CORPORATION LAW

(Corporation Code, B.P. Blg. 68)

INTRODUCTION PARTNERSHIP CORPORATION

Created by mere The existence of the
Basic types of business organizations: agreement corporation commences
only from the issuance of
a Certificate of
1. Sole proprietorship – a form of business
Registration of the SEC
organization with only one proprietary owner;
or in proper cases,
a single individual conducts business under
passage of special law
his own name or under a business name
Even two persons may Needs at least five
2. Partnership – exists when two or more
form a partnership incorporators
persons bind themselves to contribute
Subject only to what may More restricted in its
money, property, or industry to a common
be agreed upon by the powers because of its
fund, with the intention of dividing the profits
partners limited personality
among themselves
3. Joint accounts or Sociedad de Cuentas en There is mutual agency Stockholders are not
Participacion – is present when there is an in partnership and each agents of the corporation
agreement whereby merchants may interest general partner can in the absence of express
themselves in the transaction of other represent and bind the authority
merchants, contributing thereto the amount partnership
of capital they may agree upon, and Interest in the partnership Corporate shares are
participating in the favorable and cannot be transferred freely transferable
unfavourable results thereof in the proportion without the consent of without the consent of
they may determine other partners other stockholders
4. Business trusts – a legal relation whereby (unless there is a
one person, called the trustor, conveys a stipulation)
property to another for the benefit of a Partners may be liable The liability of
person called the beneficiary beyond their investment stockholders and
5. Joint venture – an association of persons or members of for corporate
companies jointly undertaking some obligations is limited to
commercial enterprise; generally all their investment
contribute assets and share risks There is no right of
6. Cooperative – an autonomous and duly succession in partnership
registered association of persons, with a as death of a general
common bond of interest, who have partner dissolves the
voluntarily joined together to achieve their partnership
social, economic, and cultural needs and
aspirations by making equitable contributions Similarities between a corporation and a partnership:
to the capital required, patronizing their
products and services and accepting a fair 1. Both have juridical personality distinct from
share of the risks and benefits of the their components;
undertaking in accordance with universally 2. Both are group of persons;
accepted cooperative principles 3. Capitals of both are derived from their
7. Syndicate – a group of people who come components;
together to work for a common aim 4. There is distribution of profits in stock
8. Corporations corporations and in partnerships;
5. They both act only through their agents; and
 A sole proprietorship has no legal personality 6. They can be organized only where there is a
separate from its proprietor. law authorizing their organization.

Business name – refers to any name that is different Advantages of corporations:

from the true name of an individual which is used or
signed in connection with hi/her business on any 1. The capacity to act as a legal unit;
written or printed receipts including receipts for 2. Limitations of, or exemption from, individual
business taxes, duties and fees and withdrawal or liability of shareholders;
delivery receipts 3. Continuity of existence;
4. Transferability of shares;
 Corporations can enter into joint venture 5. Centralized management of board of
agreements. Two or more corporations may enter directors;
into a joint venture through a contract or 6. Professional management;
agreement if the nature of the venture is in line 7. Standardized method of organization and
with the business authorized by their charters. finance; and
The contract or agreement need not be 8. Easy capital generation.
registered with the SEC provided that the joint
venture will not result in the formation of a Disadvantages of corporations:
partnership or corporation. (SEC Opinion)
1. It is prone to double taxation;
2. They are subject to greater governmental TITLE I
regulation and control;
3. A corporation may be burdened with an
inefficient management if stockholders GENERAL PROVISIONS
cannot organize to oppose management;
4. Limited liability of stockholders may at times
Section 1. Title of the Code. – This Code
translate into limited ability to raise creditor
capital;
shall be known as "The Corporation
5. It is harder to organize compared to other Code of the Philippines."
business organizations;
6. It is harder or more complicated to maintain; Purpose of Corporate Law:
and
7. The owners or stockholders do not 1. Defining the area within which the parties are
participate in the day-to-day management. free to allocate risks, control, and profit as
they wish;
2. Prescribing the allocations of these elements
in the absence of express agreement.

GENERAL RULE: The Corporation Code is the

primary law that should be applied in the regulation of
corporations.

EXCEPTION: The Corporation Code applies only

suppletorily to banks and other financial institutions,
and insurance corporations.

Section 2. Corporation defined. – A

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.

Attributes of a corporation:

1. It is an artificial being;
2. It is created by operation of law;
3. It has the right of succession; and
4. It has the power, attributes and properties
expressly authorized by law or incident to its
existence.

Concession Theory – A corporation is an artificial

being invisible, intangible, and existing only in
contemplation of law. It owes its existence from the
sovereign power. It is a creature without any
existence until it has received the imprimatur of the
state acting according to law.

Genossenchaft theory – A corporation is the reality of

the group as a social and legal entity, independent of
state recognition and concession.

Realist or inherence theory – A corporation is the

legal recognition of group interests that, as a practical
matter, already exists. This theory tends to view the
corporation as a group whose group activities are
such as to require separate legal recognition, with
many of the attributes of a natural person, and by its
focus on the voluntary associational activities of
individuals provides a basis for invoking the usual
constitutional and other legal protection for
individuals.

Enterprise theory – This theory stresses the

underlying commercial enterprise without emphasis
on entity-aggregate distinctions of the components.
Symbol theory – A corporation is a symbol for the
aggregate of the associates in their group
personalities. A corporation is regarded as the symbol
for the aggregate of group jural relations of the
persons composing the enterprise.
Franchise – a special privilege conferred by
governmental authority, and which does not belong to
citizens of the country generally as a matter of
common right; that through which the state grants
corporations the right to exist
 The properties of the corporation are not the
properties of its shareholders, members or
officers. Properties registered in the name of the
corporation are owned by it as an entity separate
and distinct from those who compose it.
(Stockholders of Guanson & Sons, Inc. v.
Register of Deeds, G.R. No. L-18216) In the
same manner, properties of the shareholders,
members or officers of the corporation are not
properties of the corporation.

Types of franchise:  The interest of the shareholder in the corporation

is indirect, contingent and inchoate. (PNB v.
Aznar, G.R. Nos. 171805 and 172021) The
1. Corporate or general franchise – the
interest of the shareholder on a particular
franchise to exist as a corporation; vested in
property becomes actual, direct and existing only
the individuals who compose the corporation
upon liquidation of the assets of the corporation
and not in the corporation itself, and cannot
and the same property is assigned to the share
be conveyed in the absence of legislative
holder concerned.
authority to do so
2. Special or secondary franchise – certain
rights and privileges conferred upon existing  The ownership of corporate properties is in the
corporations, such as the right to use the corporation itself and not in the holders of its
share of stocks. (Mobila Products v. Umezawa,
streets of a municipality to lay pipes of
G.R. No. 149357)
tracks, erect poles or string wires; vested in
the corporation and may ordinarily be
conveyed or mortgaged under a general  While shares of stock constitute personal
power granted to a corporation to dispose its property, they do not represent property of the
property corporation. A share of stock only typifies an
aliquot part of the corporation’s property, or the
right to share in its proceeds to that extent when
 The right to be and to act as a corporation is not
distributed according to law and equity, but its
a natural or civil right of any person; such right as
holder is not the owner of any part of the capital
well as the right to enjoy the immunities and
of the corporation.
privileges resulting from incorporation constitute
a franchise and a corporation, therefore cannot
 Indeed, the stockholders of a corporation are not
be created except by or under a special authority
co-owners of its assets. The shareholders do not
from the State. (Recreation and Amusement
own pro-indiviso shares in the assets and
Association of the Phil. v. City of Manila, G.R. No.
therefore, they cannot mortgage or convey the
L-7922)
same except in their capacity as directors,
collectively with the other directors, or as duly
 Only GOCCs may be created by special law.
authorized officers of the corporation. (Juanito
(Constitution)
Ang v. Spouses Ang, G.R. No. 201675)

 Under the contract theory, incorporation is

FOR PURPOSES OF ANSWERING QUESTIONS:
deemed to involve contracts among the A corporation has a personality separate and
members, between the members and the
distinct from its members. The properties of the
corporation, and between the members or the
corporation are not the properties of its
corporation and the State. Thus, because of the shareholders, members or officers. The interest of
contract between the State and the corporation, the shareholder in the corporation is merely
the corporation is entitled to the right against inchoate.
impairment of contracts. The State cannot
likewise take the life of the corporation without
 The obligations of the corporation are not the
due process.
obligations of its shareholders and members and
officers and vice-versa.
Perpetual succession – that continuous existence
which enables a corporation to manage its affairs, and
 The corporation cannot likewise be made to
hold property without the necessity of perpetual
answer for the personal obligations of the
conveyances, for purposes of transmitting it
stockholders, members, directors or officers.

 A corporation continues to exist even if there is a

Limited Liability Rule – A stockholder is personally
change in those who compose it. Death of a
liable for the financial obligations of a corporation to
shareholder or transfer of his shares will not
the extent of his unpaid subscription. While stock
affect the continued existence of the corporation.
holders are generally not liable, the stockholders may
be liable if they have not or have not fully paid the
 A corporation has a personality separate and
subscription price.
distinct from its members. It has a personality
separate and distinct from the persons
Reasons for the Limited Liability Rule:
composing it as well as from that any other entity
to which it may be related. (Secosa v. Heirs of
1. Investment in shares is encouraged because
Francisco, 433 SCRA 273) Doctrine of separate
the task of evaluating equity investment is
personality
greatly simplified considering that the low-
 probability even of insolvency and the
financial condition of other investors can
already be ignored;
2. Investment in risky ventures is encouraged;
3. Banks and other financial intermediaries who
are considered experts are encouraged to
closely monitor corporate debtors more
closely.
Remedies of the creditors of a corporation in relation
to the limited liability rule:
1. Implead the stockholders who have unpaid
subscription; or
2. File a separate action against the
stockholders to enforce any judgement
obligation.
 The acts of the stockholders do not bind the
corporation unless they are properly authorized.
 It is well settled that an individual cannot enter
into a contract with himself but a corporation has
the same freedom of contracting with its
stockholders that it has of contracting with any
other person. (Fletcher)
 A non-stock corporation may file an action in the
name of its members only if it can prove that the
members indeed authorized the corporation to
institute the action for and in behalf of such
members. The mere fact that the non-stock
corporation was organized for the purpose of
advancing the interests and welfare of its
members does not necessarily mean that the
corporation has the authority to represent its
members in legal proceedings, including an
arbitration proceeding. (Ormoc Sugar Planters
Assoc., v. CA, G.R. No. 156660)
 Under the doctrine of piercing the veil of
corporate fiction, the corporation’s separate
juridical personality may be disregarded when
there is an abuse of the corporate form. The
corporation will be treated by the courts as a
mere aggrupation of persons and the liability will
directly attach to them.
Instances when corporate personality may be
disregarded:
1. When the corporate identity is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime; (fraud cases)
2. Where the corporation is a mere alter ego or
business conduit of a person; (alter ego
cases)
3. 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.
(alter ego cases)
 Mere ownership by a single stockholder or by
another corporation of all or nearly all of the
capital stock of a corporation is not in itself
sufficient ground for disregarding the separate
corporate personality. (Wensha Spa Center v.
Yung, G.R. No. 185122)
 The similarity of business of two corporations
does not warrant the disregard of the corporate
veil. The mere fact that the businesses of the two
entities are interrelated is not a justification for
disregarding the separate personalities, absent
sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors
and third persons of their rights. (China Bank v.
Dyne-Sem Electronics, G.R. No. 149237)
 The overlapping of incorporators and
stockholders of two or more corporations will not
necessarily justify the piercing of the veil of
corporate fiction. Much more has to be proven.
(China Bank v. Dyne-Sem Electronics, supra)
 The mere fact that two corporations have the
same president is not sufficient to pierce the veil
of corporate fiction of the two corporations.
(Complex Electronics Employees Association v.
NLRC, 310 SCRA 403)
 While generally, transfer of assets of the
corporation will not make the transferee liable,
other circumstances might justify the piercing of
the corporate veil. (Claparols v. CIR, 65 SCRA
613)
Variants within the doctrine of piercing the veil of
corporate fiction:
1. The instrumentality doctrine – calls for the
application of the test consisting of the three
requisites, to wit:
a. Control, 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;
b. 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; and
c. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of.
2. The alter ego doctrine – It must be shown
(1) that there is unity of interest and
ownership (2) that the separate personalities
of the corporation and the individual no
longer exist and (3) that if the acts are
treated as those of the corporation alone, an
inequitable result will follow.
3. The identity doctrine – If the plaintiff can
show that there was such a unity of interest
and ownership that the independence of the
corporations had in effect ceased or had
never begun, and adherence to the fiction of
separate identity would serve only to defeat
justice and equity by permitting the economic
entity to escape liability arising out of an
operation of one corporation for the benefit
of the whole enterprise.
From the foregoing, the cases where the doctrine of shares only as nominee of the person who actually
piercing the veil of corporate entity may be applied owns the shares
are as follows:
 A one-man corporation enjoys the attribute of
1. Cases when fraud or other wrongful acts or corporations. However, it is a precondition that a
omission are present (instrumentality rule certificate of incorporation is issued by the SEC.
and alter ego case); and however, in order to avoid the operation of the
2. Cases when there is no intent to commit a doctrine of piercing the veil of corporate fiction,
wrongful act in organizing the corporation or the corporate business and properties of the
operation of the corporation but injustice and corporation should be kept separate from the
inequity may result if the corporate veil is not properties and business of the person who owns
pierced (pure alter ego cases). the shares. The corporation should not be treated
as a mere conduit; otherwise, the attribute that
 Only the courts (or administrative tribunals like the personality of the corporation is separate may
the NLRC) can pierce the veil of corporate fiction. be disregarded.
Hence, a sheriff who has a ministerial duty to
enforce a final and executory decision cannot Primary rules of attribution – in recognition of the
“pierce the veil of corporate fiction” by enforcing artificial nature of the existence of corporations, the
the decision against stockholders who are not latter perform physical acts or commit omissions only
parties to the action. (Cruz v. Dalisay, A.M. No. through natural person
R-181-P)
 Consistent with the Primary Rules of Attribution,
notice to the Board of Directors should also be
 The principle of piercing the veil of corporate
deemed notice to the corporation.
fiction, and the resulting treatment of two related
corporations as one and the same juridical
 Knowledge of facts acquired or possessed by an
person with respect to a given transaction, is
officer or agent of the corporation in the course of
basically applied only to determine established
his employment, and in relation to matters within
liability; it is not available to confer on the court a
the scope of his authority, is notice to the
jurisdiction it has not acquired, in the first place,
corporation, whether he communicates such
over a party not impleaded in a case. Elsewise
knowledge or not since a corporation cannot see,
put, a corporation not impleaded in a suit cannot
or know, anything except through its officers.
be subject to the court’s process of piercing the
(Francisco v. GSIS, G.R. Nos. L-18287 and L-
veil of its corporate fiction. In that situation, the
18155) (Attribution of knowledge)
court has not acquired jurisdiction over the
corporation and, hence, any proceedings taken
Two test for determining whether a corporation is
against that corporation and its property would
foreign or domestic:
infringe on its right to due process. (Kukan
International Corp., v. Hon. Reyes, G.R. No.
1. Aggregate test (Control test) – requires looking
182729) [Aquino, while agreeing that impleading
into the nationality, domicile, or residence of the
the “conduit” or “alter ego” is the best way to
individuals who control the corporation; what
enforce the doctrine of piercing the veil of
about the Grandfather Rule? The Grandfather
corporate fiction, he submits however that the
Rule applies if the share of Filipinos in a
requirements of due process is not violated if the
shareholder corporation is less than 60%.
person who is sought to be made liable was not
expressly impleaded or was not part of the
original parties in the complaint. He explains that  All covered corporations shall, at all time,
if the personalities of the persons and entities are observe the constitutional or statutory ownership
merged into one, then both already participated requirement. For purposes of determining
in the trial on the merits although only one was compliance therewith, the required percentage of
impleaded.] Filipino ownership shall be applied to both (a) the
total number of outstanding shares of stock
entitled to vote in the election of directors; and (b)
 When the veil of corporate fiction is pierced in
the total number of outstanding shares of stock,
proper cases, the corporate character is not
whether or not entitled to vote in the election of
necessarily abrogated. It continues for legitimate
directors. (SEC Memo Cir. No. 8 S. 2013)
objectives. (Reynoso IV v. CA, G.R. Nos.
116124-25) The corporate personality is
A corporation is considered a Philippine National if:
disregarded only for purposes of granting the
relief prayed for in the complaint. It cannot be
1. It is a corporation organized under Philippine
disregarded for purposes of other cases and for
laws of which 60% of the capital stock
other purposes.
outstanding and entitled to vote is owned
and held by Filipino citizens; or
Group of Companies – refers to corporations that
2. It is a corporation organized abroad and
are financially related to one another as parent
registered as doing business in the
corporations, subsidiaries and affiliates
Philippines under the Corporation Code of
which 100% of the capital stock entitled to
 A group of companies has no personality
vote belong to Filipinos. (Sec. 3, R.A. No.
separate and distinct from each of the component
7042, as amended) [This is for purposes of
corporations.
applying said law. Under the entity test, it is
not a Filipino corporation.]
One-man corporation – a corporation where all the
outstanding shares belong to one person, although
there are other incorporators or directors who hold
 Generally, the test that should be applied to corporation’s reputation may be besmirched,
determine whether or not a corporation is a there is no physical suffering, mental anguish, or
Filipino corporation is the Control Test and not other similar injury.] [NOTE: There is another
the Grandfather Rule. (Narra Nickel Mining and exception. Moral damages may be awarded in
Development Corp. v. Redmont Consolidated favor of a corporation in defamation cases
Mines, G.R. No. 195580) because of the specific provision in Art. 2219(7)
of the Civil Code that expressly provides for such
Control Test Grandfather Rule award. Such provision does not qualify whether
The test that applies as a Applies if the share of the plaintiff is a natural or juridical person.
rule Filipinos in a shareholder (Filipinas Broadcasting Networks v. Ago Medical
corporation is less than and Educational Center, 448 SCRA 413)]
60%, or where the 60-40
Filipino-alien In the problems under this topic presented by
shareholding is in doubt Aquino, the corporation sought moral damages
A method of determining A method of determining on the ground that its President suffered mental
the nationality of the nationality of anguish, fright, social humiliation, and serious
corporation by looking corporation which in turn anxiety as a result of the tortuous act of
into the ownership of the is owned by another defendant. The question is whether the
outstanding capital stock corporation by breaking corporation could recover the moral damages.
of the corporation down the equity structure The answer given is that as a general rule
of the shareholders of the corporations are not entitled to recover moral
corporation damages, except in libel cases. But even
If the shareholder The percentage of assuming that the corporation could recover
corporation is considered Filipino ownership and moral damages, it is not the one which suffered
a Philippine National, the foreign ownership in the the mental anguish, fright, social humiliation, and
shares it own in the shareholder corporation serious anxiety, but its president. A corporation is
subsidiary corporation are considered in separate and distinct from the officers who
are considered Filipino determining the compose it. Thus, it cannot recover moral
owned even if some of percentage of Filipino damages.
the shareholders in the ownership and foreign
shareholder corporation ownership in the  A corporation is a person, in proper cases, within
are not Filipinos subsidiary corporation the due process and equal protection clause of
the Constitution. Just like a natural person, it
2. Entity test (place of incorporation test) – looks cannot be deprived of its life and property without
to the nation where the corporation was due process of law. (A corporation however is not
incorporated. entitled to protection of the due process clause
for the protection of “liberty.”)
 One exceptional situation where the Supreme
Court ruled that a corporation has no nationality  It is elementary that the right against self-
is the case of Corporation Sole. The requirement incrimination has no application to juridical
of at least 60% of Filipino capital is not applicable persons. While an individual may lawfully refuse
to it. to answer incriminating questions unless
protected by an immunity statute, it does not
 For practical purposes, a corporation is in a follow that a corporation, vested with special
metaphysical sense a resident of the place privileges and franchises, may refuse to show its
where its principal office is located as stated in hand when charged with an abuse of such
the Articles of Incorporation. (Hyatt Elevators and privileges. There is a reserved right on the part of
Escalators Corp. v. Goldstar Elevator, Phil., G.R. the legislature to inquire if the corporation has
No. 161026) abused its privileges. In making such inquiry,
proper government agencies may require the
Doctrine of Corporate Responsibility – Under this corporation to produce its books. (BASECO v.
doctrine, a corporation is directly and primarily liable, PCGG, 150 SCRA 181)
not merely vicarious, to the injury incurred to a party
with whom the corporation has a special relationship  GENERAL RULE: No criminal action can lie
for failure to fulfil an obligation imposed directly on it. against a corporation.
[Since the liability of the corporation is not merely
vicarious, it may not set up diligence in the selection  EXCEPTION: A corporation may be held
and supervision of the employee.] criminally liable for acts or omissions made by its
officers or agents in its behalf if the imposable
 As a rule, a corporation is not entitled to moral penalty is fine, revocation of its charter, or other
damages because, not being a natural person, it sanctions imposed by law. (Gosiaco v. Ching,
cannot experience physical suffering or G.R. No. 173807) Modern rule
sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. The  Corporations may be punished for contempt. (17
only exception to this rule is when the C.J.S. Contempt § 34)
corporation has a reputation that is debased,
resulting in its humiliation in the business realms. Theory of Special or Limited Capacities – The powers
(MERALCO v. T.E.A.M. Corp., 540 SCRA 62) of the corporation are given by law and it cannot
[Aquino does not agree with the exception. exercise powers that are not so given. In fine, the
According to him, the award for moral damages powers of the corporation are only those that are
is justified only when there is physical suffering, expressly provided for, implied powers, and incidental
mental anguish, or other similar injury. While the
powers. (see fourth attribute) [This is the prevailing
theory.]
Theory of General Capacities – A corporation may
exercise any and all power that may be exercised by
natural persons.
Section 3. Classes of corporations. –
Corporations formed or organized under
this Code may be:
1. Stock corporations – 
Corporations which have capital
stock divided into shares and are
authorized to distribute to the
holders of such shares dividends
or allotments of the surplus
profits on the basis of the shares
held are stock corporations.
(underlined - requisites)
2. Non-stock corporations – All
other corporations are non-stock
corporations.
 ILLUSTRATION OF REQUISITES: The Supreme
Court ruled that the Philippine Reclamation
Authority (PRA) is a GOCC because it is neither
a stock nor a non-stock corporation. It cannot be
considered as a stock because although it has a
capital stock divided into no par value shares, it is
not authorized to distribute dividends, surplus
allotments or profits to stockholders. PRA cannot
also be considered a non-stock corporation
because it does not have members and it was
not organized for any of the purpose mention in
Section 88 of the Corporation Code.
 The issuance of share certificates is not, by itself,
proof that the corporation is a stock corporation.
The so-called share certificates may nothing
more than proof of membership in a non-stock
corporation.
Section 4. Corporations created by
special laws or charters. – Corporations
created by special laws or charters shall
be governed primarily by the provisions
of the special law or charter creating
them or applicable to them,
supplemented by the provisions of this
Code, insofar as they are applicable.
Corporations going public – a corporation which
decides to list its shares in the stock exchange
Corporations going private – a corporation which
would restrict the shareholders to a certain group
 The Roman Catholic Church is a corporation by
prescription.
Public corporation – a corporation organized for the
government of a portion of a State (like cities and
municipalities) for the purpose of serving general
good and welfare
Quasi-public corporation – corporations like railroad
and canal corporations that are engaged in private
business affected with public interest
GOCC – any agency (1) organized as a stock or non-
stock corporation (2) vested with functions relating to
public needs whether governmental or proprietary in
nature, and (3) 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 51% of its capital stock
Despite common misconceptions, GOCCs are
regarded as private corporations. (Phil. National
Construction Corp. v. Pabion, 320 SCRA 188)
 The SEC has no jurisdiction over GOCCs created
by special law because they are primarily
governed by their charters. However, the
Corporation Code may apply suppletorily either
by operation of law or through express provisions
in the charter. (Chartered GOCC)
 The creation or establishment of private
corporations through special laws is prohibited,
except GOCCs. (Sec. 16, Art. XII, Constitution)
Requisites for the exception:
o The private corporation must be a
GOCC;
o The creation of the corporation
through special law must be in the
interest of common good; and
o The creation meets the test of
economic viability.
(NOTE: The test of economic viability applies only to
GOCCs that perform economic or commercial
activities, and need to compete in the market place.)
(NOTE: The prohibition above does not apply to
public corporations. GOCCs are excepted in a sense
that they are regarded as private corporations.)
 The employees of GOCCs created by special law
or charter are subject to civil service laws. The
Labor Code covers employees of GOCCs that
are created under the Corporation Code.
(Salenga v. CA, G.R. No. 174941)
Government instrumentalities with corporate powers –
refer to instrumentalities or agencies of the
government, which are neither corporations nor
agencies integrated within the departmental
framework, but vested by law with special functions or
jurisdiction, endowed with some if not all corporate
power, administering special funds, and enjoying
operational autonomy usually through a charter
Affiliate – refers to a corporation 50% or less of the
outstanding capital stock of which is owned or
controlled, directly or indirectly, by the GOCC
 The Philippine National Red Cross is not a
subdivision, agency or instrumentality of the
government nor a GOCC or a subsidiary thereof.
It is not also a private corporation because its
charter is not unconstitutional. It is sui generis.
(Liban v. Gordon, G.R. No. 175352)
Section 5. Corporators and aforementioned require the
concurrence of the stockholders
incorporators, stockholders and
representing at least 2/3 of the
members. – outstanding capital stock, or at
least 2/3 of the members
Corporators are those who compose a whenever applicable.)
corporation, whether as stockholders or o To enter into management contract
under certain conditions if any of
as members.
the circumstances mentioned in the
9th power is absent;
Incorporators are those stockholders or o To adopt, amend or repeal the by-
members mentioned in the articles of laws;
incorporation as originally forming and o The power to revoke the power of
the board to amend the by-laws
composing the corporation and who are
which was previously delegated by
signatories thereof. the stockholders; and
o To fix the issued value or price of
Corporators in a stock corporation are no-par value shares. (The
called stockholders or shareholders. aforementioned require the
concurrence of the stockholders
Corporators in a non-stock corporation representing majority of the
are called members. (4a) outstanding capital stock.)

Components of the corporation: Section 6. Classification of shares. –

1. Stockholders or members (corporators);

The shares of stock of stock
2. Directors or trustees; and
3. Officers. corporations may be divided into classes
or series of shares, or both, any of which
 Generally, the shareholders participate in the classes or series of shares may have
control and management of the corporation by such rights, privileges or restrictions as
exercising their right to vote in the election of
may be stated in the articles of
members of board of directors. However, there
are still matters which the Corporation Code
incorporation.
reserves for them to participate directly such as:
o Amending the articles of Share – the unit into which the proprietary interests in
incorporation; a corporation are divided; the intangible interest or
o Power to extend or shorten right which an owner has in the management, profit
corporate term; and assets of the corporation
o Increase/decrease corporate stock;
o Incur, create, or increase bonded How are shares classified:
indebtedness;
o Denying pre-emptive right; The classification of shares is first
o Sell, dispose, lease, encumber all determined by the incorporators in the Articles of
or substantially all of corporate Incorporation filed with the SEC. After the corporation
assets; comes into existence, the Board of Directors and the
o Investing in another corporation or stockholders may alter them by amending the Articles
business or for any purpose other of Incorporation.
than the primary purpose;
o To declare stock dividends;
 Classification of shares is allowed under the
o To enter into management contract
Corporation Code so that entrepreneurs who
with another corporation under any
decide to go into business would have a wide
of the following conditions:
latitude of flexibility and in order to assure that
 Where a stockholder or
they will be able to raise capital and at the same
stockholders representing
time run the corporation in the manner which will
the same interest of both
be equitable to all investors. The intent of the
the managing and the
legislature is therefore focused in making the
managed corporations
business organization attractive by making it
own or control more than
flexible in providing for the financial
1/3 of the total
arrangements within the corporate entity itself.
outstanding capital stock
entitled to vote of the
Kinds of shares:
managing corporation; or
 Where a majority of the
members of the board of 1. Common or preferred shares;
directors of the managing 2. Voting or non-voting shares;
corporation also constitute 3. Par value or no par value shares;
a majority of the members 4. Treasury shares;
of the board of directors of 5. Redeemable shares; and
the managed corporation; 6. Founder’s shares.
o Delegate the power to the board to
amend the by-laws. (The
GENERAL RULE: No share may be the right of common shareholders to vote is
deprived of voting rights. invalid. (Heirs of Gamboa v. Teves, G.R. No.
176579)

EXCEPTION: Those classified and

Any or all of the shares or series of
issued as "preferred" or "redeemable"
shares may have a par value or have no
shares may be deprived of voting rights,
par value as may be provided for in the
unless otherwise provided in this Code.
articles of incorporation: Provided,
however, that...
Consequence of the EXCEPTION: The
vote necessary to approve a particular
Banks, trust companies, insurance
corporate act as provided in this Code
companies, public utilities, and building
shall be deemed to refer only to stocks
and loan associations shall not be
with voting rights, except as provided in
permitted to issue no-par value shares of
the immediately succeeding paragraph.
stock.

EXCEPTION TO THE EXCEPTION: Par value shares – those with fixed value (an arbitrary
(NOTE: Even if the shares are validly amount) stated in the Articles of Incorporation and the
deprived of voting rights, they still have the share certificate
right to vote on the following matters.)
Where the articles of incorporation No par value shares – refer to shares without such
arbitrary amount
provide for non-voting shares in the
cases allowed by this Code, the holders Other values that are commonly associated with
of such shares shall nevertheless be shares of stock:
entitled to vote on the following matters:
1. Market value – the price at which shares of
1. Amendment of the articles of capital stock is bought and sold by investors
in the market
incorporation;
2. Book value – the amount per share that each
shareholder would receive if the corporation
2. Adoption and amendment of were liquidated without incurring any further
by-laws; expenses and if assets were sold and
liabilities liquidated ate their recorded
amounts
3. Sale, lease, exchange,
3. Liquidation value – the amount a stockholder
mortgage, pledge or other would receive upon the dissolution and
disposition of all or substantially liquidation of the corporation
all of the corporate property; 4. Redemption value – the price per share at
which the corporation may redeem its share
5. Issued (stated) value – the selling price of
4. Incurring, creating or the shares fixed by the Board or Article of
increasing bonded indebtedness; Incorporation

5. Increase or decrease of capital  Shares without par value may be converted to

stock; par value shares and vice-versa, by amending
the Articles of Incorporation. In the case of
conversion of no par value shares to par value
6. Merger or consolidation of the shares, the conversion will be based on the latest
corporation with another book value of the no par value shares. (SEC
corporation or other corporations; Opinion)

The issuance of no-par value shares are subject

7. Investment of corporate funds
to the following conditions:
in another corporation or
business in accordance with this 1. They are deemed fully paid;
Code; and 2. They are non-assessable;
3. The holder of such shares shall not be liable
8. Dissolution of the corporation. to the corporation or to its creditors in
respect thereto;
4. They may not be issued for a consideration
There shall always be a class or series of less than the value of five (P5.00) pesos per
shares which have complete voting share;
rights. 5. The entire consideration received by the
corporation for its no-par value shares shall
be treated as capital; and
 Common shares cannot be deprived of the right
6. The entire consideration received by the
to vote in any corporate meeting, and any
corporation for its no-par value shares shall
provision in the articles of incorporation restricting
not be available for distribution as dividends.
Shares that cannot be without par value:
1. Preferred shares
2. Shares in banks
3. Shares in trust companies
4. Shares in insurance companies
5. Shares in public utilities
6. Shares in building and loan associations
PREFERRED SHARES OF STOCK issued
by any corporation may be given
preference in the distribution of the
assets of the corporation in case of
liquidation and in the distribution of
dividends, or such other preferences as
may be stated in the articles of
incorporation which are not violative of
the provisions of this Code: Provided,
That...
Preferred shares of stock may be issued
only with a stated par value.
Common shares – represent the residual ownership
interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary
rights or privileges and entitles the shareholder to a
pro rata division of profits
Preferred shares – those that entitle the shareholder
to some priority on dividends and asset distribution
 Preferred shareholders are not creditors of the
corporation by virtue of the preferred shares. The
holder obtains neither the enforceable claim to
interest and repayment of principal that is
provided by debt not the rights of residual owner
that is provided by common shares. (Hamilton)
[Pasabot ani, dili siya creditor pero gitagaan
siyag rights parehas sa creditor. The reason for
this is to make preferred shares more attractive
to investors.]
Reasons why corporations issue preferred shares:
1. To avoid the use of bonds that have fixed
interest charges that must be paid
regardless of the amount of net income;
2. To avoid issuing so many additional common
shares that earnings per share will be less in
the current year than in prior years; and
3. To avoid diluting the common shareholders’
control of the corporation since preferred
shares usually have no voting rights.
 The board of directors may declare dividends
only out of unrestricted retained earnings. (see
Sec. 43) Thus, there is guaranty that preferred
shareholders will receive any dividends. The
declaration of dividends is dependent upon the
availability of surplus profit or unrestricted
retained earnings, as the case may be.
 Preferences granted to preferred stockholders do
not give them a lien upon the property of the
corporation nor make them creditors of the
corporation, the right of the former being always
subordinate to the latter. Dividends are, thus,
payable only when there are profits earned by the
corporation and as a general rule, even if there
are existing profits, the board of directors has the
discretion to determine whether or not dividends
are to be declared.
 Preferred shares are considered in the
computation of the equity of foreigners and
Filipinos in a corporation for purposes of
determining compliance with nationalization laws.
(SEC Opinion)
The board of directors, where authorized
in the articles of incorporation, may fix
the terms and conditions of preferred
shares of stock or any series thereof:
Provided, That...
Such terms and conditions shall be
effective upon the filing of a certificate
thereof with the Securities and Exchange
Commission.
Kinds of preferred shares:
1. Cumulative or non-cumulative;
2. Participating or non-participating;
3. Preferred as to dividends and/or preferred as
to assets upon distribution.
Kinds of preferred shares:
1. Preferred shares as to assets – gives the
holder thereof preference in the distribution
of the assets of the corporation in case of
liquidation
2. Preferred shares as to dividends – the holder
of which is entitled to receive dividends on
said share to the extent agreed upon before
any dividend at all are paid to the holders of
common stock
Cumulative preferred share – if a dividend is omitted
in any year, it must be made up in a later year before
any dividend may be paid on the common in the later
year
Non-cumulative preferred share – there is no need to
make up for undeclared dividends
Participating preferred shares – entitled to participate
with the common shares in excess distribution
 Preferred shares may be stipulated as
convertible into common shares. This feature of
the preferred share must be stipulated in the
Articles of Incorporation. [From preferred to
common - conversion]
 Shares that are originally common shares may
be reclassified into preferred shares.
Reclassification of shares is a legitimate exercise
of corporate powers under the Corporation Code.
(COCOFED v. Republic)
 A provision in the articles of incorporation that
gives the BOD blanket authority to fix the terms
and conditions of preferred shares might result in
 an abuse of such authority that might adversely
affect the rights of shares already issued. (SEC
Opinion)
A corporation may, furthermore, classify
its shares for the purpose of insuring
compliance with constitutional or legal
requirements.
EXAMPLE OF AN APPLICATION OF THE ABOVE
PROVISION:
To facilitate the requirements of nationalization law, a
realty company, where foreign equity must only be
limited to 40%, may classify in its articles of
incorporation 60% of the shares as Class A shares
that can be acquired only by Filipinos and 40% of the
shares as Class B shares that can be acquired by
foreigners and Filipinos. In such case, there will be
assurance that excess foreign participation will be
prevented.
GENERAL RULE: Each share shall be
equal in all respects to every other
share. (Doctrine of Equality of Shares)
EXCEPTION; Requisites:
1. It is provided in the articles of
incorporation that the shares are
not equal; and
2. Such is stated in the certificate of
stock.
Example: The Board cannot issue preferred shares in
the absence of provisions in the Articles of
Incorporation.
 A provision in the articles of incorporation that
gives the board of directors blanket authority to
fix the terms and conditions of preferred shares
might result in an abuse of authority that might
adversely affect the rights of share already
issued. (SEC Opinion)
Escrow shares – shares that are deposited by the
corporation or shareholder with a third person to be
held by the latter until the performance of a certain
condition or the happening of an event like payment
of the subscription price to the corporation or
purchase price to a shareholder; may be common
shares or preferred shares
Section 7. Founders’ shares. – Founders’
shares classified as such in the articles
of incorporation may be given certain
rights and privileges not enjoyed by the
owners of other stocks.
If exclusive right to vote and be voted for
in the election of directors is granted, the
following conditions must be complied:
1. It must be for a limited period not
to exceed five (5) years; and
2. There must be approval of the
Securities and Exchange
Commission.
3. The five-year period shall
commence from the date of the
aforesaid approval by the
Securities and Exchange
Commission.
Section 8. Redeemable shares. –
REDEEMABLE SHARES – shares that
may be purchased or taken up by the
corporation upon the expiration of a
fixed period, regardless of the existence
of unrestricted retained earnings in the
books of the corporation, and upon such
other terms and conditions as may be
stated in the articles of incorporation.
Requirements for redeemable shares:
1. The articles of incorporation
expressly so provides for the
issuance of redeemable shares;
2. The terms and conditions for the
redemption of such shares are
stated in the articles of
incorporation and the certificate
of stock representing said shares.
 Redeemable shares are usually preferred shares.
 While redeemable shares may be redeemed
regardless of the existence of unrestricted
retained earnings, this is subject to the condition
that the corporation has, after such redemption,
assets in its books to cover 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. (Rep. Planters Bank v.
Agana, G.R. No. 51765)
Unrestricted retained earnings – means the amount of
accumulated profits and gains realised out of the
normal and continuous operations of the company
after deducting therefrom distributions of stockholders
and transfers to capital stock or other accounts, and
which is:
1. Not appropriated by its Board of Directors for
corporate expansion projects or program;
2. Not covered by a restriction for dividend
declaration under a loan agreement; and
3. Not required to be retained under special
circumstances obtaining in the corporation
such as when there is a need for a special
reserve for probable contingencies.
Compulsory or obligatory redeemable share – one
that requires the issuing corporation to redeem or
repurchase its preferred shares at a fixed date or at
the option of the holder thereby giving the shareholder
the right to the return of their investment
 Mandatory or compulsory redemption is allowed.
The terms and conditions, however, as stated in
the articles of incorporation and the certificate of
stock, must be clear that the redemption is
mandatory. It is also subject to the requirement
that enough assets are left to cover the debts and
liabilities.
Sinking fund – a fund set up by the corporation where
cash is gradually set aside in order to accumulate the
amount necessary to meet the redemption price of
redeemable shares at specified dates in the future
DEFAULT RULE: When redeemable shares are
reacquired, the same shall be considered retired and
no longer issuable. If the redeemable shares are
considered retired, the authorized capital stock of the
corporation is in effect reduced by the corresponding
number of shares because the redeemed shares can
no longer be re-issued. (SEC Opinion)
CUSTOM RULE: The redeemed shares will not be
considered retired and will become treasury shares if
the Articles of Incorporation expressly provides that
once redeemed, the redeemable shares shall be
classified as treasury shares. (SEC Opinion)
Section 9. Treasury shares. – Treasury
shares are shares of stock which have
been issued and fully paid for, but
subsequently reacquired by the issuing
corporation by purchase, redemption,
donation or through some other lawful
means. Such shares may again be
disposed of for a reasonable price fixed
by the board of directors.
Stages in the life of treasury shares:
1. Creation of treasury shares through
purchase, redemption, donation or some
other lawful means;
2. The rights enjoyed by the corporation as the
holder of treasury shares are restricted;
3. Disposition of treasury shares.
Limitations on treasury shares:
1. They may be re-issued or sold again as long
as the corporation holds them as treasury
shares;
2. Treasury shares cannot participate in
dividends because dividends cannot be
declared by the corporation to itself;
3. Treasury shares cannot be represented
during stockholder’s meetings for otherwise
equal distribution of voting powers among
stockholders will be effectively lost and the
directors will be able to perpetuate their
control of the corporation;
4. The amount of unrestricted retained earnings
equivalent to the cost of treasury shares
being held shall be restricted from being
declared and issued as dividends.
TITLE II
INCORPORATION AND
ORGANIZATION OF PRIVATE
CORPORATIONS
Incorporation – the performance of conditions, acts,
deeds, and writings by incorporators, and the official
acts, certification or records, which give the
corporation its existence (Fletcher)
 Incorporation is not necessary for liability to
attach under the rule on corporation by estoppel.
Documentary requirements for incorporation (stock
corporations):
1. Name verification slip;
2. Articles of Incorporation and By-Laws;
3. Treasurer’s Affidavit;
4. Joint affidavit of two incorporators
undertaking to change corporate name, as
provided in its Articles of Incorporation or as
amended thereafter, immediately upon
receipt of notice or directive from the SEC
that another corporation, partnership, or
person has acquired a prior right to the use
of that name or that name has been declared
misleading, deceptive, confusingly similar to
a registered name, or contrary to public
morals, good customs or public policy. This
commitment may appear in the Articles of
Incorporation, in which case, the Joint
Affidavit is no required.
5. Indorsements/clearances from other
government agencies, if applicable;
6. For corporations with foreign equity, proof of
remittance by non-resident aliens and
foreign corporate subscribers to register their
investment with the BSP or an affidavit with
the BSP;
7. For corporation with more that 40% foreign
equity, application form required by the
Foreign Investments Act of 1991;
8. For corporations with applications with the
PEZA, SBMA, CDA, CEZA or other
economic zone, Certificate of Authority or
endorsement from said government
agencies;
9. Cash, or such other additional requirements,
if paid up capital is not cash.
Documentary requirements for incorporation (non-
stock corporations):
1. Name verification slip;
2. Articles of Incorporation and By-Laws;
3. Affidavit of an incorporator or director
undertaking to change corporate name;
4. List of members certified by the Corporate
Secretary unless the members are named in
the Articles of Incorporation;
5. List of names of contributors or donors and
the amounts contributed or donated, as
certified by the treasurer. There shall be no
fixed amount of contribution required but
only such reasonable amount as the
incorporators and trustees may deem
sufficient to enable the corporation to start
operation, except in the case of foundations
 which must have a minimum contribution of
at least P1,000,000.
6. Registration data sheet;
7. For foundations, notarized certificate of bank
deposit of the contribution of not less than
P1,000,000 and statement of willingness to
allow the SEC to conduct an audit;
8. For religious corporations, refer to Sec. 109-
116 of the Code, and an affidavit of
affirmation or verification by the chief priest,
rabbi, minister or presiding elder;
9. For federations, certified list of member-
associations by Corporate
Secretary/President;
10. For condominium corporation/association,
Master Deed with primary entry of the
Register of Deeds and certification that there
is no other existing similar condominium
association within the condominium project.
Section 10. Number and qualifications of
incorporators. –
1. They must be natural persons;
 Local government units, which are public
corporations in corporate law, cannot organize a
corporation. However, local government officials
may organize corporations but subject to the
limitations imposed under the Local Government
Code and the Code of Conduct and Ethical
Standards for Public Officials and Employees.
 By way of exception, upon consultation with the
rural banks in the area, duly established
cooperatives and corporations primarily
organized to hold equities in rural banks may
organize a rural bank.
 The Corporation Code does not bar corporations
from being original subscribers.
2. They must be not less than five
(5) but not more than fifteen (15);
 While the law limits the number of incorporators,
the law does not limit the number of original
subscribers.
3. They must all be of legal age;
 Incapacitated persons cannot be incorporators.
4. The majority must be residents of
the Philippines;
 There is no requirement that the majority must be
citizens of the Philippines. The rule, however, is
subject to the requirements of pertinent
nationalization laws.
5. If the corporation is a stock
corporation, each incorporator
must own or be a subscriber to at
least one share.
 Being an incorporator is an accomplished fact.
An incorporator remains to be an incorporator
even if he will later cease to be a corporator or
shareholder. (SEC Opinion)
Section 11. Corporate term. – A
corporation shall exist for a period not
exceeding fifty (50) years from the date
of incorporation unless sooner dissolved
or unless said period is extended.
The corporate term as originally stated in
the articles of incorporation may be
extended for periods not exceeding fifty
(50) years in any single instance by an
amendment of the articles of
incorporation, in accordance with this
Code; Provided, That
No extension can be made earlier
than five (5) years prior to the
original or subsequent expiry
date(s) unless there are justifiable
reasons for an earlier extension
as may be determined by the
Securities and Exchange
Commission. (Thus, if the original term
is 50 years, an application for extension of
the term cannot be filed on the 40 th year of
the life of the said corporation.)
 The corporation ipso facto ceases upon the
expiration of the term of existence. Extension
cannot be sought after the expiration.
 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. (The doctrine of relation or
relating back doctrine does not apply.)
 EXCEPTION: The doctrine of relation or relating
back doctrine applies if the failure to file the
application for extension within the term of the
corporation is due to the neglect of the officer
with whom the certificate is required to be filed or
to a wrongful refusal on his part to receive it.
(Alhambra Cigar v. SEC, 24 SCRA 269)
 EXCEPTION: The doctrine of relation or relating
back doctrine was applied when the corporation’s
failure to file the application for extension was
due to the “EDSA Revolution” that resulted in the
closure of the SEC.
 EXCEPTION TO THE EXCEPTION: If there was
fault or negligence on the part of the corporation.
The steps to be taken for the extension of the
corporate term:
1. The articles of incorporation shall be
amended, in accordance with the
Corporation Code, stating the term of
extension;
 2. The approved amendment of the articles of
incorporation shall be submitted to the SEC
for approval;
3. The amendment is deemed approved upon
inaction of the SEC for 6 months after
submission due not the fault of the
corporation or upon its approval. The
effectivity of the amendment relates back to
the date of its filing with the SEC. (1968
BAR)
Section 12. Minimum capital stock
required of stock corporations. –
GENERAL RULE: Stock corporations
incorporated under this Code shall not
be required to have any minimum
authorized capital stock.
EXCEPTION: As otherwise specifically
provided for by special law, and subject
to the provisions of the following
section.
Section 13. Amount of capital stock to be
subscribed and paid for the purposes of
incorporation. –
Percentage of authorized capital stock
as stated in the articles of incorporation
that must be subscribed at the time of
incorporation: At least 25% of the
authorized capital stock (Initial minimum
subscribed capital)
Amount that must be paid on the total
subscription upon subscription: At least
25% of the subscribed capital (Initial
minimum paid-up capital)
Provided, however, That
In no case shall the paid-up
capital be less than five Thousand
(P5,000.00) pesos.
When to pay the balance of the total
subscription:
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 board of directors;
Authorized capital stock – the amount fixed in the
article of incorporation to be subscribed and paid by
the stockholders of the corporation
Subscribed capital – that portion of the authorized
capital stock that is covered by subscription
agreement whether fully paid or not
Paid-up capital – the amount of outstanding capital
stock and additional paid-in capital or premium paid
over the par value of the shares; that portion of the
authorized capital stock that has been subscribed and
paid
Outstanding capital stock – refers to the total shares
of stock issued to subscribers or stockholders,
whether or not fully or partially paid except treasury
shares so long as there is a binding subscription
agreement
Capital – includes properties and assets of the
corporation that are used for its business operation
Stated capital – the sum of the par value of all issued
par value shares, the entire amount received for no-
par value shares and any amount transferred by a
stock dividend or other corporate action from surplus
to stated capital
 It is not necessary that 25% of each subscribed
share must be paid. It is only required that at
least 25% of the subscribed capital must be paid.
 Exceptionally, subscription of non-resident
foreigners must be fully paid.
Section 14. Contents of the articles of
incorporation. – All corporations
organized under this code shall file with
the Securities and Exchange
Commission articles of incorporation 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 this Code or by
special law:
1. The name of the corporation;
 The Articles of incorporation has been described
as 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. (Lanuza v. CA, G.R. No. 131394)
 An entry in the Articles of Incorporation is
evidence of the factual stipulations therein. For
instance, the recitals in the Articles of
Incorporation that there are unpaid subscriptions
are proof against the stockholders. If the
shareholder alleges that he or she has fully paid
the subscription, he or she must substantiate the
averment of full payment, as well as counter the
recitals found in the Articles of Incorporation that
the subscription were only partly paid. (Halley v.
Printwell, Inc., G.R. No. 157549)
 The name of the corporation need not reflect the
purpose of the corporation. The purpose of the
 name is for identification and not to give an
indication of its purpose. (SEC Opinion)
2. The specific purpose or purposes for
which the corporation is being
incorporated. Where a corporation has
more than one stated purpose, the
articles of incorporation shall state
which is the primary purpose and which
is/are the secondary purpose or
purposes: Provided, That a non-stock
corporation may not include a purpose
which would change or contradict its
nature as such; (Purpose clause)
 GENERAL RULE: The primary purpose
determines the classification of a corporation.
 EXCEPTION: Where the corporation actually
engages in one of its secondary purposes, it may
ALSO be classified in accordance with the
secondary purposes. (SEC Opinion)
Purposes of the “purpose clause”:
1. The person who intends to invest his money
in the business will know where and in what
kind of business or activity his money will be
invested;
2. The directors and officers will be informed
regarding the scope of business they are
authorized to act; and
3. A third person will be aware if the transaction
he has with the corporation is within the
authority of the corporation.
General limitations imposed on the purpose clause:
1. It cannot be created or formed for a purpose
or function of which a corporate body is
incapable;
2. It cannot be created for a purpose that is
contrary to law, morals, or public policy;
3. It cannot be organized for two or more
incompatible purposes;
4. The corporation may not be organized for a
purpose that is contrary to its nature.
 The best proof of the purpose of a corporation is
its Articles of Incorporation. If the purpose stated
therein is lawful, then the SEC has no authority to
inquire whether the corporation has purposes
other than those stated and mandamus will lie to
compel it to issue the certificate of incorporation.
(Gala v. Ellice Agro-Industrial Corp., 418 SCRA
431)
 It is a well-established rule that collateral attack
on the legality of the purpose of the corporation is
not allowed in this jurisdiction. Thus, a party in a
case for damages cannot impugn the legality of
the purpose of the corporation. A case should be
filed to directly attack the purpose of the
corporation. (Gala v. Ellice Agro-Industrial Corp.,
supra)
3. The place where the principal office of
the corporation is to be located, which
must be within the Philippines;
 For purposes of complying with this requisite, it is
not enough to state the Region where the
principal office is located. It is necessary to
indicate, if feasible, the street number, street
name, barangay, city or municipality and the
specific address of the incorporator, directors, or
trustee.
4. The term for which the corporation is
to exist;
5. The names, nationalities and
residences of the incorporators;
6. The number of directors or trustees,
which shall not be less than five (5) nor
more than fifteen (15);
7. The names, nationalities and
residences of persons who shall act as
directors or trustees until the first
regular directors or trustees are duly
elected and qualified in accordance with
this Code;
8. If it be a stock corporation,
1. the amount of its authorized
capital stock in lawful money of
the Philippines,
2. the number of shares into which it
is divided, and
3. in case the share are par value
shares, the par value of each,
4. the names, nationalities and
residences of the original
subscribers, and
5. the amount subscribed and paid
by each on his subscription, and
6. if some or all of the shares are
without par value, such fact must
be stated;
9. If it be a non-stock corporation, the
amount of its capital, the names,
nationalities and residences of the
contributors and the amount contributed
by each; and
10. Such other matters as are not
inconsistent with law and which the
incorporators may deem necessary and
convenient.
The Securities and Exchange
Commission shall not accept the articles
of incorporation of any stock corporation
unless accompanied by a sworn
statement of the Treasurer elected by the
subscribers showing that at least twenty-
five (25%) percent of the authorized
capital stock of the corporation has been
subscribed, and at least twenty-five
(25%) of the total subscription has been
fully paid to him in actual cash and/or in
property the fair valuation of which is
equal to at least twenty-five (25%)
percent of the said subscription, such
paid-up capital being not less than five
thousand (P5,000.00) pesos.
Section 15. Forms of Articles of
Incorporation. – Unless otherwise
prescribed by special law, articles of
incorporation of all domestic
corporations shall comply substantially
with the following form:
ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age
and a majority of whom are residents of the
Philippines, have this day voluntarily agreed to
form a (stock) (non-stock) corporation under the
laws of the Republic of the Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
"_____________________, INC. or
CORPORATION";
SECOND: That the purpose or purposes for which
such corporation is incorporated are: (If there is
more than one purpose, indicate primary and
secondary purposes);
THIRD: That the principal office of the corporation
is located in the City/Municipality of
________________________, Province of
_______________________, Philippines;
FOURTH: That the term for which said corporation
is to exist is _____________ years from and after
the date of issuance of the certificate of
incorporation;
FIFTH: That the names, nationalities and
residences of the incorporators of the corporation
are as follows: TABLE
SIXTH: That the number of directors or trustees of
the corporation shall be _______; and the names,
nationalities and residences of the first directors
or trustees of the corporation are as follows:
TABLE
SEVENTH: That the authorized capital stock of the
corporation is ______________________
(P___________) PESOS in lawful money of the
Philippines, divided into __________ shares with
the par value of ____________________
(P_____________) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is
______________ shares without par value. (In
case some shares have par value and some are
without par value): That the capital stock of said
corporation consists of _____________ shares of
which ______________ shares are of the par value
of _________________ (P____________) PESOS
each, and of which _________________ shares are
without par value.
EIGHTH: That at least twenty five (25%) per cent
of the authorized capital stock above stated has
been subscribed as follows: TABLE
NINTH: That the above-named subscribers have
paid at least twenty-five (25%) percent of the total
subscription as follows: TABLE
(Modify Nos. 8 and 9 if shares are with no par
value. In case the corporation is non-stock, Nos.
7, 8 and 9 of the above articles may be modified
accordingly, and it is sufficient if the articles state
the amount of capital or money contributed or
donated by specified persons, stating the names,
nationalities and residences of the contributors or
donors and the respective amount given by each.)
TENTH: That _____________________ has been
elected by the subscribers as Treasurer of the
Corporation to act as such until his successor is
duly elected and qualified in accordance with the
by-laws, and that as such Treasurer, he has been
authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or
fees) or contributions or donations paid or given
by the subscribers or members.
ELEVENTH: (Corporations which will engage in
any business or activity reserved for Filipino
citizens shall provide the following):
"No transfer of stock or interest which shall
reduce the ownership of Filipino citizens to less
than the required percentage of the capital stock
as provided by existing laws shall be allowed or
permitted to be recorded in the proper books of
the corporation and this restriction shall be
indicated in all stock certificates issued by the
corporation."
IN WITNESS WHEREOF, we have hereunto signed
these Articles of Incorporation, this __________
day of ________________, 19 ______ in the
City/Municipality of ____________________,
Province of ________________________, Republic
of the Philippines.
________________________________
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
____________ _____________
(Notarial Acknowledgment)
TREASURER’S AFFIDAVIT  The Constitution only allows corporations with
REPUBLIC OF THE PHILIPPINES) maximum foreign equity of 40% to own private
CITY/MUNICIPALITY OF ) S.S. lands. The prohibition in the Constitution is
PROVINCE OF ) limited to private lands and land of the public
domain. Corporations can still own real property
I, ____________________, being duly sworn, even of more than 40% of its outstanding capital
depose and say: belongs to foreigners. One exception is with
respect to condominium units because foreign
That I have been elected by the subscribers of the interest in the condominium corporation should
corporation as Treasurer thereof, to act as such not exceed 40%.
until my successor has been duly elected and
qualified in accordance with the by-laws of the Section 16. Amendment of Articles of
corporation, and that as such Treasurer, I hereby Incorporation. –
certify under oath that at least 25% of the
authorized capital stock of the corporation has
been subscribed and at least 25% of the total Requirements (unless otherwise
subscription has been paid, and received by me, provided by this code or by special
in cash or property, in the amount of not less laws):
than P5,000.00, in accordance with the
Corporation Code.
1. The amendment must be for
____________________
legitimate purposes and must not
be contrary to other provisions of
(Signature of Treasurer) the Corporation Code and special
laws;
SUBSCRIBED AND SWORN to before me, a
Notary Public, for and in the City/Municipality 2. Majority vote of the board of
of___________________Province of
directors or trustees;
_____________________, this _______ day of
___________, 19 _____; by __________________
with Res. Cert. No. ___________ issued at 3. The vote or written assent of the
_______________________ on ____________, 19 stockholders representing at least
______
2/3 of the outstanding capital
stock, or the vote or written
NOTARY PUBLIC
assent of at least 2/3 of the
My commission expires on _________, 19 _____ members if it be non-stock
corporation;
Doc. No. _________;
 Silence or failure to object cannot be construed
Page No. _________; as approval by stockholders.

 The law does not require that the approval by the

Book No. ________;
stockholders is made in a meeting duly called for
the purpose. Written assent solicited by the board
Series of 19____
even without meeting is sufficient.

To constitute retail business, the following requisites 4. The original and amended articles
must be present:
together shall contain all
1. The person or entity must be selling provisions required by law to be
merchandise, commodities or goods; set out in the articles of
2. The sale must be direct to the general public; incorporation. Such articles, as
3. The merchandise, commodities or goods are amended shall be indicated by
for consumption; and
4. The sale must not be merely incidental to the
underscoring the change or
primary purpose of the business. changes made;

Consumer goods – goods that are used or bought for 5. A copy thereof duly certified
use primarily for personal, family or household under oath by the corporate
purposes
secretary and a majority of the
directors or trustees stating the
Mass media – refers to the print medium of
communication, which includes all newspapers, fact that said amendment or
periodicals, magazines, journals, and publications and amendments have been duly
all advertising therein, and billboards, neon signs and approved by the required vote of
the like, and the broadcast medium of communication,
the stockholders or members,
which includes radio and television broadcasting in all
their aspects and all other cinematographic or radio shall be submitted to the
promotions and advertising
 Securities and Exchange
Commission; and
6. The amendment must
approved by the SEC.
The amendments shall take effect (1)
upon their approval by the Securities
and Exchange Commission or (2) from
the date of filing with the said
Commission if not acted upon within six
(6) months from the date of filing for a
cause not attributable to the corporation.
Documentary Requirements:
1. Amended articles of incorporation;
2. Directors’ or trustees’ certificate;
3. Monitoring clearance issue by
Compliance Monitoring Division;
4. Secretary’s certificate.
 The names of incorporators cannot be changed
and their number cannot be increased because
the names and number of the original
incorporators are accomplished facts.
 There can be no amendment of the articles of
incorporation of a non-stock corporation to
convert it into a stock corporation with the
members as shareholder. Amendment cannot be
allowed if it goes against the nature of the
corporation. (Pero pwede from stock to non-stock
because the stockholders are merely deemed to
have waived their right to their share in the profits
of the corporation.)
Limitations on the amendment of the Corporation
Code:
thereto is not substantially in
accordance with the form
prescribed herein;
be
2. That the purpose or purposes
of the corporation are patently
unconstitutional, illegal, immoral,
or contrary to government rules
and regulations;
Some patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations
purposes:
1. The declared purpose of the corporation is to
promote and enhance the incorporation of
the Philippines as an American State;
2. The purpose is to practice a profession;
3. The corporation is organized to engage in
the illegal gambling;
4. The purpose of the corporation is immoral
such as to provide a “mail-order-bride”
service;
5. The purpose of the corporation is to
establish a local government unit like a
barangay.
3. That the Treasurer’s Affidavit
concerning the amount of capital
stock subscribed and/or paid is
false;
4. That the percentage of
ownership of the capital stock to
be owned by citizens of the
Philippines has not been
complied with as required by
existing laws or the Constitution.

1. It must not remove or impair the right or

remedy in favour or against any corporation,
No articles of incorporation or
its stockholders, members, directors, amendment to articles of incorporation
trustees, or officers; and of:
2. It must not remove any liability incurred by
any such corporation, stockholders,
1. banks,
members, directors, trustees or officers.
2. banking and quasi-banking
institutions,
Section 17. Grounds when articles of
3. building and loan associations,
incorporation or amendment may be
4. trust companies and other
rejected or disapproved. – The Securities
financial intermediaries,
and Exchange Commission may reject
5. insurance companies,
the articles of incorporation or
6. public utilities,
disapprove any amendment thereto if the
7. educational institutions, and
same is not in compliance with the
8. other corporations governed by
requirements of this Code: Provided,
special laws
That the Commission shall give the
incorporators a reasonable time within
shall be accepted or approved by the
which to correct or modify the
Commission unless accompanied by a
objectionable portions of the articles or
favorable recommendation of the
amendment. The following are grounds
appropriate government agency to the
for such rejection or disapproval:
effect that such articles or amendment is
in accordance with law.
1. That the articles of
incorporation or any amendment
 The SEC’s duty to approve an application for
registration is ministerial provided that all the
requirements of law are complied with.
Section 18. Corporate name. – No
corporate name may be allowed by the
Securities and Exchange Commission if
the proposed name (1) is identical or
deceptively or confusingly similar to that
of any existing corporation or to any
other name already protected by law or
(2) is patently deceptive, confusing or
contrary to existing laws.
When a change in the corporate name is
approved, the Commission shall issue
an amended certificate of incorporation
under the amended name. (n)
Purposes of the prohibition:
1. The avoidance of fraud upon the public
which would have occasion to deal with the
entity concerned;
2. The evasion of legal obligations and duties;
and
3. The reduction of difficulties of administration
and supervision over corporations.
Dominancy test – the name cannot be used if the
name indicated in the articles of incorporation adopts
a dominant feature of an existing corporate name or
even a trademark belonging to another
GENERAL RULE: Generic, descriptive and
geographical terms cannot be exclusively
appropriated.
EXCEPTION: Doctrine of Secondary meaning
Doctrine of secondary meaning – if a corporate name,
though descriptive, has been used for so long and
exclusively by one corporation and has become
associated with that corporation alone in the mind of
the public, another corporation cannot register said
name as corporate name
 A corporation having a prior right over a name
may, by a suit for injunction, prevent another
corporation from using such name. (Iglesia case)
Such corporation has to show the following:
1. That it has acquired prior right over the use
of such corporate name;
2. It is any of the cases mentioned under
Section 18, to wit:
a. The name is identical, deceptively
or confusingly similar to that of any
existing corporation, including
internationally known foreign
corporation though not used in the
Philippines;
b. The name is already protected by
law; or
c. The name is contrary to law,
morals, or public policy or is
patently deceptive or confusing.
 A corporate name is in the nature of a right in
rem that can be asserted against the whole
world. (Philips Export B.V. v. CA, G.R. No.
96161)
 A corporation may have a better right to use its
corporate on the ground of priority of adoption.
(UCCP v. Branford United Church of Christ, G.R.
No. 171905)
 Even a foreign corporation may sue a domestic
corporation to prevent the latter from using its
name.
 A corporation cannot use any other corporate
name other than what is reflected in the Articles
of Incorporation. (Laureano Corp. v. CA, 272
SCRA 253)
 A corporation may use a trade name or business
name that is different from its corporate name.
(SEC Opinion) It is, however, required such trade
or business name be indicated in the articles of
incorporation or partnership. (SEC Memo Cir.)
 The name of a corporation or partnership that
has been dissolved or whose registration has
been revoked shall not be used by another
corporation or partnership within three years from
the approval of dissolution or six years from the
date of revocation, unless its use has been
allowed at the time of the dissolution or
revocation by the stockholders, members or
partners who represent the majority of the
outstanding capital stock or membership of the
dissolved corporation or partnership, as the case
may be.
 A general power to alter or amend the charter of
a corporation necessarily includes the power to
alter the name of the corporation. (Phil. First
Insurance Co. v. Hartigan, G.R. No. L-26370)
Section 18 actually recognizes the right to
change the corporate name.
 The corporation, upon the change of its name is
in no sense a new corporation or the successor
of the original corporation. It is the same
corporation with a different name, and its
character is in no respect changed. The change
of name has no effect on the identity of the
corporation or on its property, rights or liabilities.
(P.C. Javier v. CA, 462 SCRA 36)
 The corporation that changed its name is not
required under the Corporation Code to formally
notify its debtors. Notification to debtors is
discretionary.
Section 19. Commencement of corporate
existence. – A private corporation
formed or organized under this Code
commences to have corporate existence
and juridical personality and is deemed
incorporated from the date the Securities
and Exchange Commission issues a
certificate of incorporation under its
official seal; and thereupon the
incorporators, stockholders/members
and their successors shall constitute a
body politic and corporate under the
name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law.
 GENERAL RULE: No contract entered into
before incorporation can bind the corporation.
(Marc II Mktg. v. Joson, G.R. No. 171993)
Ordinarily, a non-existent person cannot be a
subject of a contract or transaction. Thus, it is
only after the issuance of the certificate of
registration that a corporation can transact
business.
 EXCEPTIONS:
o A pre-incorporation subscription
agreement is binding even if the
corporation is still legally non-existent.
o Contracts entered into by the promoter
may, in certain cases, bind a
corporation. The general rule, however,
is that the acts of the promoter are not
binding on the corporation that will be
organized.
Promoters – persons who, acting alone or with others,
take initiative in founding and organizing the business
or enterprise (Securities Regulation Code)
Promotional activities:
1. Discovery – consists of finding the 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 and
money to set the business in motion as well
as the secondary details of setting up the
corporation itself
What are these “certain cases?”
When the acts of the promoters of a
corporation are ratified or accepted by the corporation
if and when subsequently organized, the corporation
is bound by such acts of the promoters. (Cagayan
Fishing Development Corp. v. Sandiko, G.R. No. L-
43350)
Underwriters – a person who guarantees on firm
commitment and/or declared best effort basis the
distribution and sale of securities of any kind by
another company
Section 20. De facto corporations. – 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:
1. A valid law under which the corporation is
organized; (Aquino seems to apply the
orthodox view regarding the effect of
unconstitutional or invalid laws.)
2. An attempt in good faith to incorporate –
there must be colourable compliance with
law;
3. An assumption of corporate power.
 There can be no claim of attempt in good faith to
incorporate if no certificate of incorporation is
issued by the SEC. all incorporators know or
ought to know that the personality of a
corporation begins to exists only from the time
the certificate is issued. (Hall v. Piccio, G.R. No.
L-2598)
 A de facto corporation enjoys the attributes of a
corporation until the State questions its
existence.
 Only the State, in a direct proceeding, can object
to the existence of a de facto corporation.
(Justice Fisher)
 A group of employees who continued the
operations of a dissolved corporation or a
corporation whose registration had been revoked
cannot acquire the status of a de facto
corporation. If the charter of a corporation is
forfeited and its legal existence terminated, it is
no longer a corporation either de jure or de facto.
(SEC Opinion)
Section 21. Corporation by estoppel. –
All persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as
general partners for all debts, liabilities
and damages incurred or arising as a
result thereof: Provided, however, That
when any such ostensible corporation is
sued on any transaction entered by it as
a corporation or on any tort committed
by it as such, it shall not be allowed to
use as a defense its lack of corporate
personality.
On who assumes an obligation to an
ostensible corporation as such, cannot
resist performance thereof on the
ground that there was in fact no
corporation.
 Liability as a general partner means that a person
is liable even beyond his investment. His
personal properties may be made to answer for
 what is purportedly a corporate debt of the non-
existent corporation.
Requisites in order for a person to be liable as a
general partner:
1. He assumes to act, together with others, as
a corporation or on behalf of a corporation;
and
2. He knows for a fact that there is no such
corporation.
 Thus, those without knowledge of the non-
existence of the corporation are liable as if they
are regular stockholders. They are not liable
beyond their investments.
transaction of its businesses or the
construction of its works, or to
continuously operate is due to causes
beyond the control of the corporation as
may be determined by the Securities and
Exchange Commission.
Organize or organization – the election of officers,
providing for subscription and payment of capital
stock, the adoption of by-laws, and such other similar
steps

 The doctrine of corporation by estoppel applies to

a third party only when he tries to escape liability
on a contract from which he has benefited on the
irrelevant ground of defective corporation. It is not
applicable if the party is not trying to escape
liability from the contract but rather is the one
claiming from the contract. (International Express
v. CA)

 The doctrine of corporation by estoppel can be

invoked only for the purpose of protecting third
persons or creditors. It cannot be invoked by
persons who represent themselves as
stockholders of the corporation by estoppel.

 From my own observation, the doctrine of

estoppel as used in the Corporation Code cannot
be raised as a defense against a suit to enforce
an obligation. It can only be raised as a bar
against a defense based on the non-existence of
the corporation, whether it is the corporation by
estoppel, the persons acting on behalf of the
corporation by estoppel, or a third person that is
alleging such non-existence, as the case may be.

Section 22. Effects on non-use of

corporate charter and continuous
inoperation of a corporation. – If a
corporation does not formally organize
and commence the transaction of its
business or the construction of its works
within two (2) years from the date of its
incorporation, its corporate powers
cease and the corporation shall be
deemed dissolved.

However, if a corporation has

commenced the transaction of its
business but subsequently becomes
continuously inoperative for a period of
at least five (5) years, the same shall be a
ground for the suspension or revocation
of its corporate franchise or certificate of
incorporation. (The dissolution is not
automatic. There must be a positive action
from the government.)

This provision shall not apply if the

failure to organize, commence the
 TITLE III
BOARD OF
DIRECTORS/TRUSTEES AND
OFFICERS
Section 23. The board of directors or
trustees. – Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code
shall be exercised, all business
conducted and all property of such
corporations controlled and held by the
board of directors or trustees to be
elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation,
who shall hold office for one (1) year
until their successors are elected and
qualified.
The powers/functions of the board of directors or
trustees:
1. Exercises all powers provided for under the
Corporation Code;
2. Conducts all business of the corporation;
and
3. Controls and holds all property of the
corporation.
 Acts of management pertain to the board; and
those of ownership, to the stockholders or
members. (Tan v. Sycip, G.R. No. 153468)
 GENERAL RULE: All actions of the corporation
shall be done only through its Board of Directors.
 EXCEPTION: The board of directors may
authorize, through a board resolution, another
person to act for the corporation.
Every director must own at least one (1)
share of the capital stock of the
corporation of which he is a director,
which share shall stand in his name on
the books of the corporation. Any
director who ceases to be the owner of
at least one (1) share of the capital stock
of the corporation of which he is a
director shall thereby cease to be a
director.
 It is sufficient that legal title as it appears in the
books is in the director since legal title is what
counts. What is material is the legal title to, not
beneficial ownership of, the stock as appearing
on the books of the corporation. (Lee v. CA, G.R.
No. 93695)
 The trustee in a voting trust agreement is
qualified to run as director. The trustee has legal
title over the shares. (Lee v. CA, supra)
 A holder of a non-voting share cannot be elected
as a director. (SEC Opinion)
 The Articles of Incorporation may increase the
share ownership requirement.
Trustees of non-stock corporations must
be members thereof.
 Re-election is allowed unless the articles of
incorporation or the by-laws provide otherwise.
A majority of the directors or trustees of
all corporations organized under this
Code must be residents of the
Philippines.
Theories on the source of powers of
directors/trustees:
1. Agency theory – all powers reside in the
stockholders and are just delegated to the
directors as agents;
2. Concession theory – the power of the
directors is derived from the State;
3. Platonic guardian theory – every corporation
must have a board and the board is an
aristocracy or group of Platonic guardians
created by legislative ordainment
4. Sui generis theory – the directors are not
agents of the stockholders who elect them;
they are fiduciaries whose duties run
primarily the corporation. They are not
trustees in the strict sense. Their powers are
derived through the statute under which the
corporation is organized, yet they do not
qualify solely as Platonic guardians. They
are indeed sui generis.
 The stockholders do not control the directors and
the concurrence of the stockholders is not
necessary for their actions unless the
Corporation Code, the articles of incorporation or
the by-laws provides otherwise. Stockholders
cannot reverse the decisions of the board of
directors.
 The stockholders, as owners of the corporation,
are not entirely helpless. If the stockholders do
not agree with the policies of the board, their
remedy is to wait for the election of the directors
or to remove the directors if they have the
required vote. (Cua v. Tan, G.R. No. 181455)
Business judgement rule –
 The acts and contracts entered by the board
within the power conferred upon it are
binding on the corporation and courts will not
interfere unless such acts or contracts are so
unconscionable and oppressive as to
amount to wanton destruction of rights of the
minority.
 Questions of policy or management are left
solely to the honest decision of officers and
directors of a corporation and the courts are
without authority to substitute their
judgement for the judgement of the board of
directors; the board is the business manager
 of the corporation and so long as it acts in
good faith, its orders are not reviewable by
the courts of the SEC.
 Corporate officers and directors, absent self-
dealing or other personal interest, shall be
shielded from liability for any harm to the
corporation resulting from their decisions if
such decisions lie within the powers of the
corporation and the authority of management
and are reasonably made in good faith and
with loyalty and due care. (GENERAL RULE)
Rationale for the business judgement rule:
1. If management were liable for mere good
faith errors in judgement, few capable
individuals would be willing to incur financial
and emotional risks of serving in such roles;
2. Courts are generally ill equipped to evaluate
business judgements; and
3. Management has the expertise to discharge
the responsibility of making such
determinations. (Heller v. Boylan, 29 N.Y.S.
2d 653)
 The board must act, not individually or
separately, but as a body in a lawful meeting.
(Tan v. Sycip, supra) The actions of the board
are expressed in resolutions.
 The action of one director or trustee does not
bind the corporation. Absent any valid delegation
or authorization from the board, the declarations
of an individual director relating to the affairs of
the corporation are not binding on the
corporation. (AF Realty & Development v.
Dieselman Freight Services, G.R. No. 111448)
 A Secretary’s Certificate – a certificate issued by
the Corporate Secretary of the corporation – is
sufficient proof of the existence of a resolution
from the Board. (Metrobank v. Centro
Development Corp., G.R. No. 180974)
 The minutes of meeting of the board of directors
can establish the existence of a resolution of the
board. (China Bank v. QBRO Fishing Enterprise,
G.R. No. 184556)
 GENERAL RULE: Thus, the general rule is that
only the board of directors can bind the
corporation.
 EXCEPTION: When the board of directors or the
by-laws authorizes another person to act for the
corporation.
 EXCEPTION: When the corporation is in
estoppel, as when it knowingly permits one of its
officers to act within the scope of an apparent
authority, and holds the officer or agent out to the
public as possessing a power to those acts. It
cannot deny the officer’s authority as against a
third person who deals with such officer or agent
in good faith. (Doctrine of apparent authority)
 EXCEPTION: When the law or the Articles of
Incorporation allows the officer to act for the
corporation.
 EXCEPTION: When the act is incidental from the
nature of officer’s function.
 EXCEPTION: When the Board of Directors
ratifies the officer’s act which is without authority.
 EXCEPTION: When the corporation has
previously authorized similar acts as a matter of
general practice, custom, and policy.
Corporate Governance – the framework of rules,
systems and processes in the corporation that
governs the performance by the Board of Directors
and Management of their respective duties and
responsibilities to the stockholders and other
stakeholders which include, among others,
customers, employees, suppliers, financiers,
government and community it operates
The Code of Corporate Governance applies (1) to
registered corporations and (2) to branches and
subsidiaries of foreign corporations operating in the
Philippines that:
1. Sell equity and/or debt securities to the
public that are required to be registered with
the SEC;
2. Have assets in excess of P50,000,000 or
such other amount as the SEC shall
prescribe and having 200 or more
shareholders each holding at least 100
shares of a class of its equity securities;
3. Whose equity securities are listed on an
Exchange; or
4. Are grantees of secondary licenses from the
SEC.
Two alternative theories on corporate governance:
1. Shareholder Primacy Theory (conservative)
– holds that the corporation should be run for
the exclusive benefit of shareholders
2. Corporate Social Responsibility Theory
(progressive) – prefers the limitation on
excessive pursuit of profit and promotion of
employee, customer, and community voice
in corporate governance
Section 24. Election of directors or
trustees. – At all elections of directors or
trustees, there must be present, either in
person or by representative authorized
to act by written proxy, the owners of a
majority of the outstanding capital stock,
or if there be no capital stock, a majority
of the members entitled to vote.
The election must be by ballot if
requested by any voting stockholder or
member.
In stock corporations, every stockholder
entitled to vote shall have the right to
vote in person or by proxy the number of
shares of stock standing, at the time
fixed in the by-laws, in his own name on
the stock books of the corporation, or
where the by-laws are silent, at the time
of the election; and said stockholder
may vote such number of shares for as
many persons as there are directors to
be elected or he may cumulate said
shares and give one candidate as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal, or he may distribute
them on the same principle among as
many candidates as he shall see fit:
Provided, That
The total number of votes cast by him
shall not exceed the number of shares
owned by him as shown in the books of
the corporation multiplied by the whole
number of directors to be elected:
Provided, however, That
No delinquent stock shall be voted.
Unless otherwise provided in the articles
of incorporation or in the by-laws,
members of corporations which have no
capital stock may cast as many votes as
there are trustees to be elected but may
not cast more than one vote for one
candidate.
Candidates receiving the highest number
of votes shall be declared elected. Any
meeting of the stockholders or members
called for an election may adjourn from
day to day or from time to time but not
sine die or indefinitely if, for any reason,
no election is held, or if there are not
present or represented by proxy, at the
meeting, the owners of a majority of the
outstanding capital stock, or if there be
no capital stock, a majority of the
members entitled to vote. (31a)
Section 25. Corporate officers, quorum. –
Immediately after their election, the
directors of a corporation must formally
organize by the election of a president,
who shall be a director, a treasurer who
may 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.
Any two (2) or more positions may be
held concurrently by the same person,
except that no one shall act as president
and secretary or as president and
treasurer at the same time.
Officers of a corporation:
1. President
a. Must be a director;
b. Cannot be at the same time a
Secretary or a Treasurer;
2. Secretary
a. Must be a resident and citizen of
the Philippines;
3. Treasurer
a. May or may not be a director;
4. Other officers as may be provided for in the
by-laws
 The corporate office must be specifically
indicated in the roster of corporate offices in the
by-laws of the corporation. It is not enough that
the By-laws merely empowers the board of
directors to create additional offices. (Matling
Industrial and Commercial Corp. v. Coros, G.R.
No. 157802)
 The board may create an office which is not
provided in the by-laws. But such office is not a
corporate office within the meaning of Sec. 25 of
the Corporation Code. (This power of the board is
covered by the Business judgement rule.)
The directors or trustees and officers to
be elected shall perform the duties
enjoined on them by law and the by-laws
of the corporation.
 The President of a corporation possesses the
power to enter into a contract for the corporation,
when the conduct on the part of both the
president and the corporation shows that he had
been in the habit of acting in similar matters on
behalf of the company and that the company had
authorized him so to act and had recognized,
approved and ratified his former and similar
actions. Furthermore, a party dealing with the
president of a corporation is entitled to assume
that he has the authority to enter, on behalf of the
corporation, into contracts that are within the
scope of the powers of said corporation and that
do not violate any statute or rule on public policy.
(People’s Aircargo & Warehousing v. CA, 297
SCRA 170)
 Foreigners cannot be officers in wholly
nationalized and partly nationalized corporations.
(This is different from directors because
foreigners can be directors of partly nationalized
corporations, in the same proportion to the
foreign equity limitation.)
 Service of summons may be made on the
president, general manager, corporate secretary,
treasurer or in-house counsel. Service of
summons made on officers not specified is
invalid and does not bind the corporation. (Sec.
11, Rule 14, Rules of Court)
De facto officer – a person who acts as an officer,
under color of authority, through election or
appointment
Color of authority – authority derived from an election
or appointment, although irregular, so that the
incumbent must be more than a volunteer
GENERAL RULE: A majority of the
number of directors or trustees as fixed
in the articles of incorporation shall
constitute a quorum for the transaction
of corporate business.
ILLUSTRATION: The Articles of Incorporation
provides that the corporation has 15 directors. The
majority of 15 is 8. Thus, to constitute a quorum in a
meeting, 8 directors must be present.
 The basis for determining the presence of the
required number of directors or trustees for
purposes of confirming that there is a quorum is
the number fixed in the Articles of Incorporation
and not the actual present members of the board.
(Yoshizaki v. Joy Training Center of Aurora, G.R.
No. 174978) A vacancy does not reduce the
quorum.
EXCEPTION: When the articles of
incorporation or the by-laws provide for
a greater majority.
GENERAL RULE: Every decision of at
least a majority of the directors or
trustees present at a meeting at which
there is a quorum shall be valid as a
corporate act.
EXCEPTION: For the election of officers,
the vote of a majority of all the members
of the board is required.
Directors or trustees cannot attend or
vote by proxy at board meetings. (33a)
Section 26. Report of election of
directors, trustees and officers. – Within
thirty (30) days after the election of the
directors, trustees and officers of the
corporation, the secretary, or any other
officer of the corporation, shall submit to
the Securities and Exchange
Commission, the names, nationalities
and residences of the directors, trustees,
and officers elected. Should a director,
trustee or officer die, resign or in any
manner cease to hold office, his heirs in
case of his death, the secretary, or any
other officer of the corporation, or the
director, trustee or officer himself, shall
immediately report such fact to the
Securities and Exchange Commission.
General information sheet (GIS) – indicates who and
who is not a corporate officer or director or
stockholder
(NOTE: The GIS is important because it establishes
in the court whether a person is a Member of the
Board or not.)
Section 27. Disqualification of directors,
trustees or officers. – No person
convicted by final judgment of an
offense punishable by imprisonment for
a period exceeding six (6) years, or a
violation of this Code committed within
five (5) years prior to the date of his
election or appointment, shall qualify as
a director, trustee or officer of any
corporation. (n)
Qualifications for directors or trustees:
1. He must own at least one share of the
capital stock of the corporation in his own
name or if the corporation is a non-stock
corporation, he must be a member thereof;
2. A majority of the directors/trustees must be
residents of the Philippines;
3. He must have not have been convicted by
final judgement of an offense punishable by
imprisonment for a period exceeding 6
years, or a violation of the Corporation Code
committed within 5 years prior to the date of
his election;
4. He must be of legal age; and
5. He must possess other qualifications as may
be prescribed in special laws or regulations
or in the by-laws of the corporation.
6. He must be a natural person.
 While a corporation cannot be elected as a
director, its duly authorized officer, agent or
trustee who has been designated as “nominee”
may be eligible to be elected as director.
 A corporation is empowered to provide in its by-
laws the qualifications and disqualifications of
members of the board, and officers. (Sec. 47)
Section 28. Removal of directors or
trustees. –
REQUISITES for removal of any director
or trustee of a corporation from office:
1. It must be by a vote of the
stockholders holding or representing
at least two-thirds (2/3) of the
outstanding capital stock, or if the
corporation be a non-stock
corporation, by a vote of at least two-
thirds (2/3) of the members entitled to
vote;
2. Such removal shall take place either
at a regular meeting of the
corporation or at a special meeting
called for the purpose;
a. A special meeting of the
stockholders or members of a
corporation for the purpose of
 removal of directors or
trustees, or any of them, must
be called by the secretary on
order of the president or on
the written demand of the
stockholders representing or
holding at least a majority of
the outstanding capital stock,
or, if it be a non-stock
corporation, on the written
demand of a majority of the
members entitled to vote.
b. Should the secretary fail or
refuse to call the special
meeting upon such demand or
fail or refuse to give the
notice, or if there is no
secretary, the call for the
meeting may be addressed
directly to the stockholders or
members by any stockholder
or member of the corporation
signing the demand.
c. Notice of the time and place of
such meeting, as well as of the
intention to propose such
removal, must be given by
publication or by written
notice prescribed in this Code.
3. In either case (regular or special
meeting), after previous notice to
stockholders or members of the
corporation of the intention to
propose such removal at the
meeting.
4. Removal may be with or without
cause: Provided, That...
a. Removal without cause may
not be used to deprive
minority stockholders or
members of the right of
representation to which they
may be entitled under Section
24 of this Code.
 The removal of the director does not result in the
transfer of his shares; the removed director
remains a shareholder.
 Since the authority to elect corporate officers
rests with the board, there is a correlative
authority to remove the corporate officers. The
removal of corporate officers is a corporate act.
(Tabang v. NLRC, G.R. No. 121143)
Section 29. Vacancies in the office of
director or trustee. –
GENERAL RULE: Any vacancy occurring
in the board of directors or trustees may
be filled by the vote of at least a majority
of the remaining directors or trustees.
EXCEPTION: Vacancies must be filled by
the stockholders or members in a
regular or special meeting called for that
purpose if:
1. The vacancies are by removal by
the stockholders or members; or
2. The vacancies are due to
expiration of term; or
3. The remaining directors or
trustees do not constitute a
quorum; or
4. The vacancy is due to an
increase in the number directors
or trustees. (May be filled in the
same meeting authorizing the
increase of directors or trustees if
so stated in the notice of the
meeting.)
5. If the by-laws so provide. (SEC
Opinion) (A provision in the by-laws that
automatic replacement will occur in case of
vacancy is invalid. It is contrary to Sec. 29.)
A director or trustee so elected to fill a
vacancy shall be elected only or the
unexpired term of his predecessor in
office.
 Note that filling up vacancies by the remaining
board members, if proper, is not mandatory.
Therefore the remaining board members, even if
they can validly fill the vacancy, may opt to fill the
vacancy through election by the stockholders or
members.
 A vacancy due to the resignation of a hold-over
director who cannot be filled up by the remaining
hold-over directors. The vacancy was not due to
resignation but by expiration of the term. Hence,
only the stockholders can elect a replacement
under Sec. 29. (Valle Verde Country Club v.
Africa, G.R. No. 151969)
Section 30. Compensation of directors. –
GENERAL RULE: The directors shall not
receive any compensation, as such
directors, except for reasonable per
diems.
EXCEPTION: When directors may
receive compensation other than per
diems:
1. When there is a provision in the
by-laws fixing their
compensation;
 2. When by the vote of the
stockholders representing at least
a majority of the outstanding
capital stock at a regular or
special stockholders’ meeting, the
directors are granted
compensation.
In no case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of the
corporation during the preceding year.
Per diem – pay for a day’s services
 The salaries of officers are not covered by the
10% limit under Sec. 30.
 A director is also entitled to salaries if he is
performing functions as an officer. (Western
Institute of Tech. v. Salas, G.R. No. 113032)
Section 31. Liability of directors, trustees
or officers. –
When directors or trustees are jointly
and severally liable for all damages
suffered by the corporation, its
stockholders or members and other
persons:
1. When they willfully and knowingly
vote for or assent to patently
unlawful acts of the corporation; or
2. When they are guilty of gross
negligence or bad faith in directing
the affairs of the corporation; or
3. When they acquire any personal or
pecuniary interest in conflict with
their duty as such directors or
trustees.
a. When a director, trustee or
officer attempts to acquire or
acquires, in violation of his
duty, any interest adverse to
the corporation in respect of
any matter which has been
reposed in him in confidence,
as to which equity imposes a
disability upon him to deal in
his own behalf, he shall be
liable as a trustee for the
corporation and must account
for the profits which otherwise
would have accrued to the
corporation.
Three paramount duties of management:
1. Obedience
2. Diligence
3. Loyalty
 Corporate officers are not permitted to use their
position of trust and confidence to further their
private interests.
 Corporate officers or employees, through whose
act, default or omission the corporation commits
a crime, may themselves be individually held
answerable for the crime. (Espiritu v. Petron
Corp., G.R. No. 170891)
Other instances when directors or trustees are
personally and solidarily liable:
1. When a director has consented to the
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with
the corporate secretary his written objection
thereto;
2. When the director, trustee or officer has
contractually agreed or stipulated to hold
himself personally and liable with the
corporation;
3. When director, trustee or officer is made, by
specific provision of law, personally liable for
his corporate actions.
 Bad faith includes cases where the corporate
officers exceeded their authority. (Pamplona
Plantation v. Acosta, 510 SCRA 249)
 Generally, directors and officers are personally
liable in cases when they acted with malice or
bad faith in terminating the services of an
employee. (Ever Electrical Manufacturing v.
Samahang Manggagawa, G.R. No. 194795)
 Any person claiming damages from a director,
trustee or officer must file an action in court and
must avail of the appropriate remedy available
under the rules. He cannot take the law in his
own hands.
Section 32. Dealings of directors,
trustees or officers with the
corporation. – A contract of the
corporation with one or more of its
directors or trustees or officers is
VOIDABLE, at the option of such
corporation, unless all the following
conditions are present:
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not
necessary to constitute a quorum for
such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
reasonable under the circumstances;
and
4. That in case of an officer, the contract
has been previously authorized by the
board of directors.
Where any of the first two conditions set
forth in the preceding paragraph is
absent, in the case of a contract with a
director or trustee, such contract may be
ratified by the vote of the stockholders
representing at least two-thirds (2/3) of
the outstanding capital stock or of at
least two-thirds (2/3) of the members in a
meeting called for the purpose:
Provided, That full disclosure of the
adverse interest of the directors or
trustees involved is made at such
meeting: Provided, however, That the
contract is fair and reasonable under the
circumstances.
 Self-dealing is discouraged because the
directors, trustees and officers have fiduciary
relationship with the corporation, and there can
be no real bargaining where the same is acting
on both sides of the trade.
Section 33. Contracts between
corporations with interlocking
directors. – Except in cases of fraud, and
provided the contract is fair and
reasonable under the circumstances, a
contract between two or more
corporations having interlocking
directors shall not be invalidated on that
ground alone: Provided, That...
If the interest of the interlocking director
in one corporation is substantial and his
interest in the other corporation or
corporations is merely nominal, he shall
be subject to the provisions of the
preceding section insofar as the latter
corporation or corporations are
concerned.
Stockholdings exceeding twenty (20%)
percent of the outstanding capital stock
shall be considered substantial for
purposes of interlocking directors. (n)
Section 34. Disloyalty of a director. –
Where a director, by virtue of his office,
acquires for himself a business
opportunity which should belong to the
corporation, thereby obtaining profits to
the prejudice of such corporation, he
must account to the latter for all such
profits by refunding the same, unless his
act has been ratified by a vote of the
stockholders owning or representing at
least two-thirds (2/3) of the outstanding
capital stock. This provision shall be
applicable, notwithstanding the fact that
the director risked his own funds in the
venture. (Doctrine of corporate opportunity)
 The prohibition no longer applies if the action was
made after the resignation of the director.
Tests applied for the application of the doctrine:
1. Interest or expectancy test – precludes
acquisition by corporate officers of the
property of a business opportunity in which
the corporation has a “beachhead” in the
sense of a legal or equitable interest or
expectancy growing out of pre-existing right
or relationship
2. Line of business test – characterizes an
opportunity as corporate whenever a
managing officer becomes involved in an
activity intimately or closely associated with
the existing or prospective activities of the
corporation
3. Fairness test – determines the existence of a
corporate opportunity by applying ethical
standards of what is fair and equitable under
the circumstances
4. Mixed test – application of any two or all
tests
 The burden of proof on the questions of good
faith, fair dealing and loyalty of the officer to the
corporation should rest upon the officer who
appropriated the business opportunity for his own
advantage. Such burden necessarily lies with the
acquiring officer because a fiduciary with a
conflict of interest should be required to justify his
actions and because of the practical reality that
the facts with regard to such questions are more
apt to be within his knowledge. (Miller v. Miller)
 Property or business opportunity ceases to be a
corporate opportunity and is transformed into
personal opportunity where the corporation is
definitely no longer able to avail itself of the
opportunity due to financial insolvency or legal
restrictions or any other factor that prevents the
corporation from acting upon the opportunity for
its own advantage. (SEC Opinion)
 Section 34 does not cover trustees and officers.
Section 35. Executive committee. – The
by-laws of a corporation may create an
executive committee, composed of not
less than three members of the board, to
be appointed by the board. Said
committee may act, by majority vote of
all its members, on such specific matters
within the competence of the board, as
may be delegated to it in the by-laws or
on a majority vote of the board, except
with respect to: (1) approval of any
action for which shareholders’ approval
is also required; (2) the filing of
vacancies in the board; (3) the
amendment or repeal of by-laws or the
adoption of new by-laws; (4) the
amendment or repeal of any resolution
of the board which by its express terms
is not so amendable or repealable; and
(5) a distribution of cash dividends to the
shareholders.
TITLE IV
POWERS OF CORPORATIONS
Section 36. Corporate powers and
capacity. – Every corporation
incorporated under this Code has the
power and capacity:
1. To sue and be sued in its corporate
name;
2. Of succession by its corporate name
for the period of time stated in the
articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation
in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this
Code;
6. In case of stock corporations, to issue
or sell stocks to subscribers and to sell
stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such
real and personal property, including
securities and bonds of other
corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require,
subject to the limitations prescribed by
law and the Constitution;
8. To enter into merger or consolidation
with other corporations as provided in
this Code;
9. To make reasonable donations,
including those for the public welfare or
for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation, domestic
or foreign, shall give donations in aid of
any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and
other plans for the benefit of its
directors, trustees, officers and
employees; and
11. To exercise such other powers as
may be essential or necessary to carry
out its purpose or purposes as stated in
the articles of incorporation. (13a)
Distinction between a natural person and a juridical
person as to capacity:
The natural person can do anything and
everything except that which the law prohibits. But a
corporation can only do what the law authorizes it to
perform.
Kinds of powers:
1. Express – powers expressly provided by the
Corporation Code, applicable special laws,
administrative regulations and the Articles of
Incorporation; include those under Sec. 36,
Sections 11, 16, and 37 to 44
2. Implied – powers that are reasonably
necessary or proper for the execution of the
powers expressly granted and are not
expressly or impliedly excluded; Sec. 36(11)
3. Incidental – powers that are deemed
conferred on the corporation because they
are incidental to the existence of the
corporation; include the right of succession,
the right to have a corporate name, the right
to make by-laws for its government, the right
to sue, and the right to acquire and hold
properties for the purposes authorized by the
charter
 The powers expressly provided for in the
Corporation Code are deemed part of the Articles
of Incorporation even if such powers are not
enumerated therein.
Specific powers of corporations as provided in the
Corporation Code:
1. To extend or shorten the corporate term
(Sections 11 and 37);
2. To amend the articles of incorporation (Sec.
16);
3. To increase or decrease capital stock (Sec.
38);
4. To incur or create bonded indebtedness
(Sec. 38);
5. To deny pre-emptive right (Sec. 39);
6. To sell or dispose all or substantially all of
the assets of the corporation (Sec. 40);
7. To acquire its own shares (Sec. 41);
8. To invest corporate funds in another
corporation, business or for any other
purpose (Sec. 42);
9. To declare dividends (Sec. 43);
10. To enter into a management contract (Sec.
44).
 GENERAL RULE: A corporation cannot enter into
a contract of partnership. A corporation cannot
become a member of a partnership in the
absence of express authorization by statute or
charter.
Exception; Requisites:
1. The authority to enter into a partnership
relation is expressly conferred by the charter
or Articles of Incorporation of the
corporation, and the nature of the business
venture to be undertaken by the partnership
is in line with the business authorized by the
charter or articles of incorporation of the
corporation involved;
2. The partnership is a limited partnership and
the corporation must be a limited partner;
3. If it is a foreign corporation, it must obtain a
license to transact business in the country.
 A corporation can enter into a joint venture.
 A corporation can validly borrow funds.
 In the absence of an express power in the
Articles of Incorporation, the power to act as
surety or guarantor cannot be justified.
 A corporation cannot act as an accommodation
party in a negotiable instrument.
 The power to borrow money for corporate
purposes includes the power to mortgage
properties of the corporation to secure its
obligations.
 While generally, the corporation cannot mortgage
its properties to secure the obligation of third
persons, it has been recognized that the
corporation can mortgage its properties to secure
the obligation of a subsidiary. (SEC Opinion)
 GENERAL RULE: The corporate practice of any
profession is not sanctioned.
 EXCEPTION: Architects can organize a
corporation for the practice of their profession.
(Sec. 37, R.A. No. 9266)
Section 37. Power to extend or shorten
corporate term. – A private corporation
may extend or shorten its term as stated
in the articles of incorporation when:
1. approved by a majority vote of the
board of directors or trustees and
2. ratified at a meeting by the
stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds
(2/3) of the members in case of non-
stock corporations.
3. Written notice of the proposed action
and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place
of residence as shown on the books
of the corporation and deposited to
 the addressee in the post office with
postage prepaid, or served
personally: Provided, That
4. in case of extension of corporate
term, any dissenting stockholder may
exercise his appraisal right under the
conditions provided in this code. (n)
5. A copy of the amended articles of
incorporation shall be submitted to the
SEC for approval.
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. – No
corporation shall increase or decrease
its capital stock or incur, create or
increase any bonded indebtedness
unless:
1. approved by a majority vote of the
board of directors and,
2. at a stockholder’s meeting duly
called for the purpose, two-thirds
(2/3) of the outstanding capital stock
shall favor the increase or diminution
of the capital stock, or the incurring,
creating or increasing of any bonded
indebtedness.
3. Written notice of the proposed
increase or diminution of the capital
stock or of the incurring, creating, or
increasing of any bonded
indebtedness and of the time and
place of the stockholder’s meeting at
which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any
bonded indebtedness is to be
considered, must be addressed to
each stockholder at his place of
residence as shown on the books of
the corporation and deposited to the
addressee in the post office with
postage prepaid, or served
personally.
4. A certificate in duplicate must be
signed by a majority of the directors
of the corporation and countersigned
by the chairman and the secretary of
the stockholders’ meeting, setting
forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital
stock, the amount of capital stock
or number of shares of no-par
stock thereof actually subscribed,
the names, nationalities and
residences of the persons
subscribing, the amount of capital
stock or number of no-par stock
subscribed by each, and the
amount paid by each on his
subscription in cash or property,
or the amount of capital stock or
number of shares of no-par stock
allotted to each stock-holder if
such increase is for the purpose
of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to
be incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the
meeting;
(6) The amount of stock
represented at the meeting; and
(7) The vote authorizing the
increase or diminution of the
capital stock, or the incurring,
creating or increasing of any
bonded indebtedness.
5. The Securities and Exchange
Commission shall not accept for
filing any certificate of increase of
capital stock unless accompanied by
the sworn statement of the treasurer
of the corporation lawfully holding
office at the time of the filing of the
certificate, showing that at least
twenty-five (25%) percent of such
increased capital stock has been
subscribed and that at least twenty-
five (25%) percent of the amount
subscribed has been paid either in
actual cash to the corporation or that
there has been transferred to the
corporation property the valuation of
which is equal to twenty-five (25%)
percent of the subscription.
6. Any increase or decrease in the
capital stock or the incurring,
creating or increasing of any bonded
indebtedness shall require prior
approval of the Securities and
Exchange Commission.
7. No decrease of the capital stock shall
be approved by the Commission if its
 effect shall prejudice the rights of
corporate creditors.
One of the duplicate certificates shall be
kept on file in the office of the
corporation and the other shall be filed
with the Securities and Exchange
Commission and attached to the original
articles of incorporation. From and after
approval by the Securities and Exchange
Commission and the issuance by the
Commission of its certificate of filing, the
capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing
may declare
Non-stock corporations may incur or
create bonded indebtedness, or increase
the same, with the approval by a majority
vote of the board of trustees and of at
least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and
Exchange Commission, which shall have
the authority to determine the sufficiency
of the terms thereof. (17a)
Ways of increasing or decreasing capital stock:
1. By increasing or decreasing the number of
shares and retaining the par value; or
2. By increasing or decreasing the par value of
existing shares without changing the number
of shares; or
3. By increasing or decreasing number of
shares and increasing or decreasing the par
value.
Stock split – a share is divided or converted into two
or more shares but the amount of the outstanding
capital remains the same because the par value is
also divided in as many shares
 Increase in the subscribed capital need not go
through the process provided for in Section 38
and mere approval of the board is sufficient.
 There is no need to get the approval of the SEC
for the creation of the additional paid-up capital
except in cases where property is given in
payment of subscription price. (SEC Opinion)
Bonded indebtedness – refers to secured
indebtedness or those secured by real or personal
property that are covered by certificates
Section 39. Power to deny pre-emptive
right. –
PRE-EMPTIVE Right – the right of the
stockholders of a stock corporation to
subscribe to all issues or disposition of
shares of any class, in proportion to
their respective shareholdings,
When pre-emptive right is not available:
1. When such right is denied by the
articles of incorporation or an
amendment;
2. Such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock
ownership by the public; or
3. When shares are issued in good faith
with the approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in
exchange for property needed for
corporate purposes or in payment of
a previously contracted debt.
 The pre-emptive right is transferable unless there
is an express restriction in the articles of
incorporation. (SEC Opinion)
 Even when the pre-emptive right is not available,
an issue may still be objectionable if the directors
acted in breach of trust and their primary purpose
is to perpetuate or shift control of the corporation,
or to “free out: the minority interest. (Majority
Stockholders of Ruby Industrial Corp. v. Lim,
G.R. No. 165887)
 The pre-emptive right must be exercised within
the time prescribe by the articles of incorporation
or the by-laws. When the articles of incorporation
and the by-laws are silent, the board may fix a
reasonable time within which the stockholders
may exercise the right.
Section 40. Sale or other disposition of
assets. – A corporation may sell, lease,
exchange, mortgage, pledge or
otherwise dispose of all or substantially
all of its property and assets, including
its goodwill, upon such terms and
conditions and for such consideration,
which may be money, stocks, bonds or
other instruments for the payment of
money or other property or
consideration, as its board of directors
or trustees may deem expedient.
REQUISITES of sale or other disposition:
1. There must be no violation of the
provisions of existing laws on illegal
combinations and monopolies (e.g.,
Bulk Sales Law);
2. There must be approval by a majority
vote of its board of directors or
trustees;
3. It must be authorized by the vote of
the stockholders representing at
least two-thirds (2/3) of the
outstanding capital stock, or in case
of non-stock corporation, by the vote
of at least to two-thirds (2/3) of the
members, in a stockholder’s or
member’s meeting duly called for the
purpose.
a. In non-stock corporations
where there are no members
with voting rights, the vote of
at least a majority of the
trustees in office will be
sufficient authorization for the
corporation to enter into any
transaction authorized by this
section.
4. Written notice of the proposed action
and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place
of residence as shown on the books
of the corporation and deposited to
the addressee in the post office with
postage prepaid, or served
personally.
Any dissenting stockholder may
exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be
deemed to cover substantially all the
corporate property and assets if thereby
the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it
was incorporated. (NOTE: The percentage of
the asset sold in the total assets is immaterial. What
is important is whether the corporation could continue
its business or not.)
After such authorization or approval by
the stockholders or members, the board
of directors or trustees may,
nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage,
pledge or other disposition of property
and assets, subject to the rights of third
parties under any contract relating
thereto, without further action or
approval by the stockholders or
members.
When the authorization of the
stockholders or members is not
necessary:
1. When the board abandons the sale,
lease, exchange, mortgage, pledge or
other disposition of property;
2. If the sale or other disposition of
property is necessary in the usual
and regular course of business of
said corporation; or
3. If the proceeds of the sale or other
disposition of such property and
assets be appropriated for the
conduct of its remaining business; or
4. When the transaction does not cover all
or substantially all of the assets.
Two kinds of corporate acquisitions:
1. Asset sales – the corporate entity sells all or
substantially all of its assets to another entity
2. Stock sales – the individual or corporate
shareholders sell a controlling block of stock
to new or existing shareholders
 GENERAL RULE: The transferee-corporation of
all or substantially all of the assets (or even
shares) of the transferor-corporation will not be
liable for the debts of said transferor-corporation.
 EXCEPTIONS: (1) If there is an express or
implied assumption of liabilities; (2) there is a
consolidation or merger or a de facto merger; (3)
if the purchase was in fraud of creditors; or (4) if
the purchaser becomes a continuation of the
seller. (Edward Nell Co. v. Pacific Farms, 15
SCRA 415)
Remedies of the creditors (if it falls under the
exceptions):
1. Hold the transferee liable for the obligations
of the assignor;
2. File an action to rescind the sale of the
assets.
 The vendor of all or substantially all assets must
deliver to the vendee a written sworn statement
of the name and addresses of all creditors of the
vendor. Any sale in violation of this requirement
is considered fraudulent and void. (Bulk Sales
Law)
 The seller in asset sales is authorized to dismiss
the affected employees, but is liable for the
payment of separation pay under the law. The
buyer in good faith is not obliged to absorb the
employees affected by the sale, nor is it liable for
the payment of their claims. (SME Bank v. De
Guzman, G.R. Nos. 184517 and 186641)
Section 41. Power to acquire own
shares. – A stock corporation shall have
the power to purchase or acquire its own
shares for a legitimate corporate
purpose or purposes, including but not
limited to the following cases: Provided,
That the corporation has unrestricted
retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares
arising out of stock dividends;
2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid
subscription, in a delinquency
sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or
withdrawing stockholders entitled
to payment for their shares under
the provisions of this Code. (a)
Other requirements imposed by the SEC:
1. The corporate affairs warrant it;
2. Legitimate and proper corporate objective is
advanced;
3. The transaction is designed and carried out
in good faith;
4. The capital is not impaired;
5. The creditors are not prejudiced.
Section 42. Power to invest corporate
funds in another corporation or business
or for any other purpose. – Subject to the
provisions of this Code, a private
corporation may invest its funds in any
other corporation or business or for any
purpose other than the primary purpose
for which it was organized when:
1. approved by a majority of the board
of directors or trustees and
2. ratified by the stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock, or
by at least two thirds (2/3) of the
members in the case of non-stock
corporations, at a stockholder’s or
member’s meeting duly called for the
purpose.
a. Where the investment by the
corporation is reasonably
necessary to accomplish its
primary purpose as stated in
the articles of incorporation,
the approval of the
stockholders or members
shall not be necessary.
3. Written notice of the proposed
investment and the time and place of
the meeting shall be addressed to
each stockholder or member at his
place of residence as shown on the
books of the corporation and
deposited to the addressee in the
post office with postage prepaid, or
served personally.
Any dissenting stockholder shall have
appraisal right as provided in this Code
 It is believed that Sec. 42 does not cover passive
investment. The same may be justified in the
exercise of general power to purchase securities
in other corporations as provided in par. 7 of Sec.
36 of the Corporation Code.
Section 43. Power to declare dividends. -
The board of directors of a stock
corporation may declare dividends out of
the unrestricted retained earnings which
shall be payable in cash, in property, or
in stock to all stockholders on the basis
of outstanding stock held by them.
1. Any cash dividends due on
delinquent stock shall first be applied
to the unpaid balance on the
subscription plus costs and
expenses.
2. Stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid.
a. No stock dividend shall be
issued without the
approval of stockholders
representing not less than
two-thirds (2/3) of the
outstanding capital stock
at a regular or special
meeting duly called for the
purpose.
 The board of directors has the discretion to
declare dividends. (GENERAL RULE) The
decision of the board alone is necessary to
declare cash or property dividends.
 While the approval of the stockholders is required
in declaring stock dividends, the stockholders
cannot compel the board to declare stock
dividends.
Property dividends – those that are paid in property
instead of cash where the surplus is in that form and it
is practicable to so distribute them among the
shareholders
Stock dividends – earnings that are distributed in the
form of shares of stock, the surplus or undivided
profits is converted into capital
 The declaration of stock dividends is akin to a
forced purchase of stocks. By declaring stock
dividends, a corporation ploughs back a portion
or its entire unrestricted retained earnings either
to its working capital or for capital asset
acquisition or investments. (PLDT v. NTC, 539
SCRA 365)
Retained earnings – the accumulated profits realized
out of normal and continuous operations of the
business after deducting therefrom distributions to
stockholders and transfers to capital stock or other
accounts
Unrestricted retained earnings – means the amount of
accumulated profits and gains realised out of the
normal and continuous operations of the company
after deducting therefrom distributions of stockholders
and transfers to capital stock or other accounts, and
which is:
1. Not appropriated by its Board of Directors for
corporate expansion projects or program;
2. Not covered by a restriction for dividend
declaration under a loan agreement; and
3. Not required to be retained under special
circumstances obtaining in the corporation
such as when there is a need for a special
reserve for probable contingencies.
GENERAL RULE: Dividends cannot be declared out
of capital. There must be unrestricted retained
earnings from which dividends are declared.
EXCEPTION: (1) Liquidating dividends; and (2)
dividends from investments in Wasting Assets
Corporation.
GENERAL RULE: Stock corporations are
prohibited from retaining surplus profits
in excess of one hundred (100%) percent
of their paid-in capital stock. (But this is the
exception to the general rule that even if there are
existing profits, the Board of Directors has the
discretion to determine whether or not dividends are
declared.)
EXCEPTIONS:
1. When justified by definite corporate
expansion projects or programs
approved by the board of directors;
or
2. When the corporation is prohibited
under any loan agreement with any
financial institution or creditor,
whether local or foreign, from
declaring dividends without its/his
consent, and such consent has not
yet been secured; or
3. When it can be clearly shown that
such retention is necessary under
special circumstances obtaining in
the corporation, such as when there
is need for special reserve for
probable contingencies.
Section 44. Power to enter into
management contract. – No corporation
shall conclude a management contract
with another corporation unless such
contract shall have been approved by
the board of directors and by
stockholders owning at least the
majority of the outstanding capital stock,
or by at least a majority of the members
in the case of a non-stock corporation, of
both the managing and the managed
corporation, at a meeting duly called for
the purpose: Provided, That (1) where a
stockholder or stockholders
representing the same interest of both
the managing and the managed
corporations own or control more than
one-third (1/3) of the total outstanding
capital stock entitled to vote of the
managing corporation; or (2) where a
majority of the members of the board of
directors of the managing corporation
also constitute a majority of the
members of the board of directors of the
managed corporation, then the
management contract must be approved
by the stockholders of the managed
corporation owning at least two-thirds
(2/3) of the total outstanding capital
stock entitled to vote, or by at least two-
thirds (2/3) of the members in the case of
a non-stock corporation. No
management contract shall be entered
into for a period longer than five years
for any one term.
The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all
of the business of another corporation,
whether such contracts are called
service contracts, operating agreements
or otherwise: Provided, however, That
such service contracts or operating
agreements which relate to the
exploration, development, exploitation or
utilization of natural resources may be
entered into for such periods as may be
provided by the pertinent laws or
regulations. (n)
Section 45. Ultra vires acts of
corporations. – No corporation under
this Code shall possess or exercise any
corporate powers except those
conferred by this Code or by its articles
of incorporation and except such as are
necessary or incidental to the exercise of
the powers so conferred. (n)
Philippine Foreign
Investment Negative List Up to Twenty Percent (20%)
LIST A: FOREIGN OWNERSHIP IS LIMITED BY
MANDATE OF THE CONSTITUTION AND SPECIFIC
Foreign Equity
LAWS
No Foreign Equity  Private radio communication network

 Mass Media except recording

 Practice of professions
Up to Twenty-Five Percent
o Engineering
 Aeronautical (25%) Foreign Equity
 Agricultural
 Chemical
 Civil  Private recruitment, whether for local or overseas
 Electrical employment
 Electronics and Communication  Contracts for the construction and repair of locally-
funded public works except:
 Geodetic
 Mechanical o Infrastructure/development projects covered
in RA 7718; and
 Metallurgical o Projects which are foreign-funded or
 Mining assisted and required to undergo
 Naval Architecture and Marine international competitive bidding of
 Sanitary contracts for construction of defense-related
o Medicine and Allied Professions structure.
 Medicine
 Medical Technology
 Dentistry
 Midwifery Up to Thirty Percent (30%)
 Nursing Foreign Equity
 Nutrition and Dietetics
 Optometry
 Pharmacy  Advertising
 Physical and Occupational
Therapy
 Radiologic and X-ray
Technology Up to Forty Percent (40%)
 Veterinary Medicine
o Accountancy Foreign Equity
o Architecture
o Criminology
o Chemistry  Exploration, development, and utilization of natural
resources
o Customs Brokerage
o Environmental Planning  Ownership of Private Lands
o Forestry  Operation and management of public utilities
o Geology  Ownership/establishment and administration of
o Interior Design educational institutions
o Landscape Architecture  Culture, production, milling, processing, trading
o Law excepting retailing, of rice and corn and acquiring,
o Librarianship by barter, purchase or otherwise, rice and corn and
o Marine Deck Officers the by-products thereof
o Marine Engine Officers  Contracts for the supply of materials, goods, and
o Master Plumbing commodities to government-owned or controlled
o Sugar Technology corporation, company, agency, or municipal
o Social Work corporation
o Teaching  Project Proponent and facility operator of a BOT
o Agriculture project requiring a public utilities franchise
o Fisheries  Operation of deep sea commercial fishing vessels
o Guidance counseling  Adjustment Companies
o Real estate service  Ownership of condominium units where the
o Respiratory therapy common areas in the condominium projects are co-
o Psychology owned by the owners of the separate units or owned
 Retail trade enterprises with paid-up capital of less by a corporation
than US$ 2,500,00
 Cooperatives
 Private Security Agencies
 Small-scale Mining
Up to Forty-Nine Percent (49%)
 Utilization of Marine Resources in archipelagic Foreign Equity
waters, territorial sea, and exclusive economic zone
as well as small-scale utilizaton of natural resources
in rivers, lakes, bays, and lagoons  Lending companies
 Ownership, operation, and management of cockpits
 Manufacture, repair, stockpiling, and/or
Up to Sixty Percent (60%)
distribution of nuclear weapons Foreign Equity
 Manufacture, repair, stockpiling, and/or
distribution of biological, chemical and radiological
weapons, and anti-personal mines (various treaties  Financing companies regulated by the Securities
to which the Philippines is a signatory and and Exchange Commission
conventions supported by the Philippines)  Investment houses regulated by the SEC
 Manufacture of firecrackers and other pyrotechnic
devices
1. This is limited to Filipino citizens save in cases
prescribed by law
 2. Full foreign participation is allowed for retail trade
enterprises: (a) with paid-up capital of US$2,500,000 or
more provided that investments for establishing a store
is not less than US$830,000; or (b) specializing in high-
end or luxury products, provided that the paid-up
capital per store is not less than US$250,000
3. Domestic investments are also prohibited
(Conventions/Treaties to which the Philippines is a
signatory)
4. Full foreign participation is allowed through financial
or technical assistance agreement with the President
(Art. XII, Sec. 2 of the Constitution)
5. Full foreign participation is allowed provided that
within the 30-year period from start of operation, the
foreign investor shall divest a minimum of 60 percent
of their equity to Filipino citizens
6. No foreign national may be allowed to own stock in
financing companies or investment houses unless the
country of which he is a national accords the same
reciprocal rights to Filipinos
LIST B: FOREIGN OWNERSHIP IS LIMITED FOR
REASONS OF SECURITY, DEFENSE, RISK TO HEALTH,
AND MORALS AND PROTECTION OF SMALL AND
MEDIUM-SCALE ENTERPRISES
o Gunnery, bombing, and fire control systems
and components
o Guided missiles/missile systems and
components
o Tactical aircraft (fixed and rotary-winged),
parts and components thereof
o Space vehicles and component systems
o Combat vessels (air, land, and naval) and
auxiliaries
o Weapons repair and maintenance equipment
o Military communications equipment
o Night vision equipment
o Stimulated coherent radiation devices,
components, and accessories
o Armament training devices
o Others as may be determined by the
Secretary of the DND
However, the manufacture or repair of these items may be
authorized by the Secretary of National Defence to non-Philippine
nationals; provided that a substantial percentage of output, as
determined by the said agency, is exported. Provided further that
the extent of foreign equity ownership allowed shall be specified in
the said authority/clearance.

Up to Forty Percent (40%)  Manufacture and distribution of dangerous drugs

 Sauna and steam bathhouses, massage clinics, and
Foreign Equity other like activities regulated by law because of risks
posed to public health and morals
 Manufacture, repair, storage, and/or distribution of  All forms of gambling, except those covered by
products and/or ingredients requiring Philippine investment agreements with PAGCOR or the
National Police (PNP) clearance: PAGCOR Charter
o Firearms (handguns to shotguns), parts of  Domestic market enterprises with paid-in equity
firearms and ammunition therefore, capital of less than the equivalent of US$200,000
instruments or implements used or intended  Domestic market enterprises which involve
to be used in the manufacture of firearms advanced technology or employ at least fifty (50)
o Gunpowder direct employees with paid-in-equity capital of less
o Dynamite than the equivalent of US$100,000
o Blasting supplies
o Ingredients used in making explosives:
 Chlorates of potassium and
sodium
 Nitrates of ammonium,
potassium, sodium barium,
copper (11), lead (11), calcium,
and cuprite
 Nitric acid
 Nitrocellulose
 Perchlorates of ammonium,
potassium, and sodium
 Dinitrocellulose
 Glycerol
 Amorphous phosphorus
 Hydrogen peroxide
 Strontium nitrate powder
 Toluene
 Telescopic sight, sniper scope, and other similar
devices

However, the manufacture or repair of these items may be

authorized by the Chief of the PNP to non-Philippine nationals;
provided that a substantial percentage of output, as determined by
the said agency, is exported. Provided further that the extent of
foreign equity ownership allowed shall be specified in the said
authority/clearance.

 Manufacture, repair, storage, and/or distribution of

products requiring Department of National Defense
(DND) clearance;
o Guns and ammunition for warfare
o Military ordnance and parts thereof (e.g.,
torpedoes, depth charges, bombs, grenades,
missiles)

Type of Business

Government Agency

a. Air Transport Civil Aeronautics Board

b. Banks, Pawnshops or other Financial Bangko Sentral ng Pilipinas (BSP)

Intermediaries with Quasi-Banking
Functions

c. Charitable Institutions Department of Social Welfare and Development

(DSWD)
d. Educational Institutions:
(stock & non-stock)

Elementary to High school Department of Education (DepEd)

College, Tertiary Course Commission on Higher Education (CHED)

Technical Vocational Course Technical Education Skills and Development

Authority (TESDA)

f. Electric Power Plants/Trading of Petroleum Department of Energy

Products

g. Hospitals/Health Department of Health (DOH)

Maintenance Organizations

h. Insurance Insurance Commission (IC)

j. Professional Associations Professional Regulation Commission (PRC)

k. Radio, TV, Telephone National Telecommunications Commission

(NTC)

l. Recruitment for Overseas Employment Philippine Overseas Employment Administration

(POEA)

m. Security Agency/ Anti-Crime Task Force Philippine National Police (PNP)

n. Tobacco Related Business National Tobacco Administration

n. Volunteer Fire Brigade Bureau of Fire Protection

o. Water Transport/Shipbuilding/Ship Repair Maritime Industry Authority

AN ACT TO PUNISH ACTS OF EVASION OF THE LAWS ON THE NATIONALIZATION OF CERTAIN RIGHTS,
FRANCHISES OR PRIVILEGES

Be it enacted by the National Assembly of the Philippines

Section 1. Penalty — In all cases in which any constitutional or legal provisions requires Philippine or any other
specific citizenship as a requisite for the exercise or enjoyment of a right, franchise or privilege, any citizen of the
Philippines or of any other specific country who allows his name or citizenship to be used for the purpose of evading
such provision, and any alien or foreigner profiting thereby, shall be punished by imprisonment for not less than five
nor more than fifteen years, and by a fine of not less than the value of the right franchise or privilege, which is
enjoyed or acquired in violation of the provisions hereof but in no case less than five thousand pesos.
The fact that the citizen of the Philippines or of any specific country charged with a violation of this Act had, at the
time of the acquisition of his holdings in the corporations or associations referred to in section two of this Act, no real
or personal property, credit or other assets the value of which shall at least be equivalent to said holdings, shall be
evidence of a violation of this Act.1

Section 2. Simulation of minimum capital stock — In all cases in which a constitutional or legal provision requires
that, in order that a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a
certain per centum of its capital must be owned by citizens of the Philippines or of any other specific country, it shall
be unlawful to falsely simulate the existence of such minimum stock or capital as owned by such citizens, for the
purpose of evading said provision. The president or managers and directors or trustees of corporations or
associations convicted of a violation of this section shall be punished by imprisonment of not less than five nor more
than fifteen years, and by a fine not less than the value of the right, franchise or privilege, enjoyed or acquired in
violation of the provisions hereof but in no case less than five thousand pesos.2

Section 2-A. Unlawful use, Exploitation or enjoyment — Any person, corporation, or association which, having in its
name or under its control, a right, franchise, privilege, property or business, the exercise or enjoyment of which is
expressly reserved by the Constitution or the laws to citizens of the Philippines or of any other specific country, or to
corporations or associations at least sixty per centum of the capital of which is owned by such citizens, permits or
allows the use, exploitation or enjoyment thereof by a person, corporation or association not possessing the
requisites prescribed by a the Constitution or the laws of the Philippines; or leases, or in any other way, transfers or
conveys said right, franchise, privilege, property or business to a person, corporation or association not otherwise
qualified under the Constitution, or the provisions of the existing laws; or in any manner permits or allows any person,
not possessing the qualifications required by the Constitution, or existing laws to acquire, use, exploit or enjoy a right,
franchise, privilege, property or business, the exercise and enjoyment of which are expressly reserved by the
Constitution or existing laws to citizens of the Philippines or of any other specific country, to intervene in the
management, operation, administration or control thereof, whether as an officer, employee or laborer therein with or
without remuneration except technical personnel whose employment may be specifically authorized by the Secretary
of Justice, and any person who knowingly aids, assists or abets in the planning consummation or perpetration of any
of the acts herein above enumerated shall be punished by imprisonment for not less than five nor more than fifteen
years and by a fine of not less than the value of the right, franchise or privilege enjoyed or acquired in violation of the
provisions hereof but in no case less than five thousand pesos: Provided, however, That the president, managers or
persons in charge of corporations, associations or partnerships violating the provisions of this section shall be
criminally liable in lieu thereof: Provided, further, That any person, corporation or association shall, in addition to the
penalty imposed herein, forfeit such right, franchise, privilege, and the property or business enjoyed or acquired in
violation of the provisions of this Act: And provided, finally, That the election of aliens as members of the board of
directors or governing body of corporations or associations engaging in partially nationalized activities shall be
allowed in proportion to their allowable participation or share in the capital of such entities. 3

Section 2-B. Any violation of the provisions of this Act by the spouse of any public official, if both live together, shall
be cause for the dismissal of such public official. 4itc@lawphil

Section 2-C. The exercise, possession or control by a Filipino citizen having a common-law relationship with an alien
of a right, privilege, property or business, the exercise or enjoyment of which is expressly reserved by the Constitution
or the laws to citizens of the Philippines, shall constitute a prima facie evidence of violation of the provisions of
Section 2-A hereof.5

Section 3. Any corporation or association violating any of the provisions of this Act shall, upon proper court
proceedings, be dissolved.

Section 3-A. Reward to informer. — In case of conviction under the provisions of this Act, twenty-five per centum of
any fine imposed shall accrue to the benefit of the informer who furnishes to the Government original information
leading to said conviction and who shall be ascertained and named in the judgment of the court. If the informer is a
dummy, who shall voluntarily take the initiative of reporting to the proper authorities any violation of the provisions of
this Act and assist in the prosecution, resulting in the conviction of any person or corporation profiting thereby or
involved therein, he shall be entitled to the reward hereof in the sum equivalent to twenty-five per centum of the fine
actually paid to or received by the Government, and shall be exempted from the penal liabilities provided for in this
Act. 6

Section 4. This Act shall take effect upon its approval.

itc-alf

Approved, October 30, 1936.