BATAS

THE CORPORATION CODE PAMBANSA

Blg. 68
 CORPORATION

Is an artificial being created by operation of

law, having the right of succession and the
powers, attributes and properties expressly
authorized by law or incident to its existence.
(Section 2, The Corporation Code of the
Philippines)
 ATTRIBUTES OF A
CORPORATION

(ALS-PAPI)
1. ARTIFICIAL being
2. Created by operations of LAW
3. Enjoys the right of SUCCESSION
4. The POWERS, ATTRIBUTES,
PROPERTIES expressly authorized by law
or INCIDENT to its existence.
QUESTION:
A corporation was created by a special law. Later,
the law creating it was declared invalid. May such
corporation claim to be a de facto corporation?

ANSWER:
NO. A private corporation may be created only
under the Corporation Code. Only public
corporations may be created under a special law.
Where a private corporation is created under a
special law, there is no attempt at a valid
incorporation and it cannot claim a de facto status.
 FRANCHISE

A franchise includes any special privilege or right

affected with public interest, conferred by the
State on corporations or persons and which does
not belong to the citizens of the country, generally
as a matter of common right. (De Leon, 2010,
citing JRS Business Corp. v. Imperial Insurance,
Inc., G.R. No. L19891, July 31, 1964)
 Kinds of Franchise
PRIMARY FRANCHISE SECONDARY FRANCHISE
The franchise or authority to exist as a corporation Special authority given to a corporation to engage in a
specialized business (e.g. banks, insurance companies,
right to use the streets of a municipality to lay pipes of
tracks, erect poles, or string wires).

Certain rights and privileges conferred upon existing

corporations.

The franchise to exercise powers and privileges

granted to such corporation to the business for which it
was created, including those conferred for purposes of
public benefit such as the power of eminent domain and
other powers and privileges enjoyed by public utilities.

GR: Granted by the Corporation Code Granted by a Government Agency, or a Municipal

XPN: In GOCC’s with a special charter, a special law Corporation
grants the franchise

Cannot be transferred without the approval of Congress It may ordinarily be conveyed or mortgaged under a
general power granted to a corporation to dispose of its
property (i.e. Through board resolution or approval of
stockholders
It can be subject to levy and sale on execution together
with corporate property
 Rule on whether a defective
incorporation result into a
partnership

GENERAL RULE:
Parties who had intended to participate or
actually participated in the business affairs of
the proposed corporation would be
considered as partners under a de facto
partnership and would be liable as such in
the action for settlement of obligation.
EXCEPTION:
Parties who took no part except to subscribe
for the stock in a proposed corporation, do
not become parties with other subscribers
and are not liable for action for settlement of
the alleged partnership contribution.
 ENGAGEMENT INTO A
CONTRACT OF PARTNERSHIP
OR A JOINT VENTURE
GENERAL RULE:
Corporations have no power to enter into partnership.
EXCEPTION:
The SEC allowed corporations to enter into partnerships with
other corporations and individuals provided:
1.Authority is expressly conferred by the charter or the AOI
and the nature of business is in line with the business
authorized by the charter or the AOI;
2.Partnership must be limited partnership;
3. If foreign corporation- must obtain license to transact
business in the country.
QUESTION: May a corporation enter into a
joint venture? (1996 Bar)

ANSWER: YES. A corporation may enter

into a joint venture with another where the
nature is in line with the business authorized
by its charter.
 Advantages vs. Disadvantages
of a Corporation

ADVANTAGE DISADVANTAGE
The capacity to act as a legal unit More complicated in formation
and management
Limitation of, or exemption from Higher cost of formation and
liability of shareholders operation
Continuity of Existence Lack of personal element
Transferability of shares Greater government control and
regulation
Centralized management of BO Management and control are
separate from ownership
Standardized method of Stockholders have little voice in
organization and financ the conduct of business
 JOINT ACCOUNT
VS.
PARTNERSHIP
JOINT ACCOUNT PARTNERSHIP
Has no firm name and is conducted Has a firm name.
in the name of the ostensible partner
Has no juridical personality and can Has juridical personality and may
sue or be sued only in the name of sue or be sued under its firm name
the ostensible partner.

Has no common fund. Has a common fund.

The ostensible partner manages its All general partners have the right of
business operations. management
Liquidation thereof can only be done Liquidation may, by agreement, be
by the ostensible partner. entrusted to a partner or partners
 CORPORATION VS. PARTNERSHIP
BASIS PARTNERSHIP CORPORATION
As to creation and Created by mere Created by operation
governing law agreement of the of law and governed
parties and governed by the Corporation
by the Civil Code Code

Commencement of From the moment of Existence of a

juridical personality meeting of minds of corporation
and term of existence partners commences from the
The term of date of issuance of the
partnership may be Certificate of
established for any Incorporation by the
period of time SEC
stipulated by the Existence cannot be in
partners. excess of 50 years, but
may be extended to
not more than 50 years
at any single instance.
Number of incorporators May be organized by at GR: Requires at least 5
least 2 persons incorporators but not more than 15.
XPN: Corporation sole

Powers GR: May exercise any May exercise only such powers as
power authorized by the may be granted by law and its
partners. articles of incorporation, implied
therefrom or incidental thereto.
XPN: Acts which are
contrary to law, morals,
good customs, public order,
public policy

Management When management is not GR: Power to do business and

agreed upon, every partner manage its affairs is vested in the
is an agent of the Board of Directors (BOD) / Board
partnership of Trustees (BOT).
XPNs: 1. Executive Committee
(Sec. 35, CC) 2. Management
Contract (Sec. 44, CC) 3. The AOI
of a close corporation may provide
that the business of the corporation
shall be managed by the
stockholders of the corporation
rather than by a board of directors.
(Sec. 97, CC)
Effect of A partner as such can sue The suit against a
mismanagement a co-partner who member of the BOD or
mismanages BOT who mismanages
must be brought in the
name of the
corporation (Derivative
suit).

Extent of liability to GR: Partners are liable Stockholders are liable

third persons personally and only to the extent of
subsidiarily (sometimes the shares subscribed
solidarily) for partnership by them whether paid
debts to third persons or not.

XPN: Limited partner

Right of Succession No right of succession Has right of

succession
Transferability of Partner cannot Stockholder has the
Shareholder’s transfer his interest in right to transfer his
interest the partnership shares without prior
without the consent consent of the other
of all the other stockholders unless
existing partners. the right of first
refusal is embodied
in the articles of
incorporation

Dissolution May be dissolved Can only be

any time by the will of dissolved with the
any or all of the consent of the State.
partners.
Death or insolvency
Death, civil of shareholders
interdiction and cannot dissolve the
insolvency of a corporation
partner dissolve the
partnership
CLASSES OF
CORPORATION
1. As to whether their membership is represented by
shares of stock or not:
a. Stock – one which has: 1. capital stock divided into
shares and; 2. are authorized to distribute to the holders of
such shares dividends or allotments or the surplus profits on
the basis of the shares held. (Sec. 3, CC)
b. Non-Stock – is one which do not issue shares and are
created not for profit but for public good and welfare and
where no part of its income is distributable as dividends to
its members, trustees, or officers. (Sec. 87, CC)
2. As to the number of persons who compose them:
a. Corporation aggregate - corporation consisting of more
than one member or corporator. The CC requires that these
corporations must be formed by “not less than 5 persons.”
(Sec. 10, CC)
b. Corporation Sole ‐ religious corporation which
consists of one member or corporator only and his
successor.

3. As to whether they are for religious purpose or not:

a. Ecclesiastical corporation ‐ one organized for religious
purpose.
b. b. Lay corporation ‐ one organized for a purpose other
than for religion.

4. As to whether they are for charitable purpose or not:

a. Eleemosynary [charitable] ‐ one established for religious
purposes.
b. b. Civil ‐ one established for business or profit.
5. As to state or country under or by whose laws they
have been created:
a. Domestic‐ one incorporated under the laws of the
Philippines.
b. Foreign ‐ 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. (Sec. 123, CC)

6. As to their legal right to corporate existence:

a. De jure ‐ one existing both in fact and in law.
b. De facto ‐ one existing in fact but not in law
7. As to whether they are open to the public or not:
a. Close ‐ one which is limited to selected persons or members
of the family. (Sec. 96‐ 105, CC)
b. Open ‐ one which is open to any person who may wish to
become a stockholder or member thereto.
8. As to their relation to another corporation:
a. Parent or Holding ‐ one which is related to another
corporation that it has the power either, directly or indirectly to,
elect the majority of the director of such other corporation
b. Subsidiary ‐ one which is so related to another corporation
that the majority of its directors can be elected either, directly or
indirectly, by such other corporation
9. As to whether they are corporations in a true sense or
only in a limited sense:
a. True ‐ one which exists by statutory authority
b. Quasi ‐ one which exist without formal legislative grant
9. As to whether they are corporations in a true sense
or only in a limited sense:
a. True ‐ one which exists by statutory authority
b. Quasi ‐ one which exist without formal legislative grant

10. As to whether they are for public (government) or

private purpose: (2001, 2004 Bar)
a) Public - one formed or organized for the government of
a portion of the State (like cities and municipalities) for the
purpose of serving the general good and welfare. (Aquino,
2014) If the corporation is created for political or public
purpose connected with the administration, then it is public.
(Diaz, et al., 2014)
b) Private - one formed for some private purpose, benefit
or end. It may either be a stock or non-stock. (Aquino, 2014
 REQUISITES FOR THE
FORMATION OF A STOCK
CORPORATION
1. A capital stock divided into shares, and

2. An authority to distribute to the holders of

such shares, dividends or allotments of the
surplus profits on the basis of the shares
held
DE FACTO SEC. 20, THE
CORPORATION CODE
CORPORATION OF THE PHILIPPINES
SECTION 20, THE
CORPORATION CODE OF
THE PHILIPPINES ;
The due incorporation of 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.
 REQUISITES OF A DE FACTO
CORPORATION (LAP)

1. Organized under a valid Law.

2. Attempt in good faith to form a corporation according to the

requirements of the law (Colorable Compliance).

3. Use of corporate Powers - The corporation must have

performed the acts which are peculiar to a corporation like
entering into a subscription agreement, adopting by-laws,
and electing directors (Actual User
 DEFECTS RESULTING IN
CREATION OF DE FACTO
CORPORATION
1. Articles of incorporation fails to state all the matters
required by the Code to be stated, or state some of
them incorrectly;

2. Name of the corporation closely resembles that of a

pre-existing corporation that will tend to deceive the
public;

3. Incorporators or a certain number of them are not

residents of the Philippines;
4. Acknowledgment of the articles of incorporation or
certificate of incorporation is insufficient or defective in form,
or it was acknowledged before the wrong officer;

5. Percentage of Filipino ownership of the capital stock

required for the business is less than that prescribed by law;

6. Minimum paid-up capital stock has not been paid to and

received by the corporate treasurer contrary to his affidavit;

7. Failure to submit by-laws on time.

 DEFECTS PRECLUDING
CREATION OF CORPORATION

1. Absence of articles of incorporation;

2. Failure to file articles of incorporation with

SEC;

3. Lack of certificate of incorporation from SEC

QUESTION:
University Publishing Company (UPC), through its
president, entered into a contract with Albert to publish
the commentaries on the Revised Penal Code. UPC
published the commentaries but it did not remit the
amount due to Albert. This prompted Albert to file a
collection suit. The RTC ruled against UPC. When the
Sheriff were about to implement the writ of execution
against the company, he discovered that UPC is not a
registered corporation. Consequently, the president of
UPC was substituted in the writ of execution. The
president invoked the separate legal personality of the
corporation as his defense.
a. Is UPC a de facto corporation?
b. Can the defense that UPC is a corporation by
estoppel be invoked by the president?
c. Who is liable for the debts of the corporation?
ANSWER:
a. NO. UPC cannot be a considered a de facto
corporation because it was not registered with the SEC.
b. NO. One who has induced another to act upon his
wilful misrepresentation that a corporation was duly
organized and existing under the law, cannot thereafter
set up against his victim the principle of corporation by
estoppel.
c. The president who negotiated with Albert is liable. A
person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable
for contracts entered into or for other acts performed as
such agent. (Albert v. University Publishing Co., G.R. No.
L-19118, January 30, 1965)
LIABILITIES OF OFFICERS
AND
DIRECTORS/TRUSTEES OF
A DE FACTO CORPORATION
MEMBERS OF A DE
FACTO CORPORATION
CANNOT BE HELD
LIABLE AS PARTNERS
BY THIRD PERSONS
THE EXISTENCE OF A DE
FACTO CORPORATION
CANNOT BE
COLLATERALLY ATTACKED
 DE FACTO CORPORATION
VS.
DE JURE CORPORATION
One which actually exists for all One created in strict or substantial
practical purposes as a corporation conformity with the mandatory
but which has no legal right to statutory requirements for
corporate existence as against the incorporation
State

There is a colorable compliance with There is substantial compliance with

the requirements of the law creating the requirements of the law creating
the corporation. the corporation.
Can be attacked directly but not Its right to exist as a corporation
collaterally. cannot be successfully attacked or
questioned by any party even in
direct proceeding for that purpose
by the State. (De Leon, 2010)
 SECTION 21, THE
CORPORATION BY CORPORATION
ESTOPPEL CODE OF THE
PHILIPPINES
SECTION 21, THE
CORPORATION CODE OF THE
PHILIPPINES;
All persons who assumes 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.
NOTE: Where there is no third person
involved and the conflict arises only among
those assuming the form of a corporation
who know that the corporation has not been
registered, there is NO corporation by
estoppel.
 DE FACTO CORPORATION
VS.
CORPORATION BY ESTOPPEL
DE FACTO CORPORATION CORPORATION BY ESTOPPEL
There is existence in law There is no existence in law
The dealings among the parties The dealings among the parties
on a corporate basis is not on a corporate basis is required
required
The State reserves the right to Quo warranto proceeding is not
question its existence through a applicable
quo warranto proceeding
Stockholders in a de facto Stockholders are liable as
corporation are liable as a de jure general partners for all debts,
corporation liabilities and damages incurred
SPECIAL
CORPORATIONS
 ORGANIZATION OF A
CORPORATION SOLE

A corporation sole is organized by the mere

filing of the verified articles of incorporation
by the head of any religious denomination,
sect or church with the SEC without the need
of an issuance of a certificate of
incorporation. Once filed, a separate juridical
character is acquired which is separate and
distinct from his natural character
 NATIONALITY OF A
CORPORATION SOLE

A corporation sole does not have any

nationality but for purposes of applying
nationalization laws, nationality is
determined not by the nationality of its
presiding elder but by the nationality of its
members, constituting the sect in the
Philippines. Thus, the Roman Catholic
Church can acquire lands in the Philippines
even if it is headed by the Pope.
ACQUISITION OF
PROPERTY BY A
CORPORATION SOLE
ALIENATION OF
PROPERTIES BY A
CORPORATION SOLE
PURCHASE AND SALE OF
PROPERTY BY A CORPORATION
SOLE FOR ITS CHURCH,
CHARITABLE, BENEVOLENT OR
EDUCATIONAL PURPOSES
DISSOLUTION OF A
CORPORATION SOLE IS NOT
NECESSARY FOR IT TO
BECOME A CORPORATION
AGGREGATE
NATIONALITY OF
CORPORATIONS
 WHO ARE CONSIDERED AS
PHILIPPINE NATIONALS?
Under RA 7042 (Foreign Investment Act of 1991),
the following are considered Philippine Nationals:

1. Corporations organized under Philippine laws of

which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens.
NOTE: RA 7042 provides that where a corporation and its non-Filipino
stockholders own stocks in a SEC-registered enterprise, at least 60%
of the capital stock outstanding and entitled to vote of both
corporations and at least 60% of the members of the board of
directors of both corporations must be Filipino citizens (DOUBLE 60%
RULE).
2. Corporations organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos.
 TESTS IN DETERMINING THE
NATIONALITY OF
CORPORATIONS
(PCGD)
1. Place of Incorporation test
2. Control test
3. Grandfather rule – Nationality is attributed to the
percentage of equity in the corporation used in
nationalized or partly nationalized area. This test is an
exception to the Control Test and was applied by the
SEC in several cases.
4. Domiciliary test – Determined by the principal
place of business of the corporation.
CORPORATE
JURIDICAL
PERSONALITY
DOCTRINE OF
SEPARATE JURIDICAL
PERSONALITY
NOTE : The general presumption is that a
corporation is a bona fide corporation, and
should alone be liable for its corporate acts
and liabilities.

The importance of this doctrine is that, a

corporation upon coming into existence, is
invested by law with a personality separate
and distinct from those persons composing
it.
 SIGNIFICANCE OF THE
DOCTRINE OF SEPARATE
PERSONALITY
1. Liability for acts or contracts
GENERAL RULE: the obligation of the
corporation is not the liability of the
stockholders, officers or directors

2. Right to bring actions

- may bring civil and criminal actions in its own
name in the same manner as natural persons
3. Right to acquire and possess property
- property conveyed to or acquired by the
corporation is in law the property of the corporation
itself as a distinct legal entity and not that of the
stockholders or members.
4. Acquisition of jurisdiction
- service of summons may be made on the
president, general manager, corporate secretary,
treasurer or in house counsel
5. Changes in individual membership
- corporation remains unchanged and unaffected in
its identity by changes in its individual membership
or ownership of its stocks.
 (1999 BAR)
QUESTION: As a result of perennial business
losses, a corporation's net worth has been wiped
out. In fact, it is now in negative territory.
Nonetheless, the stockholders did not like to give
up. Creditor-banks, however, do not share the
confidence of the stockholders and refuse to grant
more loans.
a. What tools are available to the stockholders to
replenish capital?
b. Assuming that the corporation continues to
operate even with depleted capital, would the
stockholders or the managers be solidarily liable for
the obligations incurred by the corporations?
ANSWER:
a. In the case where the creditor-banks refused to
grant more loans to the stockholders, the
stockholders can publicly sell their shares and
assets. They can also demand payment from
stockholders of their unpaid subscriptions where
there is no due date inscribed in the subscription
contract.
b. No, the stockholders or managers cannot be held
solidarily liable for the obligations incurred by the
corporation. They cannot be held personally liable
for as long as their acts are for and in behalf of the
corporation, within the scope of their authority and in
good faith. Also, a corporation has a personality
separate and distinct from its individual stockholders
STOCKHOLDERS ARE NOT THE
OWNERS OF CORPORATE
PROPERTIES AND ASSET
TRUST FUND
DOCTRINE
The capital stock, property, and other assets of a
corporation are regarded as equity in trust for the
payment of corporate creditors which are
preferred over the stockholders in the distribution of
corporate assets.

The distribution of corporate assets and

property cannot be made to depend on the
whims and caprices of the stockholders,
officers, or directors of the corporation unless
the indispensable conditions and procedures for the
protection of corporate creditors are followed.
STOCKHOLDERS ARE NOT
REAL PARTIES IN INTEREST
TO CLAIM DAMAGES AND
RECOVER COMPENSATION
 (2000 BAR)

QUESTION: Nine individuals formed a private

corporation pursuant to the provisions of the
Corporation Code of the Philippines. Incorporator S
was elected director and president-general
manager. Part of his emolument is a Ford
Expedition, which the corporation owns. After a few
years, S lost his corporate positions but he refused
to return the motor vehicle claiming that as
stockholder with a substantial equity share, he owns
that portion of the corporate assets in his
possession. Is the contention of S valid? Explain.
ANSWER: NO. The Ford Expedition is a corporate
property. A corporation has a separate and distinct
personality that when it owns a property, it shall not
be deemed to be the property of its stockholder no
matter how substantial the ownership of his shares
is. Shareholders are in no legal sense the owners of
corporate property owned by the corporation as a
distinct legal personality. (Concepcion Magsaysay
Labrador v. CA, G.R. No. 58168, December 19,
1989)
CIRCUMSTANCES THAT ARE NOT
ENOUGH TO WARRANT
DISREGARD OF THE SEPARATE
JURIDICAL PERSONALITY OF
THE CORPORATION
1. ownership of controlling shares;

2. common directors and similarity of

business.
ENTITLEMENT OF
CORPORATIONS TO
CONSTITUTIONAL
RIGHTS
1. Right to Due Process (Sec. 1, Art. III,
Constitution)

2. Right against unreasonable searches

and seizures (Sec. 2, ibid)
LIABILITY FOR
TORTS AND CRIMES
RECOVERY OF
MORAL DAMAGES
RECOVERY OF MORAL DAMAGES

GENERAL RULE: A corporation is not entitled to moral

damages because it has no feelings, no emotions, no
senses.
EXCEPTIONS:
1. The corporation may recover moral damages under item
7 of Article 2219 of the New Civil Code because said
provision expressly authorizes the recovery of moral
damages in cases of libel, slander, or any other form of
defamation. *Article 2219(7) does not qualify whether the injured party is a
natural or juridical person. Therefore, a corporation, as a juridical person, can
validly complain for libel or any other form of defamation and claim for moral
damages.

2. When the corporation has a reputation that is debased,

resulting in its humiliation in the business realm
DOCTRINE OF
PIERCING THE
CORPORATE VEIL
 REQUIREMENT TO JUSTIFY
THE PIERCING OF THE
CORPORATE VEIL
- allegation or proof of fraud or other public
policy considerations is needed.
- the wrongdoing must be clearly and
convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended
may result from an erroneous application
 EFFECT OF PIERCING THE
CORPORATE VEIL
1. The corporation will be treated merely as an
association or collection of persons or individuals
undertaking business as a group and the stockholders or
members will be considered as a corporation, that is,
liability will attach personally or directly to the officers and
stockholders.
2. Where there are two (2) corporations, they will be
merged into one, the one being merely regarded as the
instrumentality, agency, conduit or adjunct of the other
3. The corporation continues for other legitimate
objectives, the corporate character not necessarily
abrogated.
GROUNDS FOR APPLICATION
OF DOCTRINE (FACO)

a. if the fiction is used to perpetrate fraud (Fraud

Test);
b. if a certain corporation is only an adjunct or an
extension of the personality of the corporation (Alter
ego or Instrumentality Test)
c. the complete control of one corporate entity to
another which perpetuated the wrong is the proximate
cause of the injury (Control Test)
d. if the fiction is pierced to make the stockholders
liable for the obligation of the corporation (Objective
Test)
 ACQUISITION OF JURISDICTION
AS PREREQUISITE FOR THE
APPLICATION OF THE DOCTRINE

Two-fold Implication:
1. the court must first acquire jurisdiction over the
corporation or corporations involved before its or their
separate personalities are disregarded; and
2. the doctrine of piercing the veil of corporate entity can
only be raised during a full-blown trial over a cause of
action duly commenced involving parties duly brought
under the authority of the court by way of service of
summons or what passes as such service.
 CIRCUMSTANCES WHICH DO
NOT WARRANT THE
PIERCING OF THE
CORPORATE VEIL(FCS)
1. A corporation owns fifty (50%) of the capital stock of another
corporation, or the majority ownership of the stocks of a corporation
is not per se a cause for piercing the veil.
2. Two corporations have common directors or same or single
stockholder who has all or nearly all of the capital stock of both
corporations is not in itself sufficient ground to disregard separate
corporate entities.
3. There is a substantial identity of the incorporators of the 2
corporations does not necessarily imply fraud and does not warrant
piercing the corporate veil.
 TEST IN DETERMINING
APPLICABILITY
(ECAO)
1. When the corporation is used to defeat public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; (Equity Cases)
2. In fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; (Control Test)
3. In Alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation
4. The Objective test where the end result in piercing the veil of corporate
fiction is to make the stockholders liable for debts and obligations of the
Corporation not to make the Corporation liable for the debts and obligations
of the stockholders.
 THREE-PRONGED TEST TO
DETERMINE THE APPLICATION
OF THE ALTER EGO/
INSTRUMENTALITY THEORY:
1. Instrumentality or Control test
-not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own
2. Fraud test
-such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff’s
legal right
3. Harm test
- control and breach of duty must have proximately caused the injury
or unjust loss complained of
NOTE: Piercing the corporate veil based on
the alter ego theory requires the
concurrence of the three elements - control,
fraud or fundamental unfairness, and harm
or damage. The absence of any of these
elements prevents piercing the corporate
veil.
 INDICATIONS THAT A SUBSIDIARY
CORPORATION IS A MERE
INSTRUMENTALITY OF ITS PARENT
CORPORATION
1. The parent corporation owns all or most of the capital
stock of the subsidiary.
2. The parent and subsidiary corporations have common
directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
incorporation.
5. The subsidiary has grossly inadequate capital.
INCORPORATION
AND ORGANIZATION
 INCORPORATION

It is the performance of conditions, acts,

deeds, and writings by incorporators, and
the official acts, certification or records,
which give the corporation its existence.
6. The parent corporation pays the salaries and other expenses or
losses of the subsidiary.
7. The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.
8. In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the
parent corporation, or its business or financial responsibility is referred
to as the parent corporation’s own.
9. The parent corporation uses the property of the subsidiary as its
own.
10. The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their orders from
the parent corporation.
11. The formal legal requirements of the subsidiary are not observed.
STEPS IN THE CREATION
OF A CORPORATION
1. Promotion

2. Incorporation (Sec. 10, CC)

3. Formal organization and

commencement of business operations
(Sec. 22, CC)
 COMPONENTS OF A
CORPORATION (DUMP-ISSCO)
1. Corporators
2. Incorporators
3. Directors and trustees
4. Corporate Officers
5. Stockholders
6. Members
7. Promoter
8. Subscribers
9. Underwriter
 PROMOTER
-a person who, acting alone or with others, takes
initiative in founding and organizing the business or
enterprise of the issuer and receives consideration
therefor. (SRC, Sec. 3.10)
-is a person who brings about or cause to bring
about the formation and organization of a
corporation by:
1.Bringing together the incorporators or the persons
interested in the enterprise;
2. Procuring subscriptions or capital for the
corporation; and
3. Setting in motion the machinery which leads to
the incorporation of the corporation itself.
 PROMOTIONAL ACTIVITIES
Promotional activities includes: (DIA)
1. Discovery – consists of finding a business opportunity to
be developed.
2. Investigation – entails an analysis of the proposed
business to determine whether or not it is economically
feasible.
3. Assembly – Includes the bringing together of the
necessary personnel, property or money to set the business
in motion as well as secondary details of setting up the
corporation itself (De Leon, supra)
 RELATION OF THE
PROMOTER TO THE
CORPORATION
- occupies a fiduciary or quasi-trust relation toward
the corporation when it comes into existence and
towards the subscribers prior to its organization, as
long as they are acting as promoters
- this fiduciary relation imposes upon the promoter to
act in good faith in all dealings in behalf of the
corporation to protect the corporation from dishonest
promoters
*Promoter is not an agent of the corporation
 PROMOTER IS NOT AN AGENT
OF THE CORPORATION
1. If Corporation was never formed –
The promoter is liable for his pre-incorporation acts and
assumes the risk that he may not be reimbursed or relieved of
liability in the event that the corporation is not formed
GENERAL RULE: The promoter is liable to return the money
paid by the subscribers for shares in a projected corporation,
which failed to organize, this notwithstanding that the money
has been already applied in payment of preliminary expenses or
otherwise.
EXCEPTION: Where the subscriber agrees that the amount
paid on his subscription may be applied on certain promotional
or development expenses and it is so applied, the promoters
are not personally liable for the amount paid on the subscription
2. If Corporation was formed-
GENERAL RULE: If the contract is partly to be
performed before incorporation, the promoters solely are
liable even if the promoter signed "on behalf of
corporation to be formed, who will be obligor.
EXCEPTION: The promoter may be absolved from
liability by the adoption of the corporation of the contract.
The adoption must be expressed in a novation or agreement
to the effect:

1. That the creditor agreed to look solely to the new corporation

for payment; or
2. That the promoter did not have any duty toward the creditor
to form the corporation and give the corporation the opportunity
to assume and pay the liability.
 NUMBER AND
QUALIFICATIONS OF
INCORPORATORS
1. GENERAL RULE: Natural person
 EXCEPTION: Under the Rural Banks Act of 1992, incorporated
cooperatives are allowed to be incorporators of rural banks.

2. GENERAL RULE : Incorporators must not be less than 5 but not more
than 15
EXCEPTION : 1. Corporation sole and 2. Educational institutions

3. An incorporator must be of Legal age

4. Majority of the incorporators must be Residents of the Philippines (2006

Bar)
5. Each must own or subscribe to at least 1 share. (Sec.10, CC)
 INCORPORATOR
VS.
CORPORATOR
BASIS INCORPORATOR CORPORATOR
Who are they? Those stockholders or Those who compose a
members mentioned in corporation, whether as
the AOI as originally stockholders or as
forming and composing members.
the corporation and who
are signatories thereof.
Signatory of the AOI? A signatory of the AOI May or may not be
signatory of the AOI
Effect upon the sale of Does not cease to be an Ceases to be a
his shares incorporator upon sale of corporator by sale of his
his share shares in case of stock
corporation.

In case of non-stock
corporation, when the
corporator ceases to be
a member.
BASIS INCORPORATOR CORPORATOR

Number of GR: 5 to 15 natural persons GR: No limit XPN:

incorporators/ XPNs: 1. In case of rural banks, Close corporations
corprorator registered cooperatives may be
incorporators.
2. corporation sole – only 1
incorporator

Filipino GR: Filipino citizenship is not a Same rule applies

Citizenship requirement.
XPN: When engaged in a
business which is partly or wholly
nationalized where majority must
be citizens.
Same
 INCORPORATOR
VS.
SUBSCRIBER (2012 BAR)
BASIS INCORPORATOR SUBSCRIBER
Who are they? Those stockholders or They are persons who
members mentioned in the have agreed to take and
AOI as originally forming and pay for original,
composing the corporation. unissued shares of a
corporation formed or to
be formed.
Signatory of the A signatory of the AOI May or may not be
AOI? signatory of the AOI
Number of GR: 5 to 15 natural persons GR: No limit
incorporators/subs XPNs: 1. In case of rural XPN: Close
cri ber banks, registered corporations – not more
cooperatives may be than a specified number
incorporators. of persons, usually not
2. corporation sole – only 1 exceeding 20 (CC, Sec.
incorporator 96
BASIS CORPORATORS SUBSCRIBERS
Filipino Citizenship GR: Filipino citizenship Same rule applies
is not a requirement.

XPN: When engaged in

a business which is
partly or wholly
nationalized where
majority must be
citizens.

Residence requirement Majority of the Residency requirement

incorporators must be is not available
residents of the
Philippines.
CORPORATE NAME
LIMITATIONS ON THE USE OF
CORPORATE NAME

1. No corporate name may be allowed by the SEC if

the proposed name is identical or deceptively or
confusingly similar to that of any existing
corporation. (CC, Sec. 18)
2. No corporate name may be allowed by the SEC if
the proposed name is identical or deceptively or
confusingly similar to any other name already
protected by law. (Sec. 18, CC)
3. The proposed name is patently deceptive,
confusing or contrary to existing laws. (Sec. 18, CC)
4. If the name applied for is similar to the name of a
registered firm, the applicant shall at least contain one or
more distinctive words to the proposed name to remove
the similarity or differentiate it from the registered name.
However, the addition of these distinctive words shall not
be allowed if the registered name is coined or unique
unless the board of directors of the subject corporation
gives its consent to the applied name. (De Leon, 2010,
citing SEC Memo, Cir. No.

5, Series of 2008) 5. The corporate name shall contain the

word “Corporation” or its abbreviation “Corp.” or
“Incorporated”, or “Inc.” The corporate name of a
foundation shall use the word “Foundation”. This is to
distinguish the corporation from a partnership and other
business organizations. (SEC Memo. Circ. No. 5, Series of
2008)
6 .A person’s full name or surname may be used in a corporate
name: a. If he is a stockholder of the corporation and has consented
to such use; b. If the person is already deceased, the consent shall
be given by his estate; c. The Commission may require a registrant to
explain to its satisfaction the reason for the use of a person’s name;
d. The meaning of initials used in a name shall be stated by the
registration the articles of incorporation in a separate document
signed by an incorporator or director. (SEC Memo. Circ. No. 5, Series
of 2008)
7. The name of a dissolved firm shall not be allowed to be used by
other firms within 3 years after the approval of the dissolution of the
corporation by SEC, unless allowed by the last stockholders
representing at least majority of the outstanding capital stock of the
dissolved firm. (SEC Memo. Circ. 14, Series of 2000)
8. For as long as a corporation is existing regardless of whether or
not it is in operation, its corporate name cannot be used by any other
group or corporation. (SEC Opinion, Sept. 2, 1993)
DOCTRINE OF
SECONDARY MEANING
It is the doctrine which states that a word or
phrase originally incapable of exclusive
appropriation with reference to an article on
the market, because geographically or
otherwise descriptive, might nevertheless
have been used so long and so exclusively
by one producer with reference to his article
that, in that trade and to that branch of the
purchasing public, the word or phrase has
come to mean that the article was his
product. (Philippine Nut Industry, Inc. vs.
Standard Brands. Inc. G.R. No.L23035, July
31, 1975)
The doctrine of secondary meaning requires
that the word or phrase used in the
corporate name has been for such length of
time with such exclusivity as to have
associated or identified the corporation in the
mind of the general public (or at least that
portion of the general public to do with the
corporation’s market). (Lyceum of the
Philippines vs. CA, supra)
A CORPORATION THAT
CHANGES ITS CORPORATE
NAME IS NOT CONSIDERED
AS A NEW CORPORATION
NOTE: The amendments of the articles of
incorporation of Zeta to change the
corporate name to Zuellig Freight and Cargo
Systems, Inc. did not produce the dissolution
of the former as a corporation (Zuellig
Freight and Cargo Systems vs. National
Labor Relations Commission, et al., G.R. No.
157900, July 22, 2013)
Q
CORPORATE TERM
TERM OF CORPORATE EXISTENCE
GENERAL RULE: The period stated in the AOI, this in no
case, shall exceed 50 years.

EXCEPTION: Unless sooner dissolved or unless said period

is extended. (CC, Sec. 11)

NOTE: Extension may be made for periods not exceeding 50 years in any single
instance by an amendment of the articles of incorporation. However, extension
must be made within 5 years before the expiry date of the corporate term, unless
there are justifiable reasons for an earlier extension as may be determined by
the SEC. (CC, Sec. 11)
Extension must also comply with procedural requirements for amendment of
AOI.
DOCTRINE OF RELATION
OR RELATING BACK
DOCTRINE
GENERAL RULE: The filing and recording of a
certificate of extension after the term cannot relate
back to the date of the passage of the resolution of
the stockholders to extend the life of the corporation.

EXCEPTION: The doctrine of relation applies if the

failure to file the application for extension within the
term of the corporation is due to:
1. The neglect of the SEC officer with whom the
certificate is required to be filed; or
2. A wrongful refusal on his part to receive it.
(Aquino, 2006)
MINIMUM CAPITAL STOCK
AND SUBSCRIPTION
REQUIREMENTS
 CAPITAL STOCK
REQUIREMENTS
GENERAL RULE: There is no minimum authorized
capital stock as long as the paid-up capital is not
less than P5,000.00.

EXCEPTION: As provided by special law.

Minimum stock subscription and paid-up capital
requirements

At least 25% of the authorized capital stock as stated in

the AOI must be subscribed at the time of incorporation,
and at least 25% of the total subscription must be paid
upon subscription. (Sec 13, CC)
 PAID-UP CAPITAL

Paid-up capital forms part of the authorized

capital stock of the corporation, subscribed
and then actually paid for. The assets
transferred and the loans extended to a
corporation should not be considered in
computing the paid-up capital of the
corporation.
 TIME WHEN THE UNPAID
SUBSCRIPTION IS PAYABLE

The balance or the unpaid subscription shall

be payable:
1. On a date or dates fixed in the contract of
subscription without need of call; or
2. In the absence of a fixed date or dates,
upon call for payment by the BOD. (Sec. 13,
CC)
ARTICLES OF
INCORPORATION (AOI)
 NATURE AND FUNCTION OF
ARTICLES
Articles of Incorporation
The Articles of Incorporation (AOI) is one that defines the
charter of the corporation and the contractual relationships
between the State and the corporation, the stockholders and
the State, and between the corporation and its stockholders.
Three-fold nature of AOI
An AOI, which stands as the corporate charter is a contract of
three-fold nature because it is a contract between:
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.
 CONTENTS
All corporations organized under the Code shall file with the
SEC an AOI in any of the official languages duly signed
and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise
prescribed by the Code or by special law: (NaP-
PlaTINumASONO)
1. NAme of corporation;
2. Purpose/s, indicating the primary and secondary
purposes (Purpose Clause);
3. PLAce of principal office;
4. Term of existence;
5. Names, nationalities and residences of Incorporators;
6. NUMber of directors or trustees, which shall not be less
than 5 nor more than 15, except for corporation sole;
7. Names, nationalities, and residences of the persons who
shall Act as directors or trustees until the first regular ones
are elected and qualified;
8. If a Stock corporation, the amount of its authorized
capital stock, number of shares and in case the shares are
par value shares, the par value of each share;
9. Names, nationalities, number of shares, and the
amounts subscribed and paid by each of the Original
subscribers which shall not be less than 25% of authorized
capital stock;
10. If Non-stock, the amount of capital, the names,
residences, and amount paid by each contributor, which
shall not be less than 25% of total subscription; name of
treasurer elected by subscribers; and
11. Other matters as are not inconsistent with law and
which the incorporators may deem necessary and
convenient. (Sec. 14, CC)
AMENDMENT
 LIMITATIONS IN THE
AMENDMENT OF AOI
1. The amendment must be for legitimate purposes
and must not be contrary to other provisions of the
CC and special laws;
2. Approved by majority of BOD/BOT;
3. Vote or written assent of stockholders
representing 2/3 of the outstanding capital stock or
2/3 of members;
4. The original and amended articles together shall
contain all provisions required by law to be set out in
the AOI. Such articles, as amended, shall be
indicated by underscoring the change/s made;
5. Certification under oath by corporate secretary and a majority of the
BOD/BOT stating the fact that said amendment/s have been duly approved
by the required vote of the stockholders or members, shall be submitted to
the SEC;
6. Must be approved by SEC (Sec. 16, CC);
7. Must be accompanied by a favorable recommendation of the
appropriate government agency in cases of:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies and other financial intermediaries
e. Insurance companies f
. Public utilities
g. Educational institutions
h. Other corporations governed by special laws (Sec. 17 [2], CC)
TIME WHEN THE AMENDMENT OF
THE AOI TAKES EFFECT

The amendment of the AOI takes effect either:

1. Upon approval by the SEC, that is, upon issuance
of amended certificate of incorporation or
2. From the date of filing with the SEC:
a. If not acted upon within 6 months from the date of
filing; and
b. For a cause not attributable to the corporation.
 CONVERSION OF A STOCK
CORPORATION INTO A NON-STOCK
CORPORATION (2001 BAR)
A stock corporation may be converted into a non-stock
corporation by mere amendment provided, all the
requirements are complied with. Its rights and liabilities
will remain. (CC, Sec. 16)
NOTE: A non-stock corporation cannot be converted into a stock
corporation through mere amendment of its Articles of Incorporation.
This would violate Section 87 of the Corporation Code, which prohibits
distribution of income as dividends to members. Giving the members
shares, is tantamount to distribution of its assets or income. (SEC
Opinion, March 20, 1995) Under Section 122 of the Corporation
Code, the non-stock corporation must be dissolved first.
 NON-AMENDABLE ITEMS
Those matters referring to accomplished facts,
except to correct mistakes:
1. Names of incorporators;
2. Names of original subscribers to the capital stock
of the corporation and their subscribed and paid up
capital;
3. Names of the original directors;
4. Treasurer elected by the original subscribers;
5. Members who contributed to the initial capital of
the non‐stock corporation;
6. Witnesses to and acknowledgment with AOI.
GROUNDS FOR THE REJECTION
OR DISAPPROVAL OF THE AOI
OR AMENDMENT THERETO

1. If such is not substantially in accordance with the

form prescribed by the CC;
2. The purpose/s of the corporation is/are patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The treasurer’s affidavit concerning the amount of
capital stock subscribed and/or paid is false;
4. The required percentage of ownership of the
capital stock to be owned by Filipino citizens has not
been complied with. (CC, Sec. 17)
 EFFECT OF NON-USE OF
CORPORATE CHARTER AND
CONTINUOUS INOPERATION
OF A CORPORATION

1. Failure to organize and commence business

within 2 years from incorporation – its corporate
powers ceases and the corporation shall be deemed
dissolved.
2. Continuous inoperation for at least 5 years –
ground for the suspension or revocation of corporate
franchise or certificate of incorporation (Sec. 22, CC)
REGISTRATION AND
ISSUANCE OF
CERTIFICATE OF
INCORPORATION
 BASIC REQUIREMENTS FOR THE
REGISTRATION AND ISSUANCE OF A
CERTIFICATE OF INCORPORATION
OF A STOCK CORPORATION

1. Name verification slip;

2. AOI and by-laws;

3. Treasurer’s affidavit
 DOCTRINE OF CORPORATE
ENTITY

GENERAL RULE: A corporation comes into

existence upon the issuance of the certificate
of incorporation by the SEC under its official
seal. Then and only then will it acquire a
juridical personality. (CC, Sec. 19)

EXCEPTION: In case of a corporation sole, the

corporation sole commences existence upon
the filing of the articles of incorporation.
ADOPTION OF BY-LAWS
 BY-LAWS

By-laws are rules and regulations or private

laws enacted by the corporation to regulate,
govern and control its own actions, affairs
and concerns and of its stockholders or
members and directors and officers in
relation thereto and among themselves in
their relation to it.
 NATURE AND FUNCTIONS OF
BY-LAWS

The corporate power to adopt by-laws is inherent in every

corporation. However, to give emphasis to such
necessary corporate incident, said power is expressed in
Sec. 36(5) and Sec. 46 of the CC.

The by-laws supplement the AOI. The function of by-laws

is to define the rights and duties of corporate officers and
directors or trustees, and of stockholders or members
towards the corporation and among themselves with
reference to the management of corporate affairs and to
regulate transaction of the business of the corporation in
a particular way. (De Leon, 2010)
 REQUISITES OF VALID BY-
LAWS (2000, 2001 BAR)

The following are the requisites for the validity of by-laws: (CoMorO-RAG)

1. Must be consistent with the COrporation Code, other pertinent laws and
regulations;
2. Must not be contrary to MORals and public policy;
3. Must not impair Obligations and contracts or property rights of
stockholders;
4. Must be Reasonable;
5. Must be consistent with the charter or AOI;
6. Must be of General application and not directed against a particular
individual.
ADOPTION OF THE ORIGINAL
BY-LAWS

Filed within one (1) month from notice of issuance of

certificate of incorporation , in which case it must be:
(i) approved by stockholders constituting at least a
majority of outstanding capital and (ii) a copy
(signed by approving stockholders or members,
certified by majority of directors or trustees, and
countersigned by corporate secretary) filed with the
SEC.
ARTICLES OF INCORPORATION VS. BY-LAWS
BASIS AOI BY-LAWS
Requirement for Condition precedent in Condition subsequent; its
corporate existence the acquisition of absence merely
corporate existence furnishes a ground for
the revocation of the
franchise
Essence Essentially a contract For the internal
between the corporation government of the
and the stockholders/ corporation but has the
members; between the force of a contract
stockholders/ member between the corporation
inter se, and between the and the stockholders/
corporation and the members, and between
State; the stockholders and
members;
Time of execution Executed before May be executed after
incorporation incorporation. Sec. 46
allows the filing of the by-
laws simultaneously with
the Articles of
Incorporation
Time of execution Executed before May be executed
incorporation after incorporation.
Sec. 46 allows the
filing of the by-laws
simultaneously with
the Articles of
Incorporation

Manner of amendment Amended by a May be amended by a

majority of the majority vote of the
directors/ trustees and BOD and majority vote
stockholders of outstanding capital
representing 2/3 of the stock or a majority of
outstanding capital the member in non-
stock, or 2/3 of the stock corporation
members in case of
non-stock
corporations
AMENDMENT OR REVISION
 WAYS OF AMENDING,
REPEALING OR ADOPTING
NEW BY-LAWS:
1. Amendment may be made by stockholders
together with the Board – by majority vote of
directors and owners of at least a majority of the
outstanding capital stock/members; or
2. By the board only after due delegation by the
stockholders owning 2/3 of the outstanding
capital stock/members. Provided, that such power
delegated to the board shall be considered as
revoked whenever stockholders owning at least
majority of the outstanding capital stock or
members, shall vote at a regular or special
meeting. (CC, Sec. 48)