Commercial Law Review Corporation Code PDF

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro CORPORATION CODE (BP BLG 68) B. Attributes of a Corporation  Artificial Being *Corporation Code is the general law on Private - It exist by fiction of law only, hence it is Corporation regarding to its creation, formation and su...

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro CORPORATION CODE (BP BLG 68) *Corporation Code is the general law on Private Corporation regarding to its creation, formation and powers. INTRODUCTION: A. Historical Background Effectivity: May 1, 1980 Article XII Section 16 of the 1987 Constitution: “The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” *Congress has limited powers in the formation, creation and regulation of a private corporation. Purposes: 1. Uniformity 2. To avoid corruption General Rule: Congress is prohibited to enact a law directly forming a private corporation. Exception: GOCC may be created by special charter. *GOCC is a private corporation with regard to function and in the meantime a public corporation with regard to ownership. Twin Conditions must be present in forming a GOCC: 1. Interest in the common good 2. Subject to the test of economic viability - Means can survive alone in the market; can generate income which they can use for their operating expenses CONCEPT AND ATTRIBUTES OF A CORPORATION: A. Statutory definition of a Corporation Section 2 of the Corporation Code: “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.”

B. Attributes of a Corporation  Artificial Being - It exist by fiction of law only, hence it is subject to limitations that are inherent because of its nature - A corporation is a juridical person which exists by process of legal fiction Doctrine of Corporate Entity/Doctrine of Separate Personality - A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entities to which it may be connected Consequences/Implications of Separate Personality: 1. It is entitled to own properties in its own name and its properties are not the properties of its stockholders, directors and officers. Cases: Magsaysay-Labrador v CA; Sulo ng Bayan v Araneta *The interest of the stockholders over the properties of the corporation is merely inchoate. *Merely inchoate because there are still condition precedents before the shareholders get their share, viz, in Asset, there are dissolution and satisfaction of claims; in profitsharing, there are unrestricted retained earnings and declaration by the Board of Directors. 2. It can incur obligations and its obligations are not the obligations of its stockholders, directors and officers. Case: Francisco v CA 3. The rights belonging to the corporation cannot be invoked by the stockholders, directors and officers and vice versa. 4. Corporations are entitled to certain constitutional rights, i.e., right against unreasonable searches and seizure, due process clause. *It is not entitled to certain constitutional right, i.e., right 1

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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against self-incrimination particularly production of corporate documents. *Right against self-incrimination is applicable only to natural persons. General Rule: Constitutional guarantees are applicable to corporations. Exceptions: 1. Right against self-incrimination 2. Freedom to travel Case: Bataan Shipyard v PCGG It is liable for tort. It is liable when the act was committed by the officer or agent under express direction or authority from the stockholders or members acting as a body or generally from the directors as the governing body. Generally, the corporation is considered a national of the country where it was incorporated (Place of incorporation test) *Exceptions: 1. In times of war, the nationality of a corporation is determined by the nationality of the controlling stockholders; 2. Under the Foreign Investment Act of 1991 Corporations are incapable of intent, hence, they cannot commit felonies that are punishable under the RPC. They cannot commit crimes that are punishable under special laws because crimes are personal in nature requiring personal performance of overt acts. In addition, the penalty of imprisonment cannot be imposed. *Criminal liability falls upon to responsible officers. *Responsible officers cannot invoke the doctrine of separate personality. *Corporations cannot be incarcerated. Moral damages cannot be awarded in favor of corporations because

they do not have feelings and mental state. *Corporations can claim damages such as actual, compensatory, exemplary, loss of earning capacity. General Rule: Corporation cannot claim moral damages. Exception: If the corporation has a good reputation and such reputation was destroyed. Case: Coastal Pacific Trading v Southern Rolling Mills, Co. *In Filipinas Broadcasting Network Inc. v. Ago Medical and Educational Center, the SC ruled that a corporation can recover moral damages under Article 2219(7) if it was the victim of defamation. Doctrine of Piercing the Veil of Corporate Entity – The doctrine that a corporation is a legal entity distinct from the persons composing it. It is a theory introduced for the purposes of convenience and to serve the ends of justice. But when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically. Cases: Times Transportation Co. v Santos Sotelo; Concept Builders v NLRC *The doctrine of piercing the veil of corporate entity is the exception to the doctrine of corporate entity. *The users of this doctrine are: 1. Stockholder; 2. Group of stockholders; 3. Another corporation. Effects: 1. Stockholders, officers and corporation are in effect jointly liable; 2. In case of two corporations, they will be treated as one wherein they will be both solidarily liable. (Instrumentality rule) *There is no effect on the existence of each corporation as long as their separate entity is used for legitimate purposes. Instrumentality Rule – When one corporation is so organized and controlled and its affairs are conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of the corporate entity to the instrumentality may be disregarded. *The user is another corporation. Keyword: CONTROL 2

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Requisites: 1. Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy and business 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 in contravention of plaintiff’s legal rights; 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Three cases of piercing the veil: 1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong; 2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation; 3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity. Probative Factors of Identity: 1. Identical shareholders; 2. Same set of officers, directors, or trustees; 3. Use of same premises, properties, tools and equipments; 4. Engage practically in the same business; 5. The same manner of keeping books and records. *The probative factors of identity are not conclusive but may be considered as strong evidence.  Creature of Law Article XII Section 16 of the 1987 Constitution: “The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” Concession Theory – It is a principle in the creation of corporations, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC. The life of the corporation is a concession made by the State.

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Right of Succession - Capacity to have continuity of existence despite the changes on the persons who compose it. Thus, the personality continues despite the change of stockholders, members, board members or officers; death or disability. - Also known as Principle of Perpetual Succession Reason: To make the corporation more stable

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Creature of enumerated powers, attributes and properties Doctrine of Limited Capacity – No corporation under the Corporation Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred. The corporation’s capacity is limited to such express, implied and incidental powers. *Corporation may be restrained from engaging a particular transaction because it is beyond their powers. *General Capacity – a corporation can perform any act for as long as it is lawful, moral and not contrary to public policy or order. Ultra Vires Doctrine – Even if the act is lawful, moral and not contrary to public order or policy but such act is not within the express, implied and incidental powers of the corporation such act shall be void for being ultra vires. *These doctrines are based on Section 2 and Section 45 of the Corporation Code.

C. Classification of Private Corporations: 1. As to existence of Stocks: 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 the shares held. (Sec. 3) 3

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Non-stock Corporation – A corporation where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec. 87) Q: Is it correct to say that a Non-stock corporation cannot generate income on their own? A: NO 2. As to function/organizers: Public Corporation – for public purpose and organized by the State. Private Corporation – for profit making functions and organized by private persons alone or with the State 3. As to laws of Incorporation (Place of Incorporation) : Domestic Corporation – corporation formed, organized or existing under the Philippine Laws. Foreign Corporation – corporation formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) *License is necessary for; 1. Regulation purposes and 2. Access to local courts. 4. As to legal status: De Jure Corporation – corporation created in strict or substantial compliance with the mandatory requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the state. De Facto Corporation – the due incorporation of any corporation claiming in good faith to be a corporation under the Corporation 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 Solicitor General in a quo warranto proceeding. (Sec. 20) - organized with a colourable compliance with the requirements of a valid law and its existence cannot be inquired collaterally. - There is an irregularity or defect in the constitution or organization.

Can be compared to a voidable contract, i.e., valid until annulled. *Can be challenged by the State later on. Cases: Hall v Piccio; Seventh Adventist v Northeastern Mindanao Mission *The filing of the Articles of Incorporation and the issuance of the certificate of registration are the essential requisites for the existence of a de facto corporation. Requisites: 1. The existence of a valid law under which it may be incorporated; 2. An attempt in good faith to incorporate; 3. Use of corporate powers; 4. Filing of the Articles of Incorporation; 5. Subsequent compliance with the requirement of law. *In both corporations, there must be a certificate of registration issued. Doctrine of 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 an result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered into by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack or corporate personality. (Sec. 21) - Group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said contract. Case: Lim Tong Lim v CA *Lim is stopped because he benefited from the transaction. Remedy: To ran after those persons responsible for the representations Essence: They are precluded from denying their existence by their previous act or conduct Holding Corporation – it is one which controls another as a subsidiary by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment. 4

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Affiliate – 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. It may be the controlled or controlling corporation, or under common control. Subsidiary Corporation – one which is so related to another corporation that the majority of its directors can be elected either directly or indirectly by such other corporation. It is always controlled. Open Corporation – one which is open to any person who may wish to become a stockholder or member thereto. Close Corporation – those whose shares of stock are held by limited number of persons like the family or other closely knit group. (Sec. 96) FORMATION AND ORGANIZATION OF A PRIVATE CORPORATION: A. Submission of Articles of Incorporation; contractual significance *The life of a corporation commences from the issuance of the Certificate of Registration by the SEC upon filing of the Articles of Incorporation and other documents. Article of Incorporation – is the charter of the corporation, and the contractual relationships between the State and the corporation, the stockholder and the State, and between the corporation and its stockholders. Contractual Significance: 1. The issuance of a certificate of incorporation signals the birth of the corporation’s juridical personality; 2. It is an essential requirement for the existence of a corporation, even a de facto one. B. Contents and Form of the Articles Incorporation (Secs. 14 and 15) Contents of Articles of Incorporation: 1. Corporate Name; 2. Purpose Clause; 3. Principal office; 4. Term of existence; 5. Incorporators; 6. Directors or trustees; 7. Capitalization;

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Corporate Name Purpose: Identification *Corporation can not adopt any name or group of words at its pleasure because of statutory limitation, viz., Sec. 18 of the Corporation Code which provides that: “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. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. SEC Guideline ”x x x b. In order to prevent confusion and difficulties of administration, supervision and control, if the proposed name contains a word already use as a part of the firm name or style of a registered entity, the proposed name must contain two other words different and distinct from the name of the company already registered or protected by law. x x x” Case: Ang Mga Kaanib Ni Jesus Cristo *The phrase “Ang Mga Kaanib” are words merely descriptive of membership while the phrase “Sa Bansang Pilipinas” are merely descriptive of the place. *Both parties are religious institutions *Both use the acronym H.S.K. As a rule, generic name or descriptive word may be used as a corporate name. Reason: public domain; can be used by anyone; public use. Exception: Doctrine of Secondary Meaning – a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that in that trade 5

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. Requisites: 1. Period of use; 2. The use must be exclusive. Case: Lyceum of the Philippines *The exclusivity requirement was not satisfied by Lyceum of the Philippines. *In case of change of name, the corporation is not dissolve nor create a new corporation; it also does not extinguish the corporate liability. *Change of name can be done by amending the Articles of Incorporation. Procedure: 1. Obtain approval of majority of the Board and 2/3 stockholders; 2. Submission to the SEC for approval. Purpose Clause *Only one primary purpose. Primary purpose defines the business activities of the corporation. It is the ordinary course of business of the corporation. *Secondary Purpose is for future expansion. There is no limit on the secondary purpose. *In case the primary purpose is not viable then secondary purpose may be used. Principal Office *The principal place of business may determine the venue of court cases involving corporations. It may also determine if service of summons and notices was properly made. It is also important for tax purposes (local taxation). *The SEC requires the exact address to be indicated in the Articles of Incorporation. *It is the residence of the corporation. It is where the corporation maintains its books and records and where normally the bulk of its business is being conducted or undertaken. *For personal action, venue is the residence. Term of Existence *A corporation has a maximum term of 50 years. It may be extended for a period not exceeding 50 years in any single instance.

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As a rule, no extension can be made earlier than 5 years prior to the expiration of the term. *No limitations regarding number of extension can apply. Reason: To compel the stockholders to meet the corporation’s term. Exception: If for compelling reasons, earlier extension will be allowed. *During the three year winding up period, the corporation still has personality but activities are limited to the liquidation of the corporation affairs and not to transact further business. As a rule, after the term has expired, no more extensions be allowed or entertained by the SEC. Reason: No more period to extend. Exception: Doctrine of Relation – The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relations applies if the failure to file the application for e...