Corporation

Classification of corporations

1. As to whether shares of stock are issued or not

• Stock corporation - One that has capital stock divided into shares and is authorized to distribute
dividends or allotments of the surplus profits on the basis of shares held. (Sec. 3)

• Non-stock corporation - One no part of the income of which is distributable as dividends to its
members, trustees or officers. (Sec. 87)

2. As to the state or country under whose laws it was created

• Domestic corporation - One incorporated under Philippine laws.

• Foreign corporation - One formed, organized and 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.
(Sec. 123)

Tests to determine nationality of a corporation:

• Incorporation test - The nationality of a corporation follows that of the country under whose laws it
was incorporated. This is the test applied in our jurisdiction as can be determined from the definition of
a foreign corporation. (See Sec. 123.)

• Control test - The nationality of a corporation follows that of the stockholders owning the controlling
interest. This is applied during wartime for the purpose of the security of the State, Accordingly, even if
the corporation was formed under our jurisdiction, it shall be considered a foreign corporation if
controlled by foreigners.

Note: The Securities and Exchange Commission explained that in the implementing rules of the Foreign
Investments Act (R.A. 7042) of a Philippine National, the control test shall be applied for purposes of
entitlement to certain financial privileges. The Grandfather Rule will be applied only if there are
questions about compliance with Filipino ownership requirements.

The "Grandfather Rule"

• This is a method by which the percentage of Filipino equity in corporations engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and other
nationalization laws, is accurately computed, and the diminution of said equity prevented. [Securities
and Exchange Commission (SEC Opinion, 1977]

• The presence of corporate stockholders with alien stockholding would as a result diminish effective
control of Filipinos, if this is not applied. (Integrated Bar of the Philippines Journal, FQ 1989)

Application of the "Grandfather Rule"

• The rule applies with respect to the registration of the subsidiary if the capital Structure of both the
parent corporation and its subsidiary do not comply with the 60%:40% Filipino to foreign ratio (i.e., not
less than 60% for Filipinos) as in the following illustration where the foreign ownership in the investing
corporation exceeds 40%. Thus, when the subsidiary applies for registration to engage in nationalized or
partly nationalized industries, such application will not be given due course because the Filipino equity
will be diminished to as low as 38.5%.

• If both the parent and the subsidiary corporations comply with the 60%:40% ratio, the Grandfather
Rule will not be applied as the parent corporation will be considered 100% Filipino. Thus, the application
of the subsidiary for registration will be given due course.

• Formulaa

(Filipino equity Investing) (equity investee)

100

3. As to number of persons composing them

▪ Corporation aggregate - One that is composed of more than one corporator.

• Corporation sole - One composed of only one person, like a bishop or rabbi.

4. As to whether its purpose is public or private

• Public corporation - One that is organized for the government of a portion of the State, like
provinces, cities, municipalities and barangays.

• Private corporation - One that is formed for a private purpose Corporation. or end, like Jollibee Foods

This classification includes the following:

• Government-owned or controlled corporations - These refer to corporations created under a special

law (Sec. 4) other than those for the government of a portion of the State, such as the Land Bank, GSIS,
etc., and those formed under the Corporation Code where the government owns at least a majority of
its outstanding voting capital stock. They may be performing governmental or proprietary function.

• Quasi-public corporations - Those organizedzed for profit which are granted a franchise by the State
to perform public service, such as Meralco.

5. As to whether its purpose is religious or not

• Ecclesiastical or religious corporation - One that is formed for a religious purpose.

• Lay corporation - One that is formed for a purpose other than ecclesiastical or religious.

6. As to whether its purpose is charitable or not

• Eleemosynary corporation - One that is organized for public charity.

• Civil corporation - One that is organized for business or profit.

7. As to their legal right to corporate existence

• De jure corporation - One that has been created in strict compliance with all the legal requirements
and whose right to exist as a corporation cannot be successfully attacked in a direct proceeding for that
purpose by the State.

• De facto corporation - One that is defectively created but there is an exercise of corporate rights and
franchise resulting from an attempt in good faith to incorporate on the part of its members. It has all the
powers of a de jure corporation but its due existence can be attacked directly in a quo warranto
proceeding.

• Its due existence cannot be attacked collaterally or as an incident to a proceeding.

• For a de facto corporation to exist, the following conditions must be present:

1. There must be valid law under which it is incorporated.

2. There must be an attempt in good faith to incorporate.

3. There must be an actual exercise of corporate powers.

4. A certificate of incorporation is issued despite a defect in its incorporation.

• Some defects that will result in the creation of a de facto corporation are: (a) when majority of the
incorporators are not residents of the Philippines; (b) when the name of the corporation is similar to
that of an existing corporation or one that is protected by law; or (c) when the acknowledgment is
defective.

• However, the following will preclude even the existence of a de facto corporation: (a) absence of
articles of incorporation; and (b) failure to file the articles of incorporation.

8. As to their relation to another corporation or other corporations

▪ Parent or holding corporation - One which owns the shares of another corporation and having
power, directly or indirectly, over the latter including the election of the directors thereof.

▪ Subsidiary corporation - One whose shares of stock are owned by another corporation, called the
parent corporation, which has the power to elect its directors.

9. As to whether its shares may be held by the public or not

▪ Close corporation - One whose shares are limited to a few and restricted as to their transfer, and
not listed in any stock exchange. (See Sec. 96.)

▪ Open corporation - One whose shares are open to the public such as those whose shares are listed
in the stock exchanges.

10. Other classifications

• Corporation by prescription - One which has exercised corporate powers for such a length of time
without interference by the State, and which, by fiction of law, is given the status of a corporation.

• Corporation by estoppel - One which is in reality not a corporation but is considered as one with
respect to those who are precluded by their admission or conduct from denying its existence, Liability of
persons assuming to act as a corporation and those dealing with it (Sec. 21)

1. 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 arising as result thereof.

When any such ostensible corporation is sued on any transaction entered by it as a corporation or on
tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

2. Any person who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Components of a corporation

• Corporators - Those who compose the corporation whether as stockholders or members.

• Incorporators - Those stockholders or members mentioned in the articles of incorporation as

originally forming and composing the corporation and who are signatories of such document.

Note: One's name may be mentioned in the articles of incorporation as a subscriber or member, but if
he is not a signatory thereto, he is a mere stockholder or member, not an incorporator.

• Stockholders - The corporators of a stock corporation.

• Members - The corporators of a non-stock corporation.

Promoters

• Concept

A promoter is a person, natural or juridical, who usually discovers a prospective business and brings
persons interested to invest in it through the formation of a corporation. Although the law does not
require the services of a promoter as a precondition to incorporation, a promoter facilitates the creation
of the corporation by negotiating contracts for its initial operations including subscriptions to its capital
stock, incorporating the business, and helping management start operations.

• Promoter's liability on contracts

A promoter is personally liable for contracts made for the benefit of the proposed corporation. If the
incorporation of the corporation does not materialize, the promoter remains personally liable. If the
corporation is formed, he remains liable until the corporation ratifies or adopts such contracts, or
releases him from liability. The third person must also agree to absolve him from liability.

• Corporation's liability on contracts entered into by a promoter

A newly-formed corporation is not automatically liable for pre-incorporation contracts entered into by a
promoter in its behalf. It will become liable only by the adoption, ratification or novation of such
contracts. The adoption or ratification of the contract is similar to the agency concept of ratification.

Capital stock and other terms, concept

 1. Capital stock The amount specified in the articles of Incorporation paid in, or procured to be paid in
for carrying on of the business of the corporation.

• Authorized capital stock-This is the total amount of shares which a corporation is allowed to issue if
the shares have a par value. If the shares do not have par value, the corporation does not have an
authorized capital stock but it has an authorized number of shares which it may issue. Once issued, the
corporation shall haye a capital stock but not an authorized capital stock.

• Subscribed capital stock This is the part of capital stock which is subscribed, whether paid or unpaid.

• Outstanding capital stock-This refers to the total shares of stock issued to subscribers or
stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement),
except treasury shares. (Sec. 137)

• Paid-up capital stock The part of the subscribed capital stock paid to the corporation.

• Unissued capital stock That part of the capital stock which is not issued or subscribed.

2. Legal capital It refers to the total par value of all issued par value shares, or the total cash or
consideration received for all issued no par value shares.

3. Stated capital This refers to the capital with which a corporation whose shares are without par
value commences its business and increased or diminished by subsequent capital transactions.

4. Capital It refers to actual property of the corporation in money and property.

Share of stock, concept

• A share of stock is one of the units into which the capital stock of the corporation is divided. It
represents the intangible interest or right which an owner has in the management, profits and assets of
the corporation. It is property, subject to conversion. (Shurdut Investment Corp. vs. Bataan Pulp, 44752-
R, March 13, 1975.)

Stock certificate, concept; distinguished from share of stock

• A stock certificate is the written acknowledgment by the corporation of the stockholder's interest in
the corporation and its property. It is distinguished from share of stock as follows:

1. Share of stock represents the rights and interest of a stockholder in the corporation. Stock
certificate is the

written evidence of such right.

 2. Share of stock is intangible personal property, while stock certificate is tangible personal property.

3. Share of stock may be issued even if not fully paid, except shares without par value which are
deemed fully paid and non-assessable upon issuance. Stock certificate, as a rule is issued only if the
subscription is fully paid.