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CORPORATION LAW CLASS SUPPLEMENTAL READINGS 2

Chapter 3 FORMATION AND ORGANIZATION OF CORPORATION


1. Who May Form a Corporation
1.1 Incorporators
Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the Philippines, may form a private corporation for
any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be
a subscriber to at least one (1) share of capital stock of the corporation. (Section 10)
1) Natural persons

 Corporations and partnerships cannot be incorporators, but may be stockholders.


This prevents “layering” which may harbour criminals and will make the corporation a
tool for defrauding the public.

 Incorporators are those stockholders or members mentioned in the articles as originally


forming and composing the corporation and who are signatories thereof.

 Corporators are stockholders or members who join the corporation after its
incorporation.

 Original subscribers are persons whose names are mentioned in the Articles, but not
as incorporators. They do not sign the Articles.
2) At least five incorporators but not more than fifteen

 They must sign the articles of incorporation.

 GENUINE INTEREST: Each incorporator must own or subscribe to at least one 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), banks
(General Banking Act), retail trade (RA 1180), savings and loan associations (RA 3799), investment
houses (Sec 5, PD 129), and other areas of investment as 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 and controlled by aliens, must get written authorization
from BOI before it can register with SEC. (purpose is to enable BOI to determine whether such

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corporation wherein aliens own a substantial number of shares would contribute to the sound
and balanced development of the national economy)

4) Incorporators must be of legal age

2 Conditions Precedent for Incorporation

2.1 Consent or agreement of at least 5 natural persons with respect to:

1. Compliance with the Corp Code;

2. Contribution/pooling of resources – delivered to and held in trust by a designated trustee;

3. Governance of:

• Contributions;

• Distribution of contributions;

• Division of profits/sharing of losses;

• Pursuit of purpose/objectives;

• Corporate combination; and

• Transactions with third parties; and

4. Continuity or termination of existence.

2.2 Mandatory Requirements of the Code:

1. Execution of constitutive documents (AOI, By-laws);

2. Payment/delivery of contributions – delivered to and held in trust by a designated


trustee;

3. Submission of constitutive documents to SEC for review or evaluation; and

4. SEC action – issuance of certificate of registration. Note that once contributions are
made before incorporation, such subscriptions are irrevocable for a period of 6 months
(general rule).

Exceptions:

1. When all of the other subscribers consent to the revocation; or

2. When the incorporation fails to materialize (Sec. 61)

3. Steps in the formation of a corporation

3.1. PROMOTION

The “promoter” brings together persons interested in the business enterprise and sets in motion the
machinery that leads to the formation of the corporation.

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“Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing
the business or enterprise of the issuer and receives consideration therefor.

3.2. DRAFTING OF ARTICLES OF INCORPORATION

These constitute the charter of the corporation

1. CORPORATE NAME

• No corporate name may be allowed by the SEC if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws.
(Section 18)

• A corporate name is essential to the corporation’s acquisition of juridical personality

• Change of corporate name shall require the approval of the SEC. SEC will issue amended
certificate of incorporation under the amended name.

• A change in corporate name involves an amendment of the Articles, which requires a


majority vote of the board and the vote or written assent of stockholders holding 2/3 of the
outstanding capital stock (§16) Note: Does not include the non-voting stock.

• It is the sole means of identifying the corporation from its members or stockholders, and
from other entities and corporations

• Amendment in a corp’s AOI changing its corporate name does not extinguish the personality
of the original corporation. The corp upon such change of its name, is in no sense a new entity,
nor the successor of the original corp. it is the same corp with a different name, and its
character is not changed. Consequently, the “new” corp is still liable for the debts and
obligations of the “old” corp (Republic Planters Bank v CA, 1992)

• This is essential because through it, corporation can sue and be sued

• SEC may allow incorporators to reserve the name for a particular period

• To distinguish from partnerships and other business orgs, the law requires corporations to
append the word “Corporation” or “Inc” to its chosen name

• A corporation should transact business only through its chosen name

Philips Export BV (PEBV) v CA (1992)

Facts:

PEBV is a foreign corp under the law of Netherlands, although not engaged in business in the
Phils. It is the registered owner of the Philips trademark, and owns two local companies with
the name Philips also. PEBV asked the cancellation of the word Philips from Standard Philips,
a local manufacturer, alleging infringement of its exclusive right to use the same. SEC and CA
ruled for Std Philips, saying there was no confusion (unlike in Converse case).

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Held:

Corp’s right to use its corp and trade name is a property right, a right in rem. General Rule:
Corp must have a name by which it is to sue and be sued and do all legal acts. Accdg to Corp
Code, no corp name may be allowed 1) if complainant corp acquired a prior right over name
and 2) proposed name is a) identical or b) deceptively or confusingly similar or c) patently
deceptive, confusing or contrary to existing law PEBV’s local companies were incorporated 26
yrs before Std Philips.

TEST OF CONFUSING SIMILARITY IN CORP NAMES: Whether similarity is such as to mislead a


person using ordinary care and discrimination Philips is the dominant word. No need to prove
that there was actual confusion, as long as probable or likely to occur. Std Philips’ purpose, as
per its articles of incorp also includes sale and manufacture of electrical products, which is
PEBV’s line of business. Even if SEC guidelines mandate that a corp could add 2 other words
to proposed name, only one word “Std” was added. “Corp” not counted.

Note: A prior user can consent to the use of its name

2. PURPOSE CLAUSE
• Where a corporation has more than 1 purpose, the AOI shall state which is the
primary purpose and which is secondary (Section 14(2))

• A non-stock corporation may not include those which contradict or change its nature
• SEC can reject or disapprove the AOI if the stated purpose is patently
unconstitutional, illegal, immoral, contrary to government rules and regulations.
(Section 17 (2))

• Purpose clause confers as well as limits the powers which a corporation may exercise

• A corporation only has such powers as are expressly granted to it by law and by its
AOI, those which may be incidental to such conferred powers (Section 45), those
reasonably necessary to accomplish its purposes (Section 36 (11), and those which
may be incident to its existence (Section 2).

Reasons for purpose clause:


• so that a stockholder contemplating an investment will know what lines of
business his money is to be risked

• so that management will know what lines of business it is authorized to act so


that anyone who transacts with the corporation may ascertain whether a
transaction he is entering is one with the general authority of the management

o Under Sec 14(2) a corporation can have as many purposes as it wants


provided: o AOI specify the corporation’s primary and secondary
purposes which need not be related to each other

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o Corporation for which special provisions are made can only have the
purpose peculiar to them o Purposes must be lawful

• If purpose is lawful, SEC is not authorized to inquire whether corporation has hidden
motives and mandamus will lie to compel it to issue certificate

• PD 902-A, Sec 6(h) gives SEC, after consultation with BOI, NEDA, or other appropriate
government agency, the power to refuse or deny the application for registration of
any corporation if its establishment, organization, operation will not be consistent
with the declared national economic policies
• A corporation may not be formed for the purpose of practicing a profession

3. PRINCIPAL OFFICE
• Must be within the Philippines (Section 14 (3))
• AOI must specify both province or city or town where it is located
• Important in (1) determining venue in an action by or against the corporation (2)
determining the province where a chattel mortgage of shares should be registered (Chua
Gan v Samahang Magsasaka)
• The statement of the principal office establishes the residence of the corporation
4. TERM OF EXISTENCE
• When a corporation is organized, the maximum life that can be stipulated in the AOI is 50
years. But during the life of the corporation, the life or term can be extended to another 50
years at any one instance (Section 11)
• But such extension of the life a corporation cannot be made earlier than 5 years before the
end of its original term. Exception: where there are justifiable reasons for an earlier extension
as may be determined by the SEC.

Exception: Condominium corporations can be organized for a period of 200 years


• Extension involves an amendment of the AOI. Thus, the requisites under Section 16
must be complied with. Any dissenting stockholder may exercise his appraisal right (Section
37).

5. INCORPORATORS AND DIRECTORS; NUMBER AND QUALIFICATIONS


• “Directors” is used for stock corporations, while “trustees” is used for stock
corporations.
• GENERAL RULE: not less than 5 but not more than 15
EXCEPTIONS:
i) Non-stock corporations – articles or by-laws may provide for more than 15
trustees (Section 92).
i. Exception: Educational nonstock corporations – trustees may not
exceed 15. However, the number of trustees shall be in multiples of
5 (§108) ii) Merger of banks – new board is allowed to have such
number of directors as is equivalent to the total number of directors
of the merging banks, though it may exceed fifteen (General Banking

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Act, as amended). • Incorporators and d irectors of a stock
corporation must own at least one share of stock of the corporation.
In a non-stock corporation, a trustee must be a member thereof.

ii. In nationalized industries, aliens may be directors of a corporation


only in such number as may be proportional to their allowable
ownership of shares,2 e.g. if the articles provide for 10 directors, and
alien ownership is limited to 40% of the capital, then aliens may
occupy a maximum of 4 board seats.

6. CAPITAL STOCK; SUBSCRIPTION; PAYMENT


Capital stock

o Capital stock is the amount fixed in the AOI, to be subscribed and paid in or secured to
be paid in by the shareholders of a corporation, either in money or property, labor or
services, at the organization of the corporation or afterwards and upon which is to
conduct its operation.

o The capital stock limits the maximum amount or number of shares that may be issued
by the corporation without formal amendment of the AOI. It remains the same even
though the actual value of the shares as determined by the assets of the corporation is
diminished or increased.

Authorized capital stock

o ACS is synonymous with capital stock where the shares of the corporation have par
value. If the shares of stock have no par value, the corporation has no ACS, but it has
capital stock the amount of which is not specified in the AOI as it cannot be determined
until all the shares have been issued. In this case, the two terms are not synonymous (De
Leon)

o State the authorized capital stock in lawful money of the Philippines, the number of
shares into which the ACS is divided, and the par value of each par value shares (Section
14(8), Section 15(7))

o Stock corporations are not required to have any minimum authorized capital stock
except when special laws provide otherwise (Section 12)

Subscribed capital stock

o It is the amount of the capital stock subscribed whether fully paid or not. It connotes an
original subscription contract for the acquisition by a subscriber of unissued shares in a
corporation (Sections 60,61)

o At least 25% of authorized capital stock must be subscribed (Section 13)

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o Subscription – mutual agreement of the subscribers to take and pay for the stock of a
corporation

o Pre-incorporation subscription – amount which each incorporator or stockholder agrees


to contribute to a proposed corporation

Outstanding capital stock

o It is the portion of the capital stock which is issued and held by persons other than the
corporation itself. Under Section 137, it is the total shares of stock issued under the
binding subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. It is thus broader than “subscribed” capital stock

o The terms “subscribed capital stock” and “issued” or “outstanding” capital stock are
used synonymously since subscribed capital stock, as distinguished from the certificate of
stock, can be issued even if not fully paid. But while every subscribed share (assuming
there is a binding subscription agreement) is “outstanding,” an issued share may not have
the status of outstanding share (as in the case of treasury shares) Paid-up capital

o 25% of subscribed capital stock must be paid-up for the purpose of incorporation, but
in no case shall be less than P 5000 (Section 13) o Portion of the authorized capital stock
which has been subscribed and paid. Not all funds or assets received by the corporation
can be considered paid-up capital, for this term has a technical signification in corporation
law. Such must from part of the authorized capital stock of the corporation, subscribed
and then actually paid-up. [MSCI-NACUSIP Local Chapter v. National Wages and
Productivity Commission]

o Must be in the form of (a) cash deposited in a bank or (b) property which may be used
or actually needed by the corporation in its operations o Capital can’t consist or be
invested in money market placement

o Corporations with more stringent capital requirements:

 Insurance corporations – must have paid-up capital stock of at least P 5 M


(Insurance Code, Sec 188)

 Banks – monetary board fixes minimum paid-up capital requirements for the
different classes of banks (Central Bank Act and General Banking Act).

Unissued capital stock

o It is that portion of the capital stock that is not issued or subscribed. It does not vote and draws
no dividends Legal capital

o It is the amount equal to the aggregate par vale and/or issued value of the outstanding capital
stock. When par value shares are issued above par, the premium or excess is not to be considered
as part of the legal capital. In the case of no par value shares, the entire consideration received
forms part of legal capital and shall not be available for distribution of dividends (Section 6, par 3)

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Capital

o It is used broadly to indicate the entire property or assets of the corporation. It includes the
amount invested by the stockholders plus the undistributed earnings less losses and expenses.

o In the strict sense, it refers to that portion of the net assets paid by the stockholders as
consideration for the shares issued to them, which is utilized for the prosecution of the business
of the corporation (De Leon)

7. TREASURER-IN TRUST
The person elected by the subscribers as Treasurer of the corporation at the time of the
incorporation, who is named as such in the AOI and who has been authorized to receive for
and in the name and for the benefit of the corporation, all subscriptions, fees, contributions
or donations paid or given by the subscribers or members.

8. TREASURER’S AFFIDAVIT
The sworn statement of the Treasurer elected by the subscribers stating at least 25% of the
authorized capital stock of the corporation has been subscribed and that at least 25% of the
total subscription has been fully paid to him in actual cash and/or property, the fair valuation
of which is equal to at least 25% of the said subscription, such paid-up capital being not less
than 5,000.00 (Section 14)

9. OTHER MATTERS
• Classes of shares, as well as the preferences or restrictions on any such class (Section 6)
• Denial or restriction of pre-emptive right (Section 39)
• Prohibition against transfer of stock which would reduce stock ownership to less than
the required minimum in the case of a nationalized business or activity (Section 15(11))

4. FILING OF ARTICLES AND PAYMENT OF FEES


• Corporations governed by special laws have to submit a recommendation from the appropriate
government agency to the effect that such articles are in accordance with law.
a) banks, banking and quasi-banking institutions,
b) building and loan associations,
c) trust companies and other financial intermediaries,
d) insurance companies,
e) public utilities,
f) educational institutions, and
g) other corporations governed by special laws (Section 17)
• Non-stock corporations that intend to solicit gifts, donations, and contributions from the
public at large for the benefit of an indefinite number of persons must secure a Certificate
of Registration from the Insurance Commissioner.

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• Failure to file AOI will prevent due incorporation of the proposed corporation and will
not give rise to its juridical personality (Section 19). It will not even be a de facto
corporation (Section 20)
1. Unless the certificate of incorporation has been issued, there can be
no de facto corporation (Hall vs. Piccio, 1950)

2. Campos—this statement should not be taken as an absolute principle,


but in the light of the circumstances before the court.

5. EXAMINATION OF ARTICLES BY SEC; APPROVAL OR REJECTION

• The SEC may reject any AOI thereto if the same is not in compliance with the requirements of
this Code (Section 17)

• The SEC shall give the incorporators a reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. (Section 17)

Grounds for disapproving articles of incorporation (Sec 17):

a) AOI does not substantially the form prescribed

b) Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations

c) Treasurer’s Affidavit concerning the amount of capital subscribed and or paid is false

d) Percentage requirement of ownership of Filipino citizens as required by the Constitution not complied
with.

• After consulting with BOI, NEDA, appropriate government agency, SEC may deny registration of
any corporation if its establishment will not be consistent with declared national policies

• Certificate of authority required of the following:

a) Insurance Companies- Insurance Commission

b) Banks, Building and Loan Associations, Finance CompaniesMonetary Board

c) Educational Institutions- Secretary of Education

d) Public Utilities- Board of Power, Board of Transportation, National Telecommunication


Commission, etc..

• Remedy in case of rejection of AOI: by petition for review in accordance with


the Rules of Court (Section 6, last par., PD 902-A) ISSUANCE OF CERTIFICATE OF
INCORPORATION

• A private corporation formed or organized under this Code commences to have


corporate existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal (Section 19)

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• Thereupon the incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in accordance with law. (Ibid)

• If incorporators are found guilty of fraud in procuring Certificate of


Incorporation, SEC may revoke the same after proper notice and hearing (§6(I),
PD 902-A)

6. Defective Attempts to Incorporate

DE FACTO CORPORATIONS – a corporation where there exists a flaw in its incorporation

Requisites of a de facto corporation (Ballantine as cited in Campos)

a) Valid statute – there is an apparently valid statue under which the corporation with its
purposes may be formed. There can be no de facto corporation under a statute
subsequently declared unconstitutional

Municipality of Malabang vs. Benito (1969)

FACTS:

The municipality of Balabagan was created by EO 386 of President Garcia out of barrios and sitios of
Malabang. The petitioners seek to nullify the EO. They rely on the Pelaez ruling that the President’s power
to create municipalities under Sec. 68 of the Administrative Code is unconstitutional. Respondents argue
that the Pelaez ruling is inapplicable because Balabagan is a de facto corporation.

HELD:

The Municipality of Balabagan was not a de facto corporation. The color of authority requisite to a de
facto municipal corporation may be an unconstitutional law, valid on its face, which has either: a. Been
upheld for a time by the courts; or b. Not yet been declared void; provided that a warrant for its creation
can be found in some other valid law or in the recognition of its potential existence in the general
constitution of the state. The mere fact that Balabagan was organized before the statute was invalidated
cannot make it a de facto corporation because, independently of the Administrative Code, there is no
other valid statute to give color of authority to its creation. This doesn’t mean that the acts done by
Balabagan the exercise of its corporate powers are a nullity. The existence of EO 386 is an “operative fact
which cannot be justly ignored.”

b) User of corporate powers – there has been some user of corporate powers, the transaction
of business in some way as if it were a corporation

• not necessary that dealings between the parties should have been on a corporate basis

• election of directors and officers would not be user of corporate powers since these acts
are just indicative of a mere association

• taking subscriptions to and issuing shares of stock, buying lot, constructing, and leasing
a building on it will constitute sufficient user of corporate powers to constitute a de facto

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corporation c) Substantial or Colorable compliance - there has been colorable compliance
with legal requirements in GOOD FAITH

• while the corporation is still in the process of incorporation, it is quite clear that there
can be no substantial or colorable compliance and therefore it cannot be at such a stage
a de facto corporation

• A corporation which has not yet been issued a certificate of incorporation cannot claim
“in good faith” to be a corporation. Thus, it cannot be a de facto corporation [Hall v. Piccio
86 Phil 603] Compliance with the

• Compliance with the above conditions would make the corporation de facto whose
incorporation cannot be attacked collaterally. It may only be attacked directly by the State
in a quo warranto proceeding (Section 20)

• De facto doctrine grew out of the necessity to promote the security of business
transactions and to eliminate quibbling over irregularities

• The de facto doctrine is the exception to the general rule that when there is no corp
entity to talk about, it is the natural persons who are liable

• Where corporations are neither de jure or de facto, associates may be held liable as
partners unless estoppel applies (Section 21)

• No articles and no by-laws: no de facto corp. There’s no colorable compliance at all

• De facto corporation is like a de jure corporation, has all the powers and liabilities of de
facto corp

• THE ONLY DIFFERENCE: its incorporation can be attacked by State in quo warranto
action

Ratio: Only State can give it legal existence, so only the State is wronged

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