Corporation – Introduction

POWERS OF A CORPORATION:
Express Powers
a. To sue and be sued in its corporate name
b. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation
c. To adopt and use a corporate seal
d. To amend its articles of incorporation in accordance with the provisions of this Code
e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
f. Stock corporations: To issue or sell stocks to subscribers and to sell treasury stocks in accordance with
provisions of this Code; and to admit members to corporation if it be a non-stock corporation
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such
real and personal property, including securities and bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution
h. To enter into merger, consolidation, partnership and joint venture with other corporations
i. To make reasonable donations, including those for public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, that no corporation, domestic or foreign, shall give
donations political party or candidate or for purposes of partisan political activity.
AMENDMENT: Domestic corporation can now give donations
j. To establish pension, retirement, & other plans for benefit of directors, trustees, officers and employees

Implied Powers:
a. To issue checks or promissory note or bill of exchange or mercantile documents
b. To establish a local post office in case of a mining company
c. To operate power plant in case of a cement factory company
d. To sell, supply or manage advertising materials in case of an advertising company.
Incidental or inherent powers:
a. Right of succession
b. Right to have corporate name
c. Right to make by-laws for its governance
d. Right to sue and be sued
e. Right to acquire and hold properties for the purposes authorized by the charter.

STATUS OF ULTRA VIRES ACTS BY THE CORPORATION

Illegal per se Null and void
Failure to comply w/ voting formality Null and void but declaration of nullity
required by law may be barred by estoppel
Being outside the primary and secondary
Voidable on the part of the other party
purposes of the corporation
STATUS OF ULTRA VIRES ACTS OR CONTRACTS BY THE CORPORATE OFFICERS ON BEHALF THE CORPORATION
Illegal per se Null and void
Unenforceable but may become enforceable on the basis of
Which are unauthorized or
(1) Express or implied ratification by the corporation
when the corporate officers
(2) Doctrine of estoppel or
exceed their authority
(3) Doctrine of apparent authority of corporate officers

ADVANTAGES/DISADVANTAGES OF FORMING A CORPORATION

ADVANTAGES DISADVANTAGES
1. Continuity of existence 1. High cost of formation
2. Limited liability on the part of investors 2. Little voice of stockholders in management
3. Strong juridical personality 3. Weakened credit rating because of limited
4. Legal capacity to act as a distinct unit liability feature
5. Centralized management 4. Greater degree of governmental regulation
6. Ease in transferability of shares of
5. More taxes particularly indirect double
stocks in case of stock corporation
taxation
7. Ease in raising funds
Organization & Incorporation
REQUIRES A CERTAIN MINIMUM, OR FULL, FILIPINO OWNERSHIP REQUIREMENT:

Reserved to Filipinos
Mass Media 100%
Advertising 70%
Public Utility 60%
Educational Institution 60%
Exploration, evaluation and
60%
development of natural resources
Ownership of land 60%

RESTRICTIONS & PREFERENCES ON SHARES OF STOCK: In order to be binding, must be indicated:

Ordinary Stock Corporations Close Corporations
Articles of Incorporation Articles of Incorporation
Stock Certificate Stock Certificate
By-laws
Governance of a Corporation
Board of Directors
Corporate Officers
RESPONSIBILITIES UNDER THE REVISED CODE OF CORPORATE GOVERNANCE

CORPORATE SECRETARY
1. Safekeeping and preservation of the integrity of minutes of the meetings of the
Board and its committees, as well as other official records
2. Be loyal to the mission, vision and objectives of the corporation
3. Work fairly and objectively with the Board, Management and stockholders
4. Have appropriate administrative and interpersonal skills
5. If he is not at the same time the corporation's legal counsel, be aware of laws,
rules and regulations necessary in performance of his duties & responsibilities
6. Have a working knowledge of the operations of the corporation
7. Inform the members of the Board of the agenda of their meetings and ensure
that members have before them accurate information that will enable them to
arrive at intelligent decisions on matters that require their approval
8. Attend all Board meetings, except when justifiable causes, such as, illness, death
in immediate family and serious accidents, prevent him from doing so
9. Ensure board procedures, rules, and regulations are strict followed by members
10. If he is also the Compliance Officer, perform all the duties and responsibilities of
the said officer as provided for in this Code.

COMPLIANCE OFFICER
1. Monitor compliance by corporation with this Code and the rules & regulations of
regulatory agencies and, if any violations are found, report matter to Board and
recommend imposition of appropriate disciplinary action on responsible parties
and adoption of measures to prevent a repetition of violation
2. Appear before commission when summoned in relation to compliance with Code
3. Issue a certification every January 30th of the year on the extent of the
corporation's compliance with this Code for the completed year and, if there are
any deviations, explain the reason for such deviation.
Shares of stocks
By-laws

CONTENTS OF THE BYLAWS:

1. Time, place and manner of calling & conducting regular or special meetings of directors or trustees
2. Time and manner of calling and conducting regular or special meetings and mode of notifying the
stockholders or members thereof
3. Required quorum in meetings of stockholders or members and the manner of voting therein
4. Modes by which a stockholder, member, director or trustees may attend meetings and cast votes
5. Form for proxies of stockholders and members and the manner of voting them
6. Directors' or trustees’ qualifications, duties and responsibilities, guidelines for setting the
compensation of directors or trustees, and officers, and the maximum number of other board
representations that an independent director or trustee may have which should not be more than
the number prescribed by the Commission
7. Time for holding annual election of directors or trustees and mode/manner of giving notice
8. Manner of election or appointment and the term of officers other than directors or trustees
9. Penalties for violation of the bylaws
10. Manner of issuing stock certificates (For stock corporations)
11. Other matters as may be necessary for the proper or convenient transaction of its corporate affairs
for the promotion of good governance and anti-graft and corruption measures.
• Arbitration agreement may be provided in bylaws pursuant to Section 181 of RCC
Stock & Transfer Book
Merger & Consolidation
CORPORATE REORGANIZATION- change in a company's structure for FORMS:
1. Asset sale
various reasons such as to expand operations, increase profitability, 2. Stock sale
improve efficiency or avoid liquidation or bankruptcy. 3. Merger/Consolidation

Combination of two or more corporations whereby ore corporation (surviving

MERGER:
corporation) absorbs the other corporation(s) (absorbed corporation/s). B+C=B
Combination of two or more corporations (constituent corporations) and forming a
CONSOLIDATION:
new corporation (consolidated corporation) B+C=A
In a consolidation, constituent corporations are all dissolved, while in merger, absorbing or surviving
corporation is not, only the absorbed.

Employees of the absorbed corporation in a merger

Employment contracts are automatically assumed by the surviving corporation in a merger, even in
the absence of an express stipulation in the articles of merger or the merger plan.
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION
1. BOD/T of each constituent corporations shall approve a plan of merger or consolidation
2. Approval of the plan by the stockholders representing 2/3 OCS or 2/3 of the member in non-stock
corporations of each of such corporations at separate corporate meetings called for the purpose
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall
be given to all stockholders or members in the same manner as in regular/special meetings of
stockholders (from 2 weeks, either personally or by registered mail stating the purpose thereof).
4. Execution of the articles of merger or consolidation by each constituent corporation
• To be signed by the president or vice-president and certified by the corporate secretary or
assistant secretary setting forth the matters required in Sec. 78
5. Submission of the articles of merger or consolidation in quadruplicate to the SEC.
• AMENDMENT: Requirement to submit in quadruplicate has been removed.
• If corporations is under direct supervision of any other government agency or governed
special laws the favorable recommendation of government agency shall first be secured
6. Issuance of certificate of merger or consolidation by the SEC at which time the merger or
consolidation shall be effective.
• If plan is contrary to law, SEC shall set a hearing to give corporations an opportunity to be
heard upon notice.

EFFECTS OF MERGER OR CONSOLIDATION

1. There will only be a SINGLE corporation- the surviving corporation or the consolidated corporation.
2. Termination of corporate existence of constituent corporation and absorbed corporation.
3. Surviving or consolidated corporation shall possess all the rights, privileges, immunities and
franchises of the constituent corporations and all property and all receivables due, including
subscriptions to shares and other choses in action, and every other interest of, or belonging to or
due to the constituent corporations shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed
4. Rights of creditors or any lien on the property of the constituent corporations shall not be impaired
by the merger or consolidation.
5. No need to liquidate or wind-up the affairs of the absorbed or constituent corporation because
(1) There are no assets to distribute
(2) No debts & liabilities to pay - since all these are transferred to surviving or consolidated
corporation.

CONTENTS OF ARTICLES OF MERGER OR CONSOLIDATION

1. CV and FV of assets & liabilities of respective companies as of agreed cutoff date
2. Method to be used in the merger or consolidation of accounts of the companies
3. Provisional or pro-forma values, as merged or consolidated, using the accounting method; and
4. Other information as may be prescribed by the SEC
 Meetings

DIRECTORS STOCKHOLDERS
Quorum Majority Majority of OCS
Annual as fixed in by-laws.
Regular meeting Monthly as fixed in by-laws
If no date fixed, any date after April 15
Special meeting Anytime deemed necessary or as provided for in the by-laws
Regular 2 days prior to the meeting (previously 21 days (from 2 weeks)
Notice
Special 1 day) 1 week
Not be at the principal office
• Unless it is not practicable, in the
Place Anywhere (even outside PH)
city or municipality where the
principal office is located.
Not allowed for a director or trustee
• Since he was elected because of
Proxy voting his personal qualifications and Generally allowed
must personally attend & vote)
GR: Majority of those present shall be
valid as a corporate act.

Voting Exceptions: Refer to voting requirements under

requirement 1. Election of corporate officers: “Rights of shareholders”
majority of all members of board.
2. When by-laws provide for higher
Voting requirement.
Non-Stock Corporations
• No part of its income is distributable as dividends to its members, trustees, or officers, and
any profit which it may obtain incidental to its operations shall, whenever necessary or
proper, be used for furtherance of purposes for which the corporation was organized.
• Provision governing stock corporation, shall be applicable to non-stock corporations,
except as may be covered by specific provisions pertaining to non-stock corporations.

DIFFERENCES
STOCK CORPORATION NON-STOCK CORPORATION
Charitable, religious, educational,
professional, cultural scientific, social, civic
PURPOSE Generally, for profit service, or similar purposes, like trade,
industry, agricultural and like chambers or
any combination thereof
DISTRIBUTION OF
Authorized Not authorized
DIVIDEND
NUMBER OF
Not more than 15 May or may not be more than 15
DIRECTORS/TRUSTEES
TERM OF OFFICE OF
1 year 3 years
DIRECTORS/TRUSTEES
Members may directly elect officers, unless
ELECTION OF OFFICERS Duty of the directors
otherwise provided in AOI or bylaws,
One member, one vote. Unless limited,
VOTING May be straight or Cumulative broadened, or denied to the extent
specified in AOI or by-laws
By mail or other similar means as may be
MANNER OF VOTING Either in person or by proxy
authorized by the by-laws
Membership is personal and non-
TRANSFERABILITY OF
Transferable transferable, unless AOI or by-laws provide
INTEREST
otherwise
OWNERSHIP/ Member
QUALIFICATION OF At least one share Independent trustees- not required to be a
DIRECTOR/TRUSTEE member
Principal office unless not
practicable, in the city or
PLACE OF MEETING Any place in the Philippines
municipality where the
principal office is located
DISTRIBUTION OF ASSETS IN THE EVENT OF DISSOLUTION:

Shall be paid, satisfied, and discharged, or

All liabilities & obligations
adequate provision shall be made therefor
Upon a condition requiring return, transfer or
Assets held by corporation
conveyed in accordance with such requirements
Assets received and held by corporation Shall be transferred or conveyed to one or more
subject to limitations permitting their use corporations, societies or organizations engaged in
only for charitable religious, benevolent, activities in the Philippines substantially similar to
education or similar purpose, but not held those of the dissolving corporation according to a
upon a condition requiring return, transfer, plan of distribution adopted.
or conveyance by reason of the dissolution
Shall be distributed in accordance with the
provisions of AOI or by laws, to the extent that
Assets other than mentioned in the preceding
determine the distributive rights of members, or
paragraphs if any
any class or classes of members, or provide for
distribution.
Distributed to such person, societies,
organizations or corporations, whether or not
In any other cases, assets may be
organized for profit, as may be specified in a plan
of distribution adopted pursuant to this chapter.

PLAN OF DISTRIBUTION

1) Board of trustees shall, by majority vote, adopt a resolution recommending a plan

of distribution and directing the submission thereof to a vote at a regular or special
meeting of members having voting rights
2) Each member entitled to vote shall be given a written notice setting forth the
proposed plan of distribution or summary thereof and the date, time and place of
such meeting within the time and in manner provided in this Code for the giving of
notice of meetings
3) Such plan of distribution shall be adopted upon approval of at least 2/3 of the
members having voting rights present or represented by proxy at such meeting.
Close Corporation
REQUIREMENTS TO BE CLASSIFIED AS CLOSE CORPORATION
1. Number of stockholders must not exceed 20.
2. Issues stocks are subject to transfer restrictions such as:
a. Right of first refusal or
b. Right of preemption in favor of the stockholders or the corporation.
3. Corporation shall not be listed in stock exchange, or should not be publicly offered
4. At least 2/3 of the voting stocks or voting rights are not owned or controlled by another
corporation which is not a close corporation.

CHARACTERISTICS OF CLOSE CORPORATION

1. Stockholders may act as directors without need of election, therefore liable as directors.
2. Stockholders involved in the management of the corporation are liable as directors.
3. Quorum may be greater than mere majority.
4. Corporate officers or employees may be elected or employed directly by the stockholders
instead by the BOD
5. Transfers of stocks to others, which would increase the number of stockholders to more
than the maximum are invalid.
6. Corporate actuations may be binding even without a formal board meeting.
7. Appraisal rights can be exercised regardless of existence of unrestricted RE
8. Pre-emptive right is absolute and available to all stock issuances unless restricted by AOI
9. Deadlocks are settled by SEC.

CANNOT BE A CLOSE CORPORATION: (I COME BSP)

1. Insurance companies
2. Corporations vested by public interest
3. Oil companies
4. Mining companies
5. Educational Institutions
6. Banks
7. Stock exchanges
8. Public Utilities
DIFFERENCES WITH ORDINARY STOCK CORPORATION

CLOSE ORDINARY STOCK

# OF STOCKHOLDERS Cannot exceed 20 No limitation

Generally, no restriction on
SHARES OF STOCK Subject to specified restrictions
transfer of shares

Shares are prohibited from being listed in

PROHIBITIONS No prohibition
stock exchange or offered for sale to public

Stockholders may take an active part in

MANAGEMENT Management is lodged in BOD
corporate management rather than BOD

NUMBER OF To the extent that all stockholders can be

Maximum of 15
DIRECTORS deemed directors, can be up to 20.

To the extent that directors may be Ordinarily, no such

classified into one or more classes and to classification and no

VOTING
be voted solely by a particular class of restrictions on cumulative

stock, cumulative voting maybe restricted voting

OFFICERS ARE ELECTED May be by stockholders By BOD

RESTRICTION ON Should be indicated in AOI, stock Valid and binding if indicated

TRANSFER OF SHARES certificates and by-laws. in AOI and stock certificates

Broader as it includes all issues without May be denied on certain

PRE-EMPTIVE RIGHT
exception grounds

May be exercised for any reason, as long as

May be exercised only on
APPRAISAL RIGHT corporation has sufficient assets to cover
specific grounds.
its liabilities exclusive of capital stock
One-Person Corporation
CORPORATE SECRETARY: NOT ALLOWED
a) Be responsible for maintaining the minutes book and/or record of the corporation.
b) Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which
notice shall be given no later than 5 days from such occurrence
c) Notify SEC of the death of the single stockholder within 5 days from such occurrence and stating
in such notice the names, residence addresses, and contact details of all known legal heirs; and
d) Call the nominee or alternate nominee and the known legal heist to a meeting and advise the legal
heirs with regard to, among others the election of a new director, amendment of AOI, and other
ancillary and/or consequential matters.
TREASURER: ALLOWED
Allowed to be positioned by sole stockholder, provided he shall give:
1) Bond to SEC in a sum as may be required. (Renewed every 2 years or as often as may be required)
2) Written undertaking to faithfully administer the OPC's funds to be received as treasurer, and to
disburse and invest the same according to the Articles as approved by the SEC.
Foreign Corporation
TWO ACKNOWLEDGED TESTS IN DETERMINING THE NATIONALITY OF A CORPORATION:
CONTROL TEST OR LIBERAL RULE GRANDFATHER RULE/TEST
• Used for purposes of applying laws • Method of determining the nationality of a
o Ex. Prohibition to acquire lands applicable to corporation which in turn is owned by another
corporations more than 40% is owned by corporation by breaking down the entity
non-Filipinos.
structure of the shareholders.
• Under this, no need to further trace the
• True Filipino ownership is traced all the way to
ownership of the 60% or more Filipino
the individual stockholders of the corporation
stockholdings of the investing corporation
(A) owning shares in another corporation (B),
since a corporation which is at least 60%
by multiplying the Filipino ownership of the first
Filipino-owned is considered Filipino.
corporation (A) to the corresponding ownership
of the other corporation (B).
• Applies to nationalized activities or those which
require whole or partial Filipino ownership.
Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining the controlling interests in enterprises
engaged in the exploitation of natural resources owned by Filipino citizens, provides:
• Shares belonging to corporations or • But if % of Filipino ownership in the
partnerships at least 60% of the capital of corporation or partnership is less than 60%,
which is owned by Filipino citizens shall be only the number of shares corresponding to
considered as of Philippine nationality. such percentage shall be counted as of
(Control Test) Philippine nationality. (Grandfather rule)

GRANDFATHER RULE SHALL BE APPLIED WHEN:

a. Corporation's Filipino equity falls below the threshold required
b. There exists "doubt" as to the Filipino or Foreign equity

❖ This would thus require the application first of the control test.
❖ When after applying the Control Test, and it meets the required nationality requirements
but there exists a "doubt" as to Filipino ownership, grandfather rule would be
supplementally applied.
Dissolution & Liquidation