the same before
to inquire whether the corporation has purpose the notary public.
other than those stated, and Mandamus will lie
to compel it to issue the certificate of  Directors
incorporation.
The number of directors cannot exceed 15
It is also a well-established rule that collateral even after the incorporation.
attack in the legality of the purpose of the
The Articles of Incorporation states the
corporation is not allowed.
names, nationalities, and residences of persons
 Principal Office who shall act as directors or trustees until the
first regular directors or trustees are duly
The Principal Office must be within the elected and qualified in accordance with the
Philippines. Corpo Code.
 This means that the original directors Section 16. – Amendment of Articles of
originally appearing in the Articles will be Incorporation.
replaced by regular directors after the issuance
 Requirements:
of the certificate of incorporation.
a. The amendment must be for legitimate
 Capital Stock purposes and must not be contrary to
other provisions of the Corpo Code
It is mandatory to state the authorized capital
and Special Laws.
stock, the number of shares into which it is
b. The amendment must be approved by
divided and the par value of the shares, in
the majority vote of the BOD or BOT.
lawful money of the Philippines if the shares
c. There must be a vote or written assent
have par value. If the shares have no par value,
of the stockholders representing at
only the number of shares need be stated.
least 2/3 of the Outstanding Capital

 Paid-up Capital Stock, or the vote or assent of at least

2/3 of the members if it be a non-stock 19
If the paid-up capital consists of property, corp.
verification of its ownership, physical existence, d. The original and amended articles
and reasonableness of the valuation at which it together shall contain all provisions
is being transferred to the corporation is made required by law to be set out in the
by the SEC. Articles.
e. A copy thereof duly certified under
Documents to support ownership of the
oath by the corporate secretary and a
property, whether real or personal, are required
majority of the directors or trustees
to be submitted.
stating the fact that said amendment
If any of the properties used as paid-up or amendments have been duly
capital is mortgaged or otherwise encumbered, approved by the required vote of the
written consent of the mortgagee is necessary. stockholders or members shall be
submitted to the SEC.
If the transfer value of the property is higher f. The amendment must be approved by
than the cost or assessed value, an appraisal the SEC.
report prepared by a licensed appraiser is
required.  Express and Implied Approval

A Deed of Assignment executed by the Express: The amendments shall take effect
owner, proprietor or partners in case of upon their approval by the SEC.
partnership, transferring the properties, as well
as other assets and liabilities in favor of the Implied: The amendments shall take effect from
corporation is required. The Deed of the date of filing with the SEC if not acted upon
Assignment covering real estate properties within 6 months from the date of filing for a
must be presented for primary entry to the cause not attributable to the corp.
ROD where the property is located.
 Provisions to be Amended
 Effect if Sole Proprietorship is Organized
The amendment may involve amendment of
A single proprietorship may be organized as the corporate name, increase in the ACS, and
a corporation. In such case, it is required that other similar changes.
there is a Deed of Assignment that must
Amendment is not allowed if it pertains to
specify the liabilities of the sole proprietorship
Accomplished Facts, such as names and
that are being assumed by the new
numbers of the incorporators and names of the
corporation.
original directors.

Amendments cannot likewise be allowed if it

goes against the nature of the corporation. For
example, there can be no amendment of the
 Other provisions may be inserted in the Articles of a non-stock corp to convert it into
Articles of Incorporation as long as they are not stock corp with the members as shareholders.
contrary to law, morals, good customs, public This procedure will enable the distribution of
order, and public policy. the assets of non-stock corp to the members.
 Written Assent of the Stockholders d. The purpose of the corp is immoral
such as to provide a “mail-order-bride”
Silence or failure to object cannot be service.
construed as approval by stockholders. The law e. The purpose of the corp is to establish
requires the express approval of the a local government unit like a
stockholders through an affirmative vote or an “barangay”.
assent that is in writing.

 Who can question Amendments? Section 18. – Corporate name.

Amendments to the Articles and By-laws can  Basic Policy

be questioned only by a real party-in-interest
A corporation cannot use a name that
like a shareholder or member.
belongs to another even as a trade name.

Section 17. – Grounds when articles of  What Must be Proved by the Oppositor
20
incorporation or amendment may be a. The corporation has acquired a prior
rejected or disapproved. right over the use of such corporate
name; and
 Ministerial Duty b. It is any of the cases mentioned under
Section 18.
The SEC duty to approve an application for
registration is ministerial provided that all the
 Similar Names
requirements of law are complied with. The SEC
must approve the Articles if the applicant has A corporation has an exclusive right to use its
substantially complied with the requirements of name, which may be protected by injunction.
the Corpo Code.
Under the Dominancy Test that is
However, Section 17 recognizes the power of incorporated in the Intellectual Property Code,
the SEC to reject the Articles or any proposed there will be infringement if the mark contains
amendment thereto if the provisions of the the dominant feature of the mark of a
Corpo Code are violated. trademark belonging to another.

 Rejection Not Based on the Submitted

Articles

It may be necessary to go beyond the Articles

and the supporting papers in order to - Lyceum of the Philippines, Inc. vs. CA
determine if the establishment, organization or
The SC explained that the purposes of
operation is inconsistent with the declared
the prohibitions under Section 18 are:
national policies.
a. The avoidance of fraud upon the
 Illegal or Immoral Purposes
public which would have occasion
Rejection of the Articles or any amendment to deal with the entity concerned;
thereto will result if the purpose/s of the b. The evasion of legal obligations
corporation are patently unconstitutional, and duties; and
illegal, immoral or contrary to government c. The reduction of difficulties of
rules and regulations. administration and supervision
over corporations.
Some instances when the Articles may be
rejected: As a rule, generic, descriptive and
geographical terms cannot be exclusively
a. The declared purpose of the corp is to appropriated, such as the term “International”.
promote and enhance the
incorporation of the Philippines as an Doctrine of Secondary Meaning
American State.
Under this doctrine, a word or phrase which
b. The purpose is to practice a profession.
is originally incapable of exclusive
c. The corp is organized to engage in
appropriation because the word or phrase is
illegal gambling.
geographic or otherwise descriptive might,
nevertheless, have been used for so long and
so exclusively by one producer with reference corporation. The new corporation has a
to an article and the purchasing public has personality distinct and separate from the
considered the word or phrase as associated to dissolved corporation. The new corporation
his product. cannot enjoy the rights and privileges of the
dissolved corporation although the new
 Registration Subject to Prior Right
corporation ahs the same or similar name.

The corporate name is a property right that

 Change of Name
cannot be impaired or defeated if another
corporation will appropriate the same. It is in A corporation has the right to apply for a
the nature of a right in rem that can be change of name if there is no express
asserted against the whole world. A prohibition in the statute.
corporation may have a better right to use its
The corporation, upon the change of its
corporate name on the ground of priority of
name is in no sense a new corporation or the
adoption.
successor of the original corporation. It is the 21
same corporation with a different name, and its
 Name in Articles of Incorporation
character is in no respect changed.
A corporation cannot use any other
 Corporations with Same Name
corporate name other than what is reflected in
the Articles of Incorporation. Even if two corporations have the same
name, the corporations do not have a single
A corporation may use a trade name or legal personality. The two registration
business name that is different from its certificates show the separate nature of these
corporate name. juridical entities.

The SEC pointed out that there are instances

wherein a corporation is mandated to use, Section 19. – Commencement of corporate
issue and/or submit papers reflecting therein existence.
not only just the business name but also its
 Certificate of Incorporation
corporate name.
The issuance of the certificate of
 SEC Rules incorporation by the SEC marks the
commencement of the corporate term of
The rules require the inclusion in the
corporations incorporated under the Code.
corporate name of the word “Corporation” or
“Incorporated”, or the abbreviations “Corp.” or The certificate is an indispensable
“Inc.”. The requirement is imposed to requirement before corporate life can ensue.
There is no corporation to speak of prior to an
distinguish corporations from other business
entity’s incorporation.
organizations like partnerships, sole
proprietorships and unregistered associations. A certificate of incorporation from the SEC is
not necessary if the corporation is created
The rules provide that the name of a through special law.
corporation or partnership that has been
 Contract Law under the Corporation Code
dissolved or whose registration has been
revoked shall not be used by another It is only after the issuance of the certificate
corporation or partnership, unless its use has of registration that a corporation can transact
been allowed at the time of the dissolution or business.
revocation by the stockholders, members or
However, the law makes the pre-
partners who represent a majority of the incorporation subscription agreement binding
outstanding capital stock or membership of the even if one of the parties – the corporation – is
dissolved corporation or partnership, as the still legally non-existent.
case may be.
 Promoters

The General Rule is that the acts of the

promoter are not binding on the corporation
that will be organized.
If a new corporation is organized using the
Promoters are persons who, acting alone or
name of a dissolved corporation, the newly with others, take initiative in founding and
formed corporation cannot be considered as organizing the business or enterprise.
the legal successor of the dissolved
 Promotional activities include: compliance may be a ground to revoke
the certificate of incorporation.
a. Discovery – consists of finding the
business opportunity to be developed.  Requisites of De Facto Corporation:
b. Investigation - entails an analysis of the a. A valid law under which the
proposed business to determine corporation is organized.
whether or not it is economically b. An attempt in good faith to
feasible. incorporate.
c. Assembly – includes the bringing c. An assumption of corporate powers.
together of the necessary personnel,
property and money to set business in Valid Law
motion as well as the secondary details
of setting up the corporation itself. One view (as recognized by Dean) vis-à-vis
unconstitutional law is that it is an “Operative
Fact”. Under this view, an unconstitutional law
does not bar the existence of a de facto
Promoters could not act as agents for a corporation.
projected corporation since that which has no 22
legal existence could have no agent. Good Faith

The stockholders and the corporation cannot Attempt in good faith means that there must
be held personally liable for the compensation be colorable compliance with the law.
claimed by the promoter for the services
performed by him in the organization of the There can be no claim of attempt in good
corporation. faith to incorporate if no Certificate of
Incorporation is issued by the SEC.
Even if the stockholders benefited from such
services of the promoter, there is no Assumption of Powers
justification to hold them personally liable
A corporation must have exercised its
therefor.
franchise to be a corporation by doing business
 Underwriters should be distinguished from under it.
promoters. An underwriter is a person who
 Distinguished from De Jure Corporations
guarantees on firm commitment and/or
declared best effort basis the distribution and
A De Jure Corp has a right to corporate
sale of securities of any kind by another
existence even against the State.
company.

In the case of De Facto Corp, it has a right to

Section 20. – De facto corporations. corporate existence even against the State if
the attack is collateral but not if direct.
 Rules in determining if the corporation is
a de jure corporation or one that is  Nature and Status of a De Facto
defectively formed: Corporation

a. Non-compliance with directory The personality of a de facto corporation is

provisions of law or regulations will not subject to attack by the State in a proper
affect the de jure existence of the proceeding.
corporation.
b. Non-compliance with the mandatory A de facto corporation enjoys the attributes
provisions will affect the de jure of a corporation until the State questions its
existence. However, only substantial existence.
compliance is required and mere
 Dissolved Corporation
colorable compliance may result in a
de facto corporation. A group of employees who continued the
c. Non-compliance with conditions operations of a dissolved corporation or a
precedent to incorporation may affect corporation whose registration had been
the de jure existence of the revoked cannot acquire the status of a de facto
corporation. corp.
d. Non-compliance with conditions
subsequent to incorporation may not  Effect of Non-Filing of By-Laws
affect the existence of a corporation
but may be a ground for revocation of - Sawadjaan vs. CA
the certificate of incorporation.
e. Condition precedent to carry on the The SC observed that a corporation
business will not affect the may be considered a de facto corp
corporation’s de jure status but non- because of its failure to submit its by-
laws on time.
 Author’s comment: action in corporate for against the
outsider;
The observation is erroneous. The c. The enterprise contracts with an
nature of a juridical entity as a de facto outsider and the outsider brings action
corp arises from the very beginning of against the component individuals; and
its existence. The filing of by-law with d. The enterprise contracts with an
the SEC is not a mandatory provision; outsider, and the component
non-compliance of conditions individuals seek to hold the outsider
subsequent to incorporation may not liable in his contract.
affect the existence of a corporation, it
is only a ground for revocation of the Tort Liability
certificate of incorporation.
The liability under Section 21 in case there is
an ostensible corporation is applicable to tort
liability. There is a difference between tort
Section 21. – Corporation by estoppel. liability and contractual liability with respect to
the application of estoppel.
23
 Estoppel
 When Not Applicable
One who assumes an obligation to an
ostensible corporation as such cannot resist The SC ruled that this the doctrine of
performance thereof on the ground that there corporation by estoppel applies only to a third
was in fact no corporation. party when he tries to escape liability on a
contract from which he has benefited on the
When a third person has entered into a irrelevant ground of defective incorporation.
contract with an association which represented
itself to be a corporation, the association will  Cannot Override Jurisdictional
be stopped from denying its corporate capacity Requirements
in a suit against it by such third person.
The doctrine of corporation by estoppel
 Liability as General Partner cannot be likewise be advanced to override
jurisdictional requirements under the law.
Those who assume to act as a corporation
knowing it to be without authority to do shall  Rules of Court Provision
be liable as a general partner. Therefore, they
Section 15 of Rule 3 provides that when two
are liable beyond their investment; in other
or more persons not organized as an entity
words, their personal property may be made to
with juridical personality enter into a
answer for what is purportedly a corporate
transaction, they may be sued under the name
debt of the non-existent corporation.
by which they are generally or commonly
This also means that those without known.
knowledge of the non-existence of the
corporation are liable as if they are regular
stockholders of a corporation. They are not Section 22. – Effects on non-use of
liable beyond their investments. corporate charter and continuous
inoperation of a corporation.
On the other hand, a third party who,
knowing an association to be unincorporated,  Conditions subsequent
nonetheless treated it as a corporation and
received benefits from it, may be barred from This Section involves two violations of
denying its corporate existence in a suit conditions subsequent to incorporation:
brought against the alleged corporation.
a. Failure to organize and commence
business within 2 years from
incorporation.
b. Becoming continuously inoperative for
a period of at least 5 years.

Enterprise Liability  Period to Organize

The main sequences of Corporation by Even if the corporation has been operating
Estoppel: for 10 years, there is a ground to revoke the
franchise if it ceased to operate thereafter for
a. The enterprise contracts with an at least 5 years.
outsider, who later brings against the
enterprise as though it were a  Effect of Failure to Organize
corporation;
If the corporation failed to organize within 2
b. The enterprise contracts with the
years but exercises corporate powers after such
outsider, and subsequently brings