Corporation Lecture No 1

DEFINITION OF A CORPORATION:

• Within the context of Philippine law, a "corporation" is treated as 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.

DEFINITION EXPLAINED:

Dissecting the meaning, a corporation is an artificial being because it is not a natural person. It is merely
a juridical entity that is created by law.

By operation of law, a corporation is formed because there are legal procedures and requirements that
need to be satisfied strictly otherwise, no corporation can be given life.

A corporation has the right of succession because it does not succumb upon the death of its
stockholders and members. Their heirs rather step into their shoes and claim their positions to continue
their place in the corporation. In effect, the corporation likewise continues its life and legitimate affairs in
the hands of the new breed of owners.

It has the powers, attributes and properties expressly authorized by law or incident to its existence.

ATTRIBUTES OF A CORPORATION: THE DOCTRINE OF LEGAL ENTITY

ATTRIBUTES OF A CORPORATION:

1. It is a juridical entity with a separate and distinct personality.

2. It is created by operation of law.

3. It has the right of succession.

4. It has the powers, attributes, and properties expressly authorized by law or incident to its
existence.

DOCTRINE OF CORPORATE ENTITY:

• Section 19 of Corporation Code of the Philippines provides:

• Section 19. Commencement of corporate existence. - A private corporation formed or organized

under this Code commences to have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders / members
and their successors shall constitute a body politic and corporate under the name stated in the
articles of incorporation for the period of time mentioned therein, unless said period is extended
or the corporation is sooner dissolved in accordance with law.
A corporation comes into existence upon the issuance of the certificate of incorporation. Then and only
then will it acquire a juridical personality to sue and be sued, enter into contracts, hold or convey
property or perform any legal act, in its own name. Corporations cannot come into existence by mere
agreement of the parties as in the case of business partnerships. They require special authority or grant
from the State. This power is exercised by the State through the legislature, either by a special
incorporation law or charter which directly creates the corporation or by means of a general corporation
law under which individuals desiring to be and act as a corporation may incorporate.

DOCTRINE OF SEPARATE PERSONALITY:

• A corporation is an artificial being or a juridical person with a personality separate and distinct
from its individual stockholders or members and from any other legal entity to which it may be
attached or connected.

By virtue of the separate juridical personality of the corporation, the following consequences are
produced:

1. Restricted liability for acts or contracts: The general rule is that obligations incurred by a
corporation, acting through its authorized agents are its sole liabilities. Similarly, a corporation
may not generally, be made to answer for acts or liabilities of its stockholders or members or
those of the legal entities to which it may be connected and vice versa.

2. It has the power to bring independent actions. It may bring civil and criminal actions in its own
name in the same manner as natural persons (Art. 46, NCC).

3. It has the right to acquire and possess property. Property conveyed to or acquired by the
corporation is in law the property of the corporation itself as a distinct legal entity and not that
of the stockholders or members (Art. 44(3), NCC).

4. 4. Court can acquire jurisdiction over its person. Service of summons may be made on the
president, general manager, corporate secretary, treasurer or in-house counsel (Sec. 11, Rule 14,
Rules of Court).

5. 5. Stronger identity despite any change in its composition. Changes in individual membership
Corporation remains unchanged and unaffected in its identity by changes in its individual
membership.

6. 6. Entitlement to constitutional guaranties. Ø Corporations are entitled to certain constitutional

rights, such as: (a) Due process; (b) Equal Protection of the law; and (c) Protection against
unreasonable searches and seizures.

NOTE: However, it is not entitled to certain constitutional rights such as political rights or
purely personal rights not only because it is an artificial being but also because it is a mere
creature of law.
 7. Entitlement to moral damages. - A corporation is not entitled to moral damages because it has
no feelings, no emotions, no senses (ABS-CBN vs. Court of Appeals, G.R. No. 128690, Jan. 21,
1999). In Filipinas Broadcasting vs. Ago Med., however, it was held that a juridical person such as
a corporation can validly complain for libel or any other form of defamation and claim for moral
damages. The SC had rationated that Art. 2219 (7) does not qualify whether the plaintiff is a
natural or a juridical person (Filipinas Broadcasting vs. Ago Medical Center-Bicol, et. al., 448 SCRA
413).

8. Liability for damages to third persons. - A corporation is liable for damages to third person
whenever a tortuous act is committed by an officer or agent under the express direction or
authority of the stockholders or members acting as a body, or, generally, from the directors as
the governing body (PNB vs. CA, 83 SCRA 237 [1978]).

9. 9. Liability for Crimes. - Since a corporation is a mere legal fiction, it cannot be held liable for a
crime committed by its officers since it does not have the essential element of malice, except if
by express provision of law, the corporation is held criminally liable; In such case the responsible
officers would be criminally liable (People vs. Tan Boon Kong, 54 Phil. 607 [1930]).

ADVANTAGES AND DISADVANTAGES OF CORPORATION

ADVANTAGES OF A CORPORATION:

(a) Stockholders and owners have limited liability.

• In a corporation, the owners of the company are only liable for the amount of money which they
have invested through purchasing shares. This means that if the company goes bankrupt and has
no money left to pay back the creditors and lenders, the money invested by its shareholders into
the company (by purchasing its shares) will be used to pay back the creditors and lenders.
Hence, the shareholders will lose the amount invested. Creditors and lenders, however, have no
claim on the personal properties and assets of the owners. This is what limited liability means:
limited up to the extent of the amount invested.

(b) Convenient multiplicity of funds through investing public.

• In a corporation, it is relatively easy to raise huge sums of capital through the public. Since the
total money a company wishes to raise is divided into thousands and lakhs of shares, the price of
each share comes out to be very small. A small price allows a number of people to purchase the
shares of the company. Hence, it becomes easy to raise a big amount for a corporation by
dividing it into smaller units

(c) Perpetual life of a corporation.

• Prior to the advent of the Revised Corporation Code that took effect in March 2019, a
corporation can exist for a period not exceeding fifty (50) years, but it has now gained a
perpetual existence upon the effectivity of the new law. Ergo, the life of a corporation is
perpetual and has no more limit, unless its Articles of Incorporation provides for a shorter term.
Likewise, a corporation whose term had already expired may be revived upon application to and
 approval by SEC. This is known as the “Lazarus provision”. Once revived, its term is likewise
perpetual unless a shorter term is provided in its articles. (Section 11, Revised Corporation
Code) Consequently, corporations continue to exist beyond the deaths of the Board of Directors,
the executives, and the managers. Its life can come to an end only when the same is dissolved
according to law. Hence, investors don’t have to worry about an unexpected death or illness of
the executives and managers, somebody else will come and take their place. This also allows the
managers to plan for the long term and do better.

(d) Convenient transfer of ownership.

• Ownership in a corporation is typically easy to transfer. In the case of a public company, the
shares (instruments of ownership) are freely transferrable. In the case of a private company
however, it is comparatively difficult to transfer shares as there are some restrictions.

(e) Convenient identification of accountability.

• Since the corporation has a separate personality of its own, clients are transacting to it as a
person with the power to do business in its own name. On the part of the clients, it is safe and
convenient to deal with the corporation as they knew who is liable for every transaction since
every officer or employee are deemed to be acting only in the name of the corporation.
Accountability therefore begins and ends with the coporation.

DISADVANTAGES OF A CORPORATION:

(a) The process of formation is demanding and entails a lot of conditions.

• Setting up a corporation is a very complex process. It takes heavy paperwork to set it up. It needs
a number of conditions to satisfy and permissions from different regulatory authorities. Likewise,
many norms of different regulatory bodies that a corporate must fulfill before it can start its
business. For instance, if you are setting up an educational corporation, you need prior
permission from DepEd, CHED or TESDA depending on the kind of school you are going to
operate. A medical corporation requires DOH intervention and a recruitment agency needs prior
permit from the DOLE.

(b) Profits obtained from corporate activities are taxed twice.

• Practically speaking, income obtained from corporate transactions faces two (2) modes of
taxation. Firstly, the corporation has to pay a flat Corporate Tax on its profits. And then the
dividends received by the shareholders are taxed in their hands. This makes it less attractive for
business owners to set up a corporation.

(c) The power to decide is concentrated on a select group of people.

• Essentially, since the corporation is merely an artificial being, it needs real people to conduct its
affairs. This power resides in the group of people called the Board of Directors or the Board of
Trustees who elect officers among themselves. Sometimes, it happens that the Board of
Directors and the executives may fulfill their personal interests by taking certain decisions. These
decisions may not be good for the health of the corporation. For e.g., they may decide to pay
themselves higher salaries out of the profits, or, they may purchase luxury offices for them with
 expensive facilities, etc. All these types of personally beneficial decisions may harm the
corporate and its image especially if the corporate is not making good profits.

CORPORATION AS DISTINGUISHED FROM PARTNERSHIP

 PARTNERSHIP CORPORATION

Definition: It is a contract of two or more An artificial being created by operation of law

persons who bind themselves having the right of succession, the powers
to contribute money, property and attributes and properties expressly
or industry to a common fund, authorized by law or incidental to its
with the intention of dividing existence.
the profits among themselves.

Similarity: Both are juridical persons

Differences:

a) as to the Created by mere agreement of Created by operation of law or by-law.

manner the parties
of
creation

General Rule: may use any

b) b) as to The word “Corporation” or “Incorporated”
name
name whether complete or abbreviated (Corp. or
Exception: not similar or Inc.) must be added to the corporate name.
confusingly similar to the name In case of One-Person-Corporation, the
of existing partnership or letters “OPC” shall be put either below or at
corporation the end of its corporate name.

- (in limited partnership) the

word “limited” whether
complete or abbreviated (Ltd.)
must be added to the
partnership name

Differences:

c) as to Always for business profit Maybe for other purposes.

purpose
Examples: educational, religious or charitable
;
corporations. NOTE: An OPC is always stock
(for profit).
Partners may agree on any term
Perpetual existence at present. Prior to the
d) as to Old Corporation Code, the term limit is 50
term years. Under the new Code, no more term
limit unless clearly stated in the Articles.

Differences:

e) as to number Minimum of 2, no maximum No more minimum number of incorporators

of organizers for forming a CORPORATION but not more
than 15

Managed by all partners but

Gen. Rule: Decisions are made by majority of
f) as to decisions are made by the
the members of the Board of Directors or
management; partner or partners having the
Corporation Lecture No 2
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

• The doctrine that a corporation is a legal entity distinct from the persons composing is a
theory introduced for purposes of convenience and to serve the ends of justice. But when the
veil of corporate fiction is used as a shield to defeat public convenience, justify wrong, protect
fraud, or defend a crime, this fiction shall be disregarded and the individuals composing it will
be treated identically.

• Actually, the piercing of the veil of corporate fiction is frowned upon and can only be done if it
has been clearly established that the separate and distinct personality of the corporation is
used to justify a wrong, protect fraud, or perpetrate a deception.

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

• The doctrine requires the court to see through the protective shroud which exempts its
stockholders from liabilities that they ordinarily would be subject to, or distinguishes a
corporation from a seemingly separate one, were it not for the existing corporate fiction. In
any cases where the separate corporate identity is disregarded, the corporation will be treated
merely as an association of persons and the stockholders or members will be considered as
the corporation, that is, liability will attach personally or directly to the officers and
stockholders. However, mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality.

Nature and Objectives of Piercing Doctrine

• (1) it has only res judicata effect;

• 2) its purpose is to prevent fraud or wrong and not available for other purposes;

• (3) The doctrine could not be employed by a corporation to complete its claims against another
corporation and cannot therefore be employed by the claimant who does not appear to be the
victim of any wrong or fraud;

• (4) it is essentially a judicial prerogative only. To pierce the veil of corporate fiction being a power
belonging to the courts, a sheriff who has ministerial duty to enforce a final and executory
decision cannot pierce the veil of corporate fiction by enforcing the decision against the
stockholders who are not parties to the action;

• (5) it must be shown to be necessary and with factual basis Ø To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly established, it
cannot be presumed.
TYPES OF CORPORATIONS (STOCK AND NON-STOCK)

• BACKGROUND:

• Corporations are either stock or non-stock in nature. Stock corporations are plainly intended to
engage in business and earn profit.

• Stock Corporations – are those which have capital stocks divided into shares and are authorized
to distribute to the holders of such shares, dividends or allotment of the surplus profits on the
basis of the shares held.

• Non-Stock Corporations – are those which are established not for profit purposes bur for some
other noble purposes such as educational, religious and charitable organizations. Since they are
not intended for profit, they have no capital stocks, no shareholders and are not allowed by law
to declare dividends for distribution to its owners/members.

• In the Philippines, not-for-profit organizations (NPOs) are typically organized as "non-stock

corporations" registered under the Corporation Code. Non-stock corporations can be formed
for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social,
civic service, or similar purposes, such as trade, industry, agricultural and similar chambers, or
any combination thereof.

Our tax laws provide additional benefits to two categories of non-stock corporations: accredited “non-
stock, non-profit corporations or organizations” (hereinafter “non-stock, non-profit corporations”), and
accredited “non-governmental organizations” (NGOs).

Among other requirements, accredited non-stock, non-profit corporations must be organized

exclusively for one or more of the following purposes: religious, charitable, scientific, athletic, social
welfare, or cultural purposes, or the rehabilitation of veterans.

DISTINGIUSHED STOCKS FROM NON-STOCKS CORPORATION

 Stock Corporation Non-Stock Corporation

1. Originally formed by incorporators who are 1.Originally formed by incorporators who are
Stockholders thereof. No required minimum no. Members thereof. No required minimum no. of
of incorporators, but not more than 15; incorporators, but not more than 15;

2. After having been formed, all persons who 2. Any person who desires to become a
may have acquired shares of stocks thereat are Member must invest in the form of a
called stockholders but only those who originally Contribution, (no shares of stocks) but only
formed the corporation in the beginning are those who originally formed the corporation
called incorporators shall be called incorporators;

3. Corporators are those who compose the 3. Corporators are those who compose the
corporation whether as incorporators or corporation whether as incorporators or
stockholders in general; members in general;

4. Governed by the Board of Directors; at . Governed by the Board of Trustees; at

least 2 but not more than 15. Except One Person least 2 but may or may not be more than 15.
Corporation, Sole and Close Corp.

TYPES OF TRADABLE STOCKS AND STOCK WARRANTS

• What are stocks and equities?

• A share of stock is evidence of a fractional ownership in a corporation. Buying a share of

common stock is in fact buying a share of a business. An individual who owns shares in any
company has an ownership interest in therein and is called a stockholder or shareholder. This
ownership is also referred to as having equity in a company, hence, stocks are also
called equities or equity securities. The percentage or proportion of ownership depends on how
many of the company’s share one owns.

• For example, 1,000 shares of common stock in a corporation that has 100,000 outstanding
shares represent 1,000/100,000 ownership interest. This means you have one percent (1%)
ownership interest in the company’s plant, its building, its inventories and other assets.

• What are stock certificates?

Ownership of a business is represented by stock certificates. When an individual becomes a stockholder

of any corporation, he receives a stock certificate – a written evidence of ownership certified to the
corporation. The certificate indicates the investor’s name, total number of shares purchased, the
certificate number, the par value and the name of the issuing corporation.
When shares are purchased, the stock certificates will be issued either in street name or in the investor’s
name. The difference is important to know since without notice form the investors all stock certificates
will be issued in street name, i.e. in the name of the brokerage firm. In this way, the brokerage firm – and
NOT the investor – will be the holder of the stock certificates. Only when the investor specifically asks for
it will the stock certificates be issued in the investor’s name.

• Stock certificates that are in the street name facilitate the transactions by brokers. When the
investor decides to sell his shares, the street certificate simply be endorsed by the stockbroker. If
it were in the investor’s name, the process would be lengthier since it is the investor who needs
to endorse it at the back of the certificate. When shares are bought and sold frequently, it is
advisable to have them issued in street name since it will facilitate the quick transfer of
ownership.

STOCK CERTIFICATE

This certifies that [Shareholder's Name], of legal age, residing at [Shareholder's Address], is the
registered owner of [Number of Shares] ([Class of Shares, e.g., Common or Preferred]) shares of the
capital stock of [Company Name], a corporation duly organized and existing under the laws of the
Republic of the Philippines, with a par value of [₱Amount] per share.

These shares are fully paid and non-assessable and are transferable only on the books of the
Corporation by the holder in person or by duly authorized attorney, upon surrender of this certificate
properly endorsed.

IN WITNESS WHEREOF, the said Corporation has caused this certificate to be signed by its duly
authorized officers and its corporate seal to be hereunto affixed, this [Date] at [City, Philippines].

_________________________
[President's Name]
President

_________________________
[Corporate Secretary's Name]
Corporate Secretary

• (Company Seal Here)

What type of stocks can you buy or sell?

• There are different types of stocks that you can buy or sell at the Philippine Stock Exchange
(PSE): common stock, preferred stock, cumulative preferred stock and convertible preferred
stock. The difference depends on the right and privileges which you receive as a stockholder.

• The majority of securities traded in the PSE are common stocks. Common stocks are usually
purchased for participation in the profits and control of ownership and the management of the
company – they have voting rights. Common stock holders are entitled to an equal pro rata
division of profits without preference or advantage over another stockholder. However, they
have the last claim on dividends and are the last to collect in case of liquidation. Common shares
can be classified into class A and class B shares. Class A shares are reserved to Filipino investors,
while Class B shares are open to foreign investors as well as Filipinos. Thus, Filipinos can own
both classes while foreigners can only avail of Class B shares. Both classes have the same
privileges and rights, and receive the same amount of dividends.

• Preferred stocks are another type of securities issued by corporations. Its name is derived from
the preference given to the holders of this stock over holders of common stocks. Holders of the
preferred stocks are entitled to receive a fixed minimum amount of dividends (expressed either
in pesos or as percentage of the stock’s par value), to the extent declared by the company’s
Board and if there are sufficient retained earnings, before any dividends are paid to the holders
of common stocks.

• Cumulative preferred stocks are special preferred stocks that accumulate unpaid dividends for
future payment. Cumulative preferred stock has prior rights to dividends over common stock;
therefore the omitted cumulative preferred dividends must be paid before the common stock
dividends can be paid. Convertible preferred stocks are preferred stocks which are exchangeable
into common stocks at the option of the holder under specified terms and conditions. The
conversion ratio specifies the number of shares the holder receives upon surrender while the
conversion price is effective price paid for the common stock when conversion occurs.
What are warrants?

• Warrants are another type of investment which you can buy or sell in the stock market. By
definition, a warrant is a security which grants the holder the right but not the obligation to buy
(in the case of a call warrant) or sell (in the case of a put warrant), a stated number of underlying
shares of stock at a specified price during a specified period of time.

• Underlying shares are the shares, unissued or issued as the case may be, of a corporation which
may subscribed to or purchased by the warrant holder upon the exercise of the right granted
under the warrants. The number of underlying shares a warrant holder is entitled to buy or sell
for every warrant he holds is known as the conversion ratio. The exercise period specifies the life
of a warrant while the expiration date is the date at which the warrant expires. The exercise
price is the stipulated stock price at which the holder can buy or sell the underlying.

• Warrants can be issued in a number of ways: (a) as part of an initial public offering; (b) attached
to a rights issue; (c) attached to bonds; or (d) as stand alone. In the case of debt or equity
offerings, warrants are used as “sweeteners” to enhance marketability of the issuances. Under
the SEC Rules Governing Warrants, Issuers or warrants may be the issuer of the underlying
shares or an entity other than the company underlying the warrants and may be in the form of:

• a) Subscription Warrant– a warrant which grants the right to subscribe to the new or
unissued shares of stock of the Issuer;

• b) Covered Warrant – a warrant which is issued by a party other than the Issuer of the
underlying shares and whose performance of obligation is secured by the deposit of the
underlying shares for the Covered Warrant with an independent Trustee which is a reputable
commercial bank;

• c) Non-collateralized Warrant – a warrant issued by a party other than the Issuer of the
underlying shares and whose performance of obligation is not secured by a deposit of the
underlying shares. Instead, the Issuer normally adopts hedging strategies to provide for its
obligations during the life of the Non-collateralized Warrant.

• Even if the trading of warrants is relatively new in the Philippine stock market, it has gained
some popularity. Currently, there are eight (8) warrants listed at the PSE. The warrant holder has
the chance to have the same exposure in the market, as with buying the stock itself, using lesser
amounts of money and the advantage of having more time, i.e. exercise period, in which to raise
money to purchase more shares (the underlying stock). Also, the investor is protected from the
downside risk of the underlying stock’s price depreciation since the exposure of their money is
limited to only the price of the warrants.
Corporation Lecture No 3
Philippine Stock Exchange; How To Invest in the Philippine Stock Market

• CLASSES OF SHARES - VOTING AND NON-VOTING

The classification of shares, their corresponding rights, privileges, or restrictions, and their
stated par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all
respects to every other share, except as otherwise provided in the articles of incorporation and in the
certificate of stock. These are the relevant provisions in the Revised Corporation Code (Republic Act No.
11232).

• CLASSES/SERIES OF SHARES

The shares in stock corporations may be divided into classes or series of shares, or both. A
corporation may further classify its shares for the purpose of ensuring compliance with constitutional or
legal requirements.

PAR VALUE

• The shares or series of shares may or may not have a par value. However, the following shall not
be permitted to issue no-par value shares of stocks:

 Banks

 Trust

 Insurance

 pre-need companies

 public utilities

 building and loan associations, and

 other corporations authorized to obtain or access funds from the public, whether publicly listed
or not

NO-PAR VALUE

• No-par value shares must be issued for a consideration of at least Five pesos (P5) per share. The
entire consideration received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

• Shares of capital stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in respect
thereto
NONVOTING SHARES

• Certain shares may be deprived of voting rights under the articles of incorporation, provided that
there shall always be a class or series of shares with complete voting rights. This fact must be
reflected in the certificate of stock. Nonvoting shares may nevertheless vote in certain instances.

• Only shares classified and issued as “preferred” or “redeemable” shares, unless otherwise
provided in the Revised Corporation Code, shall have no voting rights.

PREFERRED SHARES

 Preferred shares of stock issued by a corporation may be given preference in the distribution of
dividends and the distribution of corporate assets in case of liquidation, or such other
preferences.
 Preferred shares must always be issued with a stated par value.
 The board of directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof. Such terms and conditions shall be
effective upon filing of a certificate thereof with the Securities and Exchange Commission.

FOUNDERS’ SHARES

• Founders’ shares may be given certain rights and privileges not enjoyed by the owners of
other stocks. Where the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years from the date of
incorporation: Provided, That such exclusive right shall not be allowed if its exercise will violate
Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No.
7042, otherwise known as the “Foreign Investments Act of 1991”; and other pertinent laws.

REDEEMABLE SHARES

• Redeemable shares may be issued by the corporation when expressly provided in the articles of
incorporation. They are shares which may be purchased by the corporation from the holders of
such shares upon the expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of stock representing the shares, subject
to rules and regulations issued by the Securities and Exchange Commission (SEC).

TREASURY SHARES

• Treasury shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation through purchase, redemption, donation, or some other
 lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of
directors.

RIGHT TO VOTE OF NONVOTING SHARES

Notwithstanding any provision in the articles of incorporation, holders of nonvoting shares shall
nevertheless be entitled to vote on the following matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;

(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate
property;

(d) Incurring, creating, or increasing bonded indebtedness;

(e) Increase or decrease of authorized capital stock;

(f) Merger or consolidation of the corporation with another corporation or other corporations;

(g) Investment of corporate funds in another corporation or business in accordance with the Revised
Corporation Code; and

(h) Dissolution of the corporation.

• Except the foregoing instances, the vote required under the Revised Corporation Code to
approve a particular corporate act shall be deemed to refer only to stocks with voting rights.

CREDITS: Philippine E-Legal Forum

STEPS IN FORMING A CORPORATION

FUNDAMENTAL STEPS IN FORMING A PRIVATE CORPORATION:

1. Have a pre-approved proposed name of the corporation; (www.sec.gov.ph)

2. The SEC Company Registration System allows you to follow the step by step guide in registering
online your intended company. The first and foremost consideration however is for you to come up
with a proposed corporate name that will be acceptable to the SEC criteria. Allow verification of name
if original or confusingly similar. (If your proposed name is denied, you can submit a motion for
reconsideration).
 • CASE 1: In 2002, Refractories Corp. of the Philippines was patented. In 2003, Industrial
Refractories Corp. of the Philippines was formed on the same line of business. Is the latter
confusingly similar with the former?

ANSWER: YES BEC. THE WORD “INDUSTRIAL” IS JUST A MERE DESCRIPTION OF THE NATURE OF
THE BUSINESS. WITH OR WITHOUT IT, IT CREATES A DAMAGING SENSE OF DOUBT OR CONFUSION TO
A CORPORATE NAME THAT HAS ALREADY BEEN EXISTING.

• CASE 2: PHILLIPS INC. has been in the industry of lights for many years. Phillips Sy came up
with his own lighting products and he wants to call it STANDARD PHILLIPS INC., the latter from
his very own name. PHILLIPS contended that it was confusingly similar but Phillips Sy argued
that he is entitled to use his very own name. Is the latter confusingly similar with the former?

ANSWER: YES BEC. ONE COULD NOT HAVE AN EXCLUSIVE USE OF HIS NAME ESPECIALLY SO IF
THAT NAME IS SO COMMON THAT IT WAS ALREADY LONG EXISTING FOR BUSINESS USE. FURTHER, THE
USE OF THE ADDED WORD “STANDARD” IS OBVIOUSLY RESORTED TO MERELY SET OUT A VERY SLIM
DIFFERENCE YET THE EFFECT OF WHICH STILL CONFUSES THE PUBLIC CONSUMERS.

• CASE 3: CROCOS is a well-known mark in the industry as a registered popular brand of clothing
owned by Crocos Fashion Inc. X, a veteran chef on the other hand applied for registration of
mark “CROCOS” at the Intellectual Property Office for the burger that he is planning to sell to
the public. He plans to introduce it as “CROCOS BURGER”. Crocos Fashion is opposing X’s
application. Q: Should the application for registration of X be allowed?

ANSWER: NO. because it violates the Confusion of Business Test. The goods of the contending
parties are actually different although claiming under the same trademark but the one with prior
registration has the better right and should prevail. The danger if registration will be allowed is
that the defendant’s product may be falsely assumed to originate from the plaintiff who is the owner
of the similar trademark. Since the trademark is well-known and identified to one person, the buying
public may patronize it under a false belief that it belongs to the same owner.

Cont STEPS IN FORMING A CORPORATION

3. Approval of your corporate name necessarily includes your “Undertaking to Change Corporate
Name” in case the same is later on found to be pre-existing already and is being claimed ownership by
others.

4. Fill-up the online form and provide all the necessary information required by the online registration
system about your company. The information you provide online will automatically translate to your
Articles of Incorporation and By-Laws.

5. When the system accepts your submissions, you will be required to print your Articles of
Incorporation, By-Laws and Treasurer's Affidavit. Have them signed by all the incorporators, Treasurer
and have them notarized. Thereafter, you will need to upload them to the same SEC website for their
perusal.
6. The Treasurer’s Affidavit shows that 25% OF THE ACS HAVE BEEN SUBSCRIBED AND 25% OF THE SCS
HAVE BEEN PAID-UP.

7. Once accepted by SEC, you will receive an Order of Payment indicating the amount of Registration
Fees you will need to pay. Print the same and proceed to Landbank or other accredited payment
centers. Then upload again to SEC website your proof of payment.

8. Wait for an email directive from SEC. Once your online submissions are all satisfactory, SEC will
order you to proceed to the SEC Head Office and submit personally the hard copies of the same
documents you sent them online (AOI, BL, TA) together with Bank Certificate of Deposit to show real
deposits of minimum 25% paid-up capital. (The Bank Issues This In the Name of the Treasurer. Ex. “Ian
Cruz, In Trust for ABC Corp. in the Process of Incorporation)”.

9. Submit Authority To Inspect Bank Documents. (TO AVOID HASSLE UNDER THE BANK SECRECY LAW).

10. The SEC will evaluate again your personal submissions and once approved, you will receive your
CERTIFICATE OF INCORPORATION which means that your corporation is finally born beginning on the
date indicated therein.

ARTICLES OF INCORPORATION
CONTENTS OF THE ARTICLES OF INCORPORATION

1. Corporate Name;

2. Primary and Secondary Purpose;

3. Principal Office or Location;

4. Term;

5. Names, Nationalities and the Residences of Incorporators;

6. Number, Names, Nationalities & Residences of the first Directors or Trustees;

7. Authorized Capital Stocks and Division of Shares;

8. Name and Nationality of Subscriber, No. of shares subscribed and the amount
subscribed;

9. Total paid-in of the amount subscribed;

10. Name of the Treasurer;

• NOTE: If it is a Non-Stock Corporation, it must also state the amount of its capital consisting of
CONTRIBUTIONS by the MEMBERS thereof.

CLOSE CORPORATION
What is a Close Corporation?

• Aside from a Family Corporation, it is one whose Articles of Incorporation provides that:

(1) all issued stocks of all classes, exclusive of treasury shares, shall be held of record by not exceeding
twenty (20) persons;

(2) the issued stocks shall be subject to one or more restrictions on permissible transfer; and

• (3) the corporation shall not list in any stock exchange or public offering. Despite these
requirements however, a corporation shall not be deemed as close corp. if at least two-thirds
(2/3) of its voting stocks are owned or controlled by another corporation which is not a close
corporation within the meaning of the Code. (Sec. 95; Revised Corp. Code)

The following cannot incorporate as a Close Corporation: (Sec. 95, RCC)

 Mining or oil companies;

 Stock exchange;

 Banks;

 Insurance companies;

 Public utilities;

 Educational institutions; and

 Other corporations vested with public interests.

ONE PERSON CORPORATION

What is a One Person Corporation (OPC)?

It is a corporation with a single stockholder: Provided, That only a natural person, trust or
an estate may form a one person corporation. The following cannot incorporate as a One-Person
Corporation: (Sec. 116, RCC)

1. Banks and quasi-banks;

2. Pre-need companies;

3. Trust companies;

4. Insurance companies;

5. Public and publicly-listed companies;

6. Non-chartered GOCCs; and

7. Professionals for the exercise of a profession.

 • NOTE: There is no required minimum capital stock for One Person Corporation except as
otherwise provided by special law (Sec. 117, RCC). It is also not required to submit and file
Corporate By-Laws (Sec. 119, RCC) but it shall file Articles of Incorporation (Sec. 118, RCC)
stating the identity of the natural person, trustee, executor, guardian or administrator of
estate.

• Likewise, in case of death of the single stockholder, the NOMINEE, along with the known legal
heirs of the single stockholder, shall facilitate the election of the new director and the
amendment of the article of incorporation. (Section 123; RCC) It is the duty of Corporate
Secretary to inform SEC of the death of single stockholder

Corporation Lecture No 4
• How are Officers determined and elected in One Person Corporation?

NOTE: The single stockholder shall be the Sole Director and President of the One-Person-
Corporation (OPC) (Sec. 121, RCC).

During the incorporation process, the sole stockholder, who also serves as the self-appointed
Treasurer of the One Person Corporation (OPC), is required to provide a bond to the Securities and
Exchange Commission (SEC) for an amount that may be determined by the SEC. This bond must be
renewed every two years (as stated in Section 122 of the Revised Corporation Code). Additionally, the
Treasurer must submit a written commitment to responsibly manage the corporation's funds, ensuring
that all disbursements and investments are made in accordance with the corporation's registration.

• As a rule, the single stockholder may not be appointed as the Corporate Secretary (Sec. 122,
RCC).

It is important to note though that the New Code requires the single stockholder to prove that the
OPC is sufficiently financed, and its assets are independent from his personal property, in order to
claim limited liability. Otherwise, he shall be jointly and severally liable for the liabilities of the OPC.

Within fifteen (15) days from issuance of the certificate of incorporation, the OPC shall appoint its
Treasurer, Corporate Secretary and other officers as it may deem necessary, and shall notify the SEC
thereof within five (5) days from appointment

The Doctrine of Piercing the Veil of Corporate Entity also applies to OPC (Sec. 130)

• When an Ordinary Stock Corporation (OSC) is fully acquired by a One Person Corporation
(OPC), it can be converted into an OPC. Similarly, an OPC can also be converted back into an
Ordinary Stock Corporation. In both scenarios, an application must be submitted to the
Securities and Exchange Commission (SEC) and is subject to its approval. (Sections 131 and
132, RCC).
How is One Person Corporation differentiated from Sole Corporation?

• A Sole Corporation is a type of religious corporation, making it a non-stock corporation, while

a One-Person Corporation is classified as a stock corporation designed for profit.

How is One Person Corporation differentiated from Sole Proprietorship?

• A Sole Proprietorship has no juridical personality of its own that is separate from the
proprietor. It cannot acquire properties, conduct transaction with other juridical entities or
exercise separate rights or powers in its own name;

• Whereas a One-Person-Corporation has juridical personality that is separate and distinct from
the single stockholder. It can acquire properties, conduct transaction with other juridical
entities or exercise separate rights or powers in its own name.

ADDITIONAL REVISIONS UNDER THE NEW LAW

A. From date of incorporation, a corporation is given five (5) years to commence operation (Sec. 21;
Revised Corporation Code). Revocation in case of failure.

B. However, if a corporation has commenced its business but subsequently becomes inoperative for a
period of at least five (5) consecutive years, the SEC may, after due notice and hearing, place the
corporation under a delinquent status.

C. A delinquent corporation shall have a period of two (2) years to resume operations and comply with
all the SEC requirements. Upon compliance, the SEC shall issue an order lifting the delinquent status.
Otherwise, failure to comply and resume operations within 2-years, the SEC shall cause the revocation
of the Certificate of Incorporation.

D. Shares of stocks may be the subject of pledge or sale just like any other incorporeal rights which are
evidenced by negotiable instruments. Ownership of shares of stock is evidenced by Certificate of
Shareholding issued by the duly-elected Corporate Secretary of the corporation.

E. What are the qualifications of incorporators?

(a) May be natural or juridical persons; singly or jointly with others; (Sec.10, New Code)

(b) Any number but not more than fifteen (15);

(c) Natural person of legal ages; juridical persons should be duly-registered;

(d) Majority of whom are residents of the Philippines;

(e) In the case of a stock corporation, each must own or subscribe at least one (1) share of the
capital stock thereof.
F. Citizenship is not a strict requirement in forming a corporation except in cases where the law
requires the minimum Filipino participation. Example: Meralco may only be run by Filipinos owning at
least 60% of the capital thereof.

G. The life of a corporation is perpetual and has no more limit, unless its Articles of Incorporation
provides for a shorter term. Likewise, a corporation whose term had already expired may be revived
upon application to and approval by SEC. This is known as the “Lazarus provision”. Once revived, its
term is likewise perpetual unless a shorter term is provided in its articles. (Section 11, Revised
Corporation Code)

H. A Corporation can’t be formed in the Philippines if its principal office is situated abroad

I. Corporate existence commences from the date the SEC issues a Certificate of Incorporation under the
official seal.

J. As a general rule, there is no more minimum capitalization for a stock corporation. However, special
laws set minimum paid-up capital stocks on certain businesses exclusive for specialized corps. such as
bank, HMO etc.

K. In case of a non-stock corporation such as a Foundation, the minimum total contribution is P1

Million

L. QUORUM is the presence of required number to sustain the validity of an act. Quorum depends on
what kind of meeting is conducted whether it be a Stockholders’ Meeting or Board Meeting. In BM,
quorum is established by declared majority. In SM, quorum is the presence of controlling interest, not
necessarily majority, to a certain meeting in order to make the conduct thereof valid and binding.
Without quorum, the meeting is invalid. Consequently, a decision arrived out of an invalid meeting is
also defective & invalid.

M. Unless otherwise stated in the by-laws, Quorum in the Board Meeting refers to the majority of
number of Directors in Articles of Incorporation who are present in the meeting regardless of their
shareholdings. Further, each Director is equal to only one vote.

N. On the other hand, Quorum in the Stockholders’ Meeting is based on the majority of the
outstanding shares of stock represented by the stockholders who are present at the meeting. Further,
issues are decided by votes based on controlling interests of the stockholders

O. The Corporate Officers under the law are the President; the Secretary; and the Treasurer. Any other
position may be deemed as Corporate Officer only if so declared as such under the By-Laws.

P. Any 2 or more positions may be held concurrently by the same person, except that no one shall act
as President and Secretary or as President and Treasurer at the same time.

Q. As a rule, in order to approve the incorporation of a registering stock corporation, at least 25% of
the AUTHORIZED Capital Stocks must be subscribed; and then at least 25% of the SUBSCRIBED Capital

R. 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 and liabilities incurred or
arising as a result thereof. It cannot invoke the veil of corporate fiction as a defense.
S. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance
thereof on ground that there was in fact no corporation.

T. A CORPORATION BY ESTOPPEL can never have assets because it lacks legitimate personality to
exercise that power. However, the Supreme Court ruled that it may be sued considering that it
possesses the attributes of a juridical person; otherwise if it cannot be sued, then it cannot be held
liable for damages and injuries to other persons. (Macasaet vs. Francisco; G.R. No. 156759; June 05,
2013)

Q: How many Trustees are there in a non-stock corporation?

A: The number of Trustees in a non-stock corporation shall be fixed in the Articles of

Incorporation or By-Laws which may or may not be more than fifteen (15). They shall hold office for
not more than three (3) years until their successors are elected and qualified. Trustees elected to fill
vacancies occurring before the expiration of a particular term shall hold office only for the unexpired
period. (Section 91 of R.A. 11232)

Q: What is the term of office of Directors as compared to Trustees?

A: Unlike Trustees which shall hold office for not more than three (3) years, Directors shall hold
office for a period of one (1) year until their successors are elected and qualified. Directors elected to
fill vacancies occurring before the expiration of a particular term shall hold office only for the
unexpired period. (Title III, Section 22 of R.A. 11232; The Revised Corporation Code of the Philippines;
signed into law on July 2018 and became effective on March 10, 2019)

Moreover, the New Code reiterated the requirement to elect independent directors in corporations
vested with public interest such as: (a) public companies, (b) banks and quasi-banks, non-stock savings
loan associations, etc., and (c) other corporations as may be determined by the SEC. The independent
directors shall constitute at least 20% of the entire board membership.

• The New Code also allows the creation of an “emergency board” when the vacancy in the
board prevents the remaining directors from constituting a quorum and emergency action is
required to prevent grave, substantial, and irreparable loss or damage to the corporation.
During an emergency, the remaining directors or trustees may fill the vacancy temporarily
from among the officers of the corporation to pass the necessary emergency action.
 • Section 24 of the New Code retained the officers and its qualifications under the Old Code,
except for the treasurer, who is now required to be a resident of the Philippines. In addition,
corporations vested with public interest are now obliged to appoint a compliance officer.

FILIPINO EQUITY ON CERTAIN CORPORATIONS

(at least 60% of the capital must be owned by Filipino citizens)

1. Corporations for exploration, development and utilization of natural resources;

2. Public service corporations.

3. Educational corporations, other than those established by religious orders and mission boards;

4. Banking corporations;

5. Corporations engaged in coastwise shipping.

6. Financing companies; and

7. Corporations engaged in power-generating and electric distribution.

FILIPINO EQUITY ON CERTAIN CORPORATIONS

100% of the capital must be owned by Filipino citizens)

1. Corporations engaged in mass media;

2. Corporations engaged in retail trade; except that foreign retailers and investors can participate with
a minimum paid-up capital of P25M; and P10M per store in case of foreign retailers with single-owned
proprietorship if it has more than one (1) physical store, pursuant to RA 11595 which amended RA
8762;

3. Rural banks; and

4. Corporations engaged in the operation of a private detective, watchman or security guard agencies.

5. Those relating to practice of professions, except if subject to reciprocity in certain special laws;

6. Small-scale mining;

7. Utilization of marine resources in archipelagic waters as well as of natural resources in rivers, lakes,
bays and lagoons;

8. Ownership and operation of cockpits;

9. Manufacture, repair, stockpiling and/or distribution of nuclear & biochemical weapons; &

10. Manufacture of firecrackers and other pyrotechnic devices.

 • Source: EO 175 (Foreign Investment Negative List) June 2022

FILIPINO EQUITY ON CERTAIN CORPORATIONS

(at least 75% of the capital must be owned by Filipino citizens)

1.Corporations engaged in the recruitment and placement of workers, locally or overseas;

2.Corporations subject to Under the Flag Law. --- In the purchase of articles for the Government,
preference shall be given to materials and supplies produced, made or manufactured in the
Philippines and to domestic entities or corporations at least 75% of the capital of which is owned by
Filipino citizens.

• Q: Does our law allow 100% foreign equity on business corporations?

• However, RA 11647, which took effect on April 01, 2022, amending Foreign Investments Act of
1991, provides that in the following instances, a business corporation with a minimum paid-in
capital of US$100,000.00 shall be fully allowed to foreign nationals:

(a) If the business involves advanced technology as determined by the DOST;

(b) Those endorsed as startup or startup enablers by the lead host agency pursuant to RA 11337 or the
Innovative Startup Act (such as the DOST, DTI, DICT, among others); or

(c) When majority of their direct employees are Filipinos, but in no case shall the number of the
Filipino employees be less than fifteen (15).

• RA 11647 reiterates that one hundred percent (100%) foreign capital investment in domestic
enterprises is allowed unless foreign participation is prohibited or limited by other laws or the
Constitution. These foreign-welcoming domestic enterprises include:

(a) Subways; Railways;

(b) Airports; Airlines;

(c) Tollways; and

(d) Transport Network Vehicle Services (TNVS).

Full foreign ownership under the foregoing entities that are traditionally considered as “public
utilities”, is now allowed under RA 11647.

Furthermore, under EO 175, effective June 2022, full foreign participation is allowed to business re:
manufacture and distribution of products requiring clearance from DND such as guns, ammunitions,
military communication gadgets and the likes.

On the other hand, all other “public utilities” businesses such as electricity distribution and
transmission, petroleum products, pipeline systems and distribution, seaports and public utility
vehicles (PUVs) are subject to a maximum of 40% foreign equity restriction under the 1987
Constitution
A2