Emmanuel S.

Neri LAW HANDOUT 12/12/19

TITLE I GENERAL PROVISION

1.) Define Corporation

- 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 incidental to its
existence.

Incidental – liable to happen as a consequence

2.) Meaning of Artificial Being

- It means that corporation is a juridical entity vested with legal personality separate and distinct
from those acting for and, in its behalf, and, in general, from the people compromising it as well
as from any other legal entity which it may be related
- Not every stockholder or officer can bind the corporation considering the existence of a
corporate entity separate from those who compose it.

3.) Characteristics of Corporations

➢ It is an artificial being - Separation of entity and people
➢ Created by Operation of Law – it cannot come into existence by mere agreement of the
parties as in the case of the partnership but require special authority or grant from the
State, either by a special incorporation law that directly creates the corporation or by
means of a general corporation law such as the Corp. Code of the Phil.
➢ It has the right of succession (Continuance of legal status despite change of ownership)
➢ It has the powers, attributes, and properties expressly authorized by the law or
incidental to its existence (Rights of properties)

4.) Partnership vs. Corporation

- By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves and exercise profession while 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 incidental to its existence.
-
5.) Meaning of government-owned or controlled corporation
- Refers to any agency organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature, and owned by the
Government directly or through its instrumentalities either wholly, or, where applicable as in
the case of stock corporations, to the extent of at least 51 percent of its capital stock.
- Requisites must concur before one may be classified as a stock corporation, namely:
➢ That it has capital stock divided into shares
➢ That it is AUTHORIZED to distribute dividends and allotments of surplus and profits to its
stockholders

Note: If ONLY ONE requisite is present, it cannot be properly classified as a stock corporation. As for
non-stock, members MUST NOT distribute any part of their income to said members.
6.) What is the meaning of “piercing the veil of corporate entity”?
- The corporate veil should not and cannot be pierced unless it is clearly established that the
separate and distinct personality of the corporation was used to justify a wrong, protect fraud,
or perpetrate a deception
- Factors for the application of the doctrine of piercing the corporate veil:
➢ Stock ownership by one or common ownership of both corporations
➢ Identity of directors and officers
➢ The manner of keeping corporate books and records
➢ Methods of conducting the business
- Elements of piercing the veil of corporate fiction
➢ Control
➢ Such control must have been used by the defendant to commit a fraud or a wrong to
perpetuate the violation of legal duty
➢ Such control and breach of duty must have proximately caused the injury or unjust loss
complained of
- Examples
➢ To ward off a judgement credit
➢ To avoid inclusion of corporate assets as part of the estate of the decedent
➢ To escape liability arising from the debt
➢ To perpetuate fraud

7.) What is the nationality of the corporation?

- To determine the nationality of a corporation under the control test, the formula is simple: a
corporation is automatically considered a Filipino national if at least 60% of its capital structure
is owned by Filipino Citizens, otherwise it is a foreign corporation.

8.) Which of the two rules shall apply?

- The grandfather rules

9.) Powers of a corporation?

- A corporation has NO POWER except those expressly conferred on it by the Corporation Code
(or special laws) and those that are implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of director and/or its duly authorized officers and
agents.
10.) Ownership of property?
- The properties acquired by a corporation is the property of a corporation and not the property
of stockholders or members

11.) What are the classes of corporation formed under the code?
- Classes of corporation may be stock and nonstock corporations

12.) What is a stock corporation?

- Is a corporation which have capital stock divided into shares and are authorized to distribute to
the holders of such share dividends or allotment of the surplus profits based on the shares held.
13.) What is a non-stock corporation?
- Is a corporation where no part of its income is distributable as dividends to its members,
trustees, or officers. Provided, that any profit which a non-stock corporation may obtain as an
incidental to its operations shall, whenever necessary or proper, be used for the furtherance of
the purpose for which the corporation was organized.

14.) What are the other classes of corporation?

-As to Purpose

➢ Public Corporation – organized for the government of a portion of the State for the general
good and welfare.
➢ Private Corporation – Corporation formed for some private purpose, benefit or end.
➢ GOCC – Corporation 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.
➢ Quasi-public Corporation – A private corporation which has accepted from the State the
grant of franchise or control involving the performance of public duties, but which is
organized for profit such as Electric, Water, and Transportation companies.

- As to legal right to Corporate Existence

➢ De Jure Corporation – A corporation created in strict or substantial conformity with the
mandatory statutory requirements for incorporation and the right of which to exist as a
corporation cannot be successfully attacked or questioned by any party even in a direct
proceeding for that purpose by the State.
➢ De Facto Corporation – Corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall no be inquired into
collaterally in any private suit to which such corporation may be a party. The inquiry
may be made by the SOLICITOR GENERAL in a quo warranto proceeding

*Quo Warranto – A writ or legal action requiring a person to show by what warrant an
corporation held, claimed, or exercised.

➢ 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.
➢ Corporation by Prescription – One which has exercised corporate powers for an
indefinite period without interference on the part of the government.

- As to laws of Incorporation
➢ Domestic Corporation – A corporation incorporated under the laws of the Philippines.
➢ Foreign Corporation – Corporation formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino Citizens and corporations to
do business in its own country or State
➢
- As to whether they are open to the public or not
➢ Open Corporation – Corporation which is open to any person who may wish to become
a stockholder or member.
➢ Close corporation – Corporation whose articles of incorporation provide that
1. All the Corporation’s issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding 20.
2. All the issued stock of all classes shall be subject to one or more specified
restrictions on transfer.
3. The corporation shall not list in any stock exchange or make any public offering of
any of its stock of any class.
- As to relationship of management and control
➢ Parent or Holding Corporation – Corporation that hold stocks in another corporation for
purposes of control.
➢ Subsidiary Corporation – Corporation more than 50% of the voting stock of which is
controlled directly or indirectly by another corporation, which thereby becomes its
parent corporation.

- As to the number of persons who compose them

➢ Corporate Aggregate – Corporation consisting of more than one member
➢ Corporation Sole - Corporation consisting of only one member for the purpose of
administering and managing, as trustee, the affairs, property, and temporalities of any
religious denomination, sect or church.

- As to whether they are for religious purposes or not

➢ Ecclesiastical Corporation – Corporation organized for religious purposes
➢ Lay Corporation – Corporation organized for a purpose other than religion.
- As to whether they are for charitable Purposes or not
➢ Eleemosynary Corporation – Corporation organized for charitable purposes
➢ Civil Corporation – Corporation organized for business or profit

15.) Are there corporations created not under the corporation code?
- Yes, these corporations are created by special law, referred to often as a charter and governed
primarily by the provisions of the special law or charter creating them or applicable to them,
supplemented by the provision of this Code, as they are applicable.
16.) Components of a corporation
➢ Corporators – Who compose a corporation, whether as stockholders or as members
➢ Incorporators – Stockholders or members as originally forming and composing the
corporation and who are SIGNATORIES thereof
➢ Stockholders – Owners of shares of stock in a stock corporation
➢ Members – Corporators of a non-stock corporation
➢ Board of Directors/Board of Trustees – Governing body in a stock corporation while the
Board of Trustees is the governing body in a non-stock corporation
 ➢ Corporate Officers – The 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. If the corporation is vested
with public interest, the board shall also elect a compliance officer
➢ Subscriber – Persons who have agreed to take a pay for original, unissued shares of a
corporation formed or to be formed
➢ Underwriter – A person who guarantees on a firm commitment and/or declared best
effort basis the distribution and sale of securities of any kind by another company.
➢ Promoter – Is a person who brings about or cause to bring about the formation and
organization of a corporation by:
1. Bringing together the incorporators or the persons interested in the enterprise
2. Procuring subscription or capital for the corporation
3. Setting in motion the machinery which leads to the incorporation of the corporation
itself

Note: Founder/Organizer – one who takes the entrepreneurial initiative in funding or

organizing a business enterprise.

17.) Can there be members in a stock corporation?

No, because members are for non-stock corporation, Stockholders are for stock corporation

18.) Who classifies shares?

- The classification of shares, their corresponding rights, privileges, or restrictions, and their
stated par value, if any, MUST BE indicated in the articles of incorporation. Each share shall be
equal in all respects to every other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock.
- INCORPORATORS – It is to be determined by the incorporators by stating it in their articles of
incorporation which will be filed with the SEC
- BOARD OF DIRECTORS AND STOCKHOLDERS - The original classification of shares made by the
incorporation which was stated in the articles of incorporation can be amended by a majority
vote of the BOD and the vote or written assent of the stockholders representing at least 2/3 of
the outstanding capital stock.

*Assent – the expression of approval or agreement

Note: No shares may be deprived of voting rights except those classified and issued as “preferred”
or “redeemable” shares, unless otherwise provided in this Code that there shall always be a class or
series of shares with complete voting rights.

19.) What are voting shares? (stock and non-stock)

- Shares with a right to vote. There shall always be a class or series of shares which have complete
voting rights
- STOCK CORPORATIONS
➢ The right to vote is inherent in and incidental to the ownership of corporate stocks. Only
stock issued and outstanding may be voted. Unissued stocks may not be voted or
considered in determining whether a quorum is present in a stockholders’ meeting, or
 whether a requisite proportion of the stock of the corporation is voted to adopt a certain
measure or act.
- NON-STOCK CORPORATION
➢ The voting rights attach to membership
➢ Each member has one vote unless so limited, broadened, or denied in the articles of
incorporation or by-laws
➢ Only those who are actual members with voting rights should be counted

20.) What are non-voting shares?

- Shares without a right to vote
- Shares classified and issued as preferred or redeemable shares may be deprived of voting rights

21.) Common stock vs Preferred stock

COMMON STOCK is a class of stock entitling the holder to:
1. Vote on corporate matters
2. Receive dividends after other claims and dividends have been to preferred shareholders
3. Share in asset upon liquidation

Note:

- Common stock is often called as CAPITAL STOCK if only class of stock outstanding in the
corporation
- Also termed Ordinary Shares
- No preference and entitles the shareholder to a pro rata division of the profits, if any
- Have complete voting rights

PREFERRED STOCK entitles the holder to:

1. Certain preferences over the holders of common stock

2. Induce persons to subscribe for shares of a corporation
3. Have Preferred shares as to Asset in case of liquidation
4. Have Preferred Shares as to Dividends before any dividends to be paid to the holders of
common stock

Note:

- There is no guarantee, that the share will receive any dividends

- Do not give them a lien upon the property of the corporation nor make them creditors of the
corporation

22.) Classification of shares and its definition

➢ Par Value Shares – Shares with a value fixed in the Articles of Incorporation and the
certificate of stock
➢ No Par Value Shares – Shares with no par value
➢ Redeemable Shares – Issued by the corporation when expressly so provided in the AoI.
They 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.
 ➢ Promotional Shares – A share issued to promoters or those in some way interested in
the company, for incorporating the company, or for services rendered in launching or
promoting the welfare of the company
➢ Share in Escrow – A share subject to an agreement by virtue of which the share is
deposited by the grantor or his agent with a third person to be kept by the depositary
until the performance of certain condition or the happening of a certain event contained
in the agreement
➢ Fractional Shares – A share that is less than one full share
➢ Over-issued Stock – Stock or share issued in excess of the authorized capital stock. Such
issuance is null and void
➢ Convertible Share – A share that is convertible by the stockholder from one class to
another class at a certain price and within a certain period
➢ Founders’ Share – Shares which may be given certain rights and privileges like dividend
payments not enjoyed by the owners of other

23.) Trust Fund Doctrine

- Provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.
- It allows the distribution of corporate capital only in three instances, namely:
1. Amendment of the Articles of Incorporation to reduce the author stocks.ized capital stock
2. Purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings
3. Dissolution and eventual liquidation of the corporation

24.) Treasury Shares

- Are shares of stock which have been issued and fully paid for, but subsequently reacquired by
the issuing corporation through purchase, redemption, donation, or some other lawful means.
Such shares may again be disposed of for a reasonable price fixed by the BOD.
- Rights that are denied to the treasury shares
1. Voting Rights
2. Rights to Dividends

Note: Treasury Shares sold below par value are not watered stock because watered stock contemplates
an original issuance of shares.

Additional Information:

- Watered stocks are stocks issued for a consideration less than the par or issued price thereof or
in any other form other than cash valued in excess of its fair value.

Note: It only refers to original issue of shares but not to a subsequent transfer of such shares by the
corporation.