corporation code and other commerical laws reviewer

8/20/2019 Corporation Code and Other Commerical Laws Reviewer

1/350

UNIVERSITY OF THE PHILIPPINES

COLLEGE OF LAW

Bar Operations 2008

COMMERCIAL LAW

Bar Operations Head │ Arianne Reyes

cademics Head │ Henry AgudaRyan Balisacan

Subject Head │ Henry AgudaTere Licaros

Subject Committee │ Lynn Ramos * Johaira WahabRuby Alberto * Dianne Capco

Information Management │Committee

Chino Baybay [Head] * Simoun Salinas [Deputy] * Rania Joya[Design & Lay-out] * Ludee Pulido [Documentations] * Linus

Madamba * Des Mayoralgo * Jillian De Dumo * Mike

Ocampo * Abel Maglanque * Edan Marri R. Cañete * Carmie

Rome Cargo


2/350

1 U P L AW U P B A R O P S 2 0 0 8 Page 2 of 351

TABLE OF CONTENTS COMMERCIAL LAW

Commercial Law

TABLE OF CONTENTS

I. Corporation Law 3

II. Negotiable Instruments Law 88

III. Insurance Code 125

IV. Transportation Law 203

V. Code of Commerce 255

VI. Banking Law 275

VII. Intellectual Property Law 327


3/350


CORPORATION LAW COMMERCIAL LAW

CORPORATION LAWa.

THE CORPORATION CODE OF THEPHILIPPINES

(BATAS PAMBANSA BLG. 68)

Chapter I

INTRODUCTION

1. The Corporation as a LegalConcept

1.1 Corporation Defined

A Corporation is an artificial being created byoperation of law, having the right of succession andthe powers, attributes, and properties expresslyauthorized by law or incident to its existence. (§2)

A corporation is a creature of:

A general enabling statute (requirements of the law must be complied with); and

The agreement of individuals who seek toincorporate (internal contractual arrangements: articles of incorporation and by-laws).

1.2 Four attributes of a corporation

An artificial being:

1. a juridical person capable of having rightsand obligations, w/ a personality separateand distinct from its members orstockholders

2. hence, stockholders are not personallyliable for corp. obligations and cannot beheld liable to third persons who have claimsagainst the corp. beyond their agreedcontribution to the corporate capital (paid-up capital and unpaid subscriptions) This is

known as the doctrine of limited liability.

Created by operation of law:

1. mere consent of the parties to form a corp.is not sufficient: the State must give itsconsent either through a special law (in thecase of a gov’t corp.) or a general law (fora private corp.)

2. the general law under w/c a private corp.may be formed or organized is theCorporation Code

Has the right of succession:

1. its continued existence during the termstated in its articles of incorp. cannot beaffected by any change in the members orstockholders

2. nor is it affected by the transfer of sharesby a stockholder to a 3rd person

Has the powers, attributes and properties expresslyauthorized by law or incident to its existence: as it

is a mere creature of the law, it can exercise onlysuch powers as the law may choose to grant it,either expressly or impliedly

1.3..Advantages of the CorporateOrganizations

1) Separate juridical personality – personalityseparate and distinct from individualstockholders and members

2) Limited liability to investors – stockholders areliable only to the extent of their contribution General rule: Where a corporation buys all

the shares of another corporation, this willnot operate to dissolve the othercorporation and as the two corporationsstill maintain their separate corporateentities, one will not answer for the debtsof the other. [Nell v Pacific Farms (15 SCRA415), Nov. 23, 1965]

Exceptions:o If there is an express assumption of

liabilities;o There is a consolidation or merger;o If the purchase was in fraud of

creditors;o If the purchaser becomes a

continuation of the seller;o If there are unpaid subscriptions

(stockholder is liable for the unpaidbalance).

3) Free transferability of units of ownership –stockholders hold their shares as personalproperty with rights to dispose, assign orencumber them as they may desire (§63)

4) Centralized Management – all corporate powersare exercised by the board of directors (§23)

1.4 Partnership vs. Corporation

1. Extent of Liability—partners are personallyliable for the debts of the partnership;stockholders cannot be made to personallyanswer to corporate creditors

2. Creation—mere agreement of the parties,

w/c can be composed of just 2 persons,gives rise to the juridical personality of thepartnership, whether or not registered w/the SEC (Art. 1768, NCC); a corp., w/ aminimum of 5 incorporators, derives its

juridical personality from the certificateissued by the SEC (§19)

3. Management—In most cases, all theowners in a partnership actively participatein management, w/ capacity to bind it byany usual contract (Art. 1818, NCC); in acorp., management is centralized in theboard of directors w/c has exclusive powerto bind the corp. (§23)

4. Nature of Relationship—partnership isbased on mutual trust and confidence(delectus personae) so that its existence isprecarious because of the facility w/ whichit can be dissolved (i.e. through the deathor unilateral act of a partner); a corp. hasmore stability as it enjoys the right of succession and is not affected by the deathor insolvency of a stockholder; also,dissolution before a corp.’s term requires a


4/350



2/3rds vote of the stock (Secs. 118 and119, Corp. Code), always subject to SECintervention

5. Powers—a corporation has only suchpowers as are expressly granted to it andsuch as are necessary to the exercise of thepowers so granted or fro theaccomplishment of its purpose(sec.2, 36(11), and 45); In a partnership, as long asthe parties have agreed to it, thepartnership can perform any act as long asit does not violate any law or right of others.

1.5 Government Regulation of Corporations

By the Legislature

Basis: police power of the state (Northern Ry Co. v.State of Washington, 300 U.S. 154) and the factthat corporations owe their existence to the state

Manner: by amending or repealing the Corp. Code

or any part thereof

NDC v Phil Veterans Bank (1990)

PD 1717 ordered the rehabilitation of the AgrixGroup of Companies to be administered by NDC.Sec 4(1) provides that all mortgages and lienspresently attached be extinguished, and that allaccrued obligations shall not bear interest. Amongthose ordered extinguished was a lien in favor of Phil Veterans Bank over prop in LB. NDC filed toforeclose the mortgage.

HELD: New Agrix was created by special decreeeven if 1973 Consti mandates that BatasangPambansa, cannot, except by general law, providefor formation, organization and regulation of private corps, unless for GOCCs.

NDC was only mandated to extend loan and tomanage company. New Agrix was entirely privateand should have been organized under Corp Law.

By the SEC

Basis: Sec. 3, PD 902-A and Sec 5.1(a), RA8799.

The Commission shall have absolute jurisdiction,supervision and control over all corporations,partnerships or associations, who are the granteesof primary franchises and/or licenses or permitsgranted by the government, to operate in thePhilippines; xxx

Note: Under Sec. 5.2 of RA8799, SEC’s jurisdictionover all cases enumerated under Sec. 5, PD 902-Awas transferred to the Regional Trial Court whichhas jurisdiction over the principal office of thecorporation, partnership or association concerned.

According to the Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-04-SC), which took effect on April 1, 2001, theRegional Trial Court has jurisdiction over casesinvolving the following:

1. Devices or schemes employed by, or any act of, the BOD, business associates,officers or partners, amounting to fraud or misrepresentation which may be

detrimental to the interest of the public and/or of the stockholders, partners or members of any corporation, partnership,or association;

2. Controversies arising out of intra-corporate, partnership, or associationrelations, between and amongstockholders, members or associates; and between, any or all of them and thecorporation, partnership, or association of

which they are stockholders, members or associates, respectively;

3. Controversies in the election or appointment of directors, trustees,officers, or managers of corporations,

partnerships, or associations;4. Derivative suits; and 5. Inspection of corporate books.

Morato v CA (2004)

Petitioners, stockholders of TF Ventures, Inc., fileda petition with the SEC against private respondentsfor the declaration of nullity of stockholders’ anddirectors’ meetings and damages. They assail thevalidity of the notice and stockholders’ meeting of TF Ventures, Inc. and the organizational meeting of the members of the BOD. The petition was referredto the Securities Investigation and ClearingDepartment (SICD) of the SEC for investigationand resolution.Meanwhile, one of the private respondents(Matsura, Chairman of the BOD), wrote a letter tothe Examiners and Appraisers Dept of the SEC,requesting for an examination of the basis for thecapital increase of T.F. Ventures, Inc. fromP10,000,000 to P100,000,000, alleging thecommission of devices, schemes and criminal acts.The letter was forwarded by the SEC to theProsecution and Enforcement Dept (PED).Petitioners contended that with the filing of theletter-petition with the PED, Matsura resorted toforum shopping.

HELD: Matsura is not guilty of forum shopping.There is no identity of causes of action or identity of rights asserted by the parties in both cases. Inthis case, SEC Case is pending before the SICD,which has exclusive jurisdiction to investigate and

resolve intra-corporate disputes. The respondent’sletter-petition, on the other hand, was referred by the SEC to the PED and is pending before theProsecution and Enforcement Department of theSEC.

Section 8 of P.D. No. 902-A, as amended, provides:

SECTION 8. The Prosecution and Enforcement Department shall have,subject to the Commission’s control andsupervision, the exclusive authority toinvestigate, on complaint or motu propio,

any act or omission of the Board of Directors/Trustees of corporations, or of partnerships, or other associations, or of their stockholders, officers or partners,including any fraudulent devices, schemesor representations, in violation of any lawor rules and regulations administered andenforced by the Commission; to file andprosecute in accordance with law andrules and regulations issued by theCommission and in appropriate cases, the


5/350



corresponding criminal or civil case beforethe Commission or the proper court orbody upon prima facie finding of violationof any laws or rules and regulationsadministered and enforced by theCommission; and to perform such otherpowers and functions as may be provided

by law or duly delegated to it by theCommission.

Prosecution under this Decree or anyAct, Law, Rules and Regulations enforcedand administered by the Commission shallbe without prejudice to any liability forviolation of any provision of the RevisedPenal Code.

Under the said provision, the SEC, through thePED, is vested with authority to investigate, eithermotu proprio or upon complaint, any act oromission, fraudulent schemes, devices ormisrepresentations in violation of any law, rules or

regulations, administered and enforced by the SEC,and to file and prosecute appropriate civil orcriminal cases upon a prima facie finding of violation of such laws, rules or regulations. Thepetitioners, in the SEC case, sought the nullificationof the Notice for the Annual Stockholders’ Meeting,the stockholders’ meeting and organizationalmeeting held on September 22, 1997, on theirclaim that the holding of the same was in violationof the Corporation Code and the By-Laws of thepetitioner corporation. In his answer to thepetition, the respondent asserted the validity of thesaid meeting and prayed, by way of counterclaim,for the nullification of the October 20, 1997

meeting of the petitioners, and for damages. Incontrast, the respondent alleged in his letter-petition in the PED case that the petitioners wereengaged in fraudulent schemes, devices ormisrepresentations in violation of the law, and SECrules and regulations. The complainant Matsuuraasked the PED to investigate the complaint and filethe corresponding administrative, civil or criminalcases before the SEC, the proper court or body, forviolation of the laws, rules or regulationsadministered and enforced by the SEC. The factthat the SICD has not yet resolved the SEC casedoes not constitute a bar to the resolution of thePED case. The proceedings in the said cases are

independent and separate of each other and maythus proceed separately.

Note that while this case was pending in the SC, RA8799, Securities Regulation Code, took effect onAugust 8, 2000. Section 5.2 of the law providesthat SEC’s jurisdiction over all cases under Sec 5 of PD 902-A is transferred to the RTCs.

Among the powers and functions of the SEC whichwere transferred to the RTC include the following:(a) jurisdiction and supervision over allcorporations, partnerships or associations who arethe grantees of primary franchises and/or a license

or permit issued by the Government; (b) theapproval, rejection, suspension, revocation orrequirement for registration statements, andregistration and licensing applications; (c) theregulation, investigation or supervision of theactivities of persons to ensure compliance; (d) thesupervision, monitoring, suspension or take overthe activities of exchanges, clearing agencies andother SROs; (e) the imposition of sanctions for theviolation of laws and the rules, regulations andorders issued pursuant thereto; (f) the issuance of

cease-and-desist orders to prevent fraud or injuryto the investing public; (g) the compulsion of theofficers of any registered corporation or associationto call meetings of stockholders or membersthereof under its supervision; and, (h) the exerciseof such other powers as may be provided by law aswell as those which may be implied from, or which

are necessary or incidental to the carrying out of,the express powers granted the Commission toachieve the objectives and purposes of these laws.

However, Section 8 of P.D. No. 902-A, asamended, has already been repealed, as providedfor in Section 76 of RA 8799.

Thus, under the new law, the PED ceased to exist.However, the SEC retains jurisdiction to continuewith its investigation of the letter-petition of respondent Matsuura.

When RA 8799 took effect, the SEC case had notyet been submitted for decision by the SEC.

Hence, the said case should be transferred to theRTC of Makati City, to be raffled to the appropriatebranch thereof assigned to try such cases. Despitethe repeal of Section 8 of P.D. No. 902-A and theabolition of the PED, the SEC may continue with itsinvestigation of the letter-petition of respondentMatsuura.

The Sandiganbayan has jurisdiction over presidents, directors or trustees, or managersof government-owned or controlled corporations organized and incorporated under the Corporation Code for purposes of the

provisions of RA 3019, otherwise known as the Anti-Graft and Corrupt Practices Act. Basis: Sec

4, RA 8249 (People v Sandiganbayan, 2005)

Union Bank v. Danilo ConcepcionGR No. 160727 June 26, 2007EYCO Group of Companies filed a petition forsuspension of payment, appointment of receiver/committee and approval of rehabilitation plan with alternative prayer forliquidation and dissolution of corporations.Suspension was granted by the SEC HearingPanel. Union Bank became part of theManCom which represented the creditorbanks but later on broke away without

notifying the group. It filed a slew of caseswith the Makati RTC and applied forpreliminary attachment. Union Bank filed amotion to dismiss the case pending with theSEC, and when the SEC issued an orderappointing regular members of the ManCom,Union Bank filed a petition for certiorari withthe CA seeking the nullification of the SECOrder and again assailing the jurisdiction of the SEC. It alleged that the jurisdiction over abasic petition for suspension of payments waswith the RTC under Act No. 1956 (InsolvencyLaw). The CA and later on the SC ruled thatthe jurisdiction is with the SEC pursuant to PD

902-A. The proceeding in the RTC was thussuspended. Concepcion was later appointed asliquidator by the SEC en banc and he filed amotion to intervene and set aside order of attachment in the said RTC case. The SEC enbanc approved of the liquidation plan thatConcepcion submitted but his motion tointervene with the RTC was denied for lack of standing. The RTC also declared EYCO indefault in the said case, proceeded to receive


6/350



evidence ex parte and later rendered partial judgment ordering EYCO to pay P400M toUnion Bank. Concepcion appealed the decisionand was sustained by the CA, which modifiedthe partial judgment of the RTC. Union Banknow comes to the SC assailing the CA’s order.

HELD: Denied. CA Order AFFIRMED. What isbeing assailed is the validity of theappointment of Concepcion as liquidator andhis standing to intervene in the RTC case.Albeit jurisdiction over a petition to declare acorporation in a state of insolvency strictly lieswith regular courts, the SEC possessed,during the period material, ample powerunder P.D. No. 902-A as amended, to declarea corporation insolvent as an incident of andin continuation of its already acquired

jurisdiction over the petition to be declared inthe state of suspension of payments in thetwo instances provided in Section 5(d)

thereof.Said Section 5(d) vests the SEC with exclusiveand original jurisdiction over petitions forsuspension of payments which may either be:(a) a simple petition for suspension of payments based on the provisions of theInsolvency Law, i.e., the petitioningcorporation has sufficient assets to cover allits debts, but foresees the impossibility of meeting the obligations as they fall due, or (b)a similar petition filed by an insolventcorporation accompanied by a prayer for thecreation of a management committee and/orrehabilitation receiver based on the provisions

of P.D. No. 902-A, as amended by P.D. No.1758. The petition of EYCO in this case was amix of both situations. EYCO’s petition forsuspension for payment was, for all intentsand purposes, still pending with the SEC as of June 30, 2000. Accordingly, the SEC’s

jurisdiction thereon, by the express terms of R.A. No. 8999, still subsists “until [thesuspension of payment case and its incidentsare] finally disposed .”

Viva Footwear v. SECGR No. 163235 April 27, 2007

Petitioner Viva Footwear ManufacturingCorporation is a domestic corporation engagedin the manufacture of rubber footwear.Respondents Philippine National Bank (PNB)and Philippine Bank of Communications(PBCom) are two of petitioner’s creditors. TheSEC, upon petition by Viva, declared the latterto be in a state of suspension of payments.The petition for rehabilitation was eventuallydismissed because it was not viable to do soas it was not financially sound. Viva nowclaims that its right to due process wasviolated when the SEC referred therehabilitation plan to the Financial Analysis

and Audit Division without notice to petitioner.

HELD: NO MERIT. DISMISSED. Inadministrative proceedings, due processsimply means an opportunity to seek areconsideration of the order complained of; itcannot be fully equated to due process in itsstrict jurisprudential sense. It is theadministrative order , not the preliminary report , which is the basis of any furtherremedies the losing party in an administrative

case may pursue. Thus, petitioner has no rightto be notified of the preliminary report by theFinancial Analysis and Audit Division of theSEC.

Petitioner’s claim that the SEC’s referral of thepetition for rehabilitation to the said division

violated its right to due process deserves noconsideration. Petitioner’s right toadministrative due process only entitles it toan opportunity to be heard and to a decisionbased on substantial evidence. No more, noless.

Chapter II

CLASSIFICATION OF PRIVATECORPORATIONS

1. General Classification under §3:

1.1 Stock corporation

One which has a capital stock divided intoshares and is authorized to distribute to theholders of such shares dividends orallotments of the surplus profits (i.e.,retained earnings on the basis of the sharesheld (§3)

It is organized for profit. The governing body of a stock corporation

is usually the Board of Directors (Except in

certain instances for close corporations)

1.2 Non-stock corporation

All other corporations are non-stockcorporations (§3)

One where no part of the income isdistributable as dividends to its members,trustees, or officers, subject to theprovisions of the Code on dissolution.Provided that any profit which a non-stockcorporation may obtain as an incident to itsoperation shall whenever necessary or

proper be used for the furtherance of thepurpose or purposes for which thecorporation was organized. (§87)

Not organized for profit. Its governing body is usually the Board of

Trustees.

CIR vs. Club Filipino, Inc de Cebu (1962)

Club Filipino is a civic corporation organized todevelop and cultivate sport of all class anddenomination for the healthful recreation andentertainment of its SH and members. Its AOI and

by-laws are silent as to dividends and theirdistribution but it was provided that upon itsdissolution, the Club’s remaining assets afterpaying debts shall be donated to a charitable Phil.Institution.

HELD: Club Filipino is a non-stock corporation.According to Section 3 of the Corporation Code,there are two elements for a stock corporation toexist: 1) capital stock divided into shares, and 2)an authority to distribute to the holders of such


7/350



shares, dividends or allotments of the surplusprofits on the basis of shares held. Nowhere inClub Filipino’s AOI or BL could be found anauthority for the distribution of its dividends orsurplus profits.

2. Other kinds of corporations

1. Public corporation - One formed or organized for the government or a particular state. Its

purpose is for the general good and welfare.2. Private corporation - One formed for some

private purpose, benefit, aim or end 3. Close corporation (§96) – One whose Articles

of Incorporation provide that:a) all of the corporation’s issued stock of all

classes, exclusive of treasury shares, shallbe held of record by not more that aspecified number of persons, not exceeding20

b) all of the issued stock of all classes shall besubject to one or more specified restrictionson transfer permitted by the Code

c) the corporation shall not list in any stockexchange or make any public offering of any of its stock of any class

d) at least 2/3 of its voting stock must not beowned or controlled by another corporationwhich is not a close

e) must not be a mining or oil company, stockexchange, bank, insurance company, publicutility, educational institution or corporationvested with public interest

4. Educational corporation (§106) - Thosecorporations which are organized foreducational purposes. This type of corporationis governed by Section 106 of the CorporationCode

5. Religious sole and aggregate (§110, 111 (2),123) A corporation sole is one formed for the

purpose of administering and managing, astrustee, the affairs, property andtemporalities of any religious denomination,sect, or church, by the chief archbishop,bishop, priest, rabbi, or other presiding elderof such religious denomination, sect orchurch. (§110)

The corporation sole is an exception to thegeneral rule that at least five (5) membersare required for a corporation to exist.Here, there is only one (1) incorporator.This is applicable to religious communitiesthe regulations of which provide that thecommunity’s properties are to be placed inthe name of the head and administered byhim. (§111(2))

A corporation aggregate is a religiouscorporation incorporated by more than oneperson.

6. Eleemosynary corporation – One organized fora charitable purpose

7. Domestic corporation – A domestic corporationis one formed, organized, or existing under thelaws of the Philippines

8. Foreign corporation – One formed, organized orexisting under any laws other than those of thePhilippines and whose law allows Filipinocitizens and corporations to do business in itsown country and state. (§123)

9. Corporation created by special laws or charter (§4) Corporations which are governed primarily

by the provisions of the special law orcharter creating them (§4)

Corporation Code is suppletory in so far asthey are applicable (Ibid)

10. Subsidiary corporation – one in which control,usually in the form of ownership of majority of its shares, is in another corporation (the parentcorporation)

11. Parent corporation – its control lies in its powerto elect the subsidiary’s directors thuscontrolling its management policies

Chapter III

FORMATION AND ORGANIZATION OFCORPORATION

1. Who May Form a Corporation

1.1 Incorporators

Any number of natural persons not less than five(5) but not more than fifteen (15), all of legal ageand a majority of whom are residents of thePhilippines, may form a private corporation for anylawful purpose or purposes. Each of theincorporators of a stock corporation must own orbe a subscriber to at least one (1) share of capitalstock of the corporation. (§10)

1) Natural persons Corporations and partnerships cannot be

incorporators, but may be stockholders.This prevents “layering” which may harbour

criminals and will make the corporation atool for defrauding the public. Incorporators are those stockholders or

members mentioned in the articles asoriginally forming and composing thecorporation and who are signatoriesthereof.

Corporators are stockholders or memberswho join the corporation after itsincorporation.

Original subscribers are persons whosenames are mentioned in the Articles, butnot as incorporators. They do not sign theArticles.

2) At least five incorporators but not more thanfifteen They must sign the articles of

incorporation. GENUINE INTEREST: Each incorporator

must own or subscribe to at least oneshare of stock of the corporation.

3) Majority of the incorporators must be residentsof the Philippines


8/350



General rule: need not be a citizen Exceptions: public utilities (Art XII, Sec 11.

Consti), schools (Art XIV, Sec 4(2), Consti),banks (General Banking Act), retail trade(RA 1180), savings and loan associations(RA 3799), investment houses (Sec 5, PD129), and other areas of investment ascongress may by law provide (Art XII, Sec.10, Consti).

Even though there are no legal restrictionsas to alien ownership, where > 40% of theoutstanding capital stock will be owned andcontrolled by aliens, must get writtenauthorization from BOI before it canregister with SEC. (purpose is to enableBOI to determine whether such corporationwherein aliens own a substantial number of shares would contribute to the sound andbalanced development of the nationaleconomy)

4) Incorporators must be of legal age

2. Conditions Precedent for Incorporation

2.1 Consent or agreement of at least 5 naturalpersons with respect to:

1. Compliance with the Corp Code;2. Contribution/pooling of resources –

delivered to and held in trust by adesignated trustee;

3. Governance of: Contributions;

Distribution of contributions; Division of profits/sharing of

losses; Pursuit of purpose/objectives; Corporate combination; and Transactions with third parties;

and 4. Continuity or termination of existence.

2.2 Mandatory Requirements of the Code:

1. Execution of constitutive documents(AOI, By-laws);

2. Payment/delivery of contributions –

delivered to and held in trust by adesignated trustee;3. Submission of constitutive documents

to SEC for review or evaluation; and 4. SEC action – issuance of certificate of

registration.

Note that once contributions are made beforeincorporation, such subscriptions are irrevocable for a period of 6 months (general rule). Exceptions:

1. When all of the other subscribers consent to the revocation; or

2. When the incorporation fails to materialize

(Sec. 61)

3. Steps in the formation of acorporation

3.1. PROMOTION

The “promoter” brings together personsinterested in the business enterprise andsets in motion the machinery that leads tothe formation of the corporation.

“Promoter” is a person who, acting alone orwith others, takes initiative in founding andorganizing the business or enterprise of theissuer and receives consideration therefor.1

3.2. DRAFTING OF ARTICLES OFINCORPORATION

These constitute the charter of the corporation

1. CORPORATE NAME No corporate name may be allowed by

the SEC if the proposed name isidentical or deceptively or confusinglysimilar to that of any existingcorporation or to any other namealready protected by law or is patentlydeceptive, confusing or contrary toexisting laws. (§18)

A corporate name is essential to thecorporation’s acquisition of juridical

personality Change of corporate name shall require

the approval of the SEC. SEC will issueamended certificate of incorporationunder the amended name (Ibid)

A change in corporate name involvesan amendment of the Articles, whichrequires a majority vote of the board and the vote or written assent of

stockholders holding 2/3 of theoutstanding capital stock (§16) Note:Does not include the non-voting stock.

It is the sole means of identifying thecorporation from its members or

stockholders, and from other entitiesand corporations Amendment in a corp’s AOI changing

its corporate name does not extinguishthe personality of the original corporation. The corp upon suchchange of its name, is in no sense anew entity, nor the successor of the

original corp. it is the same corp with adifferent name, and its character is not changed. Consequently, the “new” corp is still liable for the debts and obligations of the “old” corp (Republic Planters Bank v CA, 1992)

This is essential because through it,corporation can sue and be sued SEC may allow incorporators to reserve

the name for a particular period To distinguish from partnerships and

other business orgs, the law requirescorporations to append the word

“Corporation” or “Inc” to its chosenname

A corporation should transact businessonly through its chosen name

Philips Export BV (PEBV) v CA (1992)

PEBV is a foreign corp under the law of Netherlands, although not engaged in business inthe Phils. It is the registered owner of the Philipstrademark, and owns two local companies with thename Philips also.

PEBV asked the cancellation of the word Philipsfrom Standard Philips, a local manufacturer,

1 Sec. 3.10, The Securities Regulation Code (RA 8799)


9/350



alleging infringement of its exclusive right to usethe same. SEC and CA ruled for Std Philips, sayingthere was no confusion (unlike in Converse case).

Held:

Corp’s right to use its corp and trade name is aproperty right, a right in rem.

General Rule: Corp must have a name by which itis to sue and be sued and do all legal acts.

Accdg to Corp Code, no corp name may be allowed

1) if complainant corp acquired a prior rightover name and

2) proposed name isa) identical orb) deceptively or confusingly similar orc) patently deceptive, confusing or

contrary to existing lawPEBV’s local companies were incorporated 26 yrsbefore Std Philips.

TEST OF CONFUSING SIMILARITY IN CORP NAMES:Whether similarity is such as to mislead a personusing ordinary care and discrimination

Philips is the dominant word. No need to prove thatthere was actual confusion, as long as probable orlikely to occur. Std Philips’ purpose, as per itsarticles of incorp also includes sale andmanufacture of electrical products, which is PEBV’sline of business. Even if SEC guidelines mandatethat a corp could add 2 other words to proposedname, only one word “Std” was added. “Corp” notcounted.

Note: A prior user can consent to the use of itsname

2. PURPOSE CLAUSE Where a corporation has more than 1

purpose, the AOI shall state which isthe primary purpose and which issecondary (§14(2))

A non-stock corporation may notinclude those which contradict orchange its nature (Ibid)

SEC can reject or disapprove the AOI if the stated purpose is patentlyunconstitutional, illegal, immoral,

contrary to government rules andregulations.(§17 (2)) Purpose clause confers as well as limits

the powers which a corporation mayexercise

A corporation only has such powers asare expressly granted to it by law andby its AOI, those which may beincidental to such conferred powers(§45), those reasonably necessary toaccomplish its purposes (Section 36(11), and those which may be incidentto its existence (§2).

Reasons for purpose clause:

o so that a stockholder contemplatingan investment will know what linesof business his money is to berisked

o so that management will knowwhat lines of business it isauthorized to act

o so that anyone who transacts withthe corporation may ascertainwhether a transaction he is

entering is one with the generalauthority of the management

Under Sec 14(2) a corporation canhave as many purposes as it wantsprovided:o AOI specify the corporation’s

primary and secondary purposeswhich need not be related to eachother

o Corporation for which specialprovisions are made can only havethe purpose peculiar to them

o Purposes must be lawful If purpose is lawful, SEC is not

authorized to inquire whethercorporation has hidden motives andmandamus will lie to compel it to issuecertificate

PD 902-A, Sec 6(h) gives SEC, afterconsultation with BOI, NEDA, or otherappropriate government agency, the

power to refuse or deny the applicationfor registration of any corporation if itsestablishment, organization, operationwill not be consistent with the declarednational economic policies

A corporation may not be formed for the purpose of practicing a profession

3. PRINCIPAL OFFICE Must be within the Philippines (§14 (3)) AOI must specify both province or city

or town where it is located Important in (1) determining venue in

an action by or against the corporation

(2) determining the province where achattel mortgage of shares should beregistered (Chua Gan v SamahangMagsasaka)

The statement of the principal officeestablishes the residence of thecorporation

4. TERM OF EXISTENCE When a corporation is organized, the

maximum life that can be stipulated inthe AOI is 50 years. But during the lifeof the corporation, the life or term canbe extended to another 50 years at any

one instance (§11) But such extension of the life a

corporation cannot be made earlierthan 5 years before the end of itsoriginal term. Exception: where thereare justifiable reasons for an earlierextension as may be determined by theSEC. (Ibid)

Exception: Condominium corporationscan be organized for a period of 200years

Extension involves an amendment of the AOI. Thus, the requisites under §16 must be complied with. Any

dissenting stockholder may exercise hisappraisal right (§37).

5. INCORPORATORS AND DIRECTORS;NUMBER AND QUALIFICATIONS “Directors” is used for stock

corporations, while “trustees” is usedfor stock corporations.

GENERAL RULE: not less than 5 butnot more than 15EXCEPTIONS:


10/350



i) Non-stock corporations – articles orby-laws may provide for more than15 trustees (§92). Exception: Educational non-

stock corporations – trusteesmay not exceed 15. However,the number of trustees shall bein multiples of 5 (§108)

ii) Merger of banks – new board isallowed to have such number of directors as is equivalent to thetotal number of directors of themerging banks, though it mayexceed fifteen (General Banking

Act, as amended). Incorporators and directors of a stock

corporation must own at least oneshare of stock of the corporation. In anon-stock corporation, a trustee mustbe a member thereof.

In nationalized industries, aliens may

be directors of a corporation only insuch number as may be proportional totheir allowable ownership of shares,2

e.g. if the articles provide for 10directors, and alien ownership is limitedto 40% of the capital, then aliens mayoccupy a maximum of 4 board seats.

6. CAPITAL STOCK; SUBSCRIPTION;PAYMENT

Capital stock o Capital stock is the amount fixed in the

AOI, to be subscribed and paid in or

secured to be paid in by theshareholders of a corporation, either inmoney or property, labor or services, at the organization of the corporation or afterwards and upon which is toconduct its operation. (Fletcher)

o The capital stock limits the maximumamount or number of shares that may

be issued by the corporation without formal amendment of the AOI. It remains the same even though theactual value of the shares asdetermined by the assets of thecorporation is diminished or increased.

Authorized capital stock o ACS is synonymous with capital stock

where the shares of the corporationhave par value. If the shares of stock have no par value, the corporation hasno ACS, but it has capital stock theamount of which is not specified in the

AOI as it cannot be determined until all the shares have been issued. In thiscase, the two terms are not synonymous (De Leon)

o State the authorized capital stock inlawful money of the Philippines, the

number of shares into which the ACS isdivided, and the par value of each parvalue shares (§14(8), §15(7))

o Stock corporations are not required tohave any minimum authorized capitalstock except when special laws provideotherwise (§12)

Subscribed capital stock

2 Sec. 2-A, CA 108 (Anti-Dummy Law) as amended by PD 716.

o It is the amount of the capital stock subscribed whether fully paid or not. It connotes an original subscriptioncontract for the acquisition by asubscriber of unissued shares in acorporation ( §60,61)

o At least 25% of authorized capital stockmust be subscribed (§13)

o Subscription – mutual agreement of thesubscribers to take and pay for thestock of a corporation

o Pre-incorporation subscription –amount which each incorporator orstockholder agrees to contribute to aproposed corporation

Outstanding capital stock o It is the portion of the capital stock

which is issued and held by personsother than the corporation itself. Under §137, it is the total shares of stock

issued under the binding subscriptionagreements to subscribers or stockholders, whether or not fully or

partially paid, except treasury shares.It is thus broader than “subscribed” capital stock

o The terms “subscribed capital stock” and “issued” or “outstanding” capital stock are used synonymously since

subscribed capital stock, asdistinguished from the certificate of stock, can be issued even if not fully

paid. But while every subscribed share(assuming there is a binding

subscription agreement) is“outstanding,” an issued share may not have the status of outstanding share(as in the case of treasury shares)

Paid-up capital o 25% of subscribed capital stock must

be paid-up for the purpose of incorporation, but in no case shall beless than P 5000 (§13)

o Portion of the authorized capital stockwhich has been subscribed and paid.Not all funds or assets received by thecorporation can be considered paid-up

capital, for this term has a technicalsignification in corporation law. Suchmust from part of the authorizedcapital stock of the corporation,subscribed and then actually paid-up.[MSCI-NACUSIP Local Chapter v.National Wages and ProductivityCommission]

o Must be in the form of (a) cashdeposited in a bank or (b) propertywhich may be used or actually neededby the corporation in its operations

o Capital can’t consist or be invested inmoney market placement

o Corporations with more stringentcapital requirements: Insurance corporations – must

have paid-up capital stock of atleast P 5 M (Insurance Code, Sec 188)

Banks – monetary board fixesminimum paid-up capitalrequirements for the differentclasses of banks (Central Bank Act and General Banking Act).


11/350



Unissued capital stock o It is that portion of the capital stock

that is not issued or subscribed. It does not vote and draws no dividends

Legal capital o It is the amount equal to the aggregate

par vale and/or issued value of theoutstanding capital stock. When par

value shares are issued above par, the premium or excess is not to beconsidered as part of the legal capital (Cf§43). In the case of no par valueshares, the entire considerationreceived forms part of legal capital and shall not be available for distribution of dividends (§6, par 3)

Capital o It is used broadly to indicate the entire

property or assets of the corporation.It includes the amount invested by thestockholders plus the undistributed earnings less losses and expenses.

o In the strict sense, it refers to that portion of the net assets paid by thestockholders as consideration for theshares issued to them, which is utilized for the prosecution of the business of

the corporation (De Leon)

7. TREASURER-IN TRUSTThe person elected by the subscribers asTreasurer of the corporation at the time of

the incorporation, who is named as such inthe AOI and who has been authorized toreceive for and in the name and for thebenefit of the corporation, all subscriptions,fees, contributions or donations paid orgiven by the subscribers or members

8. TREASURER’S AFFIDAVITThe sworn statement of the Treasurerelected by the subscribers stating at least25% of the authorized capital stock of thecorporation has been subscribed and thatat least 25% of the total subscription hasbeen fully paid to him in actual cash and/or

property, the fair valuation of which isequal to at least 25% of the saidsubscription, such paid-up capital being notless than 5,000.00 (§14)

9. OTHER MATTERS Classes of shares, as well as the

preferences or restrictions on any suchclass (§6)

Denial or restriction of pre-emptiveright (§39)

Prohibition against transfer of stockwhich would reduce stock ownership toless than the required minimum in the

case of a nationalized business oractivity (§15(11))

3.3. FILING OF ARTICLES AND PAYMENT OFFEES

Corporations governed by special laws haveto submit a recommendation from theappropriate government agency to theeffect that such articles are in accordancewith law.

a) banks, banking and quasi-bankinginstitutions,

b) building and loan associations,c) trust companies and other financial

intermediaries,d) insurance companies,e) public utilities,f) educational institutions, andg) other corporations governed by special

laws (§17) Non-stock corporations that intend to solicit

gifts, donations, and contributions from thepublic at large for the benefit of anindefinite number of persons must secure aCertificate of Registration from theInsurance Commissioner.

Failure to file AOI will prevent dueincorporation of the proposed corporationand will not give rise to its juridicalpersonality (§19). It will not even be a defacto corporation (§20)

1. Unless the certificate of incorporation has been issued,there can be no de factocorporation (Hall vs. Piccio, 1950)

2. Campos—this statement should notbe taken as an absolute principle,but in the light of thecircumstances before the court.

3.4 EXAMINATION OF ARTICLES BY SEC;APPROVAL OR REJECTION

The SEC may reject any AOI thereto if thesame is not in compliance with the

requirements of this Code (§17) The SEC shall give the incorporators a

reasonable time within which to correct ormodify the objectionable portions of thearticles or amendment. (§ 17)

4. Grounds for disapproving articles of incorporation (§17)

a) AOI does not substantially the formprescribed

b) Purpose is patently unconstitutional, illegal,immoral, contrary to government rules andregulations

c) Treasurer’s Affidavit concerning the amountof capital subscribed and or paid is false

d) Percentage requirement of ownership of Filipino citizens as required by theConstitution not complied with.

After consulting with BOI, NEDA,appropriate government agency, SEC maydeny registration of any corporation if itsestablishment will not be consistent withdeclared national policies

Certificate of authority required of the

following:a) Insurance Companies- Insurance

Commissionb) Banks, Building and Loan

Associations, Finance Companies-Monetary Board

c) Educational Institutions- Secretaryof Education

d) Public Utilities- Board of Power,Board of Transportation, National


12/350



Telecommunication Commission,etc..

Remedy in case of rejection of AOI: bypetition for review in accordance with theRules of Court (§6, last par., PD 902-A)

ISSUANCE OF CERTIFICATE OF INCORPORATION

A private corporation formed or organizedunder this Code commences to havecorporate existence and juridicalpersonality and is deemed incorporatedfrom the date the Securities and ExchangeCommission issues a certificate of incorporation under its official seal (§19)

Thereupon the incorporators,stockholders/members and their successorsshall constitute a body politic and corporateunder the name stated in the articles of incorporation for the period of timementioned therein, unless said period is

extended or the corporation is soonerdissolved in accordance with law. (Ibid) If incorporators are found guilty of fraud in

procuring Certificate of Incorporation, SECmay revoke the same after proper noticeand hearing (§6(I), PD 902-A)

5. Defective Attempts to Incorporate

5.1 DE FACTO CORPORATIONS – a corporationwhere there exists a flaw in its incorporation

Requisites of a de facto corporation

(Ballantine as cited in Campos)

a) Valid statute – there is an apparently validstatue under which the corporation with itspurposes may be formed. There can be node facto corporation under a statuesubsequently declared unconstitutional

Municipality of Malabang vs. Benito (1969)

The municipality of Balabagan was created by EO386 of President Garcia out of barrios and sitios of Malabang. The petitioners seek to nullify the EO.They rely on the Pelaez ruling that the President’s

power to create municipalities under Sec. 68 of theAdministrative Code is unconstitutional.Respondents argue that the Pelaez ruling isinapplicable because Balabagan is a de factocorporation.

HELD: The Municipality of Balabagan was not a defacto corporation. The color of authority requisiteto a de facto municipal corporation may be anunconstitutional law, valid on its face, which haseither:

a. Been upheld for a time by the courts;or

b. Not yet been declared void; provided

that a warrant for its creation can befound in some other valid law or in therecognition of its potential existence inthe general constitution of the state.

The mere fact that Balabagan was organized beforethe statute was invalidated cannot make it a defacto corporation because, independently of theAdministrative Code, there is no other valid statuteto give color of authority to its creation. Thisdoesn’t mean that the acts done by Balabagan in

the exercise of its corporate powers are a nullity.The existence of EO 386 is an “operative fact whichcannot be justly ignored.”

b) User of corporate powers – there has beensome user of corporate powers, the

transaction of business in some way as if itwere a corporation not necessary that dealings between

the parties should have been on acorporate basis

election of directors and officers wouldnot be user of corporate powers sincethese acts are just indicative of a mereassociation

taking subscriptions to and issuingshares of stock, buying lot,constructing, and leasing a building onit will constitute sufficient user of corporate powers to constitute a de

facto corporationc) Substantial or Colorable compliance - there

has been colorable compliance with legalrequirements in GOOD FAITH while the corporation is still in the

process of incorporation, it is quiteclear that there can be no substantialor colorable compliance and therefore itcannot be at such a stage a de factocorporation

A corporation which has not yet beenissued a certificate of incorporationcannot claim “in good faith” to be acorporation. Thus, it cannot be a defacto corporation [Hall v. Piccio 86 Phil603]

C Compliance with the above conditions

would make the corporation de facto whoseincorporation cannot be attackedcollaterally. It may only be attackeddirectly by the State in a quo warrantoproceeding (§20)

De facto doctrine grew out of the necessityto promote the security of businesstransactions and to eliminate quibbling overirregularities

The de facto doctrine is the exception tothe general rule that when there is no corpentity to talk about, it is the natural

persons who are liable Where corporations are neither de jure or

de facto, associates may be held liable aspartners unless estoppel applies (§ 21)

No articles and no by-laws: no de factocorp. There’s no colorable compliance at all

De facto corp is like a de jure corp, has allthe powers and liabilities of de facto corp

THE ONLY DIFF: its incorporation can beattacked by State in quo warranto action

Ratio: Only State can give it legalexistence, so only the State is wronged

5.2 CORPORATION BY ESTOPPEL

It is a status acquired by persons whoassume to act as a corporation knowing itto be without authority. Such persons shallbe liable as general partners for all debts,liabilities and damages incurred or arisingas a result thereof. (§21)


13/350



When such ostensible corporation is suedon any transaction entered by it as acorporation or any tort committed by it assuch, it shall not be allowed to use as adefense as lack of corporate personality(§21)

One who assumes an obligation to anostensible corporation as such, cannotresist performance thereof on the groundthat there was in fact no corporation (§21)

Note that an unincorporated corporation isnot barred from transacting business beforethe commencement of corporate existence.Limit: personal liability. Complication: whenthe corporation did not come about

Against whom will estoppel lie? Whocommitted the active misrepresentation?

Where a person convinces other parties toinvest money for the formation of acorporation, but which has never duly incorporated, there can be no resulting

partnership among them, and the mere passive investors cannot be held liable toshare in the losses suffered by the businessenterprise (Pioneer Surety v CA, 1989)

When applicable:1. Persons assuming to act as corp are

liable as gen partners;

2. 3rd party who had dealt with anunincorporated association as a corpmay be precluded from denying itscorporate existence on a suit brought by the alleged corp – person deemed tohave admitted the existence of the corp

3. alleged corp that has entered into a

contract by virtue of which it hasreceived advantages and benefits

However, if business associatesfraudulently misrepresent the existence of a corp, 3rd party can sue them as gen

partners. 3rd party is not estopped fromasserting their liability because he had recognized the corporation’s existence.

Ratio: They cannot profit by their ownmisrepresentation.

Hence, if associates did not know of theedefective incorp, they can’t be personally held liable by innocent 3rd party (Cf Salvaierra v Garlitos, 1958)

But if 3rd party knew of defects of incorp,he is estopped from recovering fromindividual associates, but must recover only from corp assets

Lozano vs. delos Santos (1997)

This case involved two incorporated drivers’ associations that decided to unite and elect one setof officers to be given authority to collect the dailydues of the drivers who are members of theconsolidated association.HELD: Doctrine of estoppel applies when persons

assume to form a corporation and exercisecorporate functions and enter into businessrelations with third persons. Where there are nothird persons involved and the conflict arises onlyamong those assuming to form a corporation, whotherefore know that it has not been registered,there is no corporation by estoppel.

International Express Travel v. CA (2000)

The doctrine of corporation by estoppel may apply

to:o a third party - a 3rd party who had dealt with

an unincorporated association as acorporation may be precluded from denyingits corporate existence on a suit brought bythe alleged corporation on the contract even if he did not know of the defective

incorporation. 3rd

party is considered to haveadmitted the existence of a corporation by thefact that he dealt with it as a corporation

o the alleged corporation - when a third personhas entered into a contract with anassociation which represented itself to be acorporation, the association is estopped fromdenying its corporate capacity in a suit againstit by such 3rd person. It cannot allege lack of personality to be sued to evade responsibilityon a contract it has entered into and by virtueof which it has received advantages andbenefits

o associates as partners - when business

associates fraudulently misrepresents theexistence of a corporation and the 3rd partycontacts with the association as a corporationwithout knowing the serious defects in itsincorporation, such 3rd party may sueassociates as general partners. Where boththe associates and the 3rd party were ignorantof the defective incoroporation, 3rd party canthold the associates liable since they were ingood faith. If 3rd party knew of defects inincorporation and still dealt with thecorporation, he must be deemed to havechosen to deal with the corporation as suchand should be limited in his recovery to the

corporate assets.

6. Internal Organization of theCorporation

6.1 APPROVAL OF BY-LAWS

1. Definition of by-laws These are regulations, ordinances, rules

or laws adopted by an association orcorporation or the like for its internalgovernance. By- laws define the rights

and obligations of various officers,persons or groups within the corporatestructure and provide rules for routinematters such as calling meetings.

Every corporation under this code shallhave the power and capacity: to adoptby-laws not contrary to law, morals, orpublic policy, and to amend or repealthe same in accordance with this code(§36 (5))

These are subordinate to the AOI, CorpCode, and other statutes. (Fleischer vs.Nolasco(1925))

2. When to adopt by-laws (§46) Every corporation formed under this

code must within 1 month after receiptof official notice of the issuance of itscertificate of incorporation by the SECadopt a code of by-laws for itsgovernment not inconsistent with thiscode.

May be adopted and filed prior toincorporation, in such case, shall beapproved and signed by all


14/350



incorporators submitted to SECtogether with AOI

Failure to file By-laws on time:

Loyola Grand Villas Homeowners Assn v. CA

(1997)

The Supreme Court held that although theCorporation Code requires the filing of by-lawswithin one month after the issuance of theCertificate of Incorporation, it does not expresslyprovide for the consequences of non-filing withinthe said period. Failure to file the by-laws withinthat period does not imply the "demise" of thecorporation. By-laws may be required by law for anorderly governance and management of corporations but they are not essential to corporatebirth. Therefore, failure to file them within theperiod required by law by no means tolls the

automatic dissolution of a corporation.

3. How filed (§46) Must be approved by the affirmative

vote of the stockholders representingthe majority of the outstanding capitalstock or majority of members (if filed

prior to incorporation, must beapproved and signed by all incorporators)

Must be signed by the stockholders ormembers voting for it

Must be filed with the SEC certified by

the majority of directors/trustees andcountersigned by the secretary of thecorporation which shall be attached tooriginal AOI

4. Where kept (§46) Must be kept in the principal office of

the corporation; subject to inspectionof stockholder or member during officehours (Cf §74)

5. Effectivity of by-laws In all cases, the by-laws shall be

effective only from the issuance of SEC

of certification that bylaws are notinconsistent with the Code

Cannot bind stockholders or corporationpending approval

By-laws or any amendment thereto of any bank, banking institution, buildingand loan association, trust company,insurance company, public utility,educational institution or other special corporations governed by special lawsmust be accompanied by a certificate of the appropriate gov’t agency to theeffect that such by-laws are inaccordance with law

By-laws, like AOI are contracts of adhesion. They will bind thecorporation and stockholders includingthose who vote against as well as thosewho became members after approval

Contracts entered into without strictcompliance with by-laws may bebinding on the corporation due to longacquiescence and usage (Board of Liquidators vs. Kalaw (1967))

By-laws are mere internal rules amongstockholders and cannot affect orprejudice 3rd persons who deal with thecorporation unless they haveknowledge of the same (China BankingCorp v CA, 1997)

6. Contents (§47) Subject to the provisions of the

Constitution, this Code, other speciallaws, and the articles of incorporation,a private corporation may provide in itsby-laws for:a) The time, place and manner of

calling and conducting regular orspecial meetings of the directors ortrustees;

b) The time and manner of calling andconducting regular or specialmeetings of the stockholders ormembers;

c) The required quorum in meetings of stockholders or members and themanner of voting therein;

d) The form for proxies of stockholders and members and themanner of voting them; By lawsmay not prohibit the use of proxies-Peoples’ Home Savings Bank vs.Superior Court, cited in Campos

e) The qualifications, duties andcompensation of directors ortrustees, officers and employees;

f) The time for holding the annualelection of directors of trustees and

the mode or manner of givingnotice thereof;g) The manner of election or

appointment and the term of officeof all officers other than directorsor trustees;

h) The penalties for violation of theby-laws;

i) In the case of stock corporations,the manner of issuing stockcertificates; and

j) Such other matters as may benecessary for the proper orconvenient transaction of its

corporate business and affairs. The contents may be subdivided into

two major headings:a) Management and control of the

corporate entity; andb) Rights and obligations of

stockholders

7. Amendment or repeal (§48) Majority vote of the members of the

Board and majority vote of theoutstanding capital stock or majority of members, in a meeting duly called for the purpose; or

2/3 of the outstanding capital stock or members may delegate to the BOD the power to amend or repeal any by-lawsor adopt new by-laws (such power may be revoked by majority vote only)

In all other respects, the procedure for adopting the original by-laws shall bethe same in amending or repealing by-laws or adoption of a new set of by-laws


15/350



6.2 ELECTION OF DIRECTORS – discussed inChapter VII

6.3 COMMENCEMENT OF BUSINESS

7. Effects of non-use of

charter/continuous inoperation (§ 22)

1. Non-user for 2 years (non-use of charter)-when the corporation does not formallyorganize and commence the transaction of its business or the construction of its workswithin 2 years from the date of itsincorporation, its corporate powers ceaseand the corporation shall be deemeddissolved (automatic) Formal organization – may consist in

the election of new board of directorsor trustees and corporate officer

Commencement of business – maytake the form of contracting for leaseor sale of properties to be used asbusiness site of the corporation andother preparatory acts geared towardsfulfillment of the purpose for which thecorporation was established

2. Non-user for 5 years (continuousinoperation)- when the corporation hascommenced the transaction of its businessbut subsequently becomes continuouslyinoperative for a period of at least 5 years.The same shall be a ground for thesuspension or revocation of its corporate

franchise or Certificate of Incorporation(not automatic). Notice and hearing beforeSEC is required.

3. Exception: cause or non-use or operationwas due to causes beyond the control of the corporation as determined by SEC (ex.Mineral lands to be developed by thecorporation as per its purpose are theobject of court litigation and a courtinjunction against the corporate activitieshas been issued)

ANNUAL FINANCIAL STATEMENTS – filed with SECannually (SEC Rule, Nov. 20, 1980)

Chapter IV

THE CORPORATE ENTITY

1. Doctrine of separate juridicalpersonality

A corporation has a personality separate anddistinct from that of its stockholders andmembers and is not affected by the personalrights, obligations, and transactions of thelatter. Since corporate property is owned bythe corporation as a juridical person, thestockholders have no claim on it as owners, buthave merely an expectancy or inchoate right tothe same should any of it remain upondissolution of the corporation after all corporatecreditors have been paid. Such right is limitedonly to their equity interest (doctrine of limited liability).

Although stockholder’s interest in the corp may be attached by his personal creditor, corp property cannot be used to satisfy his claim(Wise & Co. vs. Man Sun Lung, 1940)

General Rule: Separate personality is vested toa corporate entity when it is issued thecertificate of incorporation by the SEC. Theexceptions are:a. de facto corporationb. corporation by estoppel

A s a separate juridical personality, acorporation can be held liable for tortscommitted by its officers for corporate purpose(PNB v CA, 1978)

It can’t be held criminally liable for a crimecommitted by its officers (People v Tan BoonKong, 1930)

Corporate entities are entitled to the followingconstitutional rights: due process, equal

protection, and protection against unreasonablesearches and seizures. However, a corp is not entitled to the privilege against self-incrimination (Bataan Shipyard & Eng’g Co. v PCGG, 1987)

A corporation is not entitled to moral damages(LBC Express, Inc v CA)

Juridical personality of the corporation endswhen liquidation ends (payment of debts and

distribution of assets) and inchoate rights or expectancies of stockholders are realized. Until such conveyance is made, title over the assetsremains with the corporation.

2. Piercing the veil of corporatefiction

2.1 Nature of the piercing doctrine

Piercing the veil of corporate entity requiresthe court to see through the protective

shroud which exempts its stockholdersfrom liabilities that ordinarily they could besubject to, or distinguishes one corporationfrom a seemingly separate one, were it notfor the existing corporate fiction [Lim v. CA,2000]. But to do this, the court must besure that the corporate fiction wasmisused, to such an extent that injustice,fraud or crime was committed uponanother, disregarding, their, his, her or its


16/350



rights. It is the protection of the interestsof innocent third persons dealing with thecorporate entity which the law seeks toprotect by this doctrine. [Traders Royal Bank v. CA, 1997 ]

Whether the existence of the corporationshould be pierced depends on questions of facts, appropriately pleaded. Mereallegation that a corporation is the alterego of the individual stockholders isinsufficient. The presumption is that thestockholders or officers are distinct entities.The burden of proving otherwise is on theparty seeking to have the court pierce theveil of corporate entity. [Ramoso v. VA,2000]

Piercing the veil of corporate entity ismerely an equitable remedy, and may beawarded only in cases when the corporatefiction is used to defeat public convenience,

justify wrong, protect fraud or defend crime

or where the corporation is a mere alterego or business conduit of a person. When it comes to applying the doctrine, the

first point to consider is the liability of obligation of the individual (the one who isbeing sought to be liable). Without suchliability, everything would have been incompliance with statutes (U.S vs.Milwaukee, 1905; Umali vs. CA, 1990).

In case of wholly-owned corporations,corporations with common stockholders, or corporations having a parent-subsidiary relationship, the following are the“inevitable consequences”:

a) Control and management of thecorporation;b) Interlocking directors;c) Common access to the use of resources,

services, and 3rd -party providers; and d) Intra-corporate dealings.In the above consequences, there is nonecessity for applying the doctrine of piercingthe corporate veil unless there is a particularact by the corporation, stockholder, or BODthat gives rise to a liability. If there’s a liabilityto speak of, such consequences may beconsidered as a means of evading such thusthe need for the piercing.

In applying the doctrine, determine:1. the rights and obligations of the

parties.2. the possibility of non-enforcement

of such rights and obligationsbecause of the shield or veil.

3. look into the circumstances andunderlying purpose of putting upthe corporation

2.2 Extent of the legal effects of piercing

The application of the piercing doctrine to aparticular case does not deny thecorporation of legal personality for any andall purposes, but only for the particulartransaction or instance for which thedoctrine was applied. [Koppel Phil. Inc. v.Yatco] (1946)

Piercing is not allowed unless the remedysought is to make the officer or anothercorporation pecuniarily liable for corporatedebts

2.3 Illustrative Cases where piercing the veilis allowed

If done to defraud the government of taxesdue it

If done to evade payment of civil liability

If done by a corporation which is merely aconduit or alter ego of another corporation

I f done to evade compliance withcontractual obligations

If done to evade financial obligation to itsemployees

2.4 Parent-subsidiary relationship

The mere fact that a corporation owns allor substantially all of the stocks of anothercorporation is not sufficient to justify theirbeing treated as one entity. If used toperform legitimate functions, the

subsidiary’s separate existence may berespected. However, to prevent abuses of the separate entity privilege, the court willpierce the veil of corporate entity andregard the two corporations as one.

Circumstances which if present in theproper combination renders the subsidiaryan instrumentality:a) The parent corporation owns all or

most of the subsidiary’s capital stockb) The parent and subsidiary corporations

have common directors or officersc) The parent corporation finances the

subsidiaryd) The parent corporation subscribes to all

the capital stock of the subsidiary orotherwise causes its incorporation

e) The subsidiary has grossly inadequatecapital

f) The parent corporation pays thesalaries and other expenses or losses of the subsidiary

g) The subsidiary has substantially nobusiness except with parent corporationor no assets except those conveyed toor by the parent corporation

h) In the papers of the parent corporationor in the statements of its officers, thesubsidiary is described as a departmentor division of the parent corporation orits business or financial responsibility isreferred to as the parent corporation’sown

i) The parent corporation uses theproperty of the subsidiary as its own

j) The directors or executives of thesubsidiary do not act independently inthe interest of the subsidiary but taketheir orders from the parentcorporation in the latter’s interest

k) The formal ledger requirements of thesubsidiary are not observed (PNB v Ritratto Group, 2001).

The subsidiary cannot be considered amere instrumentality of the parentcorporation just by the combination of the11 signs listed above. For the veil of corporate entity of the subsidiary to bepierced so that it is considered just aninstrumentality, the act questioned musthave an illegal or unfair purpose which


17/350



results to prejudice to third persons whomay seek redress from the corporate entity

De Leon vs. NLRC (2001)

FACTS: FISI contracted with FTC for securityservices. Subsequently, the stockholders of FISI

sold all their participation in the corporation to anew set of stockholders which renamed thecorporation MISI. Afterwards, FTC preterminatedits contract of security services with MISI causingpetitioner security guards to lose their employmentand file ULP case against FTC, FISI and MISI.HELD: There was ER-EE relationship between FTCand petitioners. It was shown that FISI was amere adjunct of FTC. Records show that FISI andFTC have the same owners and business address,and FISI provided security services only to FTC.The purported sale of the shares of the formerstockholders to a new set of stockholders whochanged the name of the corporation to MISI

appears to be part of a scheme to terminate theservices of FISI's security guards posted at thepremises of FTC and bust their newly-organizedunion which was then beginning to become activein demanding the company's compliance with LaborStandards laws. Under these circumstances, theCourt cannot allow FTC to use its separatecorporate personality to shield itself from liabilityfor illegal acts committed against its employees.

Francisco vs. Mejia (2001)

With specific regard to corporate officers, thegeneral rule is that the officer cannot be held

personally liable with the corporation, whethercivilly or otherwise, for the consequences of hisacts, if he acted for and in behalf of thecorporation, within the scope of his authority and ingood faith. In such cases, the officer's acts areproperly attributed to the corporation. However, if it is proven that the officer has used the corporatefiction to defraud a third party, or that he has actednegligently, maliciously or in bad faith, then thecorporate veil shall be lifted and he shall be heldpersonally liable for the particular corporateobligation involved.

3. Nationality of the Corporation

3.1 The place of incorporation test . The corporation is a national of the country

under whose laws it is organized orincorporated(§123):Domestic corporations – organized andgoverned under and by Philippine laws

Foreign corporations – organized underlaws other than those of the Philippines ancan operate only in the territory of thestate under whose laws it was formed.However, they may be licensed to dobusiness here.

3.2 Nationality of the Corporation asdetermined by the “Control Test ”

Exploitation of Natural Resources - Section2, Art. XII CONST. “only Filipino Citizens orCorporations whose capital stock are atleast 60% owed by Filipinos can qualify toexploit natural resources.”

Public Utilities - Sec. 11, Art XII, CONST. “xxx no franchise, certificate or any otherform of authorization for the operation of apublic utility shall be granted except tocitizens of the Philippines or to corporationsor associations organized under the laws of the Philippines at least 60% of whosecapital is owned by such citizens. “

War-time Test - If the controllingstockholders are enemies, then thenationality of the corporation will be baseon the citizenship of the majoritystockholders in times of war (FilipinasCompania de Seguros v Christian Huenfeld,1951) .

Investment Test - Sec. 3(a) and (b),Foreign Investments Act of 1991 (RA7042).It considers for purpose of investment a

“Philippine National” as a corporationorganized under the laws of the Philippinesof which at least 60% of the capital stock

outstanding and entitled to vote is ownedand held by citizens of the Philippines, or atrustee of the funds for pension or otheremployee retirement or separationbenefits, where the trustee is a Philippinenational and at least 60% of the fund willaccrue to the benefit of Philippine nationals.

3.3 Grandfather ruleUsed to determine the nationality of acorporation by which the percentage of Filipinoequity in corporations engaged in nationalizedand/or partly nationalized areas of activities,

provided for under the constitution and othernationalization laws, is computed, in caseswhere corporate shareholders are present inthe situation, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of thecorporate stockholder. (Villanueva, 2003)

SEC formula: SEC Letter Opinion “Shares belonging to corporations orpartnerships at least 60% of the capital of which is owned by Filipino citizens shall beconsidered as of Philippine nationality, but

if the percentage of Filipino ownership inthe corporation or partnership is less than60% only the number of sharescorresponding to such percentage shall beconsidered as of Philippine nationality.”


18/350



Chapter V

PROMOTERS’ CONTRACTS PRIOR TOINCORPORATION

1. Functions of Promoters

Organize and establish corporation Solicit or pool capital contributions Exercise/identify/consummate opportunities Make available capital

contributions/investments (underwrite) Manage/control Note: may be done prior or after incorporation.

Complications arise if performed prior toincorporation. For whom was the promoter acting in behalf of? (no juridical entity yet)

2.What are Promoter’s Contracts?

Contracts prior to existence of corporation thusthe corporation could not have been a party toit.

However, the corporation may make thecontracts its own and may become bound onsuch contracts if after incorporation, it adoptsor ratifies the same, or accepts its benefits withknowledge of the terms thereof.

Adoption or ratification need not be by expressresolution of the board and may be implied from the acts of responsible officers of thecorporation.

3. Liability of Corporation forPromoter’s Contracts

Rules on the liability of the corp. on promoters’ contracts:

3.1 General RuleCorp. is not bound by the contract – Since the

corp. did not yet exist at the time of the contract, itcould not have had an agent who could legally bindit.

3.2 Exception:

Corp. may be bound by the contract if it makes thecontract its own: How?

a. Adoption or ratification By express resolution Implied from the acts of responsible

officers of the corp.* The corp. cannot adopt only the part of the

contract which may be beneficial to it & then discard the part that is burdensome.

* The contract to be capable of adoption orratification, must be one within the powersof the corp. to enter.

b. Acceptance of benefits under the contract

with knowledge of the terms thereof

4. Personal Liability of Promoter onPre-Incorporation Contracts

There are three possible situations intended by thepromoter and the other party in pre-incorp.contracts:

1. Promoter takes a continuing OFFER on behalf of the corp, which if accepted by the corp.becomes a contract Promoter does notassume any personal liability, whether or notthe offer is accepted by the corp.

2. Promoter makes a contract at the time bindinghimself with the UNDERSTANDING that if thecorp., once formed, accepts or adopts thecontract, the promoter will be relieved of allresponsibilities

3. Promoter binds himself PERSONALLY & assumes the responsibility of looking to theproposed corp. for reimbursement

In the absence of any express or impliedagreement to the contrary, the 3rd situation will bepresumed and the promoter will be consideredpersonally liable for the contracts. Thus, the corp.’sadoption or ratification of the contract will notrelease the promoter from personal liability unlessa novation was intended. (Wells vs. Fay & Egan

Co., 143 Ga. 732, 87 S.E 873, 1915) Exception:Quaker v Hill case. In this case, Quaker looked tothe uincorporated entity when making the contract.Thus, the promoter was not liable.(Quaker Hill Inc.vs. Parr, 148 Colo. 45, 364 P. 2d 1056, 1961)

5. Compensation of Promoters

Gen rule – the corporation is not liable to paycompensation because this would be an impositionon innocent investors. (Ballantine)

Exceptions: if after it is formed, corporation expressly

promises to do so (Ballantine; Indianapolis BluePrint & Manufacturing Co. v. Kennedy et. al.,215 Ind. 409, 19 N.E 2d 554, 1939)

Services done partly before and partly afterincorporation and the corporation takes thebenefits thereof

The Corp. Code does not contain any provision asto the compensation of promoters. But theSecurities Act authorizes a promotion fee IF it isprovided for in the registration statement of thesecurities involved.

6. Fiduciary Relationship betweenCorporation & Promoter

The promoters, being responsible for the financing& organization of the corp., are under duty toexercise good faith & fairness in all their acts & transactions.

Example: Promoters often have to take options ortitle to property in their name but for the benefit of the corp. In such cases, they should not makesecret profits in passing title to the corp. If they do,

they would have to account for all such profits tothe corp. when formed. (Old Dominion Mining andSmelting Corp., 203 Mass. 159, 89 N.E 193, 1909)


19/350



Chapter VI

CORPORATE POWERS

1. General powers of corporations(§36)

a. To sue and be sued in its corporate name;b. Succession by its corporate name for the period

of time stated in the articles of incorporationand the certificate of incorporation;

c. To adopt and use a corporate seal;d. To amend its articles of incorporation in

accordance with the provisions of this Code;e. To adopt by-laws, not contrary to law, morals,

or public policy, and to amend or repeal thesame in accordance with this Code;

f. In case of stock corporations, to issue or sellstocks to subscribers and to sell stocks tosubscribers and to sell treasury stocks inaccordance with the provisions of this Code;and to admit members to the corporation if itbe a non-stock corporation;

g. To purchase, receive, take or grant, hold,convey, sell, lease, pledge, mortgage andotherwise deal with such real and personalproperty, including securities and bonds of other corporations, as the transaction of thelawful business of the corporation mayreasonably and necessarily require, subject tothe limitations prescribed by law and theConstitution;

h. To enter into merger or consolidation withother corporations as provided in this Code;

i. To make reasonable donations, including thosefor the public welfare or for hospital, charitable,cultural, scientific, civic, or similar purposes:Provided, That no corporation, domestic orforeign, shall give donations in aid of anypolitical party or candidate or for purposes of partisan political activity;

j. To establish pension, retirement, and otherplans for the benefit of its directors, trustees,officers and employees; and

k. To exercise such other powers as may beessential or necessary to carry out its purposeor purposes as stated in the articles of incorporation. (in the purpose clause)

Sources of express power (Villanueva)o Section 36 (Corp Code and other applicable

statutes)o Purpose clause (AOI, supplemented by by-

laws) Sec 38 par 11 grants such power as are

essential or necessary to carry out its purposeor purposes as stated in the AOI. A corporationis presumed to act within its powers and whena contract is not on its face necessarily beyondits authority, it will, in the absence of proof tothe contrary, presumed valid

The general powers are to be exercised by the

BOD. However, the power to amend AOI is tobe exercised by the stockholders or members 2 general restrictions on the power of the

corporation to acquire and hold properties:o that the property must be reasonably and

necessarily required by the transactions of its lawful business

o that the power shall be subject to thelimitations prescribed by other special lawsand the constitution (corporation may notacquire more than 30% of voting stocks of

a bank; corporations are restricted fromacquiring public lands except by lease of not more than 1000 hectares)

2. Specific Powers - TCB PDA IDM(DIP CAB MDT)

Extend or shorten the corporate Term (§ 37) Increase or decrease Capital stock (§ 38) Incur, create or increase Bonded indebtedness

(§ 38) Deny Preemptive right (§ 39) Sell or otherwise Dispose of substantially all its

assets Acquire its own shares (§ 41) Invest in another corporation or business (§

42) Declare dividends (§ 43) Enter into Management contracts (§ 44)

3. Implied Powers

These implied powers are deemed to exist becauseof the following provisions:1. except such as are necessary or incidental to

the exercise of the powers so conferred (§36)2. such powers as are essential or necessary to

carry out its purpose or purposes as stated inthe AOI – catch-all phrase (§45)

Remember: (Coleman vs. Hotel de France Co., 29Phil. 323, 1915)1. A corporation is presumed to act within its

powers.2. When a contract, entered into by the

corporation, is not on its face necessarilybeyond its authority, it will be presumed valid.

4. The Ultra ViresDoctrine (§45)

Definition – These are acts which a corporation isnot empowered to do or perform because they arenot based on the powers conferred by its AOI orby the Corporation Code on corporations ingeneral, or because they are not ne

corporation code and other commerical laws reviewer

Documents