GENERAL PROVISIONS o Corporators compose the corporation,

Corporation an artificial being created by operation of whether stockholders or members

law having the right of succession and the powers, o Incorporators corporators mentioned in the
attributes, and properties expressly authorized by law articles of incorporation
or incident to its existence. o Stockholders owners of shares of stock
Fiction of corporate entity a corporation is a legal o Members corporators of a corporation which
entity or a person in law, distinct from the persons has no capital stock
composing it. 5. Give at least 3 advantages and 3 disadvantages of a
Stock corporation ordinary business corporation business corporation.
created and operated for the purpose of making a profit ADVANTAGES DISADVANTAGES
which may be distributed in the form of dividends to Legal capacity to act as Complicated
stockholders. a legal unit
Capital stock amount fixed in the articles of Has continuity of Entails high cost of
existence formation
incorporation
Management is Lack of personal element
Outstanding capital stock portion of the capital stock
centralized in the BOD in view of the
which is issued and held by persons other than the transferability of shares
corporation itself Creation, organization, Stockholders have little
Cumulative preferred share share which entitles the management and voice in the conduct of
holder thereof not only to the payment of current dissolution are the business.
dividends but also to dividends in arrears standardized
Treasury share shares of stock which have been 6. Illustrate a cumulative preferred share.
issued and fully paid for, but subsequently reacquired o If the stipulated dividend is not paid in a given
by the issuing corporation by purchase, redemption, year, it shall be added to the dividend which
donation or through some other lawful means. shall be due the following year and the
Promoters persons who bring about or cause to bring accumulated dividends must be paid to the
about the formation and organization of a corporation holder of said preferred share before any
by bringing together the incorporators or the persons dividend may be paid to the holders of
interested in the enterprise. common stock.
7. Give at least 4 similarities between a corporation and
1. Give at least 4 distinctions between a corporation and a partnership.
a partnership. Like partnership,
PARTNERSHIP CORPORATION o a corporation has a juridical personality
created by mere created by law separate and distinct from that of the
agreement individuals composing it;
organized by two requires at least 5 o a corporation act only through agents;
persons only o a corporation is an organization composed of
commences juridical commences only from an aggregate of individuals.
personality at the the date of the issuance 8. Distinguish share of stock from certificate of stock.
execution of the contract of certificate of o Share of stock is incorporeal or intangible
of partnership incorporation by SEC property while certificate of stock is tangible.
when the management the power to do Share of stock represents the right/interest of
is not agreed upon, business and manage
a person in a corporation, while certificate of
every partner is an its affairs is BOD or BOT
agent stock is the written evidence of that
2. Distinguish share of stock from capital stock. right/interest.
o Share of stock is used in a distributive sense
to refer to the stock in the hands of the Congress passed a proposed law creating a corporation to
stockholders (it belongs to them). Capital engage in agricultural activities. Is the law valid?
stock signify the whole body of shares of It depends. Corporations cannot come into existence
stock in the corporation. by mere agreement of the parties. Legislative grant or authority
is necessary for the creation of a corporation with respect to
corporations by prescription.
3. Give at least 3 advantages and 3 disadvantages of no
par value shares. X, Inc. and Y, Inc. are sister companies with the same set of
ADVANTAGES DISADVANTAGES officers. May X be held liable for the obligations of Y?
Issued as fully paid and Legalize large issues of It depends. A corporation may be allowed to exist
non-assessable stock for property solely for lawful purposes but where the fiction of corporate
Price is flexible Conceal the money or entity is being used as a cloak to cover for fraud or illegality, the
property represented by individuals composing it will be treated as identical. One
the shares instance where fiction is disregarded is where a subsidiary
Low-priced stocks Promote issuance of company is created by a parent company merely as an agency
enjoy wider distribution watered stock of the latter especially if the stockholders or officers of the two
4. Who are the 4 classes of persons composing a corporations are substantially the same or their system of
corporation. Identify them. operations is unified.

If the book value of the share of stock in a corporation is P100,
is this amount also its par value and market value?
It depends. The par value does not always reflect its
actual or true value or book value which may be determined by
dividing the net value of the total corporate assets by the number
of shares issued or outstanding. Par value and market value
may be more or less than market value but market value is
affected by the law of supply and demand.
The articles of incorporation provides that a particular class of
shares shall be deprived of the right to vote. Nevertheless, may
they be still entitled to vote?
Yes. Under the Code, no share may be deprived of
voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in the code.
A corporation issued redeemable shares in favor of S who
informs the corporation of his option to redeem the same as
provided in the articles of incorporation. Has C, a corporate
creditor, the right to object?
It depends. Pp. 256-257
A corporation voted its treasury shares and received dividends
thereon. Can the corporation do these?
No. Treasury shares have no voting rights as long as
they remain in the treasury. Neither are treasury shares entitled
to dividends or assets because dividends cannot be declared by
a corporation to itself as such distribution would be like taking
money or stock from one of its pockets and putting the same in
another, which would be pointless.
The treasury shares were acquired by the corporation at P100
per share. May the corporation sell them at only P50 per share?
It depends. Treasury shares may be resold by the
corporation at any price the board of directors sees fit to accept,
even at less than par.
A stockholder, dissatisfied with the management of the
corporation, surrenders his certificate of stock and demands the
return of the subscription price paid by him. Can he rightfully do
this?
No. Shares of stock do not constitute an indebtedness
of the corporation to the shareholder and are, therefore, not
credits. Hence, no action can be maintained against the
corporation for the return of the contributions of the shareholders
as long as the corporation needs them and is not under
dissolution.
INCORPORATION AND ORGANIZATION OF PRIVATE
CORPORATIONS
Articles of incorporation document prepared by the
persons establishing a corporation and filed with the
SEC.
De facto corporation one which actually exists for all
practical purposes as a corporation but which has no
legal right to corporate existence as against the state.
De jure corporation one created in strict conformity
with the mandatory statutory requirements for
incorporation.
Collateral attack one whereby corporate existence is
questioned in some incidental proceeding not provided
by law for the express purpose of attacking the
corporate existence.
1. What are the requisites in the statement of the purpose
or purposes for which a corporation is formed?
a. Lawful
b. Purpose/s must not be indefinitely stated
c. Primary purpose must be stated
d. Must be capable of being lawfully combined
2. May individuals organize a corporation by mere
agreement like in the formation of a general
partnership? Explain.
a. No. The right to be and act as a corporation
does not belong to any person as a natural
and civil right, but as a special privilege
conferred upon a group of persons by the
sovereign power of the state.
3. How shall the 25% subscription requirements be
computed where the capital stock consists only of par
value shares?
a. The minimum subscription should be 25% of
the amount of authorized capital stock or 25%
of the aggregate value of all the shares of
stock the corporation is authorized to issue.
4. What are the essentials for the existence of a de facto
corporation?
a. Valid law under which a corporation with
powers assumed might be incorporated
b. A bona fide attempt to organize a corporation
under such law
c. Actual user or exercise in good faith of
corporate powers
A corporation was continuously inoperative for 3 years. Is the
corporation deemed dissolved?
It depends. If the corporation does not formally
organize and commence its business or the construction of its
works within 2 years from the date of incorporation, its corporate
powers cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative
for a period of at least 5 years, the same shall be a ground for
the suspension/revocation of its corporate franchise or
certificate of incorporation.
2 years before the expiration of the corporation term of
existence, the corporation applied with the SEC for extension of
said term. Under the law, can the extension be granted?
It depends. The extension cannot be made earlier than
5 years prior to the expiration date unless there are justifiable
reasons therefor as may be determined by the SEC.
Under Section 10, there must be at least 5 incorporators in the
formation of a corporation. X organized a corporation, together
with A, B, C, and D. All the shares are admittedly owned by X
who register 4 shares in the name of A, B, C, and D. Is this a
violation of the mandatory requirement of minimum number of
incorporators?
No. The law permits the existence of corporation
originally formed by the required number of incorporators
affected by the subsequent accumulation of all the shares in the
hands of one individual.
Under Section 13, at least 25% of the authorized capital stock
must be subscribed and at least 25% of the subscription must
be paid-up but the paid-up capital must not be less than P5,000.
Can this requirement be complied with where the authorized
capital stock of the corporation is only P20,000.
Yes. The subscribed is 20,000 and the paid up is 25%
or 5,000.
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
Quorum such number of the membership of a
collective body as is competent to transact its business
or do any other corporate act.
Cumulative voting for one candidate stockholder is
allowed to concentrate his votes and give one
candidate as many votes as the number of directors to
be elected multiplied by the number of his shares shall
equal.
Cumulative voting by distribution stockholder may
cumulate his shares by multiplying also the number of
his shares by the number of directors to be elected and
distribute the same among as many candidates.
Corporate opportunity doctrine director who acquires
for himself a business opportunity which should belong
to the corporation.
1. State the qualifications prescribed by the Corporation
Code for directs and trustees of stock and non-stock
corporations.
a. Own at least one share of the capital stock
b. Registered in his name
c. Continuously own at least a share of stock
during his term, otherwise, he shall
automatically cases to be a director.
d. Majority must be residents of the Philippines
2. How shall the directors/trustees exercise their powers
in order to bind the corporation? Give the reasons for
the rule?
a. They must act together as a body in a lawful
meeting in order to bind the corporation by
their acts.
3. Illustrate straight voting as a method in the election of
directors.
a. Every stockholder may vote such number of
shares for as many persons as there are
directors
4. Illustrate voting in a non-stock corporation in the
election of trustees.
a. Members of non-stock corporations may cast
as many votes as there are trustees to be
elected but may not cast more than one vote
for one candidate.
A contact was entered into in the name of corporation with the
unanimous approval of all the stockholders. Is the contract
binding on the corporation?
No. The stockholders (or members) elect a board of
directors (trustees) to oversee the management and operation
of the corporation. They are not the agents of the corporation;
they cannot bind it by their acts. The directors have sole
authority to determine policy and conduct the ordinary business
of the corporation within the scope of its charter.
X, a director in a corporation, is recorded in the book of the
corporation as owner of 1 share of stock. X admits that the true
owner is Y, its President. Is X disqualified to be a director?
No. The general rule is that the person who holds the
legal title to the stock as shown by the books of the corporation
is qualified although some other person may be the beneficial
owner of the stock.
A vacancy occurs in the broad of directors, further reducing the
number from 11 to 6 members. Who is empowered to free the
vacancy, the stockholders or the incumbent directors?
It depends. It may be filled by the vote of at least a
majority of the remaining directors/trustees, if still constituting a
quorum. Otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that
purpose.
X was elected director in a corporation. The other directors who
supported his election, assured him a monthly compensation of
P50,000. In fact, they approved a resolution granting him the
compensation. Is X entitled to the compensation?
No. As a general rule, when directors perform nothing
more than the usual and ordinary duties of their office, they are
not entitled to salary or other compensation. The reason is that
directors render services gratuitously and that the return upon
their shares adequately furnishes the motives for services
without compensation. If a director deserves compensation for
such services, the same may be granted by the vote of the
stockholders.
POWERS OF CORPORATION
Implied powers powers which are reasonably
necessary to exercise the express powers and to
accomplish or carry out the purposes for which the
corporation was formed
Incidental power powers which a corporation can
exercise by the mere fact of its being a corporation or
powers which are necessary to corporate existence
and are impliedly granted.
Right of pre-emption whenever the capital stock of a
corporation is increased nad new shares of stock are
issued, the new issue must be offered first to the
stockholders who are such at the time the increase was
made.
Dividends part or portion of the profits of a
corporation set aside, declared and ordered by the
directors to be paid ratably to the stockholders on
demand or at a fixed price.
Retained earnings difference between the total
present value of its assets after deducting losses and
liabilities and the amount of its capital stock.
1. What are the ways for increasing/decreasing the
authorized capital stock?
Increasing/decreasing:
a) Number of shares authorized to be
issued without increasing/decreasing the
par value
b) Par value of each share without
increasing/decreasing the number
c) Both the number of shares authorized to
be issued and the par value
2. What do you understand by the trust fund doctrine?
 a. The assets of the corporation as represented
by its capital stock are trust funds to be
maintained unimpaired and to be used to pay
corporate creditors in the sense that there can
be no distribution of such assets among the
stockholders without provision being first
made for the payment of corporate debts.
3. Distinguish between ultra vires act from illegal act.
a. Ultra vires means simply an act which is
beyond the conferred powers of a
corporation. An illegal act is an act which is
contrary to law, morals, good customs, public
order, or public policy.
4. What is the difference as to effect between the
declaration of cash dividend and that of stock
dividend?
a. Effect of cash dividend means the assets of
the corporation diminish by just so much the
amount paid out and the property of the
individual stockholders increases. Effect of
stock dividend converts the surplus/profits of
the corporation covered by such dividend into
the permanent account thereby placing it
beyond the power of the BOD to withdraw
from corporate use and to distribute to the
stockholders.
5. Compare the relative powers of a corporation and a
private individual or an ordinary partnership.
a. An individual and partnership has absolute
right to use, enjoy and dispose of his
properties. The corporation has only such
powers as are expressly granted and those
that are necessarily implied from those
expressly granted or those which are incident
to its existence.
X subscribed to 100 shares of stock in a corporation which
declared a cash divided. The dividend received by X is based
only on the 70 shares fully paid by him. Has X the right to insist
on the payment of dividends corresponding to 100 shares?
Yes. As a general rule, the participation of each
stockholder in the earnings of the corporation is based on his
total subscription and not the amount paid by him.
X, Y, and Z each owns 10% of the capital stock of a corporation.
X exercised his pre-emptive right to new shares while Y offered
his corresponding new shares to Z who purchased the same,
thereby increasing Zs proportionate holdings. Has X a ground
for complaint?
No. the pre-emptive right of stockholders extends to
all issues or disposition of shares of any class unless denied by
the articles of incorporation or an amendment.
Suppose the original capital stock of a corporation is divided into
100,000 shares which were all offered for subscription. Only
60,000 shares were subscribed including 12,000 shares by X.
Is X entitled to pre-emption in case the remaining unissued
40,000 shares are again offered for subscription?
No. X is not entitled to pre-emption with respect to the
remaining unissued 40,000 shares. But where the number of
shares initially offered for subscription was only 40,000, then X
may exercise his pre-emptive right, in case of the remaining
40,000 shares are subsequently offered to subscription.
The corporation has surplus profits amounting to more than
100% of its paid-up capital stock. It has not declared dividends
for the last 5 years. May the corporation be compelled by the
SEC to declare dividends to its stockholders?
It depends. Stock corporations are prohibited from
retaining surplus profits in excess of 100% of their paid-in capital
stock, except when justified by definite corporate expansion
projects or programs approved by BOD, or when the corporation
is prohibited under any loan agreement with any financial
institution or creditor and such consent has not yet been
secured, or when it can be clearly shown that such retention is
necessary under special circumstances.
A corporation borrowed money for the purpose of paying
dividends. Is this legal?
It depends. As a rule dividends cannot be declared out
of borrowed money, for borrowed money is not profits; but
money may be borrowed temporarily for the purpose of paying
dividends, if the corporation has used its surplus assets to make
improvements for which it might have borrowed money.
STOCKS AND STOCKHOLDER
Derivative suit one brought by one or more
stockholders or members in the name and on behalf of
the corporation
Watered stock stock issued for no value at all or for
a value less than its equivalent either in cash, property,
services, or stock dividends.
Call declaration officially made by a corporation
usually expressed in the form of a resolution of the
BOD requiring the payment of all or a certain
prescribed portion of a subscribers stock subscription.
Highest bidder person offering at the sale to pay the
full amount of the balance on the subscription together
with accrued interest for the smallest number of
shares.
Certificate of stock written instrument signed by the
proper officer of a corporation stating or acknowledging
that the person named therein is the owner of a
designated number of shares of its stock.
1. What are the different modes by which shares may be
issued?
a. By subscription before and after incorporation
b. By sale of treasury stock after incorporation
c. By subscription to new stocks when all the
original stocks have been issued
d. By making a stock dividend
2. Classify the labilities that maybe incurred by a
stockholder.
Liability to:
a) The corporation for unpaid subscription
b) The corporation for interest on unpaid
subscription
c) Creditors of the corporation on unpaid
subscription
d) Liability for watered stock
e) Liability for dividends unlawfully paid
f) Liability for failure to create corporation
3. How is participation in a corporation acquired?
a. By subscription contract with an existing
corporation
 b. By purchase from the corporation of treasury
shares
c. By transfer from a previous stockholder of the
outstanding shares or existing subscription to
shares
4. What are the grounds for recovery of stock unlawfully
sold for delinquency?
a. Irregularity/defect in the notice of sale
b. Irregularity/defect in the sale itself
5. When is the bringing of a representative suit by a group
of stockholders allowed? Cite an example when the
method is used. Pp. 464-465
A corporation issued shares with a par value of P20.
Subsequently, the corporation purchased the shares at par
value. If the same shares are sold by the corporation for only
P15 per share, is the officer who effected the sale be held liable
for the difference or water in the stock?
No.
X subscribed for 100 shares of stock in a corporation. He has
paid only for 70 shares. May a certificate of stock be issued for
the 70 shares?
No and Yes. No certificate of stock shall be issued to a
subscriber as fully paid up until the full par value thereof, or the
full subscription in case of no par stock has been paid by him to
the corporation. However, in the absence of any prohibition in
the by-laws, there is nothing wrong or immoral nor is it contrary
to any public policy to adopt this alternative since the subscriber
is still liable for his unpaid subscription, no prejudice is caused
to the corporation or to corporate creditors. Therefore, it is
believed that the ruling is still applicable but only if allowed by
the by-laws.
X sold his shares of stock to Y. The transfer was not registered
with the corporation. What would be effects of the non-
registration insofar as the corporation is concerned?
It is invalid insofar as the corporation is concerned
except when notice is given to the corporation for purposes of
registration:
a. The transferor has the right to vote and be voted
for, and has the right to participate in any meeting
b. The transferor has the right to dividends as against
the corporation but the transferor is the trustee for
the benefit of the real owner
In the same example, has Z, a corporate creditor, the right to
enforce the liability of X?
Yes. It is invalid as against corporate creditors, and the
transferor is still liable to the corporation. The transfer of stock
by a shareholder does not relieve him from liability to creditors
of the corporation for unpaid subscription until the transfer is
consummated by being registered in the books of the
corporation.
In the same example, is X liable to pay interest on the unpaid
subscription?
It depends. Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of
subscription and at the rate of interest fixed in the by-laws.
MERGER AND CONSOLIDATION
Merger two (or more) corporations unite, one
corporation which remains in being, absorbing or
merging in itself the other which disappears as a
separate corporation.
Consolidation two (or more) corporation unite, giving
rise to a new corporate body and dissolving the
constituent corporations as separate corporations.
1. Illustrate consolidation as a form of corporate
combination.
a. Sale of assets, lease of assets, sale of stock,
merger, consolidation.
2. Illustrate lease of assets as a form of corporate
combination.
a. In this case, a corporation, without being
dissolved, leases its property to another
corporation for which the lessor merely
receives rental paid by the lessee.
X, Inc. sold all its assets to Y, Inc. Give the effects of such sale
on the existence of X, Inc. and the liability of Y, Inc. for the debts
of X, Inc.
A new corporation expressly acquired the assets and
properties, and assumed the obligations and liabilities of an old
corporation which it succeeded, the former cannot excuse itself
from said obligations and liabilities on the argument that said
two corporations are distinct and separate.
In case of merger or consolidation, has Z, a corporate creditor,
the right to object to the same?
No. As long as the procedures for effecting a plan of
merger or consolidation are followed.
APPRAISAL RIGHT
What is meant by appraisal right of a stockholder?
It refers to his right to demand payment of the fair value
of his shares, after dissenting from a proposed corporate action
involving a fundamental change in the charter or articles of
incorporation.
Give 3 instances when appraisal right is available to a
stockholder.
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholders
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets
3. In case of merger or consolidation
In what cases will a corporation bear the costs and expenses of
appraisal?
a) Where the price which the corporation offered to
pay the dissenting stockholder is lower than the
fair value as determined by the appraisers
b) Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified
X, stockholder, with appraisal right, demands payment of the fair
value of his shares. May X continue to exercise his right as
stockholder pending payment?
 It depends. If he is not paid the value of his shares
within 30 days after the award his voting and dividend rights
shall be restored until payment of his shares. Upon such
payment, all his rights as stockholder are terminated.
May X withdraw from his decision to demand payment of his
shares? Give the effect if it is found that X is not entitled to the
appraisal right.
It depends. A dissenting stockholder who demands
payment of his shares is no longer allowed to withdraw from his
decision unless the corporation consents thereto.
DISSOLUTION
Dissolution extinguishment of its franchise to be a
corporation and the termination of its corporate
existence
Liquidation winding up of the affairs of the corporation
by reducing its assents into money, settling with
creditors and debtors, and apportioning the amount of
profit and loss.
1. What are the voluntary methods for dissolving a
corporation?
It may be effected:
a) By the vote of the BOD and the stockholders
where no creditors are affected
b) By judgment of the SEC after hearing of
petition
c) By amending the articles of incorporation to
shorten the corporate term
d) In case of a corporation sole, by submitting to
the SEC a verified declaration of dissolution
for approval
2. Give the 2 legal steps involved n the dissolution of a
corporation.
a. Termination of the corporate existence at
least as far as the right to go on doing ordinary
business is concerned
b. The winding-up of its affairs, the payment of
its debts, and the distribution of its assets
Z, Inc. is dissolved
a) The BOD approved a resolution authorizing the
payment by the corporation under a contract. Is the
resolution valid?
It depends. Every corporation whose charter
expirees by its own limitation or is annulled by
forfeiture shall nevertheless be continued as
a body corporate for 3 years after the time
when it would have been so dissolved for the
purpose of prosecuting and defending suits
by or against it and enabling it to settle and
close its affairs.
b) After the lapse of the 3 years winding-up period, what
remedies, if any, are available to a corporate creditor
to recover the debts of the corporation?
The liquidation by a receiver where, upon
dissolution, the SEC may appoint a receiver
to collect its assets and pay the debts of the
corporation. Courts are also empowered to
appoint a receiver.
The directors and executive officers of Z, Inc. decided to hold a
meeting at Boracay Resort. They all died in a plane crash. They
own the majority capital stock. Is Z, Inc. deemed dissolved?
No. A corporation ma be dissolved by the SEC upon
filing of a verified complaint and after proper notice and hearing
on grounds provided by existing laws, rules and regulations.
FOREIGN CORPORATIONS
Foreign corporation corporation created by or under
the laws of another state or country.
Incorporation test a corporation organized under the
laws of the Philippines is a domestic corporation and a
foreign corporation with reference to any other state; if
organized under the laws of another country, it is
domestic with reference to said country and a foreign
corporation under our corporation code.
1. What are the objectives of laws regulation foreign
corporations?
a. To place them on an equality with domestic
corporations
b. To subject them to inspection so that their
condition may be known
c. To protect the residents of the state doing
business with them by subjecting them to the
courts of the state.
2. Give at least 3 acts constituting engaging or
transaction business and at least 3 acts that are not
included in the term.
a. Soliciting orders, opening offices, appointing
representatives
F, a foreign corporation, transacts business in the Philippines
without a license. May it sue and be sued? What is the purpose
of the law in requiring a license?
It may be sued or proceeded against before Philippine
courts. The implication of the law is that it will help corporations
and citizens here to avoid contracts made with such foreign
corporation.
Same example, except that the foreign corporation is not doing
business in the Philippines but it entered into a contract with a
Filipino manufacturer for the importation by the latter of certain
capital equipment. May it maintain a suit in our courts for the
enforcement of the contract?
Yes. Conversely, a foreign corporation no transaction
business in the Philippines may maintain an action, even if it has
no license.