Readings #1

Revised Corporation Code of the A corporation is a legal entity or

Philippines (Republic Act No. 11232) juridical person with a personality separate
and apart from its individual stockholders or
Title I. General Provisions, Definitions members and from any other legal entity to
and Classifications which it may be connected. Not every
stockholder or officer can bind the
SEC. 1. Title of the Code. This Code shall corporation considering the existence of a
be known as the "Revised Corporation corporate entity separate. Corporation
Code of the Philippines". exists separately from the one who
The present Revised Corporation incorporated it.
Code (R.A. No. 11232), took effect on
February 23, 2019. b. Consequences of separate personality
• Property. It is entitled to own
SEC. 2. Corporation Defined. A properties in its own name and its
corporation is an artificial being created properties are not the properties of
by operation of law, having the right of its stockholders, directors, and
succession and the powers, attributes, officers. The interest of the
and properties expressly authorized by stockholders over the properties of
law or incidental to its existence. the corporation is merely inchoate.
• Obligations. It can incur obligations
WHAT IS A CORPORATION? and its obligations are not the
A corporation is an artificial being obligations of its stockholders,
created by operation of law (w/ state directors, and officers.
consent), having the right of succession and • Rights. Rights belonging to the
the powers, attributes, and properties corporation cannot be invoked by
expressly authorized by law or incidental to the stockholders (or directors and
its existence (RCCP, Sec. 2). officers) even if the latter owns a
substantial majority of the shares in
What are the attributes of a corporation? that corporation, and the rights of the
a. It is an artificial being with stockholders, directors, and officers
separate and distinct personality; cannot be invoked by the
b. It is created by operation of law; corporation.
c. It has the right to succession; and • Constitutional Rights. Corporations
d. It has powers and attributes are entitled to certain constitutional
conferred by law or incident to its rights. Example: right against
existence. unreasonable searches and seizure;
corporations are also considered a
DISCUSSION OF ATTRIBUTES person under the due process
clause.
Artificial being with separate personality • Tort. It is liable for tort when the act
committed by the officer or agent
a. Doctrine of Corporate Entity (Doctrine under express direction or authority
of Separate Personality) from the stockholders or members
acting as a body or generally from
 the directors as the governing body. • Alter Ego Cases (or Conduit Cases).
Tort is an act or omission that Three-pronged tests to determine the
causes harm or injury to another application of alter ego theory:
person, leading to legal liability. i. Control Test – Control, not merely majority
c. Artificial being or complete stock control, but complete
It exists by fiction of law only; hence, domination, not only of finances, but of
it is subject to limitations that are inherent policy and business in respect to the
because of its nature. It can act only transaction attached so that the corporate
through its directors, officers, and entity as to this transaction had no separate
employees. mind, will, or existence of its own;
ii. Fraud Test – Such control must have
d. Doctrine of Piercing the Veil of been used by the corporation to commit
Corporate Entity fraud or wrong in contravention of another
When the veil of corporate fiction is person’s legal rights; and
used as a shield to perpetuate fraud, defeat iii. Harm Test – The aforesaid control and
public convenience, justify wrong or defend breach of duty must proximately cause the
crime, or for ends subversive of the policy injury or unjust loss complained of.
and purpose behind its creation, this fiction • Equity Cases. This is applied when
shall be disregarded and the individuals piercing the corporate fiction is necessary to
composing it will be treated identically. This achieve justice or equity.
doctrine may also be used on equitable
considerations. A legal principle that allows Doctrine of piercing the corporate veil
courts to disregard the separate personality should be done with caution
of a corporation when it is used as a shield The Supreme Court emphasized
to commit fraud, evade obligations, or justify that the piercing of the veil of corporate
wrongdoings. Holds the individuals fiction is frowned upon and can only be
personally liable when the corporate form is done if it has been clearly established that
abused. the separate and distinct personality of the
Mere ownership by a single corporation is used to justify a wrong,
stockholder or by another corporation of protect fraud, or perpetrate a deception.
nearly all of the capital stock of the
corporation does not justify the application
of the doctrine. There must be other What is a government-owned or
circumstances that must be present. controlled corporation (GOCC)?
"Government-owned or controlled
Areas where Doctrine of Piercing the Veil corporation" refers to any agency organized
of Corporate Entity may be applied as a stock or non-stock corporation, vested
• Fraud Cases. The veil of separate with functions relating to public needs
personality may be lifted when such whether governmental or proprietary in
personality is used to defeat public nature, and owned by the Government
convenience, justify wrong, protect fraud, directly or through its instrumentalities either
defend crime, or used as a shield to confuse wholly, or, where applicable as in the case
the legitimate issues. of stock corporations, to the extent of at
least fifty-one (51) percent of its capital and/or its duly authorized officers and
stock. agents.
Thus, for an entity to be considered
as a GOCC, it must either be organized as RIGHT OF A CORPORATION TO OWN
a stock or non-stock corporation. Two PROPERTY
requisites must concur before one may be Property acquired by a corporation is
classified as a stock corporation, namely: the property of a corporation and not the
(1) that it has capital stock divided into property of stockholders or members
shares, and Take note that a corporation is a juridical
(2) that it is authorized to distribute entity vested with a legal personality
dividends and allotments of surplus and separate and distinct from the people
profits to its stockholders. comprising it.
If only one requisite is present, it SEC. 3. Classes of Corporations.
cannot be properly classified as a stock Corporations formed or organized under
corporation. As for non-stock this Code may be stock or nonstock
corporations, they must have members corporations. Stock corporations are
and must not distribute any part of their those which have capital stock divided
income to said members. into shares and are authorized to
It is clear, therefore, that a distribute to the holders of such shares,
corporation is considered a dividends, or allotments of the surplus
government-owned or -controlled profits on the basis of the shares held.
corporation only when the Government All other corporations are nonstock
directly or indirectly owns or controls at least corporations.
a majority or 51% share of the capital stock.
What is a stock corporation?
Authorized Capital Stock- maximum Corporations which have capital
amount of shares legally allowed to issue stock divided into shares and are
Subscribed Capital Stock- authorized authorized to distribute to the holders of
capital stock that investors have agreed such shares dividends or allotments of
to buy. It includes the unpaid portion and the surplus profits on the basis of the
not necessarily paid capital. shares held are stock corporations.
Paid-in Capital Stock- portion of the
subscribed capital stock that has been Example of stock corporation:
fully paid by the subscribers. ​ Land Bank and Development Bank
of the Philippines.

POWERS OF A CORPORATION What is a non-stock corporation?

A corporation has no power except A non-stock corporation is one
those expressly conferred on it by the where no part of its income is
Corporation Code (or special laws) and distributable as dividends to its members,
those that are implied or Incidental to its trustees, or officers. Provided, that any profit
existence. In turn, a corporation exercises which a non-stock corporation may obtain
said powers through its board of directors as an incidental to its operations shall,
whenever necessary or proper, be used for
the furtherance of the purpose or purposes Public corporation. A corporation
for which the corporation was organized. organized for the government of a portion of
The provisions governing stock the State for the general good and welfare.
corporation, when pertinent, shall be Private corporation. A corporation formed
applicable to non-stock corporations. for some private purpose, benefit or end,
Possible to gain profit but is not allowed to advantage of individuals.
be distributed as dividends. Government-owned or controlled
corporation. A corporation owned by the
Example of non-stock corporation: Government directly or through its
St. Luke's Medical Center, Inc. is instrumentalities either wholly, or, where
organized as a non-stock and non-profit applicable as in the case of stock
charitable institution. corporations, to the extent of at least 51% of
its capital stock.
SEC. 107. Classes of Religious Quasi-public corporation. A private
Corporations. – Religious corporations may corporation which has accepted from the
be incorporated by one (1) or more persons. State the grant of franchise or contract
Such corporations may be classified into involving the performance of public duties
corporations sole and religious societies. but which is organized for profit (examples
Religious corporations shall be governed by are electric, water, and transportation
this Chapter and by the general provisions companies.)
on nonstock corporations insofar as
applicable. As to legal right to corporate existence
De jure corporation. A corporation created
SEC. 116. One Person Corporation. – A in strict or substantial conformity with the
One Person Corporation is a corporation mandatory statutory requirements for
with a single stockholder: Provided, That incorporation and the right of which to exist
only a natural person, trust, or an estate as a corporation cannot be successfully
may form a One Person Corporation. attacked or questioned by any party even in
a direct proceeding for that purpose by the
SEC. 108. Corporation Sole. – For the State.
purpose of administering and managing, as De facto corporation. The due
trustee, the affairs, property and incorporation of any corporation claiming in
temporalities of any religious denomination, good faith to be a corporation under this
sect or church, a corporation sole may be Code, and its right to exercise corporate
formed by the chief archbishop, bishop, powers, shall not be inquired into collaterally
priest, minister, rabbi, or other presiding in any private suit to which such corporation
elder of such religious denomination, sect, may be a party. Such inquiry may be made
or church. by the Solicitor General in a quo warranto
proceeding. There is an irregularity or defect
OTHER CLASSES OF CORPORATION in the registration to the SEC.

As to Purpose Corporation by estoppel. All persons who

assume to act as a corporation knowing it to
be without authority to do so shall be liable
as general partners for all debts, liabilities is controlled directly or indirectly by another
and damages incurred or arising as a result corporation, which thereby becomes its
thereof. parent corporation.
Corporation by prescription. One which Affiliate corporation. Not substantial
has exercised corporate powers for an enough to be controlled by the parent
indefinite period without interference on the company.
part of the government.
As to the number of persons who compose
As to laws of incorporation them
Domestic corporation. A corporation Corporation aggregate. A corporation
incorporated under the laws of the consisting of more than one member.
Philippines. Corporation sole. A corporation consisting
Foreign corporation. A corporation is of only one member for the purpose of
formed, organized or existing under any administering and managing, as trustee, the
laws other than those of the Philippines and affairs, property and temporalities of any
whose laws allow Filipino citizens and religious denomination, sect or church.
corporations to do business in its own
country or State. As to whether they are for religious
purposes or not
As to whether they are open to the public or Ecclesiastical corporation. A corporation
not organized for religious purposes.
Open corporation. A corporation which is Lay corporation. A corporation organized
open to any person who may wish to for a purpose other than for religion.
become a stockholder or member thereto.
Close corporation. A close corporation is As to whether they are for charitable
one whose articles of incorporation provide purposes or not
that: (1) All the corporation's issued stock of Eleemosynary corporation. A corporation
all classes, exclusive of treasury shares, organized for charitable purposes.
shall be held of record by not more than a Civil corporation. A corporation organized
specified number of persons, not exceeding for business or profit.
20; (2) All the issued stock of all classes
shall be subject to one or more specified SEC. 4. Corporations Created by Special
restrictions on transfer; and (3) The Laws or Charters. Corporations created
corporation shall not list in any stock by special laws or charters shall be
exchange or make any public offering of any governed primarily by the provisions of
of its stock of any class. the special law or charter creating them
or applicable to them, supplemented by
As to relationship of management and the provisions of this Code, insofar as
control they are applicable.
Parent or holding corporation. A
corporation that hold stocks in another General law vs. Special law
corporation for purposes of control. A corporation is created by operation
Subsidiary corporation. A corporation of law. It acquires a judicial personality
more than 50% of the voting stock of which either by special law or a general law. The
general law under which a private 5. Board of Directors or Board of
corporation may be formed or organized is Trustees
the Corporation Code, the requirements of The board of directors is the
which must be complied with by those governing body in a stock corporation, while
wishing to incorporate. Only upon such the Board of Trustees is the governing body
compliance will the corporation come into in a non-stock corporation.
being and acquire a juridical personality, 6. Corporate Officers
thus giving rise to its right to exist and act as The president, who shall be a
a legal entity. On the other hand, a director, a treasurer who may or may not be
government corporation is normally created a director, a secretary who shall be a
by special law, referred to often as a resident and citizen of the Philippines, and
charter. (GOCC may be created by special such other officers as may be provided for
charters in the interest of the common in the by-laws. If the corporation is vested
goods and subject to the test of economic with public interest, the board shall also
viability.) elect a compliance officer.
7. Subscribers
SEC. 5. Corporators and Incorporators, Persons who have agreed to take
Stockholders and Members. Corporators and pay for original, unissued shares of a
are those who compose a corporation, corporation formed or to be formed.
whether as stockholders or shareholders 8. Underwriter
in a stock corporation or as members in A person who guarantees on a firm
a nonstock corporation. Incorporators commitment and/or declared best effort
are those stockholders or members basis the distribution and sale of securities
mentioned in the articles of of any kind by another company.
incorporation as originally forming and A person or entity, especially an
composing the corporation and who are investment banker, who guarantees the sale
signatories thereof. of newly issued securities by purchasing all
or part of the shares for resale to the public.
Components of a corporation 9. Promoter
1. Corporators Is a person who brings about or
Those who compose a corporation, cause to bring about the formation and
whether as stockholders or as members. organization of a corporation by:
2. Incorporators 1. Bringing together the
The stockholders or members incorporators or the persons
mentioned in the articles of incorporation as interested in the enterprise;
originally forming and composing the 2. Procuring subscriptions or capital
corporation and who are signatories for the corporation; and
thereof. 3. Setting in motion the machinery
3. Stockholders (shareholders) which leads to the incorporation of
The owners of shares of stock in a the corporation itself.
stock corporation. A founder or organizer of a
4. Members corporation or business venture; one who
The corporators of a non-stock takes the entrepreneurial initiative in funding
corporation. or organizing a business enterprise.
 ●​ Two or more persons, but not more
than 15 may form a corporation.
●​ Only One Person Corporation may
have a single stockholder and sole
director.
●​ Each incorporator of a stock corp.
must own, or be a subscriber to, at
least one share of capital stock.
While, in nonstock, each must be a
member of the corporation.

Corporate Entity Theory (also known as

the Separate Legal Entity Theory) is a
fundamental concept in corporate law that
explains the legal status of a corporation as
an entity distinct from its owners
(shareholders), directors, and employees.

Aspects:
●​ Separate and distinct personality
from other corporations. The liability
and obligations of the parent
company is separate from its
subsidiary.
●​ Separate and distinct personality of
the corporation against the
stockholders or members.
Readings #2
Traditional Piercing of Corporate Veil instrumentality” or tool of another
Reverse Piercing of Corporate Veil corporation or person. If it is, the court
(Outsider Reverse Piercing and Insider may pierce the corporate veil and hold the
Reverser Piercing) controlling party personally liable.
Classification of Shares Three factors must be present: (CFP)
1. Control, not mere majority or complete
stock control, but complete domination, not
Doctrine of Piercing the only of finances but of policy and business
practice in respect to the transaction
Veil of Corporate Entity attacked so that the corporate entity as to
this transaction had at the time no separate
A legal principle that allows courts to
mind, will or existence of its own;
disregard the separate personality of a
2. Such control must have been used by the
corporation when it is used as a shield to
defendant to commit fraud or wrong, to
commit fraud, evade obligations, or justify
perpetrate the violation of the statutory or
wrongdoings. Holds the individuals
other positive legal duty, or dishonest and
personally liable when the corporate form is
unjust act in contravention of plaintiffs legal
abused.
rights; and
When the veil of corporate fiction is
3. The aforesaid control and breach of duty
used as a shield to perpetuate fraud, defeat
must proximately cause the injury or unjust
public convenience, justify wrong or defend
loss complained of.
crime, or for ends subversive of the policy
and purpose behind its creation, this fiction
Note: The absence of any of these elements
(corporation as a separate personality) shall
will prevent the piercing of the corporate
be disregarded and the individuals
veil.
composing it will be treated identically. This
doctrine may also be used on equitable
● Fraud
considerations.
○ There is fraud if there is deception
●​ The court treats a corporation as a
that would lead an ordinary prudent
mere association.
person into error after taking the
●​ The piercing of the corporate veil is
circumstances into account.
applicable to all personalities/kinds
○ Fraud may exist if the government
of corporations.
may be deprived of taxes. A
taxpayer may gain advantage of
The Supreme Court has given three
doing business through a
variants within this doctrine. They are
corporation but the separate
expounded on below:
corporate entity may be disregarded
where it serves, but as a shield for
A.​ Instrumentality Doctrine /
tax evasion and treat the person
Three-Pronged Control Test /
who actually take the benefits of the
Instrumentality Rule Test
transactions as the person taxable.
In these cases, the Doctrine of
The Instrumentality Rule is a
Piercing the Corporate Veil may be
doctrine courts use to decide whether a
invoked.
corporation is just a “mere
 that the corporation was an adjunct of the
B.​ Identity Doctrine subsidiary corporation:
● If the plaintiff can show that there was ■ Commonality of directors, officers,
such a unity interest and ownership that the and stockholders
independence of the corporation had in ■ Sharing of office
effect ceased or had never begun, and ■ Existence of financing and
adherence to the fiction of separate identity management arrangements
would serve only to defeat justice and between the two companies allowing
equity, the Doctrine of Piercing the Veil of a corporate officer of the first
Corporate Fiction may apply. corporation to handle the other
Example: A parent corporation so ■ Existence of a virtual domination, if
completely controls a subsidiary that they not control, wielded by the same
are basically the same entity. officer over the finances and
business policies and practices of
C.​ Alter Ego Doctrine the subsidiary.
● It must be shown that there is unity of
interest and ownership that the separate ***What appears from the foregoing is that
personalities of the corporation and the cases when the doctrine of piercing the
individual no longer exist and that if the acts corporate veil may be applied to both:
are treated as those of the corporation 1. Cases when fraud or other
alone, an inequitable result will follow. wrongful acts or omission are
● In this case, a corporation may be a present
dummy/sham/serves no business purpose. 2. Cases when there is NO INTENT
● Under Alter Ego cases, FRAUD is NOT to commit a wrongful act/fraud in
an essential element. organizing the corporation but
■ The Court has ruled in one case injustice and inequity may result if
that even if there is no finding of the corporate veil is not pierced.
fraud, the veil may be pierced ● The first group applies to cases
when there is substantial covered by the Instrumentality
ownership of all the stocks Doctrine and the Alter Ego doctrine.
coupled with other circumstances The second group applies ONLY to
like failure to observe corporate Alter Ego doctrine.
formalities, non-payment of
dividends, use of funds of the Other Discussions on Doctrine of
corporation by the stockholder, etc. Piercing the Veil of Corporate Fiction and
● When the corporation is owned by one its Variants
person whereby the corporation functions ● Mere ownership by a single stockholder
only for the benefit of such individual owner, or by another corporation of all or nearly all
the corporation and the individual should be of the capital stock of a corporation is not in
deemed to be the same. itself sufficient ground for disregarding the
● In one case, the Alter Ego doctrine was separate corporate personality.
applied in piercing the Corporate Veil ● The similarity of businesses of two
because of the presence of numerous corporations does not warrant the disregard
circumstances that support the conclusion of the corporate veil.
● The mere fact that a corporation owns all corporation’s assets may be reached only to
of the stocks of another corporation, taken the extent necessary to satisfy the debt.
alone, is not sufficient to justify their being Claimant: Creditor of shareholder
treated as one entity.
2. Insider reverse piercing, the controlling
Application of Piercing the Veil in Natural members will attempt to ignore the
Persons corporate fiction in order to take advantage
The piercing of the corporate veil of a benefit available to the corporation,
may apply to corporations as well as natural such as an interest in a lawsuit or protection
persons involved with corporations. This of personal assets.
Court has held that the "corporate mask Claimant: Shareholder/Insider
may be lifted and the corporate veil may be
pierced when a corporation is just but the Corporation disregarded for the
alter ego of a person or of another shareholder’s benefit. Corporate assets are
corporation. treated as personal assets for
benefits/exemptions.
Traditional Piercing: Courts will disregard Insider reverse piercing favors the
the separate personality to make directors shareholder because it allows the
or shareholders liable for corporate shareholder to disregard the corporate
obligations. veil for their own advantage, usually to
●​ Corporate creditor seeks to pierce. obtain: (1) exemptions, (2) protections, (3)
●​ Shareholder’s personal assets are rights, or (4) benefits, that would not apply
reached. if the corporation’s separate personality
were respected.
Reverse Piercing of the Veil of Corporate
Fiction Reverse Piercing: A creditor of the
"Reverse-piercing flows in the opposite shareholder is typically trying to hold the
direction (of traditional corporate corporation liable for debts of the
veil-piercing) and makes the corporation shareholder.
liable for the debt of the shareholders." ● In the same manner, the doctrine
●​ The shareholder is personally liable may also be invoked when a new
for its corporate debts, and not with corporation may be ruled to be a
the corporation’s assets. mere continuation of an old
corporation that has stopped
Two types of Reverse Piercing of the Veil operation.
of Corporate Fiction:

1. Outsider reverse piercing occurs when a Classification of Shares

party with a claim against an individual or
SEC. 6. Classification of Shares. The
corporation attempts to be repaid with
classification of shares, their
assets of a corporation owned or
corresponding rights, privileges, or
substantially controlled by the defendant;
restrictions, and their stated par value, if
The outsider wants the corporation’s
any, must be indicated in the articles of
assets to pay the owner’s debts. The
incorporation. Each share shall be equal
in all respects to every other share, and preneed companies, public utilities,
except as otherwise provided in the building and loan associations, and
articles of incorporation and in the other corporations authorized to obtain
certificate of stock. or access funds from the public, whether
The shares in stock corporations publicly listed or not, shall not be
may be divided into classes or series of permitted to issue no-par value shares of
shares, or both. No share may be stock.
deprived of voting rights except those Preferred shares of stock issued
classified and issued as "preferred" or by a corporation may be given
"redeemable" shares, unless otherwise preference in the distribution of
provided in this Code: Provided, That dividends and in the distribution of
there shall always be a class or series of corporate assets in case of liquidation,
shares with complete voting rights. or such other preferences: Provided,
Holders of nonvoting shares shall That preferred shares of stock may be
nevertheless be entitled to vote on the issued only with a stated par value. The
following matters: board of directors, where authorized in
(a) Amendment of the articles of the articles of incorporation, may fix the
incorporation; terms and conditions of preferred shares
(b) Adoption and amendment of bylaws; of stock or any series thereof: Provided,
(c) Sale, lease, exchange, mortgage, further, That such terms and conditions
pledge, or other disposition of all or shall be effective upon filing of a
substantially all of the corporate certificate thereof with the Securities and
property; Exchange Commission, hereinafter
(d) Incurring, creating, or increasing referred to as the “Commission”.
bonded indebtedness; Shares of capital stock issued
(e) Increase or decrease of authorized without par value shall be deemed fully
capital stock; paid and nonassessable and the holder
(f) Merger or consolidation of the of such shares shall not be liable to the
corporation with another corporation or corporation or to its creditors in respect
other corporations; thereto: Provided, That no-par value
(g) Investment of corporate funds in shares must be issued for a
another corporation or business in consideration of at least Five pesos
accordance with this Code; and (P5.00) per share: Provided, further, That
(h) Dissolution of the corporation. the entire consideration received by the
corporation for its no-par value shares
Except as provided in the shall be treated as capital and shall not
immediately preceding paragraph, the be available for distribution as
vote required under this Code to approve dividends.
a particular corporate act shall be A corporation may further classify
deemed to refer only to stocks with its shares for the purpose of ensuring
voting rights. compliance with constitutional or legal
The shares or series of shares requirements.
may or may not have a par value:
Provided, That banks, trust, insurance, Doctrine of equality of shares
 Each share shall be equal in all ​ The right to vote is inherent in and
respects (rights and liabilities) to every other incidental to the ownership of corporate
share except as otherwise provided in the stocks. Only stock actually issued and
articles of incorporation and stated in the outstanding may be voted.
certificate of stock.
The Right to Vote in NON-STOCK
Subscribed Capital- includes treasury Corporations
shares The voting rights attach to
Outstanding Capital- excludes treasury membership. Members vote as persons, in
shares accordance with the law and the by-laws of
the corporation. Each member shall be
Authorized Capital Stock- maximum entitled to one vote unless so limited,
amount of shares legally allowed to issue broadened, or denied in the articles of
Subscribed Capital Stock- authorized incorporation or by laws. We hold that when
capital stock that investors have agreed the principle for determining the quorum for
to buy stock corporations is applied by analogy to
Paid-in Capital Stock- portion of the nonstock corporations, only those who are
subscribed capital stock that has been actual members with voting rights should be
fully paid by the subscribers. counted.

Who may classify shares? What are non-voting shares?

1. Incorporators Shares without a right to vote. The
It is to be determined by the law provides that shares classified and
incorporators by stating it in their articles of issued as preferred or redeemable shares
incorporation which will be filed with the may be deprived of voting rights.
Securities and Exchange Commission.
What is common stock?
2. Board of Directors and stockholders A class of stock entitling the
The original classification of shares holder to vote on corporate matters, to
made by the incorporators which was stated receive dividends after other claims and
in the articles of incorporation can be dividends have been paid (especially to
amended by a majority vote of the board of preferred shareholders), and to share in
directors and the vote or written assent of assets upon liquidation. Often called a
the stockholders representing at least 2/3 of capital stock, if it is the corporation's only
the outstanding capital stock. class of stock outstanding. Also termed
ordinary shares.
What are voting shares? Is one which has no preference and
Shares with a right to vote. There shall entitles the shareholder to a pro rata
always be a class or series of shares which division of the profits, if any. The common
have complete voting rights. stock shareholders have complete voting
rights.
The Right to Vote in STOCK
Corporations What is a preferred stock?
 A preferred share of stock, on one Unpaid dividends do not accumulate.​
hand, is one which entitles the holder ​ If no dividend is declared in a year,
thereof to certain preferences over the the right is lost for that year.
holders of common stock. The
preferences are designed to induce persons 5. Participating Preferred Shares
to subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. After receiving their fixed preferred dividend,
The most common forms may be classified they also participate with common
into two: (1) preferred shares as to assets shareholders in additional dividends.
(preference in the distribution of the assets);
6. Non-Participating Preferred Shares
and (2) preferred shares as to dividends
(entitled to receive dividends to the extent They receive only their fixed dividend and
agreed upon before any dividends at all are do not share in extras.
paid to the holders of common stock. There
is no guarantee, however, that the share will 7. Convertible Preferred Shares
receive any dividends.)
Preferences granted to preferred These may be converted into common
stockholders, moreover, do not give them a shares (or another class), based on
lien upon the property of the corporation nor conditions set in the Articles of
make them creditors of the corporation, the Incorporation.
right of the former being always subordinate
to the latter. What are redeemable shares?
Redeemable shares may be issued
Types of Preferred Shares by the corporation when expressly so
1. Preferred as to Dividends. provided in the articles of incorporation.
These have priority in receiving They may be purchased or taken up by the
dividends before common shareholders. corporation upon the expiration of a fixed
period, regardless of the existence of
2. Preferred as to Assets (Liquidation unrestricted retained earnings in the books
Preference of the corporation, and upon such other
terms and conditions as may be stated in
These have priority in distribution of the articles of incorporation, which terms
corporate assets upon dissolution, up to the and conditions must also be stated in the
amount stated in the AOI. certificate of stock representing said shares.

3. Cumulative Preferred Shares Instances when holders of non-voting

shares are allowed to vote
Unpaid dividends accumulate.​
1. Amendment of the articles of
​ All arrears must be paid before
incorporation;
common shareholders receive dividends.
2. Adoption and amendment of
4. Non-Cumulative Preferred Shares 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 as the "Foreign Investments Act of
bonded indebtedness; 1991"; and other pertinent laws.
5. Increase or decrease of
authorized capital stock; Founders’ shares – those that grant to the
6. Merger or consolidation of the founders certain rights and privileges not
corporation with another corporation or enjoyed by other shares. Rules:
other corporations; a. Founders’ shares must be classified as
7. Investment of corporate funds in such in the AOI;
another corporation or business in b. They may be given rights and privileges
accordance with this Code; and not enjoyed by other shares subject to the
8. Dissolution of the corporation. following limitations:
i. if the exclusive right to vote and be voted
Note: for in the election of directors is granted, it
Shares classified both as voting and must be for a limited period not exceeding
non-voting shares are entitled to vote in five years from the date of incorporation;
eight instances enumerated above. and
ii. such exclusive right shall not be allowed if
What are par value shares? its exercise will violate the Anti-Dummy Law,
Shares with a value fixed in the Foreign Investments Act of 1991, and other
articles of incorporation and the certificate of pertinent laws.
stock.
What are no par value shares? SEC. 8. Redeemable Shares.
Shares with no par value. No Redeemable shares may be issued by
assigned face value. Must not be lower than the corporation when expressly provided
5 pesos. in the articles of incorporation. They are
shares which may be purchased by the
Note: corporation from the holders of such
Stocks shall not be issued for a shares upon the expiration of a fixed
consideration less than the par or issued period, regardless of the existence of
price thereof. unrestricted retained earnings in the
books of the corporation, and upon such
SEC. 7. Founders' Shares. - Founders' other terms and conditions stated in the
shares may be given certain rights and articles of incorporation and the
privileges not enjoyed by the owners of certificate of stock representing the
other stocks. Where the exclusive right shares, subject to rules and regulations
to vote and be voted for in the election of issued by the Commission.
directors is granted, it must be for a
limited period not to exceed five (5) Redeemable shares – shares which by
years from the date of incorporation: their terms are redeemable at a fixed date
Provided, That such exclusive right shall or at the option of either the issuing
not be allowed if its exercise will violate corporation or the stockholder or both at a
Commonwealth Act No. 108, otherwise certain redemption price. Rules:
known as the "Anti-Dummy Law"; a. The may be issued by the corporation
Republic Act No. 7042, otherwise known only if expressly provided in the AOI;
b. They may be deprived of voting rights; d. They may again be disposed of for a
c. They may be purchased or taken up by reasonable price fixed by the board of
the corporation upon the expiration of a directors.
fixed period, regardless of the existence of ●​ Can be reissued.
unrestricted retained earnings in the books
of the corporation; and Watered stock
d. The terms and conditions for their Stocks issued for a consideration
redemption must be stated in the AOI and less than the par or issued price thereof or
the stock certificate representing the said in any other form other than cash valued in
shares, subject to rules and regulations excess of its fair value.
issued by the Securities and Exchange
Commission (“SEC”). SEC. 64. Liability of Directors for
e. Redeemable shares may be redeemed Watered Stocks. – A director or officer of
regardless of the existence of unrestricted a corporation who: (a) consents to the
retained earnings, provided that the issuance of stocks for a consideration
corporation has, after such redemption, less than its par or issued value; (b)
assets in its books to cover debts and consents to the issuance of stocks for a
liabilities inclusive of capital stock. consideration other than cash, valued in
excess of its fair value; or (c) having
SEC. 9. Treasury Shares. Treasury knowledge of the insufficient
shares are shares of stock which have consideration, does not file a written
been issued and fully paid for, but objection with the corporate secretary,
subsequently reacquired by the issuing shall be liable to the corporation or its
corporation through purchase, creditors, solidarily with the stockholder
redemption, donation, or some other concerned for the difference between the
lawful means. Such shares may again be value received at the time of issuance of
disposed of for a reasonable price fixed the stock and the par or issued value of
by the board of directors. the same.

Treasury shares – those 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.
Rules:
a. They shall have no voting rights as long
as they remain in the treasury;
b. Although they are part of the
subscribed stock, they are not
considered outstanding shares;
c. Being owned by the corporation, they are
not entitled to dividends; and
Readings #3
 ●​ SEC issues a Certificate of
Incorporation if requirements are
Formation and Organization of complete.​
Corporation Corporation’s existence begins
upon issuance of that certificate.

FORMATION AND ORGANIZATION

Contents of the Articles of Incorporation

Stages in life of a corporation

SEC. 13 lists the required contents:
(a) Name of the corporation
(b) Purpose or purposes (primary
and secondary)
(c) Place of principal office (must
Section 18–21: be within the Philippines)
(d) Term of existence (if not
➢​ SEC. 18. Registration,
Incorporation and perpetual)
Commencement of Corporate (e) Names, nationalities, and
Existence – A corporation begins its addresses of incorporators
juridical existence upon issuance (f) Number of directors or trustees
of the Certificate of Incorporation (≤15)
by the SEC. (g) Names and addresses of first
➢​ SEC. 19. De facto Corporations –
directors/trustees
Corporations acting in good faith
before full compliance are treated as (h) Capital structure (for stock
validly existing. corporations)
➢​ SEC. 20. Corporation by Estoppel (i) Contributions (for nonstock
– Persons acting as a corporation corporations)
without authority are liable as (j) Other lawful matters deemed
general partners.
necessary.
➢​ SEC. 21. Effects of Non-Use and
Continuous Inoperation –
Non-organization or in operation Corporate Name
within five (5) years leads to
revocation or delinquent status. SEC. 17:

●​ Name must be distinguishable

Steps in Creation / Process of from existing or protected names.
Incorporation ●​ Use of generic words, punctuations,
or abbreviations does not make it
SEC. 18: distinct.
●​ Submission of intended corporate ●​ SEC may order cessation or
name to the SEC for verification. renaming if the name is misleading
●​ Reservation of name (if found or unlawful.
compliant)
●​ Submission of Articles of Purpose Clause
Incorporation and Bylaws to the Part of the Articles of Incorporation (SEC.
SEC. 13(b)):
 ●​ Must state the specific purpose(s). ▪ Principal Office
●​ If more than one, indicate primary ▪ Term of Existence
and secondary purposes.
●​ Nonstock corporations cannot
include purposes inconsistent with
their nature.

Principal Office

SEC. 13 (c):

●​ Must state the city or municipality

and province of the corporation’s
main office.
●​ Must be located within the
Philippines.

Term of Existence

SEC. 11:

●​ Default: Perpetual existence

(unless otherwise stated). No fixed
period of life. It continues to exist
indefinitely, until it is legally
dissolved.
●​ Old corporations before RCC
enactment also gain perpetual
existence unless they opt out.
●​ Terms may be extended or
shortened via amendment of
articles.
●​ Expired corporations may apply for
revival.
●​ Dissolved then winding up

FORMATION AND ORGANIZATION

▪ Stages in life of a corporation
▪ Steps in Creation
▪ Process of Incorporation
▪ Contents of the Articles of Incorporation
▪ Corporate Name
▪ Purpose Clause