TITLE - GENERAL PROVISIONS

REPUBLIC ACT NO. 11232 Equally well-settled is the principle that the corporate mask
may be removed or the corporate veil pierced -when the corporation
THE REVISED CORPORATION CODE OF THE PHILIPPINES is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will
TITLE 1 justifiably be impaled only when it becomes a shield for fraud,
GENERAL PROVISIONS
illegality or inequity committed against third persons.3
DEFINITIONS AND CLASSIFICATIONS
Characteristics of a corporation
SEC. 1. Title of the Code. - This Code shall be known as the "Revised 1. It is an artificial being;
Corporation Code of the Philippines". 2. Created by operation of law;
The present Revised Corporation Code (R.A. No. 11232), took effect
Olongapo Clty Sublc Water and Sewerage Co. Inc, GR No. 171626. August 6, 2014.
on February 23, 2019. 2
Ramon C. Lee and Antonio M. Lacdao vs. CA, etaL, GR No. 93695, February 4, 1992.
3
Phillpplne Nadonal Bank & Naäona.l Sugar Development Corporation vs. Andrada ElectTlc &
Engineering Company. GR No. 142936, Apt-it 17. 2002.
SEC. 2. Corporation Defined. - A corporation is an artificial being 186
created by operation of law, having the right of succession and
the powers, attributes, and properties expressly authorized by law 1
or incidental to its existence.
3. It has the right of succession; and
CORPORATION IS AN ARTIFICIAL BEING 4. It has the powers, attributes, and properties expressly
A corporation is a juridical entity vested with a legal personality authorized by law or incidental to its existence.
separate and distinct from those acting for and in its behalf and, in general,
from the people comprising iti Note:
The above definition and characteristics refer to private corporation.
It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it may be Is Boy Scouts of the Philippines (BSP) a private corporation?
related. The BSP, which is a corporation created for a public interest or
purpose, is subject to the law creating it.
It is a basic principle in Corporation Law that a corporation has a
personality separate and distinct from the officers or members who The BSP is a public corporation not subject to the test of
government ownership or control and economic viability. As presently
compose it. Not every stockholder or officer can bind the corporation constituted, the BSP still remains an instrumentality of the national
considering the existence of a corporate entity separate from those who government is a public corporation created bv Iaw for a public
compose it.2 purpose attached to the DECS pursuant to its Charter and the
Administrative Code of 1987. It is not a private corporation which is
required to be owned or controlled by the government and be
economically viable to justify its existence under a special law.
 TITLE - GENERAL PROVISIONS

The ownership and control test is likewise irrelevant for a public (1) that it has capital stock divided into shares, and
corporation like the BSP.4 (2) that it is authorized to distribute dividends and allotments of surplus and
profits to its stockholders.
What is government-owned or controlled corporation (GOCC)?
"Government-owned or controlled corporation" refers to any If only one requisite is present, it cannot be properly classified as a
agency organized as a stock or non-stock corporation, vested with stock corporation. As for non-stock corporations they must have members
functions relating to public needs whether governmentål or proprietary in and must not distribute any part of their income to said members. 6
nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital Boy Scouts oft.he Philippines vs. Commisslon on Audlt, G.R. No. 177131, June 7, 2011. s Section 2 (13) ofthe
stock.s In&oductory Provisions ofthe 1987 Code.
Phlllppine FLshe6es Development Authoriy vs. C.A. etal., G.R. No. 169836.

Thus, for an entity to be considered as a GOCC, it must either be 187

organized as a stock or non-stock corporation. Two requisites must concur
before one may be classified as a stock corporation. namely:

TITLE - GENERAL PROVISIONS

It is clear, therefore, that a corporation is considered a government- owned or -controlled corporation only when the Government directly
or
indirectly owns or controls at least a maiority or 51% share of the capita) stock. Applying this statutory criterion, the Court ruled in Leyson,
Jr. v. office of the ombudsman:
But these jurisprudential rules invoked by petitioner in support of his claim that the CllF companies are government owned and/or or
controlled corporations are incomplete without resorting to the definition of government owned or controlled corporation contained in par. (13), Sec.2, Introductory
Provisions of the Administrative Code of 1987, i.e., any agency organized as a stock or or non stock corporation vested with functions relating to public needs
whether government or proprietary in nature and owned by the government directly or indirectly through its instrumentalities either wholly or where applicable as in
the case of stock corporations to the extend of at least fifty-one percent of its capital stock. The definition mentions three (3) requisites, namely, first, any agency
organized as a stock or non stock corporation; second , vested with functions relating to public needs whether governmental or proprietary in nature, and third , owned
by the government directly or through its instrumentalities , either wholly or where applicable as in the case of stock corporation, to the extent of at least fifty one (51)
percent of its capital stock.

In the present case, all three corporations comprising the CIIF were organized as stock corporations. The UCPB-CIIF OWNS 44.10% OF
THE shares of Legaspi oil obviously below the 51 % shares removes this firm from the definition of government owned or controlled corporation

What is "Piercing the Veil of Corporate Fiction" or "Instrumentality" or Alter Ego doctrine?
 TITLE - GENERAL PROVISIONS

It is basic in corporation law that a corporation is a juridical entity vested with a legal personality separate a distinct from those acting for and
In its behalf and in general, from the people comprising it. The corporate veil should not and cannot be pierced unless it is clearly established that the
separate and distinct personality of the corporation was used to justify a wrong, protect fraud or perpetrate a deception.

Elements of piercing the veil of corporate fiction: allowed only if the following elements concur:

1. control – not mere stock control, but complete domination- not only of finances, but of policy and business practice in respect to the
transaction
2. such control must have been used by defendant to COMMIT A FRAUD OR A WRONG to perpetuate the violation of a statutory or other
positive legal duty or a dishonest and an unjust act in contravention of plaintiff ‘s legal right
3. said control and breach of duty must have proximately caused the injury or unjust loss complained of

Olongapo City vs. Subic Water and

189
TITLE 1 - GENERAL PROVISIONS Also on July 8, 1999, O Corp. formally protested the assessment
on the ground that it was not the party liable for the assessed deficiency
taxes.
Subsequently, the Customs Commissioner directed that U Corp.' pay the
amount P 99,216,580 representing U Corp.'s special duties, VAT, and Can the Commissioner of Customs lawfully pierce the veil of
Excise Taxes that it had failed to pay at the time of the release of its 17 oil corporate fiction in order to treat O Corp. as the mere alter ego of U
shipments that had arrived. Corp.? Answer:
On May 24, 1999, U Corp. conveyed to the Customs There was no ground to pierce the veil of corporate existence,
Commissioner U Corp.'s willingness to pay only P94,216,580, of which the A corporation, upon coming into existence, is invested by law
initial amount of would be taken from the collectibles of O with a personality separate and distinct from those of the persons
Corp. from the National Power Corporation, and the balance to be paid in composing it as well as from any other legal entity to which it may be
monthly installments over a period of 3. years to be secured with related. For this reason, a stockholder is generally not made to answer
corresponding post-dated checks and its future available tax credits. for the acts or liabilities of the •corporation, and vice versa. The separate
On July 2, 1999, the Customs Commissioner made a final demand and distinct personality of the corporation is, however, a mere fiction
for the total liability of P 138,060,200 upon U Corp. and O Corp. established bv law for convenience and.o promote. the ends of justice. It
may not be used or invoked for ends that subvert the policy and purpose
behind its establishment, or intended by law to which the corporation
owes its being. This is true particularly when the fiction is used to defeat
 TITLE - GENERAL PROVISIONS

public convenience, to justify wrong, to protect fraud, to defend crime, to fraud, defend crime, confuse legitimate legal or judicial issues,
confuse legitimate legal or judicial issues, to perpetrate deception, or perpetrate deception, or otherwise circumvent the law. It is
otherwise to circumvent the law. This is likewise true where the also noteworthy that from the outset the Commissioner of
corporate entity is being used as an alter ego, adjunct, or business Customs sought to collect the deficiency taxes and duties from
conduit for the sole benefit of the stockholders or of another corporate U Corp., and that it was only on July 2, 1999 when the
entity. In such instances, the veil of corporate entity will be pierced or Commissioner of Customs sent the demand letter to both U
disregarded with reference to the particular transaction involved. Corp. and O Corp. That was revealing because the failure of the
In Philippine National Bank u Ritratto Group, Inc., the Court has Commissioner of Customs to pursue the remedies against 0
outlined the following circumstances that are useful in the determination Corp. from the outset manifested that its belated pursuit of 0
of whether a subsidiary is a mere instrumentality of the Corp. was only an afterthought.ll
parentcorporation, viz:
Doctrine of piercing the corporate veil should be done with
1. Control, not mere majority or complete control, but complete caution
domination, not only of finances but of policy and business The Supreme Court emphasized that the piercing of the veil
practice in respect to the transaction attacked so that the of corporate fiction is frowned upon and can only be done if it has
corporate entity been clearly established that the separate and distinct personality
of the corporation is used to justify a wrong, protect fraud, or
190 perpetrate a deception.

1 Hence, any applicqtion Qf Che doctrine of piercinq the

corporate veil should he done with caution. A court should be
mindful of the milieu where it is to be applied. It must be certain
as to this transaction had at the time no separate mind, will or that the corporate fiction was •misused to such an extent that
existence of its own; injustice, fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be clearly and
2. Such control must have been used by the defendant to commit
convincingly established; it cannot be presumed. Otherwise, an
fraud or wrong, to perpetuate the violation of a statutory or other injustice that was never unintended may result from an erroneous
positive legal duty, or dishonest and unjust act in contravention of application. 12
plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of
see Commissloner of Customs vs. Otllnk Internaåonal Corporation, G.R. No. 161759. July 2,
2014,
In applying the "instrumentality" or "alter ego" doctrine, the
courts are concerned with reality, not form, and with how thé
corporation operated and the individual defendant's relationship to the
operation. Consequently, the absence of any one of the foregoing
elements disauthorizes the piercing of the corporate veil.
Indeed, the doctrine Qf piercing the corporate veil has no.
applicatiQn here because the Commissioner of Customs did not establish
that O Corn. had been up to avoid the payment of taxes or duties for 1 . Heirs ofFe Tan Uyvs. IntemaHonat Exchange Bank G.R. No. 166282, February 13, 2013.
2

purposes that would defeat public convenience, justify wrong, protect 191
 TITLE 1 - GENERAL PROVISIONS
TITLE 1 - GENERAL PROVISIONS have capital stock divided into shares and are
authorized to distribute to the holders of such shares,
Examples: dividends, or allotments of the surplus profits on the
The Supreme Court has pierced the corporate veil: basis of the shares held. All other corporations are
1. To ward off a judgment credit; nonstock corporations.
2. To avoid inclusion of corporate assets as part of the
estate of the decedent What is a stock corporation?
3. To escape liabilities arising from a debt; Corporations which have capital stock divided into
4. To perpetuate fraud and/or confuse legitimate issues; shares and are authorized to distribute to the holders of such
5. To promote or to shield unfair objectives; and shares dividends or allotments of the surplus profits on the
basis of the shares held are stock corporations.
6. To cover up' an otherwise blatant violation of the prohibition against
forum-shopping. Examples of GOCC organized as stock corporations:
Note: Congress has created through special charters several
Only in these and similar instances may the veil be pierced and disregarded. 13 government-owned corporations organized as stock
corporations. Prime examples are the Land Bank of the
192 Philippines Gnd the Development Bank of the Philippines.
Other government-owned corporations organized as stock
corporations under their special charters are the Philippine
193 Crop Insurance Corporation, Philippine International Trading
- GENERAL PROVISIONS Corporation, and the Philippine National Bank before it was
reorganized as a stock corporation under the Corporation
Code.16

SUCCESSION (Artificial Succession) What is a non-stock corporation?

The continuation of a corporation's legal status despite changes in A non-stock corporation is one where no part of its
ownership or management 15 income is distributable as dividends to its members,
trustees, or officers. Provided, th.at any profit which a non-
stock corporation may obtain as an incidental to its
POWERS OF A CORPORATION operations shall, whenever necessary or proper, be used for
A corporation has no power except those expressly conferred on it by the the furtherance of the purpose or purposes for which the
Corporation Code (or special laws) and those that are implied or Incidental to corporation was organized.
its existence. In turn, a corporation exercises said powers through its board of
The provisions governing stock corporation, when
directors and/or its duly authorized officers and agents.
pertinent, shall be applicable to non-stock corporations.17

Helrs ofFe Tan Uy vs Intemadonal Exchange Bank GR No. 166282, February 13, 2013. see p.1660,
Example of non-stock corporation:
St Luke's Medical Center, Inc. is organized as a non-
Blacks Law Dictionary, Tenth Edition.
stock and nonprofit charitable institution. 1B
194
RIGHT OF A CORPORATION TO OWN PROPERTY
Property acquired by a corporation is the property of a corporation and not the
property of stockholders or members.
Take note that a corporation is a juridical entity vested with a legal personality separate Manila International AltportAuthot•ity vs. CPS ecal.,G.R- No. 15S6SO, July 20.
and distinct from the-people comprising it 2006. see Section 86, Corporation Code of the Phlllpplnes.
Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. G.R. No.
195909, September 26, 2012.
SEC. 3. Classes of Corporations. - Corporations formed or organized under this 195
Code may be stock or nonstock corporations. Stock corporations are those which
- GENERAL PROVISIONS
 TITLE 1 - GENERAL
TITLE 1 PROVISIONS
Public corporation- a corporation organized for the government
or a portion of the state for the general good and welfare

Private corporation- a corporation formed for some private

purpose , benefit or end

GOCC- A corporation owned by the government directly or

indirectly or through its instrumentalities either wholly or
where applicable as in the case of stock corporations, to the
extent of at least 51% of its capital stock

Quasi-public corporation – a private corporation which has

accepted from the state a franchise or contract involving the
performance of public duties but which is organized for profit –
eg. Electric, water and transportation companies.

Parent or holding corporations – a corporation that hold stocks

in another corporation for purposes of control

Subsidiary corporation – a corporation more than 50% of the

voting stock of which is controlled directly or indirectly by another corporation, which
thereby becomes its parent corporation

Corporation sole – a corporation consisting of only one member for the

purpose of administering and managing as trustee, the affairs , property and
temporalities of any religious denomination, sect or church

Ecclesiastical corporations – corporation organized for religious

purposes

Lay corporation- a corporation organized for a purpose other than for

religion

Eleemosynary corporations – a corporation organized for charitable

purposes

Civil corporation =- a corporation organized for business or profit.

 instrumentalities either wholly, or, franchise or contract involving
TITLE where applicablé as in the case of the performance of public
stock corporations, to the extent of duties but which is organized
-
TITLE at least
GENERAL PROVISIONS
51% of its capital stock. for profit (examples are
electric, water, and trans
197 ortaäon com anies .
D
e cc D t corporation
ju or orati e fact o
re p on o
A corporation created in strict or The due incorporation of any
substantial conformity With the corporaäon claiming in good
mandatory statutory requirements faith to be a corporation under
for incorporation and the right of this Code, and its right to
which to exist as a corporation exercise corporate powers, shall
cannot be successfully attacked or not be inquired into collaterally
questioned by any party even in a in any private suit to which
direct proceeding for that purpose such corporation may be a
by the State. party. Such inquiry may be
made by the Solicitor General
in a quo warranto roceedin .
Corporation by estoppel C rporation By
o prescrip
tion
All persons who assume to act as One which has exercised
a corporation knowing it to be corporate powers for an
without authority to do so shall. indefinite period without
be liable as general partners for all interference on the part of the
debts, liabilities and damages government.
incurred or arising as a result
thereof.
Foreign
Domestic corporation corporation
A corporation incorporated under A corporation is formed,
the laws of the Philippines. organized or existing under any
laws other than those of the
Philippines and whose laws
allow Filipino citizens and
corporations to do business in
Ere its own coun or State.
ö Close
Open corp oration corporati
on
A corporation which is open to A close corporation is one
any person who may wish to whose articles of incorporation
become a stockholder or member provide (1) All the corporation's
thereto. issued stock of all classes,
exclusive of treasury shares,
shall be held of record by not
more than a specified number of
TITLE 1 TITLE GENERAL PROVISIONS
- GENERAL PROVISIONS may be created or established by special charters in the
interest of the common good and subject to the test of
economic viability.

The Constitution expressly authorizes the legislature to

create "government-owned or controlled corporations" through
special charters only if these entities are required to meet the twin
conditions Of common good and economic viability . In other
words, Congress has no power to create government-owned or
controlled corporations with special charters unless they are made
to comply with the two conditions of common good and economic
viability. The test of economic viability applies only to government
owned or controlled corporations that perform economic or
commercial activities and need to compete in the market place.
Being essentially economic vehicles of the State for the common
good — meaning for economic development purposes these
government-owned or controlled corporations with special
charters are usually organized as stock corporations just like
ordinary private corporations.21

SEC. 4. Corporations Created by Special Laws or Charters. SEC. S. Corporators and Incorporators, Stockholders and
Corporations created by special laws or charters shall be governed primarily Members. — Corporators are those who compose a
by the provisions of the special law or charter creating them or applicable corporation, whether as stockholders or shareholders in a
to them, supplemented by the provisions of this Code, insofar as they are stock corporation or as members in a nonstock corporation.
applicable. Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
General law vs. Special law
forming and composing the corporation and who are
A corporation is created by operation of law. It acquires a judicial
signatories thereof.
personality either by special law or a general law. The general law under
which a private corporation may be formed or organized is the Corporation Components of a corporation
Code, the requirements of which must be complied with by those wishing 1. Corporators
to incorporate. Only upon such compliance will the corporation come into Those who compose a corporation, whether as
being and acquire a juridical personality, thus giving rise to its right to exist stockholders or as members.
and act as a legal entity. On the other hand, a government corporation is normally 2. Incorporators
created by special law, referred to often as a

Corporations created by special laws or charters

Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not except by general law, provide
for the formation, organization, or regulation of private
corporations. Govemment owned or controlled corporations
 TITLE 1 - GENERAL PROVISIONS
TITLE
The stockholders or members mentioned in the articles of For the purpose of forming a new domestic corporation under the
incorporation as originally forming and composing the corporation and Revised Corporation Code, two (2) or more persons, but not more than fifteen
who are signatories thereof. (15), may organize themselves and form a corporation.
3. Stockholders (shareholders)
Only a One Person Corporation (OPC) may have a single stockholder,
as well as a sole director. Accordingly, its registration must comply with the
The owners of shares of stock in a stock corporation.
corresponding 'separate guidelines on the establishment of an OPC.
4. Members
The corporators of a non-stock corporation. Note:
5. Board of Directors or Board of Trustees Each incorporator of a stock corporation must own, or be a subscriber
The board of directors is the governing body in a stock to, at least one (1) share of the capital stock Each incorporator of a nonstock
corporation, while the Board of Trustees is the governing body in a corporation must be a member of the corporation.
non-stock corporation.
6. Corporate Officers The incorporators may be composed of any combination of nqturql persons",
SEC-registered pqrtnership/s SEC-registered domestic corporation/s or qssociation/(s as
The president, who shall be a director, a treasurer who may well as foreiqn corporation/s.
or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided
for in the by-laws. If the corporation is vested with public interest, Incorporators who are natural persons must be of legal age, and must
the board shall also elect a compliance officer. sign the Articles of Incorporation/Bylaws.
7. Subscribers
Note:
Persons who have agreed to take and pay for original,
Each individual signing the Articles of Incorporation/Bylaws must
unissued shares of a corporation formed or to be formed.
indicate the capacity' upon which he/she is affixing his/her signature thereto.
8. Underwriter
(i.e. Incorporator or Representative of XYZ Corp.)
A person who guarantees on a firm commitment and/or declared
best effort basis the distribution and sale of securities of any kind by
another company. An individual designated to sign the Articles of Incorporation/Bylaws
A person or entity, especially an investment banker, who on behalf of an incorporator, which is not: q natural person must also indicate
guarantees the sale of newly issued securities by purchasing all or part the corporate or partnership name of the entity being represented and for whom
of the shares for resale to the public. 22 he/she is executing the Articles of Incorporation/Bylaws.24
9. Promoter
Is a person who brings about or cause to bring about the SEC. 6. Classification of Shares. - The classification of shares, their
formation and organization of a corporation by: corresponding rights, privileges, or restrictions, and their stated par value, if
1. Bringing together the incorporators or the persons interested in any, must be indicated in the articles of incorporation. Each share shall be
the enterprise;
equal in all respects to every other share, except as otherwise provided in the
2. Procuring subscriptions or capital for the corporation; and
articles of incorporation and in the certificate of stock
3. Setting in motion the machinery which leads to the
incorporation of the corporation itself.
A founder or organizer of a corporation or business venture; one The shares in stock corporations may be divided into classes or series
who takes the entrepreneurial initiative in funding or organizing a business of shares, or both. No share may be deprived of voting rights except those
enterprise. 23 classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, That there shall always be a class or series
of shares with complete voting rights.

u
SEC Memorandum Circular (MC) No. 16, serles of 2019.
 TITLE 1 - GENERAL PROVISIONS TITLE 1 - GENERAL PROVISIONS
201 Who may classify shares?
- GENERAL PROVISIONS 1.Incorporators
It is to be determined by the incorporators by stating it
Holders of non voting shares shall nevertheless be entitled to vote in their articles of incorporation which will be filed with the
on the following matters: Securities and Exchange Commission.
(a) Amendment of the articles of incorporation; 2.Board of Directors and stockholders
The original classification of shares made by the
(b) Adoption and amendment of bylaws; incorporators which was stated in the articles of incorporation
Sale, lease, exchange, mortgage, pledge, or other disposition of can be amended by a majority vote of the board of directors and
all or substantially all of the corporate property; Incurring, the vote or written assent
of the stockholders representing at least 2/3 of the outstanding capita!
creating, or increasing bonded indebtedness;
Increase or decrease of authorized capital stock; stock
(0 Merger or consolidation of the corporation with another What are voting shares?
corporation or other corporations; Shares with a right to vote. There shall always be a class or
(g) Investment of corporate funds in another corporation or series of shares which have complete voting rights.
business in accordance with this Code; and (h) Dissolution of the
corporation. The Right to Vote in STOCK Corporations

Except as provided in the immediately preceding paragraph, the

vote required under this Code to approve a particular corporate act shall
be deemed to refer only-to stocks with voting rights.

The shares or series of shares may or may not have a par value:
Provided, That banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations
authorized to obtain or access funds from the public, whether publicly
listed or not, shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issue by a corporation may be given

preference in the distribution of dividends and in the distribution of
corporate assets in case of liquidation, or such other preferences:
Provided, That preferred shares of stock may be issued only with a
stated par value. The board of directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred
corporation that no par value shares must be issued may further
classify its shares for a corporation may further classify its shares for
the purpose of ensuring compliance with the purpose of ensuring
compliance with constitutional or legal requirements.

Doctrine of equality of shares

Each share shall be equal in all respects (rights and liabilities) to every other
share except as otherwise provided in the articles of incorporation and stated in the
certificate of stock
 TITLE 1 - GENERAL PROVISIONS
TITLE
The right to vote is inherent in and incidental to the ownership of
corporate stocks. It is settled that unissued stocks may not be voted ur
considered in determining whether a quorum is present in a stockholders'
meeting, or whether a requisite proportion of the stock of the corporation is
voted to adopt a certain measure or act . only stock actually issued and out-

standing mqv be voted. Under Section 6 of the Corporation Code (Also,

Each share of stock is entitled to vote unless otherwise provided in the
articles of incorporation or declared delinquent.

the Securities and Exchange shares of capital stock ussued without

par
Commission, hereinafter referred value shall be deemed fully paid
to as the "Commission". and nonassessable and the holder
of such shares shall not be liable
Shares of capital stock to the corporation or to its
issued without par value shall be creditor in respect thereto
deemed fully paid and provided that no par value shares
nonassessable and the holder of must be issued for a
such shares shall not be liable to consideration of at least 5 pesos
the corporation or to its creditors per share provided further that
the entire consideration received
in respect thereto provided
by the corporation for its no par
value shares shall be treated as
202
capital and shall not be available
for distribution as dividends.
delinquent under Section 67 of the
Code (Now Section 66, Revised
Corporation Code).
What are non voting
Neither the stockholders nor shares? Shares without a right to
the corporation can vote or represent vote. The law provides that
shares that have never passed to the shares classified and issued as
ownership of stockholders; or, having
so passed, have again been purchased preferred or redeemable shares
by the corporation. These shares are may be deprived of voting rights.
not to be taken into consideration in
determining majorities. When the law
speaks of a given proportion of the
Paul Lee Tan, etal. vs. Paul Syclp and Merritto Lim.
stock, it must be construed to mean C.R. No. 153468, August 17, 2006.
the shares that have passed from the
corporation, and that may be voted. 2S 203
 - GENERAL PROVISIONS - GENERAL PROVISIONS
TITLE 1
1 providing for exceptions to the exclusive grant of voting rights to Class
"A" stockholders. Which law was the amendment referring to? The
determination of which law to apply is necessary. There are two laws
being cited and relied upon by the parties in this case. . 1n this instance, the
*The Right to Vote in NON-STOCK Corporations law in force at the time of the 1992 amendment was the Corporation Code
In non-stock corporations, the voting rights attach tp (B.P. Blg. 68), not the Corporation Law (Act No. 1459), which had been
----membership. Members vote. as persons. in accordance with the repealed by then.
law and the by-laws of the corporation. Each member shall be We find and so hold that the law referred to in the amendment to
entitled to one vote unless so limited, broadened, or denied in the articles Article VII refers to the Corporation Code and no other law. Ät the time of
of incorporation or bylaws. the incorporation of M Corp. in 1977, the right of a corporation to classify
its shares of stock was sanctioned by Section 5 of Act No. 1459. The law
repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of
SEVENTH. xxx Only holders of Class A shares can have the classification _Df stock shares to corporations, but with a significant
change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions
right to vote and the right to be elected as directors or as on voting rights were explicitly provided for, such that "no share mav be
corporate officers. deprived of voting rights except those classified and issued qs "preferred"
or "redeemable n shares. unless otherwise provided this r.pde," Vhqt 'there
shall q(wqvs be q clqss or series Qf shqres which hqve complete vnänq
@.h.Ä.l' Section 6 of the Corporation Code (Also Section 6, Revised
On September 9, 1992, Article VII was again Corporation Code) being deemed written i.nto Article VII ofthe Articles of
amended to provide as follows: Incorporation of M Corp., it necessarily follows that unless Class "B"
shares of M Corp. stocks are clearly categorized to be "preferred" or
xxx Except when otherwise tv only holders of Class "A " "redeemable" shares, the holders of said Class "B" shares may not be
shares have the right to vote and the right to be elected as deprived of their voting rights. Note that there is nothing in the Articles of
directors or as corporate officers. Incorporation nor an iota of evidence on record to show that Class "B"
shares were categorized as either "'preferred" or "redeemable" shares. The
On February 9, 2001, the shareholders of M Corp. held their possible conclusion is that Class "B" shares fall under neither r.ategory and
annual stockholders' meeting and election of directors. During the thus. under the law. are allowed to exercise voting rights.
course of the proceedings, X, citing Article VI}, as amended, declared One of the rights of a stockholder is the right to participate in the
over the objections of herein A, B, and C, that no Class "B" control and management of the corporation that is exercised through his
shareholder was qualified to run or be voted upon as a director. In the vote. The right to vote is a right inherent in and incidental to the
past, M Corp. had seen holders of Class "B" shares voted for and 205
serve as members of the corporate board and some Class "B" share ownership of corporate stock, and as such is a property right The
owners were in fact nominated stockholder cannot be deprived of the right to vote his stock nor may
the right be essentially impaired, either by the legislature or by the
Paul Lee Tan. etal, vs. Paul Syclp and Merritto Lim, GR No. 15346B. August 17, 2006. corporation, without his consent, through amending the charter, or the
204 by-laws.27
for election as board members. Nonetheless, X went on to announce that the
candidates holding Class "A" shar What are non-voting shares?
Shares without a right-to vote. •
May the holders of Class "B" shares of M Corp. be deprived ofthe right to The law provides that shares classified and issued as preferred or
v redeemable shares may be deprived of voting right
Answer:
When Article Vll of the Articles of Incorporation of M Corp. was What is a common stock?
amended in 1992, the phrase "except when otherwise provided h.' law" was A class of stock entitling Che holder to vote on corporate matters,
inserted in the provision governing the grant of voting powers to Class "A" to receive dividends after other-claims and dividends have been paid
shareholders. This particular amendment is relevant for it speaks of a law (especially to preferred shareholders), and to share in assets upon
TITLE 1 - GENERAL PROVISIONS TITLE 1 - GENERAL PROVISIONS
liquidation. Common stock is often called as capital stock, if it
is the corporation's only class of stock outstanding. Also 17
ISÖ976,
see Cecilia Castillo, Arigele.G Bal'nghasay, etal, GR No. see
termed ordinary shares28
p. 1642, Blacks Dlcdonary, Tenth Edidon.
Republic Planters Bank vs. Hon. Enrique Agana, sr.. GR No. 51765, March 3. 19997.
Is one which has no preference and entitles the 206
shareholder to a pro rata division of the profits, if any. The
common stock shareholders have complete voting rights. up by the corporat regardless of retained earnings in the
books of the corporation, and upon such other terms and
What is a preferred stock?
conditions as may be stated in the articles of incorporation,
A preferred share of stock, on one hand, is one
which-entitles the holder thereof to certain preferences over which terms and conditions must also be stated in the
the holders of common stock. The preferences are designed certificate of stock representing said shares.
to induce persons to subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. The most Instances when holders of non-voting shares are allowed to vote
common forms may be classified into two: (1) preferred 1. Amendment of the articles of incorporation;
shares as to assets; and (2) preferred shares as to dividends.
The former is. a share which gives the holder thereof 2. Adoption and amendment of by-laws;
preference in the distribution of the assets of the corporation 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
in case of liquidation; the latter is a share the holder of which substantially all of the corporate property;
is entitled to receive dividends on said. share to the extent 4. Incurring, creating or increasing bonded indebtedness;
agreed upon before any dividends at all are paid to the 5. Increase or decrease of authorized capital Stock;
holders of common stoCk. •There is no guaranty, however,
that the share will receive any dividends. 29 6. Merger or consolidation of the corporation with another corporation or
other corporations;
Preferences granted to preferred stockholders,
moreover; do not give them a lien upon the property of the 7. Investment of corporate funds in another corporation or business
corporation nor make them.creditors of the corporation, the accordance with this Code; and
right of the former being always subordinate to the latter. 8. Dissolution of the corporation.

What are redeemable shares? Note:

Shares classified both as voting and non-voting shares are entitled
Redeemable shares may be issued by the corporation to vote in eight instance.s enumerated above.
when•expressly so provided in the articles of incorporation.
They maybe purchased or taken up by the corporation upon
What are par value shares?
expiration of a fixed period regardless of the existence of
unrestricted retained earnings in the books of the Shares with a value fixed in the articles of incorporation and the
corporation. certificate of stock

What are no par value shares?

Shares with no par value.

Note:
Stocks shall not be issued for a consideration less than the par issued
price thereof

Limitations on no par value shares

1. The no-par value shares must be issued for a consideration of at
least
 TITLE 1 - GENERAL PROVISIONS TITLE - GENERAL PROVISIONS
P5.OO per share; not to exceed five (5) years from the date of incorporaåon:
2. [t is deemed fully paid and non-assessable; Provided, That such exclusive right shad not be allowed if
3. The entire consideration for its issuance constitutes capital so that no its exercise will violate Commonwe
part of it should be distributed as dividends;
4. it cannot be issued as preferred shares;
5. It cannot be issued by banks, trust, insurance, and preneed companies, public What are founders' shares?
utilities, building and loan associations, and other corporations authorized to Shares classified as such in the articles of
obtain or access funds from the public whether publicly listed or not; and incorporation which may be given certain rights and
privileges (e.g. dividend payments) not enjoyed by the
207 owners of other stocks.
6. The articles of incorporation must state the fact that it is issued no
Limitation on founders' shares
par shares as well as the number of said shares. The exclusive right to vote and be voted for in the
election of directors, if granted, must be for a limited period not
What is promotional share? to exceed 5 years from the date of incorporation.
A share issued to promoters or those in some way
interested in the company for incorporating the
company, or for services rendered in launching or
208
promo#ng the welfare o fthe company.
SEC. 8. Redeemable Shares. - rédeemable shares may be issued by
What is share in escrow? the corporation when expressly provided in the articles of
A share subject to an agreement by virtue of which the incorporation. They are shares which may be purchased by the
company, deposited the grantor or his agent with a third a third
share is corporation from the holders of such shares upon the expiration of a
person to be kept by the depositary until the performance of
launching
certain condition or the happening of event a certain event fixed period, regardless of the existence of unrestricted retained
contained in the agreement. earnings in the books of the corporation, and upon such other terms
and conditions stated in the articles of Incorporation and the
by is fractional share?
What
deposited
certificate of stock representing the shares, subject to rules and
A share that is less than one full share.
certain regulations issued by the Commission.
What are redeemable shares?
Redeemable shares are shares usually preferred, which by
What is over-issued stock? their terms are redeemable at a fixed date, or at the option of
It is a stock or share issued in excess of the authorized capital either issuing corporation, or the stockholder, or both at a certain
stock. Such issuance is null and void. redemption price. A redemption by the corporation of its stock is,
in a sense, a repurchase of it for cqncellation.
What is convertible share?
A share that is convertible by the stockholder from one The present Code allows redemption of shares even if there are no
class to another class at a certain price andwithin a certain unrestricted retq(ned eqrninqs on the books of the corporation. This is a
another period. new provision which in effect qualifies the general rule that the corporation
cannot purchase its own shares except out of current retained earnings.
SEC. 7. Founders' Shares. - Founders' shares may be given certain However, while redeemable shares may be redeemed regardless of the
rights and privileges not enjoyed by the owners of other stocks. existence of unrestricted retained earnings, this is subject to the condition
that the
Where the exclusive right to vote and be voted for in the
the corporation has. after such redemption. assets in its books dto
election of directors is granted, it must be for a limited period
 pertinentlaws.

-
TITLE 1 GENERAL PROVISIONS TITLE 1 - GENERAL PROVISIONS
cover debts and liabilities .
debts and liabilities inclusive of capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they mature. 2

Limitations on redeemable shares

1. It must be expressly provided in the articles of incorporation;
2. The terms and conditions affecting said shares must be stated both in the
articles of incorporation and in the certificate of stock;
3. it may be deprived of voting rights in the articles of incorporation;
and
4. Redemption cannot be made if it will cause insolvency ofthe corporation.
What is retained earnings?
A corporation's accumulated income after dividends have been
distributed. Also termed earned surplus; undistributed profit- 31

Kinds of redeemable shares

1. Compulsory
The corporation is required to redeem the shares.
2. Optional
The corporation is not mandated to redeem the shares.

2 Republlc Planters Bank vs. Hon. Enrique A. Agana, Sr. etal., G.R- No. 51765, March 3, 1997. see p.
621, Black's Law Dictionary, Tenth Edidon.
209
 TITLE - GENERAL PROVISIONS
GENERAL PROVISIONS

SEC. 9. Treasury Shares. - Treasury shares are shares of

stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation
through purchase, redemption, donation, or some other
repercussions, not only to its depositors and creditors, but also to lawful means. Such shares may again be disposed of for
the banking industry as a Whole." reasonable price fixed by the board of directors.
Can redeemable shares be reissued?
What are treasury shares?
Redeemable shares, once redeemed are retired unless
Treasury shares are shares of stock which have
reissuance is expressly allowed in the articles of
incorporation. been issued and fully paid for, but subsequently reacquired
by the issuing corporation by purchase, redemption,
What is Trust Fund Doctrine? donation or through some other lawful means.
The Trust Fund Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. vs. Rivera, provides that subscriptions to
to the capital stock of a corporation constitute q fund to which the
creditors hqve q right to LQ0k for the sqtisfaction Qf their claims.
32 Republic Planters Bank vs. Hon. Enrique A Agana. Sr., etaL, G.R. No. Sl 765. March 3,
This doctrine is the underlying principle in the procedure for 1997. ong vs. David S. flu, GR No. 144476. April 8, 2003.
the distribution of capital assets, embodied in the Corporation Code,
which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce 211
the authorized capital stock (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained 1-
earnings, and (3) dissolution and eventual liquidation of the
to
corporation. MULTIPLE CHOICE PART f
that 1. contemplates
The distribution of corporate assets and property cannot be Voting rights an original
made depend on the whims and caprices of the stockholders, officers Right to dividends issuance
or directors of the corporation, or even, for that matter, on the earnest ofshares.
desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for the Treasury
protection of corporate creditors are followed. Otherwise, the What are watered stocks?2.
shares sold Stocks issued for a
"corporate peace" laudably hoped for by the court will remain nothing
below par consideration less than
but a dream because this time, it will be the creditors' turn to engage
value are not the par or issued price
in "squabbles and litigations" should the court order an unlawful
watered thereof or in any other
distribution in blatant disregard of the Trust Fund Doctrine. 33 form other than cash
stock
a valued in excess of its
watered fair
stock
 TITLE 1 - GENERAL PROVISIONS TITLE - GENERAL PROVISIONS

Watered stock The factors for the application l. Property acquired by a corporation is a. Non-stock corporation
refers only to original of the doctrine of piercing the the property of stockholders or members. b. Stock corporation
issue of shares but not corporate veil are the Il. A corporation exercises said powers c. Corporation aggregate
Note:
to a subsequent transfer following, excepe through its board of directors and/or its d. Corporation by
because of such shares by the a. Stock ownership by one or duly authorized offcers and agents. prescription
corporation. Thus, common ownership of both a. Only I is true
corporations b. Only Il is true Is one where no part of its
treasury shares may be
b. idenäty of directors and c. Both are b•ue income is distributable as
sold for less than their
omcers d. Both are false dividends to its members,
value. par or issued value for trustees, or officers.
c. The manner of keeping
they have already been Corporations which have capital stock a. Non-stock corporation
corporate books and
Note: issued and paidfor.3. records divided into shares and are authorized to b. Stock corporation
d. Idenäty of the stockholders distribute to the holders of such shares c. Corporation aggregate
dividends or allotments of the surplus
21
i. Any application of the profits on the basis of the shares held.
doctrine of piercing the 3
corporate veil should be done 212
with cauäon.
Il. A corporation its powers
through its board of directors
and/or its duly authorized
omcers and agents.
a. Only I is true
b. Only Il is true
c. Both are true
d. Both are false

The continuation of a
corporation's legal status
despite changes in ownership
or management
a. Succession
b. Inheritance
c. Dissolution
d. Liquidation