P
HILIPPINE
C
ORPORATE
L
AW
Commercial Law Review
OUTLINE
(1) Nature of Corporations
(2) Formation and Organization of Corporations
(3) The Corporate Entity
(4) Powers of Corporation
(5) Stockholders
(6) Board of Directors
(7) Officers
(8) Meetings
(9) Books and Records
(10) Mergers and Consolidations
(11) Non-Stock Corporations
(12) Close Corporations
(13) Educational Corporations
(14) Religious Corporations
(15) Dissolution
(16) Foreign Corporations
1. N
ATURE
OF
C
ORPORATIONS
1.1 Concept of the corporation
Sec. 2. Corporation defined.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.
1.2 Advantages and disadvantages of the Corporate
Form
CLV
ADVANTAGES
DISADVANTAGES
(1) Strong Personality
(2) Centralized Management
(3) Limited Liability to the
investors
(4) Free Transferability of Units of
Investments
(1) Abuse of Corporate Management
(2) Abuse of Limited liability feature
(3) High cost of maintenance
(4) Double Taxation
(5) Lack of Personal Element
Sundiang (page 249)
ADVANTAGES
DISADVANTAGES
(1) The capacity to act as a legal unit; (2) Limitation of, or exemption from, individual liability of shareholders; (3) Continuity of Existence (4) Transferability of Shares; (5) Centralized management of BoD; and
(6) Standardized method of organization, and finance (Salonga, Phil. Law on Private Corps, 3rd ed.,
page 9.)
(1) More complicated in formation and management;
(2) Higher cost of formation and operation;
(3) Lack of personal element; (4) Greater governmental control and regulation;
(5) Management and control are separate from ownership;
Stockholders have little voice in the conduct of business
Advantages:
1) Strong Legal Personality
- The corporation has a legal capacity to act and contract as a distinct unit in its own name; and it has continuity of existence.
A corporation’s creation, organization, management and
dissolution are standardized as they are governed by a general incorporation law.
- A corporation is an entity separate and distinct from its stockholder. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. (Remo vs. IAC) - Stockholders vs. Register of Deeds
The transfer of corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another.
2) Centralized Management
- A corporation’s management is centralized in the board of director’s. A corporation presents a more stable and efficient system of governance and dealings with third parties, since management prerogatives are centralized in its board of directors.
- As can be gleaned from Sec 23 of Corporation Code, it is the board of directors or trustees which exercises almost all the corporate powers in a corporation. (Firme vs. Bukal)
- The exercise of the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholder’s approval for certain specific acts. (Great Asain Sales Center vs. CA)
3) Limited Liability to Investors- The liability in a corporation is limited to their shares.
- Provided by jurisprudence only
- Simple division between “naked title” and “beneficial title” gives rise to limited liability.
- Peculiar only between the shareholders and a corporation
- Underlying Principle: Principle of Relativity
- CLV’s formula: Strong Juridical Personality + Centralized Management= Limited Liability
- CLV: There are ways to circumvent the law to make the shareholder liable for more than his actual share (ex. The chairman makes himself joint debtor for a loan)
- When a person invest its property in the corporation, he abdicates his “jus” of ownership
- One of the advantages of the corporation is the limitation of an investor’s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct fro its stockholders. (San Juan vs. CA)
- It is hornbook law that corporate personality is a shield against personal liability of its officers- a coporate officer and his spouse cannot be personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. (Consolidated Bank vs. CA)
- Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. (Malayang Samahan vs. Ramos)
CLV Class Notes
Q: Is a corporation in our jurisdiction given the feature of limited liability? A: No. The feature of limited liability is given to the stockholder and not to the corporation.
Q: Is limited liability a normal run of things?
A: No. It is only there because it comes with the separate juridical personality
Q: If limited liability as shown in the corporation setting is good for the investors, does it mean that delectus personarum is a bad thing?
A: No. It is good in a way, since person are bound by the contracts they enter into.
4) Free Transferability of Units of Investments
- As a general rule, the shares of stocks can be transferred without the consent of other stockholders. This places more liquidity in the corporate setting and encourages investors to channel their investments through corporate vehicles.
- Authority granted to corporations to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson vs. CA)
5) Advantages as registered Entity-
- Corporations enjoy perpetual succession under its corporate name and in an artificial form; it has the capacity to take and grant property, and contract obligations; it can sue and be sued in its corporate name as a juridical person; it has the capacity to receive and enjoy common grants of privileges and
immunities; and its stockholders or members generally have no
personal liability beyond their shares.
Disadvantages of Corporate Form
1) Abuse of Corporate Management- In a practical sense, investors have very little voice over the conduct of business of the corporation.
2) Abuse of limited liability feature- Limited liability feature has tended to increase transaction cost by the parties being forced to enter into contractual schemes skirting the limited liability of the corporation when it is a party to a transaction. Limited liability hits innocent people.
3) High cost of maintenance- Complicated and Costly Formation and Maintenance. There is a greater degree of governmental control and supervision.
4) Double Taxation- The profits if the corporation which are already subjected to corporate income tax when declared and distributed as dividends to the stockholders are again subjected to the further income tax. Dividends received by individuals from domestic corporations are subject to final 10% tax fro income earned on or after January 1, 1998 (Section 24(B)(2), 1997 NIRC). Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27 (D)(4), 1997 NIRC). In addition, there is re-imposition of the 10% “improperly accumulated earnings tax” for holding companies (Sec 29, 1997 NIRC)
5) Lack of Personal Element- This has spawned corporate irresponsibility.
1.3 Differentiated from partnerships and other
business organizations
1) SOLE PROPRIETORSHIP- Here, it is the owner who controls the
business while in a corporation, it is the Board of Directors.
2) PARTNERSHIPS- The most important distinction between a partnership
and a corporation is their legal capacities. A corporation has a stronger legal capacity. Enabling it to continue despite death, insolvency or withdrawal of any of its stockholders or members. Limited Liability is a main feature in a corporate setting, whereas partners are liable personally foe partnership
debts. Generally, every partner is an agent of the partnership and by his sole act, he can bind the partnership whereas in a corporation, only the Board of Directors or its agents can bind the corporation.
Here are the features of a partnership:
Delectus Personarum
- Selection of Partners; No outsider can come in without the consent of all partners
- Prevents the development of any market for units of ownership because of no assurance that buyers would be able to become partners
- Mutual Representation - Power to Dissolve
Mutual Agency
- Each partner can legally bind the business enterprise - Business may be undermined by act of one foolish partner
Unlimited Liability Community of Interest
- Co-ownership of capital or property
CLV Class Notes
Q: How does contractual management of a corporation compare with the management of a partnership?
A: Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership as every partner is an agent of the others. In a corporation, only the Board of Directors and not the stockholders can bind the corporation.
CLV: The principle in constitutional law that delegated power cannot be delegated further has no application in a corporate setting because a corporation is not a product of political text- it is a product of business. A corporate setting is best described as hierarchal and fiat. Just because the BoD are to be elected by the stockholders does not mean that the former derives its power from the latter. The powers of the BoD is original, said powers are not delegated by the stockholder. The powers are vested by law (and Articles of Incorporation). The BoD sit on the board not as representatives of the stockholders but because they are directors.
Q: What are the 2 types of partnerships? A: Regular and joint venture
Q: Can a corporation be a partner in a regular partnership?
A: No, because a partner must be a natural person. It is against public policy for corporation to be a partner in a regular partnership.
Q: Why did the legislature put such limited liability as an attribute of a corporation? If the feature of limited liability costs money then why not take it out? Why not leave it up to the investors who can decide if they want limited liability or not?
A: Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have 100M, it would be foolish to put all my eggs in one basket(if the basket falls, all eggs break). So I merely out 10M in one corp and then borrow the 90M while the rest of my money I put somewhere else. If the corporation fails, I do not lose all my 100 M. But if the corps succeeds and I get to pay my creditor, I retain the 10M plus profits acquired from the 90M paid up loan. This is the concept of Leveraging, using other people’s money to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to make a diligent appraisal of the credit standing of the corp.
Q: What is the main distinction between a corporation and a partnership?
A: A corporation is intermingling of corporation law and contract law. Partnership is purely contractual relationship and so every time a partner dies, the contract is actually distinguished.
Q: What is a corporation law all about?
A: It is all about jurisprudence actually built around the 4 attributes of a corporation.
Q: Does a Defective Incorporation result into a Partnership?
A: No. First, both corporate and partnership relationship are fundamentally contractual relationships created by the co-venturers. (so, yung intention is controlling)Second, there are important differences between a corporation and the partnership.(i.e. Limited liability, centralized management, easy transferability of units of ownership)
Summary of the doctrinal pronouncement in PIONEER INSURANCE case:
a) Parties who intended to participate or actually participate in the business affairs of the proposed corporation would be considered as partners under a de facto partnership, and would be liable for partnership obligations.
b) Parties who took no part except to subscribe for stock in a proposed corporation, do not become partners with other subscribers who engaged in the business under the name of pretended corporation, are not liable for action foe settlement of the alleged partnership contribution.
Q: Why are we taking up Pioneer? Why were not they liable?
A: Because Pioneer shows us that for a person to be liable as a partner, he should have actively participated in the conduct of the business, the SC held in this case that to be able to be held liable the person should possess powers of management business, the SC held in this case this case that to be able to be held liable the person should possess powers of management.
Q: In cases where there is a defective attempt to form a corporation, which is the prevailing rule, a partnership inter se is created or a corporation by estoppel?
A: It depends wholly on the extent of the participation of the party who claim is being mind. In PIONEER, there was no intent on the other parties to enter into a partnership but a corporation. As to Cervantes and Bormacheco, they cannot be considered to have entered into a partnership inter se, since there was no intention to do so ans to be held liable as such.
But if it were Cervantes or Bormacheco, who entered into the contracts using the corporate name and actively participated in the activities of the corporation, then they are to be held liable as partners.
Lim Tong Lim vs. Phil. Fishing Gear Industries
- Q: What is the difference between Pioneer and Lim Tong Lim? A: In Pioneer, the SC stopped when it declared that to be liable, you have to possess powers of management. In Lim, it continues its pronouncement by saying that you have beneficial ownership over the business, then you are also liable as a partner
CLV: Pioneer caseactors who knew of corporation’s non-existence are liable as general partners while actors who did not know are liable as limited partners, passive investors are not liable. Lim Even passive investors should be held liable provided they benefited from such transactions.
3) BUSINESS TRUST- It is simply a deed of trust which is easier and less
expensive to constitute for it is not bound by any legal requirements. It does not have separate juridical personality, and is mainly governed by contractual doctrines and common law principles on trust. Trust relationship centered upon properties, and which places naked tile in the trustor and the beneficial title in the beneficiary.
CLV Class Notes
A: The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor of the trustee/beneficiary. The concept of a separate juridical personality is absent from a business trust.
4) JOINT VENTURES
- Its legal concept is of common law origin. It is a form of partnership and should thus be governed by the law of partnerships.
- Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally, all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. (Kilosbayan vs. Guingona)
CLV Class Notes
Q: What is the difference between a joint venture and a partnership? A: A joint venture is by law a partnership because it follows the same definition as having two or more persons binding themselves together under a common fund with the intention of dividing the profits between themselves. Therefore, every joint venture is a partnership. The distinction between the two is a joint venture is for a limited purpose only while a partnership involves an arrangement or an on-going concern.
Q: Is it possible for a joint partnership not be a partnership?
A: Yes, when the joint venture forms a corporation, it hen becomes a joint venture corporation.
Q: Is the requirement of registration needed in a partnership required in a joint venture?
A: No. Only in a partnership is registration required. (Art 1772) 5) COOPERATIVES
- It is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. It
has a juridical personality distinct from its members and has a limited liability feature. Cooperatives are governed by principles of democratic control where the members in primary cooperatives have equal voting rights in a one-member-one-vote principle. The general assembly in full membership exercises all the rights and performs all the obligations of the cooperative. They are under the supervision and control of the Cooperative Development Authority. (Primary objective: SELF HELP)
- Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. (Corpuz vs. Grospe)
6) SOCIEDAD ANONIMAS
- A sociedad anonima was considered a commercial partnership where upon the execution of funds and personal property, become a juridical person- an artificial being, invisible, intangible, and existing only in contemplation of law- with power to hold, buy, and sell property, and to sue and be sued- a corporation- not a general partnership nor a limited co-partnership… The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person- a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation, (Mead vs. McCullough)
- The sociedades anonimas were introduced in the Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. (Benguet vs Pineda)
- Our corporation law recognizes the difference between sociedades anonimas and corporations and will not apply legal provisions pertaining to the latter to the former.(Phil Product vs. Primateria Societe Anonyme)
- A cuentas en particiapacion as a sort of an accidental
partnership constituted in such manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under Article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other person interested, and the latter, on the other hand, shall have not right of action against third person who contracted with the manager unless such manager formally transfers his rights to them. (Bourns vs. Carman)
1.4 Government Regulation of Corporations
Basis: Section 2 of Corp Code; Theory of Concession
Theory of Concession: Looks at a corporation as a creature of the
State within the control of the latter. This theory is essentially
followed in the Philippines.
A corporation is an artificial being created by operation of law. It owes it life to the state its birth being purely dependent on its will. Corporate by-laws must yield to judicial orders. As a matter of fact, a corporation, once it comes into being, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it. (Tayag v. Benguet Consolidation)
To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962)
“It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act,” and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association acquired a separate juridical personality, even when it adopts sets of constitution and by-laws.
International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).
Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. Torres v.
Court of Appeals, 278 SCRA 793 (1997). Catindig Class Notes
Q: How does government regulate corporations? A: From creation to dissolution
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Homeowner’s HLURB Condos SEC
Cooperative Bureau of Cooperative Development
1.5 Kinds of Corporations
(a) Stock
(b) Non-Stock
(c) De Facto
(d) Corporation by estoppel
(e) Close
(f) Educational
(g) Religious; Sole and Aggregate
(h) Special Charter
(j) GOCC
(k) Homeowner’s Association
(a) Stock
Sec. 3. Classes of corporations.
Corporations formed or organized under this Code may be stock or non-stock corporations. 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 are stock corporations. All other corporations are non-stock corporations.
(b) Non-stock
Sections 3 and 87.
Sec. 87. Definition.
For the purposes of this Code, a non-stock corporation is one 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: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n)
•
See page 902 of CLV’s Commercial Law Reviewer (2007).
•
In spite of the existence of capital stock, a corporation may
be considered a non-stock corporation for purpose of
taxation. (CIR v. Club Filipino)
•
Mere realization of profits does not make a corporation a
stock corporation. (Collector v. UV)
(c) De facto
Sec. 20. De facto corporations
The due incorporation of any corporation claiming in good faith to be a corporation under this 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 the Solicitor General in a quo warranto proceeding.
Nature of the Doctrine
•
De facto corporation is formed also in accordance with law. It
falls short of the requirements provided by law. Such is
awarded a separate juridical personality, it may thus enter
into contracts, it may sue and be sued. (note: third parties
may sue the corporation, incorporators may sue but the
corporation cannot sue) Only the actors will be held liable. In
proceeding against such, compliance with due process must
be had.
•
The doctrine of de facto corporation applies as to the first
level relationship (as between the State and corporations)
and also to the third level of relationship.
Elements: (Arnold v. Piccio)
(1) Valid Law under which it is incorporated
(2) Attempt in good faith to incorporate
(3) Assumption of corporate powers
(1) Valid Law under which it is incorporated
•
If the constitutionality of the statue is raised for the first time
in an action wherein it is sought to prevent future incurring of
rights and obligations, it will be proper to permit collateral
attack; where the constitutionality of the statue is raised for
the first time in litigation seeking enforcement of contracts or
transaction which have been fully or partially consummated,
collateral attack on the juridical personality of the corporation
should not be permitted, since the corporation should be
treated as a de facto corporation. Courts, however, through
jurisprudence, arrived at the same result as that upheld by
such minority opinion, holding that a corporation organized
under a statute subsequently declared unconstitutional may
nevertheless be considered a corporation by estoppel, where
there have been previous dealing between the parties on a
corporate basis.
(2) Attempt in good faith to incorporate- colorable compliance.
•
The Corporation must have filed its Articles of Incorporation
and the SEC duly issued a Certificate of Incorporation. (The
incorporators must have been aware of the issuance of the
certificate of incorporation by the SEC for such good faith to
exist.) (Mere intent is not sufficient)
(3) Assumption of corporate powers: Minimum requirement:
Election of BoD.
Rationale
•
To prevent any party from raising the defect of authority as a
means to avoid fulfillment of a contract or a transaction
entered into.
•
To protect the enforceability of corporate dealings and
contracts, to allow the public to take at reasonable face value
the authority of the corporation to enter into valid and binding
contracts.
•
The doctrine is meant to apply to extra –corporate dealings
and not to intra-corporate relationship
CLV Class Notes
Q: If a member of a public deals with a corporation knowing its defect, will the de facto doctrine apply?
A: Yes, because (a) juridical personality cannot be subject to collateral attack (b) No juridical entity, no separate liability
CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions whenever they involve the corporation. Parties dealing with said corporation are secured by the fact that the
transactions entered into with said corporations may be sued upon and they can recover. That is why aside from the other two requisites there must be a set of officers or directors because the principle that a corporation can only act through its officers.
Catindig Class Notes
Sir: Once there is a certificate issued, there is no de facto corporation. So for me the concept is merely historical.
(d) Corporation by estoppel
Sec. 21. Corporation by estoppelAll 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 a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered 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 of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.
CLV Class Notes
Q: What is minimum requirement for a corporation by estoppel to exist?
A: There must be an innocent party who believes that a corporation exists (believes in good faith) because of representations.
Catindig Class Notes
Q: Is a corporation by estoppel a corporation? A: No. (See definition in Section 2)
The parties are the one made liable-ASM. Q: How does government regulate corporations? A: From creation to dissolution
xxx
Homeowner’s HLURB Condos SEC
Cooperative Bureau of Cooperative Development UP Class Notes
COMMENT: The doctrine is founded on principles of equity and is applied n order to prevent injustice and unfairness to third persons vis-à-vis the corporation (or vice versa as in par. 2 Section 21). In this case the International Express Travel seeks to enforce a valid contract; it is the Federation and Henri Kahn who wish to do it injustice by trying to evade responsibility thereon. In the last point, the CA possibly tried to apply paragraph 2 Section 21, albeit mistakenly.
Nature of Doctrine
•
An admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as
against the person relying thereon.
•
Founded on principles of equity and designed to prevent
injustice and unfairness, the doctrine applies when persons
assume to form a corporation and exercise corporate
functions and enter into business relations with third persons.
Where no third person is involved in the conflict, there is no
corporation by estoppel. A failed consolidation therefore
cannot result in a consolidated corporation by estoppel.
Lozano v. De Los Santos, 274 SCRA 452 (1997)
•
A party cannot challenge the personality of the plaintiff as a
duly organized corporation after having acknowledged same
when entering into the contract with the plaintiff as such
corporation for the transportation of its merchandise. Ohta
Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).
1•
A person who accepts employment in an unincorporated
charitable association is estopped from alleging its lack of
1
The same principle applied in Compania Agricole de Ultramar v.
Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership
which required registration in the registry under the terms of the Code of
Commerce).
juridical personality. Christian Children’s Fund v. NLRC, 174
SCRA 681 (1989).
•
One who deals with an organization which is not duly
incorporated is not estopped to deny its corporate existence
when his purpose is not to avoid liability.
Int’l Express Travel
v. Court of Appeals, 343 SCRA 674 (2000).
•
Under the law on estoppel including that under Sec. 21 of
Corporation Code, those acting on behalf of an ostensible
corporation and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.
Lim
Tong Lim v. Philippine Fishing Gear Industries, Inc., 317
SCRA 728 (1999).
Two Levels
(1) With Fraud
(2) Without Fraud
•
When the incorporators represent themselves to be officers
of the corporation which was never duly registered with the
SEC, and engage in the name of the purported corporation in
illegal recruitment, they are estopped from claiming that they
are not liable as corporate officers under Sec. 25 of
Corporation Code which provides that 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 the
debts, liabilities and damages incurred or arising as a result
thereof. People v. Garcia, 271 SCRA 621 (1997); People v.
Pineda, G.R. No. 117010, 18 April 1997 (unpub).
(1) With Fraud
•
Actor is liable as a general partner for debts, damages and
liabilities incurred. “Corporation” cannot set up as defense
that corp actually does not exist.
•
If corporation sues the other party, it cannot resist obligation
by saying that no corp exist.
(2) Without Fraud
•
Actors are liable as limited partner.
•
Corporation by estoppel applies to save the contract but
juridical entity is then broken down to make actors liable.
Note: Both in bad faith: Corporation by estoppel does not apply.
(Pari Delicto Doctrine, or the contract is recissible)
(e) Close
Sec. 96. Definition and applicability of Title.
A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
Jack’s Lecture
CLOSE CORPORATIONS
This is a new title, made in recognition of the fact that the overwhelming majority of the corporations are family corps. In many family corporations here, the set-up is such that the husband is the president, the wife is the treasurer, but it is the wife who is actually running the corp. The husband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp. Has a technical meaning in the law. For it to be a close corp., the articles must provide that it cannot have more than 20 stockholders. There should be restrictions on the transfer of the shares, like usually it will be provided that if a stockholder wants to sell his share, he must first offer it to the other stockholders. Only if they are not willing to buy can he offer it to an outsider. Or it may also provide that if no stockholder is willing to buy the shares, then he must offer it to the corporation before offering to an outsider.
The corporation shall not be listed in any stock exchange. The law says that the mere fact that a corp. is controlled by another corp. does not make it a close corp. The articles must contain the features mentioned in the law. But corps. Engaged in mining, oil companies, stock exchanges, banks, insurance companies, public utilities, schools, and corps. vested with public interest are not allowed to be close corps. Because they're engaged in lines of business vested with public interest and so they should be subject to regulation and close scrutiny. The law says the articles may provide for classification of shares and qualifications for owning them. For example, you have three brothers who form a close corp. So they may provide: a) we will classify these shares into class a, class b, class c. Only the members of the family of the first brother can own class a shares. Only members of 2nd
brother can own class b shares, and class c shares can be owned only by members of the 3rd brother; b) we will have nine (9) directors, and 3 will be
elected by holders of class a shares; c) can provide for a greater quorum or voting requirements. It can be provided that you will need three fourths (3/4) majority to approve any action by the board, any action by the stockholder. Why? Because each group would want to be protected for otherwise if the two groups combine they can get anything approved, like there would be two thirds. And so the third group would want to be protected; d) the articles may provide that if it's the stockholders and not the board who will manage the affairs and that there is no need for formal meetings, if the stockholders will be the directors, then they will be subject to the same liabilities as directors.
•
See page 706-736 of CLV’s textbook or page 909 of CLV’s
Commercial Law Reviewer (2007).
Sec. 106. Incorporation
Educational corporations shall be governed by special laws and by the general provisions of this Code. (n)
Sec. 107. Pre-requisites to incorporation
Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a)
Sec. 108. Board of trustees
Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a)
•
See page 917 of CLV’s Commercial Law Reviewer (2007).
(g) Religious: sole and aggregate
Sec. 109. Classes of religious corporations
Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and
religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. (n)
Sec. 110. Corporation sole
For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a)
Sec. 111. Articles of incorporation
In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the
corporation sole is to be established and located, which
place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n)
Sec. 112. Submission of the articles of incorporation
The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)
Sec. 113. Acquisition and alienation of property
Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a)
Sec. 114. Filling of vacancies
The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a)
Sec. 115. Dissolution
A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth: 1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (n)
Sec. 116. Religious societies
Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)
•
See page 918 of CLV’ Commercial Law Reviewer (2007).
(h) Special charter
Sec. 4. Corporations created by special laws or charters
Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.
(i) Foreign
Sec. 123. Definition and rights of foreign corporations
For the purposes of this Code, a foreign corporation is one 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. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (n)
•
See page 799 of CLV’s textbook or page 946 of CLV’s
Commercial Law Reviewer.
(j) GOCC
•
Government’s majority shares does not make an entity a
public corporation. National Coal Co., v. Collector of Internal
•
A corporation is created by operation of law under the
Corporation Code while a government corporation is normally
created by special law referred to often as a charter. Bliss
Dev. Corp. Employees Union v. Calleja, 237 SCRA 271
(1994).
•
The test to determine whether a corporation is government
owned or controlled, or private in nature is simple. Is it
created by its own charter for the exercise of a public
function, or by incorporation under the general corporation
law? Those with special charters are government
corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission, and
are compulsory members of the GSIS. Camparedondo v.
NLRC, 312 SCRA 47 (1999)
•
While public benefit and public welfare may be attributable to
the operation of the Bases Conversion and Development
Authority (BCDA), yet it is certain that the functions it
performs are basically proprietary in nature—the promotion of
economic and social development of Central Luzon,
particularly, and the country’s goal for enhancement.
Therefore, the rule that prescription does not run against the
State will not apply to BCDA, it being said that when title of
the Republic has been divested, its grantees, although
artificial bodies of its own creation, are in the same category
as ordinary persons. Shipside Inc. v. Court of Appeals, 352
SCRA 334 (2001).
•
Although Boy Scouts of the Philippines does not receive any
monetary or financial subsidy from the Government, and its
funds and assets are not considered government in nature
and not subject to audit by the COA, the fact that it received a
special charter from the government, that its governing board
are appointed by the Government, and that its purpose are of
public character, for they pertain to the educational, civic and
social development of the youth which constitute a very
substantial and important part of the nation, it is not a public
corporation in the same sense that municipal corporation or
local governments are public corporation since its does not
govern a portion of the state, but it also does not have
proprietary functions in the same sense that the functions or
activities of government-owned or controlled corporations, is
may still be considered as such, or under the 1987
Administrative Code as an instrumentality of the Government,
and it employees are subject to the Civil Service Law. Boy
Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
•
But being a GOCC makes it liable for laws and provisions
applicable to the Government or its entities and subject to the
control of the Government. Cervantes v. Auditor General, 91
Phil. 359 (1952).
•
Beyond cavil, a GOCC has a personality of its own, distinct
and separate from that of the government, and the
intervention in a transaction of the Office of the President
through the Executive Secretary does not change the
independent existence of a government entity as it deals with
another government entity. PUP v. Court of Appeals, 368
SCRA 691 (2001).
•
The doctrine that employees of GOCCs, whether created by
special law or formed as subsidiaries under the general
corporation law are governed by the Civil Service Law and
not by the Labor Code, has been supplanted by the 1987
Constitution. The present doctrine in determining whether a
GOCC is subject to the Civil Service Law is the manner of its
creation, such that government corporations created by
special charter are subject the Civil Service Law, while those
incorporated under the general corporation law are governed
by the Labor Code. PNOC-Energy Development Corp. v.
NLRC, 201 SCRA 487 (1991); Davao City Water District v.
Civil Service Commission, 201 SCRA 593 (1991).
•
Section 31 of Corporation Code (Liability of Directors and
Officers) is applicable to corporations which have been
organized by special charters since Sec. 4 of Corporation
Code renders the provisions supplementarily applicable to all
corporations, including those with special or individual
charters, such as cooperatives organized under P.D. 269, so
long as those provisions are not inconsistent with such
charters. Benguet Electric Cooperative, Inc. v. NLRC, 209
SCRA 55 (1992).
•
Water districts can validly exists as corporate entities under
PD 198, and provided they are government-owned or
controlled, and their board of directors and other personnel
are government employees subject to civil service laws and
anti-graft laws. Feliciano v. Commission on Audit, 419 SCRA
363 (2004).
(k) Homeowner’s Associations (Section 4 and 26 of
RA 8763, March 7, 2000)
Republic Act No. 8763 (March 7, 2000)
Section 4. Home Guarantee Corporation. The Home Insurance and Guarantee Corporation is hereby renamed as the Home Guarantee Corporation, hereinafter refereed to as the Corporation, which shall have its principal office in Metropolitan Manila and shall exist for a period of 50 years from December 15, 2000. The Corporation may establish such offices, agencies, subsidiaries, or branches anywhere in the Philippines as its operations would require and its Board of Directors would determine.
Section 26. Powers over Homeowners Associations. The powers, authorities and responsibilities vested in the Corporation with respect to homeowners association under Republic Act No. 580, as amended by Executive Order No. 535 is hereby transferred to the Housing and Land Use Regulatory Board (HLURB).
Subject to existing laws, the HLURB is hereby authorized to create additional positions and augment its present budget as may be
needed for the operation and maintenance of the newly created unit or office as a consequence of the transfer of functions and powers. Pending the approval of the HLURB Revised Staffing Organizational Plan and release of budgetary allocations thereof, the Corporation shall extend technical, operational, and administrative assistance to the HLURB as may be mutually deemed necessary to ensure smooth turnover of functions. However, such assistance shall not extend beyond a period of 1 year from the date of effectivity of this Act.
•
Registration is made before the HLURB.
1.6 Cases
Lozano v. delos Angeles and Anda (June 19, 1997)
•
The doctrine of corporation by estoppel cannot override
jurisdictional requirements- jurisdiction is fixed by law and
cannot be acquired through or waived, enlarged or
diminished by, any act or omission of the parties, and neither
can it be conferred by the acquiescence of the court.
•
Corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness, and
where there is no third person involved and the conflict arises
only among those assuming the form of a corporation, who
know that it has not been registered, there is no corporation
by estoppel.
International Express Travel v. CA (October 19, 2000)
(1) The Federation has no juridical personality. Indeed, R.A.
3135 and P.D. No. 604 recognized the juridical existence
of national sports association. This may even be gleaned
from the powers and functions granted to these
association. However, these laws only provided the
manner by which these entities may acquire juridical
personality. The corporate status of these associations
does not automatically take place. These laws actually
requires that before an entity be considered as a
national sports association such must recognized by the
accrediting organization (i.e. PAAF). This fact of
recognition, however the President of the Federation
failed to substantiate.
(2) The President must be held liable in accordance with the
principle that any person acting or purporting to act on
behalf of a corporation which has no valid existence
assumes such privileges and obligations and become
personally liable for contracts entered into or for other
acts performed as such agent.
(3) The doctrine of corporate estoppel is not applicable. It is
only applied to a third party when he tries to escape
liability on a contract from which he has benefited. In the
case at bar, the petitioner is not trying to escape liability
but rather is the one claiming it.
2. F
ORMATION
AND
O
RGANIZATION
OF
C
ORPORATIONS
(Page 617 of CLV’s Commercial Law Reviewer)
2.1 Who may form a corporation?
Sec. 10. Number and qualifications of incorporators
Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.
2.2 Steps in formation of a corporation
(a) Promotion
CLV Class Notes
PROMOTER’S CONTRACT CORP BY ESTOPPELDE FACTO or DE JUREDISSOLUTION
Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such doctrine?
A: Where there is a representation that a corporation exists when in fact there is none and at least one party thought there was a corporation.
Who are promoters?
•
“Promoter” is a person who, acting alone or with others,
takes initiative in founding and organizing the business or
enterprise of the issuer and receives consideration therefor.
(Sec. 3.10, Securities Regulation Code [R.A. 8799])
CLV Class Notes
Q: Differentiate a promoter from an incorporator.
A: A promoter begins or initiates the formation of a corporation while an incorporator is one of the initial members of the SH’s
CLV: The definition of promoter is important to determine the liability for promoter’s contract. Before you can make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes initiative on the founding and organization of the business venture which eventually ends up as the corporation being organized. Q: At the promoter’s stage there is no juridical personality until SEC issues the certificate of Incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet been reached. Prior to the de facto corporation stage, what then is the status of the contract entered into by a promoter for and in behalf of the person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of the person or agent who had undertaken the transaction.
Q: How can ratification be done? A: Ratification can be done in two ways:
(1)express ratification- a mere board resolution making the corporation liable by accepting the contract and
(2) implied ratification- by accepting of benefits.
Q: What is the effect of promoter’s contract on the corp and other contracting parties?
A: As to the corp, it is voidable, as to other contracting parties, it is valid and enforceable
Catindig: Promotion is not a necessary stage!
