LAW ON PRIVATE CORPORATIONS

Corporation Code of the Philippines BP Blg. 68

TITLE I - GENERAL PROVISIONS
SCOPE OF THE CODE
The Corporation Code is an act which:
1. Provides for the incorporation, organization and regulation of private
corporations;
2. Defines their powers and provides for their dissolution;
3. Fixes the duties and liabilities of directors or trustees and other officers
thereof;
4. Declares the rights and liabilities of stockholders or members;
5. Prescribes the conditions under which corporations including foreign
corporations may transact business;
6. Provides penalties for violations of the Code; and
7. Repeals all laws and parts of laws in conflict and inconsistent with the
Code.
THEORIES ON FORMATION OF A CORPORATION
1. Concession theory A corporation is an artificial creature without any
existence until it has received the imprimatur of the state according to
law, through SEC
2. Theory of corporate enterprise or economic unit The corporation is
not merely an artificial being, but more of an aggregation of persons
doing business, or an underlying business unit
STATUTORY DEFINITION (Section 2) A corporation is an artificial being
created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its
existence.

Doctrine of ultra vires acts/Doctrine of Limited Capacity a

corporation, being a mere creation of law, can exercise only those powers
which are conferred by law. (Sec. 45)

Law3 Private Corporations

ATTRIBUTES OF A CORPORATION:
1. It is an artificial being;
2. It is created by operation of law;
3. It has the right of succession; and
4. It has only the powers, attributes and properties expressly authorized
by law or incident to its existence.
DISTINCTIONS BETWEEN A PARTNERSHIP AND A CORPORATION:
PARTNERSHIP
CORPORATION
1. Creation
Mere agreement of the parties
By law or by operation of law
2.No. of incorporators
At least 2 persons
5-15 incorporators (except
corporation sole)
3.Commencement of juridical personality
From the moment of execution of the
From the date of issuance of the Cert.
contract
of Inc. by the SEC
4.Powers
May exercise any power authorized by Can exercise only the powers
the partners (provided it is not
expressly granted by law or implied
contrary to law, morals, good customs, from those granted or incident to its
public order, public policy)
existence
5.Management
When management is not agreed
Vested in the board of directors or
upon, every partner is an agent of the
trustees
partnership
6.Effect of mismanagement
A partner as such can sue a partner
Suit against a member of the BOD/T
who mismanages
who mismanages must be in the name
of the corporation
7.Right of Succession
No right
Has right of succession
8.Extent of liability to third persons
Partners are liable personally &
SHs are liable only to the extent of the

Atty. Jonathan B. Tambol

subsidiarily (sometimes solidary) for

shares subscribed by them (limited
rd
partnership debts to 3 persons
liability feature)
9.Transferability of interest
Partner cannot transfer his interest in
SH has generally the right to transfer
the partnership so as to make the
his shares w/o prior consent of the
transferee a partner w/o the
other SHs because corporation is not
unanimous consent of all the existing
based on this principle
partners because partnership is based
on the principle of delectus personae
10.Term of existence
Any period of time stipulated by the
May not be formed for a term in
partners
excess of 50 years extendible to not
more than 50 years in any 1 instance
11.Firm name
Limited partnership is required by law
Any name provided it is not the same
to add the word Ltd. to its name
as or similar to any reg. firm name
12.Dissolution
May be dissolved at any time by any or Can only be dissolved with the consent
all of the partners
of the State
13.Governing law
New Civil Code
Corporation Code
SIMILARITIES BETWEEN A PARTNERSHIP AND A CORPORATION:
1. Juridical personality separate and distinct from that of the individuals
composing it;
2. Can act only through agents;
3. Composed of an aggregate of individuals (except corporation sole);
4. Distributes its profits to those who contribute capital;
5. Can be organized only where there is a law authorizing its organization;
6. A partnership is taxable as a corporation.

2.

3.

4.

Case: If A, Inc. buys the share of J, Inc., which later turns out to be
insolvent, will A, Inc. answer for the debts of J, Inc.? (Edward J. Nell vs.
Pacific Farms, 15 SCRA 415)
GR: Where a corporation buys all the shares of another
corporation, this will not operate to dissolve the other corporation and
as the two corporations still maintain their separate corporate entities,
one will not answer for the debts of the other.
Exceptions:
a.) If there is an express assumption of liabilities;
b.) There is consolidation or merger;
c.) If the purchase was in fraud of creditors;
d.) If the purchaser becomes a continuation of the seller.
N.B. Unlike a partnership which may be dissolved by many causes,
either by the withdrawal, death, insolvency, etc. of a partner, the right
of succession of a corporation allows it to maintain its separate juridical
personality in spite of what happens to the stockholders or members
who constitute it.
Limited Liability to Investors
Stockholders are personally liable for corporate debts and
liabilities only to the extent of what they have invested (paid-up
capital) and what they have promised to invest in the corporation
(unpaid subscription)
Free Transferability of Units of Ownership
Doctrine of delectus personae in partnership is not applicable and
that stockholders hold their shares as personal property with rights
to dispose, assign or encumber them as they may desire
Centralized Management
All corporate powers are vested in the Board of Directors or
Trustees
Stockholders or members no management powers, only to elect
directors or trustees

FOUR BASIC ADVANTAGES OF CORPORATE ORGANIZATIONS:

1. Strong separate juridical personality

Law3 Private Corporations

Atty. Jonathan B. Tambol

DOCTRINE OF CORPORATE FICTION/SEPARATE PERSONALITY

A corporation is a legal or juridical person with a personality separate
and apart from its individual stockholders or members composing it
and from other corporations to which it may be connected.
Rudimentary is the rule that a corporation is invested by law with a
personality distinct and separate from its stockholders or members
by legal fiction and convenience, it is shielded by a protective mantel
and imbued by law with a character alien to the persons comprising it.
(Lim vs. CA, 323 SCRA 102)

Certificate of Registration/Incorporation by the SEC issuance thereof

is the operative act for the existence of a corporation
Once Certificate of Registration is issued, the corporation acquires a
personality distinct and separate from that of its stockholders or
members.
Effects of Doctrine of Separate Personality:
1. The corporation may not be held liable for acts or liabilities of
shareholders;
2. May acquire and possess properties as well as bring legal action in
its name;
3. Properties so acquired or conveyed to the corporation is the
property of the corporation, vice versa
4. No personality to bring action for recovery of property belonging
to individual shareholders or members
5. Not entitled to moral damages (except: when it has established a
good reputation that is debased, resulting in its humiliation in the
business realm)
Note: It was held that a juridical person such as a corporation can
validly complain for libel or any form of defamation and claim for
moral damages because Art. 2219 (7) of the Civil Code does not
qualify whether the plaintiff is a natural or a juridical person.
(Filipinas Broadcasting vs. Ago Med., GRN 141994, June 17, 2005)

Law3 Private Corporations

Some cases on separate juridical personality:

1. Walter Smith vs. Ford (GRN 42420, Nov. 20, 1936) obligation of
the President of a corporation incurred in his personal capacity
cannot be collected from the corporation where he is an officer
2. Businessday Information Systems vs. NLRC (221 SCRA 9)
President/manager cannot be held personally liable for the money
claims of discharged corporate employees unless he acted with
evident bad faith in terminating their employment.

DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

Under this doctrine, a corporation will be looked upon as a separate
legal entity as a general rule, and until sufficient reason to the contrary
appears; but when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, defend crime, or when used
as a mere alter ego, the law will regard the corporation as an
association of persons (the corporation and the persons who compose
it are treated as identical).
To do this, the courts must be sure that the corporate fiction was
misused, to such an extent that injustice, fraud or crime was
committed upon another. It is the protection of the interests of
innocent third persons dealing with the corporate entity which the law
aims to protect by this doctrine. (Traders Royal Bank vs. CA, 269 SCRA
15)
There must be a clear and convincing evidence. The wrongdoing must
be clearly and convincingly established. It cannot be presumed.

3 Classes of Piercing:
1. Fraud cases when a corporation is used as a cloak to cover fraud
or to do wrong
2. Alter ego cases when the corporation is merely a farce since the
corporation is an alter ego, business conduit or instrumentality of a
person or another corporation
3. Equity cases to achieve justice or equity

Atty. Jonathan B. Tambol

1.

Control Test used in determining the applicability of the doctrine

(Alter ego cases)
1. Control must be complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive duty, or dishonest and unjust acts in contravention of
plaintiffs legal right; and
3. The aforesaid control and breach of duty must approximately
cause the injury or unjust loss complained of.

2.

3.
4.

5.

Cases where piercing applied:

1. The corporate entity is being merely used as an alter-ego of the
controlling officers or stockholders, such as when the officers and
directors of two corporations are practically the same and both
corporations hold office in the same room;
2. When the corporate officers do fraudulent or illegal acts in the
name of the corporation, such as illegal dismissal or unfair labor
practices;
3. When one tries to evade civil liability by incorporating the
properties or the business;
4. Where the corporate fiction was used as a means to perpetrate a
social injustice or as a vehicle to evade obligations or confuse the
legitimate issues;
5. Where it was used to avoid a judgment credit, to avoid inclusion of
corporate assets as part of the estate of a decedent, to avoid
liability arising from debt;
6. When used to avoid a contractual commitment by the main
stockholders or officers against his contracted non-competition
commitment.
When piercing not applicable:

Law3 Private Corporations

When other remedies are still available because piercing is a

remedy of last resort, e.g. when the corporation employed fraud in
the foreclosure proceedings where the remedy of annulment
based on vice of consent is available (Umali vs. CA, 189 SCRA 529);
Not allowed in fraud cases unless the remedy sought is to make
the officer or another corporation pecuniary liable for corporate
debts;
Cannot be allowed when there is no wrong committed;
Where there is no allegation, much less even a scintilla of
substantiation that the parties interest in the corporation are so
considerable as to merit a declaration of unity of their civil
personalities;
Cannot be employed to allow fraud, e.g. where seller of real
property wishes to avoid the consequences of a sale to a corporate
entity by claiming that the broker through whom the seller
transacted sale was also the President of the corporate buyer,
when such fact was known to her from the beginning (Araneta Inc.
vs. Tuazon de Paterno, 91 Phil 786).

CLASSIFICATION OF CORPORATIONS (Sec. 3):

1.

2.

Stock Corporation one whose capital stock is divided into shares and
which is authorized to distribute to shareholders dividends or
allotments of the surplus profits on the basis of the share held; created
and operated for the purpose of making a profit
Non-stock Corporation does not issue stocks nor distribute dividends
to its members; not created for profit but for the public good and
welfare

OTHER CLASSIFICATIONS:
1. As to number of persons who compose them
a.) Corporation aggregate more than one member or corporator
b.) Corporation sole composed of one member or corporator only
and his successors, such as a bishop
2. As to whether for religious purposes or not

Atty. Jonathan B. Tambol

3.

4.

5.

a.) Ecclesiastical organized for religious purposes

b.) Lay organized for a purpose other than for religion
As to whether they are for charitable purposes or not
a.) Eleemosynary for charitable purposes
b.) Civil for business or profit
As to State or by whose laws they have been created
a.) Domestic incorporated under the laws of the Philippines
b.) Foreign formed, organized, or existing under any laws other than
those of the Philippines
As to their legal right to corporate existence
a.) De jure existing in fact and in law
b.) De facto (Sec 20) existing in fact but not in law; there exists a
flaw in its incorporation (Note: illustrate case where A,B,C,D,E
formed a corporation but D and E failed to sign by omission in
good faith)
-One which has not complied with all the requirements
necessary to be a de jure corporation but has complied
sufficiently to be accorded corporate status as against third
parties although not against the state.
Examples:
1.) AOI fails to state all matters required by law;
2.) Name of the corp. closely resembles that of a pre-existing corp.
that it will tend to deceive the public;
3.) Incorporators or certain number of them are not residents of the
Philippines;
4.) Acknowledgement of the AOI or certificate of incorporation is
insufficient or defective in form or acknowledged before the wrong
officer;
5.) Violation of Filipino ownership;
6.) Minimum paid-up capital stock has not been paid to and received
by the corporate treasurer contrary to his affidavit
The only way to question its corporate existence is in a direct
proceeding by the state (quo warranto) through the Solicitor General.
Private individuals cannot raise the objection in such a case either
directly or indirectly, and nobody can raise the objection collaterally.

Law3 Private Corporations

6.

7.

8.

9.

As to whether they are open to the public or not

a.) Close limited to selected persons or members of a family
b.) Open open to any person who may wish to become a
stockholder or member thereto
As to their relation to another corporation
a.) Parent or Holding one which is so related to another corporation
that it has the power either, directly or indirectly to, elect the
majority of the directors of such other corporation
b.) Subsidiary one which is so related to another corporation that
the majority of its directors can be elected either, directly or
indirectly, by such other corporation
As to whether they are corporations in a true sense or only in a limited
sense
a.) True one which exists by statutory authority
b.) Quasi-corporation exists without formal legislative grant,
exception to the rule that a corporation can exist only by authority
of law
1.) Corporation by prescription one which has exercised
corporate powers for an indefinite period without
interference on the part of the sovereign power and which, by
fiction of law, is given the status of a corporation, e.g The
Roman Catholic Church
2.) Corporation by estoppel (Sec 21) one which in reality is not
a corporation, either de jure or de facto, because it is so
defectively formed, but is considered a corporation in relation
to those only who, by reason of their acts or admissions, are
precluded from asserting that it is not a corporation
As to whether public or private
a.) Public formed or organized for the government of a portion of
the State
b.) Private formed for some private purpose, benefit or end; it may
either be a stock or non-stock, government-owned or controlled or
quasi-public

Atty. Jonathan B. Tambol

IMPORTANT CLASSES OF PERSONS (Sec 5)

1. Promoter one who by contract of lease or services or agency, initiates
and undertakes the pre-incorporation steps until the actual formation
of the corporation; lays the groundwork for corporate existence
2. Corporators those who compose the corporation, whether
stockholders or members; includes incorporators, stockholders or
members
3. Incorporators those corporators mentioned in the articles of
incorporation as originally forming and composing the corporation and
who executed and signed the articles of incorporation as such
4. Stockholders owners of shares of stock in a stock corporation; also
called shareholders
5. Members corporators of a corporation which has no capital stock
6. Subscribers persons who have agreed to take and pay for original
unissued shares of a corporation formed or to be formed
7. Underwriter a person who guarantees on a firm commitment and/or
declared best effort basis the distribution and sale of securities of any
kind by another company

Components of a corporation: Incorporators, Corporators,

Stockholders/Members, Promoter, Board of Directors/Trustees, Executive
Committee, Officers of the corporation

CLASSIFICATION OF SHARES (Sec 6)

General Rule: The shares of stock in a corporation may be divided into classes or
series of shares, or both, any of which classes of series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation.
Exceptions:
1.) No share may be deprived of voting rights except those classified
and issued as preferred or redeemable shares.
2.) There shall always be a class or series of shares which have
complete voting rights.
3.) Any or all of the shares or series of shares may have a par value or
have no par value as may be provided for in the articles of
incorporation, except that banks, public utilities, insurance
companies, trust companies, and building and loan associations

Law3 Private Corporations

(BPI-TB) shall not be permitted to issue no par value shares of

stock.
N.B. There can be no privilege or restriction on any share other than what is
provided for in the articles of incorporation.
WHO CAN CLASSIFY SHARES:
1. Incorporators The classes and number of shares which a corporation
shall issue are first determined by the incorporators as stated in the
AOI filed with the SEC.
2. BOD and SHs After the corporation comes into existence, they may be
altered by the BOD and the SHs by amending the AOI pursuant to Sec.
16

Doctrine of Equality of Shares Under the law, except as otherwise provided

by the AOI and stated in the certificate of stock, each share shall be in all
respects equal to every other share. (Sec. 6, par. 5)

CAPITAL STRUCTURE
1. Capital stock amount fixed in the corporate charter to be subscribed
and paid in cash, in kind or in property at the organization of the
corporation or afterwards and upon which the corporation is to
conduct its operation
2. Capital value of the actual property of the corporation whether in
money or property
3. Authorized capital stock capital stock divided into shares of par
values as specified in the AOI
4. Subscribed capital stock amount of the capital stock subscribed
whether fully paid or not
5. Outstanding capital stock portion of the capital stock issued to
subscribers except treasury shares
6. Paid-up capital stock portion of the subscribed or outstanding capital
stock that is paid
7. Unissued capital stock portion of the capital stock that is not issued
or subscribed; does not vote and draws no dividends

Atty. Jonathan B. Tambol

8.

Legal capital amount equal to the aggregate par value and/or issued
value of the outstanding capital stock.

CLASSES OF SHARES
1. Common shares basic class which is ordinarily and usually issued
without extraordinary rights and privileges and the owners thereof are
entitled to a pro-rata share in the profits of the corporation and in its
assets
A stockholder who owns at least one common share has the following
rights:
a.) Right to vote at meetings;
b.) Right to dividends;
c.) Right to examine corporate books.
2. Preferred Shares those which entitle the shareholder to some priority
on dividends and asset distribution; always with par value and enjoy
preferences in dividends, voting, and corporate property upon
dissolution (Sec. 6)
Preferences may be:
a.) Stated in the AOI; or
b.) Fixed by BOD when authorized by AOI, provided such terms and
conditions shall be effective upon filing of a SEC certificate
Kinds of Preferred Shares:
a.) Preferred shares as to assets preference in distribution of assets
after liquidation
b.) Preferred shares as to dividends to receive dividends at fixed
rates before any dividends at all are paid to common stockholders
1.) Cumulative preferred share payment of current dividends +
dividends in arrears
2.) Non-cumulative preferred share current dividends only
3.) Participating preferred share stipulated dividends at the
preferred rate + right to participate in the remaining profits
4.) Non-participating preferred share stipulated dividends only
5.) Cumulative-participating preferred share combination of
the cumulative & participating

Law3 Private Corporations

3.

4.

5.
6.

7.

8.

Redeemable shares (callable) those which permit the issuing

corporation to redeem or purchase its own shares (Sec. 8); redeemable
at a fixed date or at the option of either the corporation or SH or both
at a redemption price; may be issued only when expressly so provided
in the AOI
Treasury shares earlier issued as fully paid and have thereafter been
acquired by the corporation by purchase, donation, redemption, or
through some lawful means (Sec. 9); only surplus earnings may be used
for its purchase; may again be disposed for a reasonable price; no
voting right, no right to dividends while they remain in the treasury
Delinquent shares the corporation may bid at a public sale
Founders shares issued to organizers and promoters of a corporation
in consideration of some supposed right or property (Sec. 7)
Par value share one with a specific money value fixed in the AOI and
appearing in the certificate of stock for each share of stock of the same
issue; primary purpose is to fix the minimum subscription or issue price
of the shares, thus, assuring creditors that the corporation would
receive a minimum amount for its stocks
No par value share one without any stated or par value appearing on
the face of the certificate of stock; has always an issued value; same
rights with holders of par value stock
Limitations:
a.) Cannot have an issued price of less than P5.00;
b.) Entire consideration for its issuance constitutes capital so that no
part of it should be distributed as dividends;
c.) Cannot be issued as preferred stocks;
d.) Cannot be issued by BPI-TB;
e.) AOI must state the fact that it issued no par value shares as well as
the number of said shares;
f.) Once issued, deemed fully paid and non-assessable
Voting share with right to vote; given to common stock, withheld
from preferred
N.B. The rule is not one stockholder, one vote but one
share, one vote because representation in a corporation is
commensurate to extent of ownership.

Atty. Jonathan B. Tambol

9. Non-voting share without right to vote; preferred or redeemable

shares
* Matters where non-voting shares can vote upon (MAIDS)
a.) Merger or Consolidation
b.) Amendment of AOI
c.) Adoption & amendment of by-laws
d.) Incurring, creating or increasing bonded indebtedness
e.) Increase/decrease of capital stock
f.) Investment of corporate funds
g.) Dissolution
h.) Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property
Note: election of directors or trustees (Sec. 24) not included
10. Promotion share issued to promoters, or those in some way
interested in the company, for incorporating the company, or for services
rendered in launching or promoting the welfare of the company, such as
advancing fees for incorporating, advertising, attorneys fees, surveying
11. Share in escrow subject to an agreement wherein share is deposited
by the grantor with a third person to be kept by the depositary until the
performance of a certain condition or the happening of a certain event
contained in the agreement
12. Watered stock issued not in exchange for its equivalent value either
in cash, property, share, stock dividends, or services
- includes stocks:
a.) issued without consideration (bonus share)
b.) issued as fully paid when the corporation has received a lesser sum
of money than its par or issued value
c.) issued for a consideration other than actual cash such as property or
services, the fair valuation of which is less than its par or issued value
d.) issued as stock dividend when there are no sufficient retained
earnings to justify it

Law3 Private Corporations

TITLE II - INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS

NUMBER & QUALIFICATIONS OF INCORPORATORS (Sec 10)
1. natural persons;
2. not less than 5 but not more than 15;
3. of legal age;
4. majority must be resident of the Philippines (not necessarily citizens of
the Philippines except when the law requires minimum Filipino
participation);
Nota Bene: Filipino Citizenship requirement
a.) 100% Filipino owned
1.) Mass media;
2.) Retail trade (less than US$ 2,500,000);
3.) Small-scale mining;
4.) Private security agencies;
b.) 80% Filipino owned private radio communications network
c.) 70% Filipino owned
1.) Pawnshop;
2.) Advertising
d.) 60% Filipino owned
1.) Utilization, exploration, development of natural resources
2.) Public utilities
3.) Banking
e.) 40% Filipino owned
1.) Financing companies regulated by the SEC;
2.) Investment houses regulated by the SEC
5. each must own or subscribe to at least one share
There must be at least five (5) stockholders in a stock corporation.
STEPS IN THE CREATION OF A CORPORATION
1. Promotion a 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 therefore.
a.) Discovery
b.) Investigation

Atty. Jonathan B. Tambol

2.

3.

c.) Assembly
Incorporation
a.) Drafting and execution of AOI by the incorporators and other
documents required for registration of the corp;
b.) Filing with the SEC of the AOI;
c.) Payment of filing and publication fees; and
d.) Issuance by the SEC of the certificate of incorporation.
Formal organization and commencement of the transaction of the
business
a.) Adoption of By-Laws and filing of the same with the SEC;
b.) Election of BOD/T and officers;
c.) Establishment of principal office;
d.) Providing for subscription & payment of capital stock.

Incorporators vs. Corporators:

INCORPORATORS
signatory to articles of incorporation
do not cease to be such (Once an
incorporator, forever an incorporator)
number is limited to 5-15
must have contractual capacity

CORPORATORS
stockholder of stock corporation or
member of non-stock corporation
cease to be such if they are no longer
stockholders
no restriction as to number
may be such through a guardian

CORPORATE TERM (Sec 11)

50 years maximum, extendible to not more than 50 years at any single
instance
May be shortened or extended
Any number of extensions, no limits, perpetual life
Can only be extended before it expires and within the last 5 years of its
existence
Exception: unless there are justifiable reasons for an earlier extension
as may be determined by SEC
If there is an extension, the AOI must be amended; requires the 2/3
votes of the OCS (Sec. 16); those opposing stockholders can exercise
their appraisal right (Sec. 37)

Law3 Private Corporations

Remember: 50-50-5 Rule

Doctrine of Relation The filing and recording of a certificate of

extension after the term cannot relate back to the date of the passage
of the resolution of the stockholders to extend the life of the
corporation. However, the doctrine of relation applies if the failure to
file the application for extension within the term of the corporation is
due to the neglect of the officer with whom the certificate is required
to be filed or to a wrongful refusal on his part to receive it.

MINIMUM CAPITAL STOCK REQUIRED OF STOCK CORPORATIONS (Sec 12 & 13)

capital stock no minimum requirement as long as the paid up capital is not
less than P5,000.00
at least 25% of authorized capital stock must be subscribed by the
stockholders at the time of incorporation
at least 25% of the total subscription must be paid at the time of
subscription

Remember: 25-25 Rule + P5,000 rule

N.B. These are mandatory requirements.

CONTENTS/FORMS OF AOI (Sec 14, 15)
Articles of Incorporation (AOI) the document prepared by the persons
establishing a corporation and filed with the SEC containing the matters
required by the code
CONTENTS OF ARTICLES OF INCORPORATION:
1. Name of corporation;
2. Purpose/s, indicating the primary and secondary purposes;
3. Place of principal office;
4. Term/duration;
5. Names, citizenship, and residences of incorporators;
6. Number, names, citizenship and residences of directors/trustees
7. If stock corporation, amount of capital stock, number of share and in
case of par value stock corporation, the par value of each share;
8. Names, residences, number of shares and amounts of subscription of
subscribers which shall not be less than 25% of authorized capital
stock;

Atty. Jonathan B. Tambol

9.

Names, residences and amount paid by each subscriber on their

subscription, which shall not be less than 25% of total subscription;
10. Name of treasurer elected by subscribers; and
11. If a corporation engages in a nationalized industry, a statement than no
transfer of stock will be allowed if it will reduce the stock ownership of
Filipinos to a percentage below the required legal minimum.
CORPORATE NAME (Sec 18)
The corporation acquires juridical personality under the name stated in
the certificate of incorporation. It is the name of the corporation which
identifies and distinguishes it from other corporation, firms, or entities.
Limitations:
1. Names which are identical, deceptively similar to that of any existing
corporation;
2. A name already protected by law;
3. A name which is patently deceptive, confusing or contrary to existing
laws
State can no longer be used as the first word of a corporate name
(SEC Circular)
deceptively similar there is tendency that the ordinary person will
be misled into thinking that such name is the same with another one
Case: Converse vs. Universal Rubber Products (147 SCRA 154)
Universal Converse is confusingly similar to Converse
Requisites:
a.) Complainant corporation acquired prior right over the use of the
name
b.) Proposed name is either identical, deceptively or confusingly
similar to that of any existing corporation or patently deceptive,
confusing or contrary to existing laws
Change of name must comply with the formalities prescribed by law
1. Amendment of the AOI
2. Filing of the amendment with the SEC
3. Once approved, SEC issues an amended certificate of incorporation
under the amended name

Law3 Private Corporations

PURPOSES OF CORPORATION
Must be lawful; if purpose is patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations, the same is a ground
for the rejection or disapproval by the SEC of the AOI; cannot be
formed for the practice of a profession, e.g., law, medicine, etc.
Must be definitely stated
Primary purpose must be stated
Secondary purposes must be compatible with the primary purpose and
with one another
PRINCIPAL OFFICE
Must be the exact complete address (SEC requirement); must be the
city or town, not merely the province
Metro Manila can no longer be stated as principal office
Change of address
a.) Change of city or municipality amendment of the AOI to be filed
with the SEC
b.) If located within the same city or municipality notice only
regarding the change of address
COMMENCEMENT OF CORPORATE EXISTENCE
A corporation commences to have juridical personality and legal
existence only from the moment the SEC issues to the incorporators a
certificate of incorporation under its official seal. Once issued, the
certificate becomes the charter or corporate franchise from which the
authority of the corporation to operate as such flows.
Religious corporations from and after the filing with the SEC of the
AOI, the chief archbishop, etc. shall become a corporation sole
Cooperatives upon registration with the Cooperatives Development
Authority (RA 6938, Sec. 16)
AMENDMENT OF AOI (Sec 16)
Corporate Charter an instrument or authority from the sovereign
power bestowing the right or privilege to be and act as a corporation.

Atty. Jonathan B. Tambol

PROCEDURE FOR AMENDMENT OF AOI

1. resolution by at least a majority vote of the Board; and
2. vote in a meeting or mere assent of 2/3 of the OCS, or in case of nonstock, by the members
subject to the appraisal right of dissenting stockholders
Appraisal Right right of a stockholder to demand the fair value of his share
after dissenting from a proposed corporate action involving a fundamental
change in the corporation in the cases provided by law; Sec 81-86
Corporations Governed by Special Law (banks, banking & quasi-banking
institutions, building & loan associations, trust companies & other financial
intermediaries, insurance companies, public utilities, educational institutions)
AOI or amendment thereto must be accompanied by a favorable
recommendation of the appropriate government agency, to the effect that such
AOI or amendment is in accordance with law.
GROUNDS FOR REJECTION/DISAPPROVAL OF AOI or AMENDMENT (Sec 17)
1. No substantial compliance with the required form
2. Purpose/s are patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations
3. Treasurers affidavit is false
4. Citizenship requirement has not been complied with
Keyword: NUT-C
WHAT CANNOT BE AMENDED IN THE AOI:
Those matters referring to facts existing as of the date of the
incorporation, such as:
1. Name of incorporators;
2. Names of original subscribers to the capital stock of the corporation
and their subscribed and paid up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of a non-stock
corporation;
5. Date and place of execution of the AOI;
6. Witnesses to and acknowledgment of the articles.

Law3 Private Corporations

ARTICLES OF INCORPORATION vs. BY-LAWS:

Articles of Incorporation
By-Laws
Essentially a contract between the
Rule for the internal government of
corporation and the
the corporation but has the force of a
stockholders/members; between the
contract between the corporation and
stockholders/members inter se; and
the stockholders/members and
between the corporation and the State between the stockholder and
(must be notarized)
members themselves
Executed before incorporation
Usually executed after the
incorporation although Sec. 46 allows
simultaneous filing of the two
A condition precedent in the
A condition subsequent
acquisition of corporate existence
Amended by a majority of the
May be amended by a majority vote of
directors/trustees and stockholders
the BOD and majority vote of OCS or a
representing 2/3 of the outstanding
majority of the members in non-stock
capital stock or 2/3 of the members in
corporations
case of non-stock corporations
Power to amend/repeal articles cannot Power to amend/repeal by-laws or
be delegated by the
adopt new by-laws may be delegated
stockholders/members to the
by the 2/3 of the OCS or 2/3 of the
BOD/BOT
members in case of non-stock
corporation
NON-USE OF CORPORATE CHARTER & CONTINUOUS INOPERATION (Sec 22)
1. Non-user for 2 years when the corporation does not formally organize and
commence the transaction of its business or the construction of its works within
two (2) years from the date of its incorporation, its corporate powers cease and
the corporation shall be deemed dissolved (automatic).
2. Non-user for 5 years when the corporation has commenced the transaction
of its business but subsequently becomes continuously inoperative for a period
of at least five years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of incorporation; not
automatic, requires notice and hearing.

Atty. Jonathan B. Tambol

TITLE III BOARD OF DIRECTORS/TRUSTEES/OFFICERS

BOARD OF DIRECTORS & TRUSTEES (Sec 23)
QUALIFICATIONS:
1. For a stock corporation, ownership of at least one share of the capital
stock of the corporation in his own name, and if he ceases to own at
least one share in his own name, he automatically ceases to be a
director. For a non-stock corporation, only members of the corporation
can be elected to the BOT.
What is material is the legal title to, not beneficial ownership of the
stocks appearing on the books of the corporation.

A person who does not own a stock at the time of his election or
appointment does not disqualify him as a director if he becomes a
shareholder before assuming the duties of his office.
2. A majority of the directors/trustees must be residents of the
Philippines.
3. Must not have been convicted by final judgment of an offense,
punishable by imprisonment for a period exceeding 6 years, or a
violation of the Corporation Code committed within 5 years prior to the
date of his election or appointment. (Sec 27)
4. Must be of legal age.
5. Only natural persons can be elected directors/trustees.
6. Other qualifications as may be prescribed in the by-laws of the
corporation or in special laws or regulations.
TERM OF OFFICE
Hold office for one (1) year until their successors are elected and
qualified
Holdover Principle If no election is conducted or no qualified
candidate is elected, the directors or trustees shall continue to act as
such in a hold-over capacity until an election is held and a qualified
candidate is so elected.
GENERAL RULE Unless otherwise provided in the Code, all corporate powers
and prerogatives are vested directly in the Board of Directors or Trustees.

Law3 Private Corporations

Exceptions:
1. In case of an Executive Committee authorized in the by-laws;
2. Contracted manager which may be an individual, a partnership or
another corporation (Note Sec. 44 if contracted manager is another
corporation);
3. Close corporations stockholders may directly manage the business of
the corporation instead, if the AOI so provide.
Principle on delegation of board power the Board may validly
delegate some of its functions and powers to officers, committees or
agents
N.B. The power to purchase real property is vested in the board. While a
corporation may appoint agents to negotiate for the purchase of real property
needed by the corporation, the final say will have to be with the board, whose
approval will finalize the transaction. A corporation can only exercise its powers
and transact its business through its board of directors and through its officers
and agents when authorized by a board resolution or by its by-laws. (Sps. Firme
vs. Bukal Enterprises, GRN 146608, Oct. 23, 2003)
ELECTION OF DIRECTORS OR TRUSTEES (Sec 24)
STOCK CORPORATION
NON-STOCK
Presence during election
Owners of a majority of the OCS, in
Majority of the members entitled to
person or by proxy, must be present at vote in person or by proxy, if allowed
the election of the directors.
in its AOI or by-laws, must be present.
Manner of voting
Cumulative voting is mandatory; a
Cumulative voting is generally not
matter of right granted by law to each available unless allowed by the AOI or
SH with voting rights
by-laws, since each member is entitled
only to one vote
METHODS OF VOTING
A. Straight Voting every SH may vote such number of shares for as
many persons as there are directors to be elected.

Atty. Jonathan B. Tambol

To illustrate: If A owns 10 shares of stock in a corporation and there are

5 directors to be elected, he is entitled to 50 votes which he may give
to the 5 candidates he chose by giving 10 votes each. The votes are
distributed equally among the 5 candidates of his choice without
preference.
B. Cumulative Voting for one candidate a SH is allowed to concentrate
his votes and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall
equal.
To illustrate: In the above example, A may cast all the 50 votes in favor
of any one candidate. Suppose there are 50 shares and 40 of these
shares are owned by A while the remaining 10 shares are owned by B,
C, D and E. if there are 5 directors to be elected, A is entitled to 200
votes. The highest number of votes that A can give each of his 4
candidates is 50. So, there is one remaining slot to complete the 5
directors. B, C, D and E can now cumulate their votes in favor of one
candidate and thus secure representation in the board.
C. Cumulative Voting by distribution a SH may cumulate his shares by
multiplying also the number of his shares by the number of directors to
be elected and distribute the same among as many candidates as he
shall see fit.
To illustrate: If A owns 10 shares, he is entitled to 50 votes if there are 5
directors to be elected. A may distribute his votes to candidates E, F
and G by giving E, 20 votes, F, 15 and G, 15. Any combination may be
adopted as long as the total number of votes cast by him does not
exceed 50 votes which is the number of shares owned by him
multiplied by the number of directors to be elected.
Note: Formula for determining the votes needed in cumulative voting:
D = [A x B] / [C + 1] + 1
E=DxC
A Total number of outstanding shares entitled to vote
B Number of directors desired to be elected
C Total number of directors to be elected
D Number of shares necessary to elect desired number of directors
E Number of votes required to elect desired number of directors

Law3 Private Corporations

Members of non-stock corporations may cast as many votes as there

are trustees to be elected but may not cast more than one vote for one
candidate, unless otherwise provided in the AOI.
Limitations:
1. At any meeting of SH/members called for the election of D/T, there
must be present either in person or by proxy, the owners of the
majority of the OCS or majority of the members entitled to vote.
2. Election must be by ballot if requested by any voting member/SH.
3. A SH cannot be deprived in the AOI/by-laws of his statutory right
to use any of the methods of voting in the election of directors.
4. No delinquent stock (unpaid subscription) shall be voted.
5. The candidates receiving the highest number of votes shall be
declared elected. A majority vote is not necessary, only plurality.
However, it is necessary that there is a quorum and in the
absence thereof, election shall be considered invalid.

CORPORATE OFFICERS; QUORUM (Sec 25)

Quorum such number of the membership of a collective body as is competent
to transact its business or do any other corporate act
1. As stipulated in the AOI/by-laws (greater majority); or
2. Majority of the number of directors or trustees plus 1
Every decision of at least a majority of the directors or trustees present
at a meeting at which there is a quorum shall be valid as a corporate
act, except:
election of officers which shall require the vote of a majority
of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
CORPORATE OFFICERS
1. President must be a director and may not concurrently be the
treasurer or secretary
2. Vice-President has the authority to act or to perform any duty of the
office in the absence of the president or if the position of president
becomes vacant

Atty. Jonathan B. Tambol

3.
4.
5.

Treasurer may or may not be a director

Secretary need not be a director unless required by the by-laws; must
be a resident and citizen of the Philippines
Other officers as may be provided in the by-laws

N.B. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as:
a.) President and Secretary, or
b.) President and Treasurer
at the same time.
Authority of officers is generally derived from law; by-laws; or
authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business.
Doctrine of Apparent Authority If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts; and thus,
the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agents authority.
CLASSIFICATION OF POWERS OR AUTHORITY:
1. Inherent authority to act and bind the corporation which the officer
has by reason of his office although it may not be sanctioned by
express authority
2. Express every power or authority expressly conferred upon him by
law and the by-laws of the corporation
3. Implied includes all incidental authority as is necessary, usual and
proper to effectuate the main authority expressly conferred
4. Apparent or Ostensible when in the usual course of the business, an
officer or agent is held by such corporation or has been permitted to
act for it in such way as to justify third persons who deal with him in
assuming that he is doing an act or making a contract within the scope
of his authority.
5. Authority by estoppel when a corporation, by its voluntary act,
places an officer or agent in such a position or situation that persons of

Law3 Private Corporations

ordinary prudence are justified in assuming that he has authority to

perform the act in question
REMOVAL OF DIRECTORS/TRUSTEES; VACANCIES (Sec 28, 29)
Requisites:
1. With or without cause, by a vote of 2/3 of OCS or by 2/3 of the
members in a non-stock corporation
Exception: when a director has been elected by virtue of the minoritys
exercise of cumulative voting rights, such director may be removed
only for cause. (Sec. 28)
2. Takes place either at a regular/special meeting called for the purpose
3. With previous notice of the time and place of such meeting, as well as
of the intention to propose such removal
May be called at the instance of any SH or member:
a.) If officers refuse to call a meeting to consider the removal of the
director
b.) With due notice
VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE
A vacancy in the office of director or trustee may be filled as follows:
1. By the Stockholders or Members:
a.) If the vacancy results from the removal by the SHs/members;
b.) Expiration of term;
c.) If the vacancy occurs other than by removal or by expiration of
term such as death, abandonment, resignation or
disqualification, if the remaining directors/trustees do not
constitute a quorum for the purpose of filling the vacancy;
d.) If the vacancy may be filled by the remaining
directors/trustees but the board refers the matter to the
SHs/members;
e.) If the vacancy is created by reason of an increase in the
number of directors or trustees.
2. By the members of the Board (if still with quorum) at least a
majority of them are empowered to fill any vacancy occurring in
the board OTHER than by:
a.) Removal by the SHs/members; or

Atty. Jonathan B. Tambol

b.) Expiration of term.

COMPENSATION OF BOARD MEMBERS (Sec 30)
G.R.: Directors are not entitled to receive any compensation except for
reasonable per diems.
Exceptions:
1. When their compensation is fixed in the by-laws;
2. When granted by the vote of stockholders representing at least a
majority of the OCS at a regular or special meeting
Limitation: the amount of compensation shall not exceed 10% of the net
income before income tax of the corporation during the preceding year.
LIABILITY OF DIRECTORS/TRUSTEES & OFFICERS (Sec 31)
Three-fold duties of Directors:
1. Duty of Obedience to direct the affairs of the corporation only in
accordance with the purposes for which it was organized
Based on Sec. 25 The directors or trustees and officers to be elected
shall perform the duties enjoined on them by law and the by-laws.
2. Duty of Diligence directors and officers are required to exercise due
care in the performance of their functions.
Based on Sec. 31 directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the
corporation shall be liable jointly and severally for all damages resulting
therefrom, suffered by the corporation, its stockholders or members
and other persons.
3. Duty of Loyalty the director or officer owes loyalty and allegiance to
the corporation a loyalty that is undivided and an allegiance that is
influenced by no consideration other than the welfare of the
corporation.
Based on Sec. 31 directors or trustees who acquire any pecuniary or
personal interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom.

Nature of Powers of Board of Directors or Trustees

Law3 Private Corporations

1.

2.

Theory of original power powers of the board are original and

undelegated. The SHs or members do not confer, nor can they revoke
those powers.
They are derivative only in the sense of being received from the State
in the act of incorporation.

BUSINESS JUDGMENT RULE

The board is the business manager of the corporation, and so long as it
acts in good faith, its orders are not reviewable by the courts.
(Montelibano vs. Bacolod-Murcia Milling, GRN 15092, May 18, 1962)
Courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have the
legitimate power of action, and contracts intra vires entered into by the
board of directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and oppressive
as to amount to a wanton destruction of the rights of the minority.
(Gamboa vs. Victoriano, GRN 40620, May 5, 1979)

Consequences:
a.) Resolution, contracts and transactions of the Board cannot be
overturned or set aside by the SH or members and not even by the
courts under the principle that the business of the corporation has
been left to the hands of the Board; and
b.) Directors and duly authorized officers cannot be held personally
liable for acts or contracts done with the exercise of their business
judgment.
Exceptions:
1.) When the Corporation Code expressly provides otherwise;
2.) When the Directors or officers acted with fraud, gross
negligence or in bad faith;
3.) When Director or officers act against the corporation in
conflict-of-interest situation.

LIMITATIONS ON POWERS OF BOD/T

1. Limitations imposed by the Constitution, statutes, AOI or by-laws

Atty. Jonathan B. Tambol

2.

3.

Cannot perform constituent or those acts which involve fundamental

changes in the corporation which require the approval of its
SHs/members.
Cannot exercise powers not possessed by the corporation.

PERSONAL LIABILITY OF DIRECTORS

G.R. Directors and officers are not solidarily liable with the corporation.
Exceptions:
In the following cases, personal liability may be incurred by directors and
trustees or the officers in some cases, when they:
1. Willfully and knowingly vote for and assent to patently unlawful acts of
the corporation (Sec 31);
2. Are guilty of gross negligence or bad faith in directing the affairs of the
corporation (Sec 31);
3. Acquire any personal or pecuniary interest in conflict of their duty (Sec
31);
4. Consent to the issuance of watered stocks, or, having knowledge
thereof, fails to file objections with the secretary (Sec 65);
5. Agree or stipulate in a contract to hold himself personally liable with
the corporation; or
6. By virtue of a specific provision of law.
Note: A director is not liable for misconduct of co-directors or other officers
unless:
1.) He connives or participates in it; or
2.) He is negligent in not discovering or acting to prevent it
REMEDIES IN CASE OF MISMANAGEMENT The remedies of the stockholders
in the event of mismanagement or abuse of powers are the following:
a.) Receivership;
b.) Injunction if the act has not yet been done;
c.) Dissolution if abuse amounts to a ground for quo warranto but
Solicitor General refuses to act;
d.) Derivative suit or complaint filed with SEC

Law3 Private Corporations

CONTRACTS OF SELF-DEALING DIRECTORS, TRUSTEES OR OFFICERS (Sec 32)

Self-dealing D/T/O those who personally contract with the
corporation in which they are directors, trustees or officers
Such contracts are VOIDABLE at the option of the corporation
UNLESS:
a.) The presence of such D/T in the board meeting approving the contract
was not necessary to constitute a quorum for such meeting;
b.) The vote of such D/T in the board meeting approving the contract was
not necessary for the approval of the contract;
c.) The contract is fair and reasonable under the circumstances;
d.) In the case of an officer, there was previous authorization by the BOD.
If conditions a or b is absent, said contract may be ratified by the vote
of the SHs representing at least 2/3 of the OCS or 2/3 of the members
in a meeting called for the purpose, provided that full disclosure of the
adverse interest of the director/trustee involved is made at such
meeting and the contract is fair and reasonable.
CONTRACTS BET. CORPORATIONS WITH INTERLOCKING DIRECTORS (Sec 33)
Corporation with Interlocking Directors one, some or all of the
directors in one corporation is/are also a director in another
corporation.

Interlocking directorship by itself is not prohibited under the

Corporation Code. However, the by-laws may contain provisions that
disallow the same.
A contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone. These contracts
are valid provided that:
1.) The contract is not fraudulent; and
2.) The contract is fair and reasonable under the circumstances.
But if the interlocking directors interest in one corporation or
corporations is substantial (exceeding 20% of the OCS), then all the
conditions prescribed in Sec. 32 on self-dealing directors must be
present with respect to the corporation in which he has nominal
interest.

Atty. Jonathan B. Tambol

DISLOYALTY OF A DIRECTOR (Sec 34)

Doctrine of Corporate Opportunity A director who, by virtue of his
office, acquires for himself a business opportunity which should belong
to the corporation, thereby obtaining profits to the prejudice of such
corporation, is guilty of disloyalty and should therefore account to the
latter for all such profits by refunding the same.
Application: Unless his act is ratified, a director shall refund to the
corporation all the profits he realizes on a business opportunity which:
1.) The corporation is financially able to undertake;
2.) From its nature, is in line with corporations business and is of
practical advantage to it; and
3.) The corporation has an interest or a reasonable expectancy.
Note: The rule shall apply notwithstanding the fact that the director risked his
own funds in the venture.
A business opportunity ceases to be corporate opportunity and
transforms to personal opportunity where the corporation refuses or is
definitely no longer able to avail itself of the opportunity.
EXECUTIVE COMMITTEE (Sec 35)
A body created by the by-laws and composed of not less than 3
members of the board which, subject to the statutory limitations, has
all the authority of the board to the extent provided in the board
resolution or by-laws.
May act by a majority vote of all of its members.
Its decisions are not subject to appeal to the board. However, if the
resolution of the ExeCom is invalid, i.e., not one of the powers
conferred to it, it may be ratified by the board.
If the ExeCom is not validly constituted, the members thereof may be
considered as de facto officers.
Limitations of the powers of the ExeCom
It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;

Law3 Private Corporations

4.
5.

Amendment or repeal of any resolution of the board which by its

express terms is not amendable or repealable; and
Cash dividend declaration

Code of Corporate Governance

Applicability:
The Code of Corporate Governance shall be applicable to:
1. Corporations whose securities are registered or listed;
2. Corporations which are grantees of permits/licenses and secondary
franchise from the Commission; and
3. Public companies.
Public Company any corporation with a class of equity securities
listed on an exchange or with assets in excess of 50 million pesos and
having 200 or more holders, at least 200 of which are holding at least
100 shares of a class of its equity securities.
Corporate Governance a system whereby shareholders, creditors and
other stakeholders of a corporation ensure that management enhances
the value of the corporation as it competes in an increasingly global
market place.
Mandatory corporate governance rules are necessary for 2 reasons:
1.) To overcome the collective action problem resulting from the
dispersion among stockholders; and
2.) To ensure that the interests of all relevant constituencies are
represented.

Atty. Jonathan B. Tambol