Corporation Law: Introduction to Corporation, Basic Principles PDF

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EPISODE 1LECTURE SERIES IN THE REVISED CORPORATION CODEBatas Pambansa Blg. 68Feb. 23, 2019 – The Revised Corporation Code took effect.What are the Kinds of Businesses? 1. As to organization A. Sole Proprietorship – the business and the owner are one and the same; all profits, losses and liabilities ...

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EPISODE 1 LECTURE SERIES IN THE REVISED CORPORATION CODE Batas Pambansa Blg. 68 Feb. 23, 2019 – The Revised Corporation Code took effect. What are the Kinds of Businesses? 1. As to organization A. Sole Proprietorship – the business and the owner are one and the same; all profits, losses and liabilities will be borne by the owner B. Partnership (Art. 1767, NCC) C. Joint Venture (Bar 1987, 1995) D. Corporation – stock corporation is intended for profit E. Cooperatives – under CDA F. Conglomerates EPISODE 2 Is JV same with partnership? NO. What is Joint Venture? 

The legal concept of a joint venture is of common law origin. It has no precise legal definition but it has been generally understood to mean an organization formed for some temporary purpose. It is in fact hardly distinguishable from the partnership, since their elements are (1) similar community of interest in the business, (2) sharing of profits and losses, and a (3) mutual right of control. The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships. (Aurbach, et. al., v. Sanitary Wares Manufacturing Corporation, 180 SCRA 130, Dec. 15, 1989)

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The Philippine Supreme Court has described a joint venture is as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks which requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. (Kilosbayan vs. Guingona, 232 SCRA 110, May 5, 1994

What are the similarities between a partnership and a corporation? 1. Juridical personality separate and distinct from that of the individuals composing it. 2. Can act only through agents. 3. Can only be authorized when there is a law authorizing its organization. 4. Both are taxable as a corporation, subject to income taxation. (Except General Professional Partnerships; See: Rufino R. Tan vs. Ramon R. Del Rosario, GR No. 109289, Oct.3, 1994) 5. Distributes its profits to shareholders/partners. 2. As to activity A. Merchandising B. Manufacturing C. Service oriented

Bar Question 2010 Your client Dianne approaches you for legal advice on putting up a medium-sized restaurant business that will specialize in a novel type of cuisine. As Dianne feels that the business is a little risky, she wonders whether she should use a corporation as the business vehicle, or just run it as a single proprietorship. She already has an existing corporation that is producing meat products profitably and is also considering the alternative of simply setting up the restaurant as a branch office of the existing corporation. Briefly explain to your client what you see as the legal advantages and disadvantages of using a separate corporation, a single proprietorship, or a branch of an existing corporation for the proposed restaurant business. (3%) SUGGESTED ANSWER: If Dianne will set up a separate corporation, her liability for its obligations and losses will be limited to the amount of her subscription in the absence of showing that there is a ground to disregard its separate juridical personality. If she were to operate a single proprietorship. her liability for its debts and losses will be unlimited. The formation and the operation of a corporation require a great deal of paper work and recordkeeping. This is not the situation in the case of a single proprietorship. If Dianne will form a separate corporation, it can raise more funds for the business than if she were to set up a single proprietorship. If she were to set up the restaurant as a branch office an existing corporation, the corporation will have more funds as capital than if she were to form separate corporation. However, all the assets of the existing corporation will be liable for the debts and losses of the restaurant business. If you advise your client to use a corporation, what officer positions must the corporation at least have? (2%) SUGGESTED ANSWER: The corporation must have at least five (5) directors (Section 14 of the Corporation Code). It must also have a president, a treasurer, and a secretary (Section 25 of the Corporation Code). What particular qualifications, if any, are these officers legally required to possess under the Corporation Code? (2%) SUGGESTED ANSWER: Every director must own at least one share of the capital stock of the corporation, which must be recorded in his name on the books of the corporation, and a majority of the directors must be residents of the Philippines (Section 25 of the Corporation Code). The president must also be a director. The secretary must be a resident and citizen of the Philippines. (Section 25 of the Corporation Code). What are the advantages of a corporation as a form of doing business? Advantages of corporate form of business: 1. Capacity to act as a single unit; 2. Limited shareholder’s liability; 3. Continuity in existence;

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Feasibility of greater undertaking; Transferability of shares; Centralized management; Standardized method of organization, management and finance.

Disadvantage of corporate form of business: 1. To have valid and binding corporate act, formal proceedings, such as board meetings are required. 2. The business transactions of a corporation are limited to the State of its incorporation and may not act as such corporation in other jurisdiction unless it has obtained a license or authority from the foreign state. (Doctrine of Limited Capacity) 3. The shareholder’s limited liability tends to limit the credit available to the corporation as a separate legal entity. 4. By the very nature of shares of stock which are personal properties; transferable at will by the owners thereof, transfers of share may result to uniting incompatible and conflicting interests. 5. The minority shareholders have practically no say in the conduct of corporate affairs 6. In large scale enterprises, shareholders’ voting rights may become merely fictitious and theoretical because of disinterest in management, wide-scale ownership and inaccessible place of meeting. 7. Double taxation may be imposed on corporate income. 8. Corporations are subject to governmental regulations supervision and control including submission of reportorial requirements not otherwise imposed in other business form. EPISODE 3 GENERAL PRINCIPLES Title of the Course Read Section 1  Section 1. Title of the Code. - This Code shall be known as the "Revised Corporation Code of the Philippines". What is a corporation? 1. Definition  Section 2. Corporation Defined. - 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 incidental to its existence.  SEC. 22. Definitions. - When used in this Title: (A) The term “person” means an individual, a trust, estate or corporation. (B) The term “corporation” shall include one person corporations, partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. “General professional partnerships” are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. (NIRC, Republic Act No. 8424, as amended) 2. As a juridical person  Read Articles 44 (3), 45, 46 and 1775 of the Civil Code Article 44. The following are juridical persons: (1) The State and its political subdivisions; (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;

(3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. Article 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or recognizing them. Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. Article 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to coownership. 

Read the case of PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 Piercing the Corporate Veil Not Warranted A corporation is an artificial being 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 the persons composing it, as well as from any other legal entity to which it may be related. This is basic. Equally well-settled 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.

EPISODE 4 3. As a creature of limited powers 

Read the case of Pascual & Santos, Inc. v. Members of Tramo Neighborhood; 442 SCRA 438 In the case at bar, the CA dismissed the petition before it on the ground that Lombos and Pascual, the signatories to the verification and certification on non-forum shopping, failed to show proof that they were authorized by petitioner's board of directors to file such a petition. Except for the powers which are (1) expressly conferred on it by the Corporation Code and those that are (2) implied by or are (3) incidental to its existence, a corporation has no powers. It exercises its powers through its board of directors and/or its duly authorized officers and agents. Thus, its power to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. (Santos vs. Tramo, GR No. 144880, Nov. 17, 2004)

Historical Background

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Philippine Corporate Law Act No. 1459 Codification of American Corporate Law April 1, 1906

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Corporation Code (BP 68) May 1, 1980 Adopted doctrines enunciated by SC under Old Corporation Law Obligations of corporate directors and officers

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Revised Corp Code (RA 11232) Feb 23, 2019 Introduce fresh and progressive concepts aimed at improving the “ease of doing business” Promotes good governance and afford protection of corporations, investors and consumers alike amid a fast-evolving business landscape

Salient Features of the Revised Corporation Code of the Philippines (RCCP)   

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Perpetual term/existence – before only 50 yrs. One person corporation (OPC) – single stockholder; prevent practice of carrying incorporators who do not really share anything just to be compliant with the law in forming corporation No minimum capital stock – before at least 25% of the 25% subscribed capital stock must be paid up (25/25 rule removed: At least 25% of ACS be subscribed and at least 25% of the subscribed capital stock be paid); BUT INCORPORATOR OF STOCK CORPORATION MUST OWN AT LEAST ONE SHARE OF CAPITAL STOCK Participation via remote communications, in absentia – before must be physically present Emergency board Electronic filing and monitoring system

NATURE AND (FOUR) ATTRIBUTES OF A CORPORATION 1. Nature of power to create a corporation -

Art XII, Sec 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. o Congress cannot enact special laws to create Private Corporation. (Reason: Corporations would be governed by different laws; prevent unfair treatment and abuse.) o But can enact general law that would govern creation of private corporation (RCCP)

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Read the case of Veterans Federation of the Phil. v. Reyes, 483 SCRA 526 From the foregoing, it is crystal clear that our constitutions explicitly prohibit the regulation by special laws of private corporations, with the exception of government-owned or controlled corporations (GOCCs). Hence, it would be impermissible for the law to grant control of the VFP to a public official if it were neither a public corporation, an unincorporated governmental entity, nor a GOCC. Said constitutional provisions can even be read to prohibit the creation itself of the VFP if it were neither of the three mentioned above, but we cannot go into that in this case since there is no challenge to the creation of the VFP in the petition as to permit this Court from considering its nullity. (Veterans Federation of the Phil. V. Angelo Reyes, GR No. 155027, Feb. 28, 2006)

ISSUE: Whether the Local Water District (Leyte Metropolitan Water District) is a private corporation exempt from jurisdiction of COA. NO. Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code, except that the Cooperative Code governs the incorporation of cooperatives. Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law, PD 198. (Feliciano v. COA, GR No. 147402, Jan. 14, 2004) EPISODE 5 2. Corporation as a person A. Entitled to equal protection of the law We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders, is entitled to the protection afforded by the due-process of law and equal protection of the laws clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying to corporations such as Smith, Bell &. Co. Ltd., the right to register vessels in the Philippines coastwise trade, does not belong to that vicious species of class legislation which must always be condemned, but does fall within authorized exceptions, notably, within the purview of the police power, and so does not offend against the constitutional provision. (Smith, Bell & Company (ltd) V. Natividad, GR No. 15574, Sept. 17, 2019) B. Unreasonable searches and seizure The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit: Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements. Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights — that the things to be seized be particularly described — as well as tending to defeat its major objective: the elimination of general warrants. (Stonehill v. Diokno, GR No. L-19550, June 19, 1967) C.

However, not entitled to the privilege of self-incrimination No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures – It is elementary that the right against self-incrimination has no application to juridical persons. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges

and franchises, may refuse to show its hand when charged with an abuse of such privileges. (Bataan Shipyard v. PCGG, GR No. 75885, May 27, 1987) 3.

Practice of profession 

It is apt to recall that only natural persons can engage in the practice of law, and such limitation cannot be evaded by a corporation employing competent lawyers to practice for it. Obviously, this is the scheme or device by which respondent "The Legal Clinic, Inc." holds out itself to the public and solicits employment of its legal services. It is an odious vehicle for deception, especially so when the public cannot ventilate any grievance for malpractice against the business conduit. Precisely, the limitation of practice of law to persons who have been duly admitted as members of the Bar (Sec. 1, Rule 138, Revised Rules of Court) is to subject the members to the discipline of the Supreme Court. Although respondent uses its business name, the persons and the lawyers who act for it are subject to court discipline. The practice of law is not a profession open to all who wish to engage in it nor can it be assigned to another (See 5 Am. Jur. 270). It is a personal right limited to persons who have qualified themselves under the law. (Mauricio Ulep v. The Legal Clinic, Inc., Bar Matter No. 553; June 17, 1993)

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An "optometrist" is a person who has been certified by the Board of Optometry and registered with the Professional Regulation Commission as qualified to practice optometry in the Philippines. Thus, only natural persons can engage in the practice of optometry and not corporations. Respondent, which is not a natural person, cannot take the licensure examinations for optometrist and, therefore, it cannot be registered as an optometrist under R.A. No. 1998. It is noteworthy that, in Apacionado, the Court did not find Acebedo to be engaged in the practice of optometry. (Dr. Alfafara, et. al., v. ACEBEDO Optical Co. Inc., GR No. 148834, April 17, 2002)

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RA 11232 Section 10. Number and Qualifications of Incorporators. - Any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes: Provided, That natural persons who are licensed to practice a profession, and partnerships or associations o...