39937570 15906340 Utopia Corporation Law Reviewer 2008

7/28/2019 39937570 15906340 Utopia Corporation Law Reviewer 2008

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FRATERNAL ORDEROF UTOPIA

ATENEO DE MANILA UNIVERSITY

SCHOOLOFLAW

ARIS S. MANGUERA

PHILIPPINE CORPORATE LAWCommercial Law Review

OUTLINE

(1) Nature of Corporations(2) Formation and Organization of Corporations(3) The Corporate Entity(4) Powers of Corporation(5) Stockholders(6) Board of Directors(7) Officers(8) Meetings

(9) Books and Records(10) Mergers and Consolidations(11) Non-Stock Corporations(12) Close Corporations(13) Educational Corporations(14) Religious Corporations(15) Dissolution(16) Foreign Corporations

1. NATUREOF CORPORATIONS

1.1Concept of the corporation

Sec. 2. Corporation defined.

A corporation is an artificial being created by operation of law, havingthe right of succession and the powers, attributes and propertiesexpressly authorized by law or incident to its existence.

1.2 Advantages and disadvantages of the CorporateForm

CLVADVANTAGES DISADVANTAGES

(1) Strong Personality(2) Centralized Management(3) Limited Liability to theinvestors(4) Free Transferability of Units

of Investments

(1) Abuse of CorporateManagement(2) Abuse of Limited liabilityfeature(3) High cost of maintenance

(4) Double Taxation(5) Lack of Personal Element

Sundiang (page 249)

ADVANTAGES DISADVANTAGES(1) The capacity to act as a legalunit;(2) Limitation of, or exemptionfrom, individual liability ofshareholders;(3) Continuity of Existence(4) Transferability of Shares;

(5) Centralized management ofBoD; and(6) Standardized method oforganization, and finance (Salonga,Phil. Law on Private Corps, 3rd ed.,page 9.)

(1) More complicated in formationand management;(2) Higher cost of formation andoperation;(3) Lack of personal element;(4) Greater governmental control andregulation;

(5) Management and control areseparate from ownership;Stockholders have little voice in theconduct of business

Advantages:

I sweat, I bleed, I soar

Service, Sacrifice, ExcellenceA-1


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1) Strong Legal Personality

- The corporation has a legal capacity to act and contract as adistinct unit in its own name; and it has continuity of existence.A corporations creation, organization, management and

dissolution are standardized as they are governed by a generalincorporation law.

- A corporation is an entity separate and distinct from itsstockholder. While not in fact and in reality a person, the lawtreats the corporation as though it were a person by process offiction or by regarding it as an artificial person distinct andseparate from its individual stockholders. (Remo vs. IAC)

- Stockholders vs. Register of DeedsThe transfer of corporate assets to the stockholder is not in thenature of a partition but is a conveyance from one party toanother.

2) Centralized Management

- A corporations management is centralized in the board ofdirectors. A corporation presents a more stable and efficientsystem of governance and dealings with third parties, sincemanagement prerogatives are centralized in its board ofdirectors.

- As can be gleaned from Sec 23 of Corporation Code, i t is theboard of directors or trustees which exercises almost all thecorporate powers in a corporation. (Firme vs. Bukal)

- The exercise of the corporate powers of the corporation rest inthe Board of Directors save in those instances where theCorporation Code requires stockholders approval for certainspecific acts. (Great Asain Sales Center vs. CA)

3) Limited Liability to Investors- The liability in a corporation is limited to theirshares.

- Provided by jurisprudence only- Simple division between naked title and beneficial title gives

rise to limited liability.- Peculiar only between the shareholders and a corporation- Underlying Principle: Principle of Relativity- CLVs formula: Strong Juridical Personality + Centralized

Management= Limited Liability

- CLV: There are ways to circumvent the law to make theshareholder liable for more than his actual share (ex. Thechairman makes himself joint debtor for a loan)

- When a person invest its property in the corporation, he

abdicates his jus of ownership- One of the advantages of the corporation is the limitation of an

investors liability to the amount of investment, which flowsfrom the legal theory that a corporate entity is separate anddistinct fro its stockholders. (San Juan vs. CA)

- It is hornbook law that corporate personality is a shield againstpersonal liability of its officers- a coporate officer and hisspouse cannot be personally liable under a trust receipt wherehe entered into and signed the contract clearly in his officialcapacity. (Consolidated Bank vs. CA)

- Obligations incurred by the corporation acting through itsdirectors, officers and employees, are its sole liabilities.(Malayang Samahan vs. Ramos)

CLV Class NotesQ: Is a corporation in our jurisdiction given the feature of limited liability?

A: No. The feature of limited liability is given to the stockholder and not tothe corporation.Q: Is limited liability a normal run of things?

A: No. It is only there because it comes with the separate juridicalpersonalityQ: If limited liability as shown in the corporation setting is good for theinvestors, does it mean that delectus personarum is a bad thing?

A: No. It is good in a way, since person are bound by the contracts theyenter into.

4) Free Transferability of Units of Investments

- As a general rule, the shares of stocks can be transferredwithout the consent of other stockholders. This places moreliquidity in the corporate setting and encourages investors tochannel their investments through corporate vehicles.

- Authority granted to corporations to regulate the transfer of itsstock does not empower the corporation to restrict the right ofa stockholder to transfer his shares, but merely authorizes theadoption of regulations as to the formalities and procedure tobe followed in effecting transfer (Thomson vs. CA)

5) Advantages as registered Entity-




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- Corporations enjoy perpetual succession under its corporatename and in an artificial form; it has the capacity to take andgrant property, and contract obligations; it can sue and be suedin its corporate name as a juridical person; it has the capacity

to receive and enjoy common grants of privileges andimmunities; and its stockholders or members generally have nopersonal liability beyond their shares.

Disadvantages of Corporate Form1) Abuse of Corporate Management- In a practical sense, investors have

very little voice over the conduct of business of the corporation.

2) Abuse of limited liability feature- Limited liability feature has tended toincrease transaction cost by the parties being forced to enter intocontractual schemes skirting the limited liability of the corporation when itis a party to a transaction. Limited liability hits innocent people.

3) High cost of maintenance- Complicated and Costly Formation andMaintenance. There is a greater degree of governmental control andsupervision.

4) Double Taxation- The profits if the corporation which are alreadysubjected to corporate income tax when declared and distributed asdividends to the stockholders are again subjected to the further incometax. Dividends received by individuals from domestic corporations aresubject to final 10% tax fro income earned on or after January 1, 1998(Section 24(B)(2), 1997 NIRC). Inter-corporate dividends betweendomestic corporations, however, are not subject to any income tax (Sec.27 (D)(4), 1997 NIRC). In addition, there is re-imposition of the 10%improperly accumulated earnings tax for holding companies (Sec 29,1997 NIRC)

5) Lack of Personal Element- This has spawned corporate irresponsibility.

1.3 Differentiated from partnerships and otherbusiness organizations

1) SOLE PROPRIETORSHIP- Here, it is the owner who controls thebusiness while in a corporation, it is the Board of Directors.

2) PARTNERSHIPS- The most important distinction between a partnershipand a corporation is their legal capacities. A corporation has a stronger legalcapacity. Enabling it to continue despite death, insolvency or withdrawal ofany of its stockholders or members. Limited Liability is a main feature in a

corporate setting, whereas partners are liable personally foe partnershipdebts. Generally, every partner is an agent of the partnership and by his soleact, he can bind the partnership whereas in a corporation, only the Board ofDirectors or its agents can bind the corporation.

Here are the features of a partnership:Delectus Personarum- Selection of Partners; No outsider can come in without the

consent of all partners- Prevents the development of any market for units of ownership

because of no assurance that buyers would be able to becomepartners

- Mutual Representation- Power to DissolveMutual Agency- Each partner can legally bind the business enterprise- Business may be undermined by act of one foolish partnerUnlimited LiabilityCommunity of Interest- Co-ownership of capital or property

CLV Class NotesQ: How does contractual management of a corporation compare withthe management of a partnership?

A: Every partner, in the absence of a stipulation in the articles ofpartnership, binds the partnership as every partner is an agent o f theothers. In a corporation, only the Board of Directors and not thestockholders can bind the corporation.

CLV: The principle in constitutional law that delegated power cannot

be delegated further has no application in a corporate setting becausea corporation is not a product of political text- it is a product ofbusiness. A corporate setting is best described as hierarchal and fiat.Just because the BoD are to be elected by the stockholders does notmean that the former derives its power from the latter. The powers ofthe BoD is original, said powers are not delegated by the stockholder.The powers are vested by law (and Articles of Incorporation). The BoDsit on the board not as representatives of the stockholders butbecause they are directors.

Q: What are the 2 types of partnerships?




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A: Regular and joint venture

Q: Can a corporation be a partner in a regular partnership?A: No, because a partner must be a natural person. It is against publicpolicy for corporation to be a partner in a regular partnership.

Q: Why did the legislature put such limited liability as an attribute of acorporation? If the feature of limited liability costs money then why nottake it out? Why not leave it up to the investors who can decide if theywant limited liability or not?

A: Even though limited liability will cost a lot of money, borrowingmakes a lot more sense. If I have 100M, it would be foolish to put allmy eggs in one basket(if the basket falls, all eggs break). So I merelyout 10M in one corp and then borrow the 90M while the rest of mymoney I put somewhere else. If the corporation fails, I do not lose allmy 100 M. But if the corps succeeds and I get to pay my creditor, Iretain the 10M plus profits acquired from the 90M paid up loan. This isthe concept of Leveraging, using other peoples money to make a

profit for yourself. This is why borrowing is an integral part of corporatelife and it is up to the creditors to make a diligent appraisal of the creditstanding of the corp.

Q: What is the main distinction between a corporation and apartnership?A: A corporation is intermingling of corporation law and contract law.Partnership is purely contractual relationship and so every time a

partner dies, the contract is actually distinguished.

Q: What is a corporation law all about?A: It is all about jurisprudence actually built around the 4 attributes of acorporation.

Q: Does a Defective Incorporation result into a Partnership?A: No. First, both corporate and partnership relationship arefundamentally contractual relationships created by the co-venturers.

(so, yung intention is controlling)Second, there are importantdifferences between a corporation and the partnership.(i.e. Limitedliability, centralized management, easy transferability of units ofownership)Summary of the doctrinal pronouncement in PIONEER INSURANCEcase:a) Parties who intended to participate or actually participate in the

business affairs of the proposed corporation would be considered aspartners under a de facto partnership, and would be liable forpartnership obligations.

b) Parties who took no part except to subscribe for stock in a proposedcorporation, do not become partners with other subscribers whoengaged in the business under the name of pretended corporation,are not liable for action foe settlement of the alleged partnershipcontribution.

Q: Why are we taking up Pioneer?Why were not they liable?A: Because Pioneer shows us that for a person to be liable as apartner, he should have actively participated in the conduct of thebusiness, the SC held in this case that to be able to be held liable the

person should possess powers o f management business, the SC heldin this case this case that to be able to be held liable the person should

possess powers of management.

Q: In cases where there is a defective attempt to form a corporation,which is the prevailing rule, a partnership inter se is created or acorporation by estoppel?

A: It depends who lly on the extent of the participation of the party whoclaim is being mind. In PIONEER, there was no intent on the other

parties to en ter into a partnership but a corporation. As to Cervantesand Bormacheco, they cannot be considered to have entered into a

partnership inter se, since there was no intention to do so ans to beheld liable as such.But if it were Cervantes or Bormacheco, who entered into the contractsusing the corporate name and actively participated in the activities ofthe corporation, then they are to be held liable as partners.

Lim Tong Lim vs. Phil. Fishing Gear Industries- Q: What is the difference between Pioneer and Lim Tong Lim?

A: In Pioneer, the SC stopped when it declared that to beliable, you have to possess powers of management. In Lim, itcontinues its pronouncement by saying that you havebeneficial ownership over the business, then you are alsoliable as a partnerCLV: Pioneer caseactors who knew of corporations non-existence are liable as general partners while actors who didnot know are liable as limited partners, passive investors arenot liable. Lim Even passive investors should be held liableprovided they benefited from such transactions.

3) BUSINESS TRUST- It is simply a deed of trust which is easier and lessexpensive to constitute for it is not bound by any legal requirements. It doesnot have separate juridical personality, and is mainly governed bycontractual doctrines and common law principles on trust. Trust relationship




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centered upon properties, and which places naked tile in the trustor and thebeneficial title in the beneficiary.

CLV Class Notes

Q: What is the difference of a Business Trust and a corporation?A: The relationship in a business trust is essentially a trust relationship.The business trust does not have a personality which is apart from thetrustor of the trustee/beneficiary. The concept of a separate juridical

personality is absent from a business trust.

4)JOINT VENTURES- Its legal concept is of common law origin. It is a form of

partnership and should thus be governed by the law ofpartnerships.

- Joint venture is an association of persons or companies jointlyundertaking some commercial enterprise; generally, allcontribute assets and share risks. It requires a community ofinterest in the performance of the subject matter, a right to

direct and govern policy in connection therewith, and duty,which may be altered by agreement to share both in profit andlosses. (Kilosbayan vs. Guingona)

CLV Class Notes

Q: What is the difference between a joint venture and a partnership?A: A joint venture is by law a partnersh ip because it follows the samedefinition as having two or more persons binding themselves togetherunder a common fund with the intention of dividing the profits betweenthemselves. Therefore, every joint venture is a partnership. Thedistinction between the two is a joint venture is for a limited purposeonly while a partnership involves an arrangement or an on-goingconcern.

Q: Is it possible for a joint partnership not be a partnership?A: Yes, when the joint venture forms a corporation, it hen becomes ajoint venture corporation.

Q: Is the requirement of registration needed in a partnership requiredin a joint venture?

A: No. Only in a partnership is registration required. (Art 1772)

5) COOPERATIVES

- It is a duly registered association of persons, with a commonbond of interest, who have voluntarily joined together toachieve lawful common social or economic end, makingequitable contributions to the capital required and accepting a

fair share of the risks and benefits of the undertaking inaccordance with universally accepted cooperative principles. Ithas a juridical personality distinct from its members and has alimited liability feature. Cooperatives are governed byprinciples of democratic control where the members in primarycooperatives have equal voting rights in a one-member-one-vote principle. The general assembly in full membershipexercises all the rights and performs all the obligations of thecooperative. They are under the supervision and control of theCooperative Development Authority. (Primary objective: SELFHELP)

- Cooperatives are established to provide a strong social andeconomic organization to ensure that the tenant-farmers will

enjoy on a lasting basis the benefits of agrarian reforms.(Corpuz vs. Grospe)

6) SOCIEDAD ANONIMAS

- A sociedad anonima was considered a commercial partnershipwhere upon the execution of funds and personal property,become a juridical person- an artificial being, invisible,intangible, and existing only in contemplation of law- withpower to hold, buy, and sell property, and to sue and be sued-a corporation- not a general co-partnership nor a limited co-partnership The inscribing of its articles of agreement in thecommercial register was not necessary to make it a juridicalperson- a corporation. Such inscription only operated to show

that it partook of the form of a commercial corporation, (Meadvs. McCullough)

- The sociedades anonimas were introduced in the Philippinejurisdiction on 1 December 1888 with the extension toPhilippine territorial application of Articles 151 to 159 of theSpanish Code of Commerce. Those articles contained thefeatures of limited liability and centralized managementgranted to a juridical entity. But they were more similar to theEnglish joint stock companies than the modern commercialcorporations. (Benguet vs Pineda)




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- Our corporation law recognizes the difference betweensociedades anonimas and corporations and will not apply legalprovisions pertaining to the latter to the former.(Phil Product vs.Primateria Societe Anonyme)

7) CUENTAS EN PARTICIPACION

- A cuentas en particiapacion as a sort of an accidentalpartnership constituted in such manner that its existence wasonly known to those who had an interest in the same, therebeing no mutual agreement between the partners, and withouta corporate name indicating to the public in some way thatthere were other people besides the one who ostensiblymanaged and conducted the business, governed under Article239 of the Code of Commerce. Those who contract with theperson under whose name the business of such partnership ofcuentas en participacion is conducted, shall have only a rightof action against such person and not against the other person

interested, and the latter, on the other hand, shall have notright of action against third person who contracted with themanager unless such manager formally transfers his rights tothem. (Bourns vs. Carman)

1.4 Government Regulation of Corporations

Basis: Section 2 of Corp Code; Theory of Concession

Theory of Concession: Looks at a corporation as a creature of theState within the control of the latter. This theory is essentiallyfollowed in the Philippines.

A corporation is an artificial being created by operation oflaw. It owes it life to the state its birth being purely dependenton its will. Corporate by-laws must yield to judicial orders. As amatter of fact, a corporation, once it comes into being, comesmore often within the ken of the judiciary than the other twocoordinate branches. It institutes the appropriate court actionto enforce its right. Correlatively, it is not immune from judicialcontrol in those instances, where a duty under the law asascertained in an appropriate legal proceeding is cast upon it.(Tayag v. Benguet Consolidation)

To organize a corporation that could claim a juridicalpersonality of its own and transact business as such, is not amatter of absolute right but a privilege which may be enjoyedonly under such terms as the State may deem necessary to

impose. cf.Ang Pue & Co. v. Sec. of Commerce and Industry,5 SCRA 645 (1962)

It is a basic postulate that before a corporation mayacquire juridical personality, the State must give its consenteither in the form of a special law or a general enabling act,and the procedure and conditions provided under the law forthe acquisition of such juridical personality must be compliedwith. Although the statutory grant to an association of thepowers to purchase, sell, lease and encumber property canonly be construed the grant of a juridical personality to such anassociation . . . nevertheless, the failure to comply with thestatutory procedure and conditions does not warrant a findingthat such association acquired a separate juridical personality,

even when it adopts sets of constitution and by-laws.International Express Travel & Tour Services, Inc. v. Court ofAppeals, 343 SCRA 674 (2000).

Since all corporations, big or small, must abide by theprovisions of the Corporation Code, then even a simple familycorporation cannot claim an exemption nor can it have rulesand practices other than those established by law. Torres v.Court of Appeals, 278 SCRA 793 (1997).

Catindig Class NotesQ: How does government regulate corporations?

A: From creation to dissolutionxxxHomeownersHLURB

CondosSECCooperativeBureau of Cooperative Development

1.5 Kinds of Corporations

(a) Stock(b) Non-Stock(c) De Facto




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(d) Corporation by estoppel(e) Close(f) Educational(g) Religious; Sole and Aggregate

(h) Special Charter(i) Foreign(j) GOCC(k) Homeowners Association

(a) StockSec. 3. Classes of corporations.

Corporations formed or organized under this Code may be stock ornon-stock corporations. Corporations which have capital stockdivided into shares and are authorized to distribute to the holders ofsuch shares dividends or allotments of the surplus profits on thebasis of the shares held are stock corporations. All other corporations

are non-stock corporations.

(b) Non-stockSections 3 and 87.

Sec. 87. Definition.

For the purposes of this Code, a non-stock corporation is one whereno part of its income is distributable as dividends to itsmembers, trustees, or officers, subject to the provisions of thisCode on dissolution: Provided, That any profit which a non-stockcorporation may obtain as an incident to its operations shall,whenever necessary or proper, be used for the furtherance of thepurpose or purposes for which the corporation was organized,subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall beapplicable to non-stock corporations, except as may be covered byspecific provisions of this Title. (n)

See page 902 of CLVs Commercial Law Reviewer (2007).

In spite of the existence of capital stock, a corporation maybe considered a non-stock corporation for purpose of

taxation. (CIR v. Club Filipino)

Mere realization of profits does not make a corporation astock corporation. (Collector v. UV)

(c) De factoSec. 20. De facto corporations

The due incorporation of any corporation claiming in good faith to bea corporation under this Code, and its right to exercise corporatepowers, shall not be inquired into collaterally in any private suit towhich such corporation may be a party. Such inquiry may be madeby the Solicitor General in a quo warranto proceeding.

Nature of the Doctrine

De facto corporation is formed also in accordance with law. Itfalls short of the requirements provided by law. Such is

awarded a separate juridical personality, it may thus enterinto contracts, it may sue and be sued. (note: third partiesmay sue the corporation, incorporators may sue but thecorporation cannot sue) Only the actors will be held liable. Inproceeding against such, compliance with due process mustbe had.

The doctrine of de facto corporation applies as to the firstlevel relationship (as between the State and corporations)and also to the third level of relationship.

Elements: (Arnold v. Piccio)

(1) Valid Law under which it is incorporated(2) Attempt in good faith to incorporate(3) Assumption of corporate powers

(1) Valid Law under which it is incorporated

If the constitutionality of the statue is raised for the first timein an action wherein it is sought to prevent future incurring ofrights and obligations, it will be proper to permit collateral




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attack; where the constitutionality of the statue is raised forthe first time in litigation seeking enforcement of contracts ortransaction which have been fully or partially consummated,collateral attack on the juridical personality of the corporation

should not be permitted, since the corporation should betreated as a de facto corporation. Courts, however, through

jurisprudence, arrived at the same result as that upheld bysuch minority opinion, holding that a corporation organizedunder a statute subsequently declared unconstitutional maynevertheless be considered a corporation by estoppel, wherethere have been previous dealing between the parties on acorporate basis.

(2) Attempt in good faith to incorporate- colorable compliance.

The Corporation must have filed its Articles of Incorporationand the SEC duly issued a Certificate of Incorporation. (The

incorporators must have been aware of the issuance of thecertificate of incorporation by the SEC for such good faith toexist.) (Mere intent is not sufficient)

(3) Assumption of corporate powers: Minimum requirement:Election of BoD.

Rationale

To prevent any party from raising the defect of authority as ameans to avoid fulfillment of a contract or a transactionentered into.

To protect the enforceability of corporate dealings and

contracts, to allow the public to take at reasonable face valuethe authority of the corporation to enter into valid and bindingcontracts.

The doctrine is meant to apply to extra corporate dealingsand not to intra-corporate relationship

CLV Class Notes

Q: If a member of a public deals with a corporation knowing its defect,will the de facto doctrine apply?

A: Yes, because (a) jur idical personality cannot be subject to colla teralattack (b) No juridical entity, no separate liability

CLV: The de facto doctrine was formulated to safeguard the security ofcommercial transactions whenever they involve the corporation.Parties dealing with said corporation are secured by the fact that thetransactions entered into with said corporations may be sued upon andthey can recover. That is why aside from the other two requisites theremust be a set of officers or directors because the principle that acorporation can only act through its officers.

Catindig Class Notes

Sir:Once there is a certificate issued, there is no de facto corporation.So for me the concept is merely historical.

(d) Corporation by estoppelSec. 21. Corporation by estoppel

All persons who assume to act as a corporation knowing it to bewithout authority to do so shall be liable as general partners for alldebts, liabilities and damages incurred or arising as a result thereof:Provided, however, That when any such ostensible corporation issued on any transaction entered by it as a corporation or on any tortcommitted by it as such, it shall not be allowed to use as a defenseits lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such,cannot resist performance thereof on the ground that there was infact no corporation.

CLV Class NotesQ: What is minimum requirement for a corporation by estoppel toexist?

A: There must be an innocent party who believes that a corporationexists (believes in good faith) because of representations.

Catindig Class Notes

Q: Is a corporation by estoppel a corporation?




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A: No. (See definition in Section 2)The parties are the one made liable-ASM.

Q: How does government regulate corporations?A: From creation to dissolution

xxxHomeownersHLURBCondosSECCooperativeBureau of Cooperative Development

UP Class NotesCOMMENT: The doctrine is founded on principles of equity and isapplied n order to prevent injustice and unfairness to third persons vis--vis the corporation (or vice versa as in par. 2 Section 21). In thiscase the International Express Travel seeks to enforce a valid contract;it is the Federation and Henri Kahn who wish to do it injustice by tryingto evade responsibility thereon. In the last point, the CA possibly triedto apply paragraph 2 Section 21, albeit mistakenly.

Nature of Doctrine

An admission or representation is renderedconclusive upon the person making it, and cannot be deniedor disproved as against the person relying thereon.

Founded on principles of equity and designed to

prevent injustice and unfairness, the doctrine applies whenpersons assume to form a corporation and exercisecorporate functions and enter into business relations withthird persons. Where no third person is involved in theconflict, there is no corporation by estoppel. A failed

consolidation therefore cannot result in a consolidatedcorporation by estoppel. Lozano v. De Los Santos, 274SCRA 452 (1997)

A party cannot challenge the personality of the plaintiff as aduly organized corporation after having acknowledged samewhen entering into the contract with the plaintiff as such

corporation for the transportation of its merchandise. OhtaDev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).1

A person who accepts employment in an unincorporated

charitable association is estopped from alleging its lack ofjuridical personality. Christian Childrens Fund v. NLRC, 174SCRA 681 (1989).

One who deals with an organization which is not dulyincorporated is not estopped to deny its corporate existencewhen his purpose is not to avoid liability.Intl ExpressTravel v. Court of Appeals, 343 SCRA 674 (2000).

Under the law on estoppel including that under Sec. 21 ofCorporation Code, those acting on behalf of an ostensiblecorporation and those benefited by it, knowing it to be without

valid existence, are held liable as general partners.

LimTong Lim v. Philippine Fishing Gear Industries, Inc., 317SCRA 728 (1999).

Two Levels(1) With Fraud(2) Without Fraud

When the incorporators represent themselves to be officersof the corporation which was never duly registered with theSEC, and engage in the name of the purported corporation inillegal recruitment, they are estopped from claiming that theyare not liable as corporate officers under Sec. 25 ofCorporation Code which provides that all persons whoassume to act as a corporation knowing it to be withoutauthority to do so shall be liable as general partners for all thedebts, liabilities and damages incurred or arising as a result

1The same principle applied in Compania Agricole de Ultramar v.

Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership

which required registration in the registry under the terms of the Code of

Commerce).




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thereof. People v. Garcia, 271 SCRA 621 (1997); People v.Pineda, G.R. No. 117010, 18 April 1997 (unpub).

(1) With Fraud

Actor is liable as a general partnerfor debts, damages andliabilities incurred. Corporation cannot set up as defensethat corp actually does not exist.

Veil will be pierced to make corporators liable.

If corporation sues the other party, it cannot resist obligationby saying that no corp exist.

(2) Without Fraud

Actors are liable as limited partner.

Corporation by estoppel applies to save the contract but

juridical entity is then broken down to make actors liable.Note: Both in bad faith: Corporation by estoppel does not apply.(Pari Delicto Doctrine, or the contract is recissible)

(e) Close

Sec. 96. Definition and applicability of Title.

A close corporation, within the meaning of this Code, is one whosearticles of incorporation provide that: (1) All the corporation's issuedstock of all classes, exclusive of treasury shares, shall be held ofrecord by not more than a specified number of persons, not

exceeding twenty (20); (2) all the issued stock of all classes shall besubject to one or more specified restrictions on transfer permitted bythis Title; and (3) The corporation shall not list in any stock exchangeor make any public offering of any of its stock of any class.Notwithstanding the foregoing, a corporation shall not be deemed aclose corporation when at least two-thirds (2/3) of its voting stock orvoting rights is owned or controlled by another corporation which isnot a close corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, exceptmining or oil companies, stock exchanges, banks, insurance

companies, public utilities, educational institutions and corporationsdeclared to be vested with public interest in accordance with theprovisions of this Code.

The provisions of this Title shall primarily govern close corporations:Provided, That the provisions of other Titles of this Code shall applysuppletorily except insofar as this Title otherwise provides.

Jacks Lecture

CLOSE CORPORATIONS

This is a new title, made in recognition of the fact that theoverwhelming majority of the corporations are family corps. In many familycorporations here, the set-up is such that the husband is the president, thewife is the treasurer, but it is the wife who is actually running the corp. Thehusband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp.

Has a technical meaning in the law. For it to be a close corp., the articlesmust provide that it cannot have more than 20 stockholders. There shouldbe restrictions on the transfer of the shares, like usually it will be providedthat if a stockholder wants to sell his share, he must first offer it to the otherstockholders. Only if they are not willing to buy can he offer it to an outsider.Or it may also provide that if no stockholder is willing to buy the shares, thenhe must offer it to the corporation before offering to an outsider.

The corporation shall not be listed in any stock exchange. The lawsays that the mere fact that a corp. is controlled by another corp. does notmake it a close corp. The articles must contain the features mentioned in thelaw. But corps. Engaged in mining, oil companies, stock exchanges, banks,insurance companies, public utilities, schools, and corps. vested with publicinterest are not allowed to be close corps. Because they're engaged in lines

of business vested with public interest and so they should be subject toregulation and close scrutiny. The law says the articles may provide forclassification of shares and qualifications for owning them. For example, youhave three brothers who form a close corp. So they may provide: a) we willclassify these shares into class a, class b, class c. Only the members of thefamily of the first brother can own class a shares. Only members of 2 nd

brother can own class b shares, and class c shares can be owned only bymembers of the 3rd brother; b) we will have nine (9) directors, and 3 will beelected by holders of class a shares; c) can provide for a greater quorum orvoting requirements. It can be provided that you will need three fourths (3/4)




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majority to approve any action by the board, any action by the stockholder.Why? Because each group would want to be protected for otherwise if thetwo groups combine they can get anything approved, like there would be twothirds. And so the third group would want to be protected; d) the articles may

provide that if it's the stockholders and not the board who will manage theaffairs and that there is no need for formal meetings, if the stockholders willbe the directors, then they will be subject to the same liabilities as directors.

See page 706-736 of CLVs textbook or page 909 of CLVsCommercial Law Reviewer (2007).

(f) Educational

Sec. 106. Incorporation

Educational corporations shall be governed by special laws and bythe general provisions of this Code. (n)

Sec. 107. Pre-requisites to incorporation

Except upon favorable recommendation of the Ministry of Educationand Culture, the Securities and Exchange Commission shall notaccept or approve the articles of incorporation and by-laws of anyeducational institution. (168a)

Sec. 108. Board of trustees

Trustees of educational institutions organized as non-stockcorporations shall not be less than five (5) nor more than fifteen (15):Provided, however, That the number of trustees shall be in multiplesof five (5).

Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other

institutions of learning shall, as soon as organized, so classifythemselves that the term of office of one-fifth (1/5) of their numbershall expire every year. Trustees thereafter elected to fill vacancies,occurring before the expiration of a particular term, shall hold officeonly for the unexpired period. Trustees elected thereafter to fillvacancies caused by expiration of term shall hold office for five (5)years. A majority of the trustees shall constitute a quorum for thetransaction of business. The powers and authority of trustees shall bedefined in the by-laws.

For institutions organized as stock corporations, the number and termof directors shall be governed by the provisions on stockcorporations. (169a)

See page 917 of CLVs Commercial Law Reviewer (2007).

(g) Religious: sole and aggregate

Sec. 109. Classes of religious corporations

Religious corporations may be incorporated by one or more persons.Such corporations may be classified into corporations sole andreligious societies.

Religious corporations shall be governed by this Chapter and by thegeneral provisions on non-stock corporations insofar as they may beapplicable. (n)

Sec. 110. Corporation sole

For the purpose of administering and managing, as trustee, theaffairs, property and temporalities of any religious denomination, sector church, a corporation sole may be formed by the chief archbishop,bishop, priest, minister, rabbi or other presiding elder of suchreligious denomination, sect or church. (154a)

Sec. 111.Articles of incorporation

In order to become a corporation sole, the chief archbishop, bishop,priest, minister, rabbi or presiding elder of any religiousdenomination, sect or church must file with the Securities andExchange Commission articles of incorporation setting forth the

following:1. That he is the chief archbishop, bishop, priest,minister, rabbi or presiding elder of his religiousdenomination, sect or church and that he desires tobecome a corporation sole;

2. That the rules, regulations and discipline of hisreligious denomination, sect or church are notinconsistent with his becoming a corporation sole anddo not forbid it;




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3. That as such chief archbishop, bishop, priest,minister, rabbi or presiding elder, he is charged with theadministration of the temporalities and the managementof the affairs, estate and properties of his religious

denomination, sect or church within his territorialjurisdiction, describing such territorial jurisdiction;

4. The manner in which any vacancy occurring in theoffice of chief archbishop, bishop, priest, minister, rabbiof presiding elder is required to be filled, according tothe rules, regulations or discipline of the religiousdenomination, sect or church to which he belongs; and

5. The place where the principal office of thecorporation sole is to be established and located, whichplace must be within the Philippines.

The articles of incorporation may include any other provision notcontrary to law for the regulation of the affairs of the corporation. (n)

Sec. 112. Submission of the articles of incorporation

The articles of incorporation must be verified, before filing, by affidavitor affirmation of the chief archbishop, bishop, priest, minister, rabbi orpresiding elder, as the case may be, and accompanied by a copy ofthe commission, certificate of election or letter of appointment of suchchief archbishop, bishop, priest, minister, rabbi or presiding elder,duly certified to be correct by any notary public.

From and after the filing with the Securities and ExchangeCommission of the said articles of incorporation, verified by affidavitor affirmation, and accompanied by the documents mentioned in thepreceding paragraph, such chief archbishop, bishop, priest, minister,rabbi or presiding elder shall become a corporation sole and all

temporalities, estate and properties of the religious denomination,sect or church theretofore administered or managed by him as suchchief archbishop, bishop, priest, minister, rabbi or presiding eldershall be held in trust by him as a corporation sole, for the use,purpose, behalf and sole benefit of his religious denomination, sect orchurch, including hospitals, schools, colleges, orphan asylums,parsonages and cemeteries thereof. (n)

Sec. 113.Acquisition and alienation of property

Any corporation sole may purchase and hold real estate and personalproperty for its church, charitable, benevolent or educationalpurposes, and may receive bequests or gifts for such purposes. Suchcorporation may sell or mortgage real property held by it by obtaining

an order for that purpose from the Court of First Instance of theprovince where the property is situated upon proof made to thesatisfaction of the court that notice of the application for leave to sellor mortgage has been given by publication or otherwise in suchmanner and for such time as said court may have directed, and that itis to the interest of the corporation that leave to sell or mortgageshould be granted. The application for leave to sell or mortgage mustbe made by petition, duly verified, by the chief archbishop, bishop,priest, minister, rabbi or presiding elder acting as corporation sole,and may be opposed by any member of the religious denomination,sect or church represented by the corporation sole: Provided, That incases where the rules, regulations and discipline of the religiousdenomination, sect or church, religious society or order concerned

represented by such corporation sole regulate the method ofacquiring, holding, selling and mortgaging real estate and personalproperty, such rules, regulations and discipline shall control, and theintervention of the courts shall not be necessary. (159a)

Sec. 114. Filling of vacancies

The successors in office of any chief archbishop, bishop, priest,minister, rabbi or presiding elder in a corporation sole shall becomethe corporation sole on their accession to office and shall bepermitted to transact business as such on the filing with theSecurities and Exchange Commission of a copy of their commission,certificate of election, or letters of appointment, duly certified by anynotary public.

During any vacancy in the office of chief archbishop, bishop, priest,minister, rabbi or presiding elder of any religious denomination, sector church incorporated as a corporation sole, the person or personsauthorized and empowered by the rules, regulations or discipline ofthe religious denomination, sect or church represented by thecorporation sole to administer the temporalities and manage theaffairs, estate and properties of the corporation sole during thevacancy shall exercise all the powers and authority of the corporationsole during such vacancy. (158a)

Sec. 115. Dissolution




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A corporation sole may be dissolved and its affairs settled voluntarilyby submitting to the Securities and Exchange Commission a verifieddeclaration of dissolution.

The declaration of dissolution shall set forth:1. The name of the corporation;

2. The reason for dissolution and winding up;

3. The authorization for the dissolution of thecorporation by the particular religious denomination,sect or church;

4. The names and addresses of the persons who are tosupervise the winding up of the affairs of thecorporation.

Upon approval of such declaration of dissolution by the Securitiesand Exchange Commission, the corporation shall cease to carry on

its operations except for the purpose of winding up its affairs. (n)Sec. 116. Religious societies

Any religious society or religious order, or any diocese, synod, ordistrict organization of any religious denomination, sect or church,unless forbidden by the constitution, rules, regulations, or discipline ofthe religious denomination, sect or church of which it is a part, or bycompetent authority, may, upon written consent and/or by anaffirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of itstemporalities or for the management of its affairs, properties andestate by filing with the Securities and Exchange Commission,articles of incorporation verified by the affidavit of the presiding elder,secretary, or clerk or other member of such religious society or

religious order, or diocese, synod, or district organization of thereligious denomination, sect or church, setting forth the following:

1. That the religious society or religious order, or diocese, synod, ordistrict organization is a religious organization of a religiousdenomination, sect or church;

2. That at least two-thirds (2/3) of its membership have given theirwritten consent or have voted to incorporate, at a duly convenedmeeting of the body;

3. That the incorporation of the religious society or religious order, ordiocese, synod, or district organization desiring to incorporate is notforbidden by competent authority or by the constitution, rules,regulations or discipline of the religious denomination, sect, or church

of which it forms a part;

4. That the religious society or religious order, or diocese, synod, ordistrict organization desires to incorporate for the administration of itsaffairs, properties and estate;

5. The place where the principal office of the corporation is to beestablished and located, which place must be within the Philippines;and

6. The names, nationalities, and residences of the trustees elected bythe religious society or religious order, or the diocese, synod, ordistrict organization to serve for the first year or such other period asmay be prescribed by the laws of the religious society or religious

order, or of the diocese, synod, or district organization, the board oftrustees to be not less than five (5) nor more than fifteen (15). (160a)

See page 918 of CLV Commercial Law Reviewer (2007).

(h) Special charter

Sec. 4. Corporations created by special laws or charters

Corporations created by special laws or charters shall be governedprimarily by the provisions of the special law or charter creating themor applicable to them, supplemented by the provisions of this Code,insofar as they are applicable.

(i) Foreign

Sec. 123. Definition and rights of foreign corporations

For the purposes of this Code, a foreign corporation is one formed,organized or existing under any laws other than those of thePhilippines and whose laws allow Filipino citizens and corporations todo business in its own country or state. It shall have the right totransact business in the Philippines after it shall have obtained a




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license to transact business in this country in accordance with thisCode and a certificate of authority from the appropriate governmentagency. (n)

See page 799 of CLVs textbook or page 946 of CLVsCommercial Law Reviewer.

(j) GOCC

Governments majority shares does not make an entity apublic corporation. National Coal Co., v. Collector of InternalRevenue, 46 Phil. 583 (1924).

A corporation is created by operation of law under theCorporation Code while a government corporation is normallycreated by special law referred to often as a charter. BlissDev. Corp. Employees Union v. Calleja, 237 SCRA 271

(1994).

The test to determine whether a corporation is governmentowned or controlled, or private in nature is simple. Is itcreated by its own charter for the exercise of a publicfunction, or by incorporation under the general corporationlaw? Those with special charters are governmentcorporations subject to its provisions, and its employees areunder the jurisdiction of the Civil Service Commission, andare compulsory members of the GSIS. Camparedondo v.NLRC, 312 SCRA 47 (1999)

While public benefit and public welfare may be attributable tothe operation of the Bases Conversion and DevelopmentAuthority (BCDA), yet it is certain that the functions itperforms are basically proprietary in naturethe promotion ofeconomic and social development of Central Luzon,particularly, and the countrys goal for enhancement.Therefore, the rule that prescription does not run against theState will not apply to BCDA, it being said that when title ofthe Republic has been divested, its grantees, although

artificial bodies of its own creation, are in the same categoryas ordinary persons. Shipside Inc. v. Court of Appeals, 352SCRA 334 (2001).

Although Boy Scouts of the Philippines does not receive anymonetary or financial subsidy from the Government, and itsfunds and assets are not considered government in natureand not subject to audit by the COA, the fact that it received aspecial charter from the government, that its governing boardare appointed by the Government, and that its purpose are ofpublic character, for they pertain to the educational, civic andsocial development of the youth which constitute a verysubstantial and important part of the nation, it is not a publiccorporation in the same sense that municipal corporation orlocal governments are public corporation since its does notgovern a portion of the state, but it also does not have

proprietary functions in the same sense that the functions oractivities of government-owned or controlled corporations, ismay still be considered as such, or under the 1987

Administrative Code as an instrumentality of the Government,and it employees are subject to the Civil Service Law. BoyScouts of the Philippines v. NLRC, 196 SCRA 176 (1991).

But being a GOCC makes it liable for laws and provisionsapplicable to the Government or its entities and subject to thecontrol of the Government. Cervantes v. Auditor General, 91Phil. 359 (1952).

Beyond cavil, a GOCC has a personality of its own, distinctand separate from that of the government, and theintervention in a transaction of the Office of the Presidentthrough the Executive Secretary does not change theindependent existence of a government entity as it deals withanother government entity. PUP v. Court of Appeals, 368SCRA 691 (2001).

The doctrine that employees of GOCCs, whether created byspecial law or formed as subsidiaries under the general




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corporation law are governed by the Civil Service Law andnot by the Labor Code, has been supplanted by the 1987Constitution. The present doctrine in determining whether aGOCC is subject to the Civil Service Law is the manner of its

creation, such that government corporations created byspecial charter are subject the Civil Service Law, while thoseincorporated under the general corporation law are governedby the Labor Code. PNOC-Energy Development Corp. v.NLRC, 201 SCRA 487 (1991); Davao City Water District v.Civil Service Commission, 201 SCRA 593 (1991).

Section 31 of Corporation Code (Liability of Directors andOfficers) is applicable to corporations which have beenorganized by special charters since Sec. 4 of CorporationCode renders the provisions supplementarily applicable to allcorporations, including those with special or individual

charters, such as cooperatives organized under P.D. 269, solong as those provisions are not inconsistent with suchcharters. Benguet Electric Cooperative, Inc. v. NLRC, 209SCRA 55 (1992).

Water districts can validly exists as corporate entities underPD 198, and provided they are government-owned orcontrolled, and their board of directors and other personnelare government employees subject to civil service laws andanti-graft laws. Feliciano v. Commission on Audit, 419 SCRA363 (2004).

(k) Homeowners Associations (Section 4 and 26 ofRA 8763, March 7, 2000)

Republic Act No. 8763 (March 7, 2000)Section 4. Home Guarantee Corporation. The Home Insurance andGuarantee Corporation is hereby renamed as the Home GuaranteeCorporation, hereinafter refereed to as the Corporation, which shallhave its principal office in Metropolitan Manila and shall exist for aperiod of 50 years from December 15, 2000. The Corporation may

establish such offices, agencies, subsidiaries, or branches anywherein the Philippines as its operations would require and its Board ofDirectors would determine.

Section 26. Powers over Homeowners Associations. The powers,authorities and responsibilities vested in the Corporation with respectto homeowners association under Republic Act No. 580, as amendedby Executive Order No. 535 is hereby transferred to the Housing andLand Use Regulatory Board (HLURB).

Subject to existing laws, the HLURB is hereby authorized to createadditional positions and augment its present budget as may beneeded for the operation and maintenance of the newly created unitor office as a consequence of the transfer of functions and powers.

Pending the approval of the HLURB Revised Staffing OrganizationalPlan and release of budgetary allocations thereof, the Corporationshall extend technical, operational, and administrative assistance to

the HLURB as may be mutually deemed necessary to ensure smoothturnover of functions. However, such assistance shall not extendbeyond a period of 1 year from the date of effectivity of this Act.

Registration is made before the HLURB.

1.6 Cases

Lozano v. delos Angeles and Anda (June 19, 1997) The doctrine of corporation by estoppel cannot override

jurisdictional requirements- jurisdiction is fixed by law andcannot be acquired through or waived, enlarged ordiminished by, any act or omission of the parties, and neithercan it be conferred by the acquiescence of the court.

Corporation by estoppel is founded on principles of equityand is designed to prevent injustice and unfairness, andwhere there is no third person involved and the conflict arisesonly among those assuming the form of a corporation, whoknow that it has not been registered, there is no corporationby estoppel.




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International Express Travel v. CA (October 19, 2000)(1) The Federation has no juridical personality. Indeed, R.A.

3135 and P.D. No. 604 recognized the juridical existenceof national sports association. This may even be gleaned

from the powers and functions granted to theseassociation. However, these laws only provided themanner by which these entities may acquire juridicalpersonality. The corporate status of these associationsdoes not automatically take place. These laws actuallyrequires that before an entity be considered as anational sports association such must recognized by theaccrediting organization (i.e. PAAF). This fact ofrecognition, however the President of the Federationfailed to substantiate.

(2) The President must be held liable in accordance with theprinciple that any person acting or purporting to act on

behalf of a corporation which has no valid existenceassumes such privileges and obligations and becomepersonally liable for contracts entered into or for otheracts performed as such agent.

(3) The doctrine of corporate estoppel is not applicable. It isonly applied to a third party when he tries to escapeliability on a contract from which he has benefited. In thecase at bar, the petitioner is not trying to escape liabilitybut rather is the one claiming it.




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2. FORMATIONAND ORGANIZATIONOFCORPORATIONS

(Page 617 of CLVs Commercial Law Reviewer)

2.1 Who may form a corporation?Sec. 10. Number and qualifications of incorporators

Any number of natural persons not less than five (5) but not morethan fifteen (15), all of legal age and a majority of whom are residentsof the Philippines, may form a private corporation for any lawfulpurpose or purposes. Each of the incorporators of a stock corporationmust own or be a subscriber to at least one (1) share of the capitalstock of the corporation.

2.2 Steps in formation of a corporation

(a) PromotionCLV Class Notes

PROMOTERS CONTRACT CORP BY ESTOPPELDE FACTO orDE JUREDISSOLUTIONQ: In order to reach the level of corporation by estoppel, what is theessential ingredient of such doctrine?

A: Where there is a representation that a corporation exists when in factthere is none and at least one party thought there was a corporation.

Who are promoters? Promoter is a person who, acting alone or with others,

takes initiative in founding and organizing the business orenterprise of the issuer and receives consideration therefor.(Sec. 3.10, Securities Regulation Code [R.A. 8799])

CLV Class NotesQ: Differentiate a promoter from an incorporator.

A: A promoter begins or initiates the formation of a corporation whilean incorporator is one of the initial members of the SHs

CLV: The definition of promoter is important to determine the liabilityfor promoters contract. Before you can make a promoter liable, you

must be able to determine who is the promoter. He must be the onewho takes initiative on the founding and organization of the businessventure which eventually ends up as the corporation being organized.

Q: At the promoters stage there is no juridical personality until SEC

issues the certificate of Incorporation. Until the certificate is issued, thestage of the de facto corporation has not yet been reached. Prior to thede facto corporation stage, what then is the status of the contractentered into by a promoter for and in behalf of the person or agent whohad undertaken the transaction?

A: Unenforceable. It is not binding upon the corporation because it hasnot given consent to the authority of the person or agent who hadundertaken the transaction.

Q: How can ratification be done?A: Ratification can be done in two ways:(1)express ratification- a mere board resolution making the corporationliable by accepting the contract and(2) implied ratification- by accepting of benefits.

Q: What is the effect of promoters contract on the corp and othercontracting parties?

A: As to the corp, it is voidable, as to other contracting parties, it isvalid and enforceable

Catindig: Promotion is not a necessary stage!

Nature of Pre-incorporation Agreements

Under Sec 60 any contract for the acquisition of unissuedstock in a corporation still to be formed shall be deemed asubscription within the meaning of the Corporation Code.

Under Sec 61, a subscription for shares of stock of a

corporation still to be formed shall be irrevocable for a periodof 6 mos. from the date of subscription, unless all of the othersubscriber consent to the revocation, or unless theincorporation of said corporation fails to materialize withinsaid period or within a longer period as may be stipulated inthe contract of subscription. However, no pre-incorporationsubscription may be revoked after the submission of thearticles of incorporation to SEC.




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Secs 60 and 61 have effectively adopted in our jurisdiction afused version of both contract theory and the offer theoryin defining the nature of pre-incorporation subscriptionagreements.

o Offer Theory- construes subscription agreement as only

continuing offers to proposed corporations, which offer

does not ripen into a contract until accepted by the

corporation when organized. The obvious result of the

offer theory is that it allows withdrawal of subscriber at

least before the corporation comes into existence and

accepts the offer.

o Contract Theory- A subscription agreement among

several persons to take shares in a proposed corporation

becomes a binding contract and is irrevocable from time

of subscription, unless cancelled by all parties before

acceptance by the corporation.

Subscription agreements are special contracts in the sensethat they go beyond what we would term as ordinarycontracts. Although subscription agreements are contractsbetween the subscriber and the corporation, they are at thesame time deemed to be contracts among the stockholders ofthe corporation.

Theories on Liabilities for Promoters Contracts

Without ratification by a corporation after its dueincorporation, a contract entered into in behalf of a

corporation yet to be organized or still in the process ofincorporation is void as against the corporation (CagayanFishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223[1937])

(b) Drafting of Articles of Incorporation

What should be contained in the Articles of Incorporation?

(a) Corporate Name(b) Primary Purpose(c) Secondary Purpose or purposes(d) Principal Office

(e) Term(f) Incorporators(g) Incorporating directors(h) Capital(i) Classification of shares(j) Subscribers(k) Treasurer-in-trust(l) Special provisions

(a) Corporate NameSec. 18. Corporate name

No corporate name may be allowed by the Securities and Exchange

Commission if the proposed name is identical or deceptively orconfusingly similar to that of any existing corporation or to any othername already protected by law or is patently deceptive, confusing orcontrary to existing laws. When a change in the corporate name isapproved, the Commission shall issue an amended certificate ofincorporation under the amended name.

SEC MEMO CIRCULAR NO. 14-2000To: All Concerned

Subject: Revised Guidelines in the Approval of Corporate and PartnershipNames

In implementing Section 18 of the Corporation Code of the Philippines (BP68), the following revised guidelines in the approval of corporate andpartnership names are hereby adopted for the information and guidelines of allconcerned:

1. The corporation name shall contain the word Corporation or itsabbreviation Corp. or Incorporated or Inc.

The partnership name shall contain the word Company or Co..For limited partnerships, the word Limited or Ltd. shall be




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included. In case of professional partnerships, the word Companyneed not be used.

2. Terms descriptive of a business in the name shall be indicative ofthe primary purpose. If there are two (2) descriptive terms, the first

shall refer to the primary purpose and the second shall refer to oneof the secondary purposes.

3. The name shall not be identical, misleading or confusingly similar toone already registered by another corporation or partnership withthe Commission or a sole proprietorship registered with theDepartment of Trade and Industry.

If the proposed name is similar to the name of a registered firm, theproposed name must contain at least one distinctive word differentfrom the name of the company already registered.

4. Business or trade name of any firm which is different from itscorporate or partnership name shall be indicated in the articles ofincorporation or partnership of the said firm

5. Trade name or trademark duly registered with the IntellectualProperty Office cannot be used as part of a corporate or partnershipname without the consent of the owner of such trademark or tradename

6. If the name or surname of a person is used as part of a corporateor partnership name, the consent of the said person or his heirsmust be submitted, except if that person is a stockholder, member,or partner of a declared national hero. If such person cannot beidentified or is non-existent, an explanation for the use of suchname shall be required

7. The meaning of the initials in the name shall be disclosed in writingby the registrant

8. The name containing a term descriptive of a business different fromthe business or a registered company whose name also bearssimilar terms(s) used by the former may be allowed

9. The name should not be patently deceptive, confusing, or contraryto existing laws

10. The name which contains a word identical to a word in a registeredname shall not be allowed if such word is coined or has alreadybeen appropriated by a registered firm, regardless of the number of

the different words in the proposed name, unless there is consentfrom the registered firm or this firm is one of the stockholders ofpartners of the entity to be registered

11. The name of an internationally known foreign corporation, or one

similar to it may not be used by a domestic corporation without theconsent of the former

12. The term Philippines when used as part of the name of asubsidiary corporation shall be in parenthesis: i.e. (Philippines) or(Phil.)

13. The following names shall not be used as part of a corporate orpartnership name:

a. As provided by special laws:

i. Finance, Financing, of Finance and Investmentby corporations or partnerships not engaged in thefinancing business (R.A. No. 5980, as amended)

ii. Engineer, Engineering, or Architects as part ofthe corporate name (R.A. No. 546 and R.A. No.1582)

iii. Bank, Banking, Banker, Building and LoanAssociation, Trust Corporation, Trust Company,or words of similar import by corporations orassociations not engaged in a banking business(R.A. No. 337, as amended)

iv. United Nations in its full or abbreviated form cannotbe part of a corporate or partnership name (R.A. No.226

v. Bonded for corporations or partnerships withunlicensed warehouse (R.A. No. 245)

b. As a matter or policy:

i. Investments by corporations or partnerships notorganized as investment house company or holdingcompany

ii. National by all stock corporations and partnerships

iii. Asean, Calabarzon, and Philippines 2000

14. The name of a dissolved firm shall not be allowed to be used byother firms within three (3) years after the approval of the dissolution




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of the corporation by the Commission, unless allowed by the laststockholders representing at least a majority of the outstandingcapital stock of the dissolved firm

15. Registrant corporations or partnerships shall submit al letter of

undertaking to change their corporate or partnership name in caseanother person of firm has acquired a prior right to the use of thesaid name or the name is deceptively or confusingly similar to theone already registered, unless his undertaking is already includedas one of the provisions of the articles of incorporation orpartnership of the registrant

These guidelines hall take effect fifteen (15) days after publication in anewspaper of general circulation

See page 293 of CLVs book for Guidelines in CorporateName (SEC Memorandum No. 14, series of 2000.)

Parties organizing a corporation must choose a name at

their peril; and the use of a name similar to one adopted byanother corporation, whether a business or a nonprofitorganization, if misleading or likely to injure the exercise of itscorporate functions, regardless of intent, may be preventedby the corporation having a prior right. Ang Mga Kaanib saIglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios KayDristo Jesus, 372 SCRA 171 (2001).

Similarity in corporate names between two corporationswould cause confusion to the public especially when thepurposes stated in their charter are also the same type ofbusiness. Universal Mills Corp. v. Universal Textile Mills Inc. ,78 SCRA 62 (1977).

Section 18 of Corporation Code expressly prohibits the useof a corporate name which is identical or deceptively orconfusingly similar to that of any existing corporation or toany other name already protected by law or is patentlydeceptive, confusing or contrary to existing laws.The policybehind the foregoing prohibition is to avoid fraud upon thepublic that will occasion to deal with the entity concerned, theevasion of legal obligations and duties, and the reduction ofdifficulties of administration and supervision over

corporations. Industrial Refractories Corp. v. Court ofAppeals, 390 SCRA 252 (2002); Lyceum of the Philippines v.Court of Appeals, 219 SCRA 610, 615 (1993).

A corporation has no right to intervene in a suit using a

name, not even its acronym, other than its registered name,as the law requires and not another name which it had notregistered. Laureano Investment and Dev. Corp. v. Court of

Appeals, 272 SCRA 253 (1997).

There would be no denial of due process when a corporationis sued and judgment is rendered against it under itsunregistered trade name, holding that [a] corporation may besued under the name by which it makes itself known to itsworkers. Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279SCRA 312 (1997).

A corporation may change its name by the amendment of its

articles of incorporation, but the same is not effective untilapproved by the SEC. Philippine First Insurance Co. v.Hartigan, 34 SCRA 252 (1970).

A change in the corporate name does not make a newcorporation, and has no effect on the identity of thecorporation, or on its property, rights, or liabilities. RepublicPlanters Bank v. Court of Appeals, 216 SCRA 738 (1992).

Jacks Lecture

CORPORATE NAME

No corporation name may be allowed if it is identical ordeceptively or confusingly similar to that of any existing corp. Andthat the way the jurisprudence has developed, the name will notbe allowed if it uses a dominant word in the name of anothercorporation, and they are engaged in the same line of business.

Well, you have, for example, the case of UNIVERSAL TEXTILEMILLS and somebody formed another corporation: UNIVERSALMILLS. The dominant word is universal, and they both engage inthe same line of business.

You know, the Telephone Directory is not owned by PLDT. That isprepared by the General Telephone Directory Corporation. PLDTis the one which merely collects the payment from the advertisers




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in the yellow pages. But they don't own/publish that directory.Now, there was this bunch of swindlers who formed a corporation:GENERAL DIRECTORY. They would start contacting advertisersin the yellow pages: "Ay, binago na ho 'yung set-up. Ngayon ho,we will collect the payment directly. So, we will send our

collector" You file a crim case against them for estafa, andthey'll say: "NO! We are printing or own directory." And they willshow it and it is a thin directory. We filed a complaint with theSEC and the SEC ordered them to change their name because itis confusingly similar with General Telephone Directory.

There was this Philippine corporation that wanted the name"Standard Phillips Corporation". Court said: that is part of thename of Phillips Electrical Lamps, Phillips export. Phillips is thedominant word and both of them manufacture electricalappliances.

On the other hand, the Court has said that Lyceum of the Phils.cannot prevent other schools from using LYCEUM becauselyceum is a generic name. It means a school. Like UNIVERSITY,UE cannot prevent others from using university as part of their

name because it's a generic name. So Lyceum of the Phils.cannot have an exclusive right to use lyceum because it is ageneric term for schools.

The same way Ateneo is a spanish word which means school.But I think what has happened is the reverse it is a generic termthat has acquired secondary meaning. You can prevent anotherschool from using that.

Well, you have this case of Carlos Valdes, the accountant, a verycontroversial character (Jack's side-story omitted ). His son lefthis company and formed the VALDES CONSULTANTS. Valdesobjected to that, because it was a confusingly similar name. Butthe SEC said: "Eh, magkaiba naman kayo ng line of businessyou are in accounting, your son set up a consultancy firm. Andyour clients are sophisticated big men. They know that the two

are different." So the SEC allowed that.Now, the existence of a corporation begins at the time

when you get your certification, issued by the SEC. That is whenexistence begins.

There are many limitations found in the law. As forexample, you are not a bank, you cannot use bank as part of yourname; you are not a financing company, you cannot usefinancing.

And the law prohibits the use of United Nations as partof the business name of any company. The general Bonded

Warehouse Act says, if you are not a bonded warehouse, youcannot use that as part of your name. The SEC issued a memocircular in 1987, it was updated 2002, which says, you cannot usecertain name as part of your like engineering, architecture aspart of the corporate name because you cannot practice a

profession. Or, it says there you cannot use calabarzon ornational as part of your corporate name. Also you cannot usePhilippines 2000 as part of your corporate name.

Or any which consists of similar words 'coz you knowthe records are computerized, when you apply, they will check.

And the one who verifies will list down all the names which aresimilar to what you have. Now, you could be allowed to use that ifyou add your line of business, and you add another word whichsignifies that you are engaged in a different line of business. Likefor example, you have a Golden Pawnshop Incorporated, and youhave somebody running a restaurant so, Golden RestaurantsIncorporated. The SEC will allow that.

(b) Primary PurposeSec. 14. Contents of the articles of incorporation

All corporations organized under this code shall file with theSecurities and Exchange Commission articles of incorporation in anyof the official languages duly signed and acknowledged by all of theincorporators, containing substantially the following matters, exceptas otherwise prescribed by this Code or by special law:

1. The name of the corporation;

2. The specific purpose or purposes for which thecorporation is being incorporated. Where a corporationhas more than one stated purpose, the articles ofincorporation shall state which is the primary purposeand which is/are he secondary purpose or purposes:

Provided, That a non-stock corporation may not includea purpose which would change or contradict its natureas such;

I sweat, I bleed, I soarService, Sacrifice, Excellence

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The best proof of the purpose of a corporation is its articlesof incorporation and by-laws. The articles of incorporationmust state the primary and secondary purposes of thecorporation, while the by-laws outline the administrative

organization of the corporation, which, in turn, is supposed toinsure or facilitate the accomplishment of said purpose.Therefore, the Court brushed aside the contention that thecorporations were organized to illegally avoid the provisionson land reform and to avoid the payment of estate taxes, asbeing prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).

(c) Secondary Purpose

(d) Principal OfficeSec. 14. Contents of the articles of incorporation

xxx The place where the principal office of the corporation is to belocated, which must be within the Philippines; xxx

Place of residence of the corporation is the place of itsprincipal office. Clavecilla Radio System v. Antillon, 19 SCRA379 (1967)

The residence of its president is not the residence of thecorporation because a corporation has a personality separateand distinct from that of its officers and stockholders. Sy v.Tyson Enterprises, Inc., 119 SCRA 367 (1982).

UP Class NotesMust be within RP so that service of summons may be easily made;

establishes the residence of the corporation which is important indetermining the venue of actions by or against the corporation (SECCircular No. 3 dated February 16, 2006)

(e) TermSec. 11. Corporate term

A corporation shall exist for a period not exceeding fi fty (50) yearsfrom the date of incorporation unless sooner dissolved or unless saidperiod is extended. The corporate term as originally stated in the

articles of incorporation may be extended for periods not exceedingfifty (50) years in any single instance by an amendment of the articlesof incorporation, in accordance with this Code; Provided, That noextension can be made earlier than five (5) years prior to the original

or subsequent expiry date(s) unless there are justifiable reasons foran earlier extension as may be determined by the Securities andExchange Commission.

Not exceeding 50 years

No extension of term can be effected once dissolution stagehas been reached, as it constitutes new business. AlhambraCigar v. SEC, 24 SCRA 269 (1968).

UP Class NotesShall exist for a period not exceeding 50 years from the date of

incorporation; may be extended for period not exceeding 50 years byan indefinite number of amendments (meaning that the corporation

can virtually live forever); no extension can be made earlier than 5years before the expiry date unless there are justifiable reasons for theearlier extension

(f) IncorporatorsSec. 10. Number and qualifications of incorporators.

Any number of natural persons not less than five (5) but not morethan fifteen (15), all of legal age and a majority of whom are residentsof the Philippines, may form a private corporation for any lawfulpurpose or purposes. Each of the incorporators of a stock corporationmust own or be a subscriber to at least one (1) share of the capitalstock of the corporation.

Therefore, a member can no longer exist as incorporator in astock corporation.

(g) Incorporating DirectorsSec. 14. Contents of the articles of incorporation

xxx

7. The names, nationalities and residences of persons who shall actas directors or trustees until the first regular directors or t rustees are


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duly elected and qualified in accordance with this Code;

xxx

(h) Capital

(i) Authorized (Sec. 12)(ii) Subscribed (Sec. 13)

(iii) Paid-up (Sec. 13)(iv) Paid-in surplus(v) Outstanding(vi) Issued

(i) AuthorizedSec. 12. Minimum capital stock required of stock corporations

Stock corporations incorporated under this Code shall not be requiredto have any minimum authorized capital stock except as otherwisespecifically provided for by special law, and subject to the provisionsof the following section.

(ii) Subscribed Contractually enforceable.

Sec. 13.Amount of capital stock to be subscribed and paid for thepurposes of incorporation

At least twenty-five percent (25%) of the authorized capital stock asstated in the articles of incorporation must be subscribed at the timeof incorporation, and at least twenty-five (25%) per cent of the totalsubscription must be paid upon subscription, the balance to be

payable on a date or dates fixed in the contract of subscriptionwithout need of call, or in the absence of a fixed date or dates, uponcall for payment by the board of directors: Provided, however, That inno case shall the paid-up capital be less than five Thousand(P5,000.00) pesos.

Jacks Lecture

25-25 RULE

When you form a corporation, at least 25% of theauthorized capital stock must be subscribed and at least 25% of

the subscription must be paid. You can form a subsidiary where 5individuals will subscribe to 1 share each to qualify for the boardyou must own at least 1 share to be an incorporator, the rest ofthe shares will be subscribed by the holding corporation and thatwill satisfy the 25-25 rule, because that holding corporation paid

for the subscription. In computing 25-25 rule, subscriptions madeby a corporation will be included. Corporations can besubscribers, only that they can not be incorporators.

(iii) Paid-up (Sec. 13)(iv) Paid-in surplus

Paid in excess of par value(v) Outstanding

Owned by parties other than the corporation itself(vi) Issued

Legally, it is synonymous with outstanding shares.

(i) Classification of Shares

(i) Common (Sec. 6)(ii) Preferred (Sec. 6)(iii) Par Value and No par value shares (Sec. 6)(iv) Founders shares (Sec. 7)(v) Redeemable (Sec. 8)(vi) Treasury (Sec. 9)(vii) Convertible(vi ii ) Participating

Sec. 6. Classification of shares

The shares of stock of stock corporations may be divided into classes

or series of shares, or both, any of which classes or series of sharesmay have such rights, privileges or restrictions as may be stated inthe articles of incorporation: Provided, That no share may bedeprived of voting rights except those classified and issued as"preferred" or "redeemable" shares, unless otherwise provided in thisCode: Provided, further, That there shall always be a class or seriesof shares which have complete voting rights. Any or all of the sharesor series of shares may have a par value or have no par value asmay be provided for in the articles of incorporation: Provided,however, That banks, trust companies, insurance companies, public


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utilities, and building and loan associations shall not be permitted toissue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be givenpreference in the distribution of the assets of the corporation in caseof liquidation and in the distribution of dividends, or such otherpreferences as may be stated in the articles of incorporation whichare not violative of the provisions of this Code: Provided, Thatpreferred shares of stock may be issued only with a stated par value.The board of directors, where authorized in the articl

Documents

39937570 15906340 Utopia Corporation Law Reviewer 2008