Corporation Law: Pointers

Corporation

-          It 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. (Sec 2, BP 68)

Components of a Corporation

a.        Incorporators

-          Those mentioned in the articles of incorporation as originally forming and composing the corporation, having signed the articles and acknowledged the same before a notary public.

-          They have no powers beyond those vested in them by the statute.

1.        They must be natural persons;

2.        At least five (5) but not more than fifteen (15)

3.        They must be of legal age

4.        Majority must be residents of the Philippines

5.        Each must own or subscribe to at least one share.

b.        Corporators

-          All the stockholders and members of a corporation including the incorporators who are still stockholders.

c.        Stockholders and members

-          Stockholders are persons who hold or own shares in a stock corporation while members are those who compose the non-stock corporation.

d.        Directors and trustees

-          The Board of Directors is the governing body in a stock corporation.

-          The Board of Trustees is the governing body in a non-stock corporation.

-          They exercise the powers of the corporation.

e.        Corporate officers

-          They are the officers who are identified as such in the Corporation Code, the Articles of Incorporation or the By-laws of the corporation.

f.         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.

-          Liability of promoter

GR:          The promoter binds himself personally and assumes the responsibility of looking to the proposed corporation for reimbursement.

XPN:       

1.        Express or implied agreement to the contrary

2.        Novation, not merely adoption or ratification of the contract.

Doctrine of piercing the veil of corporate entity

-          A corporation is a legal entity distinct from persons composing it.

-          It is a theory introduced for the purposes of convenience and to serve the ends of justice.

-          When can be disregarded:

a.        When it is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong or defend crime.

b.        When used to shield blatant violation of the prohibition against forum shopping.

Different kinds of Corporation

Stock Corporation

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

-          Organized or profit

Non-Stock Corporation

-          All other corporations are non-stock corporations.

-          One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution.

Public Corporation

-          One formed or organized for the government of a portion of the state.

-          Its purpose is for the general good and welfare.

Private Corporation

-          One formed for some public purpose, benefit, aim or end.

-          It may be stock or non-stock, government-owned or controlled or quasi-public.

Close Corporation

-          One whose articles of incorporation provide that:

1.        All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number o persons, not exceeding twenty (20);

2.        All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and

3.        The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

-          Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.

Educational Corporation

-          One organized for educational purposes.

Religious Corporations

-          One organized for religious purposes

Corporation sole

-          It is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church.

Corporation aggregate

-          It is a religious corporation incorporated by more than one person.

Eleemosynary Corporation

-          One organized for a charitable purpose.

Domestic Corporation

-          On formed, organized, or existing under the laws of the Philippines.

Foreign Corporation

-          One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state.

Corporation created by special laws or charter

-          Corporations which are governed primarily by the provisions of the special law or charter creating them.

Subsidiary Corporation

-          One in which control, usually in form of ownership of majority of its shares, is in another corporation.

Parent Corporation

-          Its control lies in its power, directly or indirectly, to elect the subsidiary’s directors thus controlling its management policies.

Corporation De Jure

-          A corporation organized in accordance with the requirements of the law.

De Facto Corporation

-          The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec 20)

-          A corporation where there exists a flaw in its incorporation.

-          Requisites:

1.        Organized under a valid law.

2.        Bona fide compliance with formalities of law.

3.        User of corporate powers.

4.        SEC issuance of certificate of incorporation.

Corporation by estoppel

-          All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.

-          Where a group of persons misrepresent themselves as a corporation, they are subsequently stopped from claiming lack of corporate life in order to avoid liability.

Different Kind of Shares

Common shares

-          The most common type of shares, which enjoy no preference but the owners thereof are entitled to management of the corporation and to equal pro-rata division of profits after preference. It represents a residual ownership interest in the corporation.

Preferred Shares

-          Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which do not violate the Corporation Code. (Sec. 6)

Par Value Shares

-          These shares are with a stated value set out in the AOI.

-          Par Value is minimum issue price of such share in the AOI which must be stated in the certificate.

No-par Value Shares

-          These are shares without a stated value.

Founder’s share

-          These are shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks.

Redeemable shares

-          These are shares which permit the issuing corporation to redeem or purchase its shares.

Treasury Shares

-          These are shares which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation, or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD.

Convertible shares

-          A type of preferred stock that the holder can exchange for a predetermined number of common shares at a specified time.

Non-Voting shares

GR:          Non-Voting Shares are not entitled to vote.

XPN:

1.        Amendment of the AOI

2.        Adoption and amendment of by-laws

3.        Sale, lease, exchange, other disposition of all or substantially all of the corporate property

4.        Incurring, creating or increasing bonded indebtedness

5.        Increase or decrease of capital stock

6.        Merger or consolidation

7.        Investment of corporate funds in another corporation or business

8.        Dissolution of the corporation.

	Corporation	Partnership
Governing Law	Corporation Code	Civil Code
Manner of creation	By law	By mere agreement
Number of incorporators	5 to 15 incorporators XPN: Corporation sole	2 or more persons
Commencement of juridical personality	Date of issuance of the certificate of incorporation by SEC	Moment of execution of the contract
Powers	Only powers expressly granted by law	Any power authorized by partners
Management	Board of Directors/ Board of Trustees	agent
Effect of mismanagement	Suit must be in the name of the corporation	Partner can sue a co-partner
Right of succession	Have the right of succession	No right
Transferability of interest	Without consent	Consent
Extent of liability to third persons	Extent of the shares	Personally and subsidiarily XPN: Limited
Term of existence	50 years Extendible for 50 years	Any period (stipulation)

Forms of Stock

Authorized Capital Stock

-          The amount fixed in the AOI to be subscribed and paid by the stockholders of the corporation.

Subscribed Capital

-          25% of the Authorized Capital Stock that is covered by subscription agreements whether fully paid or not.

Paid-Up Capital

-          25% of the Subscribed Capital which has been subscribed and actually paid.

-          It should not be less than P5000.

Outstanding Capital Stock

-          The total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is binding subscription agreement.

Capital

-          Properties and assets of the corporation that are used for its business or operation.

Qualification of Board of Directors

1.        Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of corporation.

Trustees of non-stock corporations must be members thereof.

2.        A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

3.        He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code, committed within five (5) years before the date of his election.

4.        He must be of legal age.

5.        He must possess other qualifications as may be prescribed in the by-laws of the corporation.

Election of Directors or Trustees (Sec 24)

1.        Straight voting

Every stockholder may vote such number of shares for as many persons as there are directors to be elected.

2.        Cumulative Voting for one candidate

A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.

3.        Cumulative Voting by distribution

A stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit.

*Cumulative voting is not available in non-stock corporations.

Disqualification of directors, trustees or officers (Sec.27)

1.        No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or

2.        A violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

Section 144. Violation of the Code.

                Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punishable by a fine not less than one thousand (P1000) pesos but not more than ten thousand (P10 000) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same way, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.

Interlocking Director

                There is an interlocking director in a corporation when one (or some or all) of the directors in one corporation is (or are) a director in another corporation.

a.        If the interests of the interlocking director in the corporations are both substantial (stockholdings exceed 20% of Outstanding Capital Stock).

GR:          A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone.

XPN:        If the contract is fraudulent or not fair and reasonable.

Powers of the Corporation

General Powers (Sec 36 CCP)

1.        Sue and be sued in its corporate name;

2.        Succession;

3.        Adopt and use a corporate seal;

4.        Amend Articles of Incorporation;

5.        To adopt, amend or repeal by-laws;

6.        For stock corporations – issue stocks to subscribers and to sell treasury stocks;

For non-stock corporations – admit members;

7.        Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with real and personal property, pursuant to its lawful business;

8.        Enter into merger or consolidation with other corporations;

9.        To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civil or similar purposes. Prohibited: donations in aid of any political party or candidate for purposes of partisan political activity;

10.     To establish pension, retirement and other plans for the benefit of directors, trustees, officers and employees;

11.     Other powers essential or necessary to carry out its purposes.

Specific Powers

1.        Power to extend or shorten corporate term;

2.        Increase/Decrease Corporate Stock;

3.        Incur, create bonded indebtedness;

4.        To deny pre-emptive right;

5.        Sell, dispose, lease, encumber all or substantially all of corporate assets;

6.        Purchase or acquire own shares;

7.        To invest in another corporation, business other than the primary purpose;

8.        To declare dividends;

9.        To enter into management contract;

10.     To amend the articles of incorporation.

Trust Fund Doctrine

                It means that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Stated simply, it states that all funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. Under such doctrine, no fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code.

Cases where the trust fund doctrine is violated

1.        When the corporation releases or condones payment of the unpaid subscription.

2.        When there is payment of dividends without unrestricted retained earnings.

3.        When properties are transferred in fraud of creditors.

4.        When properties are disposed or undue preference is given to some creditors even if the corporation is insolvent.

Stockholder’s suits and remedies

1.        Individual suit

One brought to assert a right by a stockholder peculiar to himself. Suits brought by a stockholder for the issuance to him a stock certificate, payment of his dividend, payment to him of the book value of his stocks, in those instances where the law allows him the right of appraisal, are individual suit.

2.        Representative Suit

One brought by a stockholder in his own behalf, and in behalf of other stockholders similarly situated, and having a common cause against the corporation.

3.        Derivative Suit

A suit brought by a stockholder, for and in behalf of the corporation and against any person, also a stockholder, director, officer, or third person. The right can be availed of by the stockholder after he has exhausted intra-corporate remedies, by requesting the board to act, and the board does not act at all.

An action brought by minority stockholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.

Requisites:

1.        Cause of action in favor of the corporation;

2.        Refusal of corporation to sue, and;

3.        Party filing the suit is a stockholder.