Sec. 2. Corporation defined. - A corporation is an 1.

Control – not mere stock control but complete

artificial being created by operation of law, having domination – not only of finances, but of policy and
the right of succession and the powers, attributes business practice in respect to the transaction
and properties expressly authorized by law or attacked and must have been such that the
incident to its existence. corporate entity as to this transaction had at the
time no separate mind, will or existence of its own.
A corporation is an artificial being that is, by such
nature, subject to certain limitations. Generally, it 2. Such control must have been used by the
cannot commit felonies punishable under the defendant to commit a fraud or wrong to perpetuate
Revised Penal Code for corporations are incapable the violation of a statutory or other positive legal
of the requisite intent to commit these crimes. It breach of duty, or a dishonest and an unjust act in
cannot commit crimes that are punishable under contravention of the plaintiff’s legal right, and,
special laws because crimes are personal in nature
requiring personal performance of overt acts. 3. The said control and breach of duty must have
proximately caused the injury or unjust loss
Also, the penalty of imprisonment cannot be complained of.
imposed. Further, a corporation cannot be awarded
moral damages. GRANDFATHER RULE The “grandfather rule” is
applied in determining the nationality of a
Piercing the Veil of Corporate Fiction “Piercing corporation. It traces the nationality of the
the veil of corporate fiction” means that while the stockholders of investor corporations so as to
corporation cannot be generally held liable for acts ascertain the nationality of the corporation where
or liabilities of its stockholders or members, and the investment is made.
vice versa because a corporation has a personality
separate and distinct from its members or Classes of Corporations:
stockholders, however, the corporate existence is 1. As to organizers:
disregarded under this doctrine when the a. Public – by State only; and
corporation is formed or used for illegitimate b. Private – by private persons alone or with the
purposes, particularly, as a shield to perpetuate State.
fraud, defeat public convenience, justify wrong,
evade a just and valid obligation or defend a crime. 2. As to functions:
a. Public – government of a portion of the State;
Circumstances that may indicate that the b. Private – usually for profit-making functions.
piercing doctrine should be applied:
1. The parent corporation owns all or most of 3. As to governing law:
the capital of the subsidiary. a. Public – Special Laws and Local Government
2. The parent and subsidiary corporations have Code; and
common directors or officers. b. Private – Law on Private Corporations.
3. The parent company finances the subsidiary.
4. The parent company subscribed to all the capital 4. As to legal status:
stock of the subsidiary or otherwise causes its a. De jure corporation – Corporation organized in
incorporation. accordance with requirements of law;
5. The subsidiary has grossly inadequate capital. b. De facto corporation – Corporation where there
6. The subsidiary has substantially no business exists a flaw in its incorporation.
except with the parent corporation or no assets
except those conveyed to or by the parent 5. As to existence of stocks:
corporation. a. Stock corporation – Corporation in which
7. The papers of the parent corporation or in the capital stock is divided into shares and is
statements of its officers, the subsidiary is authorized to distribute to holders thereof of such
described as a department or division of the parent shares dividends or allotments of the surplus profits
corporation, or its business or financial on the basis of the shares held.
responsibility is referred to as the parent b. Non-stock corporation- Corporation which
corporation’s own. does not issue stocks and does not distribute
8. The parent corporation uses the property of the dividends to their members.
subsidiary as its own.
9. The directors or executives of the subsidiary do Components of a Corporation:
no act independently in the interest of the 1. Incorporators – those mentioned in the articles
subsidiary but take their orders from the parent of incorporation as originally forming and
corporation. composing the corporation, having signed the
10. The formal legal requirements of the subsidiary articles and acknowledged the same before the
are not observed. notary public.
(Phil. National Bank v. Ritratto Group, Inc.,)
a. They must be natural persons;
Elements that must be present to justify b. At least ONE (1) but not more than fifteen (15);
piercing on the ground that the corporation is a c. They must be of Legal Age;
mere alter ego: d. Majority must be residents of the Philippines; and

1|Corporation Code Notes | (c) Atty. Jig Paler-Acasio

e. Each must own or subscribe to at least one OVER-ISSUED STOCK – Stock issued in excess
share. of authorized capital stock; null and void.

ONE PERSON CORPORATION – a corporation WATERED STOCK – Stock issued gratuitously,

with a single stockholder. Only a natural person, money/property less than par value, services less
trust or an estate may form an OPC. than par value, dividends where no surplus profits
exist.
2. Corporators – All the stockholders and
members of a corporation including the CERTIFICATE OF STOCK – Written
incorporators who are still stockholders. acknowledgment by the corporation of
3. Stockholders – Corporators in a stock thestockholder’s interest in the corporation. It is the
corporation personal property and may be mortgaged or
4. Members – Corporators in a non-stock pledged. Transfer binds the corporation when it is
corporation recorded in the corporate books. A stockholder who
5. Directors and Trustees – The Board of does not pay his subscription is not entitled to the
Directors is the governing body in a stock issue of a stock certificate. The total par value of
corporation while the Board of Trustees is the the stocks subscribed by him should first be paid.
governing body in a non-stock corporation.
6. Corporate Officers – They are the officers who CONTENTS OF ARTICLES OF
are identified as such in the Corporation Code, the INCORPORATION:
Articles of Incorporation or the Bylaws of the 1. Name of corporation;
corporation. 2. Purpose/s, indicating the primary and secondary
7. Promoter – A self-constituted organizer who purposes;
finds an enterprise or venture and helps to attract 3. Place of principal office;
investors, forms a corporation and launches it in 4. Term is already perpetual;
business, all with a view to promotion profits. 5. Names, citizenship and residences of
incorporators;
TYPES OF SHARES: 6. Number, names, citizenships and residences
1. Common Shares – A basic class of stock of directors;
ordinarily and usually issued without extraordinary 7. If stock corporation, amount of authorized capital
rights or privileges and entitles the shareholder to a stock, number of shares;
pro rata division of profits. 8. In par value stock corporations, the par value of
2. Founders Shares – Given rights and privileges each share;
not enjoyed by owners of other stocks; exclusive 9. Number of shares and amounts of subscription
right to vote/be voted in the election of directors of subscribers which shall not be less than 25% of
shall not exceed 5 years (note: within this period, authorized capital stock;
common shares are deprived of their voting rights) 10. Amount paid by each subscriber on their
3. Preferred Shares – Issued only with par value; subscription, which shall not be less than
given preference in distribution of assets in 11. Name of treasurer elected by subscribers;
liquidation and in payment of dividends and other 12. If the corporation engages in a nationalized
preferences stated in the articles of incorporation; industry, a statement that no transfer of stock will
may be deprived of voting rights. be allowed if it will reduce the stock ownership of
4. Redeemable Shares – Expressly provided in Filipinos to a percentage below the required legal
articles; have to be purchased/taken up upon minimum less than P5000.00;
expiration of period of said shares purchased
whether or not there is unrestricted retained REQUIREMENTS FOR AMENDING ARTICLES
earnings; may be deprived of voting rights. OF INCORPORATION:
5. Treasury Stocks – stocks previously issued and 1. A legitimate purpose for the amendment;
fully paid for and reacquired by the corporation 2. Majority vote of directors or trustees and the vote
through lawful means (purchase, donation, etc.); or written assent of the stockholders representing
not entitled to vote and no dividends could be at least two-thirds (2/3) of the outstanding capital
declared thereon as corporations cannot declare stock, without prejudice to the appraisal right of
dividends to itself. dissenting stockholders, or two-thirds (2/3) of the
members if it be a non-stock corporation.
INSTANCES WHEN HOLDERS OF NON-VOTING 3. Indication in the articles, by underscoring, the
SHARES CAN VOTE: change or changes made.
1. Amendments of articles of incorporation 4. A copy of amended articles duly certified under
2. Adoption/amendment of by-laws oath by the corporate secretary and a majority of
3. Increase/decrease of bonded indebtedness the directors or trustees stating the fact that said
4. Increase/decrease of capital stock amendment or amendments have been duly
5. Sale/disposition of all/substantially all corporate approved by the required vote of stockholders or
property members, as the case may be.
6. Merger/consolidation of corporation
7. Investment of funds in another GROUNDS FOR REJECTING INCORPORATION
corporation/another business purpose OR AMENDMENT TO ARTICLES OF
8. Corporate dissolution INCORPORATION:
1. Not in prescribed form;
2|Corporation Code Notes | (c) Atty. Jig Paler-Acasio
2. Purpose illegal, inimical; of corporation by estoppel requires that there must
3. Treasurer’s affidavit false; and be dealings among the parties on a corporate
4. Non-compliance with required Filipino stock basis.
ownership.
BOARD OF DIRECTORS/ TRUSTESS/OFFICERS
WHEN A CORPORATE NAME CANNOT BE QUALIFICATIONS OF DIRECTORS:
USED: 1. Must own at least one (1) share capital stock of
1. Names which are identical, deceptively or the corporation in his own name or must be a
confusingly similar to that of any existing member in the case of non-stock corporations
corporation including internationally known foreign 2. A majority of the directors/trustees must be
corporation through not used in the Philippines; residents of the Philippines
2. Name already protected by law; 3. He must not have been convicted by final=
3. Name which is contrary to law, morals or public judgment of an offense punishable by imprisonment
policy. for a period exceeding six (6) years or a violation of
the Corporation Code, committed within five (5)
CORPORATE EXISTENCE – General Rule: The years before the date of his election
Corporate life shall be in perpetuity unless stated 4. He must be of legal age
the corporate life is stated in the Articles of 5. He must possess other qualifications as may be
Incorporation. prescribed in the by-laws of the corporation.

REVIVAL OF CORPORATE EXISTENCE METHODS OF VOTING IN THE ELECTION OF

General Rule: Upon approval by the SEC, the DIRECTORS:
corporation shall be deemed revived and a 1. Straight Voting – Every stockholder “may vote
certificate of revival of corporate existence shall be such number of shares for as many persons as
issued , giving it perpertual existence. there are directors” to be elected;
2. Cumulative Voting for One Candidate – a
EXCEPTION: If the application for revival provides stockholder is allowed to concentrate his votes and
otherwise. “give one candidate as many votes as the number
of directors to be elected multiplied by the number
DE FACTO CORPORATIONS A “de facto of his shares shall equal”;
corporation” is one that is defectively created so as 3. Cumulative Voting by Distribution – a
not to become a de jure corporation. It is the result stockholder may cumulate his shares by multiplying
of an attempt to incorporate under an existing law also the number of his shares by the number of
coupled with the exercise of corporate powers. The directors to be elected and distribute the same
existence of a de facto corporation can only be among as many candidates as he shall see fit.
attacked directly by the state through quo warranto
proceedings. A de facto corporation will incur the Stock – majority of the outstanding capital stock
same obligations, have the same powers and rights Non-stock – majority of the members
as a de jure corporation.
CORPORATE OFFICERS
REQUISITES OF A DE FACTO CORPORATION: 1.PRESIDENT – MUST be director & stockholder
1. Valid law under which the corporation was on record of at least 1 share; Filipino citizenship
incorporated. and residency not required.
2. Attempt in good faith form a corporation 2.SECRETARY – may be a director; MUST be a
according to the requirements of the law. Here the Filipino citizen and resident.
SC requires that you must have filed with the SEC 3.TREASURER – may be a director; Filipino citizen
articles of incorporation and gotten the certificate not required but MUST be a resident of the
with the blue ribbon and gold seal. Philippines.
For instance the majority of the directors are not 4.COMPLIANCE OFFICER – if the corporation is
residents of the Philippines or the statement vested with public interest
regarding the paid up capital stock is not true, those 5.OTHER OFFICERS – qualification may be
are defects that may make the corporation de facto. provided for in the by-laws
3. User of corporate powers. The corporation must
have performed acts which are peculiar to a MANDATORY CORPORATE OFFICERS:
corporation like entering into a subscription 1.President
agreement, adopting by-laws, electing directors. 2. Secretary
4. It must act in good faith. So the moment, for 3. Treasurer
example, there is a decision declaring the
corporation was not validly created, it can no longer Any 2 or more positions may be held concurrently
claim good faith. but no one shall act as President and Secretary or
President and Treasurer at the same time.
CORPORATION BY ESTOPPEL It is a corporation
which is so defectively formed so that it is not a de BUSINESS JUDGMENT RULE Questions of policy
jure or a de facto corporation but is considered as a or management are left solely to the honest
corp with respect to those who cannot deny its decision of officers and directors of a corporation
existence because of some agreement or and the courts are without authority to substitute
admission or conduct on their part. The existence their judgment for the judgment of the board of
3|Corporation Code Notes | (c) Atty. Jig Paler-Acasio
directors; the board is the business manager of the d. Increase in the number of directors.
corporation and so long as it acts in good faith its
orders are not reviewable by the courts or the SEC. 2. By board if remaining directors constitute
The directors are also not liable to the stockholders a quorum – cases not reserved to stockholders or
in performing such acts. members.

INSTANCES WHEN A DIRECTOR IS LIABLE:

1. Willfully and knowingly voting for and assenting
to patently unlawful acts of the corporation;
2. Gross negligence or bad faith in directing the
affairs of the corporation;
3. Acquiring any personal or pecuniary interest in
conflict of duty.

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
possessing the power to so 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 agent’s authority.

DOCTRINE OF CORPORATE OPPORTUNITY

(Disloyalty of a Director) If there is presented to a
corporate officer or director a business opportunity
which (a) corporation is financially able to
undertake; (b) from its nature, is in line with
corporations business and is of practical advantage
to it; and (c) one in which the corporation has an
interest or a reasonable expectancy, by embracing
the opportunity, the self-interest of the officer or
director will be brought into conflict with that of his
corporation. Hence, the law does not permit him to
seize the opportunity even if he will use his own
funds in the venture. If he seizes the opportunity
thereby obtaining profits to the expense of the
corporation, he must account all
the profits by refunding the same to the corporation
unless the act has been ratified by a vote of the
stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock.

REQUISITES OF REMOVAL FROM THE BOARD:

1. It must take place either at a regular meeting or
special meeting of the stockholders or members
called for the purpose;
2. There must be previous notice to the
stockholders or members of the intention to
remove;
3. The removal must be by a vote of the
stockholders representing 2/3 of the outstanding
capital stock or 2/3 of the members, as the case
may be;
4. The director may be removed with or without
cause unless he was elected by the minority, in
which case, it is required that there is cause for
removal.

FILLING OF VACANCIES IN THE BOARD:

1. By stockholders or members – if vacancy
results because of:
a. Removal
b. Expiration of term
c. The ground is other than removal or expiration of
term where the remaining directors do not
constitute a quorum.
4|Corporation Code Notes | (c) Atty. Jig Paler-Acasio