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LECTURE NOTES ON CORPORATIONS

INTRODUCTION AND PRELIMINARIES


1.
In the Philippines, business enterprises are
organized principally in one of four forms, the
single proprietorship, the general partnership, the
limited partnership, and the corporation. The
choice of the form of organization is usually made
by the original organizers and is dictated by the
requirements of the business.
a.
Normally, a single proprietorship will be
resorted to if there is a single owner who has the
''necessary resources for the intended business
activity. Resort to partnerships and" corporations
are determined, to a large extent, by the need for
resources and limitation of liability. The choice
between a partnership and a corporation on the
other hand, is determined by Economic factors.
b.
Perhaps, the most significant economic
reason for the continued use of-partners tax
based. A partnership's distributable Income is
taxed once, while that of the corporation is taxed
twice, once at the corporate level and once again
at the stockholder-level. Then again, the same
reason may be advanced in favor of a corporate
structure as the imposition of tax at the
stockholder level may be delayed until there is a
declaration of dividends.
c.
Another, though not necessarily less
significant, is the nature of the business.
Traditionally, partnerships are ideal for short,
term business ventures, where the organizers do
not foresee the continuance of their union after
completion of the business activity and would like
to liquidate their investments quickly
d.
A corporation and a partnership are
distinguished as follows:
a)
THE MANNER OF CREATION - a corporation
is created by law, while a partnership is created
by agreement
b)
TO THE NUMBER OF INCORPORATORS- a
corporation generally requires a minimum of 5
and a maximum of 5 incorporators, while a
partnership requires a minimum of 2. The
exception is a corporation sole
c)
COMMENCEMENT OF EXISTENCE - a
corporation, commences to have existence upon
the issuance or a certificate of incorporation,
while, a partnership commences to have
existence upon agreement
d)
POWERS THAT MAY BE EXERCISED- a
corporation can oh1y~exercjse powers allowed
by law, while a partnership can exercise power
not contrary to law or public policy
e)
MANAGEMENT - a corporation is managed
by a board, while a partnership is managed by
the managing partner
f)
SUCCESSION- a corporation enjoys the
right of-succession, while a partnership does not
g)
PERSONAL LIABILITY - as a general rule,
stockholders do not have personal liability

beyond the value of their shares, while partners


are liable beyond what they have contribute
h)
TRANSFERABILITY OF INTEREST - one's
interest in a corporation is transferable without
consent, while that in partnership, requires
consent
i)
TERM OF EXISTENCE - a coloration can
exist for terms of no more than 50 years- at any
given time but subject to extension, while a
partnership is no limited as to term
j)
DISSOLUTION a corporation cannot be
dissolved without the consent of the state, while
a partnership can be dissolved without need for
the consent of the state.
e.
The Similarities are:
i.
both have juridical personality
ii.
can act only through its agent
iii.
both are composed of an aggregate
of individuals
iv.
distribution of profits is given those
who have contributed capital
v.
both can only be organized if there
is a law authorizing its registration
vi.
both are taxed as corporation
f.
Nonetheless, what is prevalent is the use
of the corporate structure as the preferred
business organization. Reasons advanced for its
use are: limitation of liability, capital generation
from equity, debt and income retention,
organizational control, free transferability of
ownership, and succession.
2.
Other forms of business organizations that
have been utilized to varying degrees are:
a.
joint accounts
b.
business trusts
c.
joint ventures
d.
cooperatives
e.
syndicates.
a.
Joint accounts or sociedad de cuentas en
participacion
are
arrangements
among
merchants who Interest themselves In the
transactions of other merchants, contributing
thereto the part of the capital they may agree
upon, and who participate in the favorable or
unfavorable results thereof in the proportion they
may determine.
It is a form of business Association in which two
or more persons interest themselves in the
business of another contributing thereto money,
property, or industry; and participating in the
results of the business in the proportion that they
may determine.
b.
A business trust is a legal relation whereby
one person, called the trustor, conveys a property
to another for the benefit of ajperson called the
beneficiary. The person in whom confidence is
reposed as regards the property is called the
trustee.

A trust agreement can actually be entered into


with a trust department of a commercial or
universal bank. Pertinent regulations issued by
the Bangko Sentral ng Pilipinas defines the term
"trust business" as any activity resulting from a
trustor-trustee
relationship
or
trusteeship
involving the appointment of a trustee by a
trustor
for
the
administration,
holding,
management of funds and/or properties of the
trustor by the trustee for the use, benefit or
advantage of the trustor or of others called
beneficiaries
In the United States, a business trust is called the
"Massachusetts Trust" because they were
developed in Massachusetts from 1910 to 1925. It
is defined as an unincorporated business
association established by a declaration or deed
of trust, and governed 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.
c.
A Syndicate is a group of people who
come together to work for a common aim. This
unincorporated business association is often
encountered among insurance companies who
may be underwriting a, large risk or bonks who
are lending 3 huge amount. Syndication therefore
the practice of dividing investment risk between
several persons in order to minimize individual
risk.
ADVANTAGES AND DISADVANTAGES OF A
CORPORATION
1.
The advantages are:
a.
the capacity to act as a legal unit
b.
limitation of or exemption from,
individual liability of shareholders;
c.
continuity of existence;
d.
transferability of shares
e.
centralized management of board,
of directors;
f.
professional management;
g.
standardized
method
of
organization, and finance; and
h.
easy capital generation.
2.

The disadvantages are:


a.
it is prone to "double taxation;
b.
they are subject to greater
governmental regulation and control;
c.
corporation may be burdened with
an Inefficient management if stockholders
cannot organize to oppose management;
d.
limited liability of stockholders may
at times translate Into limited ability to
raise creditor capital;
e.
it is harder to organize compared
to other business organizations;
f.
it is harder or more complicated to
maintain; and

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

Fiction applies. This doctrine is also known


as the'-Doctrine
of Disregarding the
Fiction of Corporate Entity or Corporate
Alter Ego doctrine. It is an exception
because the application of the doctrine
seeks to hold the stockholder or members
of the corporation personally liable for
corporate obligations.
f.
For the doctrine to apply, any of
following circumstances must obtain:
i.
Corporate fiction is being used to
defeat public
convenience.
The
convenience is the creation of a separate
and distinct person from the stockholder
or members to facilitate the transaction of
business. These are referred to as the
Alter-Ego cases. An example Is when a
stockholder or member who has an
unsavory
reputation utilizes corporate
fiction to hide his true identity for illegal
purposes, or
ii.
It justifies a wrong, protects fraud
or defends crime. These are the referred
to as the Fraud cases.
g.
To sustain the application of the
doctrine-to alter-ego cases, resort has
been had to the instrumentality Rule. The
requisites of which are:
i.
There is complete domination of
control of policy and business practice
ii.
The control is used to commit the
fraud
iii.
The control used is the proximate
cause of injury or loss
h.
The residence of a corporation is
ordinarily the place of incorporation. For
venue purposes, a domestic corporation is
a resident of a particular province, city or
municipality.
i.
Tort liability can be imposed on a
corporation because generally speaking,
the rules governing liability of a principal
or master for a tort committed by an
agent or servant are the same whether
the principal or master be a natural person
or a corporation. Hence, when a tortous
act is committed by an officer or agent of
a corporation under express direction or
authority of the corporation, It would be
liable
j.
A corporation is a person, in proper
cases, within the due process and equal
protection clause of the Constitution. Just
like a natural person, It cannot be
deprived of Its life and property due
process However, it cannot exercise
constitutional rights is inconsistent with its
being an artificial being, such as
protection of liberty. Note however that
while a corporation can invoke the right
against unreasonable search and secure,

there is a legal way to obtain the required


information as a corporation cannot refuse
to produce Its books and records lawfully
required
rely
by
the
appropriate
government agency. Hence, it has been
held that when a corporation, vested a
with special privileges and franchises, is
charged, with abuse of such privileges and
franchises cannot claim a right against self
incrimination when directed to produce its
books and records.
h.
As a rule, no criminal action can lie
against a corporation. A corporation
cannot commit felonies as provided for in
the Revised Penal Code because artificial
beings are incapable of intent, nor can it
actually perform an overt act.
i.
To make a corporation criminally
liable, the Supreme Court 0 clarified that it
is necessary that the statute, by express
words or by necessary intendment include
corporations within the persons who could
offend against criminal laws and the
legislature must at the same time
establish a procedure applicable to
corporations. Hence, the court acquitted
the president of a corporation who signed
a trust receipt as the law prevailing prior
to the enactment of the Trust Receipts Law
did not provide for the existence of
corporate criminal liability
j.
It cannot be entitled to moral
damages. Note the ruling in "MambulaoLumber vs.. PNB allowing recovery of
moral
damages
for
a
besmirched
reputation which was modified by the case
of Acme Shoe vs. Court of Appeals when
the Supreme Court said that: mental
suffering can only be experienced by one
having a nervous system and it flows from
real ills, sorrows and grief of life, all of
which cannot be suffered by respondent
banks as an artificial person. The
subsequent case of Solid Homes vs. Court
of Appeals provided that there is not
abandonment of the Mambulao ruling
because it is not ah en banc decision. This
was followed by Asset Privatization Trust
vs. Court of Appeals, which restated
Mambulao, then again by ABS-CBN v Court
of Appeals stated that Mambulao is an
obiter dictum, then BPI vs. Casa
Montessori Internationale, which again
cited Mambulao and held that for breach
of the fiduciary duty required of a bank, a
corporate client may claim moral damages
when its good reputation is besmirched by
the breach, and social humiliation results
therefrom.
The
latest
Is
Filipinas
Broadcasting Network, Inc. vs. Ago
Medical and Educational Center23 where

it was held that Article 221 The Civil Code


allows the recovery of moral damages on
cases of libel, slander or any other form of
defamation without qualification as to
whether the plaintiff is a natural or
juridical person. While the court may allow
the
grant
of
moral
damages
to
corporations, it is not automatically
granted; there must be proof of the
existence of actual basis of the damage
and its causal relation to the defendant's
acts.
k.
When a corporation is said to have
only those powers of properties expressly
authorized by law or incident to its
existence, we look to what is provided for
by law or Its charter first, then determine
the causal connection between the act or
power with what is express.
l.
This attribute is a recognition of
what is known as the "Theory of Special or
Limited Capacities. The opposite of this
theory is the "Theory of General
"Capacities" whlchTnairitaTns that a
corporation can exercise any and all
powers that may be exercised by persons.
m.
Partnerships, corporations can only
exercise those expressly authorized by
law, can be implied or are necessary to
carry out its purposes, such as acts In the
usual course of business or Incidental to y
its existence because they attach to a
corporation upon its creation and said to
be inherent such as the right of succession
or to sue. Natural persons or partnerships,
on the other hand can exercise or perform
any act provided! it is not contrary to law.
The reason being that corporations owe
their existence to the state, while natural
persons or partnerships.
Express and Implied powers can further be
distinguished as follows:
(a)
Express powers deal with main business,
object or purposed of the corporation, while
Implied powers deal with the means and methods
of attaining the object or purpose
(b)
Express powers are determined by the
language of the law and its charter while Implied
powers may change according to .time, place and
circumstances,
(c)
Test of Express powers is whether they
are found in the Words of the law or charter while
the Test of Implied powers is whether they are
purely incidental to Its express powers and is
reasonably necessary to their being carried out
The right of succession refers to its continued
existence unaffected by anything that happens to
its stockholders or members limited only by the
term stated in its Articles of Incorporation.

It does not contemplate Corporate Immortality


but rather a continuity of existence irrespective of
that of its components.
Under the Code, the term of a corporation is fifty
(50) years is subject to renewal.
KINDS OF CORPORATIONS
There are two basic kinds of corporations.
1.
A stock corporation is one whose capital
stock Is 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.
2.
A non stock corporation Is one where no
part of its income is distributable as dividends to
Its members, trustees or officers, and when any
profit is obtained as an incident if its operations
shall, whenever necessary or proper be used for
the furtherance of the purpose/s for which the
corporation was organized
3.
These general types of corporations have
also been distinguished as civil corporations
referring to those organized for the benefit,
pecuniary or otherwise, of its members as
opposed to an eleemosynary or charitable
corporation that is organized to administer a
charitable trust
4.
The provisions on stock corporations apply
in the absence of specific provisions covering
non-stock corporations.
DIFFERENCES BETWEEN STOCK AND NON STOCK
CORPORATIONS
1.
Subject to the Articles of Incorporation or
By-Laws, the right to vote may be limited,
broadened or denied to some extent.
a.
Unless.so provided, each member is
entitled to one vote.
b.
In exercising the right, he may vote by
proxy and also by mail or other similar means as
authorized by the Articles of Incorporation or ByLaws with the approval of and under conditions
prescribed by the SEC.
2.
Membership and all rights, are personal
and non transferable unless provided by the
Articles of Incorporation or By-Laws.
a.
It may be terminated in the manner and
for the uses provided in the Articles of
Incorporation or By-Laws
b.
Note that courts have no power to strip
membership as it constitutes an unwarranted and
undue interference with the right of a corporation
to determine its membership.
c.
Termination of membership .carries with it
all rights to property and other privileges unless
By-Laws provide otherwise. Note that admission
is an expressly granted power in the Corporation
Code.

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

secure the state against the possibility of a


fictitious name to be subscribed and to furnish
proof of signatures.
c.
A majority must be residents of the
Philippines. It is mandatory requirement because
the business is to be conducted in the Philippines
d.
They must be residents of the Philippines.
It Is a mandatory requirement because the
business is to be conducted in the Philippines
e.
They must own or subscribe to at least
one share of stock
CAPITALIZATION
1
Stock /corporations shall not be required
to have a minimum authorized capital stock,
except as otherwise provided by special laws,
subject, to the provisions of Section 13 providing
that 25% of the authorized capital stock must be
subscribed and 25% of which must be paid up,
the remaining balance to be payable on a date
fixed or upon call, which in no case shall be less
than Php 5,000.00
a.
Examples of capitalization requirements
as fixed by law are:
Universal
BankPHP
4,950,000,000.00.
Commercial Bank PHP
2,400,000,000.00, Thrift Bank in Metro-Manila
PHP 325,000,000.00 and a Rural Bank in Baguio
PHP 6,500,000.00.
b.
Corporations/may subscribe but cannot
be considered in determining compliance with
25/25 rule because they are not incorporators.
Such however is debatable as Section 13 states
authorized capital stock without qualification
PROCESS OF INCORPORATION:
1)
The process of incorporation begins with
the execution of the
Articles of Incorporation, which Upon return by
the SEC, together with
the Certificate of Incorporation constitutes it as
the Charters of the corporation.
2)
The Articles of Incorporation is the
document prepared by the person's region of
decomposing the Corporation and subsequently
filed with the SEC containing requirements of law.
When a group of persons which to create a
corporation, they would have to execute
documents and comply with the requirements of
this state before being given juridical personality,
since such is a mere privilege. This is another
explanation for what is known as the Concession
Theory
a.
in addition, since incorporation involves
the execution of contracts among members,
between members and the Corporation, and
betwee members or the Corporation and the
state, the process of incorporation is known as
the Contract Theory.
CONTENTS OF THE ARTICLES OF INCORPORATION

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

4. Statement of Name, nationalities and


residences of incorporators determines prima
facie compliance with constitutional and legal
requirements.
5
Term of existence is for a maximum of 50
years from date of incorporation unless sooner
dissolved or the term is extended.

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.

stock issued and held by persons other than the


corporation itself () unissued capital stock - is the
portion of capital stock not issued or subscribed ()
paid up capital stock - is the portion of subscribed
or outstanding capital stock that is paid () Legal
Capital - is the amount equal to the aggregate
par value in or issued value of outstanding capital
stock.
iii.
Shares or stocks or the representation of
ones right or interest in a corporation, its
management from the right to vote, incorporate
earnings may be of dividends, and property upon
dissolution.
iv.
The authorized capital stock when divided
into shares may:
1.
further be divided into classes/series or
both, having rights, privileges or restrictions as
stated in the Articles. Absent such, they are equal
in all respects. This classification may also be
undertaken for the purpose of complying with
constitutional or legal requirements.
2.
When so classified, they may further be
divided into common shares entitled to a pro-rata
division of profits or preferred shares that are
given preference in the distribution of assets,
dividends or other privileges, provided such are
not in violation of the Corporation Code or do not
have a right greater than corporate creditors.
Such preferences are decided by the board, as it
may be authorized to fix terms and conditions,
which shall be effective only upon filling of the
appropriate certificate with the SEC.
3.
if shares are classified as common, they
may or may not have par value except when it is
a bank, trust company, utility, building or loan
association.
4.
If the shares are classified as preferred, it
a.
should always have par value
b.
it may be deprived of voting rights,
together with redeemable shares but if so, there
must be class/series which shall have full voting
rights or In addition, even if voting rights are not
enjoyed, holders of such shares shall still vote in
the following instances:
i.
amendment of articles
ii.
adoption or amendment of by laws
iii.
Sale, lease, exchange, pledge or other
disposition of all or substantially all of corporate
property
iv.
increase/decrease of corporate bonded
indebtedness
v.
increase/decrease of corporate capital
stock
vi.
merger/consolidation

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.