THE REVISED CORPORATION CODE OF THE PHILIPPINES

(R.A. NO. 11232)

A CORPORATION is an arti cial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence.

What are the ATTRIBUTES of a corporation?

a. It is an arti cial being with separate and distinct personality;

b. It is created by operation of law;
c. It has the right of succession; and
d. It has powers, attributes, and properties expressly authorized by law or incident to
its existence.

ARTIFICIAL BEING WITH SEPARATE PERSONALITY

A corporation is a being; it has a separate juridical personality. The personality of the

corporation is distinct from its stockholders, members, directors, trustees, and o cers.
The separateness of its personality is present even if a corporation is a ONE PERSON
CORPORATION.

Consequences of a separate personality:

1. A corporation is entitled to own properties in its own name nad its properties are
not the properties of its stockholders, directors, and o cers. The interests of the
stockholders over the properties are merely inchoate.
2. A corporation can incur obligations and its obligations are not the obligations of its
stockholders, directors, and o cers.

LIMITED LIABILITY RULE - a stockholder is personally liable for the nancial

obligations of the corporation to the extent of his unpaid subscription. While
stockhodlers are generally not liable, the stockholders may be liable if they have not
paid or have not fully paid the subscription price and the corporation is insolvent or it
cannot comply with its obligations.

ONE PERSON CORPORATION - the limited liability rule applies to a one person
corporation. But, a sole shareholder claiming limited liability has the burden of
a rmatively showing that the corporation was adequately nanced. If he cannot prove
that the corporation’s property is independent to that of the stockholder’s personal
property, the stockholder shall be jointly and severally liabile for the debts and other
liabilities of the One Person Corporation.

3. Rights belong to the corporation cannot be invoked by the stockholders even if that
latter owns substantial majority of the shares in that corporation and rights of the
stockholder, directors, and o cers cannot be invoked by the corporation.

4. A corporation is liable for tort. It is liable when the act was committed by the o cer
or agent under express direction or authority from the stockholders or members acting
as a body or generally from the directors as the governing body.

5. Generally, the corporation is considered a national of the country where it was

incorporated (PLACE OF INCORPORATION TEST).
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 Exceptions:

a. WAR-TIME CONTROL TEST. In times of war, the nationality of a corporation is

determined by the nationality of the controlling stockholders.
b. CONTROL. TEST. The Foreign Investment Act of 1991 (R.A. No. 7042 as amended)
gives the de nition of a Philippine National — (1) A corporation organized under the
Philippine laws of which 60% of the capital stock outstanding and entitled to vote is
owned and held by Filipino citizens; (2) a corporation organized abroad and
registered as doing business in the Philippines under the general law on
corporations of which 100% of the capital stocks entitled to vote belong to
Filipinos.

Where a corporation and its non-Filipino stockholders own stocks in a SEC-registered

enterprise, at least 60% of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation shall be
considered a Philippine national.

A corporation organized in another country and registered to do business in the

Philippies of which 100% of the outstanding capital stock entitled to vote is wholly
owned by Filipinos is also a Philippine National for investment purposes.

GRANDFATHER RULE

It is the method of attributing the shareholdings of a given corporate shareholder to the

second or even the subsequent tier of ownership to determine the ultimate ownership
in a corporation. It is a method of determining the nationality of a corporation that owns
shares in another corporation by breaking down the equity structure of the
shareholders of the corporation.

The percentage of shares held by the second corporation in the rst is multiplied by the
latter’s own Filipino equity, and the product of these percentages is determined to be
the ultimate Filipino ownership of the subsidiary corporation. The CONTROL TEST is
the primary test.

However, the GRANDFATHER RULE applies if (1) the Filipino equity is less than 60% of
the outstanding capital of a corporation that owns shares in a partly nationalized
enterprise — at least 60% must be owned by the Philippine nationals; or (2) there is an
attempt to circumvent the nationalization requirement or when there is doubt as to the
real owners.

SEC TEST — for purposes of applying the nationalization laws, the VOTING
CONTROL TEST and BENEFICIAL OWNERSHIP TEST should both be applied — full
bene cial ownership of the stocks, coupled with the voting rights is essential.

According to SEC, the requirement of 60% Filipino ownership must be applied to

BOTH the total number of outstanding shares of stock entitled to vote in the election of
directos and the total number of outstanding shares of stock, whether or not entitled to
vote in the election of Directors.

ARTIFICIAL BEING

A corporation exists by ction of law only; hence, it is subject to limitations that are
inherent because of its nature.

1. It can act only through its directors, o cers, and employess.

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 2. Generally, corporations cannot be criminally liable because there is no law making
them criminally liable. It is incapable of INTENT, hence, they cannot commit
felonies.
3. A corporation cannot be arrested or imprisoned, hence, it cannot be penalized for a
crime punishable by imprisonment. However, it can be charged with a FINE.

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

The doctrine stems from the theory that a corporation is a legal entity distinct from the
persons composing it. It was adopted for the purpose of convenience and to serve the
ends of justice. But when the veil of corporate ction is used as a shiled to perpetuate
fraud, to defeat public convenience, justify wrong or defend crime, this ction shall be
disregarded and the individuals composing it will be treated identically. The corporate
veil cannot be used to shield blatant violation of rules/laws.

The following elements must be established to justify the piercing of the veil of
corporate ction under the test that is often used by the Supreme Court which is called
the INSTRUMENTALITY RULE or the THREE-PRONGED CONTROL TEST.

a. Control - not mere stock control, but complete dominion. Not only of nances, but
of policy and business practice in respect to the transaction attacked and must
have been such that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
b. Such control must have been used by the defendant to commit a fraud or wrong to
perpetuate the violation of a statutory or other positive legal breach of duty, or a
dishonest and an unjust act in contravention of the plainti ’s legal right; and
c. The said control and breach of duty must have proximately caused the injury or
unjust loss complained of.

Probative Factors to show the fact of control so the doctrine of piercing the veil of
corporate entity may be applied.

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 o cers;
c. The parent company nances the subsidiary;
d. The parent company subscribed to all the capital stock of the subsidiary or
otherwise caused its incorporation;
e. The subsidiary has grossly inadequate capital;
f. The subsidiary has substantially no business except with the parent corporation;
g. The papers of the parent corporation or in the statements of its o cers, the
subsidiary is described as a department or division of the parent corporation, or its
business or nancial responsibility is referred to as the parent corporation’s own;
h. The parent corporation uses the property of the subsidiary as its own;
i. The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary, but take their orders from the parent corporation;
j. The formal legal requirements of the subsidiary are not observed.

CREATED BY OPERATION OF LAW

CONCESSION THEORY — it is a principle in the creation of corporations, under which

a corporation is an arti cial creature without any existence until it has received the
imprimatur of the State acting according to law through the SEC. The life of the
corporation is a concession made by the State.
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How are Corporations created?

GENERAL LAW — private corporations are generally created under the provisions of
the Corporation Code. This is done by ling the ARTICLES OF INCORPORATION and
BY-LAWS with the SEC. If the SEC nds the documents to be fully ocmpliant with the
corporation code and other relevant laws and regulations, the SEC shall issue the
CERTIFICATE OF INCORPORATION. The life of the corporation starts from the date of
issuance of the Certi cate of Incorporation.

SPECIAL LAW — public corporations are created through special laws. Exceptions:
only GOCC’s are the private corporations that can be created through special laws.
Corporations created by special laws or charters shall be governed primarily by the
provisions of the special law or Carter creating them or applicable to them,
supplemented by the provisions of the RCCP.

POWERS, ATTRIBUTES, and PROPERTIES

No corporation shall possess or exercise any corporate powers, except those

conferred by law, its Articles of Incorporation, those implied from express powers and
those as are necessary or incidental to the exercise of the powers so conferred. The
corporation’s capacity is limited to such express, implied, and incidental powers.

CLASSIFICATIONS AND DISTINCTIONS

a. As to organizers:
1. Public - by the state only
2. Private - by private persons alone with the State
b. As to functions:
1. Public - government of a portion of the State
2. Private - usually for pro t-making functions
c. As to governing laws:
1. Public - special laws and Local Government Code
2. Private - law on private corporations (RCCP)
d. As to legal status:
1. De Jure Corporation - a corporation organized in accordance with
requirements of law
2. De Facto Corporation - a corporation where there exists a aw in its
incorporation.
elements:
a. The existence of a valid law under which it may be incorporated;
b. An attempt in good faith to incorporate;
c. Use of corporate powers.

e. Corporation by Estoppel - group of persons which holds itself out as a corporation

and enters into a contract with a third person on the strength of such appearance
cannot be permitted to deny its existence in an action under said contract. This is not a
real corporation.

f. Corporation by Prescription — a corporation that was not formally organized as

such, but has been duly recognized by immemorial usage as a corporation, with rights
and duties maintainable at law. Ex. Catholic Church.

g. As to existence of stocks:
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 1. Stock corporation - a corporation in which capital stock is divided into
shares and is authorized to distribute to holders of such shares dividends or allotments
of the surplus pro ts on the basis of the shares held.

2. Non-stock corporation - a corporation which does not have capital stock or

does not issue stocks and does not distribute dividends or allotment of surplus pro ts
to its members.

h. A to laws of incorporation:

1. Domestic corporation - organized under Phil. Laws.

2. Foreign corporation - organized or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and corporations to do
business in its own country or state.

i. As to the number of components:

1. Corporation Aggregate - a corporation that is formed by and is composed of

two or more stockholders or members
2. Corporation Sole - a corporation that is organized and formed by one person
(who may be the hief archbishop, bishop, priest, minister, rabbi, or other presiding elder
of a religious denomination, sect, or chuch). This applies to religious corporations
where a corporation sole is allowed for puposes of administering and managing as
trustee, the a airs, property, and temporalities of any religious denomination, sect or
church.
3. One Person Corporation - a corporation with a single stockholder, who may
be a natural person, a trust, or an estate. An OPC is a stock corporation. Submission of
By-Laws is not required.

REAL ESTATE INVESTMENT TRUST (REIT)

A stock corporation established in accordance with the Corporation Code of the

Philippine and the rules and regulations promulgated by the SEC principally for the
purpose of owning income-generating real estate assets.

DE JURE vs DE FACTO corporations

DE JURE DE FACTO

One created in strict or substantial conformity with One which actually exists for all practical
the statutory requirements for incorporation purposes as a corporation but which has no legal
right to corporate existence as against the state

Right to exist cannot be successfully attacked Right to exist can be successfully attacked in a
even in a direct proceeding by the State direct proceeding by the State (Quo Warranto)

ADVANTAGES AND DISADVANTAGES

ADVANTAGES:

1. The capacity to act as a legal unit

2. Limitation of, or exemption from, individual liability of shareholders
3. Continuity of existence
4. Transferability of shares
5. Centralized management of board of directors
6. Standardized method of organization and nance
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DISADVANTAGES:

1. More complicated in formation and management

2. Higher cost of formation and operation
3. Lack of personal element
4. Greater governmental control and regulation
5. Management and control are separate from ownership
6. Stockholders have little voice in the conduct of business

COMPONENTS OF A CORPORATION

a. INCORPORATORS - those stockholders mentioned in the AoI as originally forming

and composing the corporation, having signed the Articles and acknowledged the
same before a notary public. They have no powers beyond those vested in them by
the statute.

Requirements:
1. Incorporators must not be more than 15 - one incorporator is su cient for a
One Person Corporation; for other corporations, there must be 2 or more incorporators
2. If the incorporator is a natural person, he or she must be of legal age
3. Each incorporator must be a stockholder of the stock corporation or a
member of the non-stock corporation to be formed — the incorporator in a stock
corporation must own or subscribe to at least (1) share.

NOTES:

1. Incorporators are no longer limited to natural persons. Juridical persons can now be
incorporators.
2. Although there is no express requirement under the RCCP, the partnerhsip
associations or corporations must also be duly organized under existing laws.
3. Natural persons who are licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a profession, shall not be
allowed to organize as a corporation, unless otherwise provided under special laws.

b. CORPORATORS - those who compose a corporation whether as tockholders or

shareholders in a stock corporation or as members in a non-stock corporation.
Incorporators are corporators only if they remain to be stockholders or members;
incorporators cease to be corporators if they transfer or sell all their shares, but they
remain to be incorporators.

c. STOCKHOLDERS AND MEMBERS - persons who hold or own shares in a stock

corporation, while members are those who compose the non-stock corporation.

d. BOARD OF DIRECTORS OR TRUSTEES - BOD is the governing body in a stock

corporation, while the Board of Trustees is the governing body in a non-stock
corporation.

The Board exercies the powers of the corporation. Under the RCCP, the number of
directors of a stock corporation shall NOT be more than 15 while the number of
trustees may be more than 15, except for educational corporations and religious
society. There is no more minimum number of directors or trustees except for
educational corporations and religious society which shall have not less than 5 nor
more than 15 trustees.
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e. CORPORATE OFFICERS - they are the o cers who are identi ed as such in the
RCCP, the AoI, or the By-Laws of the corporation.

f. PROMOTER - a self-constituted organizer who nds an enterprise or venture and

helps to attract investors, forms a corporation, and launches it in business, all with a
view to promoting pro ts.

INCORPORATORS CORPORATORS

Signatory to Articles Stockholder of stock corporation or member of

non-stock corporation

Do not cease to be such incorporators if they are Cease to be such if they are no longer
no longer stockholders stockholders

The number cannot exceed 15 No restriction as to number

Must have contractual capacity May be such through his guardian

FOREIGN STOCKHOLDERS

Can all the stockholders in a corporation be foreigners?

Yes, except in fully or partly nationalized corporations. For example, a manufacturer

that exports all its products can be wholly-owned by foreigners.

What are the fully or partly nationalized corporations?

1. Where no foreign stockholder is allows:

1. Mass media. Except recording
2. Retail trade enterprise with paid up capital of less than $2.5M. but, this does not
cover a restaurant within a hotel.
3. Private security agencies
4. Small-scale mining
5. Utilization of natural resources
6. Cockpits
7. Manufacture, repair, stockpiling, and/or distribution of nuclear weapons
8. Manufacture of recrackers and other pyrotechnic devices

2. Up to 20% foreign equity:

Private Radio Communications Network

3. Up to 25% foreign equity:

1. Private recruitment, whether for local or overseas, employment
2. Construction and repaird of locally funded works
3. Construction of defense-related structures

4. Up to 40% foreign equity:

1. Exploration, development and utilization of natural resources
2. Realty companies and other corporations that own private lands
3. Operation and management of public utilities
4. Culture, production, milling, proceesing, trading, except retail of rice and corn
and by-products
5. Adjustment companies
6. Sauna and steam bath houses, massage clinics, and similar activites
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5. Up to 60% foreign equity:
1. Financing companies
2. Investment houses

FORMATION OF A CORPORATION

The life of a corporation commences from the issuance of the Certi cate of
Incorporation by the SEC upon ling of the Articles of Incorporation and other
documents.

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