PRIVATE CORPORATIONS

ATTY. BALANQUIT, CPA

SECTION 1 - TITLE OF THE CODE SECTION 2 – CORPORATION DEFINED

“A corporation is an artificial being created by
Historical background operations of law, having the right of
March 1, 1906 – Act no. 1459 succession and the powers, attributes and
- Known as the Corporation Law properties expressly authorized by law or
- enacted by the Philippine Commission incident(al) to its existence”
April 1, 1906 – Act no. 1459
- Legislative body if the Philippines Attributes of a corporation
- during American regime 1. It is an Artificial being
May 1, 1980 - Batas Pambansa blg. 68 2. It is Created by operations of law
- Law governing Private Corporations in 3. It has the right of succession
the Philippines 4. It has only the powers, attributes and
- Cabinet bill no. 3 properties expressly authorized by law or
- “This Bill intended to supplant the incident to its existence.
present Corporation Law and hereafter known
as the CORPORATION CODE OF THE Corporation is a legal or juridical person, not a
PHILIPPINES” person but treated as a person

Purpose: Be the effective partner of the Stockholders – Stock corporations
National Government in spreading the benefits Individual members – Non-stock corporations
of Capitalism for social and economic
development of the nation. Consequences of legal concept of separate
personality:
Article XII – SEC 16: Congress shall not provide
formation, organization and regulation of 1. Liability for debt – corporation is not
Private Corporations. liable for debts of stock holders
They can lose no more than their
Scope of the Code: investment
1. Provide for the incorporation, 2. Right to bring action – may incur
organization and regulation of Private obligations and bring civil and criminal
Corporations. Both stock and non-stock, actions
including educational and religious. 3. Right to acquire and possess property –
2. Defines their powers of provide for their corporation properties
dissolution 4. Liability for contracts – all contracts
3. Fixes the duties and liabilities of officers entered into in its name
4. Declares the rights and liabilities of 5. Tax exemption – cannot be extended to
stockholders or members include dividends paid to stockholders
5. Prescribe the condition of corporation 6. Changes in individual membership –
may transact with remains unchanged/unaffected
6. Provides Penalties for violations 7. Liability under exceptional circumstances
7. Repeals all laws and parts of laws – personal or solidary liability



Disregarding fiction of corporate entity or
Doctrine Piercing the veil of the Corporate 6. Corporation formed for the purpose of
Enitity -cannot be extended to a point not evading his individual contract – Evade
within its reason and purposes, promote the separate and personal creditors
ends of justice.
- corporation is allowed to exist solely for lawful 7. Corporation is dissolved and its assets
purposes are transferred to another corporation-
To avoid financial liability of the first
Corporate entity used as cloak or cover for corporation, owned by same person,
fraud second corporation considered as
- illegal and will be disregarded successor of the first entity.
- individuals composing it will be treated
as identical Corporation as a creation of law or by
- if there’s two (2) corporations – will be operation of law
merged into one, one being the alter ego Corporation – Cannot come to its
of the other, law will not recognize existence by mere agreement
separate corporate existence if clearly Special Incorporation Law – Directly
established as a shield for wrongdoing. creates the corporation
- Creditors of financially troubled General Incorporation Law – person
corporations benefit when they succeed desiring to be and act as a corporation
in piercing the corporate entity for they may incorporate.
can go after the assets of the individual
stockholders. Governing General law/ Special law
General Law – BP 68 or AKA Corporation
Instances where fiction disregarded: Code of the Philippines
1. Corporate functions for the benefit of a Special Law – Controlled by government
SINGLE PERSON – sole owner has Exception – Legislative grant or authority
complete control over the funds. is necessary for the creation of a
corporation obtains with respect to
2. Corporation is a mere instrumentality if CORPORATION BY PRESCRIPTION.
the individual stockholders – out of
principle of law Right of Succession of a corporation
Corporation – has a capacity of
3. Domestic or Philippine corporation is continuous existence but by no means
controlled by aliens – Nationality shall immortal
be deemed for reasons of national -Life is limited to the period of time
security. stated in the articles of incorporation
Control Test – determining the -Not exceeding 50 years unless sooner
nationality of a private corporation. dissolved or said period is extended

4. Corporation is organized by an insolvent Powers, Attributes, and properties of a
debtor to defraud his creditor – he corporation
transfers his properties to it for Corporation – may exercise only such
fraudulent purpose. powers granted by the law
-Express grant is not necessar
5. Created by a parent company – officers
of 2 corporations are substantially the
same, system of operations is unified.


Distinction between Partnership and Corporations
Partnership Corporation
Creation Created by agreement By operation of law
Number of incorporators 2 or more partners At least 5 incorporators
As to Juridical Moment of execution of Issuance of certificate from SEC
Personality contract
Powers Authorized by partners and Expressly granted by law or
not contrary to law incidental to its existence
Management If no stipulation, every partner Vested in the board of directors
is agent
Effect of Co-partner who mismanages Must be in the name of the
mismanagement can be sued corporation
Right of succession No such right Has such right
Extent of liability to third Liable personally and Up to the investment
person subsidiarily (except: LP)
Transferability of Interest Cannot Stockholder has a right even
w/o consent of the other
Term of Existence Any stipulated period May not be formed for a term
in excess of 50 years extendible
for not more than 50 yrs.
Firm Name LP required to have “ltd.” May adopt any but not
identical to others
Dissolution At any time by will of any or all May only be dissolved with the
partners consent of the state
Laws which governs Civil Code Corporation Code

Similarities between partnership and corporation
1. Has JURIDICAL PERSONALITY
2. Can only ACT THROUGH AGENTS
3. Composed of an AGGREGATE OF INDIVIDUALS
4. DISTRIBUTES ITS PROFITS to those who contributed capital
5. LAW AUTHORIZED its organization
6. Partnership is TAXABLE, Corporation is subject to INCOME TAX

Advantages of Corporation
1. Has LEGAL CAPACITY TO ACT
2. CONTINUITY OF EXISTENCE
3. CREDIT is STRENGTHED BY SUCH CONTINUITY
4. Management is CENTRALIZED in the BOARD OF DIRECTORS
5. STANDARDIZE; governed under one general Incorporation Law
6. Makes FEASIBLE GIGANTIC FINANACIAL ENTERPRISE
7. STAKEHOLDERS have LIMITED LIABILITY
8. NOT GENERAL AGENTS of the business
9. Shares of STOCKS CAN BE TRANSFERRED


Disadvantages of Corporation
1. COMPLICATED in FORMATION and MANAGENENT
2. Entails relatively HIGH COST
3. Credit is WEAKEND BY THE LIMITED LIABILITY
4. LACK of PERSONAL ELEMENT
5. Greater degree of GOVERNMENTAL CONTROL
6. VOTING RIGHTS have become theoretical
7. STOCKHOLDERS have little voice
8. SEPARATE FROM OWNERSHIP

SECTION 3 – CLASSES OF CORPORATION
Stock Corporation – created for purpose of making profits, distributed in the form of dividends
Non-Stock Corporation – Do not issue stock, created for public good and welfare, no capital stock

As to persons who COMPOSE THEM: As to open to the public or not:
a. CORPORATION AGGREGATE – More than a. CLOSE CORPORATION – Limited to
1 member or corporator selected person or members of a family
b. CORPORATION SOLE – Religious b. OPEN CORPORATION – Open to any who
Corporation wish to become a partner

As to RELEGIOUS PURPOSE OR NOT: As to RELATION TO ANOTHER CORPORATION:
a. ECCLESIASTICAL CORPORATION – a. PARENT OR HOLDING CORPORATION –
Organized for religious purposes Has the power either directly or indirectly
b. LAY CORPORATION – Purpose other than to elect the majority of the directors.
for Religion, in turn, may be either b. SUBSIDIARY CORPORATION – Majority of
“ELEEMOSYNARY or CIVIL” its directors can be elected by such other
corporation.
As to CHARITABLE PURPOSES OR NOT:
a. ELEEMOSYNARY CORPORATION – As to TRUE SENSE OR LIMITED SENSE:
Established for charitable purposes a. TRUE CORPORATION – Exist by statutory
b. CIVIL CORPORATION – Established for authority
business or profit. b. QUASI-CORPORATION – Exis without
formal legislative grant.
As to state or country under or by whose laws - CORPORATION BY PRESCRIPTION – Exercise
they have been created: corporate powers for an indefinite period
a. DOMESTIC CORPORATION – Under the EXAMPLE: Roman Catholic Church
laws of the Philippines - CORPORATION BY ESTOPPEL – Not a
b. FOREIGN CORPORATION – Organized corporation in reality, either de jure or de
other than those of the Philippines facto and Defectively formed

As to LEGAL RIGHTS TO CORPORATE EXISTENCE As to PUBLIC (GOVERNMENT) OR PRIVATE
a. DE JURE CORPORATION – Existing in PURPOSE:
FACT and LAW a. PUBLIC CORPORATIONS – Organized or
b. DE FACTO CORPORATION – Existing in formed for the government of PORTION
FACT but NOT IN LAW OF THE STATE
b. PRIVATE CORPORATIONS – Formed for
some private purpose, benefit or end.

TEST OF THE CORPORATION – The Purpose

PUBLIC CORPORATION – Political or public purpose, Municipal Corporations or Local Govmnts.
(Provinces, cities, municipalities and barangays)

PRIVATE CORPORATION – whole interest belongs to the state

a. Government owned or Controlled Corporations – owned or controlled by the
government through parent corporation or subsidiary.
- Performing governmental or propriety functions.

b. Quasi-Public Corporations – performance of some public duties or service.
- aka “PUBLIC UTILITIES” or “PUBLIC SERVICE CORPORATIONS”



SECTION 4 – CORPORATIONS CREATED BY SPECIAL
LAWS OR CHARTERS

Incorporation of a private corporation by a special act. Subject to the constitutional limitation,
shall be owned and controlled by the government.

REASON FOR RESTRICTION:
1. Prevent the granting of special privileges.
2. Prevent BRIBERY and CORRUPTION of the legislative.

GOVERNING LAW:
1. Governed by such law and suppletorily by the provisions of the Code “insofar as they are
applicable”
2. Governed by the Labor Code – incorporated under the general incorporation law.
3. Proper to increase its capitalization by amending the articles of incorporation\\



SECTION 5 – CORPORATORS AND INCORPORATORS,
STOCKHOLDERS AND MEMBERS

COMPONENTS OF CORPORATION:
A. CORPORATORS – Who composes the corporation. The term includes incorporators,
stockholders and members.
B. INCORPORATORS – Originally formed the Corporation, mentioned in the articles of
incorporation
C. STOCKHOLDERS – Owners of shares of stock in a stock corporation. a.k.a Shareholders
D. MEMBERS – Corporators of corporation which has no capital stock. Not required to
subscribe as long as the minimum capital requirements are complied.



THREE OTHER CLASSES:

E. PROMOTERS – Brings together the incorporators or the persons interested in the
enterprise
F. SUBSCRIBERS – Agreed to take and pay for original, unissued shares of a corporation, may
not be stockholders.
G. UNDERWRITER – Usually an investment banker
- Agreed to buy an entire issue of securities
- Guaranteed the sale of an issue by agreement
- Agreed to use his “best efforts”
- Offered for sale the stock he has purchased from controlling stockholder



SECTION 6 – CLASSIFICATION OF SHARES

POWER TO CLASSIFY SHARES:

1. Division into classes or series of shares – maybe divided into classes or series of shares
“Series” – Subdivision of a class of shares
2. Primary Classification of shares – may be divided into other classes, In case of liquidation
rights to corporate assets
3. At least one class of shares with voting rights – must have at least one class of stock with
voting rights

WHEN CLASSIFICATION OF SHARES MAY BE MADE:

1. By the incorporators – first determined by the incorporators as stated in the AOI filed at
SEC
2. By the board of Directors and the stockholders – may be altered by amending AOI

REASONS FOR CLASSIFICATIONS OF SHARES:

1. Compliance with constitutional or Legal requirements – prescribed minimum percentage
of capital stock
CLASS A – shares shall be held exclusively for Filipino Citizens only
CLASS B – either Filipino Citizens or Foreigner
2. Expediency for monitoring purposes

SHARES PRESSUME TO BE EQUAL IN ALL ASPECTS – DOCTRINE OF EQUALITY OF SHARES
EXCEPT: provided in the AOI and stated in the Cert of Stock

CAPITAL STOCK AND CAPITAL EXPLAINED:

A. CAPITAL STOCK – Fixed in the AOI, to be subscribed and paid in by the sharehlders, either
in money, property, labor or service.
- It represents the equity of the stockholders in the corporate assets.

1. Authorized Capital Stock – Synonymous with capital stock, maximum number of share
THAT A CORPORATION MAY ISSUE
2. Subscribed Capital Stock – amount of capital stock subscribed whether fully paid or
not.
3. Outstanding Capital Stock – issued and held by persons other than the corporation
itself. The total shares of stock issued to subscribers or stockholders whether fully or
partially paid.
4. Paid-Up Capital Stock – portion of the subscribed capital stock that is paid
5. Unissued Capital Stock – not issued or subscribed. It does not vote and draw no
dividends.

B. CAPITAL – used to indicate the entire property or assets of the corporation.
- portion of the net assets paid by the stock holders
LEGAL CAPITAL – equal to the aggregate par value and/or issued value of the
outstanding capital stock.


CAPITAL AND CAPITAL STOCK DISTINGUISH:
CAPITAL CAPITAL STOCK
actual corporate property is an amount
concrete thing something abstract
fluctuates or varies from day to day fixed and unaffected by profits and losses
belongs to the corporation belongs to the stockholders
either real or personal property always personal


SITUS - Location

LEGAL CAPITAL – Remains unchanged except outstanding shares are increased or reduced in
number or amount
CAPITAL STOCK – used in a collective sense
Limits the maximum amount or number of shares
CERTIFICATE OF STOCK – written acknowledgement, formal written evidence of the holder’s
ownership of one or more shares.
STOCK OR SHARE OF STOCK – used in a distributive sense
One of the units into which the capital stock is divided, represents the interest or
right which owner has:
-right to vote in the management of the corporation
-right in a portion of corporate earnings
-right upon dissolution and winding up
NATURE OF SHARE OF STOCK:

1. Distinct undivided share
2. Property distinct from the Capital
3. Do not constitute and indebtedness of the corp to the shareholders
4. Undivided part of the corporation’s property



SHARE OF STOCK AND CERTIFICATE OF STOCK DISTINGUISH:
SHARE OF STOCK CERTIFICATE OF STOCK
Incorporeal or intangible property tangible
Represents the right or interest of a person Written evidence of that right or interest
Issued even if not fully paid (except no par) Subscription must be fully paid
Domicile of Corporation Domicile of the owner

CLASSES OF SHARES IN GENERAL:

1. PAR VALUE or NO PAR VALUE:
a. Par value share – one with specific money value fixed in the AOI
-Appearing in the cert of stock
-Purpose: Fix the minimum issue price
-not usually the price investors buy or sell the stock
b. No Par value share – without any stated or appearing on the face of the cert
-does not state how much it represents
-has always “issued value”
-has the same rights as holders of par value stock
-expressed to be divided into a stated number of shares

2. VOTING OR NON-VOTING SHARE:
a. Voting Share – share with right to vote, “one share, one vote”
b. Non-voting Share – share with no right to vote
proviso – fundamental matter which holders of non-voting shares
shall nevertheless be entitled to vote

3. COMMON AND PREFFERED SHARE:
a. Common share of stock – entitles the holder to PRO-RATA division of the profits.
-private corps ordinarily issue
-residual owners of the corp
-corp may issue more than 1 class of common stock
b. Preferred share of stock – entitles the holder to certain preferences over holders of
common stock
-priority as to distribution of assets of a corporation in case of
dissolution.
-shall be equal to every other share except otherwise stated in the
AOI and in the cert pf stock
-rarely given voting privileges
-if more than one, usually designated as “first preferred” “second
preferred” and etc.

4. PROMOTION SHARE: Issued to promoters and to those in some way interested in the
company.

5. SHARE IN ESCROW: Subject to agreement, share is deposited by the grantor or his agent
-makes the depository a trustee under an express trust
-subject to suspensive condition


6. CONVERTIBLE STOCK: changeable by the stockholder from one class to another class
EXCEPT: Restricted in the AOI, stockholder may demand conversion
at his pleasure

NATURE OF PAR VALUE, BOOK VALUE and MARKET VALUE
1. PAR VALUE – Indicated in the cert of stock
- Amount of money or property contributed to the capital stock
2. BOOK VALUE – peso equity in corporate capital of each share of stock
3. MARKET VALUE – price a willing seller would sell and a willing buyer would buy
- Affected by the law of supply and demand

ADVANTAGES OF PAR VALUE SHARES:
1. Easily be sold as the public is more attracted to this kind of share.
2. Greater protection to creditors
3. Unlikelihood of sale of subsequently issued shares
4. Unlikelihood of the distribution of dividends that are only ostensible profits

DISADVANTAGES OF PAR VALUE:
1. Subscribers are liable to corporate creditors for their unpaid subscription
2. Stated face value of the share is not an accurate criterion of its true value

ADVANTAGES OF NO PAR VALUE:
1. Issued as fully paid and non-assessable
2. Price is flexible
3. Low-priced stocks enjoy wider distribution
4. Tell no untruth
5. Simplifying accounting procedure

DISADVANTAGES OF NO PAR VALUE:
1. Legalize large issues of stock for property
2. Conceal the money or property
3. Promote issuance of watered stock
4. Lesser protection to creditors

KINDS OF PREFERRED SHARES:
1. AS TO ASSETS – gives the holder preference in the distribution of the assets of he coro in
case of liquidation.
2. AS TO DIVIDENDS – entitled to receive dividends on said share at fixed rates before
common stockholders.
Preferred stock holders – Investors not creditors of the corporation
-can look only what is left after corporate debts are fully paid

4 LEGAL LIMITATIONS REGARDING PREFERRED SHARES
1. Preferred shares deprived of voting rights shall still be entitled to vote
2. They must not violate the provision of the code
3. Preferred shares may be issued only with stated par value
4. Board of directors may only fix the terms and conditions of preferred shares of stock
when so AUTHORIZED by the AOI.

KINDS OF PREFERRED SHARES AS TO DIVIDENDS:
1. Comulative Preferred Share – entitles the holder not only to the payment of current
dividends but also to dividends in arrears.
-Accumulated dividends must be paid to the holder before paying the
holders of common stock.
2. Non-Comulative Preferred Share – entitles the holder to the payment of current
dividends only.
3. Participating Preferred Share – has the right to share in the extra dividends
4. Non-Participating Preferred Share – entitled up to the current period only
5. Comulative-Paticipating Preferred Share – entitled not only to dividend in arrears but
also to participation with the holders of common stock in the remaining profits.

--- IN THE ABSENCE OF AGREEMENT: dividends should be deemed NON-COMULATIVE and
NON-PARTICIPATING


SECTION 7 – FOUNDERS’ SHARES

Founder’s Shares – shares issued to the organizers and promoters of a corporation
- Usually share in profits after a certain percentage has been paid
- Given privileges over other stock as to voting and as to division of profits in
excess of minimum dividend on the common stock.
1. Special rights and privileges – may be given special rights and privileges not enjoyed by
the owners of other stock.
2. Exclusive right to vote and be voted – not exceeding 5 years and must approved by SEC

Section 7 provides an EXCEPTION TO THE RULE in section 6 that “no share may
be deprived of voting rights except those classified and issued as ‘preferred’ or
‘redeemable’ shares unless otherwise provided in this Code”


SECTION 8 – REDEEMABLE SHARES

REDEEMABLE or CALLABLE SHARE: usually preferred, by it terms is redeemable at a fixed date or
at the option of either the issuing corporation, the stockholder or both at a certain redemption
price
1. MEANING OF REDEMPTION – repurchase or reacquisition of stock by corporation in exchange
for cash or property whether cancelled, retired or held in the treasury.
2. WHEN REDEEMABLE SHARES MAY BE ISSUED – only if provided in the AOI.
-common shares are never “redeemed”
3. REDEMPTION REGARDLESS OF EXISTENCE – upon expiration, they may be taken up or
purchased by the corporation.
-Rule in Section 41 is different, power to acquire its own share is subject to
condition that retained earnings is unrestricted.
-Issuance of shares may be likened to the issuance of bonds and debts.
4. WHERE CORPORATION INSOLVENT – Redemption may not be made where the corporation is
insolvent or redemption would cause insolvency.

5. TERMS and CONDITIONS – all must be stated in AOI and Cert of stock representing the share.
EXCEPT: Redemption rests entirely with the corporation, stockholder has no right
to compel and refuse the redemption of his stock.
6. VOTING RIGHTS – Redeemable shares may be deprived of voting rights in the AOI UNLESS
provided in the Code.


SECTION 9 – TREASURY SHARES

TREASURY SHARES – Lawfully issued by the corporation and fully paid for
- Later reacquired through purchase, redemption, donation, forfeiture or other
lawful means
- NOT RETIRED SHARES
- DO NOT HAVE THE STATUS OF OUTSTANDING SHARE
- Do not revert to the unissued shares
- Regarded as property acquired
- May be reissued or resold, price fixed by the Board of Directors
- Price paid should be treated in the books as payment for purchase of shares.

1. STATUS – SECTION 41: Only surplus earnings may be used for the purchase of treasury
shares
-SECTION 68: Corporation may bid at the public sale of delinquent shares, title
shall be vested in the corp as TREASURY SHARE.

2. RESALE – Any price the Board of Directors sees fit to accept
- even at less than par
- once been legally issued as fully paid
-price is reasonable
a. Stockholders may rightfully complain
b. in case of sale or reissue, becomes outstanding stock and regains dividends and
voting rights it originally held
c. Section 36 authorizes corp to sell treasury subject to provisions of Section 9

3. DECLARATION AS PROPERTY DIVIDEND – Treasury shares are unrealized income, not
distributable as dividends.

4. VOTING RIGHTS – Has no voting rights as long as they remain in the treasury, uncancelled
and subject to reissue.
- Corporation cannot be stockholder in itself

5. RIGHT TO DIVIDENDS – Neither are treasury shares are entitled to dividends or assets
-Dividends cannot be declared by a corporation to itself as such distribution.