Corporation LAW - Summary Introduction To Law PDF

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CORPORATION LAWINTRODUCTIONA 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.A corporation, being a creature of law, "owes its life to the state,...

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CORPORATION LAW INTRODUCTION Definition and attributes of a 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. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes: (1) (2) (3) (4)

It is an artificial being; Created by operation of law; With right of succession; Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS Stock v. Non-Stock Corporations Stock Definition

Purpose

Non-Stock

Corporations which have capital stock divided into shares and are authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (§3)

All other private corporations (§3)

Primarily to make profits for its shareholders

May be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination

One where no part of its income is distributable as dividends to its members, trustees or officers. (§87)

thereof. (§88)

Distribution of Profits

Profit is distributed to shareholders

Whatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members.

Composition

Stockholders

Members

Scope of right to vote

Each stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6)

Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)

Voting by proxy

May be denied by the AOI or the bylaws. (Sec. 89)

Cannot be denied. (Sec. 58)

Voting by mail

May be authorized by the by-laws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89)

Not possible.

Who exercises Corporate Powers §23

Board of Directors or Trustees

Members of the corporation

Governing Board

Board of Directors or Trustees, consisting of 5-15 directors / trustees.

Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec, 92)

Directors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23).

Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92)

Election of officers

Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97)

Officers may directly elected by the members UNLESS the AOI or bylaws provide otherwise. (Sec. 92)

Place of meetings

Any place within the Philippines, if

Generally, the meetings must be

Term of trustees

directors

or

Transferability of interest or membership

provided for by the by-laws (Sec. 93)

held at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located. (Sec. 51)

Transferable.

Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90)

Distribution of assets in case of dissolution

See Sec. 94.

CIR VS. CLUB FILIPINO (5 SCRA 321; 1962) FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its gold course. The club is operated mainly with funds derived from membership fees and dues. The BIR seeks to tax the said restaurant as a business. HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stockholders and members. There was in fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course. For a stock corporation to exist, 2 requisites must be complied with: (1) a capital stock divided into shares (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.

FORMATION AND ORGANIZATION OF CORPORATION Requirements in the formation of a corporation Who may form a corporation (See SEC. 10) INCORPORATORS Definition

REQUIREMENTS stockholders or members mentioned

COMMENTS 

compare with Corporators which

include all stockholders or members, whether incorporators or joining the corporation after its incorporation.

in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof Characteristic



natural persons



Number



not less than 5; not more than 15



may be more than 15 for nonstock corp. except educational corp.



does not prevent the “one-man (person) corporation” wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal



residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Age



of legal age

Residence



majority should be residents of the Philippines

excludes corporations and partnerships

Steps in the formation of a corporation Mutual Agreement to perform certain acts required for organizing a corporation

12345-

Organize and establish a corporation Comply with requirements of corporation code Contribute capital/resources Mode of use of capital/resource and control/management of capital/resource distribution/disposition of capital/resource (embodied in constitutive documents)

STEPS a. Promotional Stage (See SEC. 2. Definitions)

COMMENTS Promoter 

brings together persons who become interested in the enterprise

 

b. Drafting articles of incorporation

aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same.

(see chart below)

(See SEC. 14)

c. Filing of articles; payment of fees.

   

d. Examination of articles; approval or rejection by SEC.

AOI & the treasurer’s affidavit duly signed & acknowledged must be filed w/ the SEC & the corresponding fees paid failure to file the AOI will prevent due incorporation of the proposed corporation & will not give rise to its juridical personality. It will not even be a de facto corp. Under present SEC rules, the AOI once filed , will be published in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).

Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law. b) If not, the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions. Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules & regulations; c) Treasurer’s Affidavit is false; d) required percentage of ownership has not been complied with (Sec. 17) e) corp.’s establishment, organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC, after consultation w/ BOI, NEDA or any appropriate government agency -PD 902-A as amended by PD 1758, Sec. 6 (k)) 

Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in

accordance w/ the ROC.

e. Issuance of certificate of incorporation.

Certificate of Incorporation will be issued if: a) SEC is satisfied that all legal requirements have been complied with; and b) there are no reasons for rejecting or disapproving the AOI. It is only upon such issuance that the corporation acquires juridical personality. (See Sec. 19. Commencement of corporate existence)





Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice & hearing.

b. Drafting articles of incorporation (See SEC. 14) CONTENTS OF AOI

Corporate Name

COMMENTS



Essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts



A corporate name shall be disallowed by the SEC if the proposed name is either: (1)

identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or

(2)

patently deceptive, confusing or contrary to existing laws. (Sec. 18)

LYCEUM OF THE PHILS. VS. CA (219 SCRA 610) The policy underlying the prohibition against the registration of a corporate name which is “identical or deceptively or confusingly similar” to that of any existing corporation or which is “patently deceptive or patently confusing” or “contrary to existing laws is: 1.

the avoidance of fraud upon the public which would have occasion to deal with the entity concerned; 2. the prevention of evasion of legal obligations and duties, and 3. the reduction of difficulties of administration and

supervision over corporations.

Purpose Clause



A corporation can only have one (1) primary purpose. However, it can have several secondary purposes.



A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary to accomplish its purposes & those which may be incident to its existence.



Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy

Principal Office

   

must be within the Philippines specify city or province street/number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered

Term of Existence

 

cannot specify term which is longer than 50 years at a time may be renewed for another 50 years, but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension.

Incorporators and Directors

 

names, nationalities & residences of the incorporators; names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected; treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them.



Capital Stock

   

   Other matters



amount of its authorized capital stock in lawful money of the Philippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated for a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each 25% of 25% rule to be certified by Treasurer paid up capital should not be less than P5,000 Classes of shares into w/c the shares of stock have been divided; preferences of & restrictions on any such class; and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles.



If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce the Filipino ownership of its stock to less than the required minimum.

Any corporation may be incorporated as a close corporation, except: a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities; f) educational institutions; & g) corporations declared to be vested w/ public interest

De Facto Corporations: Requisites User of Corporate Powers What is a ‘de facto’ corporation? A ‘de facto’ corporation is a defectively organized corporation, which has all the powers and liabilities of a ‘de jure’ corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present: (1) That there is an apparently valid statute under which the corporation with its purposes may be formed; (2) That there has been colorable compliance with the legal requirements in good faith; and, (3) That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation.

Can a corporation transact business as a ‘de facto’ corporation while application is still pending with SEC? No. In the case of Hall v. Piccio ( 86 Phil. 603; 1950), where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no ‘de facto’ corporation on the ground that the corporation cannot claim to be in ‘good faith’ to be a corporation when it has not yet obtained its certificate of incorporation.

Formation under apparently valid statute.

MUNICIPALITY OF MALABANG V. BENITO (29 SCRA 533; 1969) WON a corporation organized under a statute subsequently declared void acquires status as ‘de facto’ corporation. No. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a ‘de facto’ corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot conceivably make it a ‘de facto’ corporation since there is no other valid statute to give color of authority to its creation.

Colorable compliance with the legal requirements in good faith. BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep. 85) The constitutive documents of the proposed corporation were deposited with the Register of Deeds but not on file in said office. One of the requirements for valid incorporation is the filing of constitutive documents in the Register of Deeds. Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a ‘de facto’ corporation? No. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the right to act as a corporate body. As long as an act, required as a condition precedent, remains undone, no immunity from individual liability is secured.

HARRIL V. DAVIS (168 F. 187; 1909) The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk of court in the judicial district where the business was located. Arkansas law requires filing in both offices. Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a ‘de facto’ corporation? No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no

incorporation or color of it under the law until the articles were filed (requisites for valid incorporation). HALL v. PICCIO (29 SCRA 533; 1969) In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no ‘de facto’ corporation on the ground that the corporation cannot claim to be in ‘good faith’ to be a corporation when it has not yet obtained its certificate of incorporation. NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry must be through a quo warranto proceeding made by the Solicitor General. (Sec. 20)

CORPORATION BY ESTOPPEL (Sec. 21) Distinguish a de facto corporation from a corporation by estoppel. The ‘de facto’ doctrine differs from the estoppel doctrine in that where all the requisites of a ‘de facto’ corporation are present, then the defectively organized corporation will have the status of a ‘de jure’ corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.

(De facto – has status o...