Chapter III – Formation/Organization
— Some areas of industry and business are limited/reserved for
Who may form a corporation?
— Incorporators: SHs or members mentioned in the AOI as originally forming
and composing the corporation and who are signatories thereof
— Corporators: all SHs or members, whether incorporators or those joining the
corporation after incorporation
— Every incorporator must be a stockholder
Number and qualifications of incorporators
1. Must be natural persons
— Only natural persons can be incorporators
o Excluding partnerships and other corporations
— But partnerships and other corporations can be stockholders in
another corporation as long as they are not incorporators thereof
(El Hogar case)
2. At least five (5) incorporators, but not more than 15
— At least 5 incorporators must sign the AOI
— If only 2 incorporators are residents of the RP, a corporation
still exists—a de facto corporation, provided…
o At least 5 incorporators must sign the AOI
— One-man corporations: owner can still incorporate by giving
nominal ownership of one share of stock each to four other
persons (legal)
— Incorporator will always retain his status as incorporator of the
corporation
— Reason for 5 incorporator requirement: if anything goes wrong if
the incorporation process, and liabilities created at the time of
incorporation, then the existence of 5 allows the public or injured
party to run after the persons
3. Residence requirement; citizenship requirement only in certain areas
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— No general requirement of RP citizenship
Filipino citizens
o Public utilities
o Retail trade
o Banks
o Investment houses
o Savings and loan associations
o Schools
o Other areas Congress may by law provide
— Where more than 40% of outstanding capital is to be owned or
controlled by aliens: written authorization must first be sought
with the BOI before registration with the SEC
4. Restrictions on stock ownership of closely-knit groups
— Sensitive areas where ownership by a close-knit group may be
detrimental to the public interest
o Ex. Banks—no bank may be licensed to operate if
equity of one person or persons related to each other
within the 3rd degree of consanguinity/affinity exceed
20% of bank voting stock
Stock ownership in certain corporations
o Stock ownership in close corporations may be limited
by the AOI ifo members of the same family or group
Steps in Formation of Corporation
1. Promotional stage
— Promoter, Defn: one who brings together persons who become
interested in enterprise, aids in procuring subscriptions and sets
in motion the machinery which leads to the formulation of the
corporation
 — Securities Regulation Code: promoter is a person who, acting
alone or with others, takes initiative in founding and organizing
the business of the issuer and receives consideration therefor
o He formulates the necessary initial business and
financial plans
o If necessary, buys the rights and property which the
business may need; with the understanding that once
formed, he shall take over the same
o Promoters may also be incorporators
o Revised securities act sec 2
— Code: before incorporation,
o at least 25% authorized capital stock should be
subscribed
o at least 25% of subscribed stock is paid-in
— if initial capital requirements cannot be met, then promoters have
to “promote” the business so other persons could invest
— shares of stock cannot be sold publicly unless they are first
registered with the SEC
— SEC requires disclosure of all pertinent information regarding:
o purposes,
o character and nature of business,
o financial position,
o financial responsibility of directors and officers,
o nature of shares to be issued
— Must appear in a registration statement
o Filed with the SEC
o Published in 2 newspapers of gen. circulation
o Once a week for 2 consecutive weeks
— If all requirements are complete, SEC issues an order making
registration effective
— SEC grants corporation a permit to offer securities for sale
2. Articles of Incorporation; drafting
AOI: constitute the charter of the corporation. It is the contract between the
corporation and its SHs as well as the agreement among SHs
— Basic contract document in Corporate Law
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o Defines the charter of the corporation
o Defines contractual relationships between and among:
 State and corporation
 SHs and State
 Corporation and SHs
— AOI does not become binding unless they have been filed with the
registered by the SEC
Contents of AOI (Sec 14)
(1) Corporate name
— Name is essential to corporate existence
— It is through the name that the corporation can sue and be sued
and perform all legal acts
— Code does not allow the corporation to adopt a name identical or
deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or
which is patently deceptive, confusing, or contrary to existing
laws
— If name is legally permissible the SEC allow the parties to
reserve it for a reasonable period
— Code requires a corporation to append the word “Corporation” or
“Inc.” to its chosen name
— A corporation should transact business only in its corporate name
— Can amend the name provided it is done in accordance with the
procedure laid down by the Code for amendments of AOI and
approval by SEC of the change in corporate name
— Once approved SEC issues an amended certificate of
incorporation under the corporation’s new name
— Change of name does not result in dissolution
Philips Export BV v CA (206 S 457).
The corporation’s right to use its corporate name is a property right, a right in
rem which it may assert and protect against the world. A name is secularly
important as necessary to the very existence of a corporation. Its name is one of
its attributes, an element of its existence, and essential to its identity. GR: each
corp must have a name by which it is to sue and be sued and do all legal acts. A
corp acquires its name by choice and need not select a name identical with or
similar to one already appropriated.
To come under the application of Sec 18 of the Corpo Code, 2 requisites must be
proven:
(1) corp has a prior right over the use of the name, or;
(2) proposed name is either identical or deceptively/confusingly similar, or;
(3) it is patently deceptive, confusing or contrary to existing law. The right to
exclusive use of corporate name is determined by priority of adoption.
Philips was incorporated on 1956 and Standard only 2 years later. In determining
the existence of confusing similarity in corporate names, the test is w/n the
similarity is such as to mislead a person using ordinary care and discrimination. A
reading of the names of Philips and its subsidiary companies indicate that Philips is
indeed a dominant word in that all companies affiliated with the principal corp are
known in the RP.
Given also Standard’s primary purpose, nothing could prevent it from dealing in the
same line of business of electrical devices, products, or supplies which fall under
its primary purposes. Standard’s use also tends to show its intention to ride on the
popularity and established goodwill of Philips. Furthermore, because Philips is a
trademark or trade name registered as far back as 1922, they have the exclusive
right to use the name free from infringement by similarity.
Lyceum of the Phils. v CA (219 S 610).
Lyceum is not entitled to a legally enforceable exclusive right to use the word
Lyceum in its corporate name.
(1) corporate names of the other Lyceums not identical with, or deceptively or
confusingly similar to Lyceum of the RP. Confusion and deception are precluded by
the appending of the geographic name after Lyceum.
(2) Lyceum the word is as generic in character as the word university. But Lyceum
of RP’s use of the word Lyceum in its corporate name has not been attended with
the exclusivity essential for applicability of the doctrine of secondary meaning. In
fact Western Lyceum used the word 17 years before Lyceum of RP.
(3) even if Western Lyceum is deemed to have lost its rights under the original
registration which was never restored when destroyed by fire, the point was
merely to emphasize that the word has already been used previously and is not
exclusive to Lyceum of RP.
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PC Javier and Sons v CA.
A change in the corporate name does not make a new corporation, whether
effected by a special act or under a general law. It has no effect on the identity
of the corporation, or on its property, rights, or liabilities. The corporation, upon
such change in its name, is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a different name, and its
character is in no respect changed.
(2) Purpose clause
— Confers as well as limits the powers which a corporation may exercise
— Sec 45: corporate powers:
o Expressly granted by law and the AOI
o Incidental to conferred powers
o Reasonably necessary to accomplish its purposes and incidental to
its existence
— Must specify primary and secondary purposes
o Secondary purpose need not be related to the main purpose
— Three reasons for requiring a purpose clause in the AOI
o So that a prospective SH contemplating an investment shall know
within what lines of business his money is to be risked
o So that management may know within what lines of business it is
authorized to act
o So that anyone who deals with the corporation may ascertain w/n
a contract or transaction is within the general authority of
management
— Sec 14(2): a corporation can have as many purposes as it may wish to
include in its AOI, subject to the ff conditions:
a) The AOI must specify which is the primary purpose and which
are the secondary purposes (need not be related)
b) For corporations governed by special laws or covered by special
provisions in the Code: can have only ONE purpose peculiar to
them and no other (ex educational corporations cannot engage in
export and import)
c) Purpose(s) must be lawful
  NEDA has the power to refuse or deny the application
for registration of any corporation if not consistent with
the declared national economic policies
 A corporation cannot be formed for the purpose of
practicing a profession
 Non-stock corporations:
— Investment in activities not within its primary purpose
o Sec 42: allowed provided…
 Approved by majority of Board
 Ratified by 2/3 of outstanding capital stock
o Exception: where reasonably necessary to accomplish primary
purposes, SHs approval not necessary
— Interpretation of purpose clauses
o GR: construed as including incidental powers reasonably
necessary to the proper exercise of the powers enumerated
in the AOI
o Detailed specification of powers enumerated, by implication,
excludes all other powers or rights
 Except incidental or subordinate powers and rights
necessary to an exercise of powers expressly given
(3) Place of Principal office of the corporation
— Residence of the corporation
— Must be within the Philippines
— Specify city or town where located
(4) Term of existence
— Not to exceed 50 years from date of incorporation
o extendible for a period not exceeding 50 years by amendment to
AOI
o no extension made earlier than 5 years before original or
subsequent expiry date
 exception: justifiable reasons as may be determined by
the Securities and Exchange Commission
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(5) Names, nationalities, and residencies of the Incorporators
and directors;
— Names, nationalities, and residencies of the incorporators, and
directors or trustees who will act as such until the first regular
directors/trustees are elected
o AOI must also name the treasurer chosen by the pre-
incorporation subscribers
(6) Number of directors or trustees; qualifications
— Number of directors: not less than 5, not more than 15
o For non-stock: can exceed 15 trustees
o Merger of banks: total number of directors of the merged banks
(may exceed 15)
o Educational non-stock: multiples of 5
— Code is SILENT on amendment of AOI to increase number of
directors to more than 15
— Incorporators must own at least one share of capital stock
— Directors must own at least one share of stock of a corporation of
which he is a director
— In non-stock corps, a trustee must be a member thereof
— Aliens may be directors, but only in such number proportional to their
allowable participation in the capital of an entity
(7) Names, nationalities and residencies of persons acting as
directors/trustees until the 1st regular directors/trustees are
duly elected and qualified
(8) Amount of authorized capital stock, number of shares—par
value or no-par value, original subscribers and the amounts
subscribed and paid by each; subscription; payment
— Sec 12: corporations shall not be required to have any minimum
authorized capital stock except where provided by special law
— In normal practice, SEC will not allow incorporation for P5000
minimum paid-up capital
— Maximum capitalization is needed to protect SHs
— Capital stock, defn: the amount fixed in the articles of incorporation
to be subscribed and paid in or secured to be paid in by the
shareholders, at the organization of the corporation or afterwards
— Outstanding Capital Stock: total shares of stock issued to
subscribers or SHs, whether or not fully or partially paid except
treasury shares
— Subscribed Capital Stock: portion of capital stock subscribed (i.e.
procured to be paid) whether or not fully paid
— Subscription, defn: mutual agreement of the subscribers to take and
pay for the stock of a corporation
o AOI must show:
 the names, nationalities, and residencies of the original
subscribers,
 the amount subscribed, and
 how much is paid thereon
o Sec 13: at least 25% of authorized capital stock, at least 25% of
total subscription to be paid upon subscription
o for non-stock: minimum authorized capital stock not required, but
subject to Sec 13
— Paid-up capital at time of incorporation must be in cash deposited in a
bank or property
— Pre-incorporation subscription: amount which each incorporator or
SH agrees to contribute to a proposed corporation
o Embodied in an agreement which takes and pays for the original
unissued shares of a corporation formed or to be formed
(Delpher)
— Par value share: appears in the stock certificate specifiying the
amount in pesos as the nominal value of the shares appearing in the
certificate of stock
o Must be stated in the AOI
o Cannot be issued at less than stipulated par value
o Can only be changed by amendment in the AOI
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— Sec 62: Consideration for no par value shares issued is the issued
value, to be fixed in the ff ways:
o AOI
o By the BOD when authorized by the AOI or BLs
o SHs representing at least a majority of outstanding capital stock
— Issuance of no par value must be reflected in the AOI
o Consideration cannot be less than issued value—cannot be less
than 5 pesos
(9) Treasurer’s Affidavit
— SEC shall not accept AOI unless accompanied by a sworn statement
by the Treasurer that:
o at least 25% of TOTAL authorized capital stock has been
subscribed
o at least 25% of subscribed and authorized capital stock has been
fully paid-up
— Treasurer must make sworn statement that minimum requirements of
subscription and payment have been complied with
o If false, AOI disapproved or certificate of registration revoked
(10) Other matters
— AOI may include other matters not inconsistent with law, such as:
o classes of shares into which shares of stock have been divided
o Preferences of and restrictions on any class
o Denial of voting rights on certain shares or pre-emptive right of
SHs
o Prohibition against transfer of stock which would reduce
ownership to less than required minimum for wholly or partially
nationalized businesses/industries
(11) Close corporations
 — A corporation will be governed by Title XII on Close Corporations only
if its articles provide for certain specific matters
— Code allows a close corporation to provide in its AOI special
provisions which would exclude it from the operation of some of the
requirements and prohibition imposed on corporations in general, and
in effect make it an “incorporated partnership” (Sec 97)
3. Filing of articles; payment of fees
— AOI and treasurer’s affidavit filed with the SEC and corresponding
fees paid
— Failure to file AOI will prevent due incorporation and will not give rise
to juridical personality and will not even be a de facto corporation
4. Examination of articles; approval or rejection by SEC
— Upon receipt the SEC shall examine the AOI to determine conformity
with law
— If not, SEC must give the incorporators reasonable time within which
to correct or modify objectionable portions
— Grounds for rejection by the SEC:
1) AOI or any amendment thereto is not substantially in accordance
with the prescribed form
2) Purpose(s) are patently unconstitutional, illegal, immoral or
contrary to government rules/regulations
3) Treasurer’s Affidavit concerning the amount of capital stock paid
or subscribed is false
4) Required percentage of ownership to be owned by Filipino citizens
has not been complied with
— SEC may, after consultation with BOI and NEDA, reject or deny
registration if not consistent with the declared national economic
policies
— SEC decision appealable to CA
5. Issuance of certificate of incorporation
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— It is only upon issuance of the certificate of incorporation that the
corporation acquires a juridical personality distinct and separate from
its members or SHs, with power to sue and be sued and to perform all
other legal acts
— Corporation DEEMED incorporated from the date SEC issues the
certificate of incorporation
6. Amendment of AOI
— Sec 16: any provision may be amended by:
o majority vote of the Board of Directors AND…
o WRITTEN ASSENT of SHs representing at least 2/3 of OCS or
2/3 members of non-stock entitled to vote
o Without prejudice to appraisal right of dissenting SH
o Unless otherwise provided in the Code or special law
AOI: Contractual implications
— AOI is the contract between the three (3) parties:
o State and corporation
o Stockholders and State
o Corporation and stockholders
Defectively incorporated entities;
De jure corporation
— Not every defect precludes a de jure corporation; as long as the
mandatory requirements for incorporation are substantially complied
with, a corporation de jure will be formed
— A de jure corporation’s due incorporation cannot be successfully
attacked even in quo warranto proceedings
De facto corporations
 — If there is no substantial compliance with the mandatory
requirements for incorporation, a corporation be deemed to exist as a
person distinct and separate from its members or SHs if all of the ff
are present:
(1) there must be an apparently valid statute
(2) there has been colorable compliance with the legal requirements
in GF
(3) there has been user of corporate powers i.e. transaction of
business in some way as if it were a corporation
— if all are met by the defectively formed corporation, it will be
considered a de facto corporation
— the due incorporation of a de facto corp cannot be collaterally
attacked either by the State or by private individuals
— such incorporation must be attacked by the State through a quo
warranto proceeding
— where requirements for a de jure or de facto corporation are not
present, then the associates may be held liable as partners for
obligations of the alleged corporation
o unless estoppel can apply (Sec 21)
1. User of corporate powers
— A slight evidence of conducting business is deemed sufficient
— It is not necessary that the dealings between the parties should be on a
corporate basis
— Ex. Buying a lot and constructing and leasing a building will constitute
sufficient user of corporate powers
2. Law subsequently declared void
— GR: there can be no de facto corporation under a statute
subsequently declared unconstitutional
— Exception: where the corporation in GF did all that is required under
the statute to form a valid corporation
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Municipality of Malabang v Benito.
Balabagan is neither a de facto nor a de jure corporation. The true basis for
denying to a corporation de facto status is the absence of any legislative act
giving life to its creation. An unconstitutional act is not a law; it confers no rights,
it imposes no duties, it affords no protection, it creates no office. EO 386 thus
created no office, although acts done by the office are not exactly a nullity. The
EO is as inoperative legally as though it were never passed, an operative fact
which cannot justly be ignored.
But a corporation created under a statute declared void it is given life by other
valid acts or in the constitution itself. The color of authority requisite to the
organization of a de facto municipal corporation may be: (1) an unconstitutional law,
upheld for a time or not yet declared void, provided a warrant for its creation is
found in some other valid law or recognition of its existence by the general laws or
the constitution.
(2) there can be no de facto municipal corporation unless either directly or
potentially such a de jure corporation is authorized by some legislative fiat
(3) there can be no color of authority in an unconstitutional statute alone, the
invalidity of which is apparent on its face
(4) there can be no de facto corporation created to take the place of an existing
de jure corporation.
3. Substantial or colorable compliance
— Difficult to ascertain when compliance with the legal requirements is
substantial or only colorable or less than colorable
— In Hall v Piccio, unless certificate of incorporation has been issued,
there can be no de facto corporation
— While in the process of incorporation, there can be no substantial nor
colorable compliance, and thus no de facto corporation (Cagayan
Fishing v Sandiko)
Harrill v Davis.
They did not become a corporation de jure just because they failed to file their
articles of incorporation. Nor did they become a corporation de facto before they
filed the articles to such an extent as to exempt them from individual liability
because they did not before that time secure any color of legal organization as a
corporation under an charter or enabling act; they were liable individually as
partners for that part of the claim falling prior to the filing of the articles.
Hall v Piccio.
(1) the rule on de facto corps are not applicable to the case. Not having obtained
the certificate of incorporation, Far Eastern Lumber and even it stockholders
cannot claim in GF to be a corporation. It is the issuance of the certificate of
incorporation that calls a corporation into being. The immunity of collateral attack
is granted to corps claiming in GF to be a corporation. Furthermore, the
corporation is not a party to the suit, it being a litigation bet stockholders of the
alleged corporation for the purpose of obtaining its dissolution. Even the existence
of a de jure corp may be terminated in a private suit between the stockholders
without need for interference by the State. The petitioners also have their
remedy by appealing the order of dissolution at the proper time.
(2) Far Eastern not being a de facto corp, the principle of corporation by estoppel
doesn’t also apply. The complaining partners have not represented themselves that
they were incorporated, and nobody was led to believe anything to his prejudice
and damage.
Corporation by Estoppel
— In corporation by estoppel, a party is precluded or estopped from
denying corporate existence
— May apply to a third party or the alleged corporation
— When a 3rd person entered into a contract with an association which
represented itself a corporation, the association will be estopped
from denying its corporate personality if sued by the 3rd party
— When a 3rd person who dealt with an unincorporated association as a
corporation may be precluded from denying its corporate existence if
sued by the alleged corporation, even if he did not know about the
defective incorporation
— When business associates fraudulently misrepresent the existence of
a corporation, and a 3rd party contracts without knowledge of the
defective incorporation, the 3rd person may sue the associates as
general partners
o If the business associates and the 3rd person in the above
example had no knowledge of the defective incorporation, then
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the 3rd person cannot hold the associates liable as partners (i.e.
personally liable)
— Estoppel also applies even in a case where the alleged corporation did
not deal with the plaintiff suing on a tort
— Difference bet de facto and estoppel:
o where all requisites of a de facto corporation are present, it will
have the status of de jure
o But if any of the requisites is absent, then estoppel may be
applied only if any of the parties is estopped from defending
ABC v Standard Products.
GR: In the absence of fraud, a person who contracted with an association in such a
way as to recognize and admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of such contract
or dealing.
Exception: Its existence is attacked for causes arising since making the contract
or other dealings. Standard already recognized the corporate existence of Asia
Bank by making a promissory note in its favor and making partial payments, and is
thus estopped from denying its corporate existence.
Cranson v Int’l Business Machines.
The doctrine of de facto corporations applies only on
(1) existence of a law authorizing incorporation
(2) effort in GF to incorporate
(3) actual user or exercise of corporate powers.
The doctrine of estoppel to deny corporate existence is generally employed where
the person seeking to hold the officer personally liable has contracted or
otherwise dealt with the association in such a manner as to recognize and in effect
admit its existence as a corporate body. It has been generally held that where
there had been a failure to comply with a requirement which the law declared to
be a condition precedent to the existence of a corporation, the corporation was
not a legal entity and was therefore precluded from suing or being sued as such.
Substantial compliance with the formalities of corporation law, which are condition
precedent to corporate existence, was not only necessary for the creation of a
corporation de jure, but was also a prerequisite to the existence of a de facto
corporation or a corporation by estoppel. The doctrine of estoppel cannot be
successfully invoked unless the corporation has at least a de facto existence, and
a de facto corporation cannot be recognized in violation of a positive law. There is
a broad distinction between those acts made necessary by statute as a
prerequisite to the exercise of corporate powers and those acts required of
individuals seeking incorporation.
On the other hand, where the corporation has obtained legal existence but has
failed to comply with a condition subsequent to corporate existence, the Court has
held that such nonperformance afforded the State the right to institute
proceedings for the forfeiture of the charter, but that such neglect or omission
could never be set up by the corporation itself, or by its members and
stockholders, as a defense to an action to enforce their liabilities. It is clear that
when a defect in the incorporation process resulted from a failure to comply with
a condition subsequent, the doctrine of estoppel may be applied for the benefit of
a creditor to estop the corporation, or the members or stockholders thereof,
from denying its corporate existence.
Where the parties had assumed corporate existence and dealt with each other on
that basis, the Court will apply the estoppel doctrine on the theory that the
parties by recognizing the organization as a corporation were thereafter
prevented from raising a question as to its corporate existence. Where there is a
concurrence of the three elements necessary for the application of the de facto
corporation doctrine there exists an entity which is a corporation de jure against
all persons but the State. On the other hand, the estoppel theory is applied only
to the facts of each particular case and may be invoked even where there is no
corporation de facto.
Thus in the case, IBM dealt with the Bureau as if it were a corporation and relied
on its credit rather than that of Cranson, it is thus estopped from asserting that
the Bureau was not incorporated at the time the typewriters were purchased.
Cranson is therefore not personally liable for the balance of the purchase price of
the typewriters.
Salvatierra v Garlitos, et. al.
GR: A person who contracted or dealt with an association in such a way as to
recognize its existence as a corporate body is estopped from denying the same in
an action arising out of such dealing… but this doctrine may not be held to be
applicable where fraud takes a part in the transaction. A stockholder cannot be
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held liable for any financial obligation by the corporation in excess of his unpaid
subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an
unincorporated association. This is because such unincorporated association is
incompetent to act and appropriate for itself the powers and attributes of a
corporation and cannot create agents or confer authority. Thus those who act or
purport to act as its representatives or agents do so without authority and at
their own risk. Considering that Refuerzo was the moving spirit behind the
consummation of the lease agreement by acting as the representative of PFP, his
liability cannot be limited or restricted to that imposed upon corporate
shareholders. In acting in behalf of a corporation he knew to be unregistered, he
assumed the risk of reaping the consequential damages or resultant rights if any
arising out of the transaction.
Chaing Kai Shek School v CA (172 S 389).
School may be sued. The school is governed by Act 2706 as amended by CA 180.
Having recognized by the government, it was under obligation to incorporate under
the Corporation Law within 90 days from recognition. Although in existence since
1932, it had never made any attempt to incorporate, and thus cannot invoke its
own noncompliance with the law to immunize it from Oh’s complaint. Having
contracted with Oh for 32 years while representing itself as possessed of
juridical personality, the school is now estopped from denying such personality.
LBC Express, Inc. v CA (236 S 602).
Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation. A corporation, being an artificial person and having existence
only in legal contemplation, has no feelings, no emotions, no sense; therefore, it
cannot experience physical suffering and mental aguish. Mental suffering can only
be experienced by one having a nervous system and it flows from real ills, sorrows,
and all griefs of life—all of which cannot be suffered by the corporation.
Lozano v delos Santos (274 S452).
Not intracorporate; SEC has no jurisdiction. The jurisdiction of the SEC is
determined by two elements:
(1) status or relationship of the parties, which must arise out of intracorporate or
partnership relations between the parties
(2) nature of the question which is the subject of the controversy, which requires
that the dispute be intrinsically connected with the regulation of the
corporation/association or deal with the internal affairs of the corporation.
There is no intracorporate dispute between the parties in this case, because it
arose out of their plan to consolidate their associations, which is still a proposal
and has not yet been approved by the SEC nor has the articles been submitted.
Consolidation only becomes effective not upon mere agreement of the members
but only upon issuance of the certificate of consolidation by the SEC.
Thus the KAMAJDA and the SAMAJODA are two separate entities, and the
dispute of the parties in the case is not within any of the associations mentioned.
It is between members of separate and distinct associations. The doctrine of
incorporation by estoppel advance by Anda is also not applicable, which is founded
on principles of equity and is designed to prevent injustice and unfairness. It
applies when persons assume to form corporations and exercise corporate
functions and enter into business relations with third persons. Where there is no
third person involved and the conflict arises only among those assuming the form
of a corporation and who have knowledge that it is not incorporated, there is no
corporation by estoppel.
Lim Tong Lim v Phil. Fishing Gear Industries, Inc (317 S 728).
It is clear that Chua Yao and Lim together set up the fishing business, buying
boats and financed by a loan from Lim’s brother. The compromise agreement
reveals the intention to divide the excess/loss from proceeds of the sale of the
boats. The boats, financed by borrowed money, fell under the common fund which
indicates the existence of a partnership relation between the three.
The doctrine of estoppel applies only to the alleged corporation and to the third
party. As to the alleged corporation, if it represents itself to be a corporation, will
be estopped from denying it corporate capacity in a suit against it by a third
person who relied in GF on such representation. As to the third party who, having
an association to be incorporated, nonetheless treated it as a corporation and
received benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. Lim definitely benefited from the use
of the nets inside the FB Lourdes, which was found to be an asset of the
partnership. Although it was never legally formed for unknown reasons, under the
law on corporation by estoppel, those acting in behalf of a corporation and those
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benefited by it, knowing it to be without valid existence, are held to be liable as
general partners. Although it is also true that Lim did not directly act in
behalf of the corporation, since he reaped the benefits of the contract
entered into by Chua and Yao with whom he had an existing relationship, he is
covered by the doctrine of corporation by estoppel.
Int’l Express Travel v CA (343 S 674).
Although the Federation derives its existence from RA 3135 or the Charter of
the Phil Amatuer Athletic Assoc and PD 604 which recognized the juridical
existence of national sports associations, such corporate status does not
automatically take effect by the mere passage of the laws. This is because before
the corporation may acquire juridical personality, the State must give its consent
either in a special law or a general enabling act. The laws cited merely recognized
the existence of the associations and provided the manner by which they acquire
juridical personality. Such entity must first be recognized by the accrediting
organization (PAAF and the Dept of Youth and Sports Devt.
The bylaws presented by Kahn does not prove that the Federation has indeed been
recognized and accredited. Thus, Kahn, falling under a person acting or purporting
to act in behalf of the corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts entered into
as its agent. It also does not fall under a corporation by estoppel, which was
mistakenly applied by Kahn. It applies only to a third party when he tries to escape
liability on a contract from which he had benefited on the irrelevant ground of
defective incorporation.
Loyola Grand Villas Homeowners south Assoc Inc (South Assoc) v CA (276 S
681).
Sec 46 requiring filing of bylaws reveals the legislative intent to attach a
directory, not a mandatory, meaning of the word “must.” By-laws may be necessary
for the government of the corporation but these are merely subordinate to the
articles of incorporation as well as to the Corpo Code and related statutes. In
some cases, the by laws were considered unnecessary to corporate existence or to
the valid exercise of corporate powers. The failure to exercise the power will be
ascribed to mere non-action and will no render void any acts of the corporation
which are otherwise valid. There can also be no automatic dissolution without
notice and compliance with the requirements of due process. The Court also
stressed that substantial compliance are mere conditions subsequent and not
prerequisites for acquisition of corporate responsibility.
Internal Organization of Corporation
1. By-laws
Contractual significance
— By-laws are the product of the agreement of the SH or members and
establish the rules for the internal government of the corporation
— By-laws are subordinate to the AOI, Corpo code and the related
statutes
— If by-laws are inconsistent with any of these, it has no binding effect
— Power to adopt and amend by-laws is an inherent power of every
corporation (Gokongwei case)
— Unlike AOI, are meant to be an intramural document to govern the
relationship between and among members of a corporate family
— Intended for the protection of the corporation and prescribes
regulations, not restrictions
— GR: although the power to adopt by-laws is an inherent right, the by-
laws cannot contravene the law (El Hogar case)
o Validity or reasonableness of the by-laws is a question of law
(Gokongwei case)
— Provisions of AOI prevail over the by-laws
— Board of Liquidators vs. Kalaw: it is possible for an express provision
of the by-law to be violated and the board may, in certain corporate
actions, bind the corporation despite it being contrary to the by-laws
o Whether through board action or authorization or through
ratificatory act of the SHs, so long as there is corporate
approval through the board, be it implied or express, it is valid to
bind the corporation
— GR: 3rd persons are not bound by the by-aws
o Exception: where they have actual or constructive knowledge
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Requisites of by-laws:
(1) By-law provisions cannot contravene law
(2) By-law provisions cannot contravene the AOI
(3) By-laws must be reasonable and cannot discriminate
Procedure for Adoption of by-laws (Sec. 46):
— Within one (1) month after receipt of official notice of issuance of
certificate of incorporation
o Loyola Grand villas case: Sec 46 is merely directory, and thus
failure to file by-laws within the period does not imply the
demise of the corporation, but is a mere ground for the SEC to
revoke the certificate
— It may also de adopted and filed prior to incorporation…
o …must be approved, signed by all incorporators and filed with the
SEC together with the articles
— vote required to adopt: at least majority of outstanding capital stock
or members of non-stock corp
— signed by SHs and kept in principal office
— certified copy filed with SEC attached to AOI
— becomes effective only upon issuance of the SEC certification
— Code allows adoption and filing of by-laws even prior to incorporation,
but must be approved by ALL incorporators and submitted to the
SEC together with the AOI
— By-laws may be submitted within one (1) month after receipt of
notice of issuance of the certificate of incorporation
o Failure to do so may result in suspension or revocation of
certificate
— SEC may disapprove by-laws which are inconsistent with law
— Sec 46 provides clearly that in ALL cases, the by-laws shall be
effective only upon issuance by the SEC of a certification that these
are not inconsistent with law
— Once approved by the SEC, by-laws will bind the corporation, and all
SHs and members including those who voted against the adoption
—

Basic Contents of By-Laws:
— Sec 47 enumerates matters which may be included in the by-laws
— By-laws may provide for the time, place and manner of directors
meetings
— By-laws may provide for time and manner of SH meetings (place of
SH meeting is fixed by law at the principal office of the corporation
— Code requires the by-laws provide for at least three (3) officers:
o President
o Secretary
o Treasurer
o Additional officers
Other matters that may be included in by-laws:
(a) designation of time when voting rights may be exercised
by SH of record (24)
(b) providing for additional officers (25)
(c) provisions for compensation of directors (30)
(d) creation of an executive committee (35)
(e) date of annual meeting or provisions for a special
meeting of SHs/members (50 & 53)
(f) quorum on meetings of SHs/members (52)
(g) providing for presiding officer at meetings of
directors/trustees and of SHs/members (54)
(h) procedure for issuance of stock certificates (63)
(i) providing for interest on unpaid subscriptions (66)
(j) entries to be made in stock and transfer book (74)
(k) providing for meetings of members outside the principal
office (24)
Other matters that may be included in either the AOI or the by-laws:
(a) cumulative voting in non-stock corporations
(b) higher quorum for valid board meeting
(c) limiting, broadening or denial of right to vote and voting
by proxy, for non-stock corporations
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(d) transferability of membership in non-stock corps
(e) termination of membership in non-stock corps
(f) manner of election and term of office of trustees and
officers in non-stock corps
(g) manner of distribution of assets in non-stock corps upon
dissolution
(h) staggered board in educational institutions
Matters that must appear in BOTH AOI and BLs:
(a) restrictions on right to transfer shares in close
corporations (98)
Matters that CANNOT be in the by-laws:
(a) classification of shares and preferences to preferred shares
(b) founders shares
(c) redeemable shares
(d) purposes of the corporation
(e) corporate term of existence
(f) capitalization of stock corporations
(g) corporate name
(h) denial of pre-emptive rights
Amendments to By-Laws
— who can amend by-laws:
o owners of at least a majority of outstanding capital stock or
members of non-stock corp
— 2/3 of outstanding capital stock or members may delegate to the
board the power to amend or repeal by-laws
o only then can the board amend by majority vote
— In the Kalaw case, the SC held that contract entered into without
strict compliance with the by-laws may, due to long acquiescence and
usage, be binding on the corporation, which may be deemed to have
waived such compliance.
— In the Fleischer, since by-laws operate merely as internal rules among
SHs, they cannot affect or prejudice 3rd persons who deal with the
corporation, unless they have knowledge of the same
Fleischer v Botica Nolasco.
The by-law in question cannot also have any effect on Fleischer, since he had no
knowledge of the by-law when the shares were transferred to him and obtained
the same in GF and for value. When no restriction is placed by law on the transfer
of corporate stock, a purchaser is not affected by any contractual restriction of
which he had no notice or wasn’t aware. A by-law of a corporation which provides
that transfer of stock shall not be valid unless approved by the board for
instance, or any other restriction imposed, while it may be enforced as a
reasonable regulation for the protection of the corporation against worthless
stockholders, cannot be made available to defeat the rights of third persons.
Mandamus will lie in favor of Fleischer to compel the Treasurer of Botica to
register his shares.
Gov’t of Phils. V El Hogar. (for the facts, goto corporate powers section)
The by-law provision is an absolute nullity, since it is in direct conflict with the
Code which declares that the board shall not have the power to force the
surrender and withdrawal of unmatured stock except in case of liquidation of the
corporation or forfeiture of stock. While it is a nullity, it is insufficient to
necessitate the involuntary dissolution of the corporation through a quo warranto
proceeding. It cannot be enforced even if the directors were to attempt to do so.
The Corporation Law does not undertake to prescribe the rate of compensation
for the directors of the corporation. The power to fix compensation is left to the
corporation itself, to be determined in its by-laws. Pursuant to this statutory
authority, el Hogar has fixed the compensation for its directors in its by-laws. If
a mistake has been made, or the rule adopted in the byaws has been found to work
harmful results, the remedy is in the hands of the SHs who have the power at any
lawful meeting to change the rule.
— “formally organize” includes not only adoption of by-laws but also the
establishment of the Board of Directors which will administer the
affairs of the corporation and exercise its powers
— the AOI names the initial members of the Board who are to act until
the 1st set of directors are duly elected and qualified
o this interim board can perform the functions of a regular board
until the date of the election of directors
o once elected, the directors must complete the organization of
the corporation by electing the officers
— after approval of by-laws, and the directors and offices elected, the
corporation is ready to commence business
— it must do so within 2 years from date of incorporation;
o otherwise, its corporate powers will cease and will be deemed
dissolved
3. Annual financial statements
— Once organized, a corporation is required to keep proper accounting
records and to file financial statements with the SEC annually

The Code specifically gives power to the corporation to provide in its by-laws for
the qualifications of directors, and the requirement of security from them for the
proper discharge of the duties of their office, is highly prudent and in conformity
with good practice. The code also has safeguards on directors from making loans
to themselves, designed to prevent the possibility of looting of the corporation.
The by-law provision is consistent with the code on this one. Valid.

2. Election of directors and officers; commencement of business

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