De Facto corporation

De Facto corporation. – The due

incorporation any corporation claiming in
good faith to be a corporation under this
Code, and its right to exercise corporate
powers, shall not be inquired into
collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.

De facto corporation – generally refer to

organizations exercising corporate power
under colour of a more or less legally
constituted corporation.

Elements of De facto corporation

1. Existence of a valid law under which a
corporation can be organized.
2. An attempt in good faith to incorporate.
3. Actual exercise of incorporate powers.

Quo warranto – an inquiry made into the

right of a corporation to conduct business.
Illustration
Seven competent individual organized a
corporation by filing the articles of
incorporation and securing a certificate of
incorporation with the SEC. However, the
addresses of two of the original subscribers
were omitted in the articles of
incorporation. In suit filed by X, a creditor,
against the corporation he alleged that the
corporation has no valid existence and
sought to hold the seven incorporators (also
directors) liable personally on the
obligation. X’s allegation that the
corporation had no valid existence would
constitute a collateral (side) attack in a
private suit. Only the Solicitor General as
government lawyer may raise the question
by quo warranto proceeding. (Literally by
“what right”).

Foreign corporations
foreign corporations. – For the purposes of
this Code, a foreign corporation is one
formed, 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. It shall have the right to
transact business in the Philippines after it
shall have obtained a license to transact
business in this country in accordance with
this Code and a certificate of authority from
the appropriate government agency.

Definition
Foreign Corporation is one formed,
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

Application to existing foreign

corporations. – Every foreign corporation
which on the date of the effectivity of this
Code is authorized to do business in the
Philippines under a license therefore issued
to it, shall continue to have such authority
under the terms and condition of its license,
subject to the provisions of this Code and
other special laws.

A foreign corporation can have no legal

existence beyond the bounds of the state or
sovereignty by which it is created. It exists
only in contemplation of law and by force of
the law, and where that law ceases to
operate, the corporation can have no
existence. It must dwell in the place of its
creation, and cannot migrate to another
sovereignty.

Foreign corporations may do business in the

Philippines either by directly entering into
transactions with resident persons, firms or
corporations or by creating a domestic
subsidiary corporation which would have its
own distinct personality.
Licensed foreign corporations is authorized
to do business in the Philippines shall
continue to have such authority under the
terms and condition of its license, subject to
the provisions of the Code and other special
laws.

Stock corporation
Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of
such shares dividends or allotments of the
surplus profits on the basis of shares held
are stock corporations.

Corporators in a stock corporation are

called stock-holders or shareholders

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

One who assumes an obligation to an

ostensible corporation as such cannot resist
performance thereof on the ground that
there was in fact no corporation.

Estoppel – It is preclusion, which prevent a

man from denying a fact in consequences of
his own previous act, allegations, or denial of a contrary
tenor. The object of the
principle of estoppel is to prevent injustice
to an otherwise innocent person.

Limited partnership vs. Private stock Corporation

Limited partnership: one formed by two or

More persons having as members one or
More general partners and one or more
Limited partners, the latter not being
Personally liable for the obligations of the
Partnership

Private Stock Corporation: Managed by directors; has

limited liability; shares are freely transferable (subject to
restrictions).

Here are concise but comprehensive explanations based

on the **Corporation Law** (including Atty. Andrix
Domingo’s coverage) for your requested topics:

## **STEPS IN CREATION OF A PRIVATE, NON-STOCK

CORPORATION**

1. **Name Verification/Reservation**
 Reserve a unique corporate name with the
**Securities and Exchange Commission (SEC)**.

2. **Drafting of Articles of Incorporation**

 States the corporate name, purpose, principal
office, term of existence, list of incorporators,
trustees, etc.
 3. **By-Laws Preparation**
 Contains internal rules: how meetings are held,
powers of officers, etc.

4. **Subscription and Contributions**

 Incorporators must commit to contributing
assets or services necessary for the operations
of the non-stock corporation.

5. **Notarization of Documents**
 All documents must be properly signed and
notarized.

6. **Filing with the SEC**

 Submit the Articles of Incorporation, By-Laws,
and other required documents to the SEC.

7. **SEC Issuance of Certificate of Incorporation**

 The non-stock corporation gains legal
personality upon the issuance of the certificate.

TYPES OF SHARES (for stock corporations)

1. Common Shares
* Basic ownership shares with **voting rights**.
 * Entitled to **dividends** after preferred shareholders.

2. **Preferred Shares**
Have preferential rights to dividends and assets during
liquidation.
* May or may not have voting rights, depending on the
terms.

3. Voting and Non-Voting Shares

* Voting shares allow participation in major corporate
decisions.
* Non-voting shares may still receive dividends but
have no say in governance.

4. **Redeemable Shares**

 Can be bought back by the corporation under

agreed terms.

5. Treasury Shares
 Shares that were once issued and then
reacquired by the corporation.

MANAGEMENT OF A CORPORATION
 1. Board of Directors / Board of Trustees (Non-Stock)
Governing body of the corporation
Elected by members (non-stock) or shareholders
(stock).
Must act as a body, not individually.

2. Corporate Officers

President: Usually the CEO, oversees day-to-day

operations.
Secretary: Keeps records, ensures legal compliance.
Treasurer: Manages funds and financial reports.
Other officers may be appointed as per the by-laws
(e.g., VP, auditor).

3. Members (Non-Stock Corporations)**

* Equivalent to shareholders in a stock corporation.

* They elect the Board and may vote on major
decisions.
Types of Suits
Derivative Suit: Filed by a stockholder on behalf of the
corporation to enforce a corporate right when the
corporation itself fails to act.

Representative Suit: Initiated by a stockholder

representing a group of stockholders to protect their
collective rights.

Individual Suit: Filed by a stockholder to protect personal

rights, such as the right to inspect corporate books.
Certificate of Stock – a written instrument
Signed by the proper corporate officers, and
Evidencing the fact that the person therein
Named is the registered owner of the share
Or shares therein described.

Nature and Functions of Certificates

It represents the number of shares which

The corporation acknowledges that the
Holder of the certificate is entitled to and is
A solemn and continuing affirmation by the
Corporation that the person to whom it was
Issued is entitled to all the rights and
Subject to all the liabilities of a stockholder
In the company in respect of the number of
Shares named, and that the company will
Respect his rights and the rights of anyone
To whim he may transfer such shares, by
Refusing to admit any new transferee to the
Rights of a stockholder except upon the
Surrender of the certificate.

Votes Required for Certain Corporate Powers/Rights

Simple Majority Vote:

Election of directors/trustees
Declaration of cash dividends
Approval of ordinary contracts

Two-Thirds (2/3) Vote of Outstanding Capital Stock or

Members:
1.Amendment of the Articles of Incorporation
2Increase or decrease of authorized capital stock
3.Merger or consolidation with another corporation
4.Dissolution of the corporation
5.Investment of corporate funds in another business
different from its purpose

Unanimous Vote:
In certain cases involving close corporations, especially
when actions involve restrictions on the transfer of shares
or deadlock-breaking mechanisms.

FOR THE ESSAY

Ultra vires acts of corporations. –
No corporation under this Code shall
possess or exercise any corporate powers
except those conferred by this Code or by
its articles of incorporation and except such
as are necessary or incidental to the
exercise of the powers so conferred.

Intra vires – The acts of a corporation within

its express or implied powers.

Ultra vires – The acts of a corporation

outside its express or implied powers.

It denotes some act or transaction on the

part of a corporation which, although not
unlawful or contrary to public policy of
executed by an individual, is yet beyond the
legitimate powers of the corporation as
they are defined by the statute under which
it is formed, or which are applicable to it, or
by its charter or incorporation papers.

Admittedly, if the contract is executed on

both sides neither party can maintain an
action to set aside the transaction or to
recover what has been parted with. The
courts will not interfere in such a case to
deprive either the corporation or the other
part of money or property acquired under
the contract. On the other hand, the great
weight of authority is to consider executor
contracts as unenforceable.
Ultra vires contracts accepted doctrines
1. If the contract is fully executed on both
sides, the contract is effective and the
courts will not interfere to deprive
either part of what has been acquired
under it.

2. If the contract is executor on both sides,

as a rule either party can maintain an
action for its non-performance.

3. Where the contract is executor on side

only, and has been fully performed on
the other, the courts differ as whether
an action will lie on the contract against
the party who has received benefits of
performance under it. Majority of the
courts hold that the party who has
received benefits from the performance
is stopped” to set up that the contract
us ultra vires to defeat an action on the
contract. There is, however, a rule
which is widely recognized by the
courts that ultra vires. “Should not be
allowed to prevail, when involved for or
against the corporation, where it will
defeat the ends of justice or work a
legal wrong.

Acts which are ultra vires are voidable but

may be ratified. In order that such ultra
vires may be ratified it must be shown that

1. The act was consummated or executed.

2. No creditors are prejudiced or they
have given their consent thereto.
3. The right of the public or the state are
not involved.
4. All of the stockholders consent thereto.

A corporation, like an individual, may ratify

and thereby render binding upon it the
originally authorized acts of its officers or
other agents. This is true because the
questioned investment is neither contrary
to law, morals, public order or public policy.
It is a corporate transaction or contract
which is within the corporate powers but which is
defective from a purported failure
to observe in its execution the requirement
of the law that the investment must be
authorized by the affirmative vote of the
stockholders holding 2/3 of the voting
power.

Doctrine of Separate Corporate Personality

This doctrine establishes that a corporation has a legal identity distinct from its shareholders,
directors, or officers. This separation means that the corporation can own property, incur
liabilities, and enter into contracts independently. However, courts may "pierce the corporate
veil" and hold individuals personally liable when the corporate entity is used to commit fraud,
evade existing obligations, or perpetrate injustice.

Rules on Dividend Declaration

Dividends are distributions of a corporation’s profits to its
shareholders. Under the Revised Corporation Code:

Cash Dividends: Declared by a majority vote of the Board

of Directors.
Stock Dividends: Require approval by a majority of the
Board and a two-thirds (2/3) vote of the outstanding
capital stock.
Dividends can only be declared from unrestricted retained
earnings. Furthermore, corporations are mandated to
declare dividends when their retained earnings exceed
100% of their paid-in capital stock, unless justified by
specific corporate needs.

Rules on the Corporation’s Term

Under the Revised Corporation Code, corporations now
have perpetual existence by default, unless otherwise
specified in their Articles of Incorporation. For
corporations incorporated under the old code with a fixed
term, they may amend their Articles to adopt a perpetual
term. This amendment requires:

Approval by a majority of the Board of Directors or

Trustees.

Ratification by at least two-thirds (2/3) of the outstanding

capital stock or members.

The amendment must then be filed with the Securities

and Exchange Commission (SEC) for approval.