Salient Features of Law on Private Corporations

Enabling Law- The New Corporation Code (Batas Pambansa No. 68), which became
effective on May 1, 1980.
Definition of Corporation:
A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or incident to
its existence.
Attributes of a Corporation:
1.

It is an artificial person. Separate and distinct juridical personality commencing

from the time the SEC approves the Articles of Incorporation and issues the
certificate of Incorporation (Sec. 19)

2.

It is created by operation of law. - Once approved by the State, the corporation is

conferred
a) Primary Franchise the right given to exist as a corporation
b) Secondary Franchise- It is the right given to operate its business wit all the
powers, attributes and properties.

3.

It has the right of succession.- May continue to exist for the duration of its life
term, uninterrupted and unaffected by the internal changes within the corporation,
such as death, insolvency or insanity of a director or stockholders.
It has the powers, attributes and properties authorized by law of incident to its
existence.

4.

How to determine the nationality of citizenship of a corporation?

1.
2.

Incorporation rule The corporate nationality of the corporation shall be

determined in accordance with the laws of the country where it is created.
Control Test- The nationality of the corporation is determined by the nationality of
the controlling stockholders.

Important Doctrines:
1.

2.

3.
4.

5.

Doctrine of the Piercing the Veil of the Corporate Fiction - When a corporations are
organized in a manner which is detrimental to the society such as for the
protection of fraud, for tax evasion, such corporate entity will be disregarded and
will be considered as a mere association of persons and all members thereof will
be personally liable.
Doctrine of Business Opportunity- (Sec. 34)- This principle reiterates that no
director of a corporation shall place his personal interest over and above the
interest of the corporation. Thus a director is given a business opportunity which
the corporation can financially take advantage of considering the director is
expected to turn over such business opportunity to the corporation.
Trust Fund Theory (Sec. 65)- A subscriber or stockholder shall be considered a
trustee for his unpaid subscription by the corporation and the corporate creditors
until such unpaid balance of the said subscription is fully paid.
Trust Fund Doctrine- (Sec. 122) There are two concepts of this doctrine whereby
the stockholders who receive he corporate assets are deemed Trustees for such
property or assets received by them under the following instances:
a) When a solvent corporation, through its Board of Directors, distributes all
its corporate assets to its stockholders, the corporate creditors can sue
directors and recover the assets from the stockholders;
b) In a dissolved corporations, the corporate creditors may also sue the
directors if the assets are distributed to the stockholders without first
liquidating all corporate liabilities and recover such assets from the
stockholders.
Doctrine of Limited Capacity Under Section 2 of the New Corporation Code, a
corporation has only such powers as are expressly granted, those are necessarily
implied from those expressly granted and those incident to its existence.

Classes of Corporation:
1.
2.

Stock Corporation - Private corporations with capital stock divided into shares and
are authorized to distribute to holders of such shares, dividends or allotments of
the surplus profits on the basis of the shares held.
Non- Stock Corporation- Those which are organized for profit and do not issue
shares of stocks.

Kinds of Corporation:

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1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

17.

Public Corporation- those formed or organized for the government of a portion of a

State.
Quasi Public corporation-Those which accepted from the State the grant of
franchise or contract involving the performance of public duties but which are
organized for profit.
Private Corporation- those formed for some private purpose, benefit, aim or end.
Domestic Corporation- one incorporated under the laws of the Philippines.
Foreign Corporation-one formed or organized or existing under the laws other than
the Phils.
Corporation Sole-a Religious Corporation consisting of one member or corporator
only and his successors, such as a bishop.
Corporation Aggregate- A corporation composing of more than one corporator.
De Facto Corporation- a corporation existing in fact but not in law (Sec. 21).
De Jure Corporation- A corporation in fact and in law.
Eleemosynary Corporation- one established for charitable purposes or those
supported by charity.
Ecclesiastical Corporation-one organized for religious purpose.
Lay Corporation- One organized for a purpose other than for religion.
Close Corporation- A corporation limited to selected persons or members of a
family (Secs. 96-105)
Open Corporation- Corporation that is open to everybody who wishes to become a
stockholder.
Multi-national Corporation- A corporation organized in one state but operates in
several countries.
Corporation by Estoppel one that in reality is not a corporation, either de jure or
de facto, because it is so defectively formed, but it is considered a corporation in
relation to those who, by reason of acts or admissions, are precluded from
asserting that it is not a corporation. Under Sec. 21, persons who represent
themselves as a corporation although not legally constituted shall be liable as
general partners for all debts, liabilities and damages incurred therein.
Corporation by Prescription- one which has exercised corporate powers for an
indefinite period without interference on the part of the sovereign power and by
fiction of law is given a status of a corporation. Ex. The Roman Catholic Church

Distinction between Incorporators and corporators (Sec. 5)

1.
2.

Corporators are the people who comprise the corporation such as the
incorporators, stockholders or members.
Incorporators - These are the original founders of the corporation whose name
appears in the articles of incorporation.

Definition of Promoter - A promoter is one who assists the incorporations in the organization of
a corporation by making all the preparations for its organization, attracts investors to finance it
and assists in the approval and launching of the corporation.
Functions of a Promoter:
1)
2)
3)
4)

Looks for the right kind of business

Takes care of the formulation of a business and financial plans.
Look for financing people to invest in a corporation
Assists in the approval and launching of the corporation.

Steps in the creation of a corporation:

1.
2.

3.

Promotion It includes all business operations peculiar to the business world such
a bringing together the incorporation of persons interested in the enterprise,
procuring subscription, making financial arrangement, etc.
Incorporation - Drafting and execution of the articles of incorporation, filing of the
articles of incorporation, payment of the filing and publication fees, issuance by
the Securities and Exchange Commission of the certificate of incorporation if all
papers are found in order.
Formal Organization and commencement of business operations- Corporate
existence commences to have juridical personality only from the moment the SEC
issues to the incorporators a certificate or incorporators, under its official seal. But
the corporation is not yet ready for business unless it is organized.

Note: Non-user of the corporate charter within two (2) years from the date of
incorporation shall result to automatic dissolution of the corporation. If corporation
already commenced business but subsequently becomes continuously inoperative for
period not less than 5 years, it becomes a ground for suspension or revocation of its
corporate charter. (Section 22)
No. of Incorporator in Stock Corporation not less than 5 but not more than 15

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Qualifications
Natural persons
Capacitated to enter into contracts
Must own and subscribe to at least one share
Majority of the incorporators must be residents of the Philippines.
Discussions:
In the absence of any provisions in the by-laws, directors are not entitled for any
compensation except for reasonable per diems. Thus, they are entitled of compensation if (a)
provided in the by laws and (b) by a vote of the stockholders representing majority of the
outstanding capital stock. Significantly, if directors are allowed to claim compensation, their
yearly compensation shall not exceed 10% of the net income of the corporation before income
tax of the preceding year (Sec. 30).
Self-dealing directors are directors of the corporation who enter a contract with the
corporation. Said contracts are voidable in character at the option of the corporation except:
a) The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
b) That the cote of such director or trustee is not necessary for the approval
of the contract;
c) The contract is fair and reasonable under the circumstances; and
d) That in the case of an officer, the contract with the officers has been
previously authorized by the Board of Directors.
Contracts entered by a self-dealing director is however ratified by a vote of the
stockholders representing 2/3 of the outstanding capital stock. (Sec. 32)
Interlocking director- is one who is a director of two corporations dealing with each
other.
The rule is the contract entered by two corporations with interlocking directors are
valid provided there is no fraud and the contract is fair and reasonable under circumstances.
But an interlocking director may be treated as self-dealing director where his interest in one
corporation is merely nominal and in the other corporation greater than 20% of its outstanding
capital stock, in such case the rule on Sec. 32 applies. (Sec. 33)
AS TO PERIOD:
Maximum life of a corporation is fifty years (50) years, unless sooner dissolved or
unless said period is extended for periods not exceeding a total of another 50 years. Extension
of the term of the corporation must be made within 5 years prior to its expiration. Extension of
corporate existence must precede amendment of its Articles of Incorporation, which is duly
approved by the SEC. The rule of Power of Succession or Perpetual Existence applies. This
means that the corporation enjoys continuity of corporate existence for the entire duration of
his life, uninterrupted and unaffected by internal changes which may occur in the corporation
such as death, insolvency or insanity of the directors or stockholders.
The Corporation Code does not prescribe a fixed amount of Authorized Capital Stock.
But it is required that 25% of the Authorized Capital Stock is subscribed (which is then called
as Subscribed Capital Stock) and 25% of the Subscribed Capital Stock shall be paid up. Paid up
capital must not be less tan P 5,000.
If the Authorized Capital Stock is expressed in No Par Value shares, the 25% subscribed
capital stock and 25% paid in capital shall be based on he no par value shares of the
authorized capital stock.
What are the things important in the Articles of Incorporation to an Accountant?
1.
2.
3.
4.
5.

The life of the corporation to determine if it still validly exists.

The purpose of the corporation to determine if it is operating within its powers and
objects.
The amount of its Authorized Capital Stock and its equivalent in terms of shares,
the part value of each share.
The amount of its 25% Subscribed Capital Stock and its 25% Paid-up.
The treasurers Affidavit certifying that the Authorized Capital Stock has been
subscribed and 25% of the subscribed capital stock is paid-up which is not less
than P 5,000.

Amendment of the articles of incorporation may be approved by a majority vote of the

Board of Directors and the vote or written assent of the stockholders constituting 2/3 of the
outstanding capital stock, (Sec. 16). The amendment of the articles of incorporation takes
effect upon the approval of SEC or from the date of filing with SEC if not acted upon within 6
months not due to the fault of the corporation.

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Outstanding capital stockthe total shares of stock issued to subscribers or

stockholders fully or partially paid as long as there is a binding subscription agreement.
Grounds for rejection or disapproval of the Articles or Amendment of Articles (Sec. 17)
1.
2.

When the articles or amendments are not in the prescribed form;

When the purpose/s are patently unconstitutional, illegal, immoral or contrary to
government rules and regulations;
3. When the treasurers affidavit is false;
4. When ownership of capital stock by Filipino citizens is not in accordance with the
Constitution or existing laws;
5. No Articles or Amendments of banks, financial institution, etc., shall be accepted or
approved by the SEC unless accompanied by a favorable recommendation of the
appropriate government agency such Articles or Amendments are in accordance
with law.
Corporate existence commences from the time the SEC approves the Articles of
Incorporation and issues a Certificate of Incorporation. The corporation thus acquires
juridical personality, (Sec. 19).
Endorsement from Government Agencies
It should be noted that certain kinds of corporations require secondary license and
endorsement from other government agencies depending on their purpose and nature. The
following are the corporate activities that require endorsements from different government
agencies.
a. Civil Aeronautics Board (CAB) for Air Transport
b. Bangko Sentral ng Pilipinas for banking, pawnshops & other financial intermediaries with
quasi-banking functions.
c. Games and Amusement Board (GAB) for Professional boxing
d. Philippine Charity Sweeptakes Office (PCSO) for operation of games of chance (e.g. lotto)
e. Department of Education (DepEd) for educational institution elementary to eigh school
f. Commission on Higher Education (CHED) for educational institution college or gertiary
course
g. Technical Skills Development Authority (TESDA) for educational institution technical or
vocational course
h. Department of Energy (DOE) for electric power plants
i. Department of Health (DOH) for hospitals
j. Insurance Commission (IC) for insurance
k. Land Transportation Franchise Regulatory Board (LTFRB) for land transport
l. Maritime Industry Authority (MARINA) for water transport, construction and building of
vessels
m. National Telecommunications Commission (NTC) for operation of radio, television and
telephone
n. Philippine Overseas Employment Administration (POEA) for recruitment of overseas
employment
Persons acting as a Corporation by Estoppel shall be liable as general partners
for all debts, liabilities and damages incurred. The Corporation by Estoppel shall not
be allowed to put up as a defense its lack of corporate personality. Neither can a third
party dealing with the corporation refuse performance or escape liability on the ground
that he was not dealing with a valid corporation, (Sec. 21).
Meaning of De Facto Corporation
A De Facto corporation is one, which actually exists for all practical purposes as a
corporation but which has no legal right to corporate existence as against the State.
Requisites of a de facto corporation.
1.
2.
3.

A valid law under which the corporation might be incorporated;

A bonafide attempt to organized under such law;
Actual user or exercise in good faith of corporate powers conferred upon it by law;

Examples:
1. Name of corporation closely resembles that of a pre-existing corporation that will
tend to deceive the public;
2. The incorporator or a certain number of them are not residents of the Phils.;
3. The acknowledgment of the articles of incorporation or certificate of incorporation
is insufficient or defective in form or it was acknowledged before the wrong officer.

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The following cannot give rise to de facto corporation:

1.
2.
3.

Absence of articles of incorporation

Failure to file articles of incorporation with the SEC
Lack of certification of incorporation from the SEC

A de facto corporation can only be assailed through a QUO WARRANTO proceeding

which means by what right?. It is a proceeding inquiring as to the right if the
corporation to operate its business and initiated by the State through the Solicitor
General.
CORPORATE POWERS:
Classification of Corporate Powers:
1.
2.

Express Powers those conferred by law or its charter.

Implied Powers - those powers incidental to the corporations existence or
necessary to execute the express powers.

GENERAL POWERS EXPRESSLY GRANTED TO CORPORATIONS (Sec. 36)

1.
2.

To sue and to be sued in its corporate name;

Of succession by its corporate name for a period of time stated in the articles of
incorporation and the certificate of incorporation.
3. To adopt and use a corporate seal.
4. To amend its articles of incorporation in accordance with provision of the
corporation Code.
5. To adopt by-laws, not contrary to law, morals or public policy and to amend and
repeal the same in accordance with the Code;
6. In case of stock corporations, to issue or sell stocks to subscriber and to sell
treasury stocks in accordance with provision of the code; and to admit members to
the corporation, if it is a non-stock corporation.
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful business of the corporation
may reasonably and necessarily require, subject to the limitations prescribed by
law and the Constitution.
8. To enter into merger or consolidation with other corporations as provided in the
Code.
9. To make reasonable donations, including those for public welfare or for hospital,
charitable, cultural, scientific, civic, similar purposes. However, no corporation,
domestic or foreign, shall give donation in aid of any political party or candidate for
purpose of partisan political activity.
10. To establish pension, retirement and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation.
OTHER POWERS EXPRESSLY CONFERRED BY THE CODE:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Power to extend or shorten corporate term (Sec. 37)

Power to increase or decrease capital stock (Sec. 38)
Power to incur, create or increase bonded indebtedness (Ibid)
Power to deny pre-emptive right (Sec. 39)
Power to sell, lease, exchange, mortgage, pledge or otherwise dispose all or
substantially all of its property or assets (Sec. 40)
Power to acquire or purchase its own shares (Sec. 41)
Power to invest corporate funds in another corporation or business or for any other
purposes (Sec. 42)
Power to declare dividends (Sec. 43)
Power to enter into management contracts.

VOTING PROPORTIONS REQUIRED FOR THE APPROVAL OF CORPORATE ACTS

1.
2.
3.
4.
5.

To amend the articles of incorporation- A MAJORITY VOTE of the Board of Directors

and vote or written assent of 2/3 of the outstanding capital stock;
To elect directors or trustees majority of the outstanding capital stock or member
entitled to vote (sec. 28);
To call a special meeting to remove directors or trustees- majority of the
outstanding capital stock entitled to vote (sec. 28)
To ratify a contract of a director/trustee or officer with the corporation (Sec. 32)
2/3 of the outstanding capital stock or members;
To extend or shorten corporate term-majority vote of the directors and 2/3 of the
outstanding capital stock,(Sec. 37);

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6.
7.
8.
9.
10.
11.

12.
13.
14.
15.
16.
17.
18.
19.

To incur or decrease the capital stock- majority vote of the directors and 2/3 of the
outstanding capital stock (Sec. 38);
To incur, create or increase bonded indebtedness- majority vote of the directors
and 2/3 of the outstanding capital stock (Sec. 38);
To sell, lease, exchange, mortgage or otherwise dispose all or substantially all
properties or assets of the corporation- majority vote of the directors and 2/3 of
the outstanding capital stock (Sec. 40);
To invest corporate funds in another business other than the primary purposemajority vote of the directors and 2/3 of the outstanding capital stock (Sec. 42);
To issue stock dividends- majority vote of the directors and 2/3 of the outstanding
capital stock (Sec. 43). The approval of the stockholders is not required with
respect to other dividends such as cash and bond dividends;
To enter into a management contract- a majority of the quorum of the board of the
directors and a majority of the outstanding capital stock of both the managed and
managing corporation and in some cases 2/3 of the total outstanding capital stock
entitled to vote with respect to the managed corporation (Sec. 44)
To adopt by laws majority vote of the outstanding capital stock (Sec. 46)
To amend or repeal the by-laws or adopt a new by-laws- a majority of the board
and outstanding capital stock (sec. 48)
To delegate to the board the power to amend, repeal and adopt by laws,-2/3 of the
outstanding capital stock, (Sec. 46)
To revoke the power delegated to the Board in No. 14-majority vote of the
outstanding capital stock.
To fix the issued price of non par value shares- majority of the quorum of Board, if
authorized and in the absence of authority, by majority of the outstanding capital
stock ( Sec. 62, last par.)
To effect or amend a plan of merger or consolidation- majority vote of the directors
and 2/3 of the outstanding capital stock of the constituent corporation (Sec. 77);
To dissolve the corporation- majority vote of the directors and 2/3 of the
outstanding capital stock (Secs. 118-119);
To adopt a plan of distribution of assets of a non-stock corporation- majority vote of
the trustees and 2/3 of the members having voting rights (Sec. 95, par, 2);

DEFINITION OF COMMON CORPORATE TERMS:

1.
2.

3.
4.

5.
6.

Capital Stock- The amount fixed in the articles of incorporation to be subscribed

and paid in or agreed to be paid in by the stockholders of a corporation.
Authorized capital stock- synonymous with capital stock if referring to corporations
issuing par value shares. If the corporation issues no par value shares, it has no
authorized capital stock but it has a capital stock the amount of which is not stated
in the articles of incorporation.
Subscribed Capital Stock- the amount of the capital stock subscribed whether fully
paid or not.
Outstanding Capital Stock- This is synonymous with subscribed capital stock in
most cases. It is that portion of the capital stock, which is issued and held by
persons other than the corporation.
Treasury shares are not considered
outstanding.
Paid-up capital stock- that portion of the capital stock that is paid.
Capital- the actual property or assets of the corporation.

Meaning of shares of stock - is an integral unit of the authorized capital stock of a corporation.
Meaning of Stock certificate- a written evidence of ownership of shares in a corporation and
the rights and liabilities and is not considered as the stock itself.
Note: As a rule a certificate of stock will not be issued to a stockholder until his
subscription is fully paid
Main classes of shares
1.
2.

Par value shares- shares with a specific value fixed in the articles of incorporation
and appearing in the certificate of stock;
No par value shares- shares without any stated value appearing on the face of the
certificate of stock.
Notes : The following cannot issue no par value shares:
a) Banks, trust companies, insurance companies and building and loan
associations.
Preferred shares of stock may be issued only with a stated par value.
Shares 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 the creditors with respect thereto.

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Shares without par may not be issued for a consideration less than the
value of P 5.00 per share. 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.
3.
4.

Voting shares- shares with right to vote.

Non Voting shares- shares without right to vote. Shares issued originally with
voting rights cannot be deprived with voting rights without the consent of the
holder.
Notes: Non-voting shares are, as a rule, not allowed to vote, except:
1.
2.
3.
4.
5.
6.

5.
6.
7.

8.
9.
10.

11.

12.

13.

In the approval of the amendment to the Articles;

Adoption and amendment of the by-laws
Sale, lease, exchange etc. of all or substantially assets of the corporation
Incurring, creating or increasing bonded indebtedness
Investment of corporate funds in other corporation
Dissolution of the corporation

Common shares- stocks which corporations generally issue.

Preferred shares- shares entitle the holder thereof certain preferences over the
holders of common shares in the payment of dividends or distribution of the assets
of the corporation.
Shares in Escrow- shares subject to an agreement by virtue of which the share is
deposited by the grantor or his agent with third person to be kept by the
depositary until the performance of a certain condition or happening of a certain
event contained in the agreement.
Convertible shares- stock which is convertible or changeable by stockholders from
one class to another class such as from preferred to common, at a certain price
and within a certain period.
Promoter shares- shares issued to promoters.
Founders shares- shares issued to organizers of the corporation in consideration a
supposed right or property. They are given special rights and privileges not
enjoyed by the owners of other stocks, such as preference in the payment of
dividends and the exclusive right to vote and be voted for the election of directors.
Said right to vote and be voted is limited to a period of 5 years, subject to the
approval of SEC.
Redeemable shares (callable Shares)-shares usually preferred, which by its terms is
redeemable at a fixed date or at the option of either the corporation or stockholder
or both at a certain redemption price. The law requires that all terms and
conditions affecting such shares must be stated not only in the articles of
incorporation but also in the certificate stock. Redeemable shares may be
redeemed by the corporation regardless of the existence of unrestricted retained
earnings in the books of the corporation. (Sec. 8)
Treasury shares- shares which has been lawfully issued by the corporation as fully
paid and later reacquired by purchase, redemption, donation or through some
other means. The corporation may again dispose of for a reasonable price fixed by
the Board. It is not entitled to vote, not entitled of dividends, cannot be voted and
not entitled of any privileges or rights.
Watered stocks - Stocks issued by the corporation that are:
a) Stocks issued for a price less than their par value (discount shares);
b) Stocks are issued for no value or consideration at all (Bonus shares);
c) Stocks are issued as payment for property acquired by the corporation, the
value of which is less than the par value of the shares issued;
d) Stocks are issued as dividends, the par value of which is not supported by
amount of profits taken from retained warning account and transferred to
stated capital.
Note: liability of directors for watered stock: directors or officers who consent
to the issue of watered stocks shall be solidarily liable together with the
stockholder who receives the watered stocks, to the corporation and the
corporate creditors for the difference between the fair value received at the
time of issuance of the stock and the par or issued value of such stock. (Sec.
65)

APPRAISAL RIGHT
It is the right of the stockholder to dissent against certain corporate actions and to
demand payment of the fair value of his shares.
What corporate actions can a stockholder exercised appraisal right?
1.
2.

Amendment to the articles changing or restricting the rights of any stockholder or

class of shares;
In case of amendment extending or shortening the corporate term

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3.
4.
5.
6.

in case of sale or other disposition of all or substantially all assets of the

corporation;
In case of merger and consolidation
In case of investment of corporate funds in another corporation
Any stockholder in a close corporation, may for any reason, compel said
corporation to purchase his shares under Sec. 105)

PRE-EMPTIVE RIGHT
Unless denied by the articles of incorporation, a stockholders pre-emptive right is the
stockholders privilege to subscribe to all issues or disposition of shares of any class in
proportion to his shareholdings, before sold to non-stockholders.
Pre-emptive right shall not extend to the following:
a) Shares issued in compliance with law requiring stock offerings or
minimum stock ownership of the public;
b) Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock for
exchange for property needed for corporate purpose; or in
payment of previously contracted debt.
Meaning of Proxy:
It is one who is given an authority by the stockholder to vote for him in a stockholders
meeting. It is a special form of agency. Proxy is also used as the written document evidencing
the authority given to the agent by the stockholder. The proxy must be submitted to the
corporation and valid only for the meeting or unless otherwise provided not to exceed 5 years
at any time.
VOTING TRUST- one created by an agreement between a group of stockholders of a
corporation and the trustee, or by a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided that for a term of years, or for a
period contingent upon a certain event, or until the agreement is terminated, control over the
stocks owned by such stockholder shall be lodged to the trustee. Under this agreement, the
stockholder remains the beneficial or equitable owner of the shares, but legal ownership is
transferred to the trustee. It must not exceed a period of 5 years unless it is conditioned upon
a loan agreement. It shall automatically expire upon full payment of the loan. A new
certificate of stock is issued to the trustee with indication that said is issued in consideration of
a voting trust agreement. The trustee on the other hand shall issue voting trust certificates to
the original stockholders. (Sec. 59)
Discussion between Control Test and Grandfather Rule. (A board subject)
As a rule, the control test applies. The primacy of the control test over the grandfather rule can
be traced to DOJ Opinion No. 19, s. 1989 (the 1989 DOJ Ruling), which states:
. . . the Grandfather Rule, which was evolved and applied by the SEC in several cases, will
not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural
resource corporation is not in doubt. (underscoring supplied)
In other words, according to the Department of Justice, the control test generally applies, with
the grandfather rule applicable only when the 60-40 Filipino-alien equity ownership is in doubt.
On the basis of the 1989 DOJ Ruling, the SEC issued several opinions doing away with the
grandfather rule. For example, in a May 30, 1990 opinion, the SEC stated:
. . . the Commission En Banc, on the basis of the Opinion of the Department of Justice No. 18.,
S. 1989 dated January 19, 9189 voted and decided to do away with the strict
application/computation of the so called grandfather rule. . . and instead applied the socalled control test method for determining corporate nationality. (underscoring supplied)
(see also SEC Opinion dated August 6, 1991; SEC Opinion dated October 14, 1991)
Around two years after the issuance of the 1989 DOJ Ruling, Congress enacted the Foreign
Investments Act of 1991 (FIA), which expressly embodied the control test. Section 3(a) of
the FIA (as amended by Republic Act No. 8179) provides:
. . . the term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That
where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of the Board of
Directors, in order that the corporation shall be considered a Philippine national.
(underscoring supplied)

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9
Similarly, Section 1(a) of the rules and regulations implementing the FIA expressly provides for
the application of the control test:
Philippine national shall mean a citizen of the Philippines or a domestic partnership or
association wholly owned by the citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefits of the Philippine nationals; Provided, that where a corporation and
its non-Filipino stockholders own stocks in Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled
to vote of each of both corporations must be owned and held by citizens of the Philippines and
at least sixty percent (60%) of the members of the Board of Directors of each of both
corporation must be citizens of the Philippines, in order that the corporation shall be
considered a Philippine national. The control test shall be applied for this purpose.
(underscoring supplied)
While the control test was enshrined in the FIA and its implementing rules, the SEC continues
to apply the grandfather rule when the Filipino equity ownership is in doubt (as provided in
the 1989 DOJ Ruling). For example, in SEC-OGC Opinion No. 22-07 dated December 7, 2007,
the SEC stated:
. . . when there is doubt as to the actual extent of Filipino equity in the investee corporation,
the Commission is not precluded from using the Grandfather Rule.
My former professor at the UP College of Law, Prof. Raul Palabrica, makes a great summary of
the SEC position in his Philippine Daily Inquirer column:
. . . this should not be taken to mean that the grandfather rule is already history. In an inverse
way, the SEC pointed out that the grandfather rule will not apply in cases where the 60-40
Filipino equity ownership is not in doubt.
The rule therefore is: While the control test shall be used as standard to determine the
nationality of corporations, the grandfather rule will be applied if there are questions about
compliance with Filipino ownership requirements. (see Raul Palabrica, Nationality Ownership
Rule, Philippine Daily Inquirer, October 19, 2007)
Based on the FIA and its implementing rules and regulations (which embody the control test),
my personal view is that the control test should be the test used in determining the nationality
of a corporation. While the 1989 DOJ opinion made reference to the application of the
grandfather rule when the 60-40 equity ownership interest is in doubt, the 1989 DOJ opinion
was issued prior to the enactment of the FIA. Also, I believe that if there is doubt as to the 6040 Filipino-alien equity ownership interest in the investing corporation that has a 60% equity in
a corporation engaged in a partly nationalized activity, what should be applied is the AntiDummy Law (in conjunction with the control test), not the grandfather rule. Thus, if 60% of the
shares of the investing corporation is held by Filipinos as dummies for foreigners, that 60%
equity in the investing corporation will not be deemed held by Philippine nationals. Applying
the control test, the investee corporation will not also be a Philippine national.
A return to the grandfather rule?
It is noteworthy that a recent SEC case raises the issue of whether the SEC is now going back
to the grandfather rule as the primary test for determining the nationality of a corporation.
In Redmont Consolidated Mines Corporation vs. McArthur Mining Corporation, SEC En Banc
Case No. 09-09-177 dated March 25, 2010, the SEC applied the grandfather rule because the
foreign investor provided practically all the funds of the Philippine mining companies; as
such, the SEC concluded that the 60-40 Filipino alien equity ownership was in doubt and
therefore the grandfather rule should be applied. However, the SEC did not stop there the
SEC made statements that seem to indicate a return to the grandfather rule. The SEC said:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of
our natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision
should not diminish that right through the legal fiction of corporate ownership and control. But
the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be
applied to accurately determine the actual participation, both direct and indirect, of foreigners
in a corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be
determined by ascertaining if 60% of the investing corporations outstanding capital stock is
owned by Filipino citizens, or as interpreted, by natural or individual Filipino citizens. If such
investing corporation is in turn owned to some extent by another investing corporation, the
same process must be observed. One must not stop until the citizenships of the individual or
natural stockholders of layer after layer of investing corporations have been established, the
very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule.
While the constitutional deliberations certainly made reference to the grandfather rule, there is
nothing in the Constitution that ultimately embodied the grandfather rule. In the absence of
any provision in the Constitution embodying the grandfather rule, I believe that Congress can
adopt a law (in this case the FIA) embodying the control test.
Hopefully, the statements made by the SEC in Redmont do not signal a return to the
grandfather rule. A change in the rules of the game will have a tremendous adverse impact on
investor confidence in the Philippines.

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10
One final note. Redmont involved mining companies that require 60% Filipino ownership
because these mining companies apparently applied for a Mineral Production Sharing
Agreement (which can be granted to Philippine nationals only). In Redmont, the SEC appears
to have reached the conclusion that the 60-40 Filipino-alien equity ownership was in doubt
because the foreign investor provided practically all the funds of the Philippine mining
companies. My own view is that the fact that the foreign investor may have contributed a big
chunk of the corporate funds should not, by itself, put the 60-40 Filipino-alien equity ownership
in doubt. The important consideration is whether the Filipino stockholders legally and
beneficially own and control 60% of the shares in the relevant company (and do not otherwise
act as dummies for the foreigners). If the foreigner wishes to provide greater financial support
for the mining project, that should be fine for as long as Filipinos remain the legal and
beneficial owner of 60% of the shares in the mining company (or in a layered structure, the
investing company). We should not deprive Filipinos of the ability to enter into contracts with
foreigners whereby foreigners provide greater funding to projects that remain under Filipino
control.
(Note: This is part of a series of How To articles. These articles intend to give the reader a
general overview of the legal aspects of doing certain things and they will not contain all
details regarding the proposed action. There may be changes to applicable laws and
regulations after the article is posted. You should consult your lawyer if you wish to take a
particular action. See Disclaimer page for additional disclaimers.)
"Grandfather Rule" - 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 nationalization laws, is computed in cases where there are corporate
shareholders.
The present liberal application of the rule embodies the control test:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality.
But if 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.
Nationalized Corporations:
100% Filipino Owned
1.
2.
3.
4.

Mass media which includes radio, television and print media (Sec. 11 (1), Art XVI, 1987
Constitution)
Rural Banks - 100% of its capital stock (R.A. 720, as amended)
Rice and Corn Industry (R.A. 3018, as amended)
Security, watchman, and detective Agency (R.A. 5487)

70% Filipino Owned

1.
2.
3.
4.

Advertising Industry; (Sec. 11 (2), Art. XVI, 1987 Constitution)

Banks other than rural banks and new banks established by consolidation of branches
or agencies of foreign banks in the Philippines (R.A. 337)
Private Development Banks (R.A. 4093)
Savings and Loans Associations (R.A. 3779 and 4378, as amended)

60% Filipino Owned

1. Financing Companies - 60% of the capital stock (R.A. 5980)
2. Fishing and Business activity relating to Fishery Industry - 60% of the capital stock (PD
43 and 704)
3. Exploration, Development and Utilization of Natural Resources (Sec. 2 Art. XII, 1987
Constitution)
4. Ownership of Lands (Sec. 2 Art. XII, 1987 Constitution)
5. Operation of Public Utility (Sec. 11 Art. XII, 1987 Constitution)
6. Educational Institutions other than those established by religious groups (Sec. 4 (2) Art.
XIV, 1987 Constitution)
7. Any business reserved by Congress (Sec. 10 Art. XII, 1987 Constitution)
8. How to determine the nationality of a corporation?
9. ..,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

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11
10.
The Constitution and various laws reserve certain areas of activities to Philippine
citizens or to corporations that have a minimum percentage of Filipino ownership. For
example, with respect to corporations, ownership of land is limited to corporations at
least sixty per centum of whose capital is owned by Philippine citizens. If 60% of the
capital of a Philippine corporation is owned by individuals who are Philippine citizens,
then there would be no issue on whether the Philippine corporation is a Philippine
national qualified to own land.
On the other hand, an issue would arise if 60% of the capital of the Philippine
corporation is owned, in turn, by another Philippine corporation that has foreign
stockholders.
If a Philippine corporation has corporate stockholders, how does one determine
whether such Philippine corporation is a Philippine national? Two tests have been
employed in the Philippines: (a) the grandfather rule; and (b) the control test.
To illustrate how these tests are applied, lets take a Philippine corporation (called
Corporation X) with the following ownership structure:
(a) non-Philippine citizens own 40% of the capital stock outstanding and entitled to
vote of Corporation X;
(b) another Philippine corporation (called Corporation Y) owns 60% of the capital
stock outstanding and entitled to vote of Corporation X.
On other hand, Corporation Y has the following ownership structure:
(a) non-Philippine citizens own 40% of the capital stock outstanding and entitled to
vote of Corporation Y;
(b) Philippine citizens own 60% of the capital stock outstanding and entitled to vote of
Corporation Y.
Lets also assume that Philippine citizens constitute at least 60% of the members of
the board of directors of each of Corporation X and Corporation Y.
If the grandfather rule is applied, Corporation X will not be deemed a Philippine
national because the grandfather rule takes into account the direct and indirect foreign
equity of foreigners in Corporation X (see SEC Opinion re: Silahis International Hotel,
May 4, 1987). Applying the grandfather rule, the direct and indirect foreign equity in
Corporation X would be 64%, calculated at follows:
Direct foreign-owned equity in Corporation X
40%
Indirect foreign owned equity in Corporation X
24%
Under the above scenario, the foreigners are deemed to have a 24% indirect foreign
equity in Corporation X because foreigners own 40% of Corporation Y, which in turn
owns 60% of Corporation X (i.e., 40% multiplied by 60% equals 24%). Thus, under the
grandfather rule, Corporation X is not qualified to own land.
On the other hand, if the control test is applied, Corporation X is deemed to be a
Philippine national qualified to own land. Under the control test, Corporation X is
considered a Philippine national since at least 60% of its capital stock outstanding and
entitled to vote is held by Corporation Y, which is also considered a Philippine national
since at least 60% of its capital stock outstanding and entitled to vote is held by
Philippine citizens.
The control test as the primary test
As a rule, the control test applies. The primacy of the control test over the grandfather
rule can be traced to DOJ Opinion No. 19, s. 1989 (the 1989 DOJ Ruling), which
states:
. . . the Grandfather Rule, which was evolved and applied by the SEC in several
cases,will not apply in cases where the 60-40 Filipino-alien equity ownership in a
particular natural resource corporation is not in doubt. (underscoring supplied)
In other words, according to the Department of Justice, the control test generally
applies, with the grandfather rule applicable only when the 60-40 Filipino-alien equity
ownership is in doubt.
On the basis of the 1989 DOJ Ruling, the SEC issued several opinions doing away with
the grandfather rule. For example, in a May 30, 1990 opinion, the SEC stated:
. . . the Commission En Banc, on the basis of the Opinion of the Department of Justice

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12
No. 18., S. 1989 dated January 19, 9189 voted and decided to do away with the strict
application/computation of the so called grandfather rule. . . and instead applied the
so-called control test method for determining corporate nationality. (underscoring
supplied)(see also SEC Opinion dated August 6, 1991; SEC Opinion dated October 14,
1991)
Around two years after the issuance of the 1989 DOJ Ruling, Congress enacted the
Foreign Investments Act of 1991 (FIA), which expressly embodied the control test.
Section 3(a) of the FIA (as amended by Republic Act No. 8179) provides:
. . . the term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a corporation and its nonFilipino stockholders own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors,
in order that the corporation shall be considered a Philippine national. (underscoring
supplied)
Similarly, Section 1(a) of the rules and regulations implementing the FIA expressly
provides for the application of the control test:
Philippine national shall mean a citizen of the Philippines or a domestic partnership or
association wholly owned by the citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines;
or a corporation organized abroad and registered as doing business in the Philippines
under the Corporation Code of which 100% of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty percent (60%) of the fund will accrue to the benefits of the Philippine
nationals; Provided, that where a corporation and its non-Filipino stockholders own
stocks in Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of Directors of each of both
corporation must be citizens of the Philippines, in order that the corporation shall be
considered a Philippine national. The control test shall be applied for this purpose.
(underscoring supplied)
While the control test was enshrined in the FIA and its implementing rules, the SEC
continues to apply the grandfather rule when the Filipino equity ownership is in
doubt (as provided in the 1989 DOJ Ruling). For example, in SEC-OGC Opinion No. 2207 dated December 7, 2007, the SEC stated:
. . . when there is doubt as to the actual extent of Filipino equity in the investee
corporation, the Commission is not precluded from using the Grandfather Rule.
My former professor at the UP College of Law, Prof. Raul Palabrica, makes a great
summary of the SEC position in his Philippine Daily Inquirer column:
. . . this should not be taken to mean that the grandfather rule is already history. In an
inverse way, the SEC pointed out that the grandfather rule will not apply in cases
where the 60-40 Filipino equity ownership is not in doubt.
The rule therefore is: While the control test shall be used as standard to determine the
nationality of corporations, the grandfather rule will be applied if there are questions
about compliance with Filipino ownership requirements. (see Raul Palabrica, Nationality
Ownership Rule, Philippine Daily Inquirer, October 19, 2007)
Based on the FIA and its implementing rules and regulations (which embody the
control test), my personal view is that the control test should be the test used in

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13
determining the nationality of a corporation. While the 1989 DOJ opinion made
reference to the application of the grandfather rule when the 60-40 equity ownership
interest is in doubt, the 1989 DOJ opinion was issued prior to the enactment of the FIA.
Also, I believe that if there is doubt as to the 60-40 Filipino-alien equity ownership
interest in the investing corporation that has a 60% equity in a corporation engaged in
a partly nationalized activity, what should be applied is the Anti-Dummy Law (in
conjunction with the control test), not the grandfather rule. Thus, if 60% of the shares
of the investing corporation is held by Filipinos as dummies for foreigners, that 60%
equity in the investing corporation will not be deemed held by Philippine nationals.
Applying the control test, the investee corporation will not also be a Philippine
national.
A return to the grandfather rule?
It is noteworthy that a recent SEC case raises the issue of whether the SEC is now
going back to the grandfather rule as the primary test for determining the nationality
of a corporation. In Redmont Consolidated Mines Corporation vs. McArthur Mining
Corporation, SEC En Banc Case No. 09-09-177 dated March 25, 2010, the SEC applied
the grandfather rule because the foreign investor provided practically all the funds of
the Philippine mining companies; as such, the SEC concluded that the 60-40 Filipino
alien equity ownership was in doubt and therefore the grandfather rule should be
applied.
However, the SEC did not stop there the SEC made statements that seem to indicate
a return to the grandfather rule. The SEC said:
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the
constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of
the Constitution. Hence, the Grandfather Rule must be applied to accurately determine
the actual participation, both direct and indirect, of foreigners in a corporation engaged
in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities
must be determined by ascertaining if 60% of the investing corporations outstanding
capital stock is owned by Filipino citizens, or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by
another investing corporation, the same process must be observed. One must not stop
until the citizenships of the individual or natural stockholders of layer after layer of
investing corporations have been established, the very essence of the Grandfather
Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule.
While the constitutional deliberations certainly made reference to the grandfather rule,
there is nothing in the Constitution that ultimately embodied the grandfather rule. In
the absence of any provision in the Constitution embodying the grandfather rule, I
believe that Congress can adopt a law (in this case the FIA) embodying the control
test.
Hopefully, the statements made by the SEC in Redmont does not signal a return to the
grandfather rule. A change in the rules of the game will have a tremendous adverse
impact on investor confidence in the Philippines.
One final note. Redmont involved mining companies that require 60% Filipino
ownership because these mining companies apparently applied for a Mineral
Production Sharing Agreement (which can be granted to Philippine nationals only).
In Redmont, the SEC appears to have reached the conclusion that the 60-40 Filipinoalien equity ownership was in doubt because the foreign investor provided practically
all the funds of the Philippine mining companies. My own view is that the fact that
the foreign investor may have contributed a big chunk of the corporate funds should
not, by itself, put the 60-40 Filipino-alien equity ownership in doubt.
The important consideration is whether the Filipino stockholders legally and
beneficially own 60% of the shares in the relevant company (and do not otherwise act
as dummies for the foreigners). If the foreigner wishes to provide greater financial
support for the mining project, that should be fine for as long as Filipinos remain the

- 13 -

14
legal and beneficial owner of 60% of the shares in the mining company (or in a layered
structure, the investing company). We should not deprive Filipinos of the ability to
enter into contracts with foreigners whereby foreigners provide greater funding to
projects that remain under Filipino control.

- 14 -