Business Law

BSABM III

LESSON 5

WHO MAY ESTABLISH BUSINESS

1. CORPORATION (BP#68)
2. PARTNERSHIP (Title IX of Civil Code of the Philippines)
3. SOLE PROPRIETORSHIP (Book 4 of the Civil Code of the
Philippines)

THE CORPORATION CODE OF THE PHILIPPINES (Sec. 1, B.P. BLG.

68 – May 1, 1980)

BACKGROUND
The Corporation Code of the Philippines (B.P. Blg. 68) is an amendment
to Act No. 1459 otherwise known as Corporation Law enacted on March
1, 1906.

PURPOSE OF THE CODE

• Provide guidelines for incorporating, organizing, and regulating
private corporations. Both stock and non-stock including
educational and religious corporations.
• Define the powers and provide for the dissolution.
• Fix the duties and liabilities of directors or trustees and other
officers thereof.
• Declare the rights and liabilities of stockholders or members.
• Prescribe the conditions under which corporations including
foreign corporations may transact business.
• Provide penalties for the violations of the Code.

CORPORATION – 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.
(Sec. 2)
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1. ARTIFICIAL BEING
a. It is NOT a true being/person BUT the law treats it as such.
b. It is a LEGAL person
c. It is different from NATURAL PERSON
d. It has a SEPARATE PERSONALITY from its Board of
Directors/Trustees and stockholders
i. AS A RULE: the personal debt of the board of
directors/stockholders/shareholders are not the debt of
the corporation and vice versa.
ii. Changes in membership do not affect the corporation

2. CREATED BY LAW
a. The law recognizes and allows it to transact business.
b. Articles of Incorporation – legal document establishing a
corporation

3. RIGHT OF SUCCESSION
a. It continues existence despite the death, withdrawal,
insolvency, and incapacity of its shareholders and members
of the Board.
b. Under Philippine laws, corporations have a life span of 50
years.

4. POWERS, ATTRIBUTES, AND PROPERTIES EXPRESSLY

AUTHORIZED BY LAW
a. It can sue and be sued.
b. It can enter into contracts.
c. Right to own properties
d. Tax liability/exemption

5. INCIDENT TO ITS EXISTENCE

a. A corporation can only operate according to its purpose or
legitimate business.
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CORPORATION VS. PARTNERSHIP

CORPORATION PARTNERSHIP
CREATION BY LAW CONTRACT
INCORPORATORS 5 2
POWERS GRANTED BY LAW AUTHORIZED BY
PARTNERS
MANAGEMENT BOARD PARTNERS
SUCCESSION HAS A RIGHT NONE
LIABILITY LIMITED EXTENDED
TRANSFER OF NO CONSENT WITH CONSENT
INTEREST
EXISTENCE 50 YEARS DISSOLVE ANY
TIME
LAW CORPORATE CODE CIVIL LAW

ADVANTAGES:
1. Legal capacity to act as a juridical person
2. Continuous existence (50-year life span and renewable)
3. Managed by a board of directors/trustees (policy-making body)
4. Standardized creation, organization, management, and dissolution
(govern by law: Corporation code)
5. Shareholders have limited liability
6. Shareholders are NOT agents
7. Any person can be an investor (so long as capable)
8. Shares of stocks are transferrable without consent by other
stockholders
9. Makes a large business enterprise or big investments possible

DISADVANTAGES:
1. Complicated to manage
2. High cost of operation
3. Little or no stockholder/owner involvement (unless elected or
appointed by the Board)
4. Collegial decision-making process (prone to disagreements)
5. Management and ownership are separate.
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CLASSIFICATION:
1. STOCK CORPORATION
a. For-profit purposes
b. Issues stock certificates
c. Pays dividends to stockholders
d. Ex.: SM Corporation; San Miguel Corporation, Jollibee
Food Corporation, GOCCs – GSIS, SEC, Pag-Ibig (HMDF),
Philhealth, SSS, LBP, DBP, BSP, BCDA, NAPOCOR, LRT,
MRT, MWSS, LWUA

2. NON-STOCK CORPORATION
a. Not-for-profit
b. Do NOT issue stocks
c. Capital: contribution and donation
d. Establish and organize for public good and welfare
e. Ex.: GMA Kapuso Foundation Inc., Philippine Dental
Society, Sta. Maria Tricycle Operators and Drivers
Association, Virgen Milagrosa University Foundation Inc.

3. PUBLIC CORPORATION
a. Purpose is for public or political interest
b. Administered by the government.
c. Created by special laws or charter
d. Ex.: LGUs – Provinces, Municipalities, Barangays;
Autonomous regions.

4. PRIVATE CORPORATION
a. Commercial corporations and GOCCs
b. Created under the corporation code
c. Ex.: Manila Electric Corporation (MERALCO), Pilipinas Shell
Petroleum Corporation, GSIS, LBP, BSP, NAPOCOR, SEC

OTHER PERSONALITIES RELATED TO CORPORATION

1. PROMOTERS – lays the groundwork for the establishment of a
corporation.

2. SUBSCRIBERS – agreed to take and pay for the original unissued

shares of the corporation.

3. UNDERWRITERS – a person or investment banker who:

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a. Agreed to buy the entire issue of securities or a substantial

part thereof at stated terms.
b. Guaranteed the sale of unsold portion at a stated price (by
agreeing to buy from the issuing party).
c. Agreed to market all or part of an issue.
d. Offered for sale stocks purchased from a controlling
stockholder.

CORPORATORS/INCORPORATORS/STOCKHOLDERS/MEMBERS

CORPORATORS INCORPORATORS STOCKHOLDERS MEMBERS

Persons who Persons who Persons who Persons
compose a establish a stock compose a who
corporation corporation corporation (own establish a
shares) non-stock
corporation
Includes: Stockholders Stockholders Corporators
whose names whose names DO of a non-
1. Incorporators appear in the NOT appear in the stock
2. Stockholders Articles of Articles of corporation
3. Members Incorporation Incorporation

STOCK
1. STOCK – one of the units in which the capital stock is divided.

STOCK CERTIFICATE
1. A written acknowledgment of the interest, rights, and participation
of a person in a corporation's management, profits, and assets.

SHARE OF STOCK
1. Represents the right or interest of the owner in:
a. The management of the corporation through his right to vote.
b. The earnings of the corporation through dividend distribution.
c. The assets and properties of the corporation through
dissolution.
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NATURE OF SHARE OF STOCK

1. Represents a distinct undivided share or interest in the common
property of the corporation.
2. Personal property of the stockholder distinct from the capital.
3. Does NOT constitute indebtedness of the corporation to the
stockholder.
4. Represents rights to share in the proceeds of the corporation
according to law or undivided part of the corporation’s property

KINDS OF SHARES:
1. PROMOTION SHARE – issued to promoters.

2. SHARE IN ESCROW – deposited to a 3rd person by the grantor or

an agent

3. CONVERTIBLE SHARE – changeable or convertible from

preferred to common.

4. FOUNDER’S SHARE – issued to organizers of the corporation

5. REDEEMABLE (CALLABLE) SHARE – preferred stocks

reacquired by the corporation at a certain price and date.

6. TREASURY SHARE – preferred stocks reacquired through

purchase, redemption, donation, forfeiture, or other lawful means.

TYPES OF STOCKS OR SHARES OF STOCKS

1. PREFERRED STOCK – given preference or bias or advantage
a. Paid first when the company is liquidated or issues
dividends.
b. Has stated par value.
c. No voting rights.
d. Terms and conditions are fixed by the Board.

2. COMMON STOCK – ordinary stocks.

a. Paid last when the company is liquidated or issues
dividends. (residual stock)
b. Has voting rights. (voting depends on numbers subscribed)
c. May have or don’t have stated par value.
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d. In case of no par value, the minimum amount is Php5.00.

(consideration received is for capital purposes ONLY)

3. OTHER TYPES/CLASSIFICATION: stocks are also divided into

classes or series
i. “CLASS A/ SERIES A” – owned exclusively by Filipino
citizens
ii. “CLASS B/ SERIES B” – owned by Filipinos and
foreigners
iii. “CLASS C/ SERIES C” – owned by retired employees
of the company

4. CAPITAL STOCK – represents the equity (share) of the

stockholder in the corporate assets. It is the fixed amount
reflected in the Articles of Incorporation, subscribed to and paid by
the stockholders

a. Types:

i. Authorized capital stock – shares with par value.

ii. Subscribed capital stock – the amount of capital stocks
subscribed or promised to be issued
iii. Outstanding capital stock – issued capital stocks
treasury share.
iv. Paid-up capital stock – paid capital stocks
v. Unissued capital stock – not issued or subscribed to.
No voting or dividend rights.

COMMON STOCKS VS. PREFERRED STOCKS

PREFERRED COMMON
Similarity with YES NO
bond
Income FIX NO
Voting YES/NO YES/NO
Payment PRIORITY NO
Growth NO YES
potential
Volatility LESS GREAT
Liquidity LESS HIGHLY
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ORGANIZATION AND ESTABLISHMENT

1. Establishing a private corporation is simply a SPECIAL
PRIVILEGE because it can be dissolved at any time by legislative
action.

STEPS IN INCORPORATION
1. Incorporators draft and execute the Articles of Incorporation.

2. Pending incorporation, the temporary treasurer executes an

affidavit (or legal written statement) for the capital subscribed and
paid up.

3. File the Articles of Incorporation with the SEC including the

following:
a. Treasurer’s affidavit indicating 25% of the entire authorized
shares paid and subscribed to in cash or property.

b. Recommendation from a proper government agency

indicating legal compliance with the Articles of Incorporation.

4. Payment of filing and publication fees.

5. Issuance of the certificate of incorporation by SEC.

INCORPORATORS
1. At least, 5 persons but not more than 15 persons. (unless provided
by special law)
2. Of legal age – capable of entering into a contract.
3. GENERAL RULE: Filipino citizen and resident of the Philippines.
4. IN CASE, there are foreign investors, 60% must be Filipino
citizens. (Constitution)
5. At least, own and subscribe 1 share of stock.
6. Natural person
7. EXCEPT: cooperatives which can incorporate a rural bank. (Sec.
4, RA 7353)
8. EXCEPT: a corporation sole (Trust Corporation) where 1
incorporator is required.
9. NOTE: A corporation cannot incorporate another corporation.
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CORPORATE TERM/PERIOD
1. Corporations can operate/exist for 50 years.
2. Corporations can be dissolved at any time under the law
3. The term may be extended for another 50 years.
4. Extension cannot be filed 5 years earlier the expiration of the
corporation unless approved by the SEC.
5. There is no extension or renewal during the liquidation period of
the corporation.
6. No limit in the renewal or extension of the corporation.

DISSOLUTION (ENDING) OF A CORPORATION

1. A corporation can be dissolved voluntarily or involuntarily.

2. 2 LEGAL STEPS INVOLVED IN THE DISSOLUTION OF A

CORPORATION
a. Termination of the corporation to do business
b. Winding up of its affairs (3 years)

3. VOLUNTARY DISSOLUTION
a. By the vote of the board of directors/trustees and the
stockholders/members where no creditors are affected.
i. Resolution is ratified by shareholders owning at least
2/3 of capital stocks.
ii. Or, by at least 2/3 of shareholders in the meeting
iii. The meeting's place, time, and object (agenda) are
published 3 consecutive weeks prior.
iv. Publication is made in a local newspaper where
corporate headquarters is located or in a newspaper of
general circulation.
v. All shareholders were notified 30 days prior.
vi. Resolution is submitted to SEC with the certification of
the majority of the BOD/BOT and countersigned by
corporate secretary.
vii. SEC issues certificate of dissolution.

b. By decision of the SEC where creditors are affected.

i. Petition filed with the SEC.
ii. Petition must be sufficient in form and substance.
iii. Petition is signed by a majority of BOD/BOT; OR, by
other officers with management positions verified by
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the president, corporate secretary, or a member of

BOD/BOT.
iv. Resolution is ratified by shareholders owning at least
2/3 of capital stocks.
v. Or, by at least 2/3 of shareholders in the meeting.
vi. Objections must be filed no later than 30 days and no
more than 60 days.
vii. Publication: 3 consecutive weeks in a local newspaper
where corporate headquarters is located or in a
newspaper of general circulation.
viii. Publication must be posted in 3 public places where
the corporate headquarters is located.
ix. On 5 days' notice, the SEC hears any objection.
x. NOTE: a receiver will be appointed during the
proceedings.

c. By amending the articles of incorporation to shorten the

term/period of the corporation.
d. By submitting a verified declaration of dissolution to the SEC
for approval (for corporation sole).

4. INVOLUNTARILY DISSOLUTION
a. Expiration of the term (as stated in the articles of
incorporation)
b. Failure to organize and commence formally within 2 years of
incorporation
c. By an act of congress
d. By order of the SEC

MINIMUM REQUIRED CAPITAL STOCK

1. None. EXCEPT: by special law.
2. Paid-up capital not less than Php5,000.00.
3. 60% is paid by Filipino citizens.
4. 40% for rural banks.
5. 70% voting capital stock for pawnshops.

SUBSCRIBED AND PAID CAPITAL STOCK

1. At least 25% subscription of the authorized capital stock.
2. At least 25% of the subscription is paid.
3. Paid-up capital not less than Php5,000.00.
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4. NOTE: in case of an increase in authorized capital stock, 25% is

subscribed and 25% of the subscription is paid.

ARTICLES OF INCORPORATION
1. A document prepared by the incorporators to establish a
corporation.
2. It is submitted and filed with the SEC which in turn issues a
Certificate of Incorporation = Corporate Charter basis for the
existence and function of the corporation.
3. NOTE: A corporation created by a special law has no article of
incorporation. The special law is its corporate charter.

CONTENTS OF THE ARTICLES OF INCORPORATION

1. Name of the corporation (ABC Corporation or Corp.; XYZ
Incorporated or Inc.)
a. Must be approved by and registered with SEC

2. Specific purpose of the corporation

a. If more than one purpose, indicate primary purpose and
secondary purpose

3. Address of the main office (must be in the Philippines)

4. Term or years of existence (maximum: 50 years; renewable)

5. Names, nationalities, and addresses of the incorporators

6. Names, nationalities, and addresses of the BOD/BOT (minimum:

5; maximum: 15; unless provided by special law)

a. BOD for stock corporation; BOT for non-stock corporation

b. Term: 1 year or as specified or amended in the AOI
c. No. of BOT: may be more than 15 with a term of 1/3 expiring
every year. For EDUCATIONAL CORPORATIONS,
multiples of 5 with 1/5 expiring every year.
d. BOD/BOT must be elected among shareholders/members
e. Once elected, BOD/BOT is not controlled by
shareholders/members
f. BOD must be a shareholder
g. At least OWNS 1 share of capital stock
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h. BOT must be a member

i. BOT must be a resident of the Philippines
j. Powers: (within the scope of its corporate charter)
i. Govern the corporation
ii. Make policies
iii. Conduct business
iv. Enter into contracts
v. Control corporate properties
vi. Act as a collegial body in a lawful meeting

k. Power limitation:
i. Must act in good faith, diligence, care, and skill
ii. Must observe the limitations of laws (including by-
laws), rules and regulations (including AOI)
iii. Cannot exercise powers not possessed by the
corporation
iv. Cannot perform major changes in corporation

7. Authorized capital stock in Philippine peso

a. Number of shares
b. Par value
c. IN CASE NO PAR VALUE: number of shares

8. Name of subscribers, nationalities, number of shares subscribed,

and the amounts subscribed of the 25% subscription

9. Name of subscribers, amounts subscribed, and total paid-in of the

25% paid-up authorized capital stock

10. Name of the treasurer of the corporation.

11. Restriction of 60% Filipino ownership of the corporation

12. Names and signatures of the attesting incorporators

13. Name and signatures of the witnesses

14. Treasurer’s affidavit (25% subscription and 25% paid up)

15. Notary public

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SAMPLE FORM (Article of Incorporation):

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SAMPLE ACCOMPLISHED FORM (Article of Incorporation):

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AMENDMENT OF AOI
1. Amending the AOI is the authority given by the corporate charter
to:
a. BOD/BOT
b. 2/3 of shareholders or members.
2. Amendments:
a. Increase or decrease of capital stock
b. Extension or shortening of term/period
c. Matters other than the foregoing

3. A majority of BOD/BOT votes must approve the amendment.

4. Amendment must be certified under oath by the corporate
secretary and a majority of BOD/BOT.
5. Amendments must be made by a meeting and approval of 2/3 of
the stockholders.
6. Amendment must be submitted to SEC.

LIMITATION OF (AOI) AMENDMENT:

1. Only for legitimate purposes
2. Must be approved by required votes of the BOD/BOT and
shareholders.
3. Not contrary to the requirements of the Code.
4. Amendments take effect only when approved by SEC.
5. If a corporation is created by special law, amendments must be
accompanied by recommendations from the appropriate
government agency.
6. For foreign corporations, simply file amendments with SEC within
60 days; and copy of the AOI to proper government agency.

GROUNDS FOR DISAPPROVAL BY SEC:

1. AOI or amendment not substantial in form
2. Purpose not constitutional, illegal, immoral, contrary to government
rules and regulations
3. False treasurer’s affidavit
4. Violation of the 60% Filipino ownership requirement
5. No government agency recommendation as required
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SUSPENSION OR REVOCATION OF CERTIFICATE OF

REGISTRATION
1. Fraud
2. Serious misrepresentation of purpose
3. Refusal to comply with a lawful order of SEC
4. Continuous no-operation for at least 5 years
5. Failure to submit by-laws within the prescribed period
6. Failure to submit the required reports in proper forms as
determined by SEC within the prescribed period

START OF CORPORATE EXISTENCE

1. Upon issuance of Certificate of Incorporation under the official seal
of SEC

QUO WARRANTO PROCEEDING (Sec. 20)

1. For DE FACTO CORPORATION; the solicitor general can file a
quo warranto with the SC.

ELECTION OF BOD/BOT
1. Annual election
2. No one can be a director, trustee, or officer when the person was
convicted by final judgment of 6 years imprisonment and
committed a violation 5 years before the election or appointment.
3. Voter or representative with written authority (proxy) must be
present
4. Voter must be majority shareholder or
5. Majority shareholders entitled to vote
6. Voting is by VIVA VOCE (orally) or roll call
7. Ballot type if requested
8. No delinquent stock (unpaid stock) can vote
9. Law requirement: plurality not majority
10. IN CASE OF FAILURE OF ELECTION, voting may be
postponed from day to day or from time to time BUT not sine die
11. Notice of meeting must be given
12. Voting can be straight or cumulative
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13. A director elected by cumulative voting can only be removed

by cause
14. NON-STOCK CORP., a voter can vote as many as there are
candidates BUT 1 candidate = 1 vote only
15. NOTE: within 30 days after elections, the secretary submits
to SEC the names, addresses, and nationalities of the elected
BOD/BOT and corporate officers.
16. The secretary, an officer, or a relative of the BOT/BOD or
officer shall inform the SEC in the event of the death, resignation,
or in any manner failure to hold office by a BOD/BOT or a
corporate officer.

VOTING
1. Directly
2. Indirectly (by proxy)
3. Only stockholders and members with voting rights can vote
4. Voting by a legal representative assigned by the court (executor,
administrator, or receiver)
5. VOTING JOINTLY
a. Shares of stock co-owned by 2 or more persons
b. Consent by all co-owners, or
c. Written proxy (authorization) signed by all co-owners

COMPENSATION OF DIRECTORS
1. GENERAL RULE, directors receive only per diem as
compensation
2. EXCEPT,
a. When stated in the by-laws, or
b. By a majority vote in a regular or special meeting of the of
stockholders representing outstanding capital stock
3. Total annual compensation must not exceed 10% of corporate
income in the preceding year.

CORPORATE OFFICERS
1. President = director
2. Treasurer = director or not
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3. Secretary – resident and Filipino citizen (usually lawyer)

4. Other officers provided in the by-laws
5. Other officers may hold 2 or more concurrent positions
6. QUORUM: a majority of BOD/BOT; unless AOI or by-laws provide
for a greater majority
7. Election of corporate officers requires a majority of BOD
8. BOD/BOT cannot vote or attend board meetings by proxy.

BOARD MEETING
1. Either regular or special
2. BOD/BOT in a LAWFUL meeting (notice provided)
3. Presence of quorum (simple majority or 50% + 1)
4. Majority decision
5. All actions, decisions and resolutions made must be recorded
6. Meeting place, time, and in the manner provided in the by-laws
7. IN CASE OF GREATER MAJORITY, consult AOI or by laws.

REMOVAL FROM OFFICE

1. By a vote of shareholders holding 2/3 of capital stocks outstanding
or 2/3 of the voting members in a non-stock corporation
2. Removal takes place in a meeting called for the purpose
3. The meeting is called by the secretary by order of the president or
by a demand letter by a majority of the stockholders or members
4. Removal may be with or without cause
5. BY THE COURT, if mismanagement occurs and the corporation is
placed under receivership
6. IN CASE of resignation, the SEC must be informed immediately
7. When the secretary refuses or fails to comply or no secretary is
available, any stockholder or member may address the demand for
removal directly to the entire stockholders or members
8. NOTE: BOD/BOT cannot remove a member
9. ABANDONMENT of office
a. Inability to perform one’s duties
b. Absence in all meetings for 1 year
c. Announcement of refusal to act as officer and stockholder
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POWERS OF THE CORPORATION

1. To sue and be sued (in the corporate’s name)
2. Succession (to succeed the rights of another)
3. To adopt and use a corporate seal
4. To amend the AOI
5. To adopt by-laws (not contrary to law, morals, public policy)
6. To issue or sell stocks (stock corporation)
7. To admit members (non-stock corporation)
8. To buy, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and deal with real and personal property, including
securities and bonds of the corporation
9. To transact lawful business
10. To enter into contracts, merger or consolidation
11. To make donations (not to political parties or political
activities)
12. To establish pension, retirement, and other benefit plans to
all employees of the corporation
13. To extend or shorten corporate term/period
14. To increase or decrease capital stocks
15. To acquire shares owned by the corporation (buy back)
16. To invest corporate funds in another corporation, business,
or any other purpose
17. To declare dividends

CONTENTS BY-LAWS
1. Time, place, and manner of calling and conducting regular or
special BOD/BOT meetings
2. Time and manner of calling and conducting regular or special
meetings of shareholders or members
3. Quorum in meetings of stockholders or members and the manner
of voting
4. Form for proxies of stockholders and members; and the manner of
voting
5. Qualifications, duties, and compensations of directors, trustees,
officers, and employees
6. Time of holding annual election of BOD/BOT and the manner of
giving notice
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7. Manner of election or appointment and the term of office of all

officers (other than directors or trustees)
8. Penalties for violation of by-laws
9. Manner of issuing certificates (for stock corporation)
10. Other matters necessary for the proper transaction of
corporate business or affairs

CORPORATE BOOKS AND RECORDS

1. Stock and transfer book (for stock corporation)
2. Financial statements
3. Record of all business transactions
4. Minutes of meetings of BOD/BOT
5. Minutes of meetings of stockholders or members
6. Other records required by the General Banking Act, National
Internal Revenue Code, Labor Code, and SEC
7. Records and books are kept and maintained at the principal office
or main office or in the office of the stock transfer agent for the
stock and transfer book
8. All records and books of the corporation are subject to inspection
and may be copied by the BOD/BOT, shareholder or member by
demand at his expense at reasonable hours on business day

MERGER AND CONSOLIDATION

1. It is the combination of 2 or more corporations to form a single
corporation

2. Common Forms of Merger and Consolidation

a. Sale of assets – selling all or substantially all of the assets to
another corporation
i.
b. Lease of assets – a corporation without being dissolved
leases a property to another corporation
c. Sale of stock – parent company and subsidiary company
d. Merger – 2 or more corporations unite where the winning,
stronger, or absorbing corporation becomes the surviving
corporation/entity
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e. Consolidation – 2 or more corporations unite giving rise to a

NEW corporation/entity
f. NOTE: the identity of a corporation is retained in a sale of
assets, lease of stock, and sale of stock

STEPS OF MERGER/CONSOLIDATION
1. Approved merger/consolidation plan (BOD/BOT approved)
2. Submission to stockholder or member for approval
3. Execution of formal contract
4. Submission to SEC for approval
5. Conduct hearing by SEC
6. Issuance of certificate by SEC

SPECIAL CORPORATIONS
1. Educational Corporations
2. Religious Corporations
3. Corporation Sole (Trust Corporation)