CORPORATIONS

BA 160, January 2015

Constitution, Article XII, Section 16 National Economy and Patrimony

The Congress shall not, except by general law,
provide for the formation, organization, or
regulation of private corporations. Governmentowned or controlled corporations may be created
or established by special charters in the interest of
the common good and subject to the test of
viability.

CHARACTERISTIC

PARTNERSHIP

CORPORATION

How created

voluntary agreement of parties

term of existence

no time limit except by agreement of not more than 50 years

the parties

as to liability to
strangers

may be liable with their private

property beyond their contribution
to the firm

liable only up to the extent of their subscribed

capital stock

transferability of
interest

transferee does not become a

partner unless all other partners
consent
generally, partners act as agents of
the partnership and as such can
bind the firm and the partners

transferee becomes a stockholder even without the

consent of the others

mismanagement

a partner can sue a partner who

mismanages

a stockholder cannot sue a member of the BOD who

mismanages, it is the corporation itself which must
file the action

nationality

a partnership is a national of the

country where it was created

national of the country under whose laws it was

incorporated with exceptions

ability to bind the

firm

attainment of legal the firm becomes a juridical person

personality
from the time the contract begins
dissolution

a partner may dissolve the

partnership by his act or withdrawal

created by the state in the form of a special charter

or by a general enabling law

it is the board of directors or its duly authorized

representative who can bind the corporation

the firm becomes a juridical person from the time of

issuance of its certificate of incorporation by the
SEC
cannot be dissolved without the approval of the
BOD and SH, and the consent of the state. 3

Definition of Corporation
A corporation is 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.
Section 2, Corporation
Code

Attributes of a Corporation
1.
2.
3.
4.

It is an artificial being;
It is created by operation of law;
It has the right of succession;
It has only the powers, attributes and
properties expressly authorized by law
or incident to its existence.

ATTRIBUTES

Corporation an artificial person

A corporation is a legal or
juridical person with a
personality separate and
apart from its individual
members or stockholders. It is
not in fact and in reality a
person but the law treats it as
though it were a person by
process of fiction.

Consequences of Artificial Personality

It may not, generally, be made to answer for acts or liabilities of its
stockholders;
It may acquire and possess property of all kinds, as well as incur
obligations and bring civil and criminal actions in the same manner
as a natural person;
Property conveyed to or acquired by the corporation is in law the
property of the corporation itself as a distinct legal entity and not
that of the stockholders or members as such and vice-versa;
A corporation has no personality to bring an action for the purpose
of recovering property which belong to its stockholders in their
personal capacities;

Consequences of Artificial Personality

All contracts entered into it its name by its regular appointed
officers and agents are the contract of the corporation and not
those of the stockholders or members;
A corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its
president;
A corporation may have a good reputation which if besmirched
may be a ground for recovery of moral damages
A corporation remains unchanged and unaffected in its identity
by changes in its individual membership.

Doctrine of Piercing the Veil of Corporate Entity

Being a mere creature of law, a
corporation may be allowed to
exist solely for LAWFUL purposes
but where the fiction of corporate
entity is being used as a cloak or
cover for fraud or illegality, this
fiction will be disregarded and
the individuals composing it will be
treated as identical.

ATTRIBUTES

Corporation as a Creation of Law

Corporations cannot come into existence by mere
agreement of the parties. They require special
authority or grant from the State. This power is
exercised by the State through the legislature either
by a special incorporation law or charter which
directly creates the corporation or by means of a
general law which, in the Philippines, is the
Corporation Code.

Corporations can only come into existence in the

manner prescribed by law. The acts required to be
done must be complied with substantially before
legal corporate existence can be acquired.

ATTRIBUTES

Right of Succession of a Corporation

Under the law, the life of a corporation is limited to
the period of time stated in the articles of
incorporation not exceeding 50 years from the date
of incorporation unless sooner dissolved or unless said
period is extended. The extension of the life of a
corporation is, however, a privilege and not a right.
Certain requirements have to be complied with.
A corporation has a capacity of continuous existence
irrespective of the death, withdrawal, or incapacity of
the individual stockholders and regardless of the
transfer of their interest or shares of stock.

ATTRIBUTES

Powers, Attributes, and Properties

A corporation, being purely a creation of law,
may exercise only such powers as are granted
by the law of its creation. An express grant,
however, is not necessary. All powers which
may be implied from those expressly provided
by law, and those which are incidental or
essential to the corporations existence may
also be exercised.

Powers of a Corporation
An individual has absolute right
fully to use, enjoy and dispose
of his properties, to perform all
acts and to make all contracts
without any control except when
they are forbidden by law.
Since a natural person does not
owe his existence to the state,
they can perform any act not
prohibited by law. The same is
true of a partnership.

Powers of a Corporation
Unlike a natural person, a
corporation owes its
existence to the state and
therefore, it has only such
powers as are expressly
and impliedly granted by
law or those incidental to its
existence. a corporation, as
an artificial person, created
by or under authority of law,
is without natural rights.

Powers of a Corporation
1. Those expressly granted or authorized by law, i.e.,
those conferred by the Corporation Code and its
articles of incorporation (EXPRESS);
2. Those incidental to its existence or to the exercise
of the powers so conferred (INCIDENTAL);
3. Those that are necessary to the exercise of the
express or incidental powers (IMPLIED).

Powers of a Corporation
Sec. 36. Corporate powers and capacity Every
corporation incorporated under this Code has the
power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;

Powers of a Corporation
Sec. 36. Corporate powers and capacity Every corporation
incorporated under this Code has the power and capacity:
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business
of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into with other corporations merger or
consolidation as provided in this Code;

Powers of a Corporation
Sec. 36. Corporate powers and capacity Every corporation
incorporated under this Code has the power and capacity:
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic,
or similar purposes: Provided, that no corporation, domestic
or foreign, shall give donations in aid of any political party
or candidate or for purposes of partisan political activity;
10.To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees;
and
11.To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in
its articles of incorporation.

Powers of a Corporation
Sec. 37 Power to extend or shorten corporate term
A private corporation may extend or shorten its term as stated in
the articles of incorporation when approved by a majority vote
of the board of directors or trustees and ratified at a meeting
by the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-thirds (2/3) of
the members in case of non-stock corporations. Written notice
of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this
code.

Powers of a Corporation
Sec. 37 Power to extend or shorten corporate term
1. approval by a majority vote of the board of
directors or trustees
2. ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock
corporations.
3. written notice of the proposed action and of the
time and place of the meeting

Powers of a Corporation
Sec. 38 Power to increase or decrease capital
stock; incur, create or increase bonded indebtedness
No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of
the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3)
of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded
indebtedness. Xxx xxx xxx

Powers of a Corporation
Sec. 38 Power to increase or decrease capital
stock; incur, create or increase bonded indebtedness
1.approval by a majority vote of the board of
directors
2.Approval of stockholders representing 2/3 of the
outstanding capital stock
3.Approval made at a stockholder's meeting duly
called for the purpose

Powers of a Corporation
Sec. 39 Power to deny pre-emptive right
All stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless such
right is denied by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall not extend
to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock,
in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.

Right of pre-emption, defined

Whenever the capital stock of a corporation is increased
and new shares of stock are issued, the new issue must be
offered first to the stockholders who are such at the time
the increase was made in proportion to their existing
shareholdings and on equal terms with other holders of the
original stocks before subscriptions are received from the
general public. This principle is known as the right of preemption or pre-emptive right of stockholders.
The rule aims to safeguard the right of a stockholder to
preserve unaltered and unimpaired his proportionate
influence and interest in the corporation and the relative
value of his holdings.

Powers of a Corporation
Sec. 40 Power to sell, lease, etc. all or substantially all corporate
assets
Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose. Xxx xxx xxxx

Powers of a Corporation
Sec. 40 Power to sell, lease, etc. all or substantially all corporate
assets
1.Subject to the provisions of existing laws on illegal combinations
and monopolies
2.majority vote of its board of directors or trustees
3.authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least to two-thirds (2/3) of the
members
4.Authority of the stockholders/members given in a stockholder's or
member's meeting duly called for the purpose.

Powers of a Corporation
Sec. 41 Power to acquire own shares
A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code.

Powers of a Corporation
Sec. 42 Power to invest corporate funds in another corporation or business or
for any other purpose
Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the
primary purpose for which it was organized when approved by a majority of
the board of directors or trustees and ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose. Xxx xxx xxx
Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be
necessary.

Powers of a Corporation
Sec. 42 Power to invest corporate funds in another
corporation or business or for any other purpose
1.approval by a majority of the board of directors or
trustees
2.ratification by the stockholders representing at least twothirds (2/3) of the outstanding capital stock, or by at
least two thirds (2/3) of the members in the case of nonstock corporations,
3.Approval and ratification made at stockholder's or
member's meeting duly called for the purpose.

Powers of a Corporation
Sec. 43 Power to declare dividends
The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall
be payable in cash, in property, or in stock to all stockholders
on the basis of outstanding stock held by them: Provided, That
any cash dividends due on delinquent stock shall first be applied
to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without
the approval of stockholders representing not less than twothirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. Xxx xxx xxx

Dividends, concept
Distinguished from profits
A dividend is that part or portion of the profits
of a corporation set aside, declared and
ordered by the directors to be paid ratably to
the stockholders on demand or at a fixed time
A dividend is that portion of the profits or net
earnings which the corporation has set aside for
ratable distribution among the stockholders. Thus
dividends come from profits profits are the
source of dividends

Powers of a Corporation
Sec. 44 Power to enter into management contracts
No corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the board of
directors and by stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the case of a nonstock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder
or stockholders representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or
(2) where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case
of a non-stock corporation. No management contract shall be entered into
for a period longer than five years for any one term. Xxx xxx xxx

Management Contract
Section 44 refers only to a management contract
with another corporation. It does not apply to
management contracts entered into by a
corporation with natural persons.
A management contract is an agreement under
which a corporation delegates the management of
its affairs to another corporation for a certain
period of time.

Powers of a Corporation
Power to enter into management contracts General
requirement
1.approval by the board of directors
2.Approval by the stockholders owning at least the
majority of the outstanding capital stock, or by at least a
majority of the members in the case of a non-stock
corporation, of both the managing and the managed
corporation,
3.Approval made at a meeting duly called for the
purpose

Powers of a Corporation
Power to enter into management contracts where
stockholders have 1/3 interests in both managed
and managing corporations
1.approval by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in the case of a nonstock corporation
2.Approval at a meeting duly called for the purpose.

Powers of a Corporation
Sec. 45 Ultra vires acts of corporations No
corporation under this Code shall possess or
exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary or
incidental to the exercise of the powers so
conferred.

Structure of Corporate Organization

OFFICERS

BOARD OF DIRECTORS

SHAREHOLDERS

Shareholders/Stockholders
Rights and Remedies
1. Right to attend and vote in person or by proxy at
stockholders meetings
2. Right to elect and remove directors
3. Right to approve certain corporate acts
4. Right to adopt and amend or repeal the by-laws or
adopt new by-laws
5. Right to compel the calling of meetings of stockholders
when for any cause there is no person authorized to call a
meeting

Shareholders/Stockholders
Rights and Remedies
6. Right to issuance of certificate of stock or other
evidence of stock ownership and be registered as
shareholder
7. Right to receive dividends when declared
8. Right to participate in the distribution of corporate assets
upon dissolution
9. Right to transfer of stock on the corporate books
10. Right to pre-emption in the issue of shares
11. Right to inspect corporate books and records

Shareholders/Stockholders
Rights and Remedies
12.Right to be furnished the most recent financial
statements upon request and to receive a
financial report of the corporations operations
13.Right to bring individual and representative or
derivative suits
14.Right to recover stock unlawfully sold for
delinquency
15.Right to enter into a voting trust agreement

Shareholders/Stockholders
Rights and Remedies
16.Right to demand payment of the value of
his shares and withdraw from the
corporation in certain cases; and
17.Right to have the corporation voluntarily
dissolved.

Actions by stockholders, Categories

1. Individual suit An action brought by a
stockholder against the corporation for direct
violation of his contractual rights as such
individual stockholder, such as the right to
vote, the right to share in the declared
dividends, the right to inspect corporate books
and records and similar other examples.

Actions by stockholders, Categories

2. Representative suit When a wrong is
committed against a group of stockholders, a
stockholder may bring a suit in behalf of himself
and all other stockholders who are similarly
situated. This is called a shareholders
representative suit which is a kind of class suit. It
saves the persons involved in the action
substantial time and money.

Actions by stockholders, Categories

3. Derivative suit one brought by one or more
stockholders or members in the name and on behalf of
the corporation to redress wrongs committed against it
or to protect or vindicate corporate rights, whenever
the officials of the corporation refuse to sue, or are the
ones to be sued, or hold control of the corporation. It
is a remedy designed by equity for those situations
where the management through fraud, neglect of duty
or other cause, declines to take the proper and
necessary steps to assert the Corporations rights.

Voting Trust Agreement

It is an agreement in writing whereby one or more
stockholders of a stock corporation transfer their
share to act as a trustee for the purpose of vesting
in such person or persons or corporation as trustee or
trustees voting or other rights pertaining to the
shares for a certain period and upon the terms and
conditions stated in the agreement
A voting trust agreement results in the separation of
the voting rights of a stockholder from his other
rights.

Board of Directors / Trustees

Governing body of the corporation
Corporate powers of corporations shall be exercised,
all business conducted, and all properties controlled
and held by the board of directors or trustees
With the exception only of some powers reserved by
law to stockholders (or members), the directors (or
trustees) have sole authority to determine policy and
conduct the ordinary business of the corporation
within the scope of its charter

Limitations on powers of BOD/Trustees

Limitations imposed by law, articles of incorporation,
or by-laws of the corporation
It cannot perform constituent rights such as acts
involving fundamental changes in the corporation
which the require the approval of the shareholders
or members
It cannot exercise powers not possessed by the
corporation

Limitations on powers of BOD/Trustees

Directors of a corporation presumptively serve without
compensation
The power of the BOD to control the corporations
property and business does not empower them to
provide themselves compensation
The BOD or trustees must act together as a body in
order to bind the corporation by their acts. (To exercise
their powers, they must meet as directors or trustees and
act at a meeting at which there is quorum

Corporate Officers
Carry on the day to day management of the business
The task of actual management and carrying on the
details of business operations and corporate policies
are delegated to the officers elected by the BOD
and over whom it exercises supervision
The only officers of a corporation are those who are
given that character either by the Code or the bylaws; the rest can be considered merely as
employees or subordinate officials