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Regulatory Framework for Business TransactionsRevised Corporation Code of the Philippines also known as R. No. 11232I. Attributes of CorporationDefinition of Corporation – It is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties ...

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Regulatory Framework for Business Transactions Revised Corporation Code of the Philippines also known as R.A. No. 11232 I.

Attributes of Corporation Definition of 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. a.

It is an artificial being. i. Implications of corporation for being artificial being 1.

The corporation cannot be held criminally liable particularly the penalty of imprisonment but it may be held liable for fines for corporate crimes. The corporate officers who approve the particular corporate crime will be the ones to be held criminally liable.

2.

As a general rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock except when a corporation has a reputation that is debased, resulting in its humiliation in the business realm such in the case of civil action for damages on the ground of libel or defamation.

3.

The corporation is not entitled to constitutional right against self-incrimination.

ii. Doctrine of separate personality means that a corporation has a personality separate and distinct from the stockholders and affiliated companies. iii.

Limited liability rule means that the stockholders are liable only up to the extent of their capital contribution when it comes to corporation’s liabilities.

iv.

Trust fund doctrine means that assets of the corporations are considered trust fund reserved for payment of liabilities to creditors of the corporation.

v. Doctrine of Piercing the veil of corporate fiction as an exception to doctrine of separate personality

b.

a.

Fraud cases – When corporate fiction is used to commit fraud.

b.

Alter ego cases – When the corporation is a mere instrumentality or alter ego of the stockholders or owners.

c.

Defeat public convenience cases – When the corporate fiction is used to commit tax evasion or to justify a wrong or to defend a crime.

d.

Equity cases – In case of labor cases in order to promote social justice.

It is created: (1) by operation of law in case of private corporation or (2) by enactment of special law in case of public corporation. i. The 1987 Constitution provides that only public corporations may be created by special law while all private corporations must be created by operation of general corporation law which is the Corporation Code of the Philippines a.ka. BP Blg. 68 through filing articles of incorporation to SEC and waiting for the latter's issuance of certificate of registration. ii. Concession theory means that a corporation owes its existence to the law and the state and the extent of its existence, powers and liberties is fixed by its charter. Thus, it only possesses properties, attributes, rights and powers provided by law or incident to its existence.

c.

It enjoys the right of succession because it continues to exist despite the death of the founders since the heirs or assignees of the stockholders will inherit the shares of their predecessors. i. Right of succession best describes the strong juridical personality of the corporation. ii. Corporate Tem - A corporation shall have perpetual existence unless its articles of incorporation provides otherwise. Corporations with certificates of incorporation issued prior to the effectivity of this Code and which continue to exist shall have perpetual existence, unless the corporation, upon a vote of its stockholders representing a majority of its articles of incorporation: Provided, That any change in the corporate right of dissenting stockholders in accordance with the provisions of this Code. A corporation whose term has expired may apply for revival of its corporate existence, together with all the rights and

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privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval by the Commission, the corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides otherwise. No application for revival of certificate of incorporation of banks, banking and quasi-banking institutions, preneed, insurance and trust companies, non-stock savings and loan associations (NSSLAs), pawnshops, corporations engaged in money service business, and other financial intermediaries shall be approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency.

iii. Period for renewal of corporate term of private corporation 1. A corporate term for a specific period may be extended or shortened by amending the articles of incorporation: Provided, That no extension may be made earlier than three (3) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Commission: Provided, further, That such extension of the corporate term shall take effect only on the day following the original or subsequent expiry date(s). iv. Effect of failure to renew the corporate term within the deadline for renewal 1. Previously, the corporation is ipso facto or automatically dissolved by operation of law without need for a court order or SEC decision. However, under the Revised Corporation Code, a corporation whose term has expired may apply for revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. d.

It has the powers, attributes, properties expressly authorized by law or incident to its existence. i. Types of powers of corporation 1.

Express powers refer to the powers expressly provided, enumerated and granted by the Corporation Code or special law to a corporation a. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds. b. For stock corporations, to issue and sell stocks to subscribers and treasury stock, for nonstock corporation, to admit members c. To enter into merger or consolidation d. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees e. To sue and be sued f. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes g. Right of succession h. To adopt and use of corporate seal i. To amend its articles of incorporation j. To adopt its by-laws k. In case of domestic corporation to give donations in aid of any political party or candidate or for purposes of partisan political activity. However, no foreign corporation shall give donations in aid of any political party or candidate or for purposes of partisan political activity.

2.

Implied or necessary powers are those inferred from or reasonably necessary for the exercise of the provided powers of the Corporation. They flow from the nature of the underlying business enterprise. a. To issue checks or promissory note or bill of exchange or mercantile documents b. To establish a local post office in case of a mining company c. To operate power plant in case of a cement factory company d. To sell, supply or manage advertising materials in case of an advertising company

3.

Incidental or inherent powers are powers that attached to a corporation at the moment of its creation without regard to its expressed powers or particular primary purpose and may be said to necessarily arise from its being a juridical person engaged in business. They flow from the nature of the corporation as a juridical person. a. Right of succession b. Right to have corporate name c. Right to make by-laws for its governance d. Right to sue and be sued e. Right to acquire and hold properties for the purposes authorized by the charter

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ii. Ultra Vires Acts or Contracts are acts committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the express, implied and incidentals powers of the corporation. iii.

Status of Ultra Vires Acts by the Corporation 1. 2. 3.

Ultra vires acts which are illegal per se – Null and void Ultra vires acts for failure to comply with voting formality required by law – Null and void but the declaration of nullity may be barred by estoppel Ultra vires acts for being outside the primary and secondary purposes of the corporation – Voidable on the part of the other party

iv. Status of ultra vires acts or contracts by the corporate officers in behalf of the Corporation 1. 2.

II.

Ultra vires acts which are illegal per se – Null and void Ultra vires acts which are unauthorized or when the corporate officers exceed their authority – Unenforceable but they may become enforceable on the basis of (1) express or implied ratification by the corporation (2) doctrine of estoppel or (3) doctrine of apparent authority of the corporate officers

e.

Advantages of forming a corporation i. Continuity of existence ii. Limited liability on the part of investors iii. Strong juridical personality iv. Legal capacity to act as a distinct unit v. Centralized management vi. Ease in transferability of shares of stocks in case of stock corporation vii. Ease in raising funds

f.

Disadvantages of forming a corporation i. High cost of formation ii. Little voice of stockholders in management iii. Weakened credit rating because of limited liability feature iv. Being subject to greater degree of governmental regulation v. More taxes

Types of Corporation a.

As to formation and nature i. Public corporation is a corporation created by special law for public purpose. 1.

Municipal corporation is a public corporation created by special law for the governance of a particular local territory.

2.

Government owned and controlled corporation is a public corporation created by special law for public purpose but performing proprietary or commercial functions.

ii. Private corporation is a corporation created by operation of law for private interest.

iii.

b.

1.

Civil corporation is a private corporation for profit or business.

2.

Quasi-public corporation a.k.a. public utility is a private corporation owned by private individuals but performing an essential governmental function.

Corporation by prescription is a corporation created by lapse of time. It is the only corporation that obtains juridical personality even without franchise granted by state or even without filing articles of incorporation to SEC.

As to purpose i. Civil corporation is a corporation created for profit. ii. Lay corporation is a corporation created for a purpose other than religion. iii.

Eleemosynary corporation is a corporation created for charity.

iv.

Ecclesiastical or religious corporation is a corporation created for religious purposes.

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1. 2.

c.

Corporation sole is a religious corporation with a single corporator. Corporation aggregate or religious society is a religious corporation governed by Board of Trustees.

As to being subject to direct attack by the state i. De jure corporation is a corporation both in fact and in law. Its juridical personality is not subject to the direct attack by the state. ii. De facto corporation is a corporation in fact but not in law. Its juridical personality is subject to direct attack by the state through a special civil action of quo warranto proceedings. iii.

d.

Ostensible corporation or corporation by estoppel is not actually a corporation since it does not have a charter. However, the persons pretending to be corporation will be liable as general partners for the contracts they have entered into. 1. When such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as defense its lack of corporate personality. 2. When persons entered into a contract or obligation with ostensible corporation as such, such persons cannot resist performance of the obligation on the ground that there was in fact no corporation.

As to nationality - Doctrine of Incorporation means that the nationality of the corporation is determined by the place of its incorporation or the law that created such corporation. i. Domestic corporation is a corporation created by Philippine Law particularly BP 68. Domestic corporation is no longer required to obtain license from SEC to engage business in the Philippines. It may sue and be sued in Philippine courts. ii. Foreign corporation is a corporation created by law of other countries. Foreign corporation is required to obtain license from SEC before it may engage in business in the Philippines. It must appoint a resident agent in the Philippines before it may be given by license by SEC to engage in business in the Philippines. 1. Right to sue of foreign corporation not doing business in the Philippines before Philippine Courts a. It may sue and be sued in Philippine courts for isolated transactions it entered into within Philippine territory. b. It may sue in Philippine courts for violation of its intellectual property rights. 2. Right to sue or personality to be sued of a foreign corporation doing business in the Philippines with license a. It may sue and be sued in Philippine courts. 3. Effects if a foreign corporation doing business in the Philippines without licenses a. It may be sued on Philippine courts. b. Generally, it may not sue before Philippine courts except in case of estoppel. However, it must obtain the necessary license and submit proof of its compliance with the requirement of law for the suit to prosper.

e.

As to control or ownership i. Holding or parent corporation is a corporation that controls another corporation. ii. Subsidiary corporation is a corporation being controlled by another corporation.

f.

iii.

Affiliate is a corporation which is a member of a group of companies.

iv.

Associate is a corporation being significantly influenced by an investor.

As to presence of stocks and distribution of dividends i. Stock corporation is a corporation whose capital stock is divided into shares of stocks and is authorized to declare dividends to its stockholders. ii. Nonstock corporation is a corporation which has no shares of stocks and is not authorized to declare dividends. 1.

Mode of conversion of nonstock corporation to stock corporation a. By dissolving the nonstock corporation and forming a new stock corporation.

2.

Modes of conversion of stock corporation to nonstock corporation a. By mere amendment of articles of incorporation; or b. By dissolving the stock corporation and forming a new nonstock corporation.

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iii. Transferability of membership in a nonstock corporation 1. Membership in a non-stock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide. iv. Revocation of membership in a nonstock corporation 1. Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. III.

Types of shares in a corporation a.

As to rights i. Common stocks or ordinary shares are those shares of stocks with complete voting rights. They must be present in every corporation. They may be issued as par value or no-par value shares. ii. Preferred stocks or preference shares are those shares of stocks with special privilege in dividend distribution or liquidation. They must be issued with stated par value. 1. Cumulative Preferred Stocks entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not during the past year’s dividends were declared or paid. 2. Noncumulative Preferred Stocks grant the holders of such shares only to the payment of current dividends but not back dividends when and if dividends are paid to the extent agreed upon before any other stockholders are paid the same. 3. Participating Preferred Stocks entitle the shareholders to participate with the common shares in excess distribution at some predetermined or at a fixed ratio as may be determined. 4. Nonparticipating Preferred Stocks entitle the shareholder thereof to receive the stipulated preferred dividends and no more. iii.

Redeemable preference shares are those shares of stocks which may be redeemed by the issuing corporation at the period stated despite the absence of unrestricted retained earnings.

iv.

Convertible preference shares are those that are changeable by the stockholder from one class to another at a certain price and within a certain period. v. Treasury shares are those shares issued but subsequently reacquired by the corporation. They have no voting rights whatsoever and may be issued even below par value so long as the price is reasonable. They may be acquired only if there is unrestricted retained earnings in order not to violate the concept of Trust Fund Doctrine.

b.

As to voting i. Voting shares are those which have complete voting rights which are the common stocks. ii. Nonvoting shares are those classified as such in the Articles of Incorporation and shall have limited voting rights. 1. Corporate acts when nonvoting preferred shares may still vote (I3 AM SAD) a. b. c. d. e. f. g. h. 2.

Corporate acts when nonvoting preferred shares are not allowed to vote (GRRADE) a. b. c. d. e. f.

c.

Incurring, creating or increasing bonded indebtedness Investments of corporate funds in another corporation or another business purpose Increase or decrease of capital stock Amendment of Articles of Incorporation including changing the corporate term Merger or consolidation of corporations Sale or disposition or pledge or mortgage of all or substantially all of corporate property Adoption and amendment of by-laws Dissolution, rehabilitation or liquidation of the corporation

Granting of compensation of directors Removal of directors Ratification of disloyalty of directors or voidable contract involving self-dealing director or interlocking director Approval of management contract Distribution of stock dividends Election of directors

Presence of par value

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i. Par value shares are those shares with face value stated in the certificate of stock. 1.

Minimum par value – There is no minimum par value.

2.

Minimum issue price of par value – The minimum issue price of par value shares is the par value because shares as a general rule shall not be issued below par except treasury shares which may be issued below par as long as the price is reasonable.

3.

Legal capital in case of par value shares – The total par value of shares issued and subscribed.

ii. No par value shares are those shares without face value but mus...