WEEK 3
Should it be subsequently found that the
III. FORMATION AND ORGANIZATION OF
A PRIVATE CORPORATION
STEPS COMMENTS
a. Promotional Promoter
Stage (See SEC.  brings together persons who become
2. Definitions) interested in the enterprise
 aids in procuring subscriptions and sets in
motion the machinery which leads to the
formation of the corporation itself
 formulates the necessary initial business and
financial plans and, if necessary, buys the
rights and property which the business may
need, with the understanding that the
corporation when formed, shall take over the
same.
b. Drafting AoI (see chart below)
(See SEC. 14)
c. Filing of  AOI & the treasurer’s affidavit duly signed &
articles; payment acknowledged
of fees.  must be filed w/ the SEC & the
corresponding fees paid
 failure to file the AOI will prevent due
incorporation of the proposed corporation &
will not give rise to its juridical personality. It
will not even be a de facto corp.
 Under present SEC rules, the AOI once filed ,
will be published in the SEC Weekly Bulletin
at the expense of the corp. (SEC Circular #
4, 1982).
d. Examination of Process:
articles; approval a) SEC shall examine them in order to
or rejection by determine whether they are in conformity w/ law.
SEC. b) If not, the SEC must give the
incorporators a reasonable time w/in w/c to correct
or modify the objectionable portions.
Grounds for rejection or disapproval of AOI:
a) AOI /amendment not substantially in
accordance w/ the form prescribed
b) purpose/s are patently
unconstitutional, illegal, immoral, or contrary to
government rules & regulations;
c) Treasurer’s Affidavit is false;
d) required percentage of ownership has
not been complied with (Sec. 17)
e) corp.’s establishment, organization or
operation will not be consistent w/ the declared
national economic policies (to be determined by
the SEC, after consultation w/ BOI, NEDA or any
appropriate government agency -- PD 902-A as
amended by PD 1758, Sec. 6 (k))
Decisions of the SEC disapproving or
rejecting AOI may be appealed to the CA by
petition for review in accordance w/ the ROC.
e. Issuance of Certificate of Incorporation will be issued if:
certificate of
incorporation. a) SEC is satisfied that all legal
requirements have been complied with; and
b) there are no reasons for rejecting or
disapproving the AOI.
It is only upon such issuance that the
corporation acquires juridical personality.
(See Sec. 19. Commencement of corporate
existence)
incorporators were guilty of fraud in
procuring the certificate of incorporation, the
same may be revoked by the SEC, after
proper notice & hearing.
A. Submission of articles of incorporation;
contractual significance
B. Contents and form of the Articles of
Incorporation (Sec. 14 & 15, CC)
Section 14. Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange Commission
articles of incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing substantially the following
matters, except as otherwise prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated
purpose, the articles of incorporation shall state which is the primary
purpose and which is/are the secondary purpose or purposes:
Provided, That a non-stock corporation may not include a purpose
which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be
located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five
(5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock
in lawful money of the Philippines, the number of shares into which it
is divided, and in case the share are par value shares, the par value
of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his
subscription, and if some or all of the shares are without par value,
such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn statement
of the Treasurer elected by the subscribers showing that at least twenty-five
(25%) percent of the authorized capital stock of the corporation has been
subscribed, and at least twenty-five (25%) of the total subscription has been
fully paid to him in actual cash and/or in property the fair valuation of which is
equal to at least twenty-five (25%) percent of the said subscription, such paid-
up capital being not less than five thousand (P5,000.00) pesos.
1. Corporate name
a. statutory limitations on the use of corporate name
(Sec. 18, CC)
Section 18. Corporate name. - No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the
amended name. (n)
CORPORATE NAME (Aquila Legis Fraternity)
A corporation cannot use a name which is:
1. identical or deceptively or confusingly similar to that of any existing
corporation or to any other name protected by law; or
2. patently deceptive, confusing or contrary to law.
The law gives a corporation no express or implied authority to assume another
name that is unappropriated; still less that of another corporation, which is
expressly set apart from it and protected by law. (Red Line Transportation Co.
vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with reference
to an article on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one producer
with reference to his article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to mean that the article was his
product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
 A corporation's right to use its corporate and trade name is a property right, a
right in rem, which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or personal, against trespass
or conversion. It is regarded, to a certain extent, as a property right and one
which cannot be impaired or defeated by subsequent appropriation by another
corporation in the same field. (Philips Export B.V. vs. CA)
To come within the scope of the prohibition of Sec. 18, two requisites must be
proven, namely:
1. That the complainant corporation acquired a prior right over the use of
such corporate name; and
2. The proposed name is either: (a) identical or (b) deceptively or
confusingly similar to that of any existing corporation or to any other name
already protected by law; or (c) patently deceptive, confusing or contrary to
existing law. (Philips Export B.V. vs. CA)
In determining the existence of confusing similarity in corporate names, the
test is whether the similarity is such as to mislead a person using ordinary care
and discrimination. Proof of actual confusion need not be shown. It suffices that
confusion is probably or likely to occur. (Philips Export B.V. vs. CA)
A corporation has an exclusive right to the use of its name, which may be
protected by injunction upon a principle similar to that upon which persons are
protected in the use of trademarks and tradenames. (Philips Export B.V. vs. CA)
A mere change in the name of a corporation, either by the legislature or by the
corporators or stockholders under legislative authority, does not, generally
speaking, affect the identity of the corporation, nor in any way affect the rights,
privileges or obligations previously acquired or incurred by it.
b. SEC guidelines on the use of corporate name
Statutory limitation:
The proposed name must not be:
a. identical; or
b. deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law; or
c. patently deceptive, confusing or contrary to law.
Remedies of corporation whose name has been adopted by another:
1. Injunction
2. De-registration
c. Doctrine of secondary meaning
A word or phrase originally incapable of exclusive appropriation with reference to
an article on the market, because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one producer with
reference to his article that, in that trade and to that branch of the purchasing
public, the word or phrase has come to mean that the article was his product.
(DOCTRINE of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
d. Change of corporate name
A corporation can change the name originally selected by it after complying with
the formalities prescribed by law, to wit: amendment of the articles of
incorporation and filing of the amendment with the SEC (Sec. 16).
An authorized change in the name of the corporation, whether effected by a
special act or under a general law, has no more effect upon its identity as a
corporation than a change of name of natural person
upon his identity. It does not affect the property, rights, or liabilities of the
corporation, nor lessen or add to its obligations. It is in no sense a new
corporation, nor the successor of the original corporation. It is the same
corporation with a different name and its character is in no respect changed
(Rep. Planters Bank vs. CA, 216 SCRA 738)
A mere change in the name of a corporation, either by the legislature or by the
corporators or stockholders under legislative authority, does not, generally
speaking, affect the identity of the corporation, nor in any way affect the rights,
privileges or obligations previously acquired or incurred by it.
A change in the name of the corporation does not affect the identity of the
corporation, nor in any way affect the rights, privileges, or obligations previously
acquired or incurred by it. (Philippine First Insurance Co. vs. Hartigan)
2. Purpose clause
PURPOSE CLAUSE (Aquila Legis Fraternity)
A corporation has only such powers as are expressly granted to it by law and
by its articles of incorporation including those which are incidental to such
conferred powers, those reasonably necessary to accomplish its purpose and
those which may be incidental to its existence.
Reasons for requiring a statement of purposes or objects:
1. In order that the stockholder who contemplates on an investment in a
business enterprise shall know within what lines of business his money is to
be put at risk.
2. So that the board of directors and management may know within what
lines of business they are authorized to act.
3. So that anyone who deals with the company may ascertain whether a
contract or transaction into which he contemplates entering is one within
the general authority of the management.
If the corporate purpose or objective includes any purpose under the
supervision of another government agency, prior clearance and/or approval of
the concerned government agencies or instrumentalities will be required.
General limitations on the purpose clause:
1. The purpose must be lawful.
2. The purpose must be specific or stated concisely although in broad or
general terms. / Purpose or purposes must be stated with sufficient clarity
3. If there is more than one purpose, the primary as well as the secondary
ones must be specified.
4. The purpose must be capable of being lawfully combined.
Significance:
a. A person who intends to invest his money in the business corporation will
know where and in what kind of business or activity his money will be
invested;
b. The directors and the officers of the corporation will know within what
scope of business they are authorized to act; and
c. A third person who has dealings with the corporation may know by
perusal of the articles whether the transaction or dealing he has with the
corporation is within the authority of the corporation or not.
3. Principal office
The articles of incorporation must state the place where the principal office of
the corporation is to be established or located, which place must be within the
Philippine (Sec. 14 [3]).
Purpose: To fix the residence of the corporation in a definite place, instead of
allowing it to be ambulatory (Young Auto Supply Co. vs. CA, 223 SCRA 670).
It is now required by the SEC that all corporations and partnerships applying for
registration should state in their Articles of Incorporation the specific address of
their principal office, which shall include, if feasible, the strict number; street
name; barangay; city or municipality; and specific residence address of each
incorporator, stockholder, director or trustee in line with the full disclosure
requirement of existing laws (SEC Circ. No. 3, Series of 2006)
The residence of the corporation is the place of its principal office as may be
indicated in its articles of incorporation and may, therefore, be sued only at that
place. (CRS vs. Antillon)
4. Term of existence
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty (50) years in any
single instance by an amendment of the articles of incorporation, in accordance
with this Code; Provided, That no extension can be made earlier than five (5)
years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission. (6)
The corporation shall exist for the term specified in the articles of incorporation
not exceeding 50 years, unless sooner legally dissolved or unless its registration
is revoked upon any of the grounds provided by law.
The corporate life may be reduced or extended by amendment of the articles of
incorporation by complying with the procedural requirements laid down in Sec.
37.
The extension of corporate term is subject to the following limitations:
a. The term shall not exceed 50 years in any one instance;
b. The amendment is effected before the expiration of the corporate term of
existence, for after dissolution by expiration of the corporation term there is
no more corporate life to extend (Alhambra Cigar vs. SEC, 24 SCRA 269).
c. The extension cannot be made earlier than 5 years prior to the expiration
date unless there are justifiable reasons therefore as may be determined by
the SEC.
The mere extension of the corporate term of existence made before the
expiration of the original term constitutes a continuation of the old, and not the
creation of a new corporation. (The Corporation Code of the Philippines, Hector
S. De Leon & Hector M. De Leon, Jr., 2006 ed.)
The expiration of the term for which the corporation was created does not,
however, produce its immediate dissolution for all purposes (Sec. 122).
a. Doctrine of relation
The filing and recording of a certificate of extension after the term cannot relate
back to the date of the passage of the resolution of the stockholders to extend
the life of the corporation. However, the doctrine of relations applies if the failure
to file the application for extension within the term of the corporation is due to
the neglect of the officer with whom the certificate is required to be filed or to a
wrongful refusal on his part to receive it (Philippine Corporate Law
Compedium,Timoteo Aquino, 2006 ed.)
5. Incorporators
Sec. 10. Number and qualifications of incorporators. - Any number of natural
persons not less than five (5) but not more than fifteen (15), all of legal age and
a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of a
stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation.
General rule: Only natural persons can be incorporators.
Exception: Cooperatives and corporations primarily organized to hold equities
in rural banks.
Minors are not qualified to become incorporators.
6. Directors and trustees
General rule: There must be at least 5 but not more than 15 directors or
trustees in a private corporation.
Exceptions:
1. Educational corporations registered as a non-stock corporation whose
number of trustees, though not less than 5 and not more than 15 should be
divisible by 5;
2. In close corporations where all the stockholders are considered as
members of the board of directors thereby effectively allowing 20 members
in the board; and
3. Corporation sole.
The by-laws may provide for additional qualifications and disqualifications.
However, it may not do away with the minimum disqualifications laid down by
the Code.
Qualifications:
1. Directors must own at least one (1) share of the capital stock of the
corporation. Trustees must be members.
2. A majority of the directors or trustees must be residents of the
Philippines.
Disqualifications:
1. Conviction by final judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of this Code committed
within five (5) years prior to the date of election or appointment.
2. Other disqualifications under applicable special laws.
A by-laws may validly provide that no person may be elected as director unless
he owns a specified number of shares required for the directorate qualification.
It may likewise disqualify a stockholder from being elected into office if he has
a substantial interest in a competitor corporation to avoid any possible adverse
effects of conflicting interest of a director.
In order to be eligible as a director, what is material is the legal title to, not
beneficial ownership, of the stock as appearing on the books of the corporation.
(Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the incumbent
director shall continue to act as such in a hold over capacity until the election
is held and a qualified candidate is so elected. (Detective and Protective Bureau
vs. Cloribel)
7. Capitalization
Authorized capital – the maximum amount fixed in the articles to be
subscribed and paid-in or secured to be paid by the subscribers.
Subscribed capital stock – the total number of shares and its total value for
which there are contracts for their acquisition or subscription.
Paid-up capital stock – the actual amount or value which has been actually
contributed or paid to the corporation in consideration of the subscriptions made
thereon.
Stocks shall not be issued for a consideration less than the par or issued
price thereof.
Consideration for the issuance of stock may be any or a combination of any
two or more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;
3. Labor performed or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares in exchange for stocks in the event of reclassification
or conversion.
Stocks shall not be issued in exchange of promissory notes or future services.
8. Shares of stock (Sec. 6, CC)
Section 6. Classification of shares. - The shares of stock of stock corporations
may be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however,
That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of
stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights. (5a)
Shares of stock designate the interest or right which the stockholder has in the
management of the corporation, and in the surplus profits and, in case of
distribution, in all assets remaining after the payment of its debts.
Stock certificate is a doc ument or instrument evidencing the interest of a
stockholder in the corporation.
The shares of stock of stock corporations may be divided into classes or series
of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation.
Purpose of classification:
1. To specify and define the rights and privileges of the stockholders.
2. For regulation and control of the issuance of sale of corporate
securities for the protection of purchasers and stockholders.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
a. Doctrine of equality of shares
Where the articles of incorporation do not provide for any distinction of the
shares of stock, all shares issued by the corporation are presumed to be equal
and enjoy the same rights and privileges and are also subject to the same
liabilities (Sec. 6, par. 5).
b. Classes of shares
Common and preferred shares
Common stock – a stock which entitles its owner to an equal pro-rata
division of profits, if there be any, but without any preference or advantage in
that respect over any other stockholder or class of stockholders.
Preferred stock – a stock that gives the holder a preference over the holder
of common stocks with respect to the payment of dividends and/or with respect
to distribution of capital upon liquidation.
Limitations on preferred stock:
1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of incorporation and in the
certificate of stock, otherwise, each share shall be, in all respect, equal to every
other share.
The guarantee to preference as to dividends does not create a relation of
debtor and creditor between the corporation and the holders of such stock. The
board has the discretion to determine whether or not to declare dividends.
Preferred shares are presumed to be non-participating.
Participating preferred shares – the holders thereof are still given the right to
participate with the common stockholders in dividends beyond their stated
preference.
Cumulative preferred share – those that entitle the owner thereof to
payment not only of current dividends but also back dividends not previously
paid whether or not, during the past years, dividends were declared or paid.
In absence of express stipulation, preferred shares are presumed to be non-
cumulative.
Non-cumulative preferred shares – those which grant the holders of such
shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same.
Types of non-cumulative preferred shares:
1. Discretionary dividend type – gives the holder of such shares the right to have
dividends paid thereon in a particular year depending on the judgment or
discretion of the board of directors.
2. Mandatory if earned type – impose a positive duty on directors to declare
dividends every year when profits are earned.
3. Earned cumulative or dividend credit – gives the holder thereof the right to
arrears in dividends if there were profits earned during the previous years but
dividends were not declared.
Unless the right to vote is clearly withheld, a preferred stockholder has the
right to vote.
Preference upon liquidation must be clearly indicated otherwise they shall be
placed on equal footing with other shares.
(i) par and no par
Par value shares – those whose value are fixed in the articles of incorporation.
Par value shares cannot be issued nor sold by the corporation at less than par.
No par value shares – those whose issued price are not stated in the certificate
of stock but which may be fixed in the articles of incorporation, or by the board
of directors when so authorized by the said articles or by the by-laws, or in the
absence thereof, by the stockholders themselves.
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and thus, non
assessable;
2. The consideration for its issuance should not be less than P5.00;
3. The entire consideration for its issuance constitutes capital, hence, not
available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies,
public utilities and building and loan associations.
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and
3. Disappearance of personal liability on the part of the holder thereof for
unpaid subscription.
(ii) voting and non-voting
Voting shares – gives the holder thereof the right to vote and participate in the
management of the corporation through the exercise of such right, either at the
election of the board of directors, or in any manner requiring the stockholder‟s
approval.
Non-voting shares – do not grant the holder thereof the right to vote except
under the penultimate paragraph of Sec. 6.
Only preferred and redeemable shares may be denied the right to vote.
There must always be a class or series of shares which have complete voting
rights.
Non-voting shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the penultimate paragraph of Sec. 6, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights.
(iii) common and preferred (see above notes)
(iv) redeemable, treasury and founder's shares
Founders’ shares
Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles
of incorporation may be given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.
Redeemable shares
Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation.
They may be purchased or taken up by the corporation upon the expiration of
a fixed period, regardless of the existence of unrestricted retained earnings in
the books of the corporation, and upon such other terms and conditions as may
be stated in the articles of incorporation, which terms and conditions must also
be stated in the certificate of stock representing said shares.
Treasury shares
Treasury shares are shares of stock which have been issued and fully paid for,
but subsequently reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.
Treasury shares may again be issued for a price less than par.
Treasury shares have no voting and dividend rights. Such rights are only
granted to outstanding shares of stock. (CIR vs. Manning)
CAPITAL REQUIREMENT
Sec. 12. Minimum capital stock required of stock corporations. - Stock
corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided for by
special law, and subject to the provisions of the following section.
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total subscription
must be paid upon subscription, the balance to be payable on a date or dates
fixed in the contract of subscription without need of call, or in the absence of a
fixed date or dates, upon call for payment by the board of directors: Provided,
however, That in no case shall the paid-up capital be less than five Thousand
(P5,000.00) pesos.
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
 General rule: Corporations may or may not provide for restrictions and
preferences regarding the transfer, sale or assignment of shares in the articles of
incorporation. It is discretionary.
Exception: Close corporations are required to subject their shares to specified
restrictions as required in Sec. 96.
General rule: Restrictions or preferences must be contained in the articles of
incorporation and in all stock certificates to be issued by the corporation.
Exception: In close corporations, such restrictions and preferences must also
be embodied in the by-laws.
NO TRANSFER CLAUSE
No transfer of stock or interest which will reduce the ownership of Filipino
citizens to less than the required percentage of the capital stock as provided by
existing laws shall be allowed or permitted to be recorded in the books of the
corporation and this restriction shall be indicated in all of the stock certificates to
be issued by the corporation.
GROUNDS FOR DISAPPROVAL
Only substantial and not strict compliance is required.
Grounds for disapproval:
1. The articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed;
2. The purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. The Treasurer‟s Affidavit concerning the amount of capital stock subscribed
and/or paid is false;
4. The percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution,
5. The articles of incorporation of corporations subject to government
supervision are not accompanied by a favorable recommendation from the
appropriate government agency.
The grounds are not exclusive.
9. treasurer's affidavit
C. Grounds for rejection of the Articles of
Incorporation (Sec. 17, CC)
Section 17. Grounds when articles of incorporation or amendment may
be rejected or disapproved. - The Securities and Exchange Commission may
reject the articles of incorporation or disapprove any amendment thereto if the
same is not in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid is false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by
existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public
utilities, educational institutions, and other corporations governed by special laws
shall be accepted or approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law. (n)
D. Commencement of corporate
existence (Sec. 19, CC)
Section 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have corporate
existence and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of incorporation under
its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in
accordance with law. (n)
COMMENCEMENT OF CORPORATE EXISTENCE
It is only from the time of the issuance of the certificate of incorporation that a
corporation acquires juridical personality and legal existence.
Prior to incorporation, a corporation has no juridical personality to enter into
contracts. (Cagayan Fishing Development vs. Sandiko)
ORGANIZATION AND COMMENCEMENT OF BUSINESS
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of
a corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be
a ground for the suspension or revocation of its corporate franchise or certificate
of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Organization – the election of officers, providing for the subscription and
payment of capital stock, the adoption of by-laws, and such other steps as are
necessary to endow the legal entity with the capacity to transact the legitimate
business for which it was created.
Failure of the corporation to organize within the prescribed period would result
in its automatic dissolution, unless its failure to do so is due to causes beyond its
control.
Substantial compliance is sufficient.
Subsequent inoperation is merely a ground for suspension or revocation of
corporate franchise. Dissolution is not automatic.
E. Amendment of the articles of
incorporation (Sec. 16, CC)
Section 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members, shall
be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS (Aquila
Legis Fraternity)
CORPORATE CHARTER
Corporate charter – an instrument or authority from the sovereign power,
bestowing rights and power.
The corporate charter is a three-fold contract:
1. Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation;
2. Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations; and
3. Between and among the stockholders or members themselves as far as
their relationship with one another is concerned.
The charter of corporations created under the Corporation Code consists of the
articles of incorporation and the Corporation Code inclusive of the by-laws
adopted thereunder and all pertinent provisions of any statute governing them.
The charter of corporations created by special laws consists of the special law
creating the same and any and all laws, rules and regulations affecting or
applicable to them.
Franchise – the right or privilege itself to be and act as a corporation or to do
a certain act.
Kinds of franchises:
 1. Primary franchise – the right or privilege of being a corporation which the
state confers upon the applicant for this faculty.
2. Secondary franchise – the powers and privileges vested in, and to be
exercised by the corporate body as such.
CORPORATE ENTITY THEORY
The corporation is possessed with a personality separate and distinct from the
individual stockholders or members.
A corporation is a distinct legal entity to be considered as separate and apart
from the individual stockholders or members who compose it, and is not affected
by the personal rights, obligations and transactions of its stockholders or
members. Conversely, a corporation has no interest in the individual property of
its stockholders unless transferred to the corporation, even in case of a one-man
corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)
A bona fide corporation should alone be liable for its corporate acts as duly
authorized by its directors and officers. (Caram vs. CA)
The president and manager of a corporation who entered into and signed a
contract in his official capacity, cannot be made liable thereunder in his individual
capacity in the absence of stipulation to that effect due to the personality of the
corporation being separate and distinct from the person composing it. (Rustan
Pulp and Paper Mills, Inc. vs. IAC)
A corporation has a personality distinct and separate from its individual
stockholders or members. The mere fact that one is president of a corporation
does not render the property he owns and possesses the property of the
corporation, since the president, as an individual, and the corporation are
separate entities. (Cruz vs. Dalisay)
Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not, of itself, sufficient ground
for disregarding the separate corporate personality. (Palay Inc. vs. Clave)
3. Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock
corporations.
4. In case of extension of corporate term, the extension should be for
periods not exceeding 50 years in any single instance, and provided that no
extension can be made earlier than 5 years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the SEC.
5. In cases of extension of corporate term, a dissenting stockholder may
exercise his appraisal rights.
Extension may be made only before the term provided in the corporate charter
expires. (Alhambra Cigar & Cigarette Mfg. Co., Inc. vs. SEC)
F. Effects of non-use of corporate charter
(Sec. 22, CC)
Section 22. Effects on non-use of corporate charter and continuous inoperation
of a corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be
a ground for the suspension or revocation of its corporate franchise or certificate
of incorporation. (19a)
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
(see notes above)

In a right of action against the corporation, the officers may not be held
personally liable as long as they act within the scope of their authority. (Soriano
vs. CA)

AMENDMENT OF THE CORPORATE CHARTER

Steps to be followed for an effective amendment of the articles of
incorporation:
1. Resolution by at least a majority of the board of directors or trustees.
2. Vote or written assent of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock
corporation.
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amender articles together shall contain all the provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended, shall be indicated by underscoring the change or changes made.
b. A copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that such amendments have
been duly approved by the required vote of the stockholders or members.
c. Favorable recommendation of the appropriate government agency concerned
in the case where the corporation is under its supervision.
Time when the amendments shall take effect:
1. Upon approval of the SEC; or
2. From the date of filing with the SEC if not acted upon with 6 months from
the date of filing for a cause not attributable to the corporation. (Note: not
applicable to special amendments)
Special amendments:
1. Extension or shortening of corporate term (Sec. 37)
2. Increase or decrease of capital stock (Sec. 38)
3. Incurring, creating or increasing bonded indebtedness (Sec. 38)

PROVISIONS SUBJECT TO AMENDMENT

Matters which are fait accompli are not subject to change.
A change in the name of the corporation does not affect the identity of the
corporation, nor in any way affect the rights, privileges, or obligations previously
acquired or incurred by it. (Philippine First Insurance Co. vs. Hartigan)

AMENDMENT OF THE CORPORATE TERM

Procedure to amend the corporate term:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting
shall be served to each stockholder or member either by mail or by personal
service.