CORPORATION LAW
MODULE 3
INTRODUCTION
LEARNING OUTCOMES
At the end of this module, you are expected to:
A. Discuss the concept and attributes of corporation;
B. Elaborate the different classifications of corporation;
C. Enumerate and explain the powers of a corporation;
D. Determine the contents of the articles of incorporation; and
E. Identify the concept and main functions of Board of directors or trustees.
CORPORATION LAW
Concept of 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 in-
cidental to its existence.
Attributes of a Corporation:
1. IT IS AN ARTIFICIAL BEING.
There are 2 kinds of persons under the law: natural persons and artificial persons.
A corporation falls under the second kind. It has a personality separate and distinct from
the stockholders or members and which commences upon the issuance of its certificate
of incorporation.
Example:
The debtor of the corporation are not the debts of its stockholders, nor are
the debts of the stockholders the debts of the corporation.
Doctrine of piercing the veil of corporate entity or corporate fiction
This is the doctrine to the effect that the separate personality of a
corporation may be disregarded it such entity is used to defeat public
convenience, justify a wrong, protect fraud, or defend crime, such as
when it used to evade the faithful compliance of obligations under a
contract or for the benefit of a single person who controls the
corporation, or to evade taxes.
Example:
ABS CVN Corporation (ABS CVN), owned by Mr. Lowpez, owed its
workers. Then, it ceased operations. The following day, ABS CVN was suc-
ceeded by, and its assets were turned over to, GMA Corporation (GMA),
90% of the subscribed shares of which were also owned by the Mr. Lowpez.
The workers of ABS CVN sue GMA for payment of their claims. GMA raises
the defense that it has a personality separate and distinct from ABS CVN.
Decide.
CORPORATION LAW
Answer:
GMA Corporation is liable to the workers. Under the doctrine of
Piercing the veil of corporate entity, the separate and distinct personality of
a corporation will be disregarded if it used to commit fraud. It is clear from
the facts that GMA took over the operations and assets of ABS CVN work-
ers, both corporations being, in legal effect, owned by the same person, Mr.
Lowpez.
2. IT IS CREATED BY OPERATION OF LAW.
A corporation does come into existence by the mere agreement of the parties.
Persons desiring to form a private corporation must comply with the requirements of the
law governing its creation.
3. IT HAS THE RIGHT OF SUCCESSION.
A corporation, as a rule, continues to exist for the period which it has been
formed regardless of the changes in the ownership of its stocks or in membership. Its
existence is not affected by the death, insolvency, or incapacity of the individual stock-
holders or members.
4. IT HAS POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW
OR INCIDENT TO ITS EXISTENCE.
Doctrine of limited capacity
A corporation can exercise only the powers expressly conferred upon it by
law and its articles of incorporation, those implied from such powers expressly
granted, and those that are incident to its existence.
CORPORATION LAW
Classification of Corporations
1. As to whether shares of stock are issued or not
A. Stock corporations - are those 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.
B. Nonstock corporation - is one where no part of its income is distributable as
dividends to its members, trustees, or officers:
2. As to the state or country under whose laws it was created.
A. Domestic corporation - one incorporated under Philippine laws.
B. Foreign corporation - is one formed, organized or existing under laws other than
those of the Philippines’ and whose laws allow Filipino citizens and corporations
to do business in its own country or State.
3. As to whether its purpose is public or private.
A. Public corporation - one that is organized for the government of a portion of the
State, like provinces, cities, municipalities and barangays.
B. Private corporation - one that is formed for a private purpose or end, like Jollibee
Foods Corporation. This classification includes the following:
i. Government-owned and controlled corporations - these refer to corporations
created under the special law other than those for the government of a portion of
the State, such as Landbank, GSIS. They may be performing governmental or
proprietary functions.
ii. Quasi-public corporations - those organized for profit which are granted to a
franchise by the state to perform public service, such as Meralco.
4. As to their legal right to corporate existence.
A. De jure corporation - one that has been created in strict compliance with all the
legal requirements and whose right to exist as a corporation cannot be
successfully attacked in a direct proceeding for that purpose by the State.
B. De facto corporation - one that is defectively created but there is an exercise of
corporate rights and franchise resulting from an attempt in good faith to
incorporate on the part of its members.
CORPORATION LAW
5. As to their relation to another corporation or other corporations.
A. Parent or holding corporation - One which owns the shares of another
corporation and having the power, directly or indirectly, over the latter including
the election of the directors thereof.
B. Subsidiary corporation - one whose shares of the stock are owned by another
corporation, called the parent corporation, which has the power to elect its
directors.
6. As to whether its shares may be held by the public or not.
A. Close corporation - one whose shares are limited to a few and restricted as to
their transfer, and both listed in any stock exchange.
B. Open corporation - one whose shares are open to the public such as those whose
shares are listed in any stock exchanges.
Components of a corporation
1. Corporators - those who compose the corporation whether as stockholders or members.
2. Incorporators - those stockholders or members mentioned in the articles of incorpora-
tion as originally forming and composing the corporation and who are signatories of
such document.
3. Stockholders - the corporators of a stock corporation.
4. Members - the corporators of a non-stock corporation.
Concept of capital stock and other terms
1. Capital Stock - the amount specified in the parties of incorporation paid in, or procured to
be paid in for carrying on of the business of the corporation.
A. Authorized capital stock - this is the total amount of shares which a corporation is
allowed to issue if the shares have a par value. If the shares do not have par value,
the corporation does not have an authorized capital stock but it has an authorized
number of shares which it may issue.
CORPORATION LAW
2. Legal capital - it refers to the total par value of all issued par value shares, or the total
cash or consideration received for all issued no par value shares.
3. Stated capital - this refers to the capital with which a corporation whose shares are
without par value commences its business and increased or diminished by
subsequent capital transactions.
4. Capital - it refers to actual property of the corporation in money and property.
Illustration:
The articles if incorporation of Paramount Corporation provide for an authorized
capital stock of P1,000,000.00 divided into 10,000 shares each having a par value of
P100.00. at the time of incorporation, 25% of the authorized capital stock was subscribed
of which 25% was paid. In its first year of operations, the corporation obtained a loan of
P300,000.00 which it used to buy equipment of the same amount. During the same
period, the corporation posted a net profit of P100,000.00.
Authorized capital stock P 1,000,000.00
Subscribed capital stock (P1,000,000.00 x 25%) P 250,000.00
Outstanding capital stock P 250,000.00
Unissued capital stock
(P 1,000,000.00 - P 250,000.00) P 750,000.00
Paid-up capital stock (P 250,000.00 x 25%) P 62,500.00
Capital (P 250,000.00 + P 300,000.00 + P 100,000.00) P 650,000.00
Legal Capital P 250,000.00
CORPORATION LAW
Classes of Shares of Stock
1. Common stock - the ordinary stock of a corporation which entitles the holder to a pro rata
division of the dividends, without any preference or advantage over any other stock-
holders.
2. Preferred stock - one which entitles the holder to certain preferences over the share-
holders. Such preferences may be as follows:
A. preferred stock as to asset - one which entitles the holder to preference in the
distribution of assets over common stock upon the liquidation of the corporation.
B. Preferred as to dividends - one that entitles the holder to preference in the
distribution of dividends over common stock.
3. Par value stock - one the nominal value of which appears on the stock certificate.
4. No par value stock - one without any nominal or par value appearing on the stock
certificate.
5. Redeemable shares - those which grant the issuing corporation the power to redeem or
purchase them after a certain period.
6. Founder’s share - those that grant to the founders certain rights and privileges not
enjoyed by the other shares.
7. Treasury shares - Those which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through
some other lawful means.
8. Watered stock - those issued without consideration or with no adequate consideration.
9. Voting shares - those entitled to vote in the meetings of the corporation.
10. Non-voting shares - those without voting rights, except in certain cases.
CORPORATION LAW
Articles of Incorporation
The basic governing document of a corporation is the articles of incorporation.
The articles are, in effect, the application of the incorporators with the government
through the Securities and Exchange Commission to give them the privilege to exist as a
corporation. As part of the charter of a corporation, they partake take of the nature of a
contract among the stockholders themselves, between the corporation and the stock-
holders, between corporation and the State, and between the stockholders and the
State.
Contents of the articles of incorporations
1. The name of the corporation.
2. The specific purpose or purposes for which the corporation is being formed. Where a
corporation has more than one stated purpose, the articles of incorporation shall
indicate the primary purpose and the secondary purpose or purposes: Provided, That a
non-stock corporation may not include a purpose which would change or contradict its
nature as such.
3. The place where the principal office of the corporation is to be located, which must be
within the Philippines.
4. The term for which the corporation is to exist, if the corporation has not elected
perpetual existence.
5. The names, nationalities, and residence addresses of the incorporators; The number of
directors, which shall not be more than fifteen (15) or the number of trustees which may
be more than fifteen (15).
6. The names, nationalities, and residence addresses of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and qualified in
accordance with this Code.
7. If it be a stock corporation, the amount of its authorized capital stock, number of shares
into which it is divided, the par value of each, names, nationalities, and residence
addresses of the original subscribers, amount subscribed and paid by each on the
subscription, and a statement that some or all of the shares are without par value, if
applicable;
CORPORATION LAW
8. If it be a nonstock corporation, the amount of its capital, the names, nationalities, and
residence addresses of the contributors, and amount contributed by each.
9. Such other matters consistent with law and which the incorporators may deem necessary
and convenient.
(Sample)
Articles of Incorporation of
________________________________________
(Name of Corporation)
The undersigned incorporators, all of legal age, have voluntarily agreed to form a (stock)
(nonstock) corporation under the laws of the Republic of the Philippines and certify the
following:
First: That the name of said corporation shall be “_________________________, Inc., Corpora-
tion or OPC”;
Second: That the purpose or purposes for which such corporation is incorporated are: (If
there is more than one purpose, indicate primary and secondary purposes);
Third: That the principal office of the corporation is located in the City/Municipality of
_________________________, Province of _______________________, Philippines;
Fourth: That the corporation shall have perpetual existence or a term of ______________
years from the date of issuance of the certificate of incorporation;
Fifth: That the names, nationalities, and residence addresses of the incorporators of the
corporation are as follows:
Name Nationality Residence
________________________________ ____________________________ ___________________________________
________________________________ ____________________________ ___________________________________
________________________________ ____________________________ ___________________________________
________________________________ ____________________________ ___________________________________
CORPORATION LAW
Sixth: That the number of directors or trustees of the corporation shall be
____________________________; and the names, nationalities, and residence addresses of the first
directors or trustees of the corporation are as follows:
Name Nationality Residence
________________________________ ____________________________ ___________________________________
________________________________ ____________________________ ___________________________________
________________________________ ____________________________ ___________________________________
________________________________ ____________________________ ___________________________________
Seventh: That the authorized capital stock of the corporation is _________________________
PESOS (P___________________), divided into _____ shares with the par value of ____________________
PESOS (P_______________) per share. (In case all the shares are without par value): That the capital
stock of the corporation is __________________________ shares without par value. (In case some
shares have par value and some are without par value): That the capital stock of said corpora-
tion consists of __________________________ shares, of which _______________________ shares have a
par value of _________________________________ PESOS (P____________) each, and of which
_______________________ shares are without par value. Eighth: That the number of shares of the
authorized capital stock above-stated has been subscribed as follows:
Name of Subscriber Nationality No. of Shares Amount Amount Paid
Subscribed Subscribed
CORPORATION LAW
(Modify No. 8 if shares are with no-par value. In case the corporation is nonstock, Nos. 7 and 8
of the above articles may be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified persons, stating the names,
nationalities, and residence addresses of the contributors or donors and the respective amount
given by each.)
Ninth: That _______________________________ has been elected by the subscribers as Treasur-
er of the Corporation to act as such until after the successor is duly elected and qualified in ac-
cordance with the bylaws, that as Treasurer, authority has been given to receive in the name
and for the benefit of the corporation, all subscriptions, contributions or donations paid or giv-
en by the subscribers or members, who certifies the information set forth in the seventh and
eighth clauses above, and that the paid-up portion of the subscription in cash and/or property
for the benefit and credit of the corporation has been duly received.
Tenth: That the incorporators undertake to change the name of the corporation immedi-
ately upon receipt of notice from the Commission that another corporation, partnership or per-
son has acquired a prior right to the use of such name, that the name has been declared not
distinguishable from a name already registered or reserved for the use of another corporation,
or that it is contrary to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or activity reserved for Filipino
citizens shall provide the following): “No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required percentage of capital stock as provided
by existing laws shall be allowed or permitted to be recorded in the proper books of the corpo-
ration, and this restriction shall be indicated in all stock certificates issued by the corporation.”
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this
_______ day of _____________, 20_____ in the City/Municipality of ______________________, Province of
_______________________, Republic of the Philippines. (
_______________________________________ _______________________________________
_______________________________________ _______________________________________
_______________________________________ _______________________________________
(Names and signatures of the incorporators)
_______________________________________
(Name and signature of Treasurer)
CORPORATION LAW
Concept of Board of Directors, Trustees and Officers
The board of directors or trustees is the governing body of a corporation. Since a corpo-
ration is an artificial person, it can only act through individuals. However, these individuals can-
not bind the corporation separately as directors or trustees. They must act as a body.
Qualification and Term of the Board of Directors or Trustees
As a general rule, the board of directors or trustees shall exercise the corporate powers,
conduct all the business, and control all properties of the corporation.
Directors shall be elected for a term of one (1) year from among the holders of stocks
registered in the corporation’s books, while trustees shall be elected for a term not exceeding
three (3) years from among the members of the corporation. Each director and trustee shall
hold office until the successor is elected and qualified. A director who ceases to own at least
one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to
be such.
Example:
X is director in T. Corp. who was elected to a 1 year term on February 1, 2020. On
April 11, 2020, X resigned and was replaced by R, who assumed as director on
May 17, 2020. On November 21, 2020, R died. S was then elected in his place.
S should serve only as director until February 1, 2021.
Election of Director or Trustees
One of the most important rights of a qualified shareholder or member is the right to
vote for the directors or trustees who are to manage the corporate affairs. The right to choose
the persons who will direct, manage and operate the corporation is significant, because it is the
main way in which a stockholder can have a voice in the management of corporate affairs, or in
which a member in a nonstock corporation can have a say on how the purposes and goals of
the corporation may be achieved. Once the directors or trustees are elected, the stockholders
or members relinquish corporate powers to the board in accordance with law.
During election of directors or trustees, the owners of majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members entitled to vote must be
present, in person or thru a representative authorized per written proxy.
CORPORATION LAW
Corporate Officers
The officers shall manage the corporation and perform such duties as may be provided
in the bylaws and/or as resolved by the board of directors. The minimum officers provided for
under Section 24 and their qualifications are:
A. a president, who must be a director;
B. a treasurer, who must be a resident;
C. a secretary, who must be a citizen and resident of the Philippines; and
D. such other officers as may be provided in the bylaws
E. a compliance officer, if the corporation is vested with public interest.
The same person may hold two (2) or more positions concurrently, except that no one
shall act as president and secretary or president and treasurer at the same time, unless
otherwise allowed by law.
A position must be expressly mentioned in the by-laws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under a by-law enabling provi-
sion is not enough to make a position a corporate office. The only officers if a corporation were
those given that character either by the Corporation Code or by the by-laws so much so that
the rest of the corporate officers could be considered only as employees or subordinate
officials.
CORPORATION LAW
Activity 1
1. Give at least 3 similarities between a corporation and a partnership.
A.___________________________________________________________________________________________
___________________________________________________________________________________________
B.___________________________________________________________________________________________
___________________________________________________________________________________________
C.___________________________________________________________________________________________
___________________________________________________________________________________________
2. Distinguish a corporation from a partnership
A. as to the manner of creation
_____________________________________________________________________________________________
_____________________________________________________________________________________________
B. as to the number of organizers
_____________________________________________________________________________________________
_____________________________________________________________________________________________
C. as to the right of succession
_____________________________________________________________________________________________
_____________________________________________________________________________________________
D. as to powers
_____________________________________________________________________________________________
_____________________________________________________________________________________________
E. as to management
_____________________________________________________________________________________________
_____________________________________________________________________________________________
F. as to commencement of existence
_____________________________________________________________________________________________
_____________________________________________________________________________________________
G. Term of existence
_____________________________________________________________________________________________
_____________________________________________________________________________________________
CORPORATION LAW
Activity 2
Make your own Articles of Incorporation on a separate sheet of paper.
Activity 3
True or False. Write the word “True” if the statements is true, and the word “False” if the
statement is false.
________1. a corporation commences to exist upon the execution of the articles of incorporation
by the incorporators.
________2. a corporation may exist for a period exceeding 50 years.
________3. all subscribed shares are issued shares whether or not fully or partially paid as long as
there is binding subscription agreement.
________4. non-voting shares are not allowed to vote in all corporate acts.
________5. a corporation may be formed for more than one purpose.
________6. as a rule, majority of the incorporators of a corporations of a corporation formed
under Philippine laws must be a citizen of the Philippines.
________7. a corporation may be a stockholder of another corporation.
________8. a director is required to be an owner of at least one share of stock of a corporation.
However, he continues to be a director although he has disposed all his shares provided the
term for which was elected has not yet expired.
________9. A share of stock in an intangible property.
________10. a corporation is an example of a natural person.
CORPORATION LAW
Activity 4
Essay
1. Food Pende Corporation operates a call center that received orders for pizzas on behalf of
Graywich Corporation which operates a chain of pizza restaurants. The two companies have the
same set of corporate officers. After 2 years of, Food Pende corporation dismissed all its call
agents for no apparent reason. The agents filed a collective suit for illegal dismissal against
Food Pende Corporation and Graywich Corporation based on the doctrine of piercing the veil
of corporate fiction. The latter set up the defense that the agents are in the employ of Food
Pende Corporation which is a separate juridical entity. Is this defense appropriate? Explain your
answer.
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
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