chapter iii formation organization

8/3/2019 Chapter III Formation Organization

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Chapter III Formation/Organization

Who may form a corporation?

Section 5.Corporators and incorporators, stockholders and members. -Corporators are those who compose a corporation, whether as stockholdersor as members. Incorporators are those stockholders or members mentionedin the articles of incorporation as originally forming and composing the

corporation and who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders.Corporators in a non-stock corporation are called members. (4a)

Incorporators: SHs or members mentioned in the AOI as originallyforming and composing the corporation and who are signatories thereof

Corporators: all SHs or members, whether incorporators or those joiningthe corporation after incorporation

Every incorporator must be a stockholder

Section 10.Number and qualifications of incorporators. - Any number ofnatural persons not less than five (5) but not more than fifteen (15), all of

legal age and a majority of whom are residents of the Philippines, may forma private corporation for any lawful purpose or purposes. Each of theincorporators of s stock corporation must own or be a subscriber to at leastone (1) share of the capital stock of the corporation. (6a)

1. Must be natural persons

Only natural persons can be incorporatorso Excluding partnerships and other corporations

But partnerships and other corporations can be stockholdersin another corporation as long as they are not incorporatorsthereof (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 existsa de facto corporation, providedo At least 5 incorporators must sign the AOI

One-man corporations: owner can still incorporate by givingnominal ownership of one share of stock each to four otherpersons (legal)

Incorporator will always retain his status as incorporator ofthe corporation

Reason for 5 incorporator requirement: if anything goeswrong if the incorporation process, and liabilities created atthe time of incorporation, then the existence of 5 allows thepublic or injured party to run after the persons

3. Residence requirement; citizenship requirement only in certainareas

No general requirement of RP citizenship Some areas of industry and business are limited/reserved forFilipino citizens

o Public utilitieso Retail tradeo Bankso Investment houseso Savings and loan associationso Schoolso Other areas Congress may by law provide

Where more than 40% of outstanding capital is to be ownedor controlled by aliens: written authorization must first besought 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 maybe detrimental to the public interest

o Ex. Banksno bank may be licensed to operate if

equity of one person or persons related to eachother within the 3rd degree ofconsanguinity/affinity exceed 20% of bank votingstock

Section 140.Stock ownership in certain corporations. - Pursuant to theduties specified by Article XIV of the Constitution, the National Economic andDevelopment Authority shall, from time to time, make a determination ofwhether the corporate vehicle has been used by any corporation or by

business or industry to frustrate the provisions thereof or of applicable laws,and shall submit to the Batasang Pambansa, whenever deemed necessary, areport of its findings, including recommendations for their prevention orcorrection.

Maximum limits may be set by the Batasang Pambansa for stockholdings incorporations declared by it to be vested with a public interest pursuant to theprovisions of this section, belonging to individuals or groups of individualsrelated to each other by consanguinity or affinity or by close business

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interests, or whenever it is necessary to achieve national objectives, preventillegal monopolies or combinations in restraint or trade, or to implementnational economic policies declared in laws, rules and regulations designedto promote the general welfare and foster economic development.

In recommending to the Batasang Pambansa corporations, businesses orindustries to be declared vested with a public interest and in formulatingproposals for limitations on stock ownership, the National Economic andDevelopment Authority shall consider the type and nature of the industry,the size of the enterprise, the economies of scale, the geographic location,the extent of Filipino ownership, the labor intensity of the activity, the exportpotential, as well as other factors which are germane to the realization andpromotion of business and industry.

o Stock ownership in close corporations may belimited by the AOI ifo members of the same familyor group

Section 97.Articles of incorporation. - The articles of incorporation of aclose corporation may provide:

1. For a classification of shares or rights and the qualifications forowning or holding the same and restrictions on their transfers asmay be stated therein, subject to the provisions of the followingsection;

-- x X x --

Steps in Formation of Corporation

1. Promotional stage

Promoter, Defn: one who brings together persons who

become interested in enterprise, aids in procuringsubscriptions and sets in motion the machinery which leadsto the formulation of the corporation

Securities Regulation Code: promoter is a person who, actingalone or with others, takes initiative in founding andorganizing the business of the issuer and receivesconsideration therefor

o He formulates the necessary initial business andfinancial plans

o If necessary, buys the rights and property whichthe business may need; with the understandingthat once formed, he shall take over the same

o Promoters may also be incorporatorso 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 couldinvest

shares of stock cannot be sold publicly unless they are firstregistered with the SEC

SEC requires disclosure of all pertinent informationregarding:

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 statemento Filed with the SECo Published in 2 newspapers of gen. circulationo Once a week for 2 consecutive weeks

If all requirements are complete, SEC issues an order makingregistration 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 thecorporation and its SHs as well as the agreement among SHs

Basic contract document in Corporate Lawo Defines the charter of the corporationo 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

Section 14.Contents of the articles of incorporation. - All corporationsorganized under this code shall file with the Securities and Exchange

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Commission articles of incorporation in any of the official languages dulysigned and acknowledged by all of the incorporators, containing substantiallythe following matters, except as otherwise prescribed by this Code or byspecial law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation isbeing incorporated. Where a corporation has more than one statedpurpose, the articles of incorporation shall state which is the primarypurpose and which is/are the secondary purpose or purposes:Provided, That a non-stock corporation may not include a purposewhich would change or contradict its nature as such;

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

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors or trustees, which shall not be less thanfive (5) nor more than fifteen (15);

7. The names, nationalities and residences of persons who shall actas directors or trustees until the first regular directors or trustees areduly elected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of its authorized capitalstock in lawful money of the Philippines, the number of shares intowhich it is divided, and in case the share are par value shares, thepar value of each, the names, nationalities and residences of theoriginal subscribers, and the amount subscribed and paid by each onhis subscription, and if some or all of the shares are without par

value, such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, thenames, nationalities and residences of the contributors and theamount contributed by each; and

10. Such other matters as are not inconsistent with law and which

the incorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles ofincorporation of any stock corporation unless accompanied by a swornstatement of the Treasurer elected by the subscribers showing that at leasttwenty-five (25%) percent of the authorized capital stock of the corporationhas been subscribed, and at least twenty-five (25%) of the total subscriptionhas been fully paid to him in actual cash and/or in property the fair valuationof which is equal to at least twenty-five (25%) percent of the saidsubscription, such paid-up capital being not less than five thousand(P5,000.00) pesos.

Section 15.Forms of Articles of Incorporation. - Unless otherwise prescribedby special law, articles of incorporation of all domestic corporations shallcomply substantially with the following form:

ARTICLES OF INCORPORATION OF

__________________________

(Name of Corporation)

KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a majority of whom areresidents of the Philippines, have this day voluntarily agreed to form a(stock) (non-stock) corporation under the laws of the Republic of thePhilippines;

AND WE HEREBY CERTIFY:

FIRST: That the name of said corporation shall be "_____________________, INC.

or CORPORATION";

SECOND: That the purpose or purposes for which such corporation isincorporated are: (If there is more than one purpose, indicate primary andsecondary purposes);

THIRD: That the principal office of the corporation is located in theCity/Municipality of ________________________, Province of

_______________________, Philippines;

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FOURTH: That the term for which said corporation is to exist is _____________years from and after the date of issuance of the certificate of incorporation;

FIFTH: That the names, nationalities and residences of the incorporators ofthe corporation are as follows:

NAME NATIONALITY RESIDENCE

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

SIXTH: That the number of directors or trustees of the corporation shall be_______; and the names, nationalities and residences of the first directors ortrustees of the corporation are as follows:

NAME NATIONALITY RESIDENCE

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

SEVENTH: That the authorized capital stock of the corporation is______________________ (P___________) PESOS in lawful money of thePhilippines, divided into __________ shares with the par value of

____________________ (P_____________) Pesos per share.

(In case all the share are without par value):

That the capital stock of the corporation is ______________ shares without parvalue. (In case some shares have par value and some are without par value):

That the capital stock of said corporation consists of _____________ shares ofwhich ______________ shares are of the par value of _________________(P____________) PESOS each, and of which _________________ shares arewithout par value.

EIGHTH: That at least twenty five (25%) per cent of the authorized capitalstock above stated has been subscribed as follows:

Name of Subscriber Nationality No of Shares Amount

Subscribed Subscribed

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

_________________ __________ ____________ ____________

NINTH: That the above-named subscribers have paid at least twenty-five(25%) percent of the total subscription as follows:

Name of Subscriber Amount Subscribed Total Paid-In

_________________ ___________________ _______________

_________________ ___________________ _______________

_________________ ___________________ _______________

_________________ ___________________ _______________

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_________________ ___________________ _______________

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporationis non-stock, Nos. 7, 8 and 9 of the above articles may be modifiedaccordingly, and it is sufficient if the articles state the amount of capital ormoney contributed or donated by specified persons, stating the names,nationalities and residences of the contributors or donors and the respectiveamount given by each.)

TENTH: That _____________________ has been elected by the subscribers asTreasurer of the Corporation to act as such until his successor is duly electedand qualified in accordance with the by-laws, and that as such Treasurer, hehas been authorized to receive for and in the name and for the benefit of thecorporation, all subscription (or fees) or contributions or donations paid orgiven by the subscribers or members.

ELEVENTH: (Corporations which will engage in any business or activityreserved for Filipino citizens shall provide the following):

"No transfer of stock or interest which shall reduce the ownership of Filipino

citizens to less than the required percentage of the capital stock as providedby existing laws shall be allowed or permitted to be recorded in the properbooks of the corporation and this restriction shall be indicated in all stockcertificates issued by the corporation."

IN WITNESS WHEREOF, we have hereunto signed these Articles ofIncorporation, this __________ day of ________________, 19 ______ in theCity/Municipality of ____________________, Province of ________________________,Republic of the Philippines.

_______________________ _______________________

_______________________ _______________________

________________________________

(Names and signatures of the incorporators)

SIGNED IN THE PRESENCE OF:

_______________________ _______________________

(Notarial Acknowledgment)

TREASURER'S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES )

CITY/MUNICIPALITY OF ) S.S.

PROVINCE OF )

I, ____________________, being duly sworn, depose and say:

That I have been elected by the subscribers of the corporation as Treasurerthereof, to act as such until my successor has been duly elected andqualified in accordance with the by-laws of the corporation, and that as such

Treasurer, I hereby certify under oath that at least 25% of the authorizedcapital stock of the corporation has been subscribed and at least 25% of the

total subscription has been paid, and received by me, in cash or property, inthe amount of not less than P5,000.00, in accordance with the CorporationCode.

____________________

(Signature of Treasurer)

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in theCity/Municipality of ___________________ Province of _____________________, this

_______ day of ___________, 19 _____; by __________________ with Res. Cert. No.___________ issued at _______________________ on ____________, 19 ______

NOTARY PUBLIC

My commission expires on

_________, 19 _____

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Doc. No. _________;

Page No. _________;

Book No. ________;

Series of 19____ (7a)

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 anyexisting corporation or to any other name already protectedby law or which is patently deceptive, confusing, or contraryto existing laws

If name is legally permissible the SEC allow the parties toreserve it for a reasonable period

Code requires a corporation to append the wordCorporation or Inc. to its chosen name

A corporation should transact business only in its corporatename

Can amend the name provided it is done in accordance withthe procedure laid down by the Code for amendments of AOIand approval by SEC of the change in corporate name

Once approved SEC issues an amended certificate ofincorporation under the corporations new name

Change of name does not result in dissolution

Philips Export BV v CA (206 S 457). Philips of the Netherlands files an

action with the SEC to delete the name Philips from the corporate name ofStandard Philips Company. Standard refuses, and Philips sought aninjunction to enjoin Standards from the use if the name Philips. SEC HearingOfficer dismisses Philips petition, arguing that Sec 18 of Corpo Code is onlyapplicable when the corporate names are identical. SEC en banc affirmsHOs decision; corporate names contain at least two different words andrules out confusion. CA dismisses Philips petition, saying that Standardsproducts are unrelated and do not compete with Philips products and wouldnot mislead consumers. I: W/N Standards use of the word Philips in its

corporate name is unlawful and may be removed under the Corpo Code. H:Yes. The corporations right to use its corporate name is a property right, aright in rem which it may assert and protect against the world. A name issecularly important as necessary to the very existence of a corporation. Itsname is one of its attributes, an element of its existence, and essential to itsidentity. GR: each corp must have a name by which it is to sue and be suedand do all legal acts. A corp acquires its name by choice and need not selecta 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 iseither identical or deceptively/confusingly similar, or; (3) it is patentlydeceptive, confusing or contrary to existing law. The right to exclusive use ofcorporate name is determined by priority of adoption. Philips wasincorporated on 1956 and Standard only 2 years later. In determining theexistence of confusing similarity in corporate names, the test is w/n thesimilarity is such as to mislead a person using ordinary care anddiscrimination. A reading of the names of Philips and its subsidiarycompanies indicate that Philips is indeed a dominant word in that allcompanies affiliated with the principal corp are known in the RP. Given alsoStandards primary purpose, nothing could prevent it from dealing in thesame line of business of electrical devices, products, or supplies which fallunder its primary purposes. Standards use also tends to show its intentionto 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 bysimilarity.

Lyceum of the Phils. v CA (219 S 610).Lyceum of the Philippines Incsues all academic institutions it could find having the corporate nameLyceum. SEC rules against Lyceum and upheld by the CA. I: W/n use ofword Lyceum in its corporate name has been for such length of time andwith such exclusivity as to have been associated with Lyceum of RP.H: Lyceum is not entitled to a legally enforceable exclusive right to use theword Lyceum in its corporate name. (1) corporate names of the otherLyceums not identical with, or deceptively or confusingly similar to Lyceumof the RP. Confusion and deception are precluded by the appending of thegeographic name after Lyceum. (2) Lyceum the word is as generic incharacter as the word university. But Lyceum of RPs use of the wordLyceum in its corporate name has not been attended with the exclusivityessential for applicability of the doctrine of secondary meaning. In factWestern Lyceum used the word 17 years before Lyceum of RP. (3) even ifWestern Lyceum is deemed to have lost its rights under the originalregistration which was never restored when destroyed by fire, the point wasmerely to emphasize that the word has already been used previously and isnot exclusive to Lyceum of RP.

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PC Javier and Sons v CA. H: From the foregoing documents, it cannot bedenied that petitioner corporation was aware of First Summa Savings andMortgage Bank's change of corporate name to PAIC Savings and MortgageBank, Inc. Knowing fully well of such change, petitioner corporation has novalid reason not to pay because the IGLF loans were applied with andobtained from First Summa Savings and Mortgage Bank. First SummaSavings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., areone and the same bank to which petitioner corporation is indebted. Achange in the corporate name does not make a new corporation, whethereffected by a special act or under a general law. It has no effect on theidentity of the corporation, or on its property, rights, or liabilities. Thecorporation, 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 witha different name, and its character is in no respect changed.

(2) Purpose clause

Confers as well as limits the powers which a corporation mayexercise

Sec 45: corporate powers:o Expressly granted by law and the AOIo Incidental to conferred powerso

Reasonably necessary to accomplish its purposes andincidental 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 shallknow within what lines of business his money is to be risked

o So that management may know within what lines ofbusiness it is authorized to act

o So that anyone who deals with the corporation mayascertain w/n a contract or transaction is within the generalauthority of management

Sec 14(2): a corporation can have as many purposes as it maywish to include in its AOI, subject to the ff conditions:

a) The AOI must specify which is the primary purpose andwhich 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 purposepeculiar to them and no other (ex educational corporationscannot engage in export and import)

c) Purpose(s) must be lawful

NEDA has the power to refuse or deny theapplication for registration of any corporation if not

consistent with the declared national economicpolicies

A corporation cannot be formed for the purpose ofpracticing a profession

Non-stock corporations:

Section 88. Purposes. - Non-stock corporations may be formed or organizedfor charitable, religious, educational, professional, cultural, fraternal, literary,

scientific, social, civic service, or similar purposes, like trade, industry,agricultural and like chambers, or any combination thereof, subject to thespecial provisions of this Title governing particular classes of non-stockcorporations. (n)

Investment in activities not within its primary purposeo Sec 42: allowed provided

Approved by majority of Board

Ratified by 2/3 of outstanding capital stocko Exception: where reasonably necessary to accomplish

primary purposes, SHs approval not necessary Interpretation of purpose clauses

o GR: construed as including incidental powers reasonablynecessary to the proper exercise of the powers

enumerated in the AOIo Detailed specification of powers enumerated, by

implication, excludes all other powers or rights

Except incidental or subordinate powers andrights necessary to an exercise of powersexpressly 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 incorporationo extendible for a period not exceeding 50 years by

amendment to AOIo no extension made earlier than 5 years before original or

subsequent expiry date

exception: justifiable reasons

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Section 11.Corporate term. - A corporation shall exist for a period notexceeding fifty (50) years from the date of incorporation unless soonerdissolved or unless said period is extended. The corporate term as originallystated in the articles of incorporation may be extended for periods notexceeding fifty (50) years in any single instance by an amendment of thearticles of incorporation, in accordance with this Code; Provided, That noextension can be made earlier than five (5) years prior to the original orsubsequent expiry date(s) unless there are justifiable reasons for an earlier

extension as may be determined by the Securities and ExchangeCommission. (6)

(5) Names, nationalities, and residencies of theIncorporators and directors;

Names, nationalities, and residencies of the incorporators, anddirectors or trustees who will act as such until the first regulardirectors/trustees are electedo 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 15o For non-stock: can exceed 15 trusteeso 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 ofdirectors 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 personsacting as directors/trustees until the 1st regulardirectors/trustees are duly elected and qualified

(8) Amount of authorized capital stock, number of sharespar 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 minimumauthorized capital stock except where provided by special law

In normal practice, SEC will not allow incorporation for P5000minimum paid-up capital

Maximum capitalization is needed to protect SHs

Capital stock, defn: the amount fixed in the articles ofincorporation to be subscribed and paid in or secured to be paidin by the shareholders, at the organization of the corporation orafterwards

Outstanding Capital Stock: total shares of stock issued tosubscribers or SHs, whether or not fully or partially paid excepttreasury 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 totake and pay for the stock of a corporationo AOI must show:

the names, nationalities, and residencies of the

original subscribers, the amount subscribed, and

how much is paid thereono Sec 13: at least 25% of authorized capital stock, at least

25% of total subscription to be paid upon subscriptiono for non-stock: minimum authorized capital stock not

required, but subject to Sec 13

Section 13.Amount of capital stock to be subscribed and paid for thepurposes of incorporation. - At least twenty-five percent (25%) of theauthorized capital stock as stated in the articles of incorporation must besubscribed at the time of incorporation, and at least twenty-five (25%) percent of the total subscription must be paid upon subscription, the balance tobe payable on a date or dates fixed in the contract of subscription without

need of call, or in the absence of a fixed date or dates, upon call for paymentby the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n)

Paid-up capital at time of incorporation must be in cashdeposited in a bank or property

Pre-incorporation subscription: amount which eachincorporator or SH agrees to contribute to a proposedcorporation

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o Embodied in an agreement which takes and pays for theoriginal unissued shares of a corporation formed or to beformed (Delpher)

Section 60.Subscription contract. - Any contract for the acquisition ofunissued stock in an existing corporation or a corporation still to be formedshall be deemed a subscription within the meaning of this Title,notwithstanding the fact that the parties refer to it as a purchase or some

other contract. (n)

Section 61.Pre-incorporation subscription. - A subscription for shares ofstock of a corporation still to be formed shall be irrevocable for a period of atleast six (6) months from the date of subscription, unless all of the othersubscribers consent to the revocation, or unless the incorporation of saidcorporation fails to materialize within said period or within a longer period asmay be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of thearticles of incorporation to the Securities and Exchange Commission. (n

Par value share: appears in the stock certificate specifiying theamount in pesos as the nominal value of the shares appearing inthe certificate of stocko Must be stated in the AOIo Cannot be issued at less than stipulated par valueo Can only be changed by amendment in the AOI

Sec 62: Consideration for no par value shares issued is theissued value, to be fixed in the ff ways:o AOIo By the BOD when authorized by the AOI or BLso SHs representing at least a majority of outstanding capital

stock

Section 62.Consideration for stocks. - Stocks shall not be issued for aconsideration less than the par or issued price thereof. Consideration for theissuance of stock may be any or a combination of any two or more of the

following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by thecorporation and necessary or convenient for its use and lawfulpurposes at a fair valuation equal to the par or issued value of thestock issued;

3. Labor performed for or services actually rendered to thecorporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated

capital; and

6. Outstanding shares exchanged for stocks in the event ofreclassification or conversion.

Where the consideration is other than actual cash, or consists of intangibleproperty such as patents of copyrights, the valuation thereof shall initially bedetermined by the incorporators or the board of directors, subject toapproval by the Securities and Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes orfuture service.

The same considerations provided for in this section, insofar as they may beapplicable, may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles ofincorporation or by the board of directors pursuant to authority conferredupon it by the articles of incorporation or the by-laws, or in the absencethereof, by the stockholders representing at least a majority of theoutstanding capital stock at a meeting duly called for the purpose. (5 and 16)

Issuance of no par value must be reflected in the AOIo Consideration cannot be less than issued valuecannot be

less than 5 pesos

(9) Treasurers Affidavit

SEC shall not accept AOI unless accompanied by a swornstatement by the Treasurer that:o at least 25% of TOTAL authorized capital stock has been

subscribedo at least 25% of subscribed and authorized capital stock has

been fully paid-up

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Section 38.Power to increase or decrease capital stock; incur, create orincrease bonded indebtedness. - No corporation shall increase or decreaseits capital stock or incur, create or increase any bonded indebtedness unlessapproved by a majority vote of the board of directors and, at a stockholder'smeeting duly called for the purpose, two-thirds (2/3) of the outstandingcapital stock shall favor the increase or diminution of the capital stock, or theincurring, creating or increasing of any bonded indebtedness. Written noticeof the proposed increase or diminution of the capital stock or of the

incurring, creating, or increasing of any bonded indebtedness and of the timeand place of the stockholder's meeting at which the proposed increase ordiminution of the capital stock or the incurring or increasing of any bondedindebtedness is to be considered, must be addressed to each stockholder athis place of residence as shown on the books of the corporation anddeposited to the addressee in the post office with postage prepaid, or servedpersonally.

A certificate in duplicate must be signed by a majority of the directors of thecorporation and countersigned by the chairman and the secretary of thestockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock ornumber of shares of no-par stock thereof actually subscribed, thenames, nationalities and residences of the persons subscribing, theamount of capital stock or number of no-par stock subscribed byeach, and the amount paid by each on his subscription in cash orproperty, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for thepurpose of making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of themeeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capitalstock, or the incurring, creating or increasing of any bonded

indebtedness.

Any increase or decrease in the capital stock or the incurring, creating orincreasing of any bonded indebtedness shall require prior approval of theSecurities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of thecorporation and the other shall be filed with the Securities and ExchangeCommission and attached to the original articles of incorporation. From andafter approval by the Securities and Exchange Commission and the issuanceby the Commission of its certificate of filing, the capital stock shall standincreased or decreased and the incurring, creating or increasing of anybonded indebtedness authorized, as the certificate of filing may declare:Provided, That the Securities and Exchange Commission shall not accept forfiling any certificate of increase of capital stock unless accompanied by thesworn statement of the treasurer of the corporation lawfully holding office atthe time of the filing of the certificate, showing that at least twenty-five(25%) percent of such increased capital stock has been subscribed and thatat least twenty-five (25%) percent of the amount subscribed has been paideither in actual cash to the corporation or that there has been transferred tothe corporation property the valuation of which is equal to twenty-five (25%)percent of the subscription: Provided, further, That no decrease of the capitalstock shall be approved by the Commission if its effect shall prejudice therights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, orincrease the same, with the approval by a majority vote of the board oftrustees and of at least two-thirds (2/3) of the members in a meeting dulycalled for the purpose.

Bonds issued by a corporation shall be registered with the Securities andExchange Commission, which shall have the authority to determine thesufficiency of the terms thereof. (17a)

Treasurer must make sworn statement that minimumrequirements of subscription and payment have been compliedwitho If false, AOI disapproved or certificate of registration revoked

(10) Other matters

AOI may include other matters not inconsistent with law, suchas:

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o classes of shares into which shares of stock have beendivided

o Preferences of and restrictions on any classo Denial of voting rights on certain shares or pre-emptive right

of SHso Prohibition against transfer of stock which would reduce

ownership to less than required minimum for wholly orpartially nationalized businesses/industries

(11) Close corporations

A corporation will be governed by Title XII on Close Corporationsonly if its articles provide for certain specific matters

TITLE XII - CLOSE CORPORATIONS

Section 96.Definition and applicability of Title. - A close corporation, withinthe meaning of this Code, is one whose articles of incorporation provide that:(1) All the corporation's issued stock of all classes, exclusive of treasuryshares, shall be held of record by not more than a specified number ofpersons, not exceeding twenty (20); (2) all the issued stock of all classes

shall be subject to one or more specified restrictions on transfer permitted bythis Title; and (3) The corporation shall not list in any stock exchange ormake any public offering of any of its stock of any class. Notwithstanding theforegoing, a corporation shall not be deemed a close corporation when atleast two-thirds (2/3) of its voting stock or voting rights is owned orcontrolled by another corporation which is not a close corporation within themeaning of this Code.

Any corporation may be incorporated as a close corporation, except miningor oil companies, stock exchanges, banks, insurance companies, publicutilities, educational institutions and corporations declared to be vested withpublic interest in accordance with the provisions of this Code.

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

Section 97.Articles of incorporation. - The articles of incorporation of aclose corporation may provide:

1. For a classification of shares or rights and the qualifications for

owning or holding the same and restrictions on their transfers asmay be stated therein, subject to the provisions of the followingsection;

2. For a classification of directors into one or more classes, each ofwhom may be voted for and elected solely by a particular class ofstock; and

3. For a greater quorum or voting requirements in meetings ofstockholders or directors than those provided in this Code.

The articles of incorporation of a close corporation may provide that thebusiness of the corporation shall be managed by the stockholders of thecorporation rather than by a board of directors. So long as this provisioncontinues in effect:

1. No meeting of stockholders need be called to elect directors;

2. Unless the context clearly requires otherwise, the stockholders ofthe corporation shall be deemed to be directors for the purpose ofapplying the provisions of this Code; and

3. The stockholders of the corporation shall be subject to all liabilitiesof directors.

The articles of incorporation may likewise provide that all officers oremployees or that specified officers or employees shall be elected orappointed by the stockholders, instead of by the board of directors.

Code allows a close corporation to provide in its AOI specialprovisions which would exclude it from the operation of some ofthe requirements and prohibition imposed on corporations ingeneral, and in effect make it an incorporated partnership (Sec

97)

3. Filing of articles; payment of fees

AOI and treasurers affidavit filed with the SEC andcorresponding fees paid

Failure to file AOI will prevent due incorporation and will not giverise to juridical personality and will not even be a de factocorporation

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4. Examination of articles; approval or rejection by SEC

Upon receipt the SEC shall examine the AOI to determineconformity with law

If not, SEC must give the incorporators reasonable time withinwhich 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 form2) Purpose(s) are patently unconstitutional, illegal, immoral or

contrary to government rules/regulations3) Treasurers Affidavit concerning the amount of capital stock

paid or subscribed is false4) 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 denyregistration if not consistent with the declared national economicpolicies

SEC decision appealable to CA

5. Issuance of certificate of incorporation

It is only upon issuance of the certificate of incorporation thatthe corporation acquires a juridical personality distinct andseparate from its members or SHs, with power to sue and besued and to perform all other legal acts

Corporation DEEMED incorporated from the date SEC issues thecertificate of incorporation

Section 19.Commencement of corporate existence. - A private corporationformed or organized under this Code commences to have corporateexistence and juridical personality and is deemed incorporated from the datethe Securities and Exchange Commission issues a certificate of incorporationunder its official seal; and thereupon the incorporators,stockholders/members and their successors shall constitute a body politicand corporate under the name stated in the articles of incorporation for theperiod of time mentioned therein, unless said period is extended or thecorporation is sooner dissolved in accordance with law. (n)

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 or2/3 members of non-stock entitled to vote

o Without prejudice to appraisal right of dissenting SHo Unless otherwise provided in the Code or special law

AOI: Contractual implications

AOI is the contract between the three (3) parties:o State and corporationo Stockholders and Stateo Corporation and stockholders

Defectively incorporated entities;

De jure corporation

Not every defect precludes a de jure corporation; as long as themandatory requirements for incorporation are substantiallycomplied with, a corporation de jure will be formed

A de jure corporations due incorporation cannot be successfullyattacked even in quo warranto proceedings

De facto corporations

Section 20.De facto corporations. - The due incorporation of anycorporation claiming in good faith to be a corporation under this Code, andits right to exercise corporate powers, shall not be inquired into collaterally inany private suit to which such corporation may be a party. Such inquiry maybe made by the Solicitor General in a quo warranto proceeding. (n)

If there is no substantial compliance with the mandatoryrequirements for incorporation, a corporation be deemed to existas a person distinct and separate from its members or SHs if allof 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 beconsidered a de facto corporation

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the due incorporation of a de facto corp cannot be collaterallyattacked either by the State or by private individuals

such incorporation must be attacked by the State through a quowarranto proceeding

where requirements for a de jure or de facto corporation are notpresent, then the associates may be held liable as partners forobligations of the alleged corporationo 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 statutesubsequently declared unconstitutional

Exception: where the corporation in GF did all that is requiredunder the statute to form a valid corporation

Municipality of Malabang v Benito. Balindog, mayor of Malabang,files an action to nullify EO 386 which created the municipality ofBalabagan, of which the mayor is Benito. They invoke SCs ruling inPelaez v Audito General declaring as unconstitutional RA2370 or theBarrio Charter Act and Sec 68 of the Administrative Code for being astatutory denial of the Presidents authority to create a new barrioand for being an undue delegation of legislative powers,respectively. Benito counters that Pelaez does not apply to thembecause the municipality of Balabagan is a de facto corporation,having been created under the color of statute before it wasdeclared unconstitutional, and as a de facto corporation, itsexistence cannot be collaterally attacked. H: Balabagan is neither ade facto nor a de jure corporation. The true basis for denying to acorporation de facto status is the absence of any legislative actgiving life to its creation. An unconstitutional act is not a law; itconfers no rights, it imposes no duties, it affords no protection, itcreates no office. EO 386 thus created no office, although acts doneby the office are not exactly a nullity. The EO is as inoperative legally

as though it were never passed, an operative fact which cannotjustly be ignored.

But a corporation created under a statute declared void it is givenlife by other valid acts or in the constitution itself. The color ofauthority requisite to the organization of a de facto municipalcorporation may be: (1) an unconstitutional law, upheld for a time ornot yet declared void, provided a warrant for its creation is found insome other valid law or recognition of its existence by the generallaws or the constitution. (2) there can be no de facto municipalcorporation unless either directly or potentially such a de jurecorporation is authorized by some legislative fiat (3) there can be nocolor of authority in an unconstitutional statute alone, the invalidityof which is apparent on its face (4) there can be no de factocorporation created to take the place of an existing de jurecorporation.

3. Substantial or colorable compliance

Difficult to ascertain when compliance with the legalrequirements 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 factocorporation (Cagayan Fishing v Sandiko)

Harrill v Davis.Davis, Mann, R. Davis, and Knight agreed to take specifiedshares in a $10000 enterprise for the purpose of building a cotton gin andcarrying on the business of buying, ginning, and selling cotton and toorganize a corporation for this purpose. They did business with Harrill,buying material and procure labor and build their cotton gin. Theypurchased lumber and other materials from Harrill after the gin wascompleted and after they commence operations. As a result, they incurred

indebtedness of over $5000, $4700 of which were incurred before they hadfiled their articles of incorporation. During all this time, the four treatedthemselves as a corporation, and so did Harrill.H: They did not become a corporation de jure just because they failed to filetheir articles of incorporation. Nor did they become a corporation de factobefore they filed the articles to such an extent as to exempt them fromindividual liability because they did not before that time secure any color oflegal organization as a corporation under an charter or enabling act; they

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were liable individually as partners for that part of the claim falling prior tothe filing of the articles.

Hall v Piccio.The Halls, Browns, Chapman and Abella signed andacknowledged articles of incorporation of the Far Eastern Lumber andCommercial Co Inc. Pending action on the articles, the Browns, Chapman,and Abella sued the Halls in the TC to dissolve what they call anunregistered partnership because of bitter dissension, mismanagement,and fraud. Hall questions the jurisdiction of the TC over their dispute. JudgePiccio then ordered the dissolution of the partnership and appointed areceiver. The Halls filed a counterbond to discharge the receiver which wasdenied by Piccio. I: W/N the TC had jurisdiction over the case, consideringFar Eastern Lumber was a de facto corporation which can only be dissolvedin a quo warranto proceeding in accordance with the Corpo Law. W/N theBrowns, upon signing the articles of inc, are estopped from claiming that it isnot a corporation. H: (1) the rule on de facto corps are not applicable to thecase. Not having obtained the certificate of incorporation, Far EasternLumber and even it stockholders cannot claim in GF to be a corporation. It isthe issuance of the certificate of incorporation that calls a corporation intobeing. The immunity of collateral attack is granted to corps claiming in GF tobe a corporation. Furthermore, the corporation is not a party to the suit, itbeing a litigation bet stockholders of the alleged corporation for the purposeof obtaining its dissolution. Even the existence of a de jure corp may beterminated in a private suit between the stockholders without need forinterference by the State. The petitioners also have their remedy byappealing the order of dissolution at the proper time. (2) Far Eastern notbeing a de facto corp, the principle of corporation by estoppel doesnt alsoapply. The complaining partners have not represented themselves that theywere incorporated, and nobody was led to believe anything to his prejudiceand damage.

Corporation by Estoppel

In corporation by estoppel, a party is precluded or estoppedfrom denying corporate existence

May apply to a third party or the alleged corporation

Section 21.Corporation by estoppel. - All persons who assume to act as acorporation knowing it to be without authority to do so shall be liable asgeneral partners for all debts, liabilities and damages incurred or arising as aresult thereof: Provided, however, That when any such ostensible corporationis sued on any transaction entered by it as a corporation or on any tortcommitted by it as such, it shall not be allowed to use as a defense its lack ofcorporate personality.

On who assumes an obligation to an ostensible corporation as such, cannotresist performance thereof on the ground that there was in fact nocorporation. (n)

When a 3rd person entered into a contract with an associationwhich represented itself a corporation, the association will beestopped from denying its corporate personality if sued by the3rd party

When a 3rd person who dealt with an unincorporated associationas a corporation may be precluded from denying its corporateexistence if sued by the alleged corporation, even if he did notknow about the defective incorporation

When business associates fraudulently misrepresent theexistence of a corporation, and a 3rd party contracts withoutknowledge of the defective incorporation, the 3 rd person maysue 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 the 3rd person cannot hold the associates liable aspartners (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 jureo 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. Asia Bank is the creditor of Standard Products Co. It

seeks to recover the balance due on a promissory note issued by the latter iao

P24736.47. TC ruled IFO Asia Bank. Standard appeals, contending that ABC failed to

prove affirmatively the corporate existence of Standard.

H: GRin 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, unless its existence is attacked for causes arising since making the contract orother 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 Intl Business Machines. Cranson invested in a new business corpto be created. He purchased and received stock certificates. The business was

conducted as if it were a corporation through corporate bank accounts, corporate books

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etc. Cranson was also elected President of the corporation and all transactions made

by him was for the account and as officer of the corporation. However, the articles of

incorporation which had been acknowledged and signed prior to May 1 1964 were only

filed on Nov 24 1961. During that time, the Bureau purchased 8 typewriters from IBM,

and partials payments had already been made. On the theory that the Real Estate

Service Bureau was neither a de jure nor a de facto corporation and that Albion

Cranson was a partner in the business and thus personally liable for the debts, IBM

sued Cranson for the balance due on electric typewriters purchased by the Bureau. I:

W/N an officer of a defectively incorporated corporation may be subjected to personalliability under the circumstances of the case. H: No. 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. Thedoctrine 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. Salvatierra entered into a lease contract with the

Phil. Fibers Producers Co. Inc, allegedly a corporation duly organized and registered

under the laws of RP, with Refuerzo as its president. Among the obligations in the

contract were: period of lease is 10 years; land would be planted with kenaf, ramie, orother crops; the lessor would be entitled to 30% of net income and lessee should

declare at the earliest possible time the income derived therefrom. PFP failed to fulfill

the obligations and Salvatierra sued the corp and Refuerzo in the RTC for an

accounting, rescission and damages. TC granted her petition, but Refuerzo countered

that decision was void with respect to him, there being no allegation as to his personal

liability and that while he was a signatory to the contract, he did so in his capacity as

president. TC granted his motion and released all properties levied by its earlier

judgment. Salvatierra appealed, claiming that her failure to allege his personal liability

was because all this time she was under the impression that the PFP represented by

Refuerzo was a duly registered corporation, but a subsequent inquiry with the SEC

revealed otherwise. H: GRa 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 tobe applicable where fraud takes a part in the transaction. A stockholder cannot be 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). Elementary schoolteacher FaustoOh, a teaching in the Chiang Kai Shek School in Sorsogon for 33 years, was summarily

dismissed from the school. In her suit against the school she demanded separation

pay, SSS benefits, and damages. She impleaded the other officials of the school. TC

dismissed the complaint but was reversed by the CA which held the school liable, but

not the school officials. I: W/N a school that has not been incorporated may be sued by

reason alone of its long continued existence. H: School may be sued. The school is

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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 Ohs 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). Carloto, President of Rural Bank ofLabason, was instructed to fly to Manila to meet with BSP officials on the payment plan

for rediscounting of its obligations. He requested his sister to send P1000 as pocket

money for the trip and include some rediscounting papers through the petitioner LBCs

Dipolog Office. The documents however, arrived at Carlotos residence but without the

cash. Despite follow-up, the cash was only received after a month and after his

scheduled trip to Manila. LBC claims Carloto was not at home upon delivery and as a

result the money was returned to LBC Dipolog. Carloto claims that because of the

delay in sending the money he failed to submit the required papers and his bank was

made to pay a P32000 fine. He then sued LBC for damages, in his personal capacity,

with the Rural Bank as one of the plaintiffs. TC ruled ifo Carloto and the Rural Bank. I:

W/N the Rural Bank of Labason should be awarded moral damages. H: No. Moral

damages are granted in recompense for physical suffering, mental anguish, fright,

serious anxiety, besmirched reputation, wounded feelings, moral shock, socialhumiliation. 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 lifeall of

which cannot be suffered by the corporation.

Lozano v delos Santos (274 S452). Case involves a dispute between two

leaders of jeepney associations. Lozano is president of Kapatirang Mabalacat-Angeles

JDA or KAMAJDA while Anda is president of the Samahang Angeles-Mabalacat JODA

or SAMAJODA. The two organizations merged to form the Unified Angeles-Mabalacat

JODA or UMJODA. Lozano and Anda ran for president of the new organization and

Lozano won. Anda protested, alleging fraud and refused to recognize the results of the

election. Anda also continued collecting dues from the members of the SAMAJODA

despite several demands to desist. Lozano sues Anda in the TC, but Anda claims TC

has no jurisdiction, only the SEC. MCTC rules ifo of Lozano, but was reversed upon

appeal by the RTC, which held the dispute to be intracorporate. I: W/N the SEC or the

TC has jurisdiction over the dispute. H: 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). In behalf

of Ocean Quest Fishing Corporation, Chua and Yao entered into a contract for the

purchase of fishing nets from Phil Fishing Gear Industries Inc. Lim Tong Lim was their

joint venture partner but was not a signatory to the agreement. Chua and Yao failed to

pay for the nets; and PFGI sued them and included Lim Tong Lim in their capacities as

general partners, on the allegation that Ocean Quest was a nonexistent corporationupon inquiry with the SEC, and moved to attach their properties. Lim filed a

counterclaim and crossclaim and moved for the lifting of the writ. TC ruled ifo PFGI,

holding that a partnership existed between the three. CA affirmed the TC ruling and

held that Lim is a partner of Chua and Yao and is liable as such for the payment of the

nets. Lim appeals, claiming he did directly participate in the negotiations and was not

even a signatory to the agreement, and was merely a lessor and not a partner. I: Is Lim

a partner? H: Yes. It is clear that Chua Yao and Lim together set up the fishing

business, buying boats and financed by a loan from Lims 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. I: Is Ocean Quest a

corporation by estoppel, exonerating Lim from liability? H: No. 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

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corporation and those 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.

Intl Express Travel v CA (343 S 674). Kahn is the president of the Phil

Football Federation. He contracted with the International Express Travel for the travel

arrangements for the football team to compete in the SEA Games in KL, includingmatches in China and Australia. Amount due to the travel agent reached P449654.83,

of which P176467.50 were paid. Kahn also paid P50000 from his personal funds. The

remaining balance being unsatisfied, the travel agent sued Kahn both in his personal

and official capacity as well as the Federation in the RTC. Kahn claims he merely acted

as agent for the Federation, and that the Federation being a corporation, he should not

be liable. CA overrules TC and exonerates Kahn, while recognizing the corporate

existence of the Federation. I: Is the Federation a corporation? If not, is it at least a

corporation by estoppel? H: No. 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 existenceof 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). LGVHAI is the association of homeowners and residents of the Loyola

Grand Villas, duly registered with the HIGC as the sole homeowners assoc in the LGV,but did not file its corporate by-laws promptly. When it did attempt to file, 2 other assoc

were already in existencethe North Assoc and the South Assoceach with 5

registered homeowners who were also incorporators and officers thereof. HIGC claims

the LGVHAI has been automatically dissolved for its failure to file its corporate by-laws

and non-user of the corporate charter. LGVHAI files a complaint with the HIGC, which

the latter recognizes in its ruling and revokes the certificates of registration of the North

and South Assoc. South appeals to Appeals Board of HIGC, and upon dismissal,

appeals with CA. CA dismisses appeal, holding that although the Corpo Code does not

provide for automatic dissolution of the corporation as a result of delay in filing of by-

laws, the SEC has the power to suspend or revoke certificates of registration, one of

the grounds of which is failure to file by-laws. But since there was no showing the

LGVHAIs registration was validly revoked, it continued to be the recognized assoc in

LGV. I: W/N LGVHAIs failure to file its by-laws within the period prescribed by the

Corpo Code had the effect of automatically dissolving the corporation? H: No. 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 governmentof 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 membersand establish the rules for the internal government of thecorporation

By-laws are subordinate to the AOI, Corpo code and the relatedstatutes

If by-laws are inconsistent with any of these, it has no bindingeffect

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 governthe relationship between and among members of a corporatefamily

Intended for the protection of the corporation and prescribesregulations, not restrictions

GR: although the power to adopt by-laws is an inherent right, theby-laws cannot contravene the law (El Hogar case)

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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, incertain corporate actions, bind the corporation despite it beingcontrary to the by-lawso Whether through board action or authorization or through

ratificatory act of the SHs, so long as there is corporateapproval through the board, be it implied or express, it isvalid to bind the corporation

GR: 3rd persons are not bound by the by-awso Exception: where they have actual or constructive

knowledge

Section 36.Corporate powers and capacity. - Every corporationincorporated under this Code has the power and capacity:

-- x X x --

5. To adopt by-laws, not contrary to law, morals, or public policy, and toamend or repeal the same in accordance with this Code

-- x X x --

TITLE V - BY LAWS

Section 46.Adoption of by-laws. - Every corporation formed under this Codemust, within one (1) month after receipt of official notice of the issuance ofits certificate of incorporation by the Securities and Exchange Commission,adopt a code of by-laws for its government not inconsistent with this Code.For the adoption of by-laws by the corporation the affirmative vote of thestockholders representing at least a majority of the outstanding capitalstock, or of at least a majority of the members in case of non-stockcorporations, shall be necessary. The by-laws shall be signed by the

stockholders or members voting for them and shall be kept in the principaloffice of the corporation, subject to the inspection of the stockholders ormembers during office hours. A copy thereof, duly certified to by a majorityof the directors or trustees countersigned by the secretary of thecorporation, shall be filed with the Securities and Exchange Commissionwhich shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may beadopted and filed prior to incorporation; in such case, such by-laws shall be

approved and signed by all the incorporators and submitted to the Securitiesand Exchange Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by theSecurities and Exchange Commission of a certification that the by-laws arenot inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, buildingand loan association, trust company, insurance company, public utility,educational institution or other special corporations governed by speciallaws, unless accompanied by a certificate of the appropriate governmentagency to the effect that such by-laws or amendments are in accordancewith law. (20a)

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 issuanceof certificate of incorporationo Loyola Grand villas case: Sec 46 is merely directory, and

thus failure to file by-laws within the period does not implythe demise of the corporation, but is a mere ground for theSEC to revoke the certificate

It may also de adopted and filed prior to incorporationo 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 toincorporation, but must be approved by ALL incorporators andsubmitted to the SEC together with the AOI

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By-laws may be submitted within one (1) month after receipt ofnotice of issuance of the certificate of incorporationo 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 thatthese 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 theadoption

Basic Contents of By-Laws:

Section 47.Contents of by-laws. - Subject to the provisions of theConstitution, this Code, other special laws, and the articles of incorporation,a private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or specialmeetings of the directors or trustees;

2. The time and manner of calling and conducting regular or specialmeetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and themanner of voting therein;

4. The form for proxies of stockholders and members and the manner ofvoting them;

5. The qualifications, duties and compensation of directors or trustees,officers and employees;

6. The time for holding the annual election of directors of trustees and themode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all officersother than directors or trustees;

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock certificates;and

10. Such other matters as may be necessary for the proper or convenienttransaction of its corporate business and affairs. (21a)

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 thecorporation

Code requires the by-laws provide for at least three (3) officers:o Presidento Secretaryo Treasurero Additional officers

Other matters that may be included in by-laws:

(a) designation of time when voting rights may beexercised 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(d) transferability of membership in non-stock corps

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(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

Section 48.Amendments to by-laws. - The board of directors or trustees, bya majority vote thereof, and the owners of at least a majority of theoutstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose,may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of themembers in a non-stock corporation may delegate to the board of directorsor trustees the power to amend or repeal any by-laws or adopt new by-laws:Provided, That any power delegated to the board of directors or trustees toamend or repeal any by-laws or adopt new by-laws shall be considered asrevoked whenever stockholders owning or representing a majority of theoutstanding capital stock or a majority of the members in non-stockcorporations, shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such amendment ornew by-laws shall be attached to the original by-laws in the office of thecorporation, and a copy thereof, duly certified under oath by the corporatesecretary and a majority of the directors or trustees, shall be filed with theSecurities and Exchange Commission the same to be attached to the originalarticles of incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by

the Securities and Exchange Commission of a certification that the same arenot inconsistent with this Code. (22a and 23a)

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-lawso

only then can the board amend by majority vote In the Kalaw case, the SC held that contract entered into withoutstrict compliance with the by-laws may, due to longacquiescence and usage, be binding on the corporation, whichmay be deemed to have waived such compliance.

In the Fleischer, since by-laws operate merely as internal rulesamong SHs, they cannot affect or prejudice 3rd persons who dealwith the corporation, unless they have knowledge of the same

Fleischer v Botica Nolasco. Fleischer was the owner and transferee, forvaluable consideration, of 5 shares of stock of the Botica Nolasco Corp,transferred to him by the original owner. The Corporation however invokesArticle 12 of its corporate by-laws, which effectively gives the corporation apreferential right of the shares in question. It claims it has a preferential

right to buy the shares from the original owner. When Fleischer requestedBotica to register his shares, the latter refused, and Fleischer sues in the TC.

TC ruled ifo Fleischer, holding that the questioned Art 12 is in direct conflictwith Sec 13 of Act 1459. I: W/N Art 12 of the by-laws of the corporation is indirect conflict with the Corporation Law? H: Yes. The Corpo Law at the timeprovides in Sec 13 that every corporation has the power to make their ownby-laws, provided they a

chapter iii formation organization

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