corporation code or bp 68 - reviewer

Corporation Code or BP 68

Chapter I: Fundamentals and Concept

Corporation – an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec.2). Corporation is a juridical entity under Art. 44(3) of the Civil Code.

Attributes of the Corporation

1. A corporation treated as an artificial being

2. Created by operation of law3. Having the right of succession4. Having the powers, attributes and

properties expressly authorized by law or incident to its existence

Corporation as an Artificial Being Corporation, partnership and

associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from of each shareholder, partner or member. (Art. 44(3) of CC)

General Rule: juridical persons are governed by law creating or recognizing them.

Private Corp. – general law such as Corp. Code

Partnership and associations for private interest – Civil Code

A juridical person may acquire ad possess property of all kids as well as incur obligations and bring civil and criminal actions ( Art. 46 CC)

A corporation being a juridical person is regarded by law with personality normally possessed by an individual and may hereinafter be known as an artificial being or person.

Exist only by Legal Fiction. No physical existence. Exist only by law, but because of its attributes it is regarded as an artificial being.

Operation of Law Explained – it means that the law is the only authority that allows the corporation to be created. It is the process of putting into course of action, in accordance or substantial compliance of the law that makes the operation, or simply, the creation of the corporation.

Right of Succession

It means that the death of any stockholder or director does not dissolve the corporation. Its life continues to exist until the term expires or unless sooner dissolved in the accordance with the law.

Upon the death of the stockholder or director, the heir is called upon by operation of law or through succession to inherit the corresponding stocks or shares of the decedent-stockholder or director.

No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corp.

Constitutional Provision Section 16, Article 12 of 1987

Constitution – the Congress shall not except by general law (Corporation Code), provide for the formation, organization or regulation of private corp.

GOCC – created by special charter The constitution prohibits the creation of

private corporations except by general law. This is to ban private corp. created by special charters which gave special privileges to other citizens that were denied to others.

Cooperative code governs the incorporation of Cooperative.

Corporations created by special law or charters

Shall be governed by the special law or charter creating them, supplemented by the Corporation Code (Sec. 4).

Statutory Constructiono Generalia specialibus non

derogant (as between a general and special law, the latter shall prevail.)

Government owned or Controlled Corporation – refers to any agency organized as a stock or non-stock corp. vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or where applicable as in the case of stock corp., to the extent of at least fifty-one (51) percent of its capital stock; provided that GOCC may be furthered categorized by DOB, CSC, and the

Notes of Janette P. Sumagaysay Based on Atty. Chavez Book on Corporation


COA for purposes of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corp. (Section 2 (13) of the AC of 1987).

For Non-stock Corp, at least majority of the members must be gov’t officials holding such membership by appointment or designation.

Stock Ownership in Certain Corporations – as provided in Section 140 of the Corp. Code:

NEDA shall from time to time make a determination of whether the corporate vehicle has been used by any corp. or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit 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 stockholding in corp. declared by it to be vested with a public interest pursuant to this sec. belonging to ind. Or group of ind. related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade , or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development.

In recommending to the Batasang Pambansa corp.,businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the NEDA shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity , the export potential, as well as other factors which are germane to the realization and promotion of business and industry.

Forms of Business Organization1. Sole proprietorship2. Partnership3. Corporation

Sole proprietorship – the oldest, simplest and most prevalent form of business enterprise. It is an unorganized business owned by one person. The sole proprietor is personally liable for all debts and obligation of the business.

No law authorizing proprietorships to file a suit or to defend an action in court.

Does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise.

Partnership – by the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession (Art. 1767 of CC)

Partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the reqt’s of Article 72 of CC on registration reqt’s with the SEC (Art. 1768 of CC).

Resemblance of Corporation and Partnership

1. Both are associations of persons or both are composing of group of persons

2. Both are regarded by law as juridical persons or artificial beings

3. Both exist only by legal fiction and can only act through its legitimate representatives

4. Both having possessed a personality separate and distinct from the person composing it

5. Both are subject to the same corporate income tax rates subject to the provisions of NIRC.

Distinctions of Corp and Partnership

Corporation PartnershipGoverning law

Corporation Code

Civil Code

Creation Operation of law

agreement

Formation At least 5 At least 2Purpose For profit or

notFor profit

Exposure to Stockholders General



liability are liable to the extent of their contributions

Partners are liable

Term 50 years subject to extension

By agreement

Birth Upon issuance of Cert, of Incorporation

Meeting of the minds of the partners

Transfer of Interest

Even without With the consent of partners

Succession allowed Not allowedManagement BOD/BOT PartnersDissolution W/ the consent

of stateEven w/o consent of state

Classification of Corporations1. Stock Corporations – corp. w/c have

capital stock divided into shares and are authorized to distribute to holders of such shares dividends or allotments of the surplus profits on the basis of the shares held.

2. Non-Stock Corporations – corp. with no capital stock and where no part of its income is distributable to its members, trustees or officers subject to the provisions of the Code on Dissolution. Provided that, any profit obtained incident to its operation shall whenever necessary or proper, be used for the furtherance of the corp.

Other Classifications:1. Corporation Sole – a series of successive

persons holding an office with continuous legal personality. Ex. Holders of monarchial or ecclesiastical positions

2. Corporation aggregate – corp. made up of number of individuals.

3. Ecclesiastical Corp . – corp. organized for spiritual purposes or for the administration of property for religious purposes. Known as Religious Corp.

4. Lay Corp . – corp. made up of laypersons and existing for business or charitable purposes

5. Eleemosynary corp. – charitable corporation dedicated to benevolent purposes

6. Civil Corp. – any corp. other than a charitable or religious corp.

7. Domestic Corp - organized and chartered under the laws of the state

8. Foreign Corp - organized and chartered under the laws of another state, government or country.

9. Close Corp - stock is not freely traded and is held by only few shareholders (w/in family). Also termed closely held corp.

10.Open Corp - allows general public to become stockholders or members

11.Parent Corp - has a controlling interest in another corp. through ownership of more than one-half voting stock

12.Subsidiary Corp - a parent corp has controlling shares

13.Affiliated Corp - one related to another by owning or being owned by common management or by a long term lease of its properties or other control device.

14.Private Corp - founded by and composed of ind. Principally for non-public purpose

15.Public Corp - whose shares are traded to among the general public

16.Corporation by Estoppel - a business that is deemed by law as a corporation because a 3rd party dealt with the business as if it were a corp., thus preventing a the 3rd party from holding the shareholder or officer of corp individually liable.

17.Corp by prescription - lacking a charter, has acquired its corporate status through a long period of operating as a corp.

18.Dormant corp. – inactive corp. legal but is not operating. Authority may be revoked or suspended.

19.Joint venture Corp - joined with one or more individuals or corporations to accomplish some specified project

20.Quasi Corp. – entity that exercise some functions of corp. but has not been granted corporate status. With limited authority.

21.Quasi- public Corp – for profit corp providing essential public service

22.Trading Corp - whose business involve buying and selling of goods

23.Tramp Corp - chartered in a state where it does not conduct business.

24.De Jure Corp - formed in accordance with all applicable laws and recognized as corp. for liability purposes.

25.De Facto Corp – incompletely formed corp. whose existence is a defense to personal liability of directors,



shareholders or officers who in good faith thought they were operating the business as a duly formed corp.

De Facto Corporations – the due incorporation of any corp. claiming in good faith to be a corp. under the code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private sui to which such corp. may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding (Sec. 20).

Distinctions between De Facto and De Jure Corp.

De Jure De FactoCreation In accordance

w/ the lawColorable compliance w/ the law

Manner of incorporation

No defect in the incorporation

Defective in the manner of incorporation

Compliance Strictly or substantially complied w/ the reqt’s of incorporation

An attempt in good faith to incorporate based on the reqt’s of law

Power Can exercise power under section 36

May also exercise such powers since it may not be attacked collaterally.

Requisites of a De facto Corp1. Presence of the valid law on the basis of

w/c the corp. may be incorporated2. Attempt in good faith to incorporate or

organize a corp. on the basis of that valid law

3. An actual exercise of corporate powers4. Issuance of cert. of incorporation

Nature and Purpose of the Action (Quo Warranto) – means by “what authority” and the object is to determine the right of the person to the use or exercise of a franchise or office and to oust the holder from its enjoyment if his claim is not well founded, or if he has forfeited his right to enjoy the office.

Examples of De Facto Corporations:1. Identical or confusing deceptive

corporate name2. Failure to state purpose in AOI

3. Place of principal office was not mentioned in AOI

4. Majority of incorporators are not residents of the Phil

5. Number of directors is less than 56. Treasurers affidavit was not under oath

Nationality of Corporation1. Incorporation Test – the country where it

was incorporated (controlling in the Philippine jurisdiction)

2. Control Test3. Place of Principal business test

Nationality of the corporation is determined under laws it was formed, organized or created.

Control Test - the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders.

Grandfather Rule - this is applied only if there is an issue on the nationality of the investor corporation. The nationality of a corporation with alien equity based on the percentage of capital owned by Filipino Citizens can be determined through this rule.

“Shares belonging to corporations or partnerships is less than 60% of the capital of which is owned by Filipino citizens shall be considered as with Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as with Philippine nationality.”

Corporate Juridical Personality – a corporation has personality separate and distinct from those of the stockholders, directors, or officers, such separate and distinct personality is merely a fiction created by law for the sake of convenience and to promote the ends of justice.

If the corporate entity is being used as follows then the corporate juridical personality shall be disregarded:

cloak or cover for fraud or illegality; as a justification for a wrong; as an alter ego; an adjunct; a business conduit for the sole benefit of

stockholders



Doctrine of Separate Juridical Personality

1. As to obligations The liability of the corporations is not the liability of the stockholders or vice versa. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

3 Basic instances when doctrine of the piercing the corporate veil applies:

a. When the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation.

b. In fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or

c. Is used in alter ego cases, i.e, where a corporation is essentially farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corp.

2. As to actionAn action filed against the corporation is not an action filed against the stockholders or vice versa unless they exceeded their authority.

3. As to propertyThe property of corporation is not the personal property of the stockholders or vice versa. A property belonging to a corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interests in the assets and business of the former.

4. As to parent-subsidiaryThe business transaction of the parent corporation is not the business transaction of the subsidiary corporation or vice versa. Further any claim that may be filed by the parent corporation is not the claim filed by the subsidiary corporation or vice versa.

5. As to crimeA corporation cannot be imprisoned unlike natural persons. Section 144 of the

Corporation Coe provides for the imposable fine or imprisonment of the violations of the code. If corporation committed such violation, after notice and hearing the corporation may be dissolved in appropriate proceedings before the SEC.

Section 144 may apply in a violation of a stockholder or member’s right to inspect the corporate books/records as provided in Sec. 74.

A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted, and if fined guilty may be fined.

The corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. The doctrine of piercing the corporate veil should be done with caution. The wrongdoing must be clearly and convincingly established; it cannot be presumed.

Solidary Liability of Corporate Directors and OfficersGeneral Rule: A corporate officer cannot be held liable for acts done in his official capacity because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members.Exception: They are solidary liable if bad faith or malice exists.

Liability for Torts and CrimesGeneral Rule: A corporate officer cannot be held liable for acts done in his official capacity because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members.Exception: To pierce this fictional veil, it must be shown that the corporate personality was used to perpetuate fraud or an illegal act, or to evade an existing obligation, or to confuse a legitimate issue.

Corporation and its directors, trustees or officer may be solidary liable when the directors, trustees or officer:



1. Assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons.

2. He consents to the issuance of watered down stocks or who , having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. Agrees to hold himself personally and solidary liable with the corporation

4. He is made by a specific provision of law personally answerable for his corporate action.

Note that these are also the grounds for the application of Doctrine of Piercing the veil.

Recovery of Damages – a corporation cannot suffer or be entitled to moral damages.

Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows and grieves of life – all of which cannot be suffered by an artificial, juridical person.

As a juridical person it is not entitled to moral damages because unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.

Exception: A corporation may have good reputation which, if besmirched may also be ground for the award of moral damages.

o When the corporation has a reputation that is debased,

o Resulting in its humiliation in the business plan

o Essential to prove the existence of the factual basis of the damage and its causal relation to petitioner’s act.

While the Court may allow grant of moral damages to corporations, it is not automatically granted; there must still be proof of the existence of the factual basis of the damage and its causal relation to the defendant’s acts. This is so because moral damages, though incapable of pecuniary estimation, are in the category of an award designed to

compensate the claimant for actual injury suffered and not to impose a penalty on a wrongdoer.

Doctrine of Piercing the Veil Grounds for the application of the Doctrine:

1. Assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons.

2. He consents to the issuance of watered down stocks or who , having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. Agrees to hold himself personally and solidary liable with the corporation

4. He is made by a specific provision of law personally answerable for his corporate action.

Bad Faith – imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means a breach of a known duty through some ill motive or interest. It partake the nature of fraud.

Negligence – characterized by the want of even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but willfully and intentionally with a conscious indifference to consequences insofar as other persons may be affected and must be established by clear and convincing evidence.

Elements of the application of the Doctrine of piercing the veil of corporate fiction:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect of the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff’s legal rights



3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

Veil of separate corporate personality may be lifted when it is used as a:

1. Shield to confuse legitimate issues2. Where lifting the veil is necessary to

achieve equity or3. For the protection of creditors

Three areas where piercing of the veil may be applied:

1. Defeat of public convenience2. Fraud cases3. Alter ego cases

Chapter II: Incorporations and Organization

Corporators and Incorporators, Stockholders and MembersTheory of Multiple Corporate PersonalitiesNumber and Qualifications of Incorporators Philippine Citizenship Requirements on certain CorporationsMinimum Capital Stock Required of stock corporationsDefinition of TermsIncorporation and OrganizationPromoterLiability of PromoterLiability of Corporation for Promoter’s Contracts


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