CORPORATION LAW: Title I - General Provisions

SECTION. 1. Title of the Code. – This Code shall be known as the “Revised Corporation Code of the Philippines”.

SEC. 2. Corporation Defined. – A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.

SEC. 3. Classes of Corporations. – Corporations formed or organized under this Code may be stock or nonstock corporations. 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. All other corporations are nonstock corporations.

SEC. 4. Corporations Created by Special Laws or Charters. – Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable

SEC. 5. Corporators and Incorporators, Stockholders and Members. – Corporators are those who compose a corporation, whether as stockholders or shareholders in a stock corporation or as members in a nonstock corporation. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

SEC. 6. Classification of Shares. – The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock.

The shares in stock corporations may be divided into classes or series of shares, or both. No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there shall always be

a class or series of shares with complete voting rights.

Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;

(d) Incurring, creating, or increasing bonded indebtedness;

(e) Increase or decrease of authorized capital stock;

(f) Merger or consolidation of the corporation with another corporation or other corporations;

(g) Investment of corporate funds in another corporation or business in accordance with this Code; and

(h) Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote required under this Code to approve a particular corporate act shall be deemed to refer only to stocks with voting rights.

The shares or series of shares may or may not have a par value: Provided, That banks, trust, insurance, and preneed companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether publicly listed or not, shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends and in the distribution of corporate assets in case of liquidation, or such other preferences: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, further, That such terms and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission, hereinafter referred to as the “Commission”.

Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided, That no-par value shares must be issued for a consideration of at least Five pesos (P5.00) per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements.

SEC. 7. Founders’ Shares. – Founders’ shares may be given certain rights and privileges not enjoyed by the owners of other stocks. Where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years from the date of incorporation: Provided, That such exclusive right shall not be allowed if its exercise will violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known as the “Foreign Investments Act of 1991”; and other pertinent laws.

SEC. 8. Redeemable Shares. – Redeemable shares may be issued by the corporation when expressly provided in the articles of incorporation. They are shares which may be purchased by the corporation from the holders of such shares upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions stated in the articles of incorporation and the certificate of stock representing the shares, subject to rules and regulations issued by the Commission.

SEC. 9. Treasury shares. – Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.

WHAT IS A CORPORATION?

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. (sec. 2, RCCP)

An artificial being, invisible, intangible, and existing only in contemplation of law. (Dartmouth College v. Woodward, 4 Wheat [U.S.] 518)

A corporation was also defined as a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested by the policy of the law with the capacity of acting in several respect as an individual, according to the design of the institution or the powers conferred upon it either at the time of its creation or any subsequent period of its existence. (Clark on Corporations)

ATTRIBUTES OF A CORPORATION

1. Artificial being

2. Created by operation of law

3. It has the right of succession

4. It has only the powers, attributes and properties expressly authorized by law

WHAT IS AN ARTIFICIAL BEING?

A corporation as a juridical person, with a legal personality separate and distinct from the persons composing it. As a juridical person, it may own properties, exercise rights, and incur obligations independently of the persons comprising it. (Divina 2020, pg. 2)

ATTRIBUTES OF AN ARTIFICAL BEING

1. obligation incurred by the corporation, only the corporation is liable;

2. file cases in its own name;

3. acquire properties;

4. entitled to some constitutional rights - due process, equal protection, searches and seizures;

5. not entitled to moral damages except when the reputation of the corporation is affected

CONCESSION THEORY

A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders. It owes its existence to law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter.

A corporation is a juristic person resulting from an association of human beings granted legal personality by the state.

GENOSSENCHAFT THEORY

Treats the corporation as the reality of the group as a social and legal entity, independent of state recognition and concession

*rejected in the case of Tayag v. Benguet Consolidated Inc., 26 SCRA 242

IMPRIMATUR DOCTRINE

A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

REALIST OR INHERENCE THEORY

A corporation under this theory is the legal recognition of group interests that, as a practical matter, already exists. This theory tends to view the corporation as a group whose activities are such as to require separate legal recognition, with many of the attributes of a natural person, and by its focus on the voluntary associational activities of individuals provides a basis for invoking the usual constitutional and other legal protection for individuals.

SYMBOL THEORY

Under this theory, a corporation is a symbol for the aggregate of the associates in their group personalities. A corporation is regarded as the symbol for the aggregate of group jural relations of the persons composing the enterprise.

DOCTRINE OF SEPARATE PERSONALITY

A corporation has a personality separate and distinct from its members. It has a personality separate and distinct from the persons composing it as well as from that of any other entity to which it may be related.

Because of the separate personality of the corporation, the properties of the corporation are not the properties of its shareholders, members or officers. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from those who compose it.

LIMITED LIABILITY RULE

A stockholder is personally liable for the financial obligations of the corporation to the extent of his unpaid subscription

Reasons for the LLR:

(1) investment in shares is encouraged because the task of evaluating equity investment is greatly simplified considering that the low-probability even of insolvency and the financial condition of other investors can already be ignored;

(2) investment in risky ventures is encouraged;

(3) banks and other financial intermediaries who are considered experts are encouraged to closely monitor corporate debtors more closely.

Remedy

The stockholders who are sought to be made liable for their unpaid subscription should be impleaded. If the stockholders are not impleaded as defendants, a separate action should be filed against them to enforce any judgment obligation.

PIERCING THE CORPORATE VEIL

Under the doctrine of piercing the veil of corporate entity, the corporation’s separate juridical personality may be disregarded when there is an abuse of corporate form. Whenever the doctrine applies, the principal and the conduit will be treated as one; the controlled corporation will be deemed to have no separate mind, will or existence of its own, and is but a conduit for its principal.

CLASSIFICATIONS

(1) cases where public convenience may be defeated, as when the corporate fiction is used as vehicle for the evasion of an existing obligation;

(2) Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or

(3) Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation

KINDS

(1) Traditional veil-piercing action

· A court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider

(2) Reverse piercing action

· Plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider

(i) Outsider reverse piercing

Ø Occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant

(ii) Insider Reverse piercing

Ø The controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets.

THREE VARIANTS WITHIN THE DOCTRINE OF PIERCING THE VEIL OF CORPORATION

(1) Instrumentality doctrine

(2) Identity doctrine

(3) Alter ego doctrine

INSTRUMENTALITY RULE

· Also referred as the “Three-pronged Control Test”

· Calls for the application of the test consisting of 3 requisites

· Leading case in the US: Lowendahl v. Baltimore & Ohio Railroad

· Adopted in PH jurisdiction in Concept Builders, Inc. V. NLRC

ELEMENTS OF ALTER EGO (THREE-PRONGED TEST)

(i) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(ii) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

(iii) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of

IDENTITY DOCTRINE

If the plaintiff can show that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, and adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation of one corporation for the benefit of the whole enterprise

FRAUD

There is fraud if there is deception that would lead an ordinarily prudent person into error after taking the circumstances into account.

ALTER EGO DOCTRINE

If there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist. The interest of equity will be served if the separate personality of the corporation will be disregarded.

THEORY OF ENTERPRISE ENTITY

This theory was offered as a unifying dominant principle to systematize the doctrines and rules pertaining to corporations including the Doctrine of Piercing the Veil of Corporate Fiction, the rules on defective incorporation and even as an alternative justification for corporate liability for pre-incorporation promoter’s contracts.

TOTALITY OF CIRCUMSTANCES TEST

The focus is on a set of circumstances or factors that serve as indicia of the applicability of the doctrine of piercing the veil of corporate fiction. The proclivity to classify is thus eschewed and the effort is instead directed to the identification of background facts that support the conclusion that the corporate entity can be disregarded in the interest of justice and equity. What is important is the totality of the circumstances and each case must be decided on its own set of facts.

Circumstances indicating the applicability of the doctrine:

(1) Commingling of funds and other assets of the corporation with those of individual shareholders;

(2) Diversion of the corporation’s funds or assets to non-corporate (to the personal uses of the corporation’s shareholders);

(3) Failure to maintain the corporate formalities necessary for the issuance of or subscription to the corporation’s stock, such as formal approval of the stock issue by the board of directors;

(4) An individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation;

(5) Failure to maintain corporate minutes or adequate corporate records;

(6) Identical equitable ownership in two entities;

(7) Identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties);

(8) Failure to adequately capitalize a corporation for the reasonable risks of corporate undertaking;

(9) Absence of separately held corporate assets;

(10) Use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation;

(11) Sole ownership of all the stock by one individual or members of a single family;

(12) Use of the same office or business location by the corporation and its individual shareholder(s);

(13) Employment of the same employees or attorney by the corporation and its shareholder(s);

(14) Concealment or misrepresentation of the identity of the ownership, management or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security);

(15) Disregard of legal formalities and failure to maintain proper arm’s length relationship among activities;

(16) Use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity;

(17) Diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another;

(18) Contracting by the corporation with another person with the intent to avoid the risk of nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge to illegal transactions;

(19) The formation and use of the corporation to assume the existing liabilities of another person or entity

SUBSIDIARY

A subsidiary means a corporation more than 50% of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby become a parent company.

GR: If used for legitimate functions, a subsidiary’s separate existence shall be respected and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business.

Circumstance which are useful in the determination of whether a subsidiary is but a mere instrumentality or alter ego off the parent-corporation

(1) The parent corporation owns all or most of the capital stock of the subsidiary;

(2) The parent and subsidiary corporations have common directors or officers;

(3) The parent corporation finances the subsidiary;

(4) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;

(5) The subsidiary has grossly inadequate capital;

(6) The parent corporation pays the salaries and other expenses or losses of the subsidiary;

(7) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation;

(8) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own;

(9) The parent corporation uses the property of the subsidiary as its own;

(10) The formal legal requirements of the subsidiary are not observed

WHAT DO YOU MEAN BY CREATED BY OPERATION OF LAW?

This means that corporations cannot come into existence by mere agreement of the parties as in the case of business partnerships. They require special authority or grant from the state. This power is exercised by the state through the legislature, either by a special incorporation law or charter which directly creates the corporation or by means of a general corporation law under which individuals desiring to be and act as a corporation may incorporate.

A corporation is therefore created by operation of law when it is granted a franchise through a special law or if it is organized under a general law. The general law under which a corporation can be organized in the Philippines is the Corporation Code, now the RCCP.

FRANCHISES

A corporation is granted by the State the right to exist by virtue of a primary franchise. A franchise is a special privilege conferred by governmental authority, and which does not belong to citizens of the country generally as a matter of common rights.

TWO KINDS OF FRANCHISE

CORPORATE OR GENERAL FRANCHISE	SPECIAL OR SECONDARY FRANCHISE
A franchise to exist as a corporation	Certain rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes of tracks, erect poles, or string wires (Aquino, 2011)
G.R.: Granted by the Corporation Code XPN: In GOCC’s with a special charter, a special law grants the franchise	Granted by a Government Agency, or a Municipal Corporation
Cannot be transferred without the approval of Congress.	It may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property.

CONTRACT THEORY

Incorporation is deemed to involve contracts among the members, between the members and the corporation, and between the members or the corporation and the State.

What do you mean by "right of succession”?

A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency or incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares of stock. But it is by no means immortal.

It is the continued existence which enables a corporation to manage its own affairs, and hold property without the necessity of perpetual conveyances, for purposes of transmitting it. By reason of this quality, this ideal and artificial person remains, in its legal entity and personality, the same through frequent changes may be made of its members.

PERPETUAL SUCCESSION

That continuous existence which enables a corporation to manage its affairs, and hold property without the necessity of perpetual conveyances, for purposes of transmitting it.

All individual members that have existed from the foundation to the present time, or that shall ever hereafter exist, are but one person in law, a person that never dies; in like manner as the River Thames is still the same river, through parts which compose it are changing every instant.

Terms of existence of a corporation

A corporation shall have perpetual existence unless its articles of incorporation provides otherwise. (sec. 11, RCCP)

OLD corpo code - May not be formed for a term in excess of 50 years extendible to not more than 50 years in any one instance

Explain " powers and attributes, and properties expressly authorized by law, or incidental to its existence"

A corporation, being purely a creation of law, may exercise only such powers as are granted by the law of its creation. An express grant, however, is not necessary. All powers which may be implied from those expressly provided by law and those which are incidental or essential to the corporation’s existence may also be exercised.

If the act of the corporation is in direct and immediate furtherance of its business, fairly incidental to the express power and reasonably necessary to their exercise, the corporation has the power to do it. (Montelibano v. Bacolod-Murcia Milling Co.)

Can the corporation be criminally prosecuted?

Generally NO. A corporation as an artificial being, cannot commit felonies described under the RPC because artificial beings are incapable of intent.

Corporations are now criminally liable under the RCCP. The RCCP now provides that if the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon such corporation and/or upon its directors, trustees, stockholders, members officers, or employees responsible for the violation of the provisions of the RCCP or indispensable to its commission.

The deliberations in the defunct Batasang Pambansa reflected the opinion of the author of the Corporation Code that “as a general proposition, offenses mala in se where intent is indispensable cannot be committed by a corporation because the existence or presence of criminal intent assumes the existence of a will which only a natural person may have. However, offenses mala prohibita, which may be committed simply by committing the act prohibited, may be committed by a corporation.

MAY A CORPORATION BE LIABLE FOR TORTS?

A corporation is civilly liable in the same manner as natural persons for torts because the rules governing the liability of a principal or master for a tort committed by an agent are the same whether the principal or master be a natural person or a corporation. A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or generally, from the directors as the governing body.

May a corporation claim moral damages?

Generally, the award of moral damages cannot be granted in favor a corporation because being an artificial person and having existence only in legal contemplation, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock which are the causes of moral damages under the Civil Code. However, it may acquire goodwill or reputation of its own and if the same is besmirched, the corporation may recover moral damages.

Classes of Corporations

a. As to the existence of shares of stock

i. Stock Corporation – has capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits based on the shares held

ii. Non-stock Corporation – has no capital stock and/or not authorized to distribute dividends to its

b. As to organizers

i. Public – by the State only

ii. Private – by private persons alone or with the State

c. As to function

i. Public – organized for the government of a portion of the State

ii. Private – usually organized for profit

d. As to Governing Law

i. Government-owned and controlled corporation (GOCC) – governed by the special law creating it and the provisions of the RCC suppletorily to the extent applicable. In case of conflict, the special law prevails.

ii. Private – governed by the RCC. The RCC is also the governing law for non-chartered GOCC

e. As to Legal Status

i. De Jure – one that has fulfilled all the requirements mandated by law and can successfully resist a suit by the State to challenge its existence. De jure means “a matter of law” that validates the corporation as a legal entity

ii. De Facto – is one organized with colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be inquired only by a direct attack by the State through a quo warranto proceeding.

iii. By Estoppel – exists when 2 or more persons assume to act as a corporation knowing it to be without authority to do so. They are liable as general partners for all debts, liabilities, and damages incurred or arising as a result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered by it as a corporation or any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was, in fact, no corporation.

iv. By Prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power

f. As to Relationship of Management and Control

i. Holding corporation – a corporation that holds stocks in other companies for purposes of control rather than for mere investment

ii. Subsidiary corporation – a company that is owned or controlled by another company, called the parent company

iii. Affiliates - two companies are affiliates when one company owns less than the majority of the voting stock of the other

iv. Parent company – A corporation that owns enough voting stock in another company to control management and operation by influencing or electing its board of directors

g. As to place of Incorporation

i. Domestic – formed, organized, or existing under Philippine laws

ii. Foreign – formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State

h. Other Classifications

i. Closed corporation – one whose articles of incorporation provides that all of the corporation’s issued stock of all classes exclusive of treasury shares, shall be held of record by not more than specified restrictions on transfers; and it shall not list any stock exchange or make any public offering its stocks of any class,

ii. Special corporations – include educational corporations and religious corporations

iii. One-Person Corporation – a corporation wherein all of the stocks are held directly or indirectly by one person

ELEMENTS OF A GOCC

GOCCs are stock or non-stock corporations vested with functions relating to public needs that are owned and controlled by the government directly or through instrumentalities.

Attributes:

(1) Its organizations as stock or non-stock corporation;

(2) Public character of its function

(3) Government ownership over the same

Test to Determine the Nationality of a Corporation

1. Place of incorporation test

· The nationality of the corporation is determined by the state of incorporation

· Under this test, a corporation is a Philippine national if it is organized and existing under Philippine laws, regardless of the nationality of the shareholders

· It is applied if the corporation is not engaged in areas of activities reserved, in whole or in part, for Filipinos

2. Control Test

· A mode of determining the nationality of a corporation engaged in nationalized areas of activities

· If the capital of the investing Corporation is at least 60% owned by Filipinos, then the entire shareholdings of the investing Corporation shall be recorded as Filipino-owned thus making both the investing and investee-corporations Philippine national

3. Grandfather rule

· This the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other applicable laws, is accurately computed, in cases where corporate shareholders with foreign shareholdings are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder

What is the prevailing mode of determining the nationality of corporations engaged in nationalized activities?

The “control test” is the prevailing mode of determining the nationality of corporations engaged in nationalized activities. However, when in the mind of the Court there is doubt as to where beneficial ownership and control reside, based on the attendant facts and circumstances of the case, then it may apply the grandfather rule.

Conditions for the Application of the Control Test and Grandfather Rule

a. The corporation is engaged in economic activities that are reserved, in whole or in part, for Filipinos, otherwise known as nationalized activities

b. Stockholders include corporations. If stockholders are all natural persons, the nationality of the corporation, under this test is ascertained by simply computing the percentage of stock ownership by Filipino and foreigners

c. Foreign stockholders are present either by owning shares directly in the corporation or owning shares in a corporation that invested in the equity of the corporation whose nationality is in issue

When is the grandfather rule applied?

a. Under the Grandfather Rule proper, if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality

b. Under the Strict Rule of Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation, when traced to determine the total percentage of Filipino ownership, show less than 60% requirement

c. If based on records, Filipinos own at least 60% of the investing corporation but there is doubt as to where control and beneficial ownership in the corporation really reside

Salient Points of the amendment to the Public Service Act

· Public utility is now clearly defined and distinguished from public service. Prior to the amendments, the Philippine Supreme Court had construed public utility to mean public service. However, with the passage of the amended PSA, it is clear that this can no longer be the case. Under the amended law, public utility is expressly defined as a public service that operates, manages or controls for public use any of the following services: 1) distribution of electricity; 2) transmission of electricity; 3) petroleum and petroleum products pipeline transmission systems, 4) water pipelines distribution systems and wastewater pipeline systems, 5) seaports, and 6) public utility vehicles. On the other hand, public service has retained its original definition under the old PSA. As such, it is now clear that public utility and public service do not refer to the same thing. To put maters into perspective, all public utilities are public services, but not all public services are public utilities.

· Congress has the power to classify a public service as a public utility. Under the amended PSA, no other service shall be deemed a public utility. This notwithstanding, Congress is empowered by law to add to the classification of public utilities through the enactment of a statute.

· Administrative agencies are prohibited from imposing nationality requirements on public services not classified as public utilities. The amended PSA expressly prohibits administrative agencies from imposing nationality requirements on public services not classified as public utilities.

· The President is bestowed with power to suspend or prohibit proposed mergers or acquisitions involving public services that would effectively give control to foreigners. Under the amended PSA, the President is given the power to suspend or prohibit any proposed merger or acquisition transaction, or any investment in a public service, which would effectively result in the grant of control to a foreign national.

· Foreign nationals may invest in public services classified as critical infrastructure subject to reciprocity rules. A foreign national is not allowed to own more than 50% equity in a public service engaged in the operation and management of critical infrastructure unless the country of such foreign national extends the same privilege to Philippine nationals as may be provided by foreign law, treaty or international agreement.

Who composes a corporation?

(a) Corporators – those who compose a corporation, whether as stockholders or shareholders in a stock corporation, or as members in a non-stock corporation

(b) Incorporators – stockholders or members mentioned in the AoI as originally forming and composing the corporation and who are signatories thereof

(c) Board of Directors – generally elected by the stockholders to conduct the business, control the property, and exercise corporate powers

(d) Officers – those appointed to assist the Board to manage the affairs

What is a promoter?

A promoter is a person who brings about or causes to bring about the formation and organization of a corporation by bringing together the incorporators or the persons interested in the enterprise, procuring subscriptions or capital to the corporation and setting in motion the machinery which leads to the incorporation of the corporation itself.

What are shares of stock?

Shares of stock are forms of securities representing equity ownership in a corporation, divided up into units. They are the measure of the stockholder’s proportionate interest in the corporation in terms of the right to vote and to receive dividends, as well as the right to share in the assets of the corporation when distributed in accordance with law and equity.

Doctrine of Equality of Shares

The doctrine of equality of shares means that all stocks issued by the corporation are presumed equal, with the same privileges and liabilities, provided that the articles of incorporation is silent on such differences.

Classes of Shares

1. Common shares

- Common shares are the basic class of stock ordinarily and usually issued without privileges or advantages except that they cannot be denied the right to vote

2. Preferred shares

- These are shares of stock that are given certain preferences as may be provided in the articles of incorporation but may be denied the right to vote

- Classification:

(a) Preferred shares as to assets – gives the holder the preference in the distribution of the assets of the corporation in case of liquidation

(b) Preferred shares as to dividends – makes the holder entitled to receive dividends to the extent agreed upon before any dividends at all are paid to the holders of common stock

(1) Cumulative Preferred Shares – the stipulated dividend on this type of preferred shares, if not paid on any given year, shall be added to the dividends which shall be due the following year(s), and holders of preferred shares shall be paid the accumulated dividends during the accumulated period before dividends are paid to the holders of common shares

(2) Non-cumulative preferred shares – if dividends are not declared for a particular year within, the covered period, the right to receive dividend for such year is extinguished

(3) Participating Preferred shares – after payment of the dividends due to the shares, the holder thereof is entitled to participate in the remaining dividends with the holders of the common shares based on the amount specified in the agreement, otherwise, in proportion to the common shares

(4) Non-participating preferred shares – after receiving the dividend due on the shares, the remaining dividends are distributed proportionately to holders of the common shares

3. Par Value shares – are those with a fixed arbitrary amount specified in the articles of incorporation and in the stock certificate

4. No par value shares – it is a stock without par value on the face of the stock certificate. No par value shares can be issued for varying amounts provided that the value or price for every issuance is not less than P5 per share

5. Voting shares – shares which can vote on all corporate acts requiring stockholders’ approval

6. Non-voting shares – these are shares that are denied the right to vote in the articles of incorporation

7. Classification to comply with Constitutional or legal requirements

8. Founder’s shares – shares classified as such in the articles of incorporation which may be given certain rights and privileges not enjoyed by owners of other stocks

9. Treasury shares – shares of stock that had been issued and fully paid for but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or some other lawful means

10. Redeemable shares – shares which may be purchased by the corporation from the holders of such shares upon the expiration of a fixed period, regardless of the existence of unrestricted earnings in the books of the corporation, and upon such other terms and conditions stated in the AoI and the certificate of stock representing the shares, subject to rules and regulations issued by SEC

- KINDS:

(a) Mandatory – the issuing corporation must redeem the shares after the expiration of a stated period or when demanded by the holder; provided that the corporation has sufficient assets to pay for the shares or the redemption will not bring about the insolvency of the corporation

(b) Optional – the issuing corporation may or may not redeem the shares after a stated period

11. Watered shares

12. Other classification as may be provided in the articles of incorporation; provided it is not contrary to law

Are holders of preferred shares creditors of the corporation?

The preferences granted to the holders of the preferred stockholders do not give them lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Shareholders, both common and preferred are considered risk-takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid.

Limitations on the issuance of No par value shares

a. Banks, trust, insurance, and preneed companies, public utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether publicly listed or not, shall not be permitted to issue no par value shares of stock

b. Preferred shares of stock may be issued only with a stated par value

c. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or its creditors in respect thereto

d. No par value shares must be issued for a consideration of at least P5 per share

e. The entire consideration received by the corporation for its no par value shares shall be treated as capital and shall not be available for distribution as dividends

In what instances does the law vest the right to vote for non-voting shares?

a. Amendment of the articles of incorporation

b. Adoption and amendment of bylaws

c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property;

d. Incurring, creating, or increasing bonded indebtedness;

e. Increase or decrease of authorized capital stock;

f. Merger or consolidation of the corporation with another corporation or other corporations

g. Investment of corporate funds in another corporation or business in accordance with the RCC; and

h. Dissolution of the corporation

Can the corporation be compelled to redeem redeemable shares if it has no available surplus profit?

Yes, if the redeemable shares are mandatory in nature, the issuing corporation may be compelled to redeem the shares, regardless of the existence of unrestricted retained earnings.

It should be noted, however, that redemption may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.

Can the reacquired redeemable shares be re-issued?

Reacquired redeemable shares are considered retired and may no longer be reissued unless otherwise stated in the AoI. The retirement of treasury shares of this nature has the effect of decreasing the capital stock of the corporation.

Legitimate purposes where a corporation is allowed to acquire its own share

(a) To eliminate fractional shares arising our of stock dividends;

(b) To collect or compromise an indebtedness to the corporation, arising out of the unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during the said sale; and

Other kinds of shares

(a) Escrow stock – a stock deposited with a third person to be delivered to a stockholder or his assign, after complying with certain conditions, usually the full payment of subscription or purchase price

(b) Convertible share – a share that is changeable by the stockholder from one class to another at a certain price and within a certain period

(d) Interest bearing share – a share where the corporation agrees absolutely to pay interest before dividends are paid to common stockholders

Cassie Lost in Lawst School

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CORPORATION LAW: Title I - General Provisions

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