. THE CORPORATION CODE OF THEPHILIPPINES (BATAS PAMBANSA BLG. 68) Chapter I INTRODUCTION 1. The Corporation as a Legal Concept 1.

1 Corporation Defined A Corporation is an artificial being cr e a t e d b y operation of law, having the right of succession andt h e p o w e r s , a t t r i b u t e s , a n d p r o p e r t i e s e x p r e s s l y authorized by law or incident to its existence. (2) A corporation is a creature of: -A general enabling statute (requirements of the law must be complied with); and The agreement of individuals who seek to i n c o r p o r a t e ( i n t e r n a l c o n t r a c t u a l arrangements: articles of incorporation and by-laws). 1.2 Four attributes of a corporation An artificial being: 1. a juridical person capa ble o f h a v i n g r i g h t s and obligations, w/ a personal ity separate a n d d i s t i n c t f r o m i t s m e m b e r s o r stockholders 2. hence, stockholders are not perso n a l l y liable for corp. obligations and can n o t b e held liable to third persons who have claims against the corp. beyond their ag reed contribution to the corporate capital (paid-up capital and unpaid subscriptions) This isknown as the doctrine of limited liability. Created by operation of law: 1. mere consent of the parties to form a corp.i s n o t s u f f i c i e n t : t h e S t a t e m u s t g i v e i t s consent either through a special law (in the c a s e o f a g o v t c o r p . ) o r a g e n e r a l l a w ( f o r a private corp.) 2. the general law under w/c a private corp. m a y b e f o r m e d o r o r g a n i z e d i s t h e Corporation Code Has the right of succession: 1. its continued existence during the term stated i n i t s a r t i c l e s o f i n c o r p . c a n n o t b e affected by any change in the members or stockholders

2. nor is it affected by the transfer of s h a r e s by a stockholder to a 3rd Person Has the powers, attributes and properties expressly authorized by law or incident to its existence : as it i s a m e r e c r e a t u r e o f t h e l a w , i t c a n exercise only such powers as the law may choose t o g r a n t i t , either expressly or impliedly 1.3..Advantages of the Corporate Organizations 1) Separate juridical personality personalitys e p a r a t e a n d d i s t i n c t f r o m i n d i v i d u a l stockholders and members 2) Limited liability to investors stockholders are liable only to the extent of their contribution General rule: Where a corporation buys all the shares of another corporation, this willn o t o p e r a t e t o d i s s o l v e t h e o t h e r corporation and as the two corporationss t i l l m a i n t a i n t h e i r s e p a r a t e c o r p o r a t e entities, one will not answer f o r t h e d e b t s of the other. [Nell v Pacific Farms (15 SCRA 415), Nov. 23, 1965] Exceptions: o If there is a n e x p r e s s a s s u m p t i o n o f liabilities; o There is a consolidation or merger; o I f t h e p u r c h a s e w a s i n f r a u d o f creditors; o I f t h e p u r c h a s e r b e c o m e s a continuation of the seller; o I f t he re a r e u np ai d s u bs c r i p t i o n s (stockholder is liable for th e u n p a i d balance). 3) Free transferability of units of ow nership stockholders hold their shares as per sonalp r o p e r t y w i t h r i g h t s t o d i s p o s e , a s s i g n o r encumber them as they may desire 4) Centralized Management all corporate powers are exercised by the board of directors 1.4 Partnership vs. Corporation

1. Extent of Liability partners are personally liable for the debts of the partnershi p ; stockholders cannot be made to personally answer to corporate creditors 2.Creationmere agreement of the parties,w / c c a n b e c o m p o s e d o f j u s t 2 p e r s o n s , gives rise to the juridical personality of thepartnership, whether or not registered w/t h e SEC (Art. 1768, NCC); a corp., w/ a minimum of 5 incorporators, derives i t s juridical personality from the certific a t e issued by the SEC (19) 3. Management I n m o s t c a s e s , a l l t h e owners in a partnership actively participate in management, w/ capacity to bind it bya ny usual contract (Art. 1818, NCC); in ac o rp., management is centralized in the board of directors w/c has exclusive power to bind the corp. (23) 4. Nature of Relationship partnership isbased on mutual tru s t a n d c o n f i d e n c e (delectus personae) so that its existence is precarious because of the facility w/ which i t c a n b e d i s s o l v e d ( i . e . through the death or unilateral act of a partner); a co rp. has more stability as it enjoys the rig h t o f succession and is not affected by the death or insolvency of a stockholder ; a l s o , dissolution before a corp.s term requires a 2/3rds vote of the stock (Secs. 118 a n d 119, Corp. Code), always subject to SEC intervention 5. Powers a corporation has only such powers as are expressly granted to it and such as are necessary to the exercise of thep o w e r s s o g r a n t e d o r f r o t h e accomplishment of its purpose ( s e c . 2 , 3 6 (11), and 45); In a partnership, as long as t h e p a r t i e s h a v e a g r e e d t o i t , t h e partnership can perform any act as long asi t d o e s n o t v i o l a t e a n y l a w o r r i g h t o f others.

Chapter II CLASSIFICATION PRIVATECORPORATIONS1. General under 3: 1.1 Stock corporation

OF Classification

One which has a capital stock divided into shares and is authorized to distribute to theh o l d e r s o f s u c h s h a r e s d i v i d ends or allotments of the surplus profits ( i . e . , retained earnings on the basis of the shares held (3) It is organized for profit. The governing body of a stock corporation is usually the Board of Directors (Except in certain instances for close corporations) 1.2 Non-stock corporation All other corporations are non - s t o c k corporations (3) O ne w he r e no pa rt o f t he i n c o m e i s distributable as dividends to its me mbers,t r u s t e e s , o r o f f i c e r s , s u b j e c t t o t he provisions of the Code o n d i s s o l u t i o n . Provided that any profit which a non-stock corporation may obtain as an incident to its operation shall whenever necessary o r proper be used for the furtherance of thep u r p o s e o r pu r po s e s f o r w h ic h t h e corporation was organized. (87) Not organized for profit. Its governing body is usually the Board o f Trustees. . 2. Other kinds of corporations 1. Public corporation - One formed or organized f o r t h e g o v e r n m e n t o r a p a r t i c u l a r s t a t e . I t s purpose is for the general good and welfare. 2. Private corporation - O n e f o r m e d f o r s o m e private purpose, benefit, aim or end

3. Close corporation One whose Articles of Incorporation provide that: a) all of the corporations issued stock of all classes, exclusive of treasury shares, shall b e he l d o f re c o rd by no t m o r e t h a t a specified number of persons, not exceeding20 b) all of the issued stock of all classes s h a l l b e subject to one or more specified restrictions on transfer permitted by the Code c) the corporation shall not list in an y s t o c k exchange or make any public offer i n g o f any of its stock of any class d) at least 2/3 of its voting stock must not b e owned or controlled by another corporation which is not a close e) must not be a mining or oil company, s t o c k exchange, bank, insurance company, public utility, educational institution or corporation vested with public interest 4.E d u c a t i o n a l c o r p o r a t i o n T h o s e c o rpo rat io n s w hi c h a r e o r ga n i z e d f o r educational purposes. This type of corporation is governed by Section 106 of the Corporation Code 5.Religious sole and aggregate A corporation sole is one formed for the purpose of administering and managing, ast r u s t e e , t h e a f f a i r s , p r o p e r t y a n d temporalities of any religious denomination,s e c t , o r c h u r c h , b y t h e c h i e f a r c h b i s h o p , bishop, priest, rabbi, or other presiding eldero f s u c h r e l i g i o u s d e n o m i n a t i o n , s e c t o r church The corporation sole is an exception to the general rule that at least five (5)members are required for a corporation to e x i s t . Here, there is only one (1) inco r p o r a t o r . This is applicable to religious c ommunitiesthe regulations of which provi d e t h a t t h e communitys properties are to be placed in t h e n a m e o f t h e h e a d a n d administered by h i m A corporation aggregate is a relig i o u s corporation incorporated by more than one person 6.Eleemosynary corporation

One organized for a charitable purpose 7.Domestic corporation A domestic corporation is one formed, organized, or existing under the laws of the Philippines 8.Foreign corporation One formed, organized or existing under any laws other than those of theP h i l i p p i n e s a n d w h o s e l a w a l l o w s F i l i p i n o citizens and c o r p o r a t i o n s t o d o b u s i n e s s i n i t s own country and state. 9.Corporation created by special laws or charter Corporations which are governed primarilyb y t he provisions of the special law o r charter creating Corporation Code is suppletory in so far as they are applicable (Ibid) 10.Subsidiary corporation o n e i n w h i c h c o n t r o l , usually in the form of ownership of majority of its shares, is in another corporation (the parent corporation) 11.Parent corporation its control lies in its power to elect the subsidiarys direc t o r s t h u s controlling its management policies Chapter III FORMATION AND ORGANIZATION OFCORPORATION 1. Who May Form a Corporation 1.1 Incorporators Any number of natural persons not less th an five(5) but not more than fifteen (15), all of legal agea n d a m a j o r i t y o f w h o m a r e r e s i d e n t s o f t h e Philippines, may form a private corporation for anyl a w f u l p u r p o s e o r p u r p o s e s . E a c h o f t h e incorporators of a stock corporation must own orbe a subscriber to at least one (1) share of c a p i t a l stock of the corporation. 1) Natural persons Corporations and partnerships cannot bei n c o r p o r a t o r s , b u t m a y b e s t o c k h o l d e r s . This prevents layering which may harbor criminals and will make the corporation a tool for defrauding the public. Incorporators are those stockholders orm embers mentioned in the articles

asoriginally forming and composi ng thecorporation and who are s i g n a t o r i e s thereof. Corporators are stockholders or membersw h o j o i n t h e c o r p o r a t i o n a f t e r i t s incorporation.

1. Sources: Sec. 2; Article 44 Civil Code

Art. 44. The following are juridical persons: Original subscribers are persons who s e names are mentioned in the Articles, bu t not as incorporators. They do not sign the Articles. 2) At least five incorporators but n o t m o r e t h a n fifteen T h e y m u s t s i g n t h e a r t i c l e s o f incorporation. GENUINE INTEREST: Each incorporatorm u s t o w n o r s u b s c r i b e t o a t l e a s t o n e share of stock of the corporation. 3) Majority of the incorporators must be residents of the Philippines General rule: need not be a citizen Exceptions: public utilities (Art XII, Sec 11.Consti), schools (Art XIV, Sec 4(2), Consti),b a n k s ( G e n e r a l B a n k i n g A c t ) , r e t a i l trade(RA 1180), savings and loan associati ons(RA 3799), investment houses (Sec 5, PD1 2 9 ) , a n d o t h e r a r e a s o f i n v e s t m e n t a s congress may by law provide (Art XII, Sec.10, Consti). Even though there are no legal restrictions as to alien ownership, where > 40% of the outstanding capital stock will be owned andc o n t r o l l e d b y a l i e n s , m u s t g e t writtenauthorization from BOI b e f o r e i t c a n register with SEC. (pu r p o s e i s t o e n a b l e BOI to determine whether such corporation wherein aliens own a substantial number of s h a r e s w o u l d c o n t r i b u t e t o t h e s o u n d a ndb a l a n c e d d e v e l o p m e n t o f t h e n a t i o n a l economy) 4) Incorporators must be of legal age Doctrine of separate PERSONALITY Main Doctrine: A Corporation has a personality Separate and Distinct from its Stockholders or Members (Jardine Davies, Inv. v. JRB Realty, Inc. (2005))

xxx(2) Other corporations, institutions and entities for public interest or purpose, created by law; their personality begins as soon as they have been constituted according to law;

2. Importance of Main Doctrine A corp., upon coming into existence, is invested by law w/ a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice (Siain Enterprises, Inc. v. Cupertino Realty Corp. (2009)) The first doctrine of legal entity of the separate personality of the corp. may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. (Shrimp Specialists Inc. v. Fuji-Triumph Agri-industrial Corp. (2009)) Corporation; separate personality. A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability. Phil. National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530, 167561, 16760311. March 13, 2013 Corporation; piercing the corporate veil. Equally wellsettled is the principle that 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. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons. However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application. Thus, cutting through the corporate cover requires an approach characterized by due care and caution: Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. x x x. Sarona v. National Labor Relations Commission has defined the scope of application of the doctrine of piercing the corporate veil: The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. (Citation omitted.) Phil. National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530, 167561, 16760311. March 13, 2013 Corporation; piercing the corporate veil; alter ego theory. In this connection, case law lays down a threepronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to 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 plaintiffs legal right; and (3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of. The first prong is the instrumentality or control test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporations relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, is operating the business directly for itself. The second prong is the fraud test. This test requires that the parent corporations conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of an element of injustice or fundamental unfairness. The third prong is the harm test. This test requires the plaintiff to show that the defendants control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendants exercise of control and improper use of the corporate form and, thereby, suffer damages. To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil. This Court finds that none of the tests has been satisfactorily met in this case. In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants

relationship to that operation. With respect to the control element, it refers not to paper or formal control by majority or even complete stock control but actual control which amounts to such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. In addition, the control must be shown to have been exercised at the time the acts complained of took place. Phil. National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530, 167561, 16760311. March 13, 2013 Corporation; piercing the corporate veil; ownership of shares. While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the latters corporate cover. This Court has declared that 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. This Court has likewise ruled that the existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Phil. National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530, 167561, 16760311. March 13, 2013 Components of a Corporation on Tue Sep 23, 2008 4:37 pm 1. Incorporators those mentioned in the articles of incorporation as originally forming and composing the corporation, having signed the articles and acknowledged the same before the notary public. a. They must be natural persons; b. At least five (5) but not more than fifteen (15); c. They must be of Legal Age; d. Majority must be residents of the Philippines; and e. Each must own or subscribe to at least one share. 2. Corporators All the stockholders and members of a corporation including the incorporators who are still stockholders. 3. Stockholders Corporators in a stock corporation 4. Members Corporators in a non-stock corporation

5. Directors and Trustees The Board of Directors is the governing body in a stock corporation while the Board of Trustees is the governing body in a non-stock corporation. 6. Corporate Officers They are the officers who are identified as such in the Corporation Code, the Articles of Incorporation or the Bylaws of the corporation. 7. Promoter A self-constituted organizer who finds an enterprise or venture and helps to attract investors, forms a corporation and launches it in business, all with a view to promotion profits.