Corporation Code

RA 11232

Atty. Jasmin Lavadia Waje - 2nd Sem 2023-2024

Revised Corporation Code RA 11232
February 23, 2019

• The Corporation Code is the general law providing for the formation,
organization and regulation of private corporations.

• The Constitution provides that only GOCCs are the private corporations that
may be created by special law.
 Sec 2
Corporation (de ned)

• Characteristics
1. Arti cial being - separate and distinct personality from those persons composing it;
juridical entity apart from its stockholders with own set of rights and obligations
provided for by law

2. Created by operation of law - State must give its imprimatur (Concession Theory:
owes its life to the State; purely dependent on the State’s will)

3. Right of succession - corporation’s existence is una ected by a change in the

composition of stockholders - unless limited by its AOI (Articles of Incorporation)

4. Powers, Attributes and Properties expressly authorized by law or incidental to its

existence - has no power except those expressly conferred on it by the Revised
Corporation Code and by its articles of incorporation
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Sec 2
Corporation (de ned)

Being a creature of the law, its powers are limited by:

• The law (see Sec. 35 for general powers and Secs. 36 to 43 for specific powers);

• By the express terms of its AOI as well those essential or necessary to carry out
its purpose or purposes under such Articles (see Sec. 35, last par.); and

• By those necessary or incidental to its powers so conferred (see Sec. 44)

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Doctrine of Separate Personality

• Corporations have separate properties, rights and obligations;

• Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from those who compose it;
• Nature of SH’s Interest in Corporate Properties - indirect, contingent,
and inchoate; only becomes actual, direct and existing upon liquidation
of the assets of the corporation.
Limited Liability Rule

GR: The stockholders are not liable to pay corporate obligations. (Donnina C. Halley v. Printwell, Inc., G.R. No. 157549,
May 30, 2011)
XC: The liability of stockholders is limited to the unpaid subscription.
There are two instances when the creditor is allowed to maintain an action upon any unpaid subscriptions based on the
trust fund doctrine:
(1) where the debtor corporation released the subscriber to its capital stock from the obligation of paying for their shares,
in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors; and
(2) where the debtor corporation is insolvent or has been dissolved without providing for the payment of its creditors.
(Enano-Bote v. Alvarez, G.R. No. 223572, November 10, 2020)

Simply agreeing in a meeting of stockholder or directors for their reduction of unpaid subscription is not valid. To allow
corporations to do such an act would violate the aforementioned trust fund doctrine in corporation law. (Salido, Jr. v.
Aramaywan Metals Development Corp., G.R. No. 233857 , March 18, 2021])
Doctrine of Piercing the Veil of Corporate Fiction

The cases covered by the doctrine can be classified into:

1) Cases where public convenience may be defeated as when the corporate fiction is used as vehicle for
the evasion of an existing obligation;
2) Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
3) Alter Ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation (Guillermo v. Uson,
G.R. No. 198967, March 7, 2016).

OPC (grounds) - if the OPC is not adequately financed

Doctrine of Piercing the Veil of Corporate Fiction

Concept Builders, Inc. vs NLRC - Probative factors for the application of the doctrine of piercing the corporate
veil

1. Stock ownership by one or common ownership of both corporations;

2. Identity of directors and officers;
3. Manner of keeping corporate books and records; and
4. Methods of conducting the business.

Elements of alter ego/instrumentality (Piercing may be allowed only if the following elements concur:)
1. Control - complete domination of stock; finances, policies and business practices - no separate mind, will or
existence;
2. To commit a fraud or wrong;
3. Resulting in injury or loss
Sec 3 (Classes of Corporations)
Stock vs Non-Stock

• Stock Corporations - Stockholders

A. Which have capital stock

B. Divided into Shares

C. AND authorized to distribute to the holders of such shares Dividends or

allotments of the surplus pro ts on the basis of shares held

• Non-Stock Corporations - Members

• All other corporations; no part of the income is distributable as dividends
•
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Sec 3
Stock vs Non-Stock
Stock Non-Stock
Cumulative voting in election of directors is provided by law Cumulative voting in election of trustees is only available
[Sec. 23] if provided in AOI or BL [Sec. 23]
Maximum of 15 directors except in merger or consolidation of
May be more than 15 [Sec. 91]
banks [Sec. 13]
Term of director is 1 year [Sec. 22] Maximum term of a trustee is 3 years [Sec. 91]
Stockholders’ meetings must be in the principal office as set
May be anywhere within Philippine territory as provided
forth in the AOI or, if not practicable, in the city or municipality
by BL. [Sec. 92]
where the principal office is located [Sec. 50]
One class of shares must always have complete voting rights Right to vote of members of any class may be denied in
[Sec. 6,] the AOI or BL [Sec. 88]
There is free transfer of shares. Membership is not personal Transfer of membership cannot be made without consent
to the stockholder. of the corporation. [Sec. 89] Membership is personal.
Note: Subject to provisions on close corporations.
May always vote by proxy [Sec. 57] Vote by proxy can be denied in the AOI or BL [Sec. 88]
Residual assets are to be distributed to the stockholders Generally, members are not allowed to participate in
upon dissolution, after payment of creditors. Dissolution is distribution of assets. Assets are to be distributed to such
effected through the methods provided in the Code. [Sec. persons, societies, organizations or corporations as may
133] be specified in a plan of distribution. [Sec. 93]
GOCC

1. Either stock or non-stock; (ie stock GOCC - LBP, DBP)

2. Vested with functions relating to public needs - governmental or proprietary;

and

3. Owned by the Govt directly or through its instrumentalities either wholly; or,
where applicable as in the case of stock corporations, to the extent of at
least 51 percent of its capital stock.

MIAA vs CA - MIAA is not a GOCC because it has no capital stock divided into
shares.
Other Classes of Corporations

• Public vs Private
• GOCC vs Quasi-Public
• De Jure vs De Facto
• Corporation by Estoppel vs Corporation by Prescription
• Domestic vs Foreign
• Open vs Close
• Parent/Holding vs Subsidiary
• Corporation Aggregate vs Corporation Sole
Sec 4: Corpo created by Spl laws or Charters

• Primary: Spl laws/charters creating them; Suppletory: RCC

• Sec 16, Art XII 1987 Constitution: GOCC may only be created through special
charters: two conditions - common good and economic viability

• The test of economic viability applies only to GOCC performing

proprietary functions - economic or commercial activities
Sec 5 Corporators and Incorporators, Stockholders and Members

• Corporators - SH/Members
• Incorporators - in the AOI as originally forming and composing the corporation and signatories thereof;
accomplished fact - cannot be amended or undone

1. Stockholders/Members

2. BOD/BOT - governing body

3. Corporate O cers - President, Treasurer, Secretary, Compliance O cer (corp with public interest)

• Subscribers - persons who have agreed to take and pay for original, unissued shares of a corporation
formed or to be formed;

• Underwriter
• Promoter
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Sec 5 Corporators and Incorporators, Stockholders and Members

• Incorporators may be composed of any combination of nature persons, SEC-registered

partnerships, SEC registered domestic corp or associations, as well as foreign corps;

• Incorporators who are natural persons must be of legal age and must sign the AOI/ByLaws;
• Each individual signing the AOI/ByLaws must indicate the capacity upon which she/he is a xing her/
his signature thereto;

• An individual designated to sign the AOI/ByLaws on behalf of an incorporator, which is not a natural
person, must also indicate the corporate or partnership name being represented and for whom he/she
is executing the AOI/ByLaws;

• Each incorporator of a stock must own or subscribe to at least 1 share of the capital stock;
• Each incorporator of a nonstock must be a member of the corporation;

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Sec 6 Classes of Shares
Classi ed by incorporators/BOD and SH

Shares of stock are units into which the capital stock is divided. A share of stock represents interest of the holder
thereof to participate in the management of the corporation, to share proportionally in the profits of the business
and, upon liquidation, to obtain an aliquot part of corporate assets after all corporate debts have been paid.

The shares in stock corporations may be divided into classes or series of shares, or both. The rights, privileges, or
restrictions, and the stated par value of the class or series of shares must be indicated in the Articles of
Incorporation. [Sec. 6]

RIGHT TO VOTE - inherent/incidental to ownership of corporate stock - it is a property right

General Rule: No share may be deprived of voting rights [Sec. 6] —(EXAMPLE: CLASS B shares denied voting rights in the AOI)
Exceptions:
• Preferred non-voting shares
• Redeemable shares,
• Provided by the Code (e.g. Treasury shares)
****There shall always be a class/series of shares which have COMPLETE VOTING RIGHTS. [Sec. 6]
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Sec 6 Classes of Shares

• Doctrine of equality of shares: GR: Each share shall be equal XC: AOI and in
the Certi cate of Stock

Classi cation - determined by the incorporators; stated in the AOI and led
with the SEC; can be amended by a majority vote of the BOD and the SH
representing 2/3 of the OCS
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Sec 6 Classes of Shares
PREFERRED SHARES

Stocks which are given, by the issuing corporation:

1.Preference in dividends;
2.Preference in the distribution of assets of the corporation in case of liquidation, or
3.Preference in both dividends and distribution, or
4.Such other preferences as may be stated in the Articles of Incorporation which do not violate the Corporation Code.
Note: Preferred shares may be issued only with a stated par value. [Sec. 6]

Unless the right to vote is clearly withheld, a preferred stockholder would have such right as it is an incident to stock
ownership. The Board of Directors may fix the terms and conditions only when so authorized by the Articles of Incorporation and
such terms and conditions shall be effective upon filing a certificate thereof with the SEC. [Sec. 6]

Kinds of Preferred Shares

1.Preferred Shares as to Assets vs. Preferred Shares as to Dividends
2.Cumulative vs. Non-Cumulative
3.Participating vs. Non-participating
Sec 6 Classes of Shares
Common Shares

A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.” [CIR
v. CA, 301 SCRA 152 (1999)]
The owners thereof are entitled to management (via exclusive right to vote) of the corporation and to equal pro-rata
division of profits.

Common Preferred
Definition Stock which entitles the owner to an Stock which entitles the holder to some
equal pro rata division of profits preference, either in the dividends, or in the
distribution of assets, or both
Value Depends if it is a par or no-par value Stated par value [Sec. 6]
Voting Rights share
Usually vested with exclusive right to May be deprived of voting rights
vote - complete voting rights
Preference upon No advantage, priority preference over Has the first crack at dividends/prof its/
Liquidation any other stockholder in the same class distribution of assets
Sec 6 Classes of Shares
Scope of Voting Rights Subject to Classi cation

Only preferred and redeemable shares maybe deprived of the right to vote [Sec. 6], except as otherwise provided
in the Revised Corporation Code.
General Rule: Non-Voting Shares are not entitled to vote. The law only authorizes the denial of voting rights in the case
of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have
complete voting rights. [Sec. 6]

Exception: These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled
to vote on the following fundamental matters: (8 instances)
1.Amendment of the Articles of Incorporation
2.Adoption and amendment of by-laws
3.Sale, lease, exchange, other disposition of all or substantially all of the corporate property
4.Incurring, creating or increasing bonded indebtedness
5.Increase or decrease of capital stock
6.Merger and consolidation
7.Investment of corporate funds in another corporation or business
8.Dissolution of the corporation

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Sec 7 Founder’s Shares
Founder’s Shares

• Classi ed as such in the AOI

• Given certain rights and privileges not enjoyed by the owners of other stocks.
These may be given special preference in voting rights and dividend payments.

• Where exclusive right to vote and be voted for in the election of directors is
granted, such right must be for a limited period not to exceed 5 years, subject
to approval by SEC The 5-year period shall commence from date of approval by
SEC. Founder’s shares given the exclusive right to vote and be voted for are not
allowed to exercise that right in violation of the Anti- Dummy Law and the Foreign
Investment Act. [Sec. 7]

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Sec 8 Redeemable Shares
Redeemable Shares - Compulsory/Optional

• Issued by corp (provided by AOI); shares which may be purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings (URE) in the
books of the corporation.
Limitations
1. Redeemable shares may be issued only when expressly provided for in the AOI [Sec. 8].
2. The terms and conditions affecting said shares must be stated both in the AOI and in the certificate of stock [Sec. 8].
3. Redeemable shares may be deprived of voting rights in the AOI. [Sec. 6]
4. The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem. [SEC-
OGC Opinion No. 07-03]
5. The redeemable shares are deemed retired upon redemption, unless otherwise provided in the AOI (i.e., if the AOI allows for
reissuance of such shares). [SEC Rules Governing Redeemable and Treasury Shares, 26 April 1982]
6. Unrestricted retained earnings are NOT necessary before shares can be redeemed, but there must be sufficient assets to pay the
creditors and to answer for operations. [Republic Planters Banks v. Agana, G.R. No. 51765 (1997)]
7. Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations. [SEC
Opinion, 24 Aug 1987]

Retained Earnings - corp’s accumulated income after dividends have been distributed; earned surplus; undistributed
profit
Sec 9 Treasury Shares
Treasury Shares

• shares which have been issued and fully paid for, but subsequently re- acquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the BOD. [Sec. 9]

Limitations on treasury shares

1.They may be re-issued or sold again as long as it is for a reasonable price fixed by the BOD.
2.Cannot participate in dividends.
3.It has no voting right as long as such shares remain in the Treasury. [Sec. 56]
4.It cannot be represented during stockholder’s meetings.
5.The amount of URE equivalent to the cost of treasury shares being held shall be restricted from being declared and
issued as dividends.

What are WATERED STOCKS?

Sec 9 Treasury Shares
Treasury Shares

Treasury Shares are not Retired Shares

Treasury shares do not revert to the unissued shares of the corporation, but are regarded as property acquired by the
corporation, which may be reissued or resold at a price to be fixed by the Board of Directors. [SEC Rules Governing
Redeemable and Treasury Shares, CCP No. 1-1982]
Note: Under the SEC Rules, the redemption of redeemable shares does not necessarily make them as treasury shares. Instead, it
leads to their automatic retirement or cancellation, unless the contrary is specifically stipulated. The articles thus provide advance
notice to ordinary shareholders that the board may, at its own discretion, reissue redeemable shares with the same features.

Treasury shares distributed by way of dividends

Treasury shares may also be distributed as property dividends. In order for treasury shares to be distributed as property
dividends, the amount of the retained earnings previously used to support their acquisition must not have been impaired by losses.
Further, such retained earnings must not be used to justify the distribution of treasury shares as property dividends. They may only
be distributed out of the other earnings of the corporation. [SEC- OGC Opinion No. 12-06, dated April 20, 2012]
Note: Treasury shares are treated as assets of the corporation. Since a treasury share is a fully paid share re-acquired by the
corporation, it is not outstanding and may be re-issued and resold. It cannot receive dividends before the resale, because the corporation
cannot grant dividends to itself. [CIR vs Manning]
Sec 6 Classes of Shares
Par Value vs No-Par Value

Par value shares

These are shares with a stated or fixed value set out in the Articles of Incorporation, which remains the same
regardless of the profitability of the corporation. This gives rise to financial stability, and is the reason why banks, trust
corporations, insurance companies and building and loan associations must always be organized with par value shares.
Par value is minimum issue price of such share in the Articles of Incorporation which must be stated in the certificate.
[Sec 61]
No par value shares
These are shares without a stated value in the AOI. They are without nominal value. They may be issued for the amount
stipulated in the AOI, or fixed by the Board. [Sec 61]
Sec 6 Classes of Shares
Par Value vs No-Par Value

Limitations on no par value shares [Sec. 6]

1.Cannot have an issue price of less than P5.00 per share;
2.Once issued, they shall be deemed fully paid and non-assessable, and the holders of such shares shall not be liable
to the corporation or to its creditors in respect thereto;
3.Entire consideration received by the corporation shall be treated as capital and shall not be available for distribution as
dividends;
4.The AOI must state the fact that the corporation issues no-par shares and the number of shares;
5.Cannot be issued as preferred stock;
6.Cannot be issued by banks, insurance companies, public utilities and building and loan associations;
7.Cannot be issued by all corporations authorized to obtain or access funds from the “public”;

Note: A new addition in the Revised Corporation Code is the prohibition on the issuance of no-par shares being imposed on all
corporations authorized to obtain or access funds from the “public.” This prohibition is not anymore limited to banks, insurance
companies, public utilities and building and loan associations.
Trust Fund Doctrine

• Provides that subscribed capital constitute a fund to which creditors have a right to look into for the
satisfaction of their credits.

• Capital stock, property and other assets of corporation are regarded as equity in trust for the payment
of creditors

• Cases where trust fund doctrine violated:

• Release/condone payment of unpaid subscriptions
• Payment of dividends without URE
• Properties transferred in fraud of creditors
• Properties disposed or undue preference given to some creditors even if corporation is insolvent
• Distribution of capital assets and properties outside dissolution
Capital

• Authorized Capital Stock ACS - amount xed in AOI to be subscribed and paid by
SH. No minimum ACS required.

• Subscribed Capital - portion of ACS covered by subscription agreement whether

fully paid or not

• Paid-up Capital - portion of ACS subscribed and paid

• Paid-in Capital - amount of OCS and additional paid-in capital (APIC) or premium
paid over the par value of the shares

• OCS - total shares of stocks issued to subscribers or SH under binding subscription

contracts, whether fully or partially paid (except treasury shares) so long as there is a
binding subscription agreement
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