CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on Private Corporation regarding to its creation, formation and powers.
I NTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987 Constitution: “The Congress shall
not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.”
*Congress has limited powers in the formation, creation and regulation of a private corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited
to enact a law directly forming a private corporation.
Exception: GOCC may be created by
special charter.
*GOCC is a private corporation with
regard to function and in the meantime a public corporation with regard to ownership.
Twin Conditions must be present in forming a GOCC:
1. Interest in the common good
2. Subject to the test of economic viability
- Means can survive alone in the market; can generate income which they can use for their operating expenses
CONCEPT AND ATTRIBUTES OF A CORPORATION:
A. Statutory definition of a Corporation
Section 2 of the Corporation Code:
“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 incident to its existence.”
B. Attributes of a Corporation • Artificial Being
- It exist by fiction of law only, hence it is subject to limitations that are inherent because of its nature
- A corporation is a juridical person which exists by process of legal fiction
Doctrine of Corporate Entity/Doctrine of Separate Personality - A corporation is a
legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entities to which it may be connected
Consequences/Implications of Separate Personality:
1. It is entitled to own properties in its own name and its properties are not the properties of its stockholders, directors and officers.
Cases: Magsaysay-Labrador v CA; Sulo ng Bayan v Araneta
*The interest of the stockholders over the properties of the corporation is merely inchoate.
*Merely inchoate because there are still condition precedents before the shareholders get their share, viz, in Asset, there are dissolution and satisfaction of claims; in profit-sharing, there are unrestricted retained earnings and declaration by the Board of Directors.
2. It can incur obligations and its obligations are not the obligations of its stockholders, directors and officers.
Case: Francisco v CA
3. The rights belonging to the corporation cannot be invoked by the stockholders, directors and officers and vice versa.
4. Corporations are entitled to certain constitutional rights, i.e., right against unreasonable searches and seizure, due process clause. *It is not entitled to certain constitutional right, i.e., right against self-incrimination particularly production of corporate documents.
*Right against self-incrimination is applicable only to natural persons.
General Rule:
Constitutional guarantees are applicable to corporations.
Exceptions:
1. Right against self-incrimination
2. Freedom to travel
Case: Bataan Shipyard v PCGG
5. It is liable for tort. It is liable when the act was committed by the 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.
6. Generally, the corporation is considered a national of the country where it was incorporated (Place of incorporation test)
*Exceptions: 1. In times of war, the nationality of a corporation is determined by the nationality of the controlling stockholders; 2. Under the Foreign Investment Act of 1991
7. Corporations are incapable of intent, hence, they cannot commit felonies that are punishable under the RPC. They cannot commit crimes that are punishable under special laws because crimes are personal in nature requiring personal performance of overt acts. In addition, the penalty of imprisonment cannot be imposed.
*Criminal liability falls upon to responsible officers.
*Responsible officers cannot invoke the doctrine of separate personality.
*Corporations cannot be incarcerated.
8. Moral damages cannot be awarded in favor of corporations because they
do not have feelings and mental state.
*Corporations can claim damages such as actual, compensatory, exemplary, loss of earning capacity.
General Rule: Corporation
cannot claim moral damages.
Exception: If the corporation has a good reputation and such reputation was destroyed.
Case: Coastal Pacific Trading v Southern Rolling Mills, Co.
*In Filipinas Broadcasting Network Inc. v. Ago Medical and Educational Center, the SC ruled that a corporation can recover moral damages under Article 2219(7) if it was the victim of defamation.
Doctrine of Piercing the Veil of Corporate Entity – The doctrine that a
corporation is a legal entity distinct from the persons composing it. It is a theory introduced for the purposes of convenience and to serve the ends of justice. But when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically.
Cases: Times Transportation Co. v Santos Sotelo; Concept Builders v NLRC
*The doctrine of piercing the veil of corporate entity is the exception to the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2. Group of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and
corporation are in effect jointly liable; 2. In case of two corporations, they will be treated
as one wherein they will be both solidarily liable. (Instrumentality rule)
*There is no effect on the existence of each corporation as long as their separate entity is used for legitimate purposes.
Instrumentality Rule – When one
corporation is so organized and controlled and its affairs are conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of the corporate entity to the instrumentality may be disregarded. *The user is another corporation.
Keyword: CONTROL
Requisites: 1. Control, not mere majority
or complete stock control, but complete dominion, not only of finances but of policy and business 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 in contravention of plaintiff’s legal rights; 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
Three cases of piercing the veil:
1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong;
2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation;
3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and equipments;
4. Engage practically in the same business; 5. The same manner of keeping books and records.
*The probative factors of identity are not conclusive but may be considered as strong evidence.
• Creature of Law
Article XII Section 16 of the 1987 Constitution: “The
Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.”
Concession Theory – It is a
principle in the creation of corporations, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC. The life of the corporation is a concession made by the State.
• Right of Succession
- Capacity to have continuity of existence despite the changes on the persons who compose it. Thus, the personality continues despite the change of stockholders, members, board members or officers; death or disability.
- Also known as Principle of Perpetual Succession
Reason: To make the corporation
more stable
• Creature of enumerated powers, attributes and properties
Doctrine of Limited Capacity –
No corporation under the Corporation Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the
powers so conferred. The corporation’s capacity is limited to such express, implied and incidental powers.
*Corporation may be restrained from engaging a particular transaction because it is beyond their powers.
*General Capacity – a corporation can perform any act for as long as it is lawful, moral and not contrary to public policy or order.
Ultra Vires Doctrine – Even if the
act is lawful, moral and not contrary to public order or policy but such act is not within the express, implied and incidental powers of the corporation such act shall be void for being ultra vires. *These doctrines are based on Section 2 and Section 45 of the Corporation Code.
C. Classification of Private Corporations: 1. As to existence of Stocks:
Stock Corporation – Corporations
which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3)
Non-stock Corporation – A corporation where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on their own?
A: NO
Public Corporation – for public
purpose and organized by the State.
Private Corporation – for profit
making functions and organized by private persons alone or with the State 3. As to laws of Incorporation (Place
of Incorporation) :
Domestic Corporation – corporation
formed, organized or existing under the Philippine Laws.
Foreign Corporation – corporation
formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123)
*License is necessary for; 1. Regulation purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation – corporation
created in strict or substantial compliance with the mandatory requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the state.
De Facto Corporation – the due
incorporation of any corporation claiming in good faith to be a corporation under the Corporation Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by Solicitor General in a quo warranto proceeding. (Sec. 20)
- organized with a colourable compliance with the requirements of a valid law and
its existence cannot be inquired collaterally.
- There is an irregularity or defect in the constitution or organization.
Can be compared to a voidable contract, i.e., valid until annulled. *Can be challenged by the State later on.
Cases: Hall v Piccio; Seventh Adventist v Northeastern Mindanao Mission
*The filing of the Articles of
Incorporation and the issuance of the certificate of registration are the essential requisites for the existence of a de facto corporation.
Requisites:
1. The existence of a valid law under which it may be incorporated;
2. An attempt in good faith to incorporate; 3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the requirement of law.
*In both corporations, there must be a certificate of registration issued.
Doctrine of Corporation by Estoppel –
All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as an result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered into by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack or corporate personality. (Sec. 21)
- Group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be
permitted to deny its existence in an action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he
benefited from the transaction.
Remedy: To ran after those
persons responsible for the representations
Essence: They are precluded from
denying their existence by their previous act or conduct
Holding Corporation – it is one which
controls another as a subsidiary by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment.
Affiliate – one related to another by owning
or being owned by common management or by a long-term lease of its properties or other control device. It may be the controlled or controlling corporation, or under common control.
Subsidiary Corporation – one which is so
related to another corporation that the majority of its directors can be elected either directly or indirectly by such other corporation. It is always controlled.
Open Corporation – one which is open to
any person who may wish to become a stockholder or member thereto.
Close Corporation – those whose shares of
stock are held by limited number of persons like the family or other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION OF A PRIVATE CORPORATION:
A. Submission of Articles of Incorporation; contractual significance *The life of a corporation commences from the issuance of the Certificate of Registration by the SEC upon filing of the Articles of Incorporation and other documents.
Article of Incorporation – is the
charter of the corporation, and the contractual relationships between the
State and the corporation, the stockholder and the State, and between the corporation and its stockholders.
Contractual Significance:
1. The issuance of a certificate of incorporation signals the birth of the corporation’s juridical personality; 2. It is an essential requirement for the existence of a corporation, even a de facto one.
B. Contents and Form of the Articles of Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation: 1. Corporate Name; 2. Purpose Clause; 3. Principal office; 4. Term of existence; 5. Incorporators; 6. Directors or trustees; 7. Capitalization; 8. Shares of stock; 9. Treasurer’s Affidavit. • Corporate Name Purpose: Identification
*Corporation can not adopt any name or group of words at its pleasure because of statutory limitation, viz., Sec. 18 of the
Corporation Code which provides
that: “No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.
SEC Guideline ”x x x b. In order to
prevent confusion and difficulties of administration, supervision and control, if the proposed name contains a word already use as a part of the firm name or style of a registered entity, the proposed name must contain two other words different and distinct from the name of the company already registered or protected by law. x x x”
Case: Ang Mga Kaanib Ni Jesus Cristo
*The phrase “Ang Mga Kaanib” are words merely descriptive of membership while the phrase “Sa Bansang Pilipinas” are merely descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or
descriptive word may be used as a corporate name.
Reason: public domain; can be
used by anyone; public use.
Exception: Doctrine of Secondary Meaning – a word or
phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his
article that in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was
not satisfied by Lyceum of the Philippines.
*In case of change of name, the corporation is not dissolve nor create a new corporation; it also does not extinguish the corporate liability.
*Change of name can be done by amending the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the Board and 2/3 stockholders; 2. Submission to the SEC for approval.
• Purpose Clause
*Only one primary purpose. Primary purpose defines the business activities of the corporation. It is the ordinary course of business of the corporation.
*Secondary Purpose is for future expansion. There is no limit on the secondary purpose.
*In case the primary purpose is not viable then secondary purpose may be used.
*The principal place of business may determine the venue of court cases involving corporations. It may also determine if service of summons and notices was properly made. It is also important for tax purposes (local taxation).
*The SEC requires the exact address to be indicated in the Articles of Incorporation.
*It is the residence of the corporation. It is where the corporation maintains its books and records and where normally the bulk of its business is being conducted or undertaken.
*For personal action, venue is the residence.
• Term of Existence
*A corporation has a maximum term of 50 years. It may be extended for a period not exceeding 50 years in any single instance.
As a rule, no extension can be
made earlier than 5 years prior to the expiration of the term.
*No limitations regarding number of extension can apply.
Reason: To compel the
stockholders to meet the corporation’s term.
Exception: If for compelling
reasons, earlier extension will be allowed.
*During the three year winding up period, the corporation still has personality but activities are limited to the liquidation of the corporation affairs and not to transact further business.
As a rule, after the term has
expired, no more extensions be allowed or entertained by the SEC.
Reason: No more period to
extend.
Exception: Doctrine of Relation
– The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relations applies if the failure to file the application for existence within the term of the corporation is due to neglect of the officer with whom the certificate is required to be filed or to wrongful refusal on is part to receive it.
*The delay in submitting the application for extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation (insuperable intervening causes)
• Incorporators
*Once an incorporator always an
incorporator. (Fait accompli – an accomplished fact which cannot be altered)
*They are the signatories to the
Articles of Incorporation.
*They are originally forming the
corporation
Q: What is the reason behind the
phrase that an incorporator is not always a corporator?
A: To be an incorporator it is not
necessary to own a share unlike as a corporator.
*Number is limited to 5 to 15.
*They must have a contractual
*Juridical person cannot create
another juridical person.
*There is no citizen requirement
but special laws may require otherwise.
*Majority must be a resident of the
Philippines.
• Directors and trustees
*The Board of Directors is the
governing body in a stock corporation while Board of Trustees is the governing body in a non-stock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one (1) share of the capital stock; 2. Majority of the directors or trustees must be residents of the Philippines.
*Any director who ceases to be the
owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director.
*Trustees of non-stock corporations
must be members thereof.
*Initial directors/trustees shall hold
office for one year until their successors are elected and qualified.
• Capitalization
Section 14(8) states that: “If it be
a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated.”
*It is required that at least 25% of the subscribed capital must be paid and in no case may be paid-up capital be less than P5,000.
Authorized Capital Stock – the
amount fixed in the articles of incorporation to be subscribed and paid by the stockholders of the corporation.
*Shows the total number of shares
Subscribed Capital – that portion
of the authorized capital stock that is covered by subscription agreements whether fully paid or not.
Paid-Up Capital – the portion of
the authorized capital stock which has been subscribed and actually paid.
Outstanding Capital Stock – the
total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement.
• Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the profits
2. expectancy on the share of
assets in case of
dissolution/liquidation.
1. vote
2. control in the management of the corporation.
Doctrine of Equality of Shares –
“Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.” - Provides that where the Article of Incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities.
Classes of Shares:
1. Par Value Share – shares that have a nominal value in the certificate of stock.
Contractual Significance:
The minimum price at which the shares are to be issued.
*The price is fixed. It is stated in the Articles of Incorporation. 2. No Par Value Share – those
shares which do not have nominal value. However, they have issued value stated in the certificate or articles of incorporation.
*There is flexibility in the price. *The price is determined by the
Board.
Limitations:
1. No par value shares cannot have an issued price of less than P5.00;
2. The entire consideration for its issuance constitutes capital
so that no part of it should be distributed as dividends;
3. They cannot be used as preferred stocks;
4. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association (Reason: imbued with public interest);
5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares;
6. Once issued, they are deemed fully paid and non-assessable.
3. Voting Shares – shares with the right to vote. They have the right to participate in the management of the corporation through the exercise of such right.
4. Non-voting Shares – shares without the right to vote.
*Has only a limited right to
vote.
General Rule: Shareholder
owning non-voting shares has no right to vote.
Exceptions:
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;
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 the Corporation Code; 8. Dissolution of the corporation.
*The exceptions are exclusive;
the list is a closed list
Statutory Constraint: Sec. 6
of the Corporation Code
*The corporation cannot provide
for shares with no voting right
General Rule: Only redeemable and preferred shares are deprived of voting right.
Exception: Common shares
may be denied of its voting right in the following instances: 1. Delinquent in paying the subscription; 2. If there was a founder’s share where it was given the right to vote exclusively for 5 years (Sec. 7). 5. Common Shares – the most
common type of shares which enjoy no preference.
*The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.
6. Preferred Shares- shares
which enjoy preference as to dividends or assets upon dissolution as stated in the Articles of Incorporation.
Reason: To attract investors. *Preference does not give them
a lien upon the property nor make them creditors of the corporation.
*Characterized as redeemable
shares.
Kinds:
1. Preferred shares as to
assets – share which gives the
holder thereof preference in the distribution of the assets of the corporation in case of liquidation;
2. Preferred shares as to
dividends – share which gives
the holder thereof preference in the distribution of the dividends to the extent agreed upon before any dividends at all are paid to the holders of common shares;
3. Participating preferred
shares – the holders thereof
are still given the right to participate with the common stockholders in dividends beyond their stated preference; 4. Non-participating
preferred shares – where
there is no such participation; 5. Cumulative preferred
shares – the shareholder is
entitled to recover dividends in arrears. While dividend declaration may not be compelled, once it is declared, the shareholder is entitled to the said arrears;
6. Non-cumulative preferred
shares – not entitled to arrears
only to present dividends.
7. Redeemable Shares – are those which permit the issuing corporation to redeem or purchase its own shares.
Limitations:
1. Redeemable shares may be issued only when expressly provided for in the Articles of Incorporation;
2. The terms and conditions affecting said shares must be stated both in the certificate of stock representing such share; 3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless otherwise provided in the Corporation Code;
4. The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem;
5. The redeemable shares are deemed retired upon redemption unless otherwise provided in the Articles of Incorporation;
6. Unrestricted retained earnings is not necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations.
8. Treasury Shares – shares which have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means.
- Shares which are previously
issued by the corporation but subsequently reacquired by the corporation.
*Retired thus can no longer be re-issued.
*They are not entitled to dividends.
*They are not entitled to voting rights. Rationale: to prevent abuse by the management. *These shares may again be disposed of for a reasonable price fixed by the Board of Directors.
9. Founders’ Shares – classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for the limited period not to exceed 5 years subject to the approval of the SEC. The 5 year period shall commence from the date of the approval by the SEC. • Treasurer’s affidavit
*The SEC shall not accept the
Articles of Incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least 25% of the authorized capital stock of the corporation has been subscribed, and at least 25% of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least 25% of the said subscription, such paid up capital being not less than P5,000.
*If the Treasurer’s affidavit is false
such act is tantamount to fraud. (PD 902-A)
*Fraud on the part of the
corporation is a ground for revocation or suspension of license depending upon the extent of the violation committed.
*If there’s no Treasurer’s Affidavit,
the first ground shall apply, i. e., noncompliance with the minimum requirement.
General Rule: 25% must be
subscribed and 25% must be paid.
Exception: If the law provides
otherwise, i.e., special laws.
C. Grounds for rejection of the Articles of Incorporation
1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein;
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;
3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false;
4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.
Dual Franchise Requirement: No
articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favourable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Code
states that “ 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 SEC 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.”
*For purposes of determining whether
a corporation enjoys the status of a de facto corporation, it must have been at least issued a certificate of registration.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code
states that: “Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees 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 of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation.”
*It is effective upon the approval of
the SEC.
*There may be an amendment by
inaction. Amendment by Inaction – Upon filing with the SEC of the amendment and the Commission failed to act on it within 6 months from the date of filing for a cause not attributable to the corporation.
F. Effects of Non-Use of Corporate Charter
Sec. 22 of the Corporation Code
states that: “If a corporation does not formally organize and commence the transaction of its business or the construction of its work within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC.”
*The period must be counted from the
issuance of the Certificate of Incorporation.
*Automatic dissolution is not
contemplated under Section 22. (SEC Opinion).
*Section 22 must be read in
conjunction with Sec 6(1) of PD 902-A which requires that the corporation must be given the opportunity to be heard in compliance with the requirement of due process before the revocation of its license.
CONTROL AND MANAGEMENT OF A CORPORATION:
A. Levels of Corporate Control
1. By Stockholders/Shareholders; 2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees • General Powers of the Board
Sec. 23 of the Corporation Code states that: “Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one year until their successors are elected and qualified.”
Powers of the Board of Directors:
1. Corporate Powers;
3. Control over and hold the properties of the Corporation.
*Board of Directors/Trustees is the
statutory representative of the corporation.
General Rule: All corporate powers emanate from the Board of Directors/Trustees.
Exception: Unless otherwise
provided in this Code. (Limiting
Clause)
The limiting clause means that there are certain corporate matters that cannot be done by the Board by reason that such matters fall upon the shareholders; or corporate matters that cannot be resolved by the Board alone, i.e., it must be done with the approval of the shareholders.
• Business Judgment Rule
Business Judgment Rule – questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC.
- A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors/trustee, is valid and binding, and generally the courts have no authority to review the same and substitute their own judgment, even when the exercise of such power may cause losses to
the corporation or decrease the profits of a department.
*Great respect is accorded to the decisions of the Board of Directors/Trustees.
*The directors are not liable to the stockholders in performing such acts.
• Qualifications of the Board Members
Sec. 23 of the Corporation Code states that: “Every director
must have at least one share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.”
*In order to be eligible as director, what is material is the legal title to and not beneficial title or ownership of the stocks appearing on the books of the corporation. *The directors/trustees must be natural persons.
*They must also be of legal age. *He must possess other qualifications as may be prescribed in the by-laws of the corporation. *Under Sec. 27 of the
Corporation Code: “No person
convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years, or a violation of
this Code committed within 5 years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.”
Reason: The position is based on
trust and confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications. • Election of the Board Members
Sec. 24 of the Corporation Code provides that: “At all
elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, that the total number of votes cast by him shall not exceed the number of shares owned by
him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, that no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of the corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.”
*It is the stockholders or
corporators who elect members of the Board of Directors.
*The only procedure required by the Code is through Election. There can be no other modes.
*The election must be by ballot if requested by any voting member or stockholder.
*A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors.
*No delinquent stock shall be voted.
*It is not required that the candidate received the majority vote, what the law provides is only plurality of votes.
*Majority number is required only for the existence of a quorum.
Not included in outstanding capital stocks: 1. Unissued stocks;
2. Non-voting stocks; 3. Treasury Shares.
Methods of Voting:
1. Straight Voting – every stockholder may vote such number of shares for as many persons as there are directors to be elected. 2. Cumulative Voting for One
Candidate – a stockholder is
allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. *Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes (10x5) available to him. X may opt to concentrate all his 50 votes to a particular candidate. 3. Cumulative Voting by
Distribution – a stockholder may
cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit.
*Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes available to him. X may opt to distribute the votes to as many candidates as there are provided that the total number of votes does not exceed 50.
Purpose of cumulative voting: To
protect the minority stockholders.
*The elected officer must act as a body.
*In a stock corporation, cumulative voting is a statutory right whereas in a non-stock corporation, cumulative voting is applicable if it is provided in the Article of Incorporation.
Sec. 26 of the Corporation Code provides that: Within 30 days
after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the SEC, the names, nationalities and residences of the directors, trustees and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the SEC.”
• Term of Office
*The directors or trustees shall hold office for one (1) year subject to the “hold over” principle, i.e., they continue in office until their successors are elected and qualified.
*The one year period does not apply to directors initially elected for purposes of incorporation.
• Quorum Requirement in Board Meetings
Sec. 25 of the Corporation Code states that: “Unless the
articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board.”
Q: Is the director allowed to let a
proxy attend a board meeting in behalf for himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should
always be computed based on the number specified in the Articles of Incorporation regardless of ensuing vacancies.
*The basis is always the number
specified in the Articles of Incorporation.
*The corporation can modify the
number by providing a different provision in the articles of incorporation, however, the law provides that the modification must be for a number greater than that provided in the law. It cannot provide for a number less than the general requirement of the code.
*For voting purposes, majority of
the member present constituting a quorum. Except: election of directors.
• Removal of Board Members
Sec. 28 of the Corporation Code states that: “Any director or
trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least 2/3 of the outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least 2/3 of the members entitled to vote: Provided, that such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, that removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Sec. 24 of this Code.”
Requisites:
1. It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose;
2. There must be previous notice to the stockholders or member of the intention to remove;
3. The removal must be by a vote of the stockholders representing 2/3 outstanding capital stock or 2/3 of members;
4. The director may be removed with or without cause unless he was elected by the minority, in which case, it is required that there is cause for removal.
Reason: The functions of directors
are fiduciary in nature.
Requisites for the removal of minority directors are:
1. Justifiable cause;
2. Satisfaction of the voting requirements, i.e., 2/3 of OCS or members.
*It is the secretary of the corporation upon order of the president or in case there is no secretary, stockholder representing majority of the outstanding capital stocks or member signing the demand who may call a meeting for the purpose of removal.
• Vacancies in the Board
Sec. 29 of the Corporation Code provides that: “Any vacancy
occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor
in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.”
General Rule: Power to elect
directors is vested in the stockholders
Exception: Vacancy occurring in
the board of directors or trustees other than by removal by the stockholders or members or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees if still constituting a quorum.
• Compensation of Board Members
Sec. 30 of the Corporation Code provides that: “In the
absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, that any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year.”
General Rule: Directors are not
entitled to receive compensation
1. When their compensation is fixed in the by-laws;
2. If compensation is granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting.
Limitation: In no case shall the
total yearly compensation of directors exceed 10% of the net income before income tax of the corporation during the preceding year.
Reason: In order to avoid temptation on the part of directors to abuse powers by appropriating compensation packages since they are in control of corporate assets.
C. Corporate Officers
• Concept of Corporate Officers
*Corporate powers reside on the
Board of Directors;
decision/policymaking resides on them. Implementation of rules/policy lies on the corporate officers
Categories:
1. Statutory Corporate
Officers – President (must be a
stockholder); Secretary (must be a resident and citizen of the Philippines); Treasurer (must be a resident and citizen of the Philippines).
2. As provided by the
By-Laws – must be clearly stated in
the By-Laws that such office is a corporate office.
3. Those designated by the
Board of Directors provided the Board of Directors is
authorized to do so by the By-Laws.
• Validity and Binding Effect of Acts of Corporate Officers
General Rule: No one, even
corporate officers can bind the corporation. It is only the Board of Directors who has the authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act is part of the function of such office;
2. If authorized by the Board of Directors
• Doctrine of Apparent Authority
Doctrine of Apparent Authority/Doctrine of Estoppel
–If a corporation, knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be stopped from denying the agent’s authority.
Cases: People’s Aircargo; Inter-Asia; Lapu-Lapu
*Requires good faith on the part of third person.
D. Liability of Directors, Trustees and Officers
• Instances when Corporate Officers/Directors are held Solidarily Liable
Sec. 31 of the Corporation Code provides that: “Directors or
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.”
General Rule:
Directors/Trustees/Officers are not solidarily liable with the corporation.
Exceptions:
1. Wilfully and knowingly vote for and assent to patently unlawful acts of the corporation (Sec. 31).
Case: Carag v NLRC
2. Guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec. 31).
Case: David v Construction Industry
3. Acquire any personal or pecuniary interest in conflict of their duty (Sec.31).
4. Consent to the issuance of watered stocks or having
knowledge thereof, fails to file objections with the secretary (Sec. 65).
5. Agree or stipulate in a contract to hold himself personally liable with the corporation.
6. By virtue of a specific provision of law such as BP 22; Trust receipts Law; RA 7832 (Anti-Electricity Pilferage Act of 1997); Securities Regulation Code *In Carag v NLRC, the Supreme Court held that not any violative of law, the Code means that violation must have a corresponding penalty. Patently unlawful act means that a law declares an act unlawful and that such law provides penalty for that unlawful act.
• Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code states that: “A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all of the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least 2/3 of the outstanding capital stock or of at least 2/3 of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, that the contract is fair and reasonable under the circumstances.”
Example:
In XYZ Corporation, A is a director. The corporation acts through the Board of Directors. XYZ Corporation and A entered into a lease contract. A as the lessor and XYZ Corporation as lessee. The contract was approved by the Board of Directors.
Q: What is the status of the
contract?
General Rule: The contract is
voidable.
Exception: If the requisites provided in Sec. 32 are present.
Exception to the Exception: If
requirement number 1 or 2 is absent, in the case of a contract with a director or trustee, such contract may be considered valid by the ratification of at least 2/3 of the outstanding capital stock or 2/3 of the members.
Requisites:
1. The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and
reasonable under the
circumstances;
4. In case of an officer, the contract has been previously authorized by the board of directors.
Reason: A’s presence in the board
meeting might affect the status of the contract.
Self-Dealing Directors/Officers
– directors/officers who transact business with their own corporation.
- This is not prohibited by law.
Interlocking Directors – those
who have been elected as directors in 2 or more different corporations. - May be prohibited by the By-Laws (Gokongwei case).
-Not prohibited by law however there are consequences.
• Contracts involving Inter-locking Directors
Sec. 33 of the Corporation Code provides that: “Except in
cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding 20% of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.”
Example:
A is a director of two corporation, ABC Corporation and XYZ Corporation. XYZ Corporation and ABC Corporation entered into a lease contract where ABC Corporation is the lessor and XYZ Corporation is the lessee.
Q: Can this contract be invalidated
on the ground that there is an interlocking director?
A: NO.
Q: What is the status of the
contract?
A: General Rule: Contracts between two or more corporations having interlocking directors are valid.
Exceptions:
1. Contracts are void if contracts are fraudulent or if contracts are unfair and unreasonable.
2. If the By-Laws prohibits interlocking director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his
interest is 20% or less of the outstanding capital stock. The interest is substantial if his interest is more than 20% of the outstanding capital stock.
*If the interlocking director has a
substantial interest in one corporation and has a nominal interest in the other corporation, the director must comply with the requisites provided in Sec. 32 on self-dealing directors.
Reason: The case is analogous to
that of transactions involving self-dealing directors because such director holds substantial interest with the other company.
• Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code states that: “Where a
director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. This provision shall be applicable notwithstanding the fact that the director risked his own funds in the venture.”
General Rule: A director shall
refund to the corporation all the profits he realizes on a business opportunity which: 1. the corporation is financially able to undertake; 2. from its nature, is in line with corporations business and is of practical advantage to it; and 3. the corporation has an interest or a reasonable expectancy.
Exception: His act has been
ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock.
*A business opportunity ceases to
be corporate opportunity and transforms to personal opportunity where the corporation refuses or is definitely no longer able to avail itself of the opportunity.