close and special corporations

7/31/2019 Close and Special Corporations

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Define a closes corporation.

A close corporation has been defined as acorporation in which the stock is held in

a few hands, or in few families, andwhich stock is not only rarely dealt inbuying or selling.


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Within the meaning of the Code, it is one whosearticles of incorporation provide the following:(Features of Close Corporation)

All its issued stock, exclusive of treasury shares,shall be held of record by not more than a specificnumber of persons, not exceeding 20; ( Number ofstockholders)

All its issued stock shall be subject to one or morerestrictions on transfer permitted by the Code; and (

Restricted transfer) Any of its stock shall not be listed in any stock

exchange or offered it to the public. (Not listed)


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Where, however, 2/3 of the working

stock or voting rights of a corporation asdefined above is owned or controlled byanother corporation which does not fallwithin the definition of a close

corporation, the former shall be deemednot a closed corporation. (sec. 96 par. 1)


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What matters are allowed by the CorporationCode to be provided in the articles ofcorporation of a close corporation?

The article of incorporation may provide: for a classification of shares or rights and the

qualification for owning or holding the same andrestrictions on their transfers as may be statedtherein;

for a classification of directors into one or moreclasses, each of which be voted for and electedsolely by a particulars class of stock, and

for a greater quorum or voting requirements inmeeting of stockholders or directors than thoseprovided in the Code.


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It may provide that the business of the corporation shallbe managed by the stockholders of the corporationrather than by a board of directors, So long this

provision continues in effect:

No meeting of stockholders need be called toelect directors;

Unless the context clearly requires otherwise,the stockholders of the corporation shall bedeemed to be directors for purposes of applyingprovisions of the Code; and


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The stockholders of the corporation shall besubject to all liabilities of directors.

It may likewise provide that all or certain specifiedofficers or employees shall be elected or appointeddirectly by the stockholders, instead of the boardof directors, (sec. 97, last par.) IN the ordinarystock corporation, corporate officers are electedby a majority of all the members of the board ofdirectors. (sec. 25)


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State the two (2) conditions imposed bythe Code for the validity of restriction

on the right to transfer share in a closecorporation:

They are:

Such restriction must appear in the articles of

incorporation and in by laws, as well as in thecertificate of stock, otherwise they shall not bebinding on any purchaser thereof in good faith; and


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They shall not be more onerous than

granting the existing stockholder or the

corporation the option to purchase theshares of the transferring stockholderswith such reasonable terms, conditions orperiods stated therein. (sec. 98)

The transfer therefor, shall only be made

to the close corporation or to thestockholders of the close corporation.


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If the close corporation or the stockholders

of the same corporation failed to exercisethe option to purchase within the periodstated, the transferring stockholder maysell his share to any third person. (Sec.

99)


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Under Section 99, when shares are held oracquired in violation of the qualifying conditions

provided in the articles of incorporation, in theby laws and in the certificate of stock, thesecretary of the corporation may refuse toregister the transfer of stock unless:

a. Such transfer has been consented to by all the

stockholders; orb. The close corporation has amended its articles

of incorporation.


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Section 100, agreements between or amongstockholders, before or after incorporation areconsidered binding as long as they are notinconsistent with the articles of incorporation. They

may agree as to how their shares should bee voted.They may also agree that the stockholders mayconsider themselves as partners among themselves.

Liability to corporate torts,Stockholders who are actively engaged in the

management of a close corporation are personallyliable for corporate torts unless the close corporationhas obtained reasonably adequate liability insurance.


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Under Section 101, in a close corporation, theBOD may decide on matters within theirmanagerial competence even without actualmeeting or even when the meetings areimproperly held as long as there is expressor implied consent on the part of those who

may have the right to complain in the fourcases specified in this section, the action bythe directors without a meeting is valid.


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1. Before or after such action is taken, writtenconsent thereto is signed by all the directors; or

2. All the stockholders have actual or implied

knowledge of the action and make no promptobjection thereto in writing; or 3. The directors are accustomed to take

informal action with the express or impliedacquiescence of all the stockholders; or

4. All the directors have express or impliedknowledge of the action in question and none ofthem makes prompt objection thereto inwriting.


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What should an absent director do?

A director who did not attend the meetingshould, after acquiring knowledge of themeeting, promptly file a written objectionwith the secretary of the corporation:otherwise, he shall be deemed to haveratified the action taken by the board, if

such action is within the powers of thecorporation.


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State the preemptive right of a stockholder in a closecorporation.The pre-emptive right of stockholders extends to all stock

to be issued, whether common or preferred, voting ornon-voting etc., newly authorized shares or newly issuedbalance of originally authorized shares including treasuryshares, whether the consideration for the issuance of thestock is cash or otherwise. (see Sec. 102). In otherwords, the right of pre-emption is a matter of absoluteright on the part of the stockholders, except only whenlimited or curtailed by the articles of incorporation.


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The amendment of the articles of incorporation ofa close corporation must be approved by theaffirmative vote of at least 2/3 of the OCS (voting and non-voting). Mere assent of thestockholders which is allowed in Section 16 isnot sufficient as meeting is required by law. Beit noted also that a greater (not lesser) voteprovided for the Articles in Incorporation isallowed when the stockholders may provide tat

such amendment shall bee approved by voteof all OCS regardless of voting rights. (Sec.103)


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Deadlocks (Section 104)

Should there be any misunderstanding

among the stockholders or directors in aclose corporation and such conflictbecomes irreconcilable making themanagement of the corporation at a

standstill, this provision is intended toprovide for remedy.


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Procedure:1. SEC upon a stockholders written petition is

allowed to intervene in order to arbitrate a

dispute or deadlock in a corporation.2. There is a dispute or deadlock as described by

this provision when the directors or stockholdersare so divided respecting the management ofthe corporation that the required votes for anycorporate action cannot be obtained, with theconsequence that its business can no longer beconducted to the advantage of the stockholdersgenerally.


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3. The SEC in exercising arbitration powersmay:

a. Cancel or alter any provision in the articles,

by laws or stockholders agreement;b. Cancel, alter or enjoin any resolution or

other act of the corporation or its directors,officers or stockholders;

c. Direct or prohibit any act of the corporation,directors, officers, stockholders and eventhird persons who are parties to thecorporation action.


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d. Require purchase of shares of anystockholders either by corporation

regardless whether availability ofunrestricted retained earnings, or by anyother stockholders.

e. Appoint a provisional director

f. Dissolve the corporation

g. Grant other reliefs as the circumstancesmay warrant.


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QUALIFICATIONS OF A PROVISIONALDIRECTOR

a. He should be an impartial personb. He is neither a stockholder or creditor of

the corporation, or its subsidiary oraffiliate.

c. Those qualifications as may bedetermined by SEC.


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Powers of the provisional director:a. All powers of a duly elected director until he

is removed by the SEC or by all of the

stockholders.b. He does not have the powers of a custodian

or receiver of the corporation.c. His compensation is determined by

agreement by between him and thecorporation subject to approval of SEC; or bySEC in the absence of agreement or in caseof disagreement between him and thecorporation.


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Under Section 105, any stockholder in a closecorporation may, for any reason, withdrawfrom the said corporation by compelling it to

purchase his shares at their fair value (which shall not be less than their par orissued value) when it has sufficient assetsover liabilities exclusive of capital stock.

Any stockholder of a close corporation may, by

written petition to SEC, compel thedissolution of said corporation.


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The grounds for dissolution are:

a) Whenever any of the acts of the

directors, officers or those in control ofthe corporation is illegal, fraudulent,dishonest, oppressive or unfairlyprejudicial to the corporation or any ofthe stockholder; or

b) Whenever the corporate assets are beingmisapplied or wasted.


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SPECIAL

CORPORATIONS


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Define an education corporation. An educational corporation is a stock or non-

stock corporation organized to provide facilitiesfor teaching or instruction. Such corporationnormally maintain a regular faculty andcurriculum and normally have a regular

organized body of pupils or students, orattendance at the place where the educationalactivities are regularly carried on.


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Concept:It is organized to provide educationalFACILITIES for teaching or instruction.

Kinds

a. Stock educational corporations

b. Non-stock educational corporations


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Incorporation of educational corporations:

The filing of Articles of Incorporation must beaccompanied by a favorable recommendation bythe Secretary of DEPED/CHED. Such articles ofincorporation may also be amended and such mustlikewise be certified to as in accordance with thelaw by the Secretary of DEPED/CHED.


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Under Section 25, Batas Pambansa Blg.232 (Educational Act of 1982), anyprivate school must incorporate as a non-stock educational corporation in

accordance with the provisions of theCorporation Code of the Philippines.


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The following provisions in Section 4,Article XIV of the 1987 Constitution arepertinent:

The State recognizes the complementary

roles of public and private institutions in theeducational system and shall exercisereasonable supervision and regulation of alleducational institutions.


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Educational institutions, other than those established

by religious groups and mission boards, shall be

owned solely by citizens of the Philippines orcorporations or associations at least sixty per centumof the capital of which is owned by such citizens. TheCongress may, however, require increased Filipinoequity participation in all educational institutions. Thecontrol and administration of educational institutions

shall be vested in citizens of the Philippines.


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No educational institution shall be established

exclusively for aliens and no group of aliens shallcomprise more than one-third of the enrollmentin any school. The provisions of this sub sectionshall not apply to schools established for foreign

diplomatic personnel and their dependents and,unless otherwise provided by law, for otherforeign temporary residents.


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Republic Act No. 6055 provides for theconversion of educational institutionsfrom stock corporations to non-profitfoundations, directing the GSIS, SSS and

Development Bank of the Philippines toassist in such conversion.


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Under Sec. 107, before SEC approves articlesor its amendment, including by laws of aneducational corporation, a favorablerecommendation by the Secretary is requiredstating that it complies the requirements,

guidelines, rules and regulations on speciallaws governing establishment of schools,colleges, universities.


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What are the rules provided by theCorporation Code regarding the board

of trustee of an educationalcorporation? For non-stock educational corporations

The number of trustee shall not be less thanfive (5) nor more than fifteen (15);

It shall be in multiples of five (5) i.e. theirnumber shall be five (5) , ten (10), or fifteen915);


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Unless otherwise provide in the articles ofincorporation or the by-laws, the terms of office

of the trustee shall be staggered with one (1)year interval.

Trustee subsequently elected shall have a termof five (5) years;

Elected to fill vacancies occurring before the

expiration of a particular term, shall hold officeonly for the unexpired period;


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A majority of the trustee shall constitute

a quorum for the transaction of business;and

The powers and authority of trusteesshall be defined in the by-laws.

For stock educational corporations- The


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For stock educational corporations Thenumber and term of directors shall begoverned by the provisions on stockcorporations.

Educational corporations may, throughtheir articles of incorporations or their bylaws, designated their governing boards

by any name than as board of trustees.


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Define a religious corporation.

A religious has been defined as acorporation composed entirely or spiritualpersons and which is erected for the

furtherance of a religion or for perpetuatingthe rights of the church or of theadministration of church or religious work orproperty.


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Concept It is a corporation created to securethe public, workshop of God.

Kinds:

a) Corporation sole One which is composedof a single member and his successor inoffice.

b) Religious society one which is composedof several persons.


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What are the classes of religiouscorporations?

They may be classified into:

Corporation sole- It is incorporated by one person andconsist of one member or corporator only and hissuccessors, such as a bishop, It may be formed by thechief archbishop, bishop, priest, minister, rabbi orother presiding elder religious denomination, sect orchurch for the purpose of administering and

managing, as trustee, the affairs property andtemporalities of such religious denomination, sect orchurch (sec. 110)


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Corporation aggregate- It is incorporate by anaggregate of persons. (sec. 109, par. 1) Under thecode, any religious society or religious order, or anydiocese, synod, or district organization of any religiousdenomination, sect or church, unless for bidden by therules of the letter or by complement authority, mayupon consent and / or by an affirmation vote at ameeting called for the purpose of 2/3 of itsmembership, incorporate for the administration ormanagement of its temporalities, affairs and propertyby filing with the Securities and Exchange Commission,

a verified articles of incorporation setting forth thematter mentioned in Sec. 116 of the Code.


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Purpose of corporation sole:A corporation sole is formed

for the purpose ofadministering and managing astrustee, the affairs, property

and temporalities of thechurch.


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Section 111 requires submissionof the articles of incorporation

of the corporation sole with theSEC and said article must setforth under Section 111.


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What are set forth in Section 111:

That he is the chief archbishop, bishop, priest,minister, rabbi or presiding elder of his religiousdenomination, sect or church and that hedesires to become a corporation sole;


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2. That the rules, regulations and discipline ofhis religious denomination, sect or church arenot inconsistent with his becoming a corporation

sole and do not forbid it;


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3. That as such chief archbishop, bishop, priest,minister, rabbi or presiding elder, he is chargedwith the administration of the temporalities andthe management of the affairs, estate andproperties of his religious denomination, sect orchurch within his territorial jurisdiction,

describing such territorial jurisdiction;


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4. The manner in which any vacancy occurringin the office of chief archbishop, bishop, priest,minister, rabbi of presiding elder is required to

be filled, according to the rules, regulations ordiscipline of the religious denomination, sect orchurch to which he belongs; and

5. The place where the principal office of the

corporation sole is to be established andlocated, which place must be within thePhilippines.


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Under Section 112, the verified articles ofincorporation must be accompanied by a sworncopy of the commission, certificate of election or

letter of appointment of such chief archbishop,etc.

From and after the filing with the SEC of said

verified articles and the other sworn documents,such chief archbishop, etc., shall becomecorporate sole.


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Section 113 provides for the powers of thecorporation sole:

a) Purchase and hold real estate and personal

property for its church, charitable, benevolentor educational purposes;

b) To receive bequests or gifts for such purposes;

c) To mortgage or sell real properly held by it

upon obtaining an order for that purpose to theRegional Trial Court of the province where theproperty is situated under the followingconditions:


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a) The application must be made by verifiedpetition by the corporation sole;

b) The application may be opposed by anymember of the religious denomination, sect orchurch;

c) There must be proof of notice of publication ofthe application to sell or mortgage

d) There must be proof that the sale or mortgageis to the interest of the corporation. (Sec. 113)


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In cases where the rules and regulations of thereligious denomination, sect, church, religioussociety or order concerned represented by such

corporation sole regulate the method ofacquiring, holding, selling and mortgaging itsproperty, such rules and regulation shall controland the intervention of the courts shall not be

necessary.


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Filling of vacancies:In case of vacancy in the office of the chiefarchbishop, bishop or priest, his successor in officeshall become the corporation sole on the filing withthe SEC of a copy of his commission, certificate ofelection or letter of appointment duly certified by anotary public.In the meantime, before the vacancy is filled, theperson or persons authorized by the rules of the

church to administer the temporalities andproperties of the church during such vacancy shallexercise the powers and authority of the corporationsole during such vacancy. (Sec. 116)


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DISSOLUTION OF CORPORATION SOLEl:

The dissolution of a corporation sole may

be done voluntarily by submitting averified declaration of dissolution with theSEC.

Upon SEC approval of such declaration, the

corporation shall cease to carry itsoperations, except to wind up its affairs.


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Religious Societies:

There is no law requiring religioussocieties or churches to register orincorporate as corporation but they maydo so in order to acquire legal personalityfor the administration of theirtemporalities or properties (SEC opinion,April 6, 1968).


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However, any religious society or religiousorder may, upon written consent and/or byan affirmative vote at a meeting called for

that purpose of 2/3 of the memberships,incorporate by filing an articles ofincorporation with SEC. It is only uponincorporation that such religious society orchurch can have juridical personality and

allowed to acquire properties in its name(SEC. Opinion, Feb. 28, 1974)


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Incidentally, the Roman Catholic Church is

not registered with SEC like otherreligious societies or churches in thePhilippines, because it has beenrecognized as a juridical person since

time immemorial. it is a corporation byprescription ( Barlin s. Ramirez, 7 Phil.41)


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DISSOLUTION

Define dissol tion as applied to a


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Define dissolution as applied to acorporation.

Dissolution signifies the extinguishmentsof its franchise to be corporation and thetermination of its corporate existence.

Gi th t l l t i l d i


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Give the two legal steps involved indissolution.

The termination of the corporate existence at

least as far as the right distribution to go ondoing ordinary business is connected; and

The winding up of its affairs, the payment of itsdebts, and the distribution of its assets among

the stockholders or members and other personsin interest.

h h d f


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Enumerate the methods or cause ofcorporate dissolution.

Every private corporation organized underthe law may be dissolved eithervoluntarily or involuntarily. (sec. 117)These two method of dissolving

corporations may be outlined as follows:


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Voluntary, which may be effected:

By the vote of the board of directors/trustee and the stockholders/ members,where no creditors are affected (sec.118);


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By judgment of the Securities and ExchangeCommission after hearing of petition for

voluntary dissolution, where creditors areaffected (sec. 119) or By amending the articles of incorporation to

shorten the corporate term (sec. 120); and In the case of a corporation sole, by

submitting to the Securities and ExchangeCommission a verified declaration ofdissolution for approval. (sec. 115)


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Involuntary, which may beaffected:

by expiration of term provided forin the original articles ofincorporation (sec. 11)

by legislative enactment (infra)


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by failure to formally organize and

commerce the transaction of itsbusiness within two (2) years from thedate of incorporation (sec. 22; seeTitle II, question No. 11)


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By judicial; decree of forfeiture on

grounds provided by law such as misuseor non-user of its franchise, violation oflaw or corporation code, etc., (see Rulesof Court, Rule 66, Sec. 22)- By quowarranto proceedings to be filed by the

Solicitor General or By order of the Securities and ExchangeCommission (sec. 121)


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State the limitation on the power of the

legislative to dissolve a privatecorporation.

Under the Constitution, the amendment,alteration or repeal of the corporate franchise of a

public utility shall be made only when thecommon good so requires. (art. XII, Sec. 11,thereof); and


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Under section 145 of the Code, it is provided that:

No right or remedy in favor or accrued anycorporation, its stockholders, members,directors, trustee, or officer nor any liabilityincurred by any such corporation, itsstockholders, members, director, trustee or

officers, shall be removed or impaired either bythe subsequent amendment or repeal of thiscode or any part or portion thereof.


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The statutory authority of Congress to dissolve acorporation is also subject to the prohibition ofthe Constitution (art. III, Sec. 10 thereof)against laws impairing the obligation or contract.However, with respect to the franchise of a public

utility the only limitation is that the power onlywhen the common goods so requires.


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Generally speaking a corporation has a right to

surrender its franchise, although this right is subjectto various limitations and interpretation. Theconsent, either express or implied of the STATE isnecessary before a surrender of corporate charter willbe effective as a dissolution. Furthermore, the

corporation must comply with all statutory conditionsprecedents before it may be dissolved.


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On What grounds may the securities and

Exchange Commission order thedissolution of a corporation? (Sec 121)

On grounds provided by existing laws,rules and regulation upon filing of a

verified (i.e. under oath) complaint andafter proper notice and hearing.


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Under Section 114 which provided a general

penalty for violation of the Code not specificallypenalized therein, if the violation is committed bya corporation, the same may, after notice and

hearing, be dissolved in appropriate proceedingsbefore the securities and Exchange Commission.


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In case of deadlocks in a close corporation

respecting the management of its affairs, theSecurities and Exchange Commission, uponwritten petition of any stockholder, shall haveauthority to make such order as it may deemappropriate including an order dissolving the

corporation (sec. 104, par. 1)


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Any stockholder of a close corporation may, by

written petition to the Securities and ExchangeCommission, compel the dissolution of suchcorporation whenever any of the acts of thedirectors, officers, or those in control of thecorporation is legal, or fraudulent, dishonest, oroppressive or unfair prejudicial to the corporationor any stockholder, or whenever corporate assetsare being misapplied or wasted. (sec. 105.)


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Under Presidential Decree No. 902- A which reorganizedthe Securities and Exchange Commission with additional

powers, the Commission may suspend or revoke, afterproper notice and hearing, the franchise or certificates ofregistration of corporations, partnerships or associations,up on any of the grounds provided by law, including thefollowing:

Fraud in procuring its certificate of registration;

Serious misrepresentation as to what thecorporation can do or is doing to the greatprejudice of , or damage to, the general public;


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Refusal to comply or defiance of any lawful order

of the Commission retaining commission of actswhich would amount to a grave violation of itsfranchise;

Continuous in operation for a period of at leastfive (5) years;

Failure to file by-laws within the required period;and Failure to file required reports in appropriate

forms as determined by the Commission withinthe prescribed period. (sec. 6 [1] thereof)


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Give the effects of dissolution:

The corporation ceases as a body corporate tocontinue the business for which it was established(sec. 122).

The corporation continues as a body corporate forthree (3) years for purposes of winding up or

liquidation (Ibid); and Upon the expiration of the winding up period of three

(3 ) years, the corporation ceases to exist for allpurposes and as a general rule, it can no longer sueand be sued such.


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What are the methods of liquidation of adissolved corporation?

Liquidation by the corporation it self The boardof directors or trustee is given by law three (3)years within which to wind up corporate affairs

(sec. 122);


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Liquidation by a duly appointed receiver The

court may appoint a receiver to take charge ofits assets and dispose of them as justice mayrequire (Ibid); and

Liquidation by trustees- Here, the board of

directors or trustee conveys the corporate assetsto a trustee or assignee who shall have chargeof the liquidation (Ibid).

Meaning of Liquidation:


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Meaning of Liquidation:Concept: It is the winding up of the affairs of

the corporation by reducing its assets in

money, settling with creditors and debtorsand apportioning the amount of profit andloss:

Method:By receivership

By the corporation itseld under Sec. 122through its directors, officers and creditors;and

By trusteeship under Section 122


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Under Republic Act No. 8799

Section 5.Powers and Functions of the Commission

.5.1. The commission shall act with transparency and shallhave the powers and functions provided by this code,Presidential Decree No. 902-A, the Corporation Code, theInvestment Houses law, the Financing Company Act andother existing laws. Pursuant thereto the Commissionshall have, among others, the following powers and

functions: (a) Have jurisdiction and supervision over all corporations,

partnership or associations who are the grantees ofprimary franchises and/or a license or a permit issued bythe Government;


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(b) Formulate policies and recommendations on

issues concerning the securities market, adviseCongress and other government agencies on allaspect of the securities market and proposelegislation and amendments thereto;

(c) Approve, reject, suspend, revoke or requireamendments to registration statements, andregistration and licensing applications;


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(d) Regulate, investigate or supervise the activities

of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the

activities of exchanges, clearing agencies and otherSROs;

(f) Impose sanctions for the violation of laws andrules, regulations and orders, and issued pursuant

thereto; (g) Prepare, approve, amend or repeal rules,

regulations and orders, and issue opinions andprovide guidance on and supervise compliance withsuch rules, regulation and orders;


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(h) Enlist the aid and support of and/or

deputized any and all enforcement agencies ofthe Government, civil or military as well as anyprivate institution, corporation, firm, associationor person in the implementation of its powersand function under its Code;

(i) Issue cease and desist orders to preventfraud or injury to the investing public;


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(j) Punish for the contempt of the Commission,both direct and indirect, in accordance with thepertinent provisions of and penalties prescribedby the Rules of Court;

(k) Compel the officers of any registeredcorporation or association to call meetings ofstockholders or members thereof under itssupervision;


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(l) Issue subpoena duces tecum and summon

witnesses to appear in any proceedings of theCommission and in appropriate cases, order theexamination, search and seizure of all documents,papers, files and records, tax returns and books ofaccounts of any entity or person under investigationas may be necessary for the proper disposition of

the cases before it, subject to the provisions ofexisting laws;


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(m) Suspend, or revoke, after proper notice and

hearing the franchise or certificate of registration ofcorporations, partnership or associations, upon anyof the grounds provided by law; and

(n) Exercise such other powers as may be providedby law as well as those which may be implied from,or which are necessary or incidental to the carrying

out of, the express powers granted the Commissionto achieve the objectives and purposes of theselaws.

5.2. The Commissions jurisdiction over all casesenumerated under section 5 of Presidential Decree No


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enumerated under section 5 of Presidential Decree No.902-A is hereby transferred to the Courts of generaljurisdiction or the appropriate Regional Trial Court:Provided, That the Supreme Court in the exercise of its

authority may designate the Regional Trial Court branchesthat shall exercise jurisdiction over the cases. TheCommission shall retain jurisdiction over pending casesinvolving intra-corporate disputes submitted for finalresolution which should be resolved within one (1) yearfrom the enactment of this Code. The Commission shallretain jurisdiction over pending suspension ofpayment/rehabilitation cases filed as of 30 June 2000until finally disposed.

What are those matters transferred from


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What are those matters transferred fromSEC to the RTC?

Sec. 5., it shall have original andexclusive jurisdiction to hear anddecide cases involving the following:


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(b) Controversies arising out of intra-corporate

or partnership relations, between and amongstockholders, members, or associates; betweenany or all of them and the corporation,partnership or association of which they arestockholders, members or associates,respectively; and between such corporation,

partnership or association and the state insofaras it concerns their individual franchise or rightto exist as such entity; and


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(c) Controversies in the election orappointments of directors, trustees,officers or managers of such

corporations, partnerships orassociations.


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Define a foreign corporation.

A foreign corporation is one formed,organized or existing under any lawsother than those of the Philippines andwhose laws allow Filipino citizens and

corporations to do business in its countryor state. (sec. 123).


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What is the requirement before a foreign

corporation may transact or do business in thePhilippines? It shall have the right to transact business in the

Philippines after its shall have obtained a license totransact business in this country in accordance withthe Code and a certificate of authority from the

appropriate government agency (Ibid). e.g. from theCentral Bank, in the case of banking institution.


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Status: A corporation can have no legal

existence beyond of the state orsovereignty which created it and althoughit may act in another state or country itcannot do so as legal or constitutional

right but only by comity and consent ofsuch state or country.


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Subject to constitutioal limitations, a state may

prohibit foreign corporations from doingbusiness therein or may take the right to dobusiness depend on terms and conditions as itmay in its discretion se fit to impose. However,by virtue o comity, a corporation created by thelaws of one state is usually allowed to transact

business in other states and to sue in the courtsof the forum.


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Only foreign corporations organized or existing in a

foreign country whose laws allow Filipino citizensand corporations to do business in its owncountry country or state.

No foreign corporation shall be permitted totransact business in the Philippines until it shallhave obtained a license from SEC and acertificate of authority from appropriategovernment agency.


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The object of the on Law Philippines

Corporation is to subject foreigncorporations doing business in thePhilippines to the jurisdiction.

The Foreign Investment Act (R.A. 7042, 1991,amended by R.A. 8179, 1996) liberalized theentry of foreign investment into the Philippines.
http://www.bcphilippineslawyers.com/republic-act-no-8179/http://www.bcphilippineslawyers.com/republic-act-no-7042/http://www.bcphilippineslawyers.com/republic-act-no-8179/http://www.bcphilippineslawyers.com/republic-act-no-8179/http://www.bcphilippineslawyers.com/republic-act-no-7042/


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y g ppUnder the Act, foreign investors are generallytreated like their domestic counterparts andmust register with the Securities and Exchange

Commission (SEC)(in the case of a corporation or partnership) or

with the Department of Trade and IndustrysBureau of Trade Regulation and ConsumerProtection (in the case of a soleproprietorship).

n of its courts.

Registration of a foreign corporation in the appropriatedepartments and government entities vest legal titleor personality to foreign corporation to engage
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p y g p g gbusiness inside the Philippine jurisdiction.

A duly licensed or registered foreign corporation has

the power to sue and can be sued in Philippinecourts. Absence of licensed or registration will notentitle the foreign corporation to sue but can be suedinstead. However, a foreign corporation is authorizedto sue even if not licensed or registered when it onlyengages in isolated transactions and when the law

specifically provides.

Under the Philippine law, a court can obtain jurisdictionover foreign corporation by the proper service ofsummons. Service of summons to foreign corporation

h h h d b h h l


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which has transacted business in the Philippineswhether licensed/ registered or in an isolatedtransaction maybe made on its resident agent

designated by law for that purpose, or in case thereis no agent, the government official designated bylaw, such as the Insurance Commissioner (in cases offoreign insurance corporation), the Superintendent ofBanks (in cases of Foreign banks) and the Securityand Exchange Commission (for other foreign

corporation registered or licensed to do business inthe Philippines).

Whenever service of Summons is so made tothe government official, the governmentofficial shall be obliged to transmit the same


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official shall be obliged to transmit the sameby mail or other legal process to thecorporation concerned.

Foreign Corporation registered in PEZA andBOI can carry on substantial internal trade.The foreign corporation can also direct anddevelop operations and enterprises ofdomestic corporations. Furthermore, it can

invest a considerable amount of capital tocertain enterprises.

Moreover, the corporation can also purchase sharesof stocks in a legitimate stock market for aminimum share authorized by law. Thus,


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y ,registration in PEZA and BOI authorizes theforeign corporation to freely engage in businessventures with in the Philippine jurisdiction.

Under the law, the President of the Philippinesmay allow entry of foreign corporation whenwarranted by public interest, such as oil drillingcompanies, Board of Investments, registered

enterprises and Philippine Economic ZoneAuthority registered enterprises.

Principle of Reciprocity

The principle of reciprocity speaks of mutualityth t t t B fit i b t t t


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among the party states. Benefits given by a state tocitizens of another state who are found within thecountry of the granting state shall also be granted to

the citizens found within the partner state. Usually,the Principle of Reciprocity is in a form of a treaty,signed by different representatives of party states. Inthis jurisdiction, the legislative departments canenact laws that can be favorable to a registeredforeign corporation, provided such is also granted to

the Filipino citizens who are within the jurisdiction ofthe grantee state.

The President of the Philippines can issue ExecutiveOrders, and Presidential Decrees that are favorable to theconduct of foreign corporation. Some of these favorpersonnel of offshore banking units which is provided


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personnel of offshore banking units which is providedunder Presidential Decree 1034 and Required Areaheadquarters of Multinational Companies under ExecutiveOrder 226, wherein they are entitled for Multiple EntrySpecial Visa to the Philippines. Also, their respectivespouses and minor dependents below 21 years old arebenefited. The multiple entry special visas are valid for 1year and can be extended based on legal or meritoriousgrounds. Holders of this visa type are exempted fromimmigration fees and registration apart from all clearances

from any form of government agency before finaldeparture.

A foreign investor is offered a lot of incentiveswhen investing in the Philippines. Incentivesinclude tax holidays, tax reduction for labor


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y ,expenses, and duty-free importation of capitalequipment, and are available for companiesinvesting in preferred areas and registered withthe Board of Investments (BOI). Thesustainability of these incentives has beenquestioned from time to time. According to someopinions, these incentives create a burden tooheavy to carry for the Philippine national

economy and therefore should be removed.

To develop the commitment of foreigninvestors the land lease times were


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prolonged in January 1995. The leasecontract can be made for 50 years and berenewed once for another 25 years.

Restrictions on foreign participation are mentioned inthree negative lists. These lists are administered bythe National Economic and Development Authority(NEDA) The division into domestic and export


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(NEDA). The division into domestic and exportenterprises is relevant when talking about investmentincentives. The basic idea is not to offer incentives to

companies that would use the benefit to compete inthe Philippine market with local companies. Adomestic market enterprise produces goods orservices solely for the domestic market. Domesticmarket enterprises with more than 40% foreignparticipation should have a paid-up capital of at least

USD 500 000, if advanced technology is not used.

An export enterprise is a manufacturing,processing or service enterprise exporting atl 60% f l d b


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least 60% of its output. Also, a trader buyingdomestically manufactured products and

exporting at least 60% of the purchase isregarded as an export enterprise. If theproduction is not included on A or B negativelists, there are no restrictions concerning

foreign ownership.

If the investment is made in a Special Economic Zone(earlier Export Processing Zone), there are norestrictions on foreign participation. However, thesecompanies are required to export the whole


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companies are required to export the wholeproduction, unless the company has received specificapproval from the Philippine Economic Zone Authority

(PEZA). This approval is always made in a specificsituation and may not be issued beforehand. Oncethe approval is gained, the domestic sales cannotexceed 30% of the production.

There are plans to continue the economicliberalization program, e.g. list B might be removed

entirely and retail trade is already proposed to beopened to foreigners, too.

Investment Negative Lists List A includes limitations made by

constitution or special law


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constitution or special law. No foreign participation is allowed in

mass media most licensed professional services (e.g.

accountants, lawyers, engineers) retail trade cooperatives private security agencies small-scale mining fisheries rice and corn farming

25% foreign equity is allowed in recruitment agencies locally funded public works projects


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locally funded public works projects 30% foreign equity is allowed in

advertizing 40% foreign equity is allowed in resources development and utilization land ownership

public utilities educational institutions financing companies construction

List B restricts foreign investment for reasons ofsecurity, defense, health, morals and protection ofsmall and medium-sized enterprises.

40% foreign participation is allowed in


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40% foreign participation is allowed in explosives munitions

armaments dangerous drugs massage clinics gambling domestic market enterprises with capital less than USD

500 000, provided enterprises don't use advancedtechnology small-scale export enterprises with capital less than USD

500 000 depleting natural resources List C which limited foreign equity by the capacity of

existing enterprises was removed in October 1994.

Sec. 125.Application for a license.- A foreigncorporation applying for a license to transact business inthe Philippines shall submit to the Securities and ExchangeCommission a copy of its articles of incorporation and by-


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Commission a copy of its articles of incorporation and bylaws, certified in accordance with law, and their translationto an official language of the Philippines, if necessary. Theapplication shall be under oath and, unless already stated

in its articles of incorporation, shall specifically set forththe following:

1. The date and term of incorporation; 2. The address, including the street number, of the

principal office of the corporation in the country or state ofincorporation;


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7. A statement of its authorized capital stock and theaggregate number of shares which the corporation hasauthority to issue, itemized by classes, par value ofshares, shares without par value, and series, if any;


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, p , , y; 8. A statement of its outstanding capital stock and the

aggregate number of shares which the corporation hasissued, itemized by classes, par value of shares, shareswithout par value, and series, if any;

9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or

appropriate in order to enable the Securities and ExchangeCommission to determine whether such corporation isentitled to a license to transact business in the Philippines,and to determine and assess the fees payable.


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Attached to the application for license shall be a dulyexecuted certificate under oath by the authorizedofficial or officials of the jurisdiction of itsincorporation, attesting to the fact that the laws ofthe country or state of the applicant allow Filipinocitizens and corporations to do business therein, andthat the applicant is an existing corporation in goodstanding. If such certificate is in a foreign language,a translation thereof in English under oath of thetranslator shall be attached thereto.


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The application for a license to transact business inthe Philippines shall likewise be accompanied by astatement under oath of the president or any otherperson authorized by the corporation, showing to thesatisfaction of the Securities and ExchangeCommission and other governmental agency in theproper cases that the applicant is solvent and insound financial condition, and setting forth the assetsand liabilities of the corporation as of the date notexceeding one (1) year immediately prior to the filingof the application.


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Foreign banking, financial and insurance corporationsshall, in addition to the above requirements, complywith the provisions of existing laws applicable tothem. In the case of all other foreign corporations,no application for license to transact business in thePhilippines shall be accepted by the Securities andExchange Commission without previous authorityfrom the appropriate government agency, wheneverrequired by law. (68a)

Sec. 126.Issuance of a license.- If the Securities andExchange Commission is satisfied that the applicant hascomplied with all the requirements of this Code and otherspecial laws, rules and regulations, the Commission shall


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p gissue a license to the applicant to transact business in thePhilippines for the purpose or purposes specified in suchlicense. Upon issuance of the license, such foreign

corporation may commence to transact business in thePhilippines and continue to do so for as long as it retainsits authority to act as a corporation under the laws of thecountry or state of its incorporation, unless such license issooner surrendered, revoked, suspended or annulled inaccordance with this Code or other special laws.

Within sixty (60) days after the issuance of the license totransact business in the Philippines, the license, except foreignbanking or insurance corporation, shall deposit with theSecurities and Exchange Commission for the benefit of presentand future creditors of the licensee in the Philippines securities


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and future creditors of the licensee in the Philippines, securitiessatisfactory to the Securities and Exchange Commission,consisting of bonds or other evidence of indebtedness of theGovernment of the Philippines, its political subdivisions andinstrumentalities, or of government-owned or controlledcorporations and entities, shares of stock in "registeredenterprises" as this term is defined in Republic Act No. 5186,shares of stock in domestic corporations registered in the stockexchange, or shares of stock in domestic insurance companiesand banks, or any combination of these kinds of securities, withan actual market value of at least one hundred thousand

(P100,000.) pesos; Provided, however,


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That within six (6) months after each fiscal

year of the licensee, the Securities andExchange Commission shall require thelicensee to deposit additional securitiesequivalent in actual market value to two(2%) percent of the amount by which the

licensee's gross income for that fiscal yearexceeds five million (P5,000,000.00) pesos.


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The Securities and Exchange Commission

shall also require deposit of additionalsecurities if the actual market value ofthe securities on deposit has decreasedby at least ten (10%) percent of theiractual market value at the time they weredeposited.


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The Securities and Exchange Commission may at itsdiscretion release part of the additional securitiesdeposited with it if the gross income of the licenseehas decreased, or if the actual market value of thetotal securities on deposit has increased, by morethan ten (10%) percent of the actual market value of

the securities at the time they were deposited. TheSecurities and Exchange Commission may, from timeto time, allow the licensee to substitute othersecurities for those already on deposit as long as thelicensee is solvent.


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Such licensee shall be entitled to collect the interestor dividends on the securities deposited. In the eventthe licensee ceases to do business in the Philippines,the securities deposited as aforesaid shall bereturned, upon the licensee's application therefor andupon proof to the satisfaction of the Securities and

Exchange Commission that the licensee has noliability to Philippine residents, including theGovernment of the Republic of the Philippines.


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Sec. 129. Law applicable. - Any foreigncorporation lawfully doing business in thePhilippines shall be bound by all laws, rules andregulations applicable to domestic corporationsof the same class, except such only as providefor the creation, formation, organization ordissolution of corporations or those which fix the

relations, liabilities, responsibilities, or duties ofstockholders, members, or officers ofcorporations to each other or to the corporation.(73a)


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Who may be a resident agent. - A

resident agent may be either an individualresiding in the Philippines or a domesticcorporation lawfully transacting business inthe Philippines: Provided, That in the case of

an individual, he must be of good moralcharacter and of sound financial standing.


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Sec. 128. Resident agent; service of process. - The

Securities and Exchange Commission shall require as a conditionprecedent to the issuance of the license to transact business inthe Philippines by any foreign corporation that such corporationfile with the Securities and Exchange Commission a writtenpower of attorney designating some person who must be aresident of the Philippines, on whom any summons and otherlegal processes may be served in all actions or other legal

proceedings against such corporation, and consenting thatservice upon such resident agent shall be admitted and held asvalid as if served upon the duly authorized officers of the foreigncorporation at its home office.

Sec. 130.Amendments to articles of incorporation or by-laws of foreign corporations. - Whenever the articles ofincorporation or by-laws of a foreign corporation authorizedto transact business in the Philippines are amended, suchforeign corporation shall within sixty (60) days after the


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foreign corporation shall, within sixty (60) days after theamendment becomes effective, file with the Securities andExchange Commission, and in the proper cases with the

appropriate government agency, a duly authenticated copy ofthe articles of incorporation or by-laws, as amended,indicating clearly in capital letters or by underscoring thechange or changes made, duly certified by the authorizedofficial or officials of the country or state of incorporation. Thefiling thereof shall not of itself enlarge or alter the purpose orpurposes for which such corporation is authorized to transactbusiness in the Philippines. (n)


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Sec. 131.Amended license. - A foreign

corporation authorized to transact business inthe Philippines shall obtain an amended licensein the event it changes its corporate name, ordesires to pursue in the Philippines other oradditional purposes, by submitting an applicationtherefor to the Securities and Exchange

Commission, favorably endorsed by theappropriate government agency in the propercases. (n)


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Sec. 132. Merger or consolidation involving a foreign

corporation licensed in the Philippines. - One ormore foreign corporations authorized to transactbusiness in the Philippines may merge or consolidatewith any domestic corporation or corporations if such ispermitted under Philippine laws and by the law of itsincorporation: Provided, That the requirements on

merger or consolidation as provided in this Code arefollowed.


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Whenever a foreign corporation authorized to transactbusiness in the Philippines shall be a party to a merger orconsolidation in its home country or state as permitted by thelaw of its incorporation, such foreign corporation shall, withinsixty (60) days after such merger or consolidation becomeseffective, file with the Securities and Exchange Commission,and in proper cases with the appropriate government agency,

a copy of the articles of merger or consolidation dulyauthenticated by the proper official or officials of the countryor state under the laws of which merger or consolidation waseffected:


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Provided, however, That if the absorbed

corporation is the foreign corporationdoing business in the Philippines, thelatter shall at the same time file a petitionfor withdrawal of it license in accordancewith this Title. (n)


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Sec. 133. Doing business without a license. - Noforeign corporation transacting business in the

Philippines without a license, or its successors orassigns, shall be permitted to maintain or intervenein any action, suit or proceeding in any court oradministrative agency of the Philippines; but suchcorporation may be sued or proceeded against beforePhilippine courts or administrative tribunals on anyvalid cause of action recognized under Philippinelaws. (69a)

Under Republic Act No. 7042, the Foreign Investment Act of 1991,doing business means:

The phrase "doing business"shall include soliciting orders,service contracts opening offices whether called


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service contracts, opening offices, whether called"liaison"offices or branches; appointing representativesor distributors domiciled in the Philippines or who in any

calendar year stay in the country for a period or periodstotaling one hundred eighty [180] days or more;participating in the management, supervision or control ofany domestic business, firm, entity or corporation in thePhilippines; and any other act or acts that imply acontinuity of commercial dealings or arrangements andcontemplate to that extent the performance of acts orworks, or the exercise of some of the functions normallyincident to, and in progressive prosecution of commercialgain or of the purpose and object of the businessorganization:


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Provided, however, That the phrase "doing business"shall not be deemed to include mere investment as a

shareholder by a foreign entity in domesticcorporations duly registered to do business, and/orthe exercise of rights as such investor; nor having anominee director or officer to represent its interestsin such corporation; nor appointing a representativeor distributor domiciled in the Philippines whichtransacts business in its own name and for its ownaccount;


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Criterion:

Doing or transacting businessconstitutes continuity of commercialdealings or arrangement.


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Effects of doing business without license:1. Foreign corporation doing business with license can

sue and be sued in the Phil. Courts2. Foreign corporation doing business without license

can be sued in Phil. Courts but it cannot sue.Exception where foreign corporations without license to

engage business in the Philippines can sue:a. When the action is for purpose of protecting its

reputation, corporate name and good will


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b. For any other valid purpose or cause

recognized under Phil. Laws in thefollowing rulings laid down by theSupreme Court

- Obtaining by a foreign corporation of anisolated purchase on certain goods fromthe Phils is an isolated transaction.


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- Incurring by a foreign corporation of damages to itsgoods erroneously discharged and lost in the port of

Manila is not even an isolated transaction.- Incurring by a foreign corporation of damages

caused by a shipping corporations failure to deliverits goods to their proper destination is an isolatedtransaction.

- A single agreement wherein a foreign corporation

purchases crude oil from the Phils in an isolatedtransaction.


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. Revocation of license. - Without prejudice to

other grounds provided by special laws, thelicense of a foreign corporation to transactbusiness in the Philippines may be revoked orsuspended by the Securities and ExchangeCommission upon any of the following grounds:

1. Failure to file its annual report or pay any feesas required by this Code;


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2. Failure to appoint and maintain a resident agent in thePhilippines as required by this Title;

3. Failure, after change of its resident agent or of hisaddress, to submit to the Securities and ExchangeCommission a statement of such change as required bythis Title;

4. Failure to submit to the Securities and ExchangeCommission an authenticated copy of any amendment to

its articles of incorporation or by-laws or of any articles ofmerger or consolidation within the time prescribed by thisTitle;


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5. A misrepresentation of any material matter in any application, report,

affidavit or other document submitted by such corporation pursuant to thisTitle;

6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,lawfully due to the Philippine Government or any of its agencies or politicalsubdivisions;

7. Transacting business in the Philippines outside of the purpose or purposesfor which such corporation is authorized under its license;

8. Transacting business in the Philippines as agent of or acting for and inbehalf of any foreign corporation or entity not duly licensed to do business inthe Philippines; or

9. Any other ground as would render it unfit to transact business in thePhilippines.


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Sec. 136. Withdrawal of foreign corporations.-Subject to existing laws and regulations, a foreign

corporation licensed to transact business in the Philippinesmay be allowed to withdraw from the Philippines by filing apetition for withdrawal of license. No certificate ofwithdrawal shall be issued by the Securities and ExchangeCommission unless all the following requirements are met;

1. All claims which have accrued in the Philippines have

been paid, compromised or settled;


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2. All taxes, imposts, assessments, and

penalties, if any, lawfully due to the PhilippineGovernment or any of its agencies or politicalsubdivisions have been paid; and

3. The petition for withdrawal of license hasbeen published once a week for three (3)

consecutive weeks in a newspaper of generalcirculation in the Philippines.

close and special corporations

Documents