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TURRECHA, ZENNIA S. ATTY.

SOLOMON HERMOSURA
L-150519 CORPORATION LAW

VI. THE CORPORATION CODE


A. Corporation
1. Definition
 An artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. 1
 An artificial being invested by law with a personality separate and
distinct from those of the persons composing it, as well as from
that of any other entity to which it may be related.
 Governed by the Corporation Code
2. Attributes of a Corporation
 Artificial Being
 Created by Operation of law
 It has a right of succession
 It has powers, attributes and properties expressly authorized by law
or incident to its existence
B. Classes of Corporations
 Under the Corporation Code
1. Stock/Non-stock
2. Domestic/Foreign
3. Special Corporations: Religious/Educational/Close Corporations
4. Corporation sole
5. De jure/De facto Corporation; Corporation by estoppel
 Under other Statutes and Jurisprudence
1. Aggregate Corporation/Sole Corporation
2. Public/Private Corporation
3. Corporations created by general law/special law; Corporation by prescription
4. Ecclesiastical/Lay Corporation
5. Eleemosynary/Civil Corporation
6. Subsidiary/Affiliate/Parent Corporation
C. Nationality of Corporations
 It is important to determine the nationality of the corporation but as rule,
it cannot be considered a citizen.2
1. Place of Incorporation Test
o Also known as The Entity Test
o The nation where the corporation was incorporated
o The sovereignty by which a corporation was created and under
whose laws it was organized, determines its national character.3
2. Control Test
o This requires looking into the nationality, domicile or residence of
the individuals who control the corporation.
o During wartime, if controlling stockholders are citizens of the
enemy state, then it is a public enemy corporation.4
o The prevailing mode of determining whether or not a corporation
is a Filipino corporation within the ambit of Sec.2, Article XII of
the 1987 Constitution entitled to undertake the exploration,
development and utilization of the natural resources of the
Philippines.
1
Section 2, The Corporation Code of the Philippines
2
Timoteo B. Aquino, Philippine Corporate Compendium, Fourth Ed., 2018, p. 89
3
Ibid
4
Ibid
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TURRECHA, ZENNIA S. ATTY.SOLOMON HERMOSURA
L-150519 CORPORATION LAW

3. Grandfather Rule
o Resorted to if doubt exists as to the locus of beneficial ownership and
control5
o It is the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized
areas of activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where shareholders are
present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the
corporate shareholder; direct and indirect shareholdings in the
corporation are determined.6
D. Corporate Juridical Personality
General Rule: A corporation has a separate personality distinct from its
stockholders and members.
Exception: Such personality may be disregarded or the veil of corporate
fiction may be pierced, attaching personal liability to the responsible
person, if the personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime or used to defeat labor laws.7
1. Doctrine of Separate Juridical Personality
o 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 stcokholders or members.8
a. Liability for Torts and Crimes
o Tort liability
A corporation is civilly liable in the same manner as a natural
person for torts. Liability may either be vicarious or direct personal
obligation and may arise out of different sources of obligation.9
o Criminal liability
-No criminal action can lie against a corporation under the present
rules. It is incapable of intent.
-An officer of a corporation can be held criminally liable for acts
done in behalf of the corporation only where the law directly
requires the corporation to do an act in a given manner and the same
law makes the person who fails to perform the act in the prescribed
manner expressly criminally liable.10
b. Recovery of Moral Damages
General Rule: Moral damages cannot be granted in favor of a
corporation because it has no feelings, emotions or senses
Exception: When it has a good reputation that is debased resulting
in social humiliation.11
2. Doctrine of Piercing the Corporate Veil
o The corporation’s separate juridical personality may be disregarded
when there is an abuse of corporate form.12

5
Ibid
6
Narra Nickel Mining and Development Corporation vs Redmont Consolidated Mines Corp., 748 SCRA
455, G.R. No. 195580, January 28, 2015
7
Dutch Movers,Inc., Cesar and Yolanda Lee vs. Edilberto Lequin, Christopher Salvador, Reynaldo Singsing
and Raffy Mascardo, G.R. No. 210032, April 25, 2017
8
Sulo ng Bayan Inc. vs. Araneta, Inc., 72 SCRA 347, No. L-31061, August 17, 1976
9
Timoteo B. Aquino, Philippine Corporate Compendium, Fourth Ed., 2018, p. 100
10
West Coast Life Insurance vs. Hurd, G.R. No. 8527, March 30, 1914
11
Mambulao Lumber Co. vs PNB, 130 SCRA 366, 1968
12
Timoteo B. Aquino, Philippine Corporate Compendium, Fourth Ed., 2018, p. 55
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TURRECHA, ZENNIA S. ATTY.SOLOMON HERMOSURA
L-150519 CORPORATION LAW

o When applied, the principal and conduit corporation will be treated


as one  solidarily liable
a. Grounds for Application of Doctrine
(1) Corporate identity is used to defeat public convenience, justify
wrong, protect fraud or defend crime
(2) Where the corporation is a mere alter ego or business conduit of a
natural person/s.
(3) Where the corporation is so organized and controlled and its affairs
are so conducted as to make it a mere instrumentality, agency,
conduit or adjunct of another corporation.
b. Test in Determining Applicability
(1) Three-pronged test (Instrumentality Rule)
i. Control
ii. Control was used by defendant to commit fraud or wrong
iii. Control and breach of duty must proximately cause the injury or
unjust loss complained of
(2) Alter ego cases
- Where the corporation is a mere alter ego or business conduit of a
person/where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another person.
(3) Totality of circumstances test – each case must be decided on its own set
of facts

E. Incorporation and Organization


 Incorporation – mere grant of privilege by the State which gives the corporation
its existence.
 Organization – systematization and orderly arrangement of the internal
and managerial affairs and organs of the corporation
1. Number and Qualifications of Incorporators
 Must be natural persons
 Must not be less than 5 but not more than 15
 Must be of legal age
 Majority must be residents of the Philippines
 If stock corporations, each must be a subscriber or own at least 1
share of the capital stock of the corporation13
2. Corporate Name; Limitations on Use of Corporate Name
 A corporation cannot use a name that belongs to another even as a
trade name.
 A corporate name shall not be identical, misleading or confusingly
similar to one already registered by another corporation with the
SEC.14
 If the proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different
from the name of the company already registered. 15
3. Corporate Term
 It shall exist for a period not exceeding 50 years from the date of
incorporation unless sooner dissolved or unless said period is
extended

13
Section 10, Corporation Code of the Philippines
14
Revised Guidelines in the Approval of Corporate and Partnership Names
15
Ibid
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 It may be extended for periods not exceeding 50 years in any single


instance
 No extension can be made earlier than 5 years prior to the original
or subsequent expiry dates unless for justifiable reasons. 16
4. Minimum Capital Stock and Subscription Requirements
 Not required to have any minimum authorized capital stock except
as specifically provided for by special law.17
 At least 25% of the authorized capital stock as stated in the Articles
of Incorporation must be subscribed at the time of incorporation
and at least 25% of the total subscription must be paid upon
subscription.18
5. Articles of Incorporation
 A document that defines the charter of the corporation.
a. Nature and Function of Articles
 It is the constitution of the Corporation.
 An entry in the Articles is evidence of the factual stipulations
therein.
b. Contents 19
(1) Name of the corporation
(2) Specific Purpose/purposes
(3) Principal Office
(4) Corporate term
(5) Names, nationalities and residences of the incorporators
(6) Number of directors/trustees
(7) Names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors/trustees are duly
elected
(8) Stock Corporation – amount of authorized capital stock in lawful
money, number of shares into which it is divided and in case of 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, and if some or all of the shares are without par
value, such fact must be stated
(9) Non-stock corporation – the amount of its captital, the names,
nationalities and residences of the contributors and the amount
contributed.
(10) Other matters not inconsistent with law and which the
incorporators may deem necessary and convenient
c. Amendment 20
 For a legitimate purpose and not contrary to law
 Must be approved by a majority vote of the board of
directors/trustees and there must be a vote/written assent of the
stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of members if non-stock corporation
 Original and amended articles shall contain all provisions required
by law and such articles as amended, shall be indicated by
underscoring the changes made

16
Section 11, Corporation Code of the Philippines
17
Section 12, Ibid
18
Section 13, Ibid
19
Section 14, Corporation Code of the Philippines

20
Section 16, Ibid
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TURRECHA, ZENNIA S. ATTY.SOLOMON HERMOSURA
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 A copy thereof must be duly certified under oath by the corporate


secretary and a majority of directors/trustees stating that the
amendment complied with the required approval; it must be
approved by SEC
d. Non-Amendable Items
 Accomplished Facts i.e. names and number of the incorporators
and original directors
 Converting non-stock corporation into a stock corporation
6. Registration and Issuance of Certificate of Incorporation
 SEC duty to approve an application for registration is ministerial
provided that all requirements of law are complied with.
 A corporation commences to have corporate existence and juridical
personality and is deemed incorporated from the date the SEC
issues a certificate of incorporation under its official seal.21
7. Adoption of By-Laws
 Every corporation formed and organized under this Code, must
within 1 month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC, adopt a code of by-laws for
its government not inconsistent with this Code. 22
a. Nature and Functions of By-Laws
 The by-laws embodies the rules and regulations of private laws
enacted by the corporation to regulate, govern and control its own
actions, affairs and concerns and of its stockholders or members
and directors and officers.
 It regulates the internal affairs of the corporation23
b. Requisites of Valid By-Laws
(1) Must be consistent with the Corporation Code, other
pertinent laws and regulations and the Articles of
Incorporation
(2) Not contrary to morals or public policy
(3) Must not disturb vested rights, impair contract property
rights of stockholders or members or create obligations not
sanctioned by law
(4) Must be reasonable
c. Binding Effect
 The provisions of the by-laws are binding not only upon the corporation
but also on its stockholders, members and those having direction,
management and control of its affairs.
 Not binding on subordinate employees having no actual knowledge of the
provisions thereof
 As to third persons, they are not binding unless there is actual knowledge.

d. Amendment or Revision
 They can be amended by the stockholders together with the Board or the
Board only after due delegation by the stockholders.24
 The power delegated to the Board to amend or repeal any by-laws or adopt
new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or

21
Section 19, Corporation Code of the Philippines
22
Section 46, Ibid
23
Maria Zarah Villanueva-Castro, Commercial Law Recap, First Edition 2018, p. 41
24
Section 48, Corporation Code of the Philippines
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majority of the members in a non-stock corporation, shall so vote at a


regular or special meeting. 25
F. Corporate Powers
1. General Powers; Theory of General Capacity
 Under this theory, a corporation may exercise any and all powers that may
be exercised.26
2. Specific Powers; Theory of Specific Capacity
 The powers of the corporation are only those that are expressly provided
for, implied or incidental powers. 27

a. Power to Extend or Shorten Corporate Term


o A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the board
of directors or trustees and ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding capital stock or at least 2/3 of
the members in case of non-stock corporations.28
o Not an inherent right

b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded


Indebtedness
o No corporation shall increase or decrease its capital stock or incur,
create, or increase bonded indebtedness unless approved by a
majority vote of the board of directors and at a stockholders
meeting duly called for the purpose, 2/3 of the outstanding capital
stock shall favor the increase or diminution of the capital stock or
the incurring, creating or increasing of any bonded indebtedness.29
o This results in the amendment of the Articles of Incorporation
c. Power to Deny Pre-Emptive Rights
o All stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any class,
in proportion to their respective shareholdings, unless such right is
denied by the articles of incorporation or an amendment thereto.30
o Pre-emptive right – right of shareholders to subscribe to all issues
or disposition of shares of any class in proportion to their
shareholdings.
d. Power to Sell or Dispose of Corporate Assets
o Requisites:
(1) Approved by the majority of board of directors or trustees
(2) Assent of stockholders representing 2/3 of outstanding
capital stock or 2/3 members in a meeting duly called for that
purpose after written notice.31
o Sale is void if the requirements are not complied with32
e. Power to Acquire Own Shares
o Requisites:
(1) Acquisition is for a legitimate corporate purpose

25
Ibid
26
Timoteo B. Aquino, Philippine Corporate Compendium, Fourth Ed., 2018, p. 112
27
Ibid
28
Section 37, Corporation Code of the Philippines
29
Section 38, Ibid
30
Section 39, Ibid
31
Section 40, Ibid
32
Islamic Directorate of the Philippines vs CA
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(2) The corporation has unrestricted retained earnings in its


books to cover the shares to be purchased or acquired.33
f. Power to Invest Corporate Funds in Another Corporation or Business
o Investment of a corporation in a business in line with its primary
purpose requires only the approval of the board.
o If it is for a secondary purpose, the following requisites must
concur:
(1) Approval by a majority of the board of directors or trustees
(2) Approval of the board must be ratified by stockholders
representing 2/3 of the authorized capital stock or 2/3
members in a meeting duly called for that purpose
(3) Written notice of the meeting and its time and place shall be
addressed to each stockholder or member at his place of
residence 34
g. Power to Declare Dividends
o The board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in
cash, in property or in stock to all stockholders on the basis of
outstanding stock held by them.35
o Dividends cannot be declared out of capital
h. Power to Enter Into Management Contracts
o No corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the
board of directors and by stockholders owning at least a majority
of the outstanding capital stock or members of both the managing
and managed corporation in a meeting duly called for that
purpose.36
i. Ultra Vires Acts
o No corporation under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its Articles of
Incorporation and except such as are necessary or incidental to the
exercise of such powers conferred. 37
i Applicability of Ultra Vires Doctrine
 Ultra vires act – one committed outside the object for which a corporation
is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law.38
ii. Consequences of Ultra Vires Acts
 If the act is ultra vires, not because it is illegal but because it is not an express,
implied or incidental power, the same may, in certain cases be enforced. 39
3. How Exercised
a. By the Shareholders
o The shareholders participate in controlling the affairs of the corporation
as they elect the directors who will actually govern the corporation and
vote on important matters that are reserved to them by the Corporation
Code.40
c. By the Board of Directors

33
Section 41, Corporation Code of the Philippines
34
Section 42, Corporation Code of the Philippines
35
Section 43, Ibid
36
Section 44, Ibid
37
Section 45, Ibid
38
Republic of the Philippines vs. Acoje Mining Company, Inc.,G.R. No. L-18062, February 28, 1963
39
Pirvano vs. De la Rama Steamship Company
40
Maria Zarah Villanueva-Castro, Commercial Law Recap, First Edition 2018, p. 46
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o The board is a collegial body which has control over the business
and affairs of the corporation; empowered to exercise the powers
of the corporation.41
c. By the Officers
o They are in charge of the day-to-day affairs of the corporation.42
4. Trust Fund Doctrine
 The property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund “only by way of analogy or metaphor”.
 Subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.43
G. Board of Directors and Trustees
1. Doctrine of Centralized Management
 The corporate powers of all corporations formed under this code shall be
exercised and all businesses of the corporation shall be conducted and all
its properties shall be controlled and held by the Board of Directors.44
2. Business Judgment Rule
 Questions of policy or management are left solely to the honest decision
of officers and directors of a corporation and courts are without authority
to substitute their judgment for the judgment of the Boarrd.45
3. Tenure, Qualifications, and Disqualifications of Directors or Trustees
 Tenure: He shall hold office for one year until their successors are elected or
qualified
 Qualifications and Disqualifications
a. He must own at least one share of capital stock of the corporation in
his own name or in non-stock corporations, he must be a member
b. Majority must be residents of the Philippines
c. He must not have been convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six years or a
violation of the Corporation Code committed within five years prior to
the date of his election
d. He must be of legal age
e. He must possess other qualifications as may be prescribed in special
laws or in the by-laws.46
4. Elections
 A corporation cannot adopt a procedure other than what is
prescribed in Section 24 of the Corporation Code.
 Automatic membership in the board is not allowed.
a. Cumulative Voting/Straight Voting
 Cumulative voting – method of concentrating votes devised to give
sufficient opportunity to minority shareholders to secure
representation in the board.
 Straight voting – every stockholder may vote such number of shares
for as many persons as there are directors to be elected
b. Quorum

41
Maria Zarah Villanueva-Castro, Commercial Law Recap, First Edition 2018, p. 47
42
Ibid
43
Maria Zarah Villanueva-Castro, Commercial Law Recap, First Edition 2018, p. 81
44
Section 23, Corporation Code of the Philippines
45
Philippine Association of Stock Transfer and Registry Agencies Inc vs CA et al., G.R. No. 137321, October
15, 2007
46
Timoteo B. Aquino, Philippine Corporate Compendium, Fourth Ed., 2018, p. 262
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 A majority of the number of directors or trustees as fixed in the articles


of incorporation shall constitute a quorum for the transaction of
corporate business.47
5. Removal
 Requisites:
(1) There must be a regular or special meeting of the stockholders
or members called for the purpose
(2) The call for the meeting shall be made by the secretary on order
of the president or on written demand of the stockholders
representing a majority of the outstanding capital stock
(3) Previous notice to stockholders
(4) Removal must be by a vote of stockholder representing 2/3 of
the outstanding capital stock; a director who was elected by the
minority must be removed only for a cause48
6. Filling of Vacancies
 Vacancies may be filled either by the stockholders or by the remaining
directors constituting a quorum depending on the reason for the
vacancy.
7. Compensation
 The by-laws may provide for a fixed compensation of the members of
the board of directors
 If there is no provision in the by-laws, compensation may be granted
to the directors by the vote of stockholders representing at least a
majority of the outstanding capital stock
 Even if by-laws do not provide for compensation, the directors are
entitled to reasonable per diems.
 Total compensation of directors shall not exceed 10% of the net
income before income tax of the corporation during the preceding
year.49
8. Rules on Fiduciaries’ Duties and Liabilities
 Management has three paramount duties: (a) obedience, (b)loyalty,
(c) diligence
 Directors and officers owe fiduciary duty to the corporation and to
the shareholders.50
9. Responsibility for Crimes
 Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, may themselves be
individually held answerable for the crime.
 Sections 31 and 34 of the Corporation Code are not subject to
criminal liability.
10. Inside Information
 It has not been generally disclosed to the public
11. Contracts
a. By Self-Dealing Directors with the Corporation
 A contract of the corporation wit one or more of its directors or trustees
or officers is generally voidable at the option of the corporation unless the
conditions set forth in Section 32 of the Corporation Code are present.
b. Between Corporations with Interlocking Directors

47
Section 25, Corporation Code of the Philippines
48
Section 28, Corporation Code of the Philippines
49
Section 30, Ibid
50
Timoteo B. Aquino, Philippine Corporate Compendium, Fourth Ed., 2018, p. 333
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 An interlocking director is one who is elected as director of two or more


corporations.
 Except in cases of fraud and provided the contract is fair and reasonable
under the circumstances, a contract between two or more corporations
having interlocking directors shall not be invalidated on that ground
alone51
12. Executive Committee
 It is a body created by the by-laws and composed of not less than 3
appointed members of the board which, subject to the statutory
limitations, has all the authority of the board to the extent provided
in the board resolution or by-laws.52
13.Meetings
 Meetings of directors, trustees, stockholders or members may be
regular or special53
a. Regular or Special
 Regular – held annually on a date fixed in the by-laws or if not so
fixed, on any date in April of every year as determined by the
Board.
 Special – any time as deemed necessary or as provided in the by-
laws54
i. When and Where
 Stockholders’ or members’ meeting, whether regular or special shall be
held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation. Provided, that Metro Manila shall, for purposes of this
section, be considered a city or municipality.
ii. Notice - in writing and the time and place stated therein
 Regular meetings – written notice shall be sent to all stockholders or
members of record at least 2 weeks prior to the meeting unless a different
period is required in the by-laws.
 Special meetings – one week written notice to all stockholders or members
unless otherwise provided in the by-laws.
b. Who Presides
 The president shall preside at all meetings of directors or trustees
as well as of the stockholders or members unless the by-laws
provide otherwise.55
c. Quorum
 Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of
the outstanding capital stock or a majority of the members in case
of non-stock corporations.56
d. Rule on Abstention
 During a board meeting on a vote taken on any issue, the general
rule is that an abstention is counted in favor of the issue that won
the majority vote; since by their act of abstention, the abstaining
directors are deemed to abide by the rule of the majority.57

51
Section 33, Corporation Code of the Philippines
52
Section 35, Ibid
53
Section 49, Ibid
54
Section 50, Ibid
55
Section 54, Ibid
56
Section 52, Ibid
57
VILLANUEVA, Corporate Law, supra at 350
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