g.
the "owners" or stockholders do
not participate in the day to day
management.
SUBJECT COVERAGE
1.
These notes cover the Corporation Code,
SEC Code of Corporate Governance, Corporate
Recovery, Securities Regulation Code, and other
related laws.
THE CONSTITUTIONAL BASIS FOR ENACTMENT OF
THE CORPORATION CODE
1.
The Constitutional basis for the Code is
Section 16, Art. 12 of the 1973 Constitution which
provides: "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 by or established by special charters in
the interest of the public good and subject to the
test of liability.
SCOPE OF THE CORPORATION CODE
1.
The Corporation Code
a.
Provides for the incorporation,
organization and regulation of private
corporations, both stock and non-stock,
including
educational
and
religious
corporations
b.
Statement of corporate powers and
provides for dissolution
c.
Fixes the duties and liabilities of
directors/trustees/officers
d.
Declares the rights of stockholders
or members
e.
Prescribes the conditions under
which it may conduct business
f.
Provide penalties for violation of
the Code
g.
Repeal all laws or parts thereof that
are inconsistent
CORPORATION DEFINED
1.
The law defines a, corporation as an
artificial being created by operation of law having
the right of succession and the powers, attributes
and properties expressly authorized by law or
incident to its existence.
a.
From the definition, the attributes of a
corporation are:
i.
created by operation of law
ii.
it is an artificial being
iii.
it only has the power, attributes
and property expressly allowed by law or
incident to its existence
iv.
it has the right of succession.
2.
When a corporation is said to be created
by operation of Law. It means that it cannot come
into existence without the consent or any
grant
of
authority
from
the
sovereign
government.
a.
The grant of authority by the
sovereign government is a
concession. Thus the concept known as
the Concession Theory or Government
Paternity Theory" or the "Franchise
Theory"
b.
Distinguishing between Plenary or
Corporate or General; Franchise which
refers to the privilege enjoyed
by
individuals to form a corporation, and the
Secondary or Special Franchise which
refers to the privilege enjoyed by the
(corporation} to be and to act as a
corporation.
c.
Private corporations are generally
organized
and
formed
under
the
provisions of the Corporation Code.
d.
They can also be formed under
special laws or charters which
then shall be the primary Jaw that will
govern them to be supplemented by the
Corporation Code.
3.
The corporation is said to be an artificial
being that is invisible and intangible, it is said to
exist only in contemplation of Jaw. The law
treats as though it were a person by process of
fiction". It is likewise
said to be a juristic person resulting from a
association of human
beings being granted legal personality by the
state
a.
Consequently, the corporation as a
juridical person has a personality separate
and distinct from the persons composing
it. In fact, this separate personality is
recognized under the Civil Code which
begins the minute it is said to be duly
constituted according to law.
b.
The Civil code also provides that as
such it may acquire and possess property
of all kinds as well incur obligations and
bring civil or criminal actions in conformity
with laws and regulations of their
organizations
c.
Property so required or conveyed
to the corporation is the property of the
corporation and vice versa. It has no
personality to bring action for recovery of
property belonging to stockholder or its
members.
d.
The
interest
of
a
stockholder/member
is
inchoate.
It
becomes actual, direct and existing only
upon liquidation of the assets of a
corporation and its eventual Assignment
to him.
e.
The obligations ;of a corporation
are not obligations of its stockholders or
members 'and vice-versa. The principle
though is subject to an exception, the
Doctrine of Piercing the Veil Of Corporate
3.
It may have any number of trustees as
fixed in the Articles of Incorporation or By-law
from the ranks of its membership.
a.
The term of the original trustees is
such that 1/3 of their number shall serve
for a year, the second 1/3 for two years
and the third 1/3 for three years
b.
Trustees subsequently elected shall
then serve for a term of three years.
Trustees elected to fill vacancies, shall
only serve for the unexpired portion.
4.
The members elect corporate officers,
unless otherwise provided by Articles of
Incorporation or By-Laws.
5.
Meetings can be held outside the place of
principal business. Provided, there be notice of
the date, time, and place and should always be in
the Philippines
PROBLEMS
CONCERNING
NON-STOCK
CORPORATIONS
1.
A non stock corporation cannot amend its
Articles of Incorporation and convert itself into a
stock corporation as the members are not
Entitled to share in the profits of the corporation
as / all present and future profits belong to the
corporation. By converting to. a stock corporation
it will be deemed to have distributed corporate P
assets among members without a. prior
dissolution. On the other hand, if it were a stock
corporation at the onset, it maybe converted to a
non-stock corporation as the corporation is not
distributing assets without dissolution, but rather,
they
are
waiving-their
rights.to
any
profits/dividends.
2.
XY is a recreational club which was
organized to operate a golf course for its
members with an original authorized capital stock
of PHP 100,000,000.00.
The Articles of
Incorporation or the By Laws provided for
declaration of dividends although there was a
provision that after its dissolution all its assets
shall be given to a charitable corporation. In this
case, XY is a stock corporation as the power to
declare dividends is inherent in a stock
corporation and the provision allowing for
distribution of Its assets to a charitable
corporation does not prohibit a declaration of
dividends before dissolution.
PURPOSE OF ORGANIZATION
1.
Non-Stock Corporations may be organized
for
the
following
purposes:
charitable,
recreational, fraternal, religious, trade, cultural,
educational, literary, scientific, professional,
social, civic service, industry, agricultural,
chambers or any combination subject to special
provisions
DISTRIBUTION OF ASSETS UPON DISSOLUTION
1.
The assets of a non stock "corporation are
to be distributed in accordance with the following
rules:
a.
Liabilities and obligations of the
corporation shall be paid, satisfied or
discharged, or adequate provisions made
therefore
b.
Assets held' under a condition
requiring return, transfer] conveyance and
which condition occurs by reason of
dissolution shall be returned, transferred
and conveyed.
c.
Assets received and held by the
corporation
subject
to
limitations
permitting use only for charitable,
religious, benevolent, educational or
similar purposes, but not subject to return,
transfer or reconveyance by reason of
dissolution
shall
be
transferred
to
corporations undertaking similar activities
pursuant to the plan of dissolution
d.
Other assets shall be distributed in
accordance
with
the
Articles
of
Incorporation or By-Laws determining the
distributive rights of its members or0as
provided
e.
In any other case, assets shall be
distributed to such persons, societies or
organizations whether organized for profit
or not as provided in the plan of
distribution.
2.
The plan of distribution must be consistent
with the distribution rules above-outlined. This
plan is adopted pursuant to a majority vote of the
Board of Trustees, then submitted for the
affirmative vote of 2/3 of the members having
voting rights at a regular or special meeting, prior
notice having been given.
ADDITIONAL
DISTINCTIONS
BETWEEN
CORPORATIONS
1.
As to the state of incorporation- it is a
domestic corporation if incorporated under
Philippine law or a foreign corporation if
incorporated under the laws of another country.
Note though that for purposes of transacting,
business in the Philippines, it must be one whose
state of incorporation allows Filipino corporations
of citizens to do business therein.
2.
As to whether it is open to the public or
not it is a closed corporation when it limits
stockholders to a number not exceeding 20, has
limitations on transfers and does not list in the
stock exchange or makes any public offering of
its shares41 or it is an open corporation when its
stocks are publicly traded
i.
A corporation that goes from close
to open is said to be going public public.", while
one that goes from being open to close is said to
be going private
3.
As to whether it is a public or private
corporation- a public, A corporation is one that is
formed for the government of a portion of the
state for the general good, while a private
corporation is one that is formed to undertake a
private activity which includes government
owned or controlled corporations. It also includes
quasi-public corporations that have accepted
from the state a franchise involving 0 o the
performance of a public activity for profit.
4.
As to legal right to exist- it is de jure, de
facto, a corporation by estoppels or a corporation
by prescription.
i.
A de jure corporation is one that is
considered as a legally constituted
corporation, having fully complied with all
the requirements of law.
ii.
A de facto corporation is one that is
so defectively created as not be a de jure
corporation, but nevertheless Is the result
of
bona fide attempt to incorporate
under existing statutory authority coupled
wit the exercise of the corporate powers
and is recognized by the courts as such
upon grounds of public policy in all
proceedings, except upon a direct attack
by the State questioning its corporate
existence;
iii.
The requisites of a de facto
corporation are:
1.
There is a valid law under
which the corporation may be
recognized.
2.
There is a bona fide attempt
in good faith to incorporate
3.
There is an actual valid
exercise of corporate powers.
iv.
In general a de facto corporation is
deemed
to
have
substantial
legal
existence except as against the state.
Consequently it has the same corporate
power and liabilities like a de jure
corporation. It is obliged to pay taxes
contracts that are entered, into are valid
and binding, it is allowed to bring suit
v.
Its existence is not open to a
collateral attack. The only way by which is
can be; attacked is by way of quo
warranto proceedings to determine the
right to the use or exercise of a franchise
or office and to oust the holder from his
enjoyment of the same, that is initiated by
the Solicitor General because (a) it is the
state's right or authority that is usurped
(b) it would produce endless confusion if
it's existence is questioned in every suit
that it is a party to (c) it is in the public
interest to maintain the validity of the
business transactions entered into with de
facto corporations,
vi.
A corporation by Estoppel arises
when the persons assume to act as a
corporation knowing it to be without
authority to do so; in this case said
persons shall be liable general partners for
debts, liabilities and damages and it
cannot as a defense, neither can one
dealing with it resist performance. Hence,
one who assumes an obligation to an
ostensible corporation as such; cannot
resist-performance thereof on the ground
that there was in fact no corporation.
vii.
A corporation by prescription is one
that is not formally organized as such but
has been duly recognized for a substantial
length of time as a corporation with rights
and duties that are enforceable under the
law. In the Philippines, the Roman Catholic
Church is recognized as such.
COMPONENTS OF A CORPORATION
1.
The components of a corporation are:
a.
Corporators are those who compose the
corporation either as stockholders or members
b.
Incorporators ate those stockholders or
members mentioned in the articles as originally
forming the corporation and are signatories
thereof
2.
Other components are:
a.
Promoters are those who bring about the
incorporation and organization of a corporation
b.
Subscribers are those who have agreed to
take out and pay for original unissued shares of a
corporation formed or to be formed.
c.
Subscribers become stockholders upon
payment of the agreed consideration for the
purchase of shares a provided for in their
subscription contracts.
d.
As to number of components. It is a
corporation it consists of more than one member,
or a corporation sole if it consists of only one
member.
e.
A corporation sole is an ecclesiastical
corporation as it is composed entirely of a
spiritual personas established to further a religion
and perpetuate the rights or a church. The
opposite of an ecclesiastical corporation is a lav
corporation,
NUMBER
AND
QUALIFICATIONS
OF
INCORPORATORS
1.
The required number and qualification of
Incorporators are:
a.
5 not more than 15 persons, exception
when It is a corporation sole
b.
Capacity to enter into contract, the act of
forming a corporation being a contractual in
nature.
Further,
the
articles
must
be
acknowledged to
1.
Name of the corporation - it is from the
name that a corporation acquires juridical
personality; it is through the name that it
exercises the power of succession, it is how it is
distinguished from another corporation.
a.
If the name is identical, deceptively, or
identical or confusingly similar to that of an
existing corporation, or to any name already
protected by law, or patently deceptive or
contrary to law it cannot be allowed.
b.
The change of name does not dissolve the
corporation and becomes effective only upon
approval of the amendment of the articles.
c.
Use of corporate name is a right in REM. If
a corporate name of another corporation is
confusingly similar to its corporate name, it is
entitled to seek its cancellation as the
appropriation of a dominant part is considered an
infringement. Test is priority adoption.
d.
The SEC has authority to deny the
registration corporate name that is in its
estimation cause confusion.
e.
It must not be contrary to law. Example:
section 1, RA 226 prohibits the use of the
emblem, seal, and name of the United Nations.
2.
Specific purpose for which it is being
incorporated. If it has more than one, the articles
must state what is the primary purpose to
facilitate its classification.
a.
Provided, and on stock corporation may
not include the purpose that would change or
contradict its nature as such.
b.
Other reasons why the purpose is required
are:
i.
This
operates
as
authorization
to
management to enter into contracts, the
directors, officers are made aware of the scope of
the allowable business activity.
ii.
Persons who invests will know where and
in what kind of business this money will go.
iii.
Third persons can be made aware whether
the corporations this transaction within its
authority.
a.
Be extended for periods not exceeding 50
years at any instance the amendment of the
articles. Provided, no extension can be made
earlier than five years prior to original or
subsequence expiry date unless justifiable
reasons for an earlier extension is given to the
SEC.
b.
amendment requires majority board
action,
confirmed by 2/3 of stockholders or
members, who shall have the right of appraisal
available.
c.
If delay in affecting amendment is due to
the neglect of the office with whom it is required
to be filed or a wrongful refusal on its party to
receive it, it would be considered as having been
file before the expiry date. This is known as the
DOCTRINE OF RELATION. If due to the force
majeure without the intervention of the
Corporation, it can also be considered as filed on
time.
d.
In the event of failure to have the term
extended, the remedy is to re-incorporate. The
requisites of which are:
i.
meeting of stockholders to affirm the
decision to re-incorporate. Those who are not
willing will have to be their participation after
provisions for liabilities have been made
ii.
copy of passed resolution signed by all
stockholders
voting
for
reincorporation
countersigned by the president and secretary is
submitted to the SEC with the new articles of
incorporation
iii.
deed of assignment of assets and
liabilities, including the name of the defunct
Corporation to the new one is to be attached to
the Articles.
3.
These were principal office is located is
required for effective regulation / supervision. It
refers to the place where the books and records
are kept.
a.
Change of address to another city or
municipality requires amendment of the articles .
If otherwise, note is sufficient.
8.
If a stock corporation, the following must
be stated:
1.
amount of authorized capital stock
2.
number of shares into which it is divided;
if it be with or without par value
3.
names, nationalities, residences of
original subscribers and the amount subscribe
and paid.
ii.
Defining topic of stop and related terms:
()authorized capital sto - is the amount fixed in
the articles to be subscribed and paid, or agreed
to be paid by stockholders in money, property
services or other means at the organization of the
corporation and after wards and upon which it is
to conduct business () subscribed capital stock is the amount of capital stock that is subscribed ()
outstanding capital stock is the portion of capital
6.
Number of directors or trustees which
shall not be less than 5 nor more than 15.
7.
Names, nationalities and residences of the
persons who shall serve as directors / trustees
until the first regular election.
vii.
nvestment in another Corporation or
business, and
viii.
dissolution.
5.
If shares are without par value, they:
a.
are considered fully paid and none
assessable, meaning the stockholder is no longer
liable to the corporation
b.
cannot be issued for less than P5.00
c.
entire consideration is treated as capital,
thus not available for dividends.
6.
Shares may also be classified as:
a.
FOUNDERs Share (Preferred shares) which are classified in the articles as having been
given certain rights or privileges not enjoyed by
others. Provided, if the exclusive right to vote and
they voted for in the election of the Board of
Directors, it should be for a limited period not
exceeding five years subject to SEC approval.
b.
REDEEMABLE
SHARES
which
the
Corporation may issue when expressly allowed by
the Articles and may be purchased and taken up
by the Corporation upon the expiration of a fix
period, regardless of the existence of unrestricted
retained earnings and such other terms and
conditions stated in the articles and the
certificate of stock. Note though that they hold
the power that the Supreme Court has held in the
case of Republic Planters Ban v. Agana, Sr. that
the Corporation after redemption, must have
sufficient assets in its books to cover debts and
liabilities inclusive of capital stock. As a rule,
redeemable shares are not to be re-issued unless
allowed by its Articles
c.
TREASURY SHARES are shares that have
been issued and paid for but subsequent
reacquired by purchase, redemption, donation or
any other lawful means. It may again be disposed
of for a reasonable price as determined by the
board. Note that its acquisition must be always
be funded by surplus profits, otherwise it violates
the TRUST FUND DOCTRINE as capital is
impaired.
9. If non-stock, amount of capital, names,
nationalities, residences of contributors and
amounts.
10. such other matters that are not inconsistent
with law, which they incorporate diversity be
necessary and convenient. Note, if the
corporation is to engage in nationalized business
activity, a prohibition must be stated that it will
not allow any transfer of stock or interests that
will reduce its ownership to less than the
percentage required by law.