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BA 162 – Law on Partnership and Private Corporations

CORPORATIONS

Sec. 1 This code shall be known as the “Corporation Code of the Philippines”

A corporation is an artificial being, created by operation of law, having the right of succession and the
Sec. 2
powers, attributes and properties expressly authorized by law or incident to its existence

ATTRIBUTES OF A CORPORATION
(1) artificial being
(2) created by operation of law
(3) has right of succession
(4) has only the powers, attributes, and properties expressly authorized by law or incident to its existence

CORPORATION AS AN ARTIFICIAL PERSONALITY

- legal/juridical person with a personality separate and apart from its individual members/stockholders
- the law treats a corporation as a person

LEGAL CONCEPT OF A CORPORATION

o not liable for the debts of its stockholders and vice versa

o may acquire/possess property of all kinds, as well as incur obligations and bring civil/criminal actions

o property conveyed to or acquired by the corporation is in law the property of the corporation itself

o all contracts entered into by its officers/agents are the contracts of the corporation and not those of
the members

o tax exemption granted to a corporation cannot be extended to include dividends paid to its
stockholders

o corporation has no personality to bring an action for and in behalf of its stockholders or members for
the purporse of recovering property which belongs to said stockholders

o a corporation remains unchanged snf unsggrvyrf by changes in individual membership

DISREGARDING CORPORATE ENTITY

“Doctrine of Piercing the Veil of Corporate Entity”

- Non recognition of the doctrine that a corporation is a legal entity distinct from the persons composing it
- Disregard of the fiction due to using the cloak for fraud or illegality

o Corporation functions for the benefit of a single person

o Corporation is a mere instrumentality of the individual stockholders

o Philippine corporation is controlled by aliens

o Corporation is organized by an insolvent debtor to defraud his creditors

o Subsidiary company is created by parent merely as an agency of the latter

o Corporation is formed by a person for the purpose of evading his individual contract

o Corporation is dissolved and its assets are transferred to another corporation to avoid a financial
liability of first corporation

CORPORATION AS A CREATION OF LAW/OPERATION OF LAW

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General Rule: Corporations cannot come into existence by mere agreement of the parties as in the case
of business partnerships  require special authority/grant from the State by a special
incorporation law or by means of a general incorporation law

Exception: The Roman Catholic Church has been recognized as a “corporation by prescription” without
normal legislature grant

RIGHT OF SUCCESSION OF A CORPORATION

General Rule: Corporation has a capacity of continuous existence irrespective of the death, withdrawal,
insolvency, or incapacity of the individual members or stockholders, regardless of transfer of the
interests and shares of stock

LIFE OF A CORPORATION
 limited to the period of time stated in the articles of incorporation not exceeding 50
years from the date of incorporation UNLESS sooner dissolved or UNLESS period
is extended

POWERS, ATTRIBUTES AND PROPERTIES OF A CORPORATION

General Rule: A corporation MAY ONLY EXERCISE POWERS GRANTED BY law of its creation.

All powers which may be implied from those provided which are INCIDENTAL/ESSENTIAL to the
corporation’s existence may ALSO BE EXERCISED.

DISTINCTION BETWEEN PARTNERSHIP AND CORPORATIONS

PARTNERSHIP CORPORATIONS

Manner of creation Mere agreement of parties Law/ operation of law

Number of incorporators Minimum of two persons Requires at least five incorporators

Date of issuance of the certificate of

Commencement of juridical Moment of execution of the contract
incorporation by SEC under official
personality of partnership
seal
May exercise any power authorized
Exercise only the powers grated
by partners provided not contrary to
Powers expressly by law or implied from
law, morals, customs, public
those granted or incident to existence
order/policy
Power to do business and manage
Every partner is an agent of the
Management affairs lies on the board of directors /
partnership
trustees
Suit against a member of the board
Partner can sue co-partner who
Effect of mismanagement must be in the name of the
mismanages
corporation

Right of succession No such right Has

Partners are liable personally and Stockholders are liable only to the
Extent of liability to third persons subsidiarilly for partnership debts to extent of their investments as
third persons represented by shares subscribed
Cannot transfer interest without the
Has right to transfer shares without
Transferability of interst consent of other partners (deletus
the consent of other stockholders
personarum)
May not be formed for a term in
May be established for any period of
Term of existence excess of 50 years extendible to not
time stipulated by the partners
more than 50 years in one instance
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Adopt any firm name provided it is
Limited partnership is required by law
Firm name not identical or deceptively similar to
to add the word “Ltd”
any registered name

May be dissolved any time, at will of

Dissolution Dissolved with the consent of state
one or all partners

Laws which govern Civil code Corporation code

SIMILARITIES BETWEEN A PARTNERSHIP AND CORPORATION

- juridical personality separate and is distinct from that of the individuals composing it

- can act through agents

- composed of an aggregate of individuals

- distributes profits to whose who contribute capital

- can be organized only where there is law authorizing its organization

- taxable subject to income tax

ADVANTAGES OF A BUSINESS CORPORATION

1. Legal capacity to act as a legal unit

2. Continuity of existence
3. Credit is strengthened by such continuity of existence
4. Management is centralized in the board of directors
5. Creation, organization, management and dissolution are standardized under one general incorporation law
6. Makes feasible gigantic financial enterprises
7. Shareholders have limited liability
8. Shareholders are not general agents of the business
9. Shares of stocks can be transferred without
10. consent of other stakeholders

DISADVANTAGES OF A BUSINESS CORPORATION

1. Relatively complicated in formation and management

2. High cost of formation and operation
3. Credit is weakened by limited liability of shareholders
4. Ordinarily lack of personal element in view of transferability of shares
5. Greater degree of governmental control
6. Voting rights have become theoretical due to use of proxies and widespread ownership
7. Stockholders have little voice in the conduct of business
8. Management and control are separate from owner

Sec. 3 Corporations formed or organized under this Code may be stock or non-stock corporations…

CLASSIFICATION OF CORPORATIONS

STOCK NON-STOCK
Ordinary business corporation created and operated for
the purpose of making a profit which may be distributed in Do not issue stock, and created not for profit but for the
the form of dividends to stock holders in the basis of public good and welfare
invested capital

OTHER CLASSIFICATIONS
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(A) As to number of persons who compose them:

a. CORPORATION AGGREGGATE - consisting of more than one member or corporator
b. CORPORATION SOLE - religious corporation consists one member (bishop)
(B) Whether for religious purpose or not
a. ECCLESIASTICAL CORPORATION - organized fro religious purpose
b. LAY CORPORATION - organized for purpose other than for religion
(C) Whether for charitable purpose or not
a. ELEEMOSYNARY CORPORATION - established for charitable purpose
b. CIVIL CORPORATION - established for business or profit
(D) State / country under or by whose laws they have been created
a. DOMESTIC CORPORATION - incorporated under the laws of the Philippines
b. FOREIGN CORPORATION - formed, organized under laws other than those of PH
(E) Legal right to corporate existence
a. DE JURE CORPORATION - corporation existing in fact and in law
b. DE FACTO CORPORATION - corporation existing in fact but not in law
(F) Whether open to the public or not
a. CLOSE CORPORATION - limited to selected persons or members of the family
b. OPEN CORPORATION - open to any person who wants to be a shareholder
(G) Relation to another corporation
a. PARENT / HOLDING CORPORATION - has power to elect majority of directors
b. SUBSIDIARY CORPORATION - majority of directors can be elected into
(H) Corporations in the true sense or limited sense
a. TRUE CORPORATION - exists by statutory authority
b. QUASI CORPORATION - exists without legislative grant
i. CORPORATION BY PRESCRIPTION
- exercised powers for an indefinite period without the interference on the part of the
sovereign power
ii. CORPORATION BY ESTOPPEL
- In reality, not a corporation, defectively formed, but is considered one in relation to
those only who, by reason of acts or admissions, are precluded from asserting that it
is not a corporation

(I) Whether public (government) or private purpose

a. PUBLIC CORPORATIONS - organized and formed for govt of a portion of State
b. PRIVATE CORPORATIONS - formed fro private purpose, benefit or end

TEST OF DISTINCTION BETWEEN PUBLIC AND PRIVATE CORPORATIONS

PUBLIC CORPORATION PRIVATE CORPORATION

Residual if not a public corporation (although the whole or
Created for political or public purpose connected with the
substantially the whole interest in the corporation belongs
administration of government
to the State)
Government-owned and controlled corporations ; quasi-
Municipal corporations / local governments public corporations (public utilities/ public service
corporations)

Corporations created by special laws or charters shall be governed primarily by the provisions of the
Sec. 4 special law or charter creating them/applicable to them, supplemented by the provisions of this Code,
insofar as they are applicable

General rule: Enactment of creating a special act for a private corporation is SUBJECT TO CONSTITUTIONAL
LIMITATION (corporation shall be owned and controlled by the government)
1. prevent the granting special privilege to one bdoy of men
2. prevent bribery and corruption

Corporators are those who compose a corporation… Incorporators those stockholders or members
Sec. 5 mentioned in the articles of incorporation… Corporators in a stock corporation are called stockholders.
Corporators in a non-stock corporation are called members.

CORPORATORS INCORPORATORS STOCKHOLDERS/ MEMBERS

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SHAREHOLDERS
Who compose the Corporators mentioned in Owners of shares of stock Corporators of a
corporation; whether the articles of incorporation in a stock corporation corporation which has no
stockholders or members as originally forming and (natural or judicial persons) capital stock
composing the corporation

PROMOTERS SUBSCRIBERS UNDERWRITERS

Agrees to buy at stated terms an
Persons who bring about or cause to entire issuance of securities;
bring about the formation and Persons who have agreed to take guaranteed the sale of an issue by
organization of the corporation by and pay for original, unissued shares agreement to buy any unsold portion
bringing together incorporators; lay of a corporation formed or to be at a stated price; “best efforts” to
the ground work for the corporation’s formed market all or part of an issue; offered
existence for sale stock he has purchased from
controlling shareholder

Sec. 6 Classification of shares

PAR. 1 Shares may be divided into classes or series of shares, or both; THERE MUST BE AT LEAST ONE
CLASS OF STOCK a corporation must have at least one class of stock with voting rights

PRIMARY CLASSIFICATION: (1) common (2) preferred

PAR. 4 Classification of shares could be based on insuring compliance with constitutional requirement
(prescribing minimum percentage of capital ownership to Filipino citizens)

PAR. 5 Each share shall be in all respects be equal to every other share, except otherwise provided in the
articles of incorporation and certificate of stock

CAPITAL STOCK AND CAPITAL DEFINED

CAPITAL STOCK CAPITAL

Amount fixed in the articles of incorporation to be The ENTIRE PROPERTY OR ASSETS of the
subscribed and paid in by shareholders either in corporation, including invested by stockholders
money, property, labor or service
Refers to that portion of the net assets paid by the
Represents the equity of the stockholders in the stockholders as consideration for the shares issued
corporate assets to them

Limits the maximum amount or number of each

class of shares that may be issued by the
corporation without formal amendment of the
articles
Amount (something abstract) Actual corporate property
Amount fixed in the articles of incorporation and Fluctuates or varies from day to day accordingly as
unaffected by profit/loss there are profits or losses
Belongs to stockholders (personal property) Belongs to corporations (real or personal)

AUTHORIZED CAPITAL STOCK SUBSCRIBED CAPITAL STOCK OUTSTANDING CAPITAL STOCK

Capital stock where shares have par Amount of the capital stock subscribed Portion of the capital stock which is
value whether fully paid or not issued and held by persons other than
the corporation

PAID-UP CAPITAL UNISSUED CAPITAL STOCK LEGAL CAPITAL

Portion of the subscribed or Portion of the capital stock that is not Amount equal to the aggregate of par
outstanding capital stock that is paid issued or subscribed; doesn’t vote and value and/or issued value of the
draws no dividends outstanding capital stock
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CAPITAL STOCK SHARE OF STOCK
The whole body of shares of stock in the corporation Refers to the stock in the hands of the shareholders

CERTIFICATE OF STOCK written acknowledgement by the corporation of the interest, right and participation of a
person in the management, profits and assets of a corporation

formal written evidence of the holder’s ownership of one or more shares; instrument of
transfer of title

COMMON STOCKS residual owners of the corporation (only get the assets left over in the liquidation)

PREFERRED STOCKS rarely given voting privileges; payment of dividends/distribution of assets preferred

PROMOTION STOCK issued to promotes for services rendered in launching the company

SHARE IN ESCROW share deposited by grantor/agent with a third party to be kept by him until a condition

CONVERTIBLE STOCK stock which is convertible or changeable from one class to another at a ratio

CUMULATIVE PREFERRED share which entitles the holder thereof not only to the payment of current dividends but
those in arrears

NONCUMULATIVE PREF. entitles holder thereof to the payment of current dividends only in preference to common
shareholders

Sec. 7 Founders’ Shares

Defined: shares issued to the organizers and promoters of a corporation in consideration of some supposed right
or property

(1) Special rights: preference in the payment of dividends

(2) Exclusive right to vote and be voted limited to five (5) years (vote for directorship)

Sec. 8 Redeemable shares

Defined: callable shares are redeemable at a fixed date / option of issuing corporation or stockholder at a certain
redemption price

ISSUANCE: expressly so provided in the articles of incorporation

PURCHASE: may be taken up upon the expiration of a fixed period regardless of the existence of an
unrestricted retained earnings in the books

Sec. 9 Treasury shares

Defined: lawfully issued by the corporation and fully paid for and later, reacquired by it either by purchase,
redemption, donation or other lawful means

- not retired shares; do not revert back to unissued shares of the corporation
- could be reissued by corporation at a price to be fixed by the board of directors
- issued shared but do not have the status of outstanding shares
- have no voting rights as long as they remain in treasury
- not entitled to dividends because dividends cannot be declared by a corporation to
itself

TITLE II: INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

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Sec. 10 Number and qualifications of incorporators

GENERAL QUALIFICATION OF AN INCORPORATOR

- Any number of natural persons not less than five (5) but not more than fifteen (15)
- All of legal age
- Majority are residents of the Philippines
- Each incorporator of a stock corporation must own or be a subscriber to at least one share of capital stock

STEPS IN CREATING A CORPORATION

1. Promotion - company is brought into existence by promoters
2. Incorporation
a. Drafting and executing the articles of incorporation with affidavit of capital subscribed
b. Filing with the Securities and Exchange Commission of the articles of incorporation with:
i. Treasurer’s affidavit showing at least 25% of the authorized shares has been subscribed and at
least 25% of the subscription has been paid in cash or property
ii. Favorable recommendation by an appropriate government agency
c. Payment of the filing and publication fees
d. Issuance of the certificate of incorporation from the SEC
3. Formal organization and commencement of business operations

Sec. 11 Corporate term

- shall exist for a period of not exceeding fifty (50) years from the date of incorporation unless sooner dissolved
or unless said period is extended
- cannot be extended exceeding fifty years (50 years) in any one instance
- no extension can be made earlier than five years prior to the original or subsequent expiry date

AUTOMATIC EXTENSION –
- amendment of articles of incorporation within the five year period before the expiration date for the existing
term

Sec. 12 Minimum capital stock required of stock corporations

General rule Stock corporations incorporated shall not be required to have any minimum authorized capital stock

Exceptions AT LEAST 60% OF CAPITAL IS OWNED BY CITIZENS OF THE PHILIPPINES

 corporations for exploration, development and utilization of natural resources
 public service corporations
 educational corporations

AT LEAST 60% OF CAPITAL STOCK OWNED BY CITIZENS OF THE PHILIPPINES

 banking corporations
 rural banks
 corporations engaged in coastwise shipping

WHOLLY OWNED BY CITIZENS

 corporations engaged in retail trade

AT LEAST 70% OF VOTING CAPITAL STOCK OWNED BY CITIZENS OF THE PHILIPPINES

 corporations engaged in pawnshop business

Sec. 13 Minimum subscription and paid-up capital

Pre-incorporation (A) At least 25% of the amount of the capital stock has been actually subscribed
(B) At least 25% of such subscription is paid

Post incorporation Continuance of the 25% subscription and 25% paid-up capital in case of increase of authorized
capital stock

Provision No paid-up capital be less than five thousand pesos

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Sec. 14 Contents of articles of incorporation

Contents (1) name of corporation

(2) specific purpose
(3) place where the principal office of the corporation is to be located
(4) term of the corporation
(5) names, nationalities and residences of incorporators
(6) number of directors (5-15 only)
(7) amount of authorized capital stock and par value per share
(8) contributors (amount, name, nationality, residence)

Sec. 15 Form of articles of incorporation

Inclusions (1) Must include an affidavit of eh treasurer of the corporation concerning the amount of capital stock
subscribed and paid

(2) Must be written in any of the official languages signed and acknowledged by incorporators

Sec. 16 Amendment of articles of incorporation

General rule Any provision or matter stated in the articles of incorporation may be amended by a majority vote of the
board of directors/trustees and the vote/written assent of the stockholders representing 2/3 of the
outstanding capital stock

Limitations Underscore changes, a copy thereof be duly certified by corporate secretary under oath and submitted to
SEC upon majority of directors have approved the required vote

Effectivity (A) Shall take into effect upon approval of SEC

(B) Within six (6) months if not acted upon

Provision Corporation governed by special law shall be accompanied by favorable recommendation regarding such
amendments

Sec. 17 Grounds when articles of incorporation or amendment may be rejected or disapproved

General rule SEC may reject the articles of incorporation / disapprove amendment if not compliant with the
requirements of the Code

Provision SEC gives reasonable time to correct/modify objectionable portions of the article/amendment

Grounds (1) Not substantial in form

(2) Purpose of corporation are patently unconstitutional, illegal, immoral, contrary to government
(3) Treasurer’s Affidavit is false
(4) Required percentage of ownership of capital stock has not been complied

Provision SEC shall not incorporate/amend articles without the favorable recommendation of government agency
appropriate for special corporations