chapter i-vii midterms

8/3/2019 Chapter I-Vii Midterms

1/113

Chapter I: Introduction

Role of corporation in modern business

Corporate form of business organization permits the combination offunds from various sources to raise the big capital needed for largebusiness and industrial enterprise

Combination of resources+advantages of limited liability=

corporations popularity

Definition and attributes of a corporation

Section 2.Corporation defined. - A corporation is an artificial being created byoperation of law, having the right of succession and the powers, attributes andproperties expressly authorized by law or incident to its existence. (2)

Four attributes:

(1) artificial being By operation of law, becomes a being with the attributes of an

individual with full capacity to enter into contractual relations a juridical person capable of having rights and obligations; with a personality separate and distinct from its members or SHs fundamental principle in corporate law: SHs are not personally liable

for corporate obligations, and cannot be liable beyond theircontribution to the corporate capital

corporation not liable for personal obligations of its SHs(2) created by operation of law

from a strict legal point of view, a corporation cannot come intobeing by mere consent of the partieso there must be a law granting ito once granted, form the primary franchise of the corporationo mere consent insufficient

State must have given its consent either through a special law orgeneral enabling lawo General law: The Corporation Codeo Compliance with the Code=acquisition of juridical personality

There must be an underlying contract among the individuals formingthe corporationo Interplay of State grant and contractual relations

(3) right of succession Continued existence cannot be affected by any change in the

members or SHs(4) powers, attributes, and properties expressly authorized by law or incident toits existence

Advantages of Corporate Form

1. strong legal personality2. limited liability to investors

a. limited to their sharesb. in partnershipscreditors can still go after individual properties

of the partners3. free transferability of units of investment

a. GR: shares of stocks can be transferred even without theconsent of other SHs

4. Centralized managementa. Centralized in the Boardb. SHs are not agents and cannot bind the corporationc. SHs are bound by management decisions and transactions of

the board, generally

Advantages Disadvantages

1 Strong legal personality Complicated and costly formation2 Limited liability Lack of personal element3 Free transferability Abuse of corporate management4 Centralized management Limited liability hits innocent victims

5 Double taxation

Laws governing Philippine corporations

Choice of Business organizations

(1) The Individual Proprietorship works well for carrying simple or small businesses owners unlimited personal liability difficulties in expansion upon death business will have to stop and be liquidated

(2) The Partnership

1767: two or more persons bind themselves to contribute money orindustry to a common fund, with the intention of dividing the profitsamong themselves

partners are personally liable for debts of the partnership; while SHscannot be made to personally answer to corporate creditors beyondthe amount contributed

much simpler to form a partnership: 5 incorporators vs. at least 2for partners

Personal relationship between and among partners based on mutualtrust and confidence

1


2/113

o Death or insolvency of partner will result in dissolutiono Corporations cannot be voluntarily dissolved except by 2/3 vote

of stock + some State act, whether judicial or administrative(SEC)

Mere agreement is sufficient to give rise to a partnership v.substantial compliance with the Corpo Code for corporations

Managementevery partner is an agent of the partnership, withcapacity to bind vs. centralized management in the BoD for

corporationso SH has no voice in the management except to elect directors

(3) The Close Corporation

Section 96.Definition and applicability of Title. - A close corporation, within themeaning of this Code, is one whose articles of incorporation provide that: (1) Allthe corporation's issued stock of all classes, exclusive of treasury shares, shall beheld of record by not more than a specified number of persons, not exceedingtwenty (20); (2) all the issued stock of all classes shall be subject to one or morespecified restrictions on transfer permitted by this Title; and (3) The corporationshall not list in any stock exchange or make any public offering of any of its stockof any class. Notwithstanding the foregoing, a corporation shall not be deemed aclose corporation when at least two-thirds (2/3) of its voting stock or votingrights is owned or controlled by another corporation which is not a closecorporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oilcompanies, stock exchanges, banks, insurance companies, public utilities,educational institutions and corporations declared to be vested with publicinterest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided,That the provisions of other Titles of this Code shall apply suppletorily exceptinsofar as this Title otherwise provides.

Small closely-knit group like a family They act and feel as partners but wishing to avail of limited liability

Most distinct characteristic: all or most SHs are active in thecorporate business either as directors or officers De facto partnership with a corporate shell

o AOI of close corp can do away with a BODo Can vest management exclusively with the SHso SHs active in management are made liable for personal tortso Business/industry imbued with public interest cannot be by a

close corporation

(4) The Joint Venturea form of partnership and should be governedby the law on partnerships

Common defn: organization formed for some temporary purpose Community of interests, sharing of profits and losses, mutual

agency Formed for the execution of a single transaction, and is thus of a

temporary nature Form of partnership and should be governed by the law on

partnerships SC has ruled that a corporation can enter into a JV, but not a

partnership Separate juridical personality Mutual agency Unlimited liability

The Business Trusta vesting of title to the assets of a businessenterprise in trustees who act as representative thereof, for the benefit of otherscalled the cestui que trust

deed of trust which is easier and less expensive to constitute for it isnot bound by any legal requirements

No separate juridical personality Governed by contract law and common law principles on trusts

Government regulation of corporations

By the LegislatureBy the SEC

Union Glass v SEC. F: The complainant Carolina Hofilea is a stockholder ofPioneer Glass Manufacturing Corporation, engaged in the operation of silicamines and the manufacture of glass and glassware. Since 1967, Pioneer Glasshad obtained various loan accommodations from the Development Bank of thePhilippines [DBP], and also from other local and foreign sources which DBPguaranteed. As security for said loan accommodations, Pioneer Glass mortgagedand/or assigned its assets, real and personal, to the DBP, in addition to themortgages executed by some of its corporate officers over their personal assets.The proceeds of said financial exposure of the DBP were used in the construction

of a glass plant in Rosario, Cavite, and the operation of seven silica miningclaims owned by the corporation. Through the conversion into equity of theaccumulated unpaid interests on the various loans amounting to P5.4 million asof January 1975, and subsequently increased by another P2.2 million in 1976,the DBP was able to gain control of the outstanding shares of common stocks ofPioneer Glass, and to get two, later three, regular seats in the corporation'sboard of directors. When Pioneer Glass suffered serious liquidity problems suchthat it could no longer meet its financial obligations with DBP, it entered into adacion en pago agreement with the latter, whereby all its assets mortgaged toDBP were ceded to the latter in full satisfaction of the corporation's obligations in

2


3/113

the total amount of P59,000,000.00. Part of the assets transferred to the DBPwas the glass plant in Rosario, Cavite, which DBP leased and subsequently soldto herein petitioner Union Glass and Container Corporation, hereinafter referredto as Union Glass. Hofilea filed a complaint before the respondent SEC againstthe DBP, Union Glass and Pioneer Glass, asserting the alleged illegality of theaforesaid dacion en pago resulting from: [1] the supposed unilateral andunsupported undervaluation of the assets of Pioneer Glass covered by theagreement; [2] the self-dealing indulged in by DBP, having acted both asstockholder/director and secured creditor of Pioneer Glass; and [3] the wrongfulinclusion by DBP in its statement of account of P26M as due from Pioneer Glasswhen the same had already been converted into equity. Union Glass moved fordismissal of the case on the ground that the SEC had no jurisdiction over thesubject matter or nature of the suit.I: W/N the SEC or the TC has jurisdiction over the suit of HofilenaH: In the ordinary course of things, petitioner Union Glass, as transferee andpossessor of the glass plant covered by the dacion en pago agreement, shouldbe joined as party-defendant under the general rule which requires the joinderof every party who has an interest in or lien on the property subject matter ofthe dispute. But since petitioner Union Glass has no intra-corporate relation witheither the complainant or the DBP, its joinder as party-defendant in SEC CaseNo. 2035 brings the cause of action asserted against it outside the jurisdiction ofthe respondent SEC, as delineated by Section 5 of PD No. 902-A. This grant ofjurisdiction must be viewed in the light of the nature and function of the SEC

under the law. Section 3 of PD No. 902-A confers upon the latter (SEC) "absolute

jurisdiction, supervision, and control over all corporations, partnerships orassociations, who are grantees of primary franchise and/or license or permitissued by the government to operate in the Philippines ... " The principal functionof the SEC is the supervision and control over corporations, partnerships andassociations with the end in view that investment in these entities may beencouraged and protected, and their activities pursued for the promotion ofeconomic development. Otherwise stated, in order that the SEC can takecognizance of a case, the controversy must pertain to any of the followingrelationships:

[a] between the corporation, partnership or association and the public;[b] between the corporation, partnership or association and its stockholders,

partners, members, or officers;

[c] between the corporation, partnership or association and the state in so

far as its franchise, permit or license to operate is concerned; and[d] among the stockholders, partners or associates themselves.

The fact that the controversy at bar involves the rights of petitioner Union Glasswho has no intra-corporate relation either with complainant or the DBP, placesthe suit beyond the jurisdiction of the respondent SEC. The case should be triedand decided by the court of general jurisdiction, the Regional Trial Court. Sincepetitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule orjurisdiction. Hofileas complaint against petitioner for cancellation of the sale of

the glass plant should therefore be brought separately before the regular court.The SC added however that for Hofileas complaint against Union Glass toprosper, final judgment must first be rendered in the issue of the validity of thedacion en pago, which is a prejudicial question, the resolution of which is alogical antecedent of the issue involved in the action against petitioner UnionGlass. But the Court held that the SEC had no jurisdiction over petitioner UnionGlass Corp., impleaded as third party purchaser of the plant from DBP in theaction to annul the dacion en pago. The Court held that such action for recoveryof the glass plant could be brought by the dissenting stockholder to the regularcourts only if and when the SEC rendered final judgment annulling the dacion enpago and furthermore subject to Union Glass' defenses as a third party buyer ingood faith.

Abejo v dela Cruz. F: Case involves a dispute between the principalstockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "toneand voice paging corporation," namely, the spouses Jose Abejo and Aurora Abejovs. De la Cruz Abejo (hereinafter referred to as the Abejos) and the purchaser,Telectronic Systems, Inc. (hereinafter referred to as Telectronics) of their133,000 minority shareholdings (for P6 million) and of 63,000 shares registeredin the name of Virginia Braga and covered by five stock certificates endorsed inblank by her (for P1,674,450.00), and the spouses Agapito Braga and VirginiaBraga (hereinafter referred to as the Bragas), erstwhile majority stockholders.With the said purchases, Telectronics would become the majority stockholder,

holding 56% of the outstanding stock and voting power of the corporationPocket Bell. Telectronics requested the corporate secretary of the corporation,Norberto Braga, to register and transfer to its name, and those of its nomineesthe total 196,000 Pocket Bell shares in the corporation's transfer book, cancelthe surrendered certificates of stock and issue the corresponding new certificatesof stock in its name and those of its nominees. Norberto Braga, the corporatesecretary and son of the Bragas, refused to register the aforesaid transfer ofshares in the corporate books, asserting that the Bragas claim preemptive rightsover the 133,000 Abejo shares and that Virginia Byaga never transferred her63,000 shares to Telectronics but had lost the five stock certificates representingthose shares. This triggered off the series of intertwined actions between theprotagonists, all centered on the question of jurisdiction over the dispute. The

Bragas assert that the regular civil court has original and exclusive jurisdiction

as against the Securities and Exchange Commission, while the Abejos and

Telectronics, as new majority shareholders, claim the contrary. RespondentJudge de la Cruz issued an order rescinding the order which dismissed thecomplaint of the Bragas in the RTC, thus holding that the RTC and not the SEChad jurisdiction. Respondent judge also revived the temporary restraining orderpreviously issued restraining Telectronics' agents or representatives fromenforcing their resolution constituting themselves as the new set of officers ofPocket Bell and from assuming control of the corporation and discharging theirfunctions.The Abejos filed a MR, which motion was duly opposed by the Bragas, which wasdenied by respondent Judge.

3


4/113

I: W/N the RTC, as claimed by the Bragas, has jurisdiction over the case or theSEC, as claimed by the AbejosH: The Court ruled that the SEC has original and exclusive jurisdiction over thedispute between the principal stockholders of the corporation Pocket Bell,namely, the Abejos and Telectronics, the purchasers of the 56% majority stockon the one hand, and the Bragas, erstwhile majority stockholders, on the other,and that the SEC, through its en banc Resolution of May 15, 1984 correctly ruledin dismissing the Bragas' petition questioning its jurisdiction, that "the issue isnot the ownership of shares but rather the nonperformance by the CorporateSecretary of the ministerial duty of recording transfers of shares of stock of theCorporation of which he is secretary." The SEC ruling upholding its primary andexclusive jurisdiction over the dispute is correctly premised on, and fullysupported by, the applicable provisions of P.D. No. 902-A which reorganized theSEC with additional powers "in line with the government's policy of encouraginginvestments, both domestic and foreign, and more active public participation inthe affairs of private corporations and enterprises through which desirableactivities may be pursued for the promotion of economic development and, topromote a wider and more meaningful equitable distribution of wealth. Thedispute at bar, as held by the SEC, is an intracorporate dispute that has arisenbetween and among the principal stockholders of the corporation Pocket Bell dueto the refusal of the corporate secretary, backed up by his parents as erstwhilemajority shareholders, to perform his "ministerial duty" to record the transfers of

the corporation's controlling (56%) shares of stock, covered by duly endorsedcertificates of stock, in favor of Telectronics as the purchaser thereof. Mandamusin the SEC to compel the corporate secretary to register the transfers and issuenew certificates in favor of Telectronics and its nominees was properly resortedto therefore.

The very complaint of the Bragas for annulment of the sales and transfers asfiled by them in the regular court questions the validity of the transfer andendorsement of the certificates of stock, claiming alleged preemptive rights inthe case of the Abejos' shares and alleged loss of the certificates and lack ofconsent and consideration in the case of Virginia Braga's shares. Such disputeclearly involves controversies "between and among stockholders," as to the

Abejos' right to sell and dispose of their shares to Telectronics, the validity of the

latter's acquisition of Virginia Braga's shares, who between the Bragas and the

Abejos' transferee should be recognized as the controlling shareholders of thecorporation, with the right to elect the corporate officers and the managementand control of its operations. Such a dispute and case clearly fall within thejurisdiction of the SEC to decide, under Section 5 of P.D. 902-A.

Insofar as the Bragas and their corporate secretary's refusal on behalf of thecorporation Pocket Bell to record the transfer of the 56% majority shares toTelectronics may be deemed a device or scheme amounting to fraud andmisrepresentation employed by them to keep themselves in control of thecorporation to the detriment of Telectronics (as buyer and substantial investor in

the corporate stock) and the Abejos (as substantial stockholders-sellers), the

case falls under paragraph (a). The dispute is likewise an intra-corporatecontroversy between and among the majority and minority stockholders as tothe transfer and disposition of the controlling shares of the corporation, fallingunder paragraph (b) of Sec 5 PD 902-A. As pointed out by the Abejos, Pocketbellis not a close corporation, and no restriction over the free transferability of theshares appears in the Articles of Incorporation, as well as in the bylaws 10 andthe certificates of stock themselves, as required by law for the enforcement ofsuch restriction. As the SEC maintains, "There is no requirement that astockholder of a corporation must be a registered one in order that theSecurities and Exchange Commission may take cognizance of a suit seeking toenforce his rights as such stockholder." This is because the SEC by expressmandate has "absolute jurisdiction, supervision and control over all corporations"and is called upon to enforce the provisions of the Corporation Code, amongwhich is the stock purchaser's right to secure the corresponding certificate in hisname under the provisions of Section 63 of the Code.

An intra-corporate controversy is one which arises between a stockholder andthe corporation. There is no distinction, qualification, nor any exemptionwhatsoever. The provision is broad and covers all kinds of controversies betweenstockholders and corporations.

Effect of Corporation Code on Existing Corporations

Section 148.Applicability to existing corporations. - All corporations lawfullyexisting and doing business in the Philippines on the date of the effectivity of thisCode and heretofore authorized, licensed or registered by the Securities andExchange Commission, shall be deemed to have been authorized, licensed orregistered under the provisions of this Code, subject to the terms and conditionsof its license, and shall be governed by the provisions hereof: Provided, That ifany such corporation is affected by the new requirements of this Code, saidcorporation shall, unless otherwise herein provided, be given a period of notmore than two (2) years from the effectivity of this Code within which to complywith the same. (n)

Must be understood to be subject to the accrued or vested rights of theexisting corporation, its SHs and 3rd parties

Any rights accrued or liabilities incurred prior to the effectivity of the latter infavor of or against such corporation, its SHs must be respected

Any additional requirements imposed by the Code must be complied withwithin 2 years from its effectivity

Magalad v Premiere Financing Corporation (209 SCRA 261). F: Premiere isa financing company engaged in soliciting and accepting money marketplacements or deposits. On September 12, 1983 with expired permit to issue

4


5/113

commercial papers and with intention not to pay or defraud its creditors,Premiere induced and misled Magalad into making a money market placement ofP50,000.00 at 22% interest per annum for which it issued a receipt as well astwo (2) post-dated checks in the total sum of P51,079.00 and assigned toMagalad its receivable from a certain David Saman for the same amount.Drawee bank dishonored the checks for lack of sufficient funds to cover theamount. Despite demands by Magalad for the replacement of said checks withcash, Premiere, for no valid reason, failed and refused to honor such demandsand due to fraudulent acts of Premiere. The TC found that Magalad has fullyestablished her claim that defendant had indeed acted fraudulently in incurringthe obligation and considering that no evidence has been adduced by thedefendant to contradict the same, judgment is hereby rendered ordering thedefendant to pay Magalad. Premiere contends that the Securities and ExchangeCommission (SEC) has exclusive and original jurisdiction over a corporationunder a state of suspension of payments. Magalad submits that the legal suitwhich she has brought against Premiere is an ordinary action for damages withthe preliminary attachment cognizable solely by the RTC.

H: Considering that Magalad's complaint sufficiently alleges acts amounting tofraud and misrepresentation committed by Premiere, the SEC must be held toretain its original and exclusive jurisdiction over the case, despite the fact thatthe suit involves collection of sums of money paid to said corporation, therecovery of which would originally fall within the jurisdiction of regular courts.

The fraud committed is detrimental to the interest of the public and, therefore,

encompasses a category of relationship within the SEC jurisdiction. Otherwisestated, in order that the SEC can take cognizance of a case, the controversymust pertain to any of the following relationships: (a) between the corporation,partnership or association and the public; (b) between the corporation,partnership or association and its stockholders, partners, members or officers;(c) between the corporation, partnership or association and the state so far asits franchise, permit or license to operate is concerned; and (d) among thestockholders, partners or associates themselves (Union Glass & Container Corp.v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).

The fact that Premiere's authority to engage in financing already expired will not

have the effect of divesting the SEC of its original and exclusive jurisdiction. The

expanded jurisdiction of the SEC was conceived primarily to protect the interest

of the investing public. That Magalad's money placements were in the nature ofinvestments in Premiere can not be gainsaid. Magalad had reasonably expectedto receive returns from moneys she had paid to Premiere. Unfortunately,however, she was the victim of alleged fraud and misrepresentation. Reliance byMagalad on the case of Union Glass & Container Corp. v. SEC (126 SCRA 31),where the jurisdiction of the ordinary Courts was upheld, is misplaced for, asexplicitly stated in those cases, nowhere in the complaints therein is found anyaverment of fraud of misrepresentation committed by the respectivecorporations involved. The causes of action, therefore, were nothing more thansimple money claims. Further bolstering the jurisdiction of the SEC in this case is

the fact that said agency already appointed a Rehabilitation Receiver forPremiere and has directed all proceedings or claims against it be suspended.This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "uponappointment of a . . . rehabilitation receiver . . . all actions for claims againstcorporations . . . under receivership pending before any court, tribunal, board orbody shall be suspended accordingly." By so doing, SEC has exercised its originaland exclusive jurisdiction to hear and decide cases involving: "a) Petitions ofcorporations, partnerships or associations to be declared in the state ofsuspension of payments.

Chapter II: Classification of Private Corporations

Stock and Non-stock Corporations

Section 3. Cl

asses of corporations. - Corporations formed or organized underthis Code may be stock or non-stock corporations. Corporations which havecapital stock divided into shares and are authorized to distribute to the holders ofsuch shares dividends or allotments of the surplus profits on the basis of theshares held are stock corporations. All other corporations are non-stockcorporations. (3a)

Section 87. Definition. - For the purposes of this Code, a non-stock corporationis one where no part of its income is distributable as dividends to its members,trustees, or officers, subject to the provisions of this Code on dissolution:Provided, That any profit which a non-stock corporation may obtain as anincident to its operations shall, whenever necessary or proper, be used for thefurtherance of the purpose or purposes for which the corporation was organized,subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall be applicableto non-stock corporations, except as may be covered by specific provisions ofthis Title. (n)

Section 88. Purposes. - Non-stock corporations may be formed or organized for

charitable, religious, educational, professional, cultural, fraternal, literary,scientific, social, civic service, or similar purposes, like trade, industry,agricultural and like chambers, or any combination thereof, subject to the specialprovisions of this Title governing particular classes of non-stock corporations. (n)

2 elements to become a stock corporation:o capital stock divided into shareso stock must be authorized to distribute dividends to its SHs

5


6/113

o because the main purpose of the corporation is to make profitsfor its shareholders

GR: a business corporation should organize as a stock corporation Non-stock corporation: special kind of corporation with needs

different from those of stock corporations

CIR v Club Filipino. The "Club Filipino, Inc. de Cebu," (Club, for short), is acivic corporation, owning and operating a club house, a bowling alley, a golfcourse, and a bar-restaurant where it sells wines and liquors, soft drinks, mealsand short orders to its members and their guests. The bar-restaurant was anecessary incident to the operation of the club and -its golf-course. The club isoperated mainly with funds derived from membership fees and dues. Whateverprofits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising from the re-valuation ofits real properties, the value or price of which increased, the Club declared stockdividends; but no actual cash dividends were distributed to the stockholders. In1952, a BIR agent discovered that the Club has never paid percentage tax onthe gross receipts of its bar and restaurant. The Collector of Internal Revenueassessed against and demanded from the Club, percentage taxes on its grossreceipts as well as fixed taxes and compromise penalty. The Club wrote theCollector, requesting for the cancellation of the assessment. The request havingbeen denied, the Club filed the instant petition for review.

I: W/N the respondent Club is liable for the payment of the sum of P12,068.84,as fixed and percentage taxes and surcharges prescribed in sections 182, 183and 191 of the Tax Code, under which the assessment was made, in connectionwith the operation of its bar and restaurant, during the periods mentionedH: It has been held that the liability for fixed and percentage taxes, as providedby these sections, does not ipso facto attach by mere reason of the operation ofa bar and restaurant. For the liability to attach, the operator thereof must beengaged in the business as a barkeeper and restaurateur. The plain and ordinaryof a business is restricted to activities or affairs where profit is the purpose orlivelihood is the motive, and the term business when used without qualification,should be construed in its plain and ordinary meaning, restricted to activities forprofit or livelihood. Having found as a fact that the Club was organized todevelop and cultivate sports of all, class and denomination, for the healthfulrecreation and entertainment of its stockholders and members; that upon its

dissolution, its remaining assests, after paying debts, shall be donated to acharitable Philippine Institution in Cebu; that it is operated mainly with fundsderived from membership fees and dues; that the Club's bar and restaurantcatered only to its members and their guests; that there was in fact no cashdividend distribution to its stockholders and that whatever was derived on retailfrom its bar and restaurant was used to defray its overall overhead expensesand to improve its golf-course (cost-plus-expenses-basis), it stands to reasonthat the Club is not engaged in the business of an operator of bar and restaurant(same authorities, cited above).

It is conceded that the Club derived profit from the operation of its bar andrestaurant, but such fact does not necessarily convert it into a profit-makingenterprise. The bar and restaurant are necessary adjuncts of the Club to fosterits purposes and the profits derived therefrom are necessarily incidental to theprimary object of developing and cultivating sports for the healthful recreationand entertainment of the stockholders and members. That a Club makes someprofit, does not make it a profit making club.

The fact that the capital stock of the respondent Club is divided into shares, doesnot detract from the finding of the trial court that it is not engaged in thebusiness of operator of bar and restaurant. What is determinative of whether ornot the Club is engaged in such business is its object or purpose, as stated in itsarticles and by-laws. It is a familiar rule that the actual purpose is not controlledby the corporate form or by the commercial aspect of the business prosecuted,but may be shown by extrinsic evidence, including the by-laws and the methodof operation.

Moreover, for a stock corporation to exist, two requisites must be complied with,to wit: (1) a capital stock divided into shares and (2) an authority to distributeto the holders of such shares, dividends or allotments of the surplus profits onthe basis of the shares held (see. 3, Act No. 1459). In the case at bar, while therespondent Club's capital stock is divided into shares, nowhere in its articles ofincorporation or by-laws could be found an authority for the distribution of its

dividends or surplus profits. Strictly speaking, it cannot, therefore, be considereda stock corporation, within the contemplation of the corporation law. "A tax is aburden, and, as such, it should not be deemed imposed upon fraternal, civic,non-profit, non-stock organizations, unless the intent to the contrary is manifestand patent."

Manual R. Dulay Ent. Inc. v. CA (225S 678). Petitioner corporation throughits president, Manuel Dulay, obtained various loans for the construction of itshotel project, Dulay Continental Hotel (now Frederick Hotel). It even had toborrow money from petitioner Virgilio Dulay to be able to continue the hotelproject. As a result of said loan, petitioner Virgilio Dulay occupied one of the unitapartments of the subject property since 1973 while at the same time managingthe Dulay Apartment as his shareholdings in the corporation was subsequentlyincreased by his father. Manuel Dulay by virtue of Board Resolution No. 186 of

petitioner corporation sold the subject property to private respondents spouses,Maria Theresa and Castrense Veloso in the amount of P300,000.00. The partiesthen executed a Memorandum to the Deed of Absolute, giving Manuel Dulaywithin two (2) years or until December 9, 1979 to repurchase the subjectproperty for P200,000.00 which was however, not annotated. Thereafter privaterespondent Maria Veloso, without the knowledge of Manuel Dulay, mortgagedthe subject property to private respondent Manuel A. Torres for a loan ofP250,000.00 which was duly annotated. The subject property was sold on April1, 1978 to private respondent Torres as the highest bidder in an extrajudicialforeclosure, upon default of Veloso to pay the loan. Veloso then executed a Deed

6


7/113

of Absolute Assignment of the Right to Redeem in favor of Manuel Dulayassigning her right to repurchase the subject property from private respondentTorres. As neither private respondent Maria Veloso nor her assignee ManuelDulay was able to redeem the subject property within the one year statutoryperiod for redemption, private respondent Torres sought to consolidate hisownership over the property. Petitioner Virgilio Dulay appeared in court tointervene in said case alleging that Manuel Dulay was never authorized by thepetitioner corporation to sell or mortgage the subject property, and sought tocancel the sheriff sale to Torres and regain possession of the property. TC rulesifo Torres, Veloso et al. The corporation and Virgilio Dulay contend that therespondent court had acted with grave abuse of discretion when it applied thedoctrine of piercing the veil of corporate entity in the instant case consideringthat the sale of the subject property between private respondents spousesVeloso and Manuel Dulay has no binding effect on petitioner corporation asBoard Resolution No. 18 which authorized the sale of the subject property wasresolved without the approval of all the members of the board of directors andsaid Board Resolution was prepared by a person not designated by thecorporation to be its secretary.

H: In the instant case, petitioner corporation is classified as a close corporationand consequently a board resolution authorizing the sale or mortgage of thesubject property is not necessary to bind the corporation for the action of itspresident. At any rate, a corporate action taken at a board meeting without

proper call or notice in a close corporation is deemed ratified by the absent

director unless the latter promptly files his written objection with the secretary ofthe corporation after having knowledge of the meeting which, in this case,petitioner Virgilio Dulay failed to do.

It is relevant to note that although a corporation is an entity which has apersonality distinct and separate from its individual stockholders or members,the veil of corporate fiction may be pierced when it is used to defeat publicconvenience, justify wrong, protect fraud or defend crime. The privilege of beingtreated as an entity distinct and separate from. its stockholders or members istherefore confined to its legitimate uses and is subject to certain limitations toprevent the commission of fraud or other illegal or unfair act. When thecorporation is used merely as an alter ego or business conduit of a person, thelaw will regard the corporation as the act of that person.

The Supreme Court had

repeatedly disregarded the separate personality of the corporation where thecorporate entity was used to annul a valid contract executed by one of itsmembers.

Petitioners' claim that the sale of the subject property by its president, ManuelDulay, to private respondents spouses Veloso is null and void as the allegedBoard Resolution No. 18 was passed without the knowledge and consent of theother members of the board of directors cannot be sustained. Virgilio is verymuch privy to the transactions involved. To begin with, he is an incorporator andone of the board of directors designated at the time of the organization of

Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the said entity is looselyreferred to as a family corporation'. The nomenclature, if imprecise, however,fairly reflects the cohesiveness of a group and the parochial instincts of theindividual members of such an aggrupation of which Manuel R. DelayEnterprises, Inc. is typical: four-fifths of its incorporators being close relativesnamely, three (3) children and their father whose name identifies theircorporation.

Petitioner corporation is liable for the act of Manuel Dulay and the sale of thesubject property to private respondents by Manuel Dulay is valid and binding.The sale between Manuel R. Dulay Enterprises, Inc. and the spouses MariaTheresa V. Veloso and Castrense C. Veloso, was a corporate act of the formerand not a personal transaction of Manuel R. Dulay. This is so because Manuel R.Dulay was not only president and treasurer but also the general manager of thecorporation. The corporation, was a closed family corporation, where theincorporators and directors belong to one single family. It cannot be concealedthat Manuel R. Dulay as president, treasurer and general manager almost hadabsolute control over the business and affairs of the corporation.

NDC v Philippine Veterans Bank (192 SCRA 257). AGRIX executed ifo PhilVeterans Bank a REM over 3 parcels of land. During the existence of themortgage, AGRIX went bankrupt. Veterans Bank than filed a claim with theAGRIX Claims Committee for the payment of its loan credit. Agrix and NDC

refused to recognize the claim, invoking PD 1717 which ordered the

rehabilitation of the Agrix Group of Companies is administered by the NationalDevelopment Company. Sec 4(1) thereof provides all mortgages and other liensattached to the assets of the dissolved corporations are hereby extinguished.Agrix proceeded to cancel the mortgage lien in light of the PD. TC annulled theentire PD 1717. NDC appeals. It claims that since Veterans Bank invokedquestioned PD when it filed a claim with the Agrix Claims committee, it is thusestopped from questioning the validity of the PD which also provides that allmortgages attached to properties of Agrix shall be extinguished.

H: Estoppel does not apply where Veterans Bank invoked the questioned PDwhen Pres Marcos was still absolute ruler and his decrees were absolute law. Nota single act or issuance of Marcos was ever declared unconstitutional as long ashe was in power.

In this case, Veterans Bank has not been paid a single centavo on its claim,which was kept pending for more than 7 years. The new corporation, New AgrixInc, is neither owned nor controlled by the government. The DC was merelyrequired to extend a loan of not more than P10M to New Agrix Inc. it is entirelyprivate and so should have been organized under the Corporation Law. TheCourt thus declared the PD 1717 as unconstitutional.

Does a defective incorporation result into a partnership? NO.

7


8/113

1. If parties intended to create a corporation, then a partnershiparrangement cannot be created in its stead since such is not withintheir intent

2. Important differences between the corporation and partnership,such as limited liability, centralized management, and easytransferability of shares are by themselves strong factors to bebound by a corporate agreement

Pioneer Insurance v CA (175 SCRA 668). F: In 1965, Jacob S. Lim wasengaged in the airline business as owner-operator of Southern Air Lines (SAL) asingle proprietorship. On May 17, 1965, at Tokyo, Japan, Japan DomesticAirlines (JDA) and Lim entered into and executed a sales contract for the saleand purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spareparts for the total agreed price of US $109,000.00 to be paid in installments. The2 planes were delivered to Lim in Manila. On May 22, 1965, Pioneer Insuranceand Surety Corporation as surety executed and issued its Surety Bond in favor ofJDA, in behalf of its principal, Lim, for the balance price of the aircrafts andspare parts. It appears that Border Machinery and Heavy Equipment Company,Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) andConstancio Maglana contributed some funds used in the purchase of the aboveaircrafts and spare parts. The funds were supposed to be their contributions to anew corporation proposed by Lim to expand his airline business. Lim had dulyreceived the amount of P151,000.00 from defendants Bormaheco and Maglana

representing the latter's participation in the ownership of the subject airplanesand spare parts. The indemnitors then executed two (2) separate indemnityagreements in favor of Pioneer, one signed by Maglana and the other jointlysigned by Lim for SAL, Bormaheco and the Cervanteses. The indemnityagreements stipulated that the indemnitors principally bind themselves jointlyand severally to indemnify and hold and save harmless Pioneer from and againstany/all damages, losses, costs, damages, taxes, penalties, charges andexpenses of whatever kind and nature which Pioneer may incur in consequenceof having become surety upon the bond. Lim doing business under the name andstyle of SAL executed in favor of Pioneer as deed of chattel mortgage as securityfor Pioneers suretyship. Lim defaulted on his subsequent installment paymentsprompting JDA to request payments from the surety. Pioneer paid a total sum ofP298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of thesaid chattel mortgage. The Cervanteses and Maglana, however, filed a third

party claim alleging that they are co-owners of the aircrafts. Pioneer also filed anaction for judicial foreclosure with an application for a writ of preliminaryattachment against Lim and respondents, the Cervanteses, Bormaheco andMaglana. After trial on the merits, a decision was rendered holding Lim liable topay Pioneer but dismissed Pioneer's complaint against all other defendants. CAmodified the trial court's decision in that the plaintiffs complaint against all thedefendants was dismissed. In all other respect the trial court's decision wasaffirmed. Lim asserted that as a result of the failure of respondents Bormaheco,Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a defacto partnership among them was created, and that as a consequence of such

relationship all must share in the losses and/or gains of the venture in proportionto their contribution.

I: What legal rules govern the relationship among co-investors whose agreementwas to do business through the corporate vehicle but who failed to incorporatethe entity in which they had chosen to invest? How are the losses to be treatedin situations where their contributions to the intended 'corporation' wereinvested not through the corporate form?

H: it is ordinarily held that persons who attempt, but fail, to form a corporationand who carry on business under the corporate name occupy the position ofpartners inter se. Where persons associate themselves together under articles topurchase property to carry on a business, and their organization is so defectiveas to come short of creating a corporation within the statute, they become inlegal effect partners inter se, and their rights as members of the company to theproperty acquired by the company will be recognized.

However, such a relation does not necessarily exist, for ordinarily persons cannotbe made to assume the relation of partners, as between themselves, when theirpurpose is that no partnership shall exist, and it should be implied only whennecessary to do justice between the parties; thus, one who takes no part exceptto subscribe for stock in a proposed corporation which is never legally formeddoes not become a partner with other subscribers who engage in business under

the name of the pretended corporation, so as to be liable as such in an action forsettlement of the alleged partnership and contribution. A partnership relationbetween certain stockholders and other stockholders, who were also directors,will not be implied in the absence of an agreement, so as to make the formerliable to contribute for payment of debts illegally contracted by the latter.

In this case, it was established by the evidence contrary to Lims postulations,that Cervantes, Bormacheo, and Maglana contributed the amount needed by Limto put up the corporation as he promised, which he received. It is therefore clearthat the petitioner never had the intention to form a corporation with therespondents despite his representations to them. This gives credence to thecross-claims of the respondents to the effect that they were induced and luredby the petitioner to make contributions to a proposed corporation which wasnever formed because the petitioner reneged on their agreement. Necessarily,

no de facto partnership was created among the parties which would entitle thepetitioner to a reimbursement of the supposed losses of the proposedcorporation. The record shows that the petitioner was acting on his own and notin behalf of his other would-be incorporators in transacting the sale of theairplanes and spare parts.

(When parties come together intending to form a corporation, but no corporationis formed due to some legal cause:

8


9/113

(1) parties who intended to participate or actually participated in thebusiness affairs of the proposed corporation would be considered aspartners under a de facto corporation

(2) parties who took no part except to subscribe for stock in a proposedcorporation, do not become partners with the subscribers engaged inthe business of the corporation)

Corporation Sole

only a religious corporation can become a corporation sole

Parent and Subsidiary corporations; holding companies; affiliatecorporations

subsidiary corporation: one where the control, in the form ofownership of majority shares, is in another corporation calledthe parent corporation

parent has the power to elect the subsidiarys directors, thuscontrolling management properties

holding company: a parent company where the sole functionis to hold the shares of other corporations which it controls

i. no other business other than holding of shares

investment company: a corporation which holds shares notfor control but for investment

affiliates: corporations subject to common control andoperated as part of a system

i. also called sister corporations

9


10/113

Chapter III Formation/Organization

Who may form a corporation?

Section 5. Corporators and incorporators, stockholders and members. -Corporators are those who compose a corporation, whether as stockholders or asmembers. Incorporators are those stockholders or members mentioned in thearticles of incorporation as originally forming and composing the corporation and

who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders.Corporators in a non-stock corporation are called members. (4a)

Incorporators: SHs or members mentioned in the AOI as originally formingand composing the corporation and who are signatories thereof

Corporators: all SHs or members, whether incorporators or those joining thecorporation after incorporation

Every incorporator must be a stockholder

Section 10.Number and qualifications of incorporators. - Any number of naturalpersons not less than five (5) but not more than fifteen (15), all of legal age anda majority of whom are residents of the Philippines, may form a private

corporation for any lawful purpose or purposes. Each of the incorporators of sstock corporation must own or be a subscriber to at least one (1) share of thecapital stock of the corporation. (6a)

1. Must be natural persons

Only natural persons can be incorporatorso Excluding partnerships and other corporations

But partnerships and other corporations can be stockholders inanother corporation as long as they are not incorporatorsthereof (El Hogar case)

2. At least five (5) incorporators, but not more than 15

At least 5 incorporators must sign the AOI If only 2 incorporators are residents of the RP, a corporation still

existsa de facto corporation, providedo At least 5 incorporators must sign the AOI

One-man corporations: owner can still incorporate by givingnominal ownership of one share of stock each to four otherpersons (legal)

Incorporator will always retain his status as incorporator of thecorporation

Reason for 5 incorporator requirement: if anything goes wrongif the incorporation process, and liabilities created at the time ofincorporation, then the existence of 5 allows the public orinjured party to run after the persons

3. Residence requirement; citizenship requirement only in certain areas

No general requirement of RP citizenship Some areas of industry and business are limited/reserved for

Filipino citizenso Public utilitieso Retail tradeo Bankso Investment houseso Savings and loan associationso Schoolso Other areas Congress may by law provide

Where more than 40% of outstanding capital is to be owned orcontrolled by aliens: written authorization must first be soughtwith the BOI before registration with the SEC

4. Restrictions on stock ownership of closely-knit groups

Sensitive areas where ownership by a close-knit group may bedetrimental to the public interest

o Ex. Banksno bank may be licensed to operate ifequity of one person or persons related to each otherwithin the 3rd degree of consanguinity/affinity exceed20% of bank voting stock

Section 140.Stock ownership in certain corporations. - Pursuant to the dutiesspecified by Article XIV of the Constitution, the National Economic andDevelopment Authority shall, from time to time, make a determination ofwhether the corporate vehicle has been used by any corporation or by businessor industry to frustrate the provisions thereof or of applicable laws, and shallsubmit to the Batasang Pambansa, whenever deemed necessary, a report of its

findings, including recommendations for their prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings incorporations declared by it to be vested with a public interest pursuant to theprovisions of this section, belonging to individuals or groups of individuals relatedto each other by consanguinity or affinity or by close business interests, orwhenever it is necessary to achieve national objectives, prevent illegalmonopolies or combinations in restraint or trade, or to implement nationaleconomic policies declared in laws, rules and regulations designed to promote the

10


11/113

general welfare and foster economic development.

In recommending to the Batasang Pambansa corporations, businesses orindustries to be declared vested with a public interest and in formulatingproposals for limitations on stock ownership, the National Economic andDevelopment Authority shall consider the type and nature of the industry, thesize of the enterprise, the economies of scale, the geographic location, the extent

of Filipino ownership, the labor intensity of the activity, the export potential, aswell as other factors which are germane to the realization and promotion ofbusiness and industry.

o Stock ownership in close corporations may be limitedby the AOI ifo members of the same family or group

Section 97.Articles of incorporation. - The articles of incorporation of a closecorporation may provide:

1. For a classification of shares or rights and the qualifications for owning orholding the same and restrictions on their transfers as may be statedtherein, subject to the provisions of the following section;

-- x X x --

Steps in Formation of Corporation

1. Promotional stage

Promoter, Defn: one who brings together persons who becomeinterested in enterprise, aids in procuring subscriptions and setsin motion the machinery which leads to the formulation of thecorporation

Securities Regulation Code: promoter is a person who, actingalone or with others, takes initiative in founding and organizingthe business of the issuer and receives consideration therefor

o He formulates the necessary initial business andfinancial plans

o If necessary, buys the rights and property which thebusiness may need; with the understanding that onceformed, he shall take over the same

o Promoters may also be incorporatorso Revised securities act sec 2

Code: before incorporation,

o at least 25% authorized capital stock should besubscribed

o at least 25% of subscribed stock is paid-in if initial capital requirements cannot be met, then promoters

have to promote the business so other persons could invest shares of stock cannot be sold publicly unless they are first

registered with the SEC SEC requires disclosure of all pertinent information regarding:

o purposes,o character and nature of business,o financial position,o financial responsibility of directors and officers,o nature of shares to be issued

Must appear in a registration statemento Filed with the SECo Published in 2 newspapers of gen. circulationo Once a week for 2 consecutive weeks

If all requirements are complete, SEC issues an order makingregistration effective

SEC grants corporation a permit to offer securities for sale

2. Articles of Incorporation; drafting

AOI: constitute the charter of the corporation. It is the contract between thecorporation and its SHs as well as the agreement among SHs

Basic contract document in Corporate Lawo Defines the charter of the corporationo Defines contractual relationships between and among:

State and corporation SHs and State Corporation and SHs

AOI does not become binding unless they have been filed with theregistered by the SEC

Section 14.Contents of the articles of incorporation. - All corporations organizedunder this code shall file with the Securities and Exchange Commission articles of

incorporation in any of the official languages duly signed and acknowledged by allof the incorporators, containing substantially the following matters, except asotherwise prescribed by this Code or by special law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is beingincorporated. Where a corporation has more than one stated purpose,the articles of incorporation shall state which is the primary purpose and

11


12/113

which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change orcontradict its nature as such;

3. The place where the principal office of the corporation is to be located,which must be within the Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors or trustees, which shall not be less than five(5) nor more than fifteen (15);

7. The names, nationalities and residences of persons who shall act asdirectors or trustees until the first regular directors or trustees are dulyelected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of its authorized capital stock

in lawful money of the Philippines, the number of shares into which it isdivided, and in case the share are par value shares, the par value ofeach, the names, nationalities and residences of the original subscribers,and the amount subscribed and paid by each on his subscription, and ifsome or all of the shares are without par value, such fact must bestated;

9. If it be a non-stock corporation, the amount of its capital, the names,nationalities and residences of the contributors and the amountcontributed by each; and

10. Such other matters as are not inconsistent with law and which theincorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles ofincorporation of any stock corporation unless accompanied by a sworn statementof the Treasurer elected by the subscribers showing that at least twenty-five(25%) percent of the authorized capital stock of the corporation has beensubscribed, and at least twenty-five (25%) of the total subscription has beenfully paid to him in actual cash and/or in property the fair valuation of which isequal to at least twenty-five (25%) percent of the said subscription, such paid-upcapital being not less than five thousand (P5,000.00) pesos.

Section 15.Forms of Articles of Incorporation. - Unless otherwise prescribed byspecial law, articles of incorporation of all domestic corporations shall complysubstantially with the following form:

ARTICLES OF INCORPORATION OF

__________________________

(Name of Corporation)

KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a majority of whom areresidents of the Philippines, have this day voluntarily agreed to form a (stock)(non-stock) corporation under the laws of the Republic of the Philippines;

AND WE HEREBY CERTIFY:

FIRST: That the name of said corporation shall be "_____________________,INC. or CORPORATION";

SECOND: That the purpose or purposes for which such corporation isincorporated are: (If there is more than one purpose, indicate primary andsecondary purposes);

THIRD: That the principal office of the corporation is located in theCity/Municipality of ________________________, Province of_______________________, Philippines;

FOURTH: That the term for which said corporation is to exist is _____________years from and after the date of issuance of the certificate of incorporation;

FIFTH: That the names, nationalities and residences of the incorporators of the

corporation are as follows:

NAME NATIONALITY RESIDENCE

___________________ ___________________ ___________________

___________________ ___________________ ___________________

12


13/113

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

SIXTH: That the number of directors or trustees of the corporation shall be_______; and the names, nationalities and residences of the first directors ortrustees of the corporation are as follows:

NAME NATIONALITY RESIDENCE

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

SEVENTH: That the authorized capital stock of the corporation is ______________________ (P___________) PESOS in lawful money of thePhilippines, divided into __________ shares with the par value of____________________ (P_____________) Pesos per share.

(In case all the share are without par value):

That the capital stock of the corporation is ______________ shares without parvalue. (In case some shares have par value and some are without par value):That the capital stock of said corporation consists of _____________ shares ofwhich ______________ shares are of the par value of _________________(P____________) PESOS each, and of which _________________ shares arewithout par value.

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stockabove stated has been subscribed as follows:

Name of Subscriber Nationality No of Shares Amount

Subscribed Subscribed

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

NINTH: That the above-named subscribers have paid at least twenty-five (25%)percent of the total subscription as follows:

Name of Subscriber Amount Subscribed Total Paid-In

_________________ ___________________ _______________

_________________ ___________________ _______________

_________________ ___________________ _______________

_________________ ___________________ _______________

_________________ ___________________ _______________

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation isnon-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly,

and it is sufficient if the articles state the amount of capital or money contributedor donated by specified persons, stating the names, nationalities and residencesof the contributors or donors and the respective amount given by each.)

TENTH: That _____________________ has been elected by the subscribers asTreasurer of the Corporation to act as such until his successor is duly elected andqualified in accordance with the by-laws, and that as such Treasurer, he hasbeen authorized to receive for and in the name and for the benefit of thecorporation, all subscription (or fees) or contributions or donations paid or given

13


14/113

by the subscribers or members.

ELEVENTH: (Corporations which will engage in any business or activity reservedfor Filipino citizens shall provide the following):

"No transfer of stock or interest which shall reduce the ownership of Filipinocitizens to less than the required percentage of the capital stock as provided byexisting laws shall be allowed or permitted to be recorded in the proper books ofthe corporation and this restriction shall be indicated in all stock certificatesissued by the corporation."

IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation,this __________ day of ________________, 19 ______ in the City/Municipalityof ____________________, Province of ________________________, Republicof the Philippines.

_______________________ _______________________

_______________________ _______________________

________________________________

(Names and signatures of the incorporators)

SIGNED IN THE PRESENCE OF:

_______________________ _______________________

(Notarial Acknowledgment)

TREASURER'S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES )

CITY/MUNICIPALITY OF ) S.S.

PROVINCE OF )

I, ____________________, being duly sworn, depose and say:

That I have been elected by the subscribers of the corporation as Treasurerthereof, to act as such until my successor has been duly elected and qualified inaccordance with the by-laws of the corporation, and that as such Treasurer, Ihereby certify under oath that at least 25% of the authorized capital stock of thecorporation has been subscribed and at least 25% of the total subscription has

been paid, and received by me, in cash or property, in the amount of not lessthan P5,000.00, in accordance with the Corporation Code.

____________________

(Signature of Treasurer)

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in theCity/Municipal ity of ___________________ Province of _____________________, this _______ day of ___________, 19 _____; by __________________ with Res. Cert. No. ___________ issued at_______________________ on ____________, 19 ______

NOTARY PUBLIC

My commission expires on

_________, 19 _____

Doc. No. _________;

Page No. _________;

Book No. ________;

Series of 19____ (7a)

Contents of AOI (Sec 14)

(1) Corporate name

Name is essential to corporate existence It is through the name that the corporation can sue and be sued

and perform all legal acts

14


15/113

Code does not allow the corporation to adopt a name identicalor deceptively or confusingly similar to that of any existingcorporation or to any other name already protected by law orwhich is patently deceptive, confusing, or contrary to existinglaws

If name is legally permissible the SEC allow the parties toreserve it for a reasonable period

Code requires a corporation to append the word Corporationor Inc. to its chosen name

A corporation should transact business only in its corporatename

Can amend the name provided it is done in accordance with theprocedure laid down by the Code for amendments of AOI andapproval by SEC of the change in corporate name

Once approved SEC issues an amended certificate ofincorporation under the corporations new name

Change of name does not result in dissolution

Philips Export BV v CA (206 S 457). Philips of the Netherlands files an actionwith the SEC to delete the name Philips from the corporate name of StandardPhilips Company. Standard refuses, and Philips sought an injunction to enjoinStandards from the use if the name Philips. SEC Hearing Officer dismisses Philipspetition, arguing that Sec 18 of Corpo Code is only applicable when the

corporate names are identical. SEC en banc affirms HOs decision; corporatenames contain at least two different words and rules out confusion. CA dismissesPhilips petition, saying that Standards products are unrelated and do notcompete with Philips products and would not mislead consumers. I: W/NStandards use of the word Philips in its corporate name is unlawful and may beremoved under the Corpo Code. H: Yes. The corporations right to use itscorporate name is a property right, a right in rem which it may assert andprotect against the world. A name is secularly important as necessary to thevery existence of a corporation. Its name is one of its attributes, an element ofits existence, and essential to its identity. GR: each corp must have a name bywhich it is to sue and be sued and do all legal acts. A corp acquires its name bychoice and need not select a name identical with or similar to one alreadyappropriated. To come under the application of Sec 18 of the Corpo Code, 2requisites must be proven: (1) corp has a prior right over the use of the name,

or; (2) proposed name is either identical or deceptively/confusingly similar, or;(3) it is patently deceptive, confusing or contrary to existing law. The right toexclusive use of corporate name is determined by priority of adoption. Philipswas incorporated on 1956 and Standard only 2 years later. In determining theexistence of confusing similarity in corporate names, the test is w/n thesimilarity is such as to mislead a person using ordinary care and discrimination.A reading of the names of Philips and its subsidiary companies indicate thatPhilips is indeed a dominant word in that all companies affiliated with theprincipal corp are known in the RP. Given also Standards primary purpose,nothing could prevent it from dealing in the same line of business of electrical

devices, products, or supplies which fall under its primary purposes. Standardsuse also tends to show its intention to ride on the popularity and establishedgoodwill of Philips. Furthermore, because Philips is a trademark or trade nameregistered as far back as 1922, they have the exclusive right to use the namefree from infringement by similarity.

Lyceum of the Phils. v CA (219 S 610). Lyceum of the Philippines Inc sues allacademic institutions it could find having the corporate name Lyceum. SECrules against Lyceum and upheld by the CA. I: W/n use of word Lyceum in its

corporate name has been for such length of time and with such exclusivity as tohave been associated with Lyceum of RP.H: Lyceum is not entitled to a legally enforceable exclusive right to use the wordLyceum in its corporate name. (1) corporate names of the other Lyceums notidentical with, or deceptively or confusingly similar to Lyceum of the RP.Confusion and deception are precluded by the appending of the geographicname after Lyceum. (2) Lyceum the word is as generic in character as the worduniversity. But Lyceum of RPs use of the word Lyceum in its corporate name hasnot been attended with the exclusivity essential for applicability of the doctrineof secondary meaning. In fact Western Lyceum used the word 17 years beforeLyceum of RP. (3) even if Western Lyceum is deemed to have lost its rightsunder the original registration which was never restored when destroyed by fire,the point was merely to emphasize that the word has already been usedpreviously and is not exclusive to Lyceum of RP.

PC Javier and Sons v CA. H: From the foregoing documents, it cannot bedenied that petitioner corporation was aware of First Summa Savings andMortgage Bank's change of corporate name to PAIC Savings and Mortgage Bank,Inc. Knowing fully well of such change, petitioner corporation has no valid reasonnot to pay because the IGLF loans were applied with and obtained from FirstSumma Savings and Mortgage Bank. First Summa Savings and Mortgage Bankand PAIC Savings and Mortgage Bank, Inc., are one and the same bank to whichpetitioner corporation is indebted. A change in the corporate name does notmake a new corporation, whether effected by a special act or under a generallaw. It has no effect on the identity of the corporation, or on its property, rights,or liabilities. The corporation, upon such change in its name, is in no sense anew corporation, nor the successor of the original corporation. It is the samecorporation with a different name, and its character is in no respect changed.

(2) Purpose clause

Confers as well as limits the powers which a corporation mayexercise

Sec 45: corporate powers:o Expressly granted by law and the AOIo Incidental to conferred powers

15


16/113

o Reasonably necessary to accomplish its purposes and incidentalto its existence

Must specify primary and secondary purposeso Secondary purpose need not be related to the main purpose

Three reasons for requiring a purpose clause in the AOIo So that a prospective SH contemplating an investment shall

know within what lines of business his money is to be riskedo So that management may know within what lines of business it

is authorized to acto So that anyone who deals with the corporation may ascertain

w/n a contract or transaction is within the general authority ofmanagement

Sec 14(2): a corporation can have as many purposes as it may wishto include in its AOI, subject to the ff conditions:a) The AOI must specify which is the primary purpose and which

are the secondary purposes (need not be related)b) For corporations governed by special laws or covered by special

provisions in the Code: can have only ONE purpose peculiar tothem and no other (ex educational corporations cannot engagein export and import)

c) Purpose(s) must be lawful NEDA has the power to refuse or deny the application

for registration of any corporation if not consistent withthe declared national economic policies

A corporation cannot be formed for the purpose ofpracticing a profession

Non-stock corporations:

Section 88. Purposes. - Non-stock corporations may be formed or organized forcharitable, religious, educational, professional, cultural, fraternal, literary,scientific, social, civic service, or similar purposes, like trade, industry,agricultural and like chambers, or any combination thereof, subject to the specialprovisions of this Title governing particular classes of non-stock corporations. (n)

Investment in activities not within its primary purposeo Sec 42: allowed provided

Approved by majority of Board Ratified by 2/3 of outstanding capital stock

o Exception: where reasonably necessary to accomplishprimary purposes, SHs approval not necessary

Interpretation of purpose clauseso GR: construed as including incidental powers reasonably

necessary to the proper exercise of the powers enumeratedin the AOI

o Detailed specification of powers enumerated, by implication,excludes all other powers or rights

Except incidental or subordinate powers and rightsnecessary to an exercise of powers expressly given

(3) Place of Principal office of the corporation

Residence of the corporation Must be within the Philippines Specify city or town where located

(4) Term of existence

Not to exceed 50 years from date of incorporationo extendible for a period not exceeding 50 years by amendment

to AOIo no extension made earlier than 5 years before original or

subsequent expiry date exception: justifiable reasons

Section 11. Corporate term. - A corporation shall exist for a period notexceeding fifty (50) years from the date of incorporation unless sooner dissolvedor unless said period is extended. The corporate term as originally stated in thearticles of incorporation may be extended for periods not exceeding fifty (50)

years in any single instance by an amendment of the articles of incorporation, inaccordance with this Code; Provided, That no extension can be made earlier thanfive (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by theSecurities and Exchange Commission. (6)

(5) Names, nationalities, and residencies of theIncorporators and directors;

Names, nationalities, and residencies of the incorporators, anddirectors or trustees who will act as such until the first regulardirectors/trustees are electedo AOI must also name the treasurer chosen by the pre-

incorporation subscribers

(6) Number of directors or trustees; qualifications

Number of directors: not less than 5, not more than 15o For non-stock: can exceed 15 trusteeso Merger of banks: total number of directors of the merged banks

(may exceed 15)o Educational non-stock: multiples of 5

16


17/113

Code is SILENT on amendment of AOI to increase number ofdirectors to more than 15

Incorporators must own at least one share of capital stock Directors must own at least one share of stock of a corporation of

which he is a director In non-stock corps, a trustee must be a member thereof Aliens may be directors, but only in such number proportional to

their allowable participation in the capital of an entity

(7) Names, nationalities and residencies of persons acting asdirectors/trustees until the 1st regular directors/trusteesare duly elected and qualified

(8) Amount of authorized capital stock, number of sharespar value or no-par value, original subscribers and theamounts subscribed and paid by each; subscription;payment

Sec 12: corporations shall not be required to have any minimumauthorized capital stock except where provided by special law

In normal practice, SEC will not allow incorporation for P5000minimum paid-up capital

Maximum capitalization is needed to protect SHs Capital stock, defn: the amount fixed in the articles of

incorporation to be subscribed and paid in or secured to be paid inby the shareholders, at the organization of the corporation orafterwards

Outstanding Capital Stock: total shares of stock issued tosubscribers or SHs, whether or not fully or partially paid excepttreasury shares

Subscribed Capital Stock: portion of capital stock subscribed (i.e.procured to be paid) whether or not fully paid

Subscription, defn: mutual agreement of the subscribers to takeand pay for the stock of a corporationo AOI must show:

the names, nationalities, and residencies of the originalsubscribers,

the amount subscribed, and how much is paid thereon

o Sec 13: at least 25% of authorized capital stock, at least 25%of total subscription to be paid upon subscription

o for non-stock: minimum authorized capital stock not required,but subject to Sec 13

Section 13.Amount of capital stock to be subscribed and paid for the purposesof incorporation. - At least twenty-five percent (25%) of the authorized capitalstock as stated in the articles of incorporation must be subscribed at the time ofincorporation, and at least twenty-five (25%) per cent of the total subscriptionmust be paid upon subscription, the balance to be payable on a date or datesfixed in the contract of subscription without need of call, or in the absence of afixed date or dates, upon call for payment by the board of directors: Provided,however, That in no case shall the paid-up capital be less than five Thousand(P5,000.00) pesos. (n)

Paid-up capital at time of incorporation must be in cash deposited ina bank or property

Pre-incorporation subscription: amount which each incorporatoror SH agrees to contribute to a proposed corporationo Embodied in an agreement which takes and pays for the original

unissued shares of a corporation formed or to be formed(Delpher)

Section 60.Subscription contract. - Any contract for the acquisition of unissuedstock in an existing corporation or a corporation still to be formed shall bedeemed a subscription within the meaning of this Title, notwithstanding the factthat the parties refer to it as a purchase or some other contract. (n)

Section 61.Pre-incorporation subscription. - A subscription for shares of stockof a corporation still to be formed shall be irrevocable for a period of at least six(6) months from the date of subscription, unless all of the other subscribersconsent to the revocation, or unless the incorporation of said corporation fails tomaterialize within said period or within a longer period as may be stipulated inthe contract of subscription: Provided, That no pre-incorporation subscriptionmay be revoked after the submission of the articles of incorporation to theSecurities and Exchange Commission. (n

Par value share: appears in the stock certificate specifiying theamount in pesos as the nominal value of the shares appearing in thecertificate of stocko Must be stated in the AOIo Cannot be issued at less than stipulated par valueo Can only be changed by amendment in the AOI

Sec 62: Consideration for no par value shares issued is the issuedvalue, to be fixed in the ff ways:o AOIo By the BOD when authorized by the AOI or BLso SHs representing at least a majority of outstanding capital stock

17


18/113

Section 62. Consideration for stocks. - Stocks shall not be issued for aconsideration less than the par or issued price thereof. Consideration for theissuance of stock may be any or a combination of any two or more of thefollowing:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation

and necessary or convenient for its use and lawful purposes at a fairvaluation equal to the par or issued value of the stock issued;

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to statedcapital; and

6. Outstanding shares exchanged for stocks in the event ofreclassification or conversion.

Where the consideration is other than actual cash, or consists of intangibleproperty such as patents of copyrights, the valuation thereof shall initially bedetermined by the incorporators or the board of directors, subject to approval bythe Securities and Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or futureservice.

The same considerations provided for in this section, insofar as they may beapplicable, may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles ofincorporation or by the board of directors pursuant to authority conferred upon it

by the articles of incorporation or the by-laws, or in the absence thereof, by thestockholders representing at least a majority of the outstanding capital stock at ameeting duly called for the purpose. (5 and 16)

Issuance of no par value must be reflected in the AOIo Consideration cannot be less than issued valuecannot be less

than 5 pesos

(9) Treasurers Affidavit

SEC shall not accept AOI unless accompanied by a sworn statementby the Treasurer that:o at least 25% of TOTAL authorized capital stock has been

subscribedo at least 25% of subscribed and authorized capital stock has

been fully paid-up

Section 38. Power to increase or decrease capital stock; incur, create orincrease bonded indebtedness. - No corporation shall increase or decrease itscapital stock or incur, create or increase any bonded indebtedness unlessapproved by a majority vote of the board of directors and, at a stockholder'smeeting duly called for the purpose, two-thirds (2/3) of the outstanding capitalstock shall favor the increase or diminution of the capital stock, or the incurring,creating or increasing of any bonded indebtedness. Written notice of theproposed increase or diminution of the capital stock or of the incurring, creating,or increasing of any bonded indebtedness and of the time and place of thestockholder's meeting at which the proposed increase or diminution of the capitalstock or the incurring or increasing of any bonded indebtedness is to beconsidered, must be addressed to each stockholder at his place of residence asshown on the books of the corporation and deposited to the addressee in thepost office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of thecorporation and countersigned by the chairman and the secretary of thestockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock ornumber of shares of no-par stock thereof actually subscribed, thenames, nationalities and residences of the persons subscribing, theamount of capital stock or number of no-par stock subscribed by each,

and the amount paid by each on his subscription in cash or property, orthe amount of capital stock or number of shares of no-par stock allottedto each stock-holder if such increase is for the purpose of makingeffective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the

18


19/113

meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock,or the incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating orincreasing of any bonded indebtedness shall require prior approval of theSecurities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of thecorporation and the other shall be filed with the Securities and ExchangeCommission and attached to the original articles of incorporation. From and afterapproval by the Securities and Exchange Commission and the issuance by theCommission of its certificate of filing, the capital stock shall stand increased ordecreased and the incurring, creating or increasing of any bonded indebtednessauthorized, as the certificate of filing may declare: Provided, That the Securitiesand Exchange Commission shall not accept for filing any certificate of increase ofcapital stock unless accompanied by the sworn statement of the treasurer of the

corporation lawfully holding office at the time of the filing of the certificate,showing that at least twenty-five (25%) percent of such increased capital stockhas been subscribed and that at least twenty-five (25%) percent of the amountsubscribed has been paid either in actual cash to the corporation or that therehas been transferred to the corporation property the valuation of which is equalto twenty-five (25%) percent of the subscription: Provided, further, That nodecrease of the capital stock shall be approved by the Commission if its effectshall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase thesame, with the approval by a majority vote of the board of trustees and of atleast two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and

Exchange Commission, which shall have the authority to determine thesufficiency of the terms thereof. (17a)

Treasurer must make sworn statement that minimum requirementsof subscription and payment have been complied witho If false, AOI disapproved or certificate of registration revoked

(10) Other matters

AOI may include other matters not inconsistent with law, such as:o classes of shares into which shares of stock have been dividedo Preferences of and restrictions on any classo Denial of voting rights on certain shares or pre-emptive right of

SHso Prohibition against transfer of stock which would reduce

ownership to less than required minimum for wholly or partiallynationalized businesses/industries

(11) Close corporations

A corporation will be governed by Title XII on Close Corporationsonly if its articles provide for certain specific matters

TITLE XII - CLOSE CORPORATIONS

Section 96.Definition and applicability of Title. - A close corporation, within themeaning of this Code, is one whose articles of incorporation provide that: (1) Allthe corporation's issued stock of all classes, exclusive of treasury shares, shall beheld of record by not more than a specified number of persons, not exceedingtwenty (20); (2) all the issued stock of all classes shall be subject to one or more

specified restrictions on transfer permitted by this Title; and (3) The corporationshall not list in any stock exchange or make any public offering of any of its stockof any class. Notwithstanding the foregoing, a corporation shall not be deemed aclose corporation when at least two-thirds (2/3) of its voting stock or votingrights is owned or controlled by another corporation which is not a closecorporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oilcompanies, stock exchanges, banks, insurance companies, public utilities,educational institutions and corporations declared to be vested with publicinterest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided,That the provisions of other Titles of this Code shall apply suppletorily except

insofar as this Title otherwise provid

chapter i-vii midterms

Documents