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Revised Corporation Code of the Philippines Republic ACT 11232
Highlights • 17 Titles • 188 sections • Major provisions introduced to harmonize with other commercial laws • Major reforms introduced • Signed on February 20 and Published on February 21, 2019
Definition of Corporation • Section 2. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incidental to its existence. • By operation of law – note section 4 (Corporations created by Special Laws or Charters) • Powers – refer to Title IV sections 35 – 44. Note section 44 on ultra vires acts
Classes of Corporations • Stock and Non-‐Stock (section 3) • In relation to Non-‐Stock Corporation, refer to Title XI (sections 86-‐94) • Refer as well to section 19 (De Facto Corporation), section 20 (Corporation by Estoppel), and Title XII (Close Corporation), Title XIII (Special Corporations – Educational/Religious/ One Person Corporation)
Test to determine whether a corporation is public or private The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of the relation of the corporation to the State. If the corporation is created by the State as the latter's own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise, it is private. Applying the above test, provinces, chartered cities, and barangays can best exemplify public corporations. They are created by the State as its own device and agency for the accomplishment of parts of its own public works.
Corporators, Incorporators, Stockholders and Members • Note section 5 -‐ Definition and distinction between Corporators, Incorporators, Members • Relate to Title III (Board of Directors); Title VII (Stocks and stockholders) • Articles of Incorporation – defined in section 13
Classification of Shares • Covered by section 6 -‐ Classification, corresponding rights, privilges, restrictions and stated par value must be stated in the Articles • Each share shall be equal in all respects to every other share, except as otherwise provided in the Articles and in the Certificate of Stock. • NO share may be deprived of voting rights except those classified and issued as preferred or redeemable shares. • Provided that there shall always be a class or series of shares with complete voting rights.
Exceptions: Where non-‐voting shares may still vote on • Where the articles of incorporation provide for non-‐voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: • 1. Amendment of the articles of incorporation; • 2. Adoption and amendment of by-‐laws; • 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; • 4. Incurring, creating or increasing bonded indebtedness;
Exceptions: Where non-‐voting shares may still vote on • 5. Increase or decrease of capital stock; • 6. Merger or consolidation of the corporation with another corporation or other corporations; • 7. Investment of corporate funds in another corporation or business in accordance with this Code; and • 8. Dissolution of the corporation. • Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
• Share or series of shares may or may not have a par value • The following are NOT allowed to issue no par value shares: 1. Banks 2. Trust 3. Insurance 4. Pre need companies 5. Public Utilities 6. Building and Loan Associations 7. Other corporations authorized to obtain or access funds from the public, whether publicly listed or not
Preferred Shares • Shares of stock issued by a corporation may be given preference in: 1. Distribution of Dividends 2. Distribution of Corporate Assets in case of liquidation, or 3. Such other preferences
Rules on Preferred Shares • May be issued only with stated par value • Board may fix the terms and conditions in the preferred shares • Such terms and conditions shall take effect upon filing of a certificate thereof with SEC
Rules on No Par • It shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto • No Par Value shares must be issued for a consideration of at least P5.00 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.
Founder’s Shares (sec.7) • Different from other shares • Not necessarily Incorporators • Granted certain rights and privileges not enjoyed by the owners of other stocks • May be granted exclusive right to vote and be voted for as Director, provided that it must be for a period not to exceed 5 years from the date of incorporation • Such exclusive right shall not be allowed if it will violate the Anti-‐ Dummy Law and the Foreign Investments Law, and other pertinent laws
Redeemable Shares (Sec.8) • 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 corporations; • Subject to other terms and conditions to be stated in the articles and the certificate of stock
Treasury Shares (sec. 9) • Classes of shares which have been issued and fully paid • But subsequently reacquired by the issuing corporation through purchase, redemption, donation or some other lawful means • Such shares may be disposed of at a reasonable price to be fixed by the Board
Difference between Treasury and Redeemable Shares Redeemable Shares
Treasury Shares
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 corporations; Subject to other terms and conditions to be stated in the articles and the certificate of stock.
Classes of shares which have been issued and fully paid But subsequently reacquired by the issuing corporation through purchase, redemption, donation or some other lawful means Such shares may be disposed of at a reasonable price to be fixed by the Board
Nationality of Corporations INCORPORATION TEST The sovereignty by which a corporation was created, under whose laws it was organised, determines its national character, and the fact that some of its incorporators were residents and citizens of a foreign country does not change this rule. Note section 140, Definition of a Foreign Corporation Section 176 – Stock Ownership in corporations
Rule in this jurisdiction Control Test under section 3 of RA 7042 as amended by RA 8179 otherwise known as the Foreign Investment Act of 1991 Also referred to as the “aggregate test” Shares belonging to 60% of the capital of which is owned is Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality.
Application of control test What is the nationality of a corporation organized and incorporated under the laws of a foreign country but owned 100% by Filipinos? FILIPINO Corporation, but not a domestic corporation.
What shares are considered in computation Common shareholdings,not preferred or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly provides that “no share may be deprived of voting rights except those classified as ‘preferred’ or ‘redeemable’ shares.”
Grandfather rule Exception to the Control Test, but can be applied cumulatively as well. Note the case of Narra Nickel Mining Corporation (2015) Resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control,” particularly n cases of corporate web layering.
Application of the rules “Doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. When is there doubt: 1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their foreign partner; 2. That the foreign investors undertake to provide practically all the technological support for the joint venture; 3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
Nationality Requirement provisions under new law Names and Nationalities of Incorporators must be stated in Articles of Incorporation (section 13 ), Section 14 paragraph 11 (No transfer of stock or interest shall reduce ownership of Filipino citizens…) When required percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been complied with, the Articles of Incorporation or Amendment may be disapproved (section 16 [d.] Section 176. Stock ownership in corporations. NEDA to submit report to congress for the prevention or correction of errors on stock ownership requirements if the corporate vehicle has been used to frustrate the law.
Power of Congress Section 176. Congress may set maximum limits for stock ownership to prevent anti-‐competitive practices as provided in RA 10667 otherwise known as the “Philippine Competition Law”
Separate juridical personality As a general rule, a corporation will be deemed a separate legal entity until sufficient reason to the contrary appears. But the rule is not absolute. A corporation's separate and distinct legal personality may be disregarded and the veil of corporate fiction pierced when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Siain Enterprises vs. Cupertino Realty Corp., et al., G.R. No. 170782, June 22, 2009
Separate personality
It is elementary that a corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or stockholder of a corporation does not make one's property the property also of the corporation, for they are separate entities.
[G.R. No. 180036.
July 25, 2012.],SITUS DEVELOPMENT CORPORATION, DAILY SUPERMARKET, INC. and COLOR LITHOGRAPHIC PRESS, INC., petitioners, vs. ASIATRUST BANK, ALLIED BANKING CORPORATION, METROPOLITAN BANK AND TRUST COMPANY, and CAMERON GRANVILLE II ASSET MANAGEMENT, INC. (CAMERON), respondents.
Hence, the rule is that assets of stockholders may not be considered as assets of the corporation, and vice-‐versa. The mere fact that one is a majority stockholder of a corporation does not make one's property that of the corporation, since the stockholder and the corporation are separate entities.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. Concepcion Magsaysay-‐Labrador vs. Court of Appeals, G.R. No. 58168, December 19, 1989;Good Earth Emporium, Inc. vs. Court of Appeals, G.R. No. 82797, February 27, 1991
Civil Code Provisions
Article 45 – private corporations are regulated by laws of general application Article 46 – juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil or criminal actions
Piercing the veil The doctrine of piercing the veil of corporate entity applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or where a corporation is the mere alter ego or business conduit of a person (Indophil Textile Mill Workers Union-PTGWO vs. Teodorico P. Calica, G.R. No. 96490, February 3, 1992). To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed Del Rosario vs. NLRC, G.R. No. 85416, July 24, 1990; James Yu vs. National Labor Relations Commission, G.R. Nos. 111810-‐11, June 16, 1995
Nature Piercing the veil of corporate entity is an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud of defend crime or where a corporation is a mere alter ego or business conduit of a person.
Tests 1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and,unjust act in contravention of plaintiffs legal rights; and, 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
Three variants to the doctrine Identity Doctrine -‐ Unity of Interest and Ownership that independence of corporation has ceased to exist, adherence to doctrine will defeat justice and equity Instrumentality Rule (Control Test) Alter Ego Doctrine -‐ Corporation is a mere dummy, unreal or a sham, serves no other business purpose
Totality of circumstances test Consider all circumstances and each case must be decided on its own set of facts.
Does the group of companies have a personality separate and distinct from its component corporations?
Group of Companies refer to those that are financially related to one another as parent corporation, subsidiaries and affiliates. NO separate personality distinct from each of the aggregate corporations, except in cases of rehabilitation. Note RA 10142 “FRIA Law”
Will the fact that a person acting as President, Chairman and Treasurer of the corporation justify already the piercing of the veil of corporate fiction based on the alter-ego theory?
May the doctrine of piercing the veil of corporate fiction apply to a corporation not impleaded in the suit?
Liability FOR TORT
A corporation is liable whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or, generally, from the directors as the governing body.
Piercing the veil of Corporate Fiction under the New Code • Section 17 – SEC may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively liable, civilly and/or criminally liable for failure to comply with the Commission’s order to cease and desist from using a corporate name that has been determined as not distinguishable. Note section 159 – Penalty for the unauthorized use of a corporate name • Section 30 – Liability of Directors, Trustees or Officers shall be jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons • Section 32 -‐ Contracts between Corporations with interlocking directors where there is fraud may be invalidated
Piercing the veil of Corporate Fiction under the New Code • Section 33 – Disloyalty of a Director where the latter acquires a business opportunity which should belong to the corporation, Director must account and refund to the latter all such profits, unless ratified by 2/3 vote of the outstanding capital stock. • Section 130 – Liability of a single shareholder shall be jointly and severally for the debts and other liabilities of the OPC should the said stockholder cannot prove that the property of the OPC is independent of the stockholder’s property
Piercing the veil of Corporate Fiction under the New Code • Section 166 – Liability of Directors, Officers, Employees, agents or representatives are engaged in graft and corrupt practices. • Section 168 – Tolerating graft and corrupt practices act • Section 170 – Separate liability of Director, Trustee and Oficer • Section 171 – Liability of Directors, Trustee, Officers or other Employees
Incorporating and Organizing a Corporation • Covered by Title II • Who • Requirements • Corporate Name • Capital Stock • Certificate of Incorporation • Articles of Incorporation and By-‐ Laws
Who are incorporators • Any person, partnership, association or corporation, singly or jointly with others may organize a corporation for any lawful purpose or purposes. • Natural or Juridical persons. Natural persons must be of legal age. • For One Person Corporations (OPC), is a corporation with single stockholder; Provided, That only a natural person, trust, or an estate may form a One Person Corporation. (section 116, Chapter III, Title XIII)
Exception • 1. Natural persons who are licensed to practice a profession • 2. Partnerships or associations organized for the purpose of practicing a profession Shall not be allowed to organize a corporation. (section 10, Title II)
Not allowed to organize a OPC (sec. 116) • 1. Banks, • 2. Quasi-‐ Banks, • 3. Pre-‐Need, • 4. Trust, • 5. Insurance, • 6. Public and Publicly listed Companies • 7. Non-‐Chartered GOCCs • 8. A natural person who is licensed to exercise a profession may not organize a OPC for the purpose of exercising such a profession
Number and Qualifications (Private Corporations) • Section 10 – Not more than 15 may organize. • Qualifications • 1. Each incorporator of a stock corporation must own OR be a subscriber to at least 1 share of the capital stock • 2. Note rules on special corporations
Special Corporations • Religious Corporations may be incorporated by one or more person. Such corporations may be classified into corporation sole and religious societies. (section 107, Chapter I, Title XIII) • One Person Corporation organized by a natural person, trust or estate only (section 116, Chapter III, Title XIII)
Corporate Name; Rules and Limitations • Must be DISTINGUISHABLE from that already reserved or registered for the use of another corporation, or if such name is already protected by law, or when its use is contrary to existing law, rules and regulations. • No corporate name shall be allowed by the Commission if it NOT distinguishable (section 17)
Corporate Name Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name. Ang Mga Kaanib Sa Iglesia Ng Dios Kay Kristo Hesus vs. Iglesia Ng Dios Kay Cristo Jesus, G.R. No. 137592, December 12, 2001
Change of name The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred. Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992
Property right A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field.
The name of a corporation is essential to its existence. It cannot change its name except in the manner provided by the statute. By that name alone is it authorized to transact business. The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision.
Statutory prohibition To come within the scope of the statutory prohibition, two requisites must be proven, namely: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. Philips Export B.V. Court of Appeals, G.R. No. 96161, February 21, 1992
STILL NOT DISTINGUISHABLE EVEN IF IT CONTAINS ONE OR MORE OF THE FOLLOWING: 1. The word “corporation,” “company,”, “incorporated,” “limited”, “limited liability,” or an abbreviation of one of such words; and 2. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing or number of the same word or phrase
WHAT MAY HAPPEN SEC , upon determination may summarily order the corporation to immediately cease and desist from using name and require the corporation to register a new one. SEC, shall cause the removal of all visible signages, marks, advertisements, labels, prints and other effects bearing such corporate name. Upon approval of new corporate name, the SEC shall cause a to issue a new certificate of incorporation under the new amended name.
Consequences of non-‐compliance Section 17 – SEC may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively liable, civilly and/or criminally liable for failure to comply with the Commission’s order to cease and desist from using a corporate name that has been determined as not distinguishable. Note section 159 – Penalty for the unauthorized use of a corporate name. Fine ranging from P10,000.00 to P200,000.00
Notes on Cease and Desist Order May be done ex-‐parte Ex-‐parte Order shall be valid for a maximum of 20 days without prejudice to the order being made permanent after due notice and hearing Commission may proceed administratively against such person in accordance with section 158 of the Code, and/or transmit evidence to the DOJ for preliminary investigation or criminal prosecution and/or initiate criminal prosecution (section 156, Title XVI)
Capital stock; Minimum Capital Stock; Subscription Requirements Section 173 defines Outstanding Capital Stock (OCS) The term OCS shall mean the total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except Treasury Shares* Treasury shares under sec 9 are reacquired by the corporation
Minimum Capital Stock Requirement NO minimum capital stock requirement, except as otherwise specifically provided by law (section 12) NO more requirement on 25% subscription, NO more more requirement on 25% paid-‐ in capital Note, however Section 16 (c.) when the SEC may disapprove an Article of Incorporation or its Amendment – certification concerning the amount of capital stock subscribed and/or paid is false. Section 16 (c.) must be read in relation to Section 37 (4th paragraph) on 25% of the increase in capital stock has been subscribed and that at least 25% of the amount subscribed has been paid in actual cash or that the property valuation is is equal to 25% of their subscription.
Subscription Contract (section 59, Title VII) Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract, notwithstanding the fact the parties refer to it as a purchase or some other contract. (section 59)
Pre-‐Incorporation Subscription (section 60, Title VII) Subscription of shares in a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription . Unless all the other subscribers consent to the revocation or the corporation fails to incorporate within the same period or within a longer period stipulated in the contract of subscription. NO pre-‐incorporation subscription may be revoked after the articles of incorporation is submitted to the SEC.
Capital Structure
The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation.
The term "capital" in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares. Gamboa vs. Teves (2011)
Importance of Articles of Incorporation The charter of a corporation is a contract between three parties: (a) It is a contract between the state and the corporation to which the charter is granted; (b) it is a contract between the stockholders and the state and (c) it is also a contract between the corporation and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and cases cited.) Government of the Phil. vs. Manila Railroad Company, G.R. No. 30646, January 30, 1929
Content of the Articles Form and Substance Requirement In any of the official languages, duly signed and acknowledged or authenticated Note section 13 and 14 of the law
Amendment of the Articles (section 15) What may be amended? Unless otherwise provided by the Code or special laws, ANY provision or matter stated in the Articles may be amended. Voting Requirement for Stock Corporations: Majority of the Members of the Board AND the vote OR written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right [section 80, Title X] of dissenting stockholders in accordance with the Code.
Amendment of the Articles for Non-‐Stock The articles may be amended by the vote OR written assent of majority of the Trustees AND at least 2/3 of the members.
When do amendments take effect The amendments shall take effect upon their approval by the Commission OR from the date of filing with the said Commission if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation.
Grounds for disapproval of amendment (sec.16) If the same is not compliant with the requirements PROVIDED: That the Commission shall give the incorporators, directors, trustees or officers a reasonable time from receipt of the disapproval within which to modify the objectionable portions of the articles or amendment.
Grounds for Disapproval 1. Not substantially in accordance with the form requirement 2. Purpose or purposes are patently unconstitutional, illegal, immoral or contrary to government rules and regulations 3. The certification concerning the amount of capital stock subscribed and/or paid is false (note : section 37, 5th paragraph) 4. Required percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been complied with.
By-‐Laws of the Corporation (Title V, sec.45-‐ 47) In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in theory execute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations; and (3) the stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation. However, just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. The levels of control and authority are all defined in the by-‐laws of the corporation.
By Laws The by laws are subordinate to the Articles and the Corporation Code, and other statutes. Otherwise, they will have no binding effect. In case of conflict between the by-‐laws and the Code, the latter shall prevail.
Every corporation has the inherent power to adopt by-‐laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. Under section 21 of the Corporation Law, a corporation may prescribe in its by-‐ laws the qualifications, duties and compensation of directors, officers and employees. (John Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-‐45911, April 11, 1979
Vote Requirement for valid by-‐laws and Effectivity Affirmative vote of the stockholders representing at least a majority of the OCS Affirmative vote of the majority of the members in a Non-‐Stock Corporation Effective only upon issuance by the Commission of a certification that the bylaws are in accordance with the code. This applies as well to amendments of by laws.
Note SEC shall not accept for filing the by laws or any amendment thereto of corporations with public interest, unless accompanied by a certificate of the appropriate government agency to the effect that such by –laws or amendments thereto are in accordance with law.
Contents and Amendments Section 46 An arbitration agreement may be provided in the by-‐laws pursuant to section 181 of the code. Section 47 on Amendment and Repeal of By-‐Laws, and Adopt New One May be delegated to the Board by the owners of 2/3 of the OCS or 2/3 of the members in a non-‐stock Any power delegated may be revoked whenever stockholders representing a majority of the members of the OCS or members shall vote at a regular or special meeting.
Commencement of Corporate Existence From the date the SEC issues the certificate of incorporation under its official seal. The incorporators, stockholders/members shall constitute the body corporate for the period of time mentioned in the articles, unless it is extended or sooner dissolved
Corporate Term of Existence (sec.11) Perpetual, unless provided in the Articles Existing corporations shall have perpetual existence, unless the majority of the OCS elects to retain its current term Provided, any change in corporate term shall not prejudice the right of appraisal of dissenting stockholders.
Corporate Term Corporate term for a specific period may be extended or shortened by amending the articles. NO extension may be made earlier than 3 years prior to the date of original or subsequent expiry date, unless there is justifiable reasons Such extension shall take effect only on the day following the original or subsequent expiry dates.
Revival Yes, upon approval by the SEC and upon issuance of a certificate of revival giving It perpetual existence. Note applications for revival by corporations with public interest must be accompanied by appropriate regulatory body.
Theory of General vs.Specific Capacity
Theory of Specific Capacity -‐ the corporation cannot exercise powers except those expressly/impliedly given. Theory of General Capacity -‐ a corporation is said to hold such powers as are not prohibited/withheld from it by general law
General Capacity A corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. (National Power Corporation vs. Honorable Abraham P. Vera, Presiding Judge, Regional Trial Court, National Capital Judicial Region, Branch 90, Quezon City and Sea Lion International Port Terminal Services, Inc., G.R. No. 83558, February 27, 1989)
General Capacity Providing gratuity pay is one of the express powers of the corporation under the Corporation Code and therefore, resolutions passed by the board approving the grant of gratuity pay to the employees of the corporation during a meeting where one of the directors was not notified thereof are not ultra vires. The grant of gratuity pay does not require shareholders’ approval as it is not tantamount to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al., and the National Labor Relations Commission, G.R. No. 76801 August 11, 1995)
General Capacity The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board. Absent the said board resolution, a petition may not be given due course.(LigayaEsguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571, September 2, 2013)
General Capacity The general rule is that a corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its bylaws. The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board. Absent the said board resolution, a petition may not be given due course. Esguerra vs. Holcim Philippines G.R. No. 182571, September 2, 2013
Business Judgment Rule the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal of the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE.
Doctrine of apparent authority The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, was laid out in Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, where it was held that: "Conformably, we have declared in countless decisions that the principal is liable for obligations contracted by the agent. The agent's apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person (citing National Food Authority vs. Intermediate Appellate Court, G.R. No. 75640, April 5, 1990).”
First Philippine International Bank vs. Court of Appeals, G.R. No. 115849, January 24, 1996
apparent authority Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals, G.R. No. 117847, October 7, 1998;Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No. 125778, June 10, 2003
source of power and authority is with the board Whatever authority the officers or agents of a corporation may have is derived from the board of directors or other governing body, unless conferred by the charter of the corporation. A corporate officer's power as an agent of the corporation must therefore be sought from the statute, the charter, the by-‐laws, or in a delegation of authority to such officer, from the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. Ignacio Vicente vs Ambrosio M. Geraldez, G.R. No. L-‐32473, July 31, 1973
board as trustees of the stockholders -‐ fiduciary The board of directors of a corporation is a creation of the stockholders. The board of directors, or the majority thereof, controls and directs the affairs of the corporation; but in drawing to itself the power of the corporation, it occupies a position of trusteeship in relation to the minority of the stock. The board shall exercise good faith, care, and diligence in the administration of the affairs of the corporation, and protect not only the interest of the majority but also that of the minority of the stock. Where the majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholders thereof. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-‐56 & 182008, December 4, 2009
corporate powers with the board The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board of directors, subject to the articles of incorporation, by-‐laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-‐laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009
delegation to be valid A corporation, like a natural person who may authorize another to do certain acts for and in his behalf, through its board of directors, may legally delegate some of its functions and powers to its officers, committees or agents appointed by it. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Luzviminda Visayan vs. NLRC, G.R. No. 69999, April 30, 1991
all business conduct with the board all corporate powers are exercised, all business conducted, and all properties controlled by the board of directors. A corporation has a separate and distinct personality from its directors and officers and can only exercise its corporate powers through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors. This has been our constant holding in cases instituted by a corporation. Cagayan Valley Drug Corp. vs. Commissioner of Internal Revenue, G.R. No. 151413, February 13, 2008
Heirs of Fausto C. Ignacio vs. Home Bankers Savings and Trust Co., et al., January 2013
Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation.
Absent such valid delegation or authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation.
Theory of Specific Capacity; Specific Powers Power to extend or decrease corporate term Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness Power to Deny Pre-‐Emptive Rights Power to Sell or Dispose of Corporate Assets Power to Acquire Own Shares Power to Invest Corporate Funds in Another Corporation or Business Power to Declare Dividends Power to Enter Into Management Contract Ultra Vires Acts NOTE: VOTING REQUIREMENTS (section 36, 37, 38, 39, 40 , 41 42, 43)
Ultra Vires Acts While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation such as the establishment of the local post office which is a vital improvement in the living condition of the employees and laborers who came to settle in a mining camp which is far removed from the postal facilities. The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. (Republic of the Philippines vs. Acoje Mining Company, Inc., G.R. No. L-‐18062, February 28, 1963)
Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals, or public policy or public duty, and are void, ultra vires acts are those which are not illegal but are merely not within the scope of the articles of incorporation and by-‐ laws. They are merely voidable and may become binding and enforceable when ratified by the stockholders. (Maria Clara Pirovana, et al.vs.the De La Rama Steamship Co., G.R. No. L-‐5377, December 29, 1954)
Section 44 No corporation shall possess or exercise corporate powers other than those conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the powers conferred.
Effect of ratification (University of Mindano vs. BSP [2016]) Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;;" and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority.” (
Implied Ratification, (University of Mindano vs. BSP [2016]) Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act,, or acceptance or retention of benefits. However, silence, acquiescence, retention of benefits, and acts that may be interpreted as approval of the act do not by themselves constitute implied ratification. For an act to constitute an implied ratification, there must be no acceptable explanation for the act-‐other than that there is an intention to adopt the act as his or her own. "[It] cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent."134
Highlights • 17 Titles • 188 sections • Major provisions introduced to harmonize with other commercial laws • Major reforms introduced • Signed on February 20 and Published on February 21, 2019
Definition of Corporation • Section 2. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incidental to its existence. • By operation of law – note section 4 (Corporations created by Special Laws or Charters) • Powers – refer to Title IV sections 35 – 44. Note section 44 on ultra vires acts
Classes of Corporations • Stock and Non-‐Stock (section 3) • In relation to Non-‐Stock Corporation, refer to Title XI (sections 86-‐94) • Refer as well to section 19 (De Facto Corporation), section 20 (Corporation by Estoppel), and Title XII (Close Corporation), Title XIII (Special Corporations – Educational/Religious/ One Person Corporation)
Test to determine whether a corporation is public or private The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of the relation of the corporation to the State. If the corporation is created by the State as the latter's own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise, it is private. Applying the above test, provinces, chartered cities, and barangays can best exemplify public corporations. They are created by the State as its own device and agency for the accomplishment of parts of its own public works.
Corporators, Incorporators, Stockholders and Members • Note section 5 -‐ Definition and distinction between Corporators, Incorporators, Members • Relate to Title III (Board of Directors); Title VII (Stocks and stockholders) • Articles of Incorporation – defined in section 13
Classification of Shares • Covered by section 6 -‐ Classification, corresponding rights, privilges, restrictions and stated par value must be stated in the Articles • Each share shall be equal in all respects to every other share, except as otherwise provided in the Articles and in the Certificate of Stock. • NO share may be deprived of voting rights except those classified and issued as preferred or redeemable shares. • Provided that there shall always be a class or series of shares with complete voting rights.
Exceptions: Where non-‐voting shares may still vote on • Where the articles of incorporation provide for non-‐voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: • 1. Amendment of the articles of incorporation; • 2. Adoption and amendment of by-‐laws; • 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; • 4. Incurring, creating or increasing bonded indebtedness;
Exceptions: Where non-‐voting shares may still vote on • 5. Increase or decrease of capital stock; • 6. Merger or consolidation of the corporation with another corporation or other corporations; • 7. Investment of corporate funds in another corporation or business in accordance with this Code; and • 8. Dissolution of the corporation. • Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
• Share or series of shares may or may not have a par value • The following are NOT allowed to issue no par value shares: 1. Banks 2. Trust 3. Insurance 4. Pre need companies 5. Public Utilities 6. Building and Loan Associations 7. Other corporations authorized to obtain or access funds from the public, whether publicly listed or not
Preferred Shares • Shares of stock issued by a corporation may be given preference in: 1. Distribution of Dividends 2. Distribution of Corporate Assets in case of liquidation, or 3. Such other preferences
Rules on Preferred Shares • May be issued only with stated par value • Board may fix the terms and conditions in the preferred shares • Such terms and conditions shall take effect upon filing of a certificate thereof with SEC
Rules on No Par • It shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto • No Par Value shares must be issued for a consideration of at least P5.00 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.
Founder’s Shares (sec.7) • Different from other shares • Not necessarily Incorporators • Granted certain rights and privileges not enjoyed by the owners of other stocks • May be granted exclusive right to vote and be voted for as Director, provided that it must be for a period not to exceed 5 years from the date of incorporation • Such exclusive right shall not be allowed if it will violate the Anti-‐ Dummy Law and the Foreign Investments Law, and other pertinent laws
Redeemable Shares (Sec.8) • 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 corporations; • Subject to other terms and conditions to be stated in the articles and the certificate of stock
Treasury Shares (sec. 9) • Classes of shares which have been issued and fully paid • But subsequently reacquired by the issuing corporation through purchase, redemption, donation or some other lawful means • Such shares may be disposed of at a reasonable price to be fixed by the Board
Difference between Treasury and Redeemable Shares Redeemable Shares
Treasury Shares
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 corporations; Subject to other terms and conditions to be stated in the articles and the certificate of stock.
Classes of shares which have been issued and fully paid But subsequently reacquired by the issuing corporation through purchase, redemption, donation or some other lawful means Such shares may be disposed of at a reasonable price to be fixed by the Board
Nationality of Corporations INCORPORATION TEST The sovereignty by which a corporation was created, under whose laws it was organised, determines its national character, and the fact that some of its incorporators were residents and citizens of a foreign country does not change this rule. Note section 140, Definition of a Foreign Corporation Section 176 – Stock Ownership in corporations
Rule in this jurisdiction Control Test under section 3 of RA 7042 as amended by RA 8179 otherwise known as the Foreign Investment Act of 1991 Also referred to as the “aggregate test” Shares belonging to 60% of the capital of which is owned is Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality.
Application of control test What is the nationality of a corporation organized and incorporated under the laws of a foreign country but owned 100% by Filipinos? FILIPINO Corporation, but not a domestic corporation.
What shares are considered in computation Common shareholdings,not preferred or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly provides that “no share may be deprived of voting rights except those classified as ‘preferred’ or ‘redeemable’ shares.”
Grandfather rule Exception to the Control Test, but can be applied cumulatively as well. Note the case of Narra Nickel Mining Corporation (2015) Resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control,” particularly n cases of corporate web layering.
Application of the rules “Doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. When is there doubt: 1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their foreign partner; 2. That the foreign investors undertake to provide practically all the technological support for the joint venture; 3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
Nationality Requirement provisions under new law Names and Nationalities of Incorporators must be stated in Articles of Incorporation (section 13 ), Section 14 paragraph 11 (No transfer of stock or interest shall reduce ownership of Filipino citizens…) When required percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been complied with, the Articles of Incorporation or Amendment may be disapproved (section 16 [d.] Section 176. Stock ownership in corporations. NEDA to submit report to congress for the prevention or correction of errors on stock ownership requirements if the corporate vehicle has been used to frustrate the law.
Power of Congress Section 176. Congress may set maximum limits for stock ownership to prevent anti-‐competitive practices as provided in RA 10667 otherwise known as the “Philippine Competition Law”
Separate juridical personality As a general rule, a corporation will be deemed a separate legal entity until sufficient reason to the contrary appears. But the rule is not absolute. A corporation's separate and distinct legal personality may be disregarded and the veil of corporate fiction pierced when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Siain Enterprises vs. Cupertino Realty Corp., et al., G.R. No. 170782, June 22, 2009
Separate personality
It is elementary that a corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or stockholder of a corporation does not make one's property the property also of the corporation, for they are separate entities.
[G.R. No. 180036.
July 25, 2012.],SITUS DEVELOPMENT CORPORATION, DAILY SUPERMARKET, INC. and COLOR LITHOGRAPHIC PRESS, INC., petitioners, vs. ASIATRUST BANK, ALLIED BANKING CORPORATION, METROPOLITAN BANK AND TRUST COMPANY, and CAMERON GRANVILLE II ASSET MANAGEMENT, INC. (CAMERON), respondents.
Hence, the rule is that assets of stockholders may not be considered as assets of the corporation, and vice-‐versa. The mere fact that one is a majority stockholder of a corporation does not make one's property that of the corporation, since the stockholder and the corporation are separate entities.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. Concepcion Magsaysay-‐Labrador vs. Court of Appeals, G.R. No. 58168, December 19, 1989;Good Earth Emporium, Inc. vs. Court of Appeals, G.R. No. 82797, February 27, 1991
Civil Code Provisions
Article 45 – private corporations are regulated by laws of general application Article 46 – juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil or criminal actions
Piercing the veil The doctrine of piercing the veil of corporate entity applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or where a corporation is the mere alter ego or business conduit of a person (Indophil Textile Mill Workers Union-PTGWO vs. Teodorico P. Calica, G.R. No. 96490, February 3, 1992). To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed Del Rosario vs. NLRC, G.R. No. 85416, July 24, 1990; James Yu vs. National Labor Relations Commission, G.R. Nos. 111810-‐11, June 16, 1995
Nature Piercing the veil of corporate entity is an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud of defend crime or where a corporation is a mere alter ego or business conduit of a person.
Tests 1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and,unjust act in contravention of plaintiffs legal rights; and, 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
Three variants to the doctrine Identity Doctrine -‐ Unity of Interest and Ownership that independence of corporation has ceased to exist, adherence to doctrine will defeat justice and equity Instrumentality Rule (Control Test) Alter Ego Doctrine -‐ Corporation is a mere dummy, unreal or a sham, serves no other business purpose
Totality of circumstances test Consider all circumstances and each case must be decided on its own set of facts.
Does the group of companies have a personality separate and distinct from its component corporations?
Group of Companies refer to those that are financially related to one another as parent corporation, subsidiaries and affiliates. NO separate personality distinct from each of the aggregate corporations, except in cases of rehabilitation. Note RA 10142 “FRIA Law”
Will the fact that a person acting as President, Chairman and Treasurer of the corporation justify already the piercing of the veil of corporate fiction based on the alter-ego theory?
May the doctrine of piercing the veil of corporate fiction apply to a corporation not impleaded in the suit?
Liability FOR TORT
A corporation is liable whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or, generally, from the directors as the governing body.
Piercing the veil of Corporate Fiction under the New Code • Section 17 – SEC may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively liable, civilly and/or criminally liable for failure to comply with the Commission’s order to cease and desist from using a corporate name that has been determined as not distinguishable. Note section 159 – Penalty for the unauthorized use of a corporate name • Section 30 – Liability of Directors, Trustees or Officers shall be jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons • Section 32 -‐ Contracts between Corporations with interlocking directors where there is fraud may be invalidated
Piercing the veil of Corporate Fiction under the New Code • Section 33 – Disloyalty of a Director where the latter acquires a business opportunity which should belong to the corporation, Director must account and refund to the latter all such profits, unless ratified by 2/3 vote of the outstanding capital stock. • Section 130 – Liability of a single shareholder shall be jointly and severally for the debts and other liabilities of the OPC should the said stockholder cannot prove that the property of the OPC is independent of the stockholder’s property
Piercing the veil of Corporate Fiction under the New Code • Section 166 – Liability of Directors, Officers, Employees, agents or representatives are engaged in graft and corrupt practices. • Section 168 – Tolerating graft and corrupt practices act • Section 170 – Separate liability of Director, Trustee and Oficer • Section 171 – Liability of Directors, Trustee, Officers or other Employees
Incorporating and Organizing a Corporation • Covered by Title II • Who • Requirements • Corporate Name • Capital Stock • Certificate of Incorporation • Articles of Incorporation and By-‐ Laws
Who are incorporators • Any person, partnership, association or corporation, singly or jointly with others may organize a corporation for any lawful purpose or purposes. • Natural or Juridical persons. Natural persons must be of legal age. • For One Person Corporations (OPC), is a corporation with single stockholder; Provided, That only a natural person, trust, or an estate may form a One Person Corporation. (section 116, Chapter III, Title XIII)
Exception • 1. Natural persons who are licensed to practice a profession • 2. Partnerships or associations organized for the purpose of practicing a profession Shall not be allowed to organize a corporation. (section 10, Title II)
Not allowed to organize a OPC (sec. 116) • 1. Banks, • 2. Quasi-‐ Banks, • 3. Pre-‐Need, • 4. Trust, • 5. Insurance, • 6. Public and Publicly listed Companies • 7. Non-‐Chartered GOCCs • 8. A natural person who is licensed to exercise a profession may not organize a OPC for the purpose of exercising such a profession
Number and Qualifications (Private Corporations) • Section 10 – Not more than 15 may organize. • Qualifications • 1. Each incorporator of a stock corporation must own OR be a subscriber to at least 1 share of the capital stock • 2. Note rules on special corporations
Special Corporations • Religious Corporations may be incorporated by one or more person. Such corporations may be classified into corporation sole and religious societies. (section 107, Chapter I, Title XIII) • One Person Corporation organized by a natural person, trust or estate only (section 116, Chapter III, Title XIII)
Corporate Name; Rules and Limitations • Must be DISTINGUISHABLE from that already reserved or registered for the use of another corporation, or if such name is already protected by law, or when its use is contrary to existing law, rules and regulations. • No corporate name shall be allowed by the Commission if it NOT distinguishable (section 17)
Corporate Name Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name. Ang Mga Kaanib Sa Iglesia Ng Dios Kay Kristo Hesus vs. Iglesia Ng Dios Kay Cristo Jesus, G.R. No. 137592, December 12, 2001
Change of name The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred. Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992
Property right A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field.
The name of a corporation is essential to its existence. It cannot change its name except in the manner provided by the statute. By that name alone is it authorized to transact business. The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision.
Statutory prohibition To come within the scope of the statutory prohibition, two requisites must be proven, namely: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. Philips Export B.V. Court of Appeals, G.R. No. 96161, February 21, 1992
STILL NOT DISTINGUISHABLE EVEN IF IT CONTAINS ONE OR MORE OF THE FOLLOWING: 1. The word “corporation,” “company,”, “incorporated,” “limited”, “limited liability,” or an abbreviation of one of such words; and 2. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing or number of the same word or phrase
WHAT MAY HAPPEN SEC , upon determination may summarily order the corporation to immediately cease and desist from using name and require the corporation to register a new one. SEC, shall cause the removal of all visible signages, marks, advertisements, labels, prints and other effects bearing such corporate name. Upon approval of new corporate name, the SEC shall cause a to issue a new certificate of incorporation under the new amended name.
Consequences of non-‐compliance Section 17 – SEC may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively liable, civilly and/or criminally liable for failure to comply with the Commission’s order to cease and desist from using a corporate name that has been determined as not distinguishable. Note section 159 – Penalty for the unauthorized use of a corporate name. Fine ranging from P10,000.00 to P200,000.00
Notes on Cease and Desist Order May be done ex-‐parte Ex-‐parte Order shall be valid for a maximum of 20 days without prejudice to the order being made permanent after due notice and hearing Commission may proceed administratively against such person in accordance with section 158 of the Code, and/or transmit evidence to the DOJ for preliminary investigation or criminal prosecution and/or initiate criminal prosecution (section 156, Title XVI)
Capital stock; Minimum Capital Stock; Subscription Requirements Section 173 defines Outstanding Capital Stock (OCS) The term OCS shall mean the total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except Treasury Shares* Treasury shares under sec 9 are reacquired by the corporation
Minimum Capital Stock Requirement NO minimum capital stock requirement, except as otherwise specifically provided by law (section 12) NO more requirement on 25% subscription, NO more more requirement on 25% paid-‐ in capital Note, however Section 16 (c.) when the SEC may disapprove an Article of Incorporation or its Amendment – certification concerning the amount of capital stock subscribed and/or paid is false. Section 16 (c.) must be read in relation to Section 37 (4th paragraph) on 25% of the increase in capital stock has been subscribed and that at least 25% of the amount subscribed has been paid in actual cash or that the property valuation is is equal to 25% of their subscription.
Subscription Contract (section 59, Title VII) Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract, notwithstanding the fact the parties refer to it as a purchase or some other contract. (section 59)
Pre-‐Incorporation Subscription (section 60, Title VII) Subscription of shares in a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription . Unless all the other subscribers consent to the revocation or the corporation fails to incorporate within the same period or within a longer period stipulated in the contract of subscription. NO pre-‐incorporation subscription may be revoked after the articles of incorporation is submitted to the SEC.
Capital Structure
The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation.
The term "capital" in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares. Gamboa vs. Teves (2011)
Importance of Articles of Incorporation The charter of a corporation is a contract between three parties: (a) It is a contract between the state and the corporation to which the charter is granted; (b) it is a contract between the stockholders and the state and (c) it is also a contract between the corporation and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and cases cited.) Government of the Phil. vs. Manila Railroad Company, G.R. No. 30646, January 30, 1929
Content of the Articles Form and Substance Requirement In any of the official languages, duly signed and acknowledged or authenticated Note section 13 and 14 of the law
Amendment of the Articles (section 15) What may be amended? Unless otherwise provided by the Code or special laws, ANY provision or matter stated in the Articles may be amended. Voting Requirement for Stock Corporations: Majority of the Members of the Board AND the vote OR written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right [section 80, Title X] of dissenting stockholders in accordance with the Code.
Amendment of the Articles for Non-‐Stock The articles may be amended by the vote OR written assent of majority of the Trustees AND at least 2/3 of the members.
When do amendments take effect The amendments shall take effect upon their approval by the Commission OR from the date of filing with the said Commission if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation.
Grounds for disapproval of amendment (sec.16) If the same is not compliant with the requirements PROVIDED: That the Commission shall give the incorporators, directors, trustees or officers a reasonable time from receipt of the disapproval within which to modify the objectionable portions of the articles or amendment.
Grounds for Disapproval 1. Not substantially in accordance with the form requirement 2. Purpose or purposes are patently unconstitutional, illegal, immoral or contrary to government rules and regulations 3. The certification concerning the amount of capital stock subscribed and/or paid is false (note : section 37, 5th paragraph) 4. Required percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been complied with.
By-‐Laws of the Corporation (Title V, sec.45-‐ 47) In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in theory execute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations; and (3) the stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation. However, just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. The levels of control and authority are all defined in the by-‐laws of the corporation.
By Laws The by laws are subordinate to the Articles and the Corporation Code, and other statutes. Otherwise, they will have no binding effect. In case of conflict between the by-‐laws and the Code, the latter shall prevail.
Every corporation has the inherent power to adopt by-‐laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. Under section 21 of the Corporation Law, a corporation may prescribe in its by-‐ laws the qualifications, duties and compensation of directors, officers and employees. (John Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-‐45911, April 11, 1979
Vote Requirement for valid by-‐laws and Effectivity Affirmative vote of the stockholders representing at least a majority of the OCS Affirmative vote of the majority of the members in a Non-‐Stock Corporation Effective only upon issuance by the Commission of a certification that the bylaws are in accordance with the code. This applies as well to amendments of by laws.
Note SEC shall not accept for filing the by laws or any amendment thereto of corporations with public interest, unless accompanied by a certificate of the appropriate government agency to the effect that such by –laws or amendments thereto are in accordance with law.
Contents and Amendments Section 46 An arbitration agreement may be provided in the by-‐laws pursuant to section 181 of the code. Section 47 on Amendment and Repeal of By-‐Laws, and Adopt New One May be delegated to the Board by the owners of 2/3 of the OCS or 2/3 of the members in a non-‐stock Any power delegated may be revoked whenever stockholders representing a majority of the members of the OCS or members shall vote at a regular or special meeting.
Commencement of Corporate Existence From the date the SEC issues the certificate of incorporation under its official seal. The incorporators, stockholders/members shall constitute the body corporate for the period of time mentioned in the articles, unless it is extended or sooner dissolved
Corporate Term of Existence (sec.11) Perpetual, unless provided in the Articles Existing corporations shall have perpetual existence, unless the majority of the OCS elects to retain its current term Provided, any change in corporate term shall not prejudice the right of appraisal of dissenting stockholders.
Corporate Term Corporate term for a specific period may be extended or shortened by amending the articles. NO extension may be made earlier than 3 years prior to the date of original or subsequent expiry date, unless there is justifiable reasons Such extension shall take effect only on the day following the original or subsequent expiry dates.
Revival Yes, upon approval by the SEC and upon issuance of a certificate of revival giving It perpetual existence. Note applications for revival by corporations with public interest must be accompanied by appropriate regulatory body.
Theory of General vs.Specific Capacity
Theory of Specific Capacity -‐ the corporation cannot exercise powers except those expressly/impliedly given. Theory of General Capacity -‐ a corporation is said to hold such powers as are not prohibited/withheld from it by general law
General Capacity A corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. (National Power Corporation vs. Honorable Abraham P. Vera, Presiding Judge, Regional Trial Court, National Capital Judicial Region, Branch 90, Quezon City and Sea Lion International Port Terminal Services, Inc., G.R. No. 83558, February 27, 1989)
General Capacity Providing gratuity pay is one of the express powers of the corporation under the Corporation Code and therefore, resolutions passed by the board approving the grant of gratuity pay to the employees of the corporation during a meeting where one of the directors was not notified thereof are not ultra vires. The grant of gratuity pay does not require shareholders’ approval as it is not tantamount to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al., and the National Labor Relations Commission, G.R. No. 76801 August 11, 1995)
General Capacity The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board. Absent the said board resolution, a petition may not be given due course.(LigayaEsguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571, September 2, 2013)
General Capacity The general rule is that a corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its bylaws. The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board. Absent the said board resolution, a petition may not be given due course. Esguerra vs. Holcim Philippines G.R. No. 182571, September 2, 2013
Business Judgment Rule the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal of the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE.
Doctrine of apparent authority The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, was laid out in Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, where it was held that: "Conformably, we have declared in countless decisions that the principal is liable for obligations contracted by the agent. The agent's apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person (citing National Food Authority vs. Intermediate Appellate Court, G.R. No. 75640, April 5, 1990).”
First Philippine International Bank vs. Court of Appeals, G.R. No. 115849, January 24, 1996
apparent authority Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals, G.R. No. 117847, October 7, 1998;Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No. 125778, June 10, 2003
source of power and authority is with the board Whatever authority the officers or agents of a corporation may have is derived from the board of directors or other governing body, unless conferred by the charter of the corporation. A corporate officer's power as an agent of the corporation must therefore be sought from the statute, the charter, the by-‐laws, or in a delegation of authority to such officer, from the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. Ignacio Vicente vs Ambrosio M. Geraldez, G.R. No. L-‐32473, July 31, 1973
board as trustees of the stockholders -‐ fiduciary The board of directors of a corporation is a creation of the stockholders. The board of directors, or the majority thereof, controls and directs the affairs of the corporation; but in drawing to itself the power of the corporation, it occupies a position of trusteeship in relation to the minority of the stock. The board shall exercise good faith, care, and diligence in the administration of the affairs of the corporation, and protect not only the interest of the majority but also that of the minority of the stock. Where the majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholders thereof. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-‐56 & 182008, December 4, 2009
corporate powers with the board The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board of directors, subject to the articles of incorporation, by-‐laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-‐laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009
delegation to be valid A corporation, like a natural person who may authorize another to do certain acts for and in his behalf, through its board of directors, may legally delegate some of its functions and powers to its officers, committees or agents appointed by it. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Luzviminda Visayan vs. NLRC, G.R. No. 69999, April 30, 1991
all business conduct with the board all corporate powers are exercised, all business conducted, and all properties controlled by the board of directors. A corporation has a separate and distinct personality from its directors and officers and can only exercise its corporate powers through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors. This has been our constant holding in cases instituted by a corporation. Cagayan Valley Drug Corp. vs. Commissioner of Internal Revenue, G.R. No. 151413, February 13, 2008
Heirs of Fausto C. Ignacio vs. Home Bankers Savings and Trust Co., et al., January 2013
Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation.
Absent such valid delegation or authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation.
Theory of Specific Capacity; Specific Powers Power to extend or decrease corporate term Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness Power to Deny Pre-‐Emptive Rights Power to Sell or Dispose of Corporate Assets Power to Acquire Own Shares Power to Invest Corporate Funds in Another Corporation or Business Power to Declare Dividends Power to Enter Into Management Contract Ultra Vires Acts NOTE: VOTING REQUIREMENTS (section 36, 37, 38, 39, 40 , 41 42, 43)
Ultra Vires Acts While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation such as the establishment of the local post office which is a vital improvement in the living condition of the employees and laborers who came to settle in a mining camp which is far removed from the postal facilities. The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. (Republic of the Philippines vs. Acoje Mining Company, Inc., G.R. No. L-‐18062, February 28, 1963)
Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals, or public policy or public duty, and are void, ultra vires acts are those which are not illegal but are merely not within the scope of the articles of incorporation and by-‐ laws. They are merely voidable and may become binding and enforceable when ratified by the stockholders. (Maria Clara Pirovana, et al.vs.the De La Rama Steamship Co., G.R. No. L-‐5377, December 29, 1954)
Section 44 No corporation shall possess or exercise corporate powers other than those conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the powers conferred.
Effect of ratification (University of Mindano vs. BSP [2016]) Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;;" and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority.” (
Implied Ratification, (University of Mindano vs. BSP [2016]) Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act,, or acceptance or retention of benefits. However, silence, acquiescence, retention of benefits, and acts that may be interpreted as approval of the act do not by themselves constitute implied ratification. For an act to constitute an implied ratification, there must be no acceptable explanation for the act-‐other than that there is an intention to adopt the act as his or her own. "[It] cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent."134
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