1UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW CORPORATION LAWProf. Danilo L. Concepcion Table of ContentsCHAPTER I: Introduction ............................................................................................... 1 15 November 2010 ................................................................................................... 2 CHAPTER II: Classification of Private Corporations ..................................................... 4 CHAPTER III: Formation and Organization of Corporation ......................................... 7 22 November 2010 ................................................................................................... 7 24 November 2010 ................................................................................................... 9 26 November 2010 ................................................................................................. 11 1 December 2010 ................................................................................................... 13 CHAPTER IV: The Corporate Entity............................................................................. 15 3 December 2010 ................................................................................................... 16 CHAPTER V: Promoters Contracts Prior to Incorporation ....................................... 19 6 December 2010 ................................................................................................... 19 CHAPTER VI: Corporate Powers ................................................................................. 21 8 December 2010 ................................................................................................... 23 CHAPTER VII: Control and Management of Corporation ......................................... 23 10 December 2010 ................................................................................................. 25 7 January 2011 ........................................................................................................ 29 10 January 2011...................................................................................................... 32 14 January 2011...................................................................................................... 36 17 January 2011...................................................................................................... 39 19 January 2011...................................................................................................... 43 21 January 2011...................................................................................................... 46 24 January 2011...................................................................................................... 48 28 January 2011...................................................................................................... 52 31 January 2011...................................................................................................... 55 2 February 2011...................................................................................................... 59 4 February 2011...................................................................................................... 62 CHAPTER VIII: Duties of Directors and Controlling Stockholders ........................... 63 9 February 2011...................................................................................................... 65 11 February 2011 ................................................................................................... 68 14 February 2011 ................................................................................................... 70 CHAPTER IX: Right of Inspection ................................................................................ 70 CHAPTER X: Derivative Suits ....................................................................................... 73 16 February 2011 ................................................................................................... 73 18 February 2011 ................................................................................................... 75 CHAPTER XI: Financing the Corporation; Capital Structure ..................................... 75 21 February 2011 ................................................................................................... 78 28 February 2011 ................................................................................................... 82 CHAPTER XII: Consideration ....................................................................................... 85 2 March 2011 .......................................................................................................... 87 9 March 2011 .......................................................................................................... 91 CHAPTER XIII: Dividends and Purchase by Corporation of its Own Shares ............. 95 11 March 2011 ........................................................................................................ 96 CHAPTER XIV: Amendments of Charter ..................................................................... 99 16 March 2011 ...................................................................................................... 102 CHAPTER XV: Transfer of Shares .............................................................................. 103 28 March 2011 ...................................................................................................... 107 CHAPTER XVI: Dissolution ......................................................................................... 107 CHAPTER XVII: Corporate Combinations ................................................................. 112 CHAPTER XVIII: Foreign Corporation ....................................................................... 113 Special Corporations ................................................................................................. 114 Non-Stock Corporations ........................................................................................... 115

CHAPTER I: IntroductionThis is the most boring course Common law institution Business organization 2 main form of business organizations before corporation was brought in the Philippines y Sociedades anonima y Partnership Many form nearest in civil law that we can call equivalent of corporation is sociedades anonima. Or anoneme in French. Americans introduced in our system of law. Corporation supplanted and repealed provisions of law in sociedades anonima Basic material is corporation code Revised version of old corporation law Copy of Delaware corporation law Enacted a corporation law which became a model of all corporation laws in the US To understand the principles and how transformed in the Phil setting Refers to work of old corporation law authors. Salonga, Tolentino, Caguioa, Simplicio Guevarra (who is the lolo of Chiz Escudero) Before the advent of new corporation law, Simplicio Guevarra Today, we use the two-volume work of Campos spouses (Justice and Professor), when they were no longer willing to teach, Jac and DLC took over Well use outline of book as syllabus of course. Although wed modify sequencing of some subject matters, the way treated deviate from outline but announces Other reference materials y De Leon Ateneo prescribed y Ruben Agpala COMELEC chair y Magic notes y Rosario Lopez spot the different with Campos spouses y CSV y Puno clan y Paras Adopted Paras Corporation Principles and Practice y Many other authors not worth mentioning. They only compile in orderly manner. Prof. Perfecto Fernandez greatest tersarial scholarship scissors cut and paste Jo Laureta good writer who calls his students bastards and idiots

Foreign materials are available in the lib. If only to amuse yourselves. Fletcher Encyclopedia of Corporation rd 3 restatement has 21 volumes. Ganon ka-vast ang subject na itoy

Its called company law in England because corporation is American invention. Its difficult to read British SC decisions. Upper House of Parliament, Justice Learnedhand.

Civil law system no concept of jurisdiction.

2Cheap source of materials for US and colony. Market for finished product of industries. Move raw materials to mainland and finished products to the islands. Rules dictated by American masters medium is transaction. So they introduced commercial law of US e.g. sales (supplanted civil law), corporation killed sociedades anoneme) but sustained partnership, NIL, insurance in order to do business in the country. Contract of sale attracts several provisions of CC. Many instances they are in conflict with traditional concepts of sale. Kailangan mestizo raw pati yung batas. Adjustment to harmonize conflicting provisions. Principle of corporation conceived and flourished in a common law background. When transported to civil law environment, some provisions collide with so many conflicting provisions so offspring is not bastard. Therefore, bring two codes in class. Civ and corporation. So you can readily look at the article mentioned and see for yourself the wording of the provision. Digest in your handwriting all the cases in Campos book. No digest, no finals. 3.y y

y y

What is the reason behind the law? There was no prohibition in the original law from which our Corpo Code was copied. Franchise of the corporation. But they observed it was inimical to growth of commerce. For commerce to grow and provide velocity to economic activities, dapat mabilis din pag-churn ng mga business organizations. Going to congress unduly delays formation of business organizations. Not only that, palakasan na sa mga congressman because every franchise, those who contributed more to campaign lobbied with tax holidays and special favorable treatment. To prevent this from happening, several states adopted non-creation by direct legislation principle and then we copied that in the Phil as a lesson from the US experience. There is an exception to the constitutional exception: GOCC? Shares of stock are drawn and controlled by government but they are also private corporation. There is a condition for them to be created by condition. Definition of GOCC is not in the GOCC nor Corpo Code but in Admin Codes preliminary provisions. General law adopted by the legislative arm of the government referred to in the constitution is the Corpo Code. i.e. Batasang Pambansa which Sir was a member. He was part of the drafters of the Corpo Code. Observer lang sha at that time.

15 November 2010There are two types of corporation: public (covered by LGC) and private (Corporation Code)

DEFINITION OF A CORPORATION2: definition of corporation. Not qualified by code but refers only to private corporation 1. Artificial from PFR: 2 beings/persons are recognized. Natural person is not defined anywhere in the CC. Juridical person has no physical existence as compared with natural. It exists only in the mind, only by contemplation of law. Private corporation has in general for that matter is not a natural person but a juridical person, artificial being. In general: CC recognizes 3 juridical entities a. Partnership b. Corporation c. Trusts to some extent d. Estate of deceased person as an extension of deceased persons personality Created by operation of law y A smart person would ask why the wording of law is formulated created by operation of law vs. created by law Congress cannot create a private corporation. Congress can only create a general law. y Why cant congress create a private corporation by direct legislation? What prevents the congress from doing it? Constitutional limitation, power to enact a law is plenary. Article IX, Section 16 The Congress shall not, EXCEPT by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

Succession y Does not refer to succession as it is known in civil law. At least now. Because in the original concept of succession during Roman times, the heir is successor of personality (takes the place/space formerly occupied by) of the decedent. Ngayon kasi property na lang. y Common law concept ang corporation, it does not refer to civil law succession but continuality of the corporation being separate from personality of the members of the corporation. Separate and distinct personality of corpo and stockholders. As a consequence of distinct personality, stockholders may come and go and be succeeded by own heirs, they may sell and transfer their shares. In fact they may transfer and sell their shares but the corporation does not change. y Continuation of personality of corporation. Powers, attributes and properties expressly authorized by law and incident to its existence. For a person to have substance, for it to transact business, for the corporation to have acts with juridical effect, that corporation must have full civil capacity. This is true for all persons, it must be in possession of 2 things: 2 elements of civil capacity: a. Juridical personality Art. 37 CC Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death. Capacity to act, which is the power to do acts with legal effect, is acquired and may be lost. Fitness: Is a cat a person? May a cat be a donee in a contract of donation? Natural person is not defined in the code but underlying presumption that it refers to a human being. Heir must be able to accept the inheritance. Dog and the cat may not accept. Pag nilagay under guardianship? 19 by provision of law, its given juridical personality, i.e. becomes fit to become subject of a legal relation. Capacity to act Art. 37 CC Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death. Capacity to act,

4.

2.

y

y

b.

3which is the power to do acts with legal effect, is acquired and may be lost. Juridical personality is inherent. A person obtains it from birth. But capacity to act is acquired and may be lost. Capacity to act is presumed. Can do anything under the sun. It may be restricted by certain situations (e.g. insanity, minority). Hence, 1 yr old infant has juridical capacity but no capacity to act. How about in the case of corporation? It has juridical capacity, but what about its capacity to act? 2 powers and attributes expressly authorized by law or incident to existence. No presumption in favor of corporation, you will have to prove it. But of course, magkakaron ng processual presumption. When corporation is incorporated with SEC and certificate of incorporation is issued. In cases na hindi naman hinahanap ng kakontrata mo anyway. Burden of proof rests with corporation if challenged to prove that it has power to do a particular act. on to the stockholders. It may be different in the form of usual contracts we encounter in the civil law. Same structure as the partnership. While a corporation is a contract among the incorporators or stockholders, the personality of the corporation does not commence from the time the incorporators agree on the formation of the corporation. When does the corporations personality commence? S19 it commences from the time the articles of incorporation is approved by the SEC. Is because it refers to a document not to each and every article of the document. Same rule for by-laws, its a document. Sa partnership di kailangan ito. Why is interest of a partner not freely transferable? Not entirely accurate. The interest of a partner in a partnership is freely transferable but not automatically become the partner. The transferee just doesnt become automatically become a partner. Its because of principle of delectus personae. A partner became a partner because of a special relationship the other partner reposed on him. Namili sila. Not any Tom, Dick or Harry can become a partner. Pamoso, mayaman. Qualities of partner were considered because of special fiduciary relationship. For this reason, you cannot ask just anybody to take your place. Does not include right to include any other partner in the partnership. Not the same in case of corporation, the interest which a stockholder has in the corporation is freely transferable. Its not in the law. Saang provision ang freedom of transferability of shares of stock in the corporation? Its not in the law because its assumed as the general principle of corporation. History of general principle: Corporation as form of business organization developed as a response to the inadequacies and impracticabilities attendant to partnership. Corporation cannot impose any prohibition on the transferability of shares. Maski wala sa batas, sinusunod natin yun. For prohibition to be valid, theres no statutory prohibition. As of now, there is none. S98 buttresses the principle. You are a bunch of illiterates! 1471: discovery of Americas by the Vikings and the Marco Polo was not st the 1 European to reach the Far East. Cavemen Europeans vs. Silk clad Chinese. At least our ancestors, pero Pinoy nakahubad pa. In England, the first of corporations is a mode or as a system of organization of monks. The Abbeys in England had an organization akin to a corporation. But of course, this was copied from the political organization of Greek city states. So ang root ng corporation as a system of organization ay mga municipal corporation in Greece. Inapply lang ang system to a smaller organization like an Abbey or a religious society or a business. Yung Civil Code of Justinian, walang corporation dun. Partnership lang. To finance a ship that will go to the Far East to trade, huge amount is needed, if partnership yan, 1000 yung partners, mahirap. In a general partnership, each of them is a manager because of mutual partnership lagi sila may meeting tuloy. Sell shares of stocks to everyone who has excess cash to finance a bapor and its provisions. Ships dont travel alone. They travel in twos para may sasagip sa cargos nung isa. Maraming lumulubog sa Cape of Good Hope kasi maalon dun, kasi dun nagmimeet ang Indian Ocean at Atlantic Ocean. Kung liable sila for everything, walang mag-iinvest kaya ininovate nila at tinanggal ang liability with present and future properties. Limited liabilities lang ang investor to the amount he committed in the venture. The amount he commits is the amount of the values he bought.

y y y

y

y

y

Powers of corporation are two types: express and implied. To be discussed more detail later. (See page 21)

CHOICE OF BUSINESS ORGANIZATIONSHow is corporation different from a partnership? A partnership is form of business organization. Is single proprietorship an organization? No, you should have members. Its not really a business organization. Pero its classified as such. Organization no longer refers to the number of persons involved. Instead, it refers to how the business was organized. Single proprietorship is included in the forms. Important? Of course, e.g. you have a client, what form will you advise him/her to pursue? Which one is better suited to his requirements? As toNumber of parties Manner of creation Transferability of interest

PARTNERSHIPAt least 2 partners Upon the meeting of the minds consensual Not freely transferable, requires consent of all other partners. Transferee does not become a partner automatically. Partners liability is unlimited (general); extends to present and future properties. Anyone of them can bind the partnership Dissolved

CORPORATIONAt least 5 Articles of incorporation May transfer interest and transferee becomes stockholder. Transferee takes his place. The amount he commits is the amount of the values he bought.

Liabilities

Management Death/withdrawal of a partner

Why five directors? Why not 3, 4 or 6? It is ideal to avoid ties during board meetings. Law makers think its the smallest ideal number for a corporation to distinguish it from a partnership. Parang sex yan, pag hindi consensual rape yan. Contract takes effect immediately upon meeting of mind of parties. Must it be in writing? No Is a corporation a contract? What are the elements of a contract? Parties, object, consent, vinculum. What is the juridical nature of a corporation? Formation of the corporation is a contract, among the original subscribers and then later

4Very impractical to allow every stockholders bind the corporation. Management is given to a smaller group of those who invested in the corporation, called board of directors. Bawal sumali ang tanga. Death and withdrawal of partner or stockholder. Very cumbersome to create a new one. To address this undesirable feature of partnership, corporations are granted with right of succession. Personality that succeeds throughout its term. Continuity of life as a person during the term of its existence. May a partnership be a stockholder in a corporation? Yes, because its a person. It can own, subscribe and buy shares of stock. May even exercise the rights of a SH. May a corporation be a partner in a corporation? Violative of a corporation law principle, a corporation may only be bound by its board of directors. Case cited in Campos has not been overruled by the SC. It may not be a partner in a GP because it will be bound by an entity other than the board of directors, i.e. the other general partners. Contrary to general principle of corporation law that only its board may bind its corporation. Esteban Bautistas Treatise of Partnership: doctrine not applicable to limited partnerships. Chi: What about SEC OPINION [February 29, 1980]? Sarthous question: Differentiate corporations entering into joint venture and partnership. DLC: Joint venture has no separate personality and only single transaction. Main difference between the two: no common fund, and therefore, no mutual agency between the parties. Usually happens between land owner and developers. Si Sir ang gumawa ng Master Deed ng mga Ayala Prime Towers.

CHAPTER II: Classification of Private CorporationsThere are two general classes of private corporations: The stock and the non-stock. Pero kung titingnan mo ang corporation code, corporation sole (S110)

STOCK AND NON-STOCK CORPORATIONStock corporations is described in S3 asCorporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations.

Bad way of making description kasi by elimination ito. 1. 2. 3. 4. 5. 6. Capital stock Which is divided into shares Authorized to distribute dividends Holders Dividends from surplus profits On basis of shares held

If one of the features is missing, it wont be stock corporation. Capital stocks not pro rata. Equal among stock holders. Hindi magiging stock corporation. Club Filipino de Cebu v CIR: SC applying principles of corporation law identified the primary distinction between stock corporation and nonstock corporation. Under the regime of old corporation law. Bakit nagkaron ng issue? Itong Club Filipino was organized to provide entertainment, leisure, recreation and other allied services exclusively to members. Members contribute fund to club and club will use funds to construct clubhouse where they can avail of those services. Hindi member yung provincial revenue officer, ayaw papasukin kaya inimbestigahan sila. Hindi kayo nagbabayad ng tax! Tumutubo kayo sa bar through mark-ups! Tax evasion, pay-up tax deficiency! Maraming abogadong members dun. Punyetang BIR ito. So nagdemandahan sila. Arguments (na hindi nakalagay mashado jan) they have a basic assumption here: The Club is not liable to pay the percentage business tax/graduated sales tax (now replaced by the VAT, not income. Not engaged in business because were a non-stock corporation. How do we define engaged in business? Invest amount of money or anything of value in return of profit. Members do not invest money for profit. Does not return to us for profit. We are not engaged in business, we are not exempt from paying. Authorized capital stocks divided into shares. No return from contributions. No dividend? But there was a declaration in your records! They received stock dividends in the past. That was not really distribution, just to adjust the value which member has in the assets of corporation because of revaluation. Long story short the issue is: Whether club Filipino is a stock and nonstock corporation? Kung ngayon ito pupunta sa court, hindi ito ang issue because non-stock corporations may also engage in business. Noon, parang the underlying principle was a corporation which is non-stock non-profit does not engage in business. Thats the underlying presumption. Ano sabi ng SC?

5How do we know whether its a stock or non-stock corporation? The principal distinction between stock and non-stock is the authority of corporation to declare dividends. SC proceeded to examine the articles of incorporation of club Filipino, no authority for the corporation to declare dividends. Questionable decision of the SC here. Look at S43 of the code. Power to declare dividends, came from S16-A of the old corporation law. When a corporation is a stock corporation, even though the articles is silent, it has power to declare dividends because of S43. Maski silent ang AOI. Lets change the facts: y Suppose a corporation is organized as a non-stock corporation and the articles is silent: May the non-stock corporation declare dividends? y Suppose a corporation is organized as non-stock but there is in AOI power to declare dividends: What kind of organization is that? Null and void ba dapat? Club of Filipino v CIR: It is the authority to declare dividends which makes a corporation a stock corporation. y Can we not argue that this corporation, because there is authorization, must be treated as stock corporation although organized as non-stock? y The other way around will also pose the same problem for us: Suppose prohibition to declare dividends, how to classify that corporation, stock or non-stock? Which one prevails over which? Silent because thats not allowed.___ Problem will arise if organized as stock corporation but prohibition in AOI to declare dividends, or if the corporation is organized as non-stock corporation (no authorized capital stock divided into shares) and yet theres a provision allowing for the declaration of dividends. Which one prevails: authority to declare stocks OR the form? If the form prevails, CIR v Club Filipino is no longer a controlling case. If form prevails over authority: Argue that authority is illegal because contrary to principles of corporation law that a stock corporation has authority to declare dividends. In which case, form prevails over authority. BUT if form prevails, then it will control the characterization of the nature of the corporation. Kung meron shang authority to declare dividends although the form is non-stock it will be treated as stock so that will be authority prevailing over form. Stock corporation with prohibition, and that corporation will be treated as non-stock although organized as stock. Best way to put it, when you see an actual document articles of incorporation. Ill show you an actual AOI and then tell you what type of private corporation is it? Stock or non-stock? How will you answer the problem, what will you look for in the articles to determine the type of corporation described in the articles. When DLC was SEC Commissioner, he had an opportunity to render an opinion. Manila Bay Yacht Club is a non-stock, non-profit corporation. It collects m onthly membership dues in exchange for which entitled to uses facilities of yacht club. You garahe your sailboats in their marina. Breakwater. President of Yacht Club was then Atty. (now Justice) Tony Carpio. They needed additional capital to upgrade the facilities and additional operating capital for restaurant and other services. Wala tayong mga specialized board. Isang security lang ang tinetrade, shares of stock lang. Wala silang shares of stock so wala silang pwedeng ioffer as IPO. Why dont you follow what other non-stock corporation had done e.g. Ayala Alabang created a corporation which owns the assets. If you buy a share of stock of corporation, not automatically make you a member. Not a member unless a stockholder. No dividends because retained as additional operating capital. Bottom line: No surplus profit available for declaration of dividends. Ayaw ng MBYC kasi costly mashado. Proposal: Amend the articles to create an authorized capital stocks divided into shares, BUT for it to remain as non-stock corporation. Hindi lang chopsuey yan, parang yak (large cattle crossed between beasts of burden not related to each other). Another option offered by Sir: Dissolve this stock corporation to convert into non-stock. Amend lang the AOI. BUT what is the effect of the amendment? Its as if you dissolved the non-stock and then incorporate a stock corporation. Whatever assets were left after paying off obligations will be used to subscribe the initial subscription of resulting corporation. Contribution to the capital of the resulting non-stock corporation: they dont like it because of tax incident Every time a corporation is dissolved and liquidated, it gives rise to tax incident. Gusto nila i-amend but remain as non-stock corporation. Sabi ng commissioners, may third option pa ba, tawagin nila si Danny. Maybe, CIR v Club Filipino is still good law, principal distinction is authority to declare dividends. If that is principal distinction, form not authority. If authority to declare dividends is in AOI, regardless of form which it was organized, should be treated as stock corporation. When theres prohibition to declare, that should prevail over the form, on the assumption that CIR v Club gives us the real distinction between these two types of corporation. How do we solve MBYC problem? Bigyan ng authorized capital stock divided into shares but lagyan ng prohibition to declare dividends remain as non-stock + require that corporation cannot amend that provision without (condition to prevent to avoid matapos maclassify because of prohibition) treated as stock corporation. Whether a corporation should be treated as non-stock corporation applying CIR Club, authority is distinction. This is the classification into stock and non-stock. Saka na corporation sole. From now on, we shall divide our discussion into stock and non-stock. Stock muna after finishing that, thats the time we go to non-stock. Easier to study non-stock after stock. Point out distinctions.

PARENT AND SUBSIDIARY CORPORATIONSLast meeting, corporation has a personality separate and distinct from personality of its stockholders. Juridical person ang corporation. As such, what are its rights and obligations? In Stonehill v Diokno, is corporation a juridical entity entitled to protection of bill of rights? Of course says SC. Constitution does not qualify the word person hence even juridical person is entitled to bill of rights. Harry Stonehill is a GI during WW2. After liberation, he looked for an opportunity to make money so he made cigarettes through a factory. Lumago pa ang kanyang business which lead to his bribery for his businesses to be treated specially and to have protection, maraming bina-bribe na government officials. In fact in one case, remember Arnault v Nazareno? Sabi nung tao ni Stonehill, may payola daw sha. List of congressmen who receive money. Arnault was summoned, appeared to testify. Invaded corporate offices of Stonehill, one truckload of documents from his offices. Kaya kinuha yung document para hindi na mabunyag not to file a case against Stonehill. Stonehill instead filed a case against search done in his offices.

6SC said tama si Harry Stonehill. Hindi pwede shotgun warrant, specify place to be searched and thing to be seized! Did SC release all the documents? No, because they were owned by your corporation. Therefore, you are not your corporation. Different and separate personality from your corporation. PERO hindi ba dapat wala rin sha personality to question the warrant? May a corporation adopt a baby? Swerteng bata ang maaadopt ng SMC! May board din sa Family Code: husband, wife and the court in case of spouses disagreement. The corporation board will also decide where the baby will go to school. What is the purpose of adoption? Mimic the relationship of parent and child. So what is the original condition that its supposed to mimic, a natural parent and a natural child. Corporation cannot possibly mimic the role, duties and obligations of a natural parent. Purpose pa lang, hindi na lulusot ang corporation. Kaya nga adoption even though not provided in the law expressly, only a natural person will qualify to adopt, implied it is there because there is also citizenship requirement in adoption. Underlying assumption in adoption: Natural persons lang yun kasi filiation which is not applicable to juridical entities. Kaya nga parent and subsidiary not parent and child. Why use parent then? Kasi yun ang ginamit by analogy to describe the relationship between these two corporations. May a corporation own shares of stock of that other corporation? Yes, corporation has power to own property (like shares), it therefore maybe a shareholder in another corporation. If it owns all the shares of the other corporation (thats possible), that corporation will now control the other corporation. In Roman Law, controlled ng parent ang child kasi chattel lang ang latter. 50 years ago, that concept still reverberates. Dominion of parents over their children, thats why they force who to marry. Pambayad utang. Parents have power of life and death over their children. If corporation has control over the other (parens patriae), the other corporation is called a subsidiary. Does a corporation have a citizenship? Yes. So does the citizenship allow the corporation to vote? Constitutional provision implies that only natural persons may be citizens of this country. Corporation, a juridical person, can only have nationality but not citizenship. This principle is followed all over the world. by holding company. Transactions over shares of stocks are treated specially. Maybe I dont know Tax but I know the Commissioner! Therefore, VENUS MEJIA YOU NEED TO BECOME TAX COMMISSIONER! CORPORATION SOLE inserted in the code to accommodate the Catholic Church which is a dictatorship of the Infallible Pope which cascades to lower levels like cardinals, bishops and parish priests. Behind the mysterious death of a pope is a Jesuit. Father general of Jesuits is the Black Pope. What is the liability of the parish when priest enters for and in behalf of the parish? Crown and the miter. Limit the liability of the bishop. What is the personality of the church? Berlin v Ramirez: Aglipay seceded from Roman Catholic Church, joined by many parish priests in Ilocos and one in Bicol. The Bicol Bishop suddenly declared: Itong church na ito, Aglipayan na ito! Nueva Caceres filed MTD on the ground that Catholic Church had no standing. ISSUE: What is its personality to bring suit to recover the church? SC said How dare you? Wala pang Pinas may Catholic Church na. Anomalous diba? Iglesia ni Cristo is also organized as a corporation sole. Aglipay made his church as religious society not a corporation sole with a board kaya laging nag-aaway. Kaya yung doctrine of infallibility, its a th th recent creation, wala yan during the 12 and 14 century. Ginawa lang yang dogma so that pope will have ascendancy during quarrels inside the church. Next meeting: Formation and organization of corporation.

AFFILIATE/SISTER CORPORATIONRelation of two subsidiaries which are controlled by the same parent corporation. Why not brothers? Ayaw ng lalaki na nacocontrol sila. Babae lang pambayad utang. Pero ngayon iba na ibig sabihin ng phrase na yan. Karma na yan. Some jurisdictions dont use sister corporation as formal term: Affiliates! They find sister to be too vulgar. All three of them are affiliates because they have relationship with each other. For these affiliates, may isang term na ginagamit: Group of corporations e.g. Yuchengco, Lopez,

HOLDING COMPANIESOrganized to hold nothing but shares of stocks of corporations When the owner of parent corporation will buy other corporation, shares of stocks will be bought by the holding company. Owners own the control company. Parent is the holding company. Bakit ginagawa ito? Under the NIRC, theres a special tax treatment for shares of stocks held

7 CHAPTER III: Formation and Organization of Corporation22 November 2010WHO MAY FORM A CORPORATIONWho may form a corporation? Law provides for a minimum and maximum number. May all of the students in this class become original members of the corporation? They want their names to be written on the article. Pwede ba yun? There is a difference between an incorporator and corporator. Law does not provide a maximum number of corporators originally forming a corporation. Not all the 60 may be incorporators. Only 15 of the 60 may be listed as incorporators. But all the 60 may be listed as SH originally forming the corporation. See S14. Nos. 7 and 8. Original subscribers has no limit as to number. All of you may be listed as original subscribers. Address has to be indicated opposite the name, number of shares subscribed and amount paid on your subscription. But not all original subscribers may be incorporators. How do we know if original subscriber is an incorporator? What differentiates original subscriber from an incorporator? They have to be named one by one. S14 No. 5. Not only that, the five people have to sign the articles. Original subscribers do not sign. San nakalagay yung pumipirma sila? S5: and who are signatories thereof Incorporator ay hindi nababago. Corporation may exist more than 50 years through extension of term, it may amend articles several time but not amend the incorporators because its fait accompli. What special function do incorporators perform? Is there special function to be performed by the 15 so they have to be separately named by the nd articles? S46, 2 paragraph. There are many sections there with many paragraphs so ngayon pa lang lagyan niyo na. By laws shall be approved and signed by the incorporators y Why incorporators only? Sasagutin natin yan when we get to bylaws. y cf that section with S61: May a subscriber to a corporation which is still to be registered with SEC withdraw his subscription? Yes, he can withdraw provided all of the other subscribers (NB not incorporators) consent to the revocation. May an alien be an incorporator? If you will look at Corporation Code, theres no prohibition for alien to be incorporator. As a GENERAL RULE: An alien may be an incorporator. May all the incorporators be aliens? Yes, no prohibition either. Kaya lang, majority of them must be residents of the country. i.e. resident alien Why does the law require majority of the incorporators to be residents (either alien or citizen)? Law does not limit the residency requirement to aliens. It applies to all incorporators. So that the regulatory agencies in the Philippines can easily compel and enforce regulations against this nascent corporation. This nascent corporation may comply with regulations through majority vote. Since they are residents, summons may easily be served on them. Therell be no problem about service of summons. Courts can easily acquire jurisdiction over persons of residents is much easier than when the person is a non-resident. Limitations and restrictions are not in Corporation Code but in constitution or special laws. But may he be a subscriber to shares of stock of another corporation? Yes. Original SH? Yes. In fact, in practice, youll readily notice, all corporations which you will incorporate will be owned by corporation which shall be listed as an original subscriber. Incorporators are only nominees with one share each.y y

Constitutional prohibition on mass media which should be controlled and owned by 100% Filipino. If the corporation will own land, 60% must be Filipino.

May a partnership be an incorporator? No, because the law is very very clear, incorporators must be natural persons which a partnership is not. For the same reason, corporation may not be an incorporator.

STEPS IN FORMING A CORPORATION1. Promotion stage

Those who initiate the formation of a corporation are necessarily the promoters of the formation of a corporation. Hindi uubra na yung 5 tao nagkita sa CR, nagkatinginan, lets form a corporation. Usually one or 2 people will think of a business opportunity. Usually when he has necessary resources to put up business, di na mag-iimbita ng kasosyo yan. If for one reason or another he does not have the resources, he will look for other people to provide lacking ingredients for business to take off. E.g. capital, connection with other corporation who will provide us with contracts, supplier of cyanide. Most likely he can say that the business is a partnership. If after analyzing the pros and cons, the promoter decides that corporation is best business organization to accommodate requirement, he will promote the corporation. e.g. kakausapin money provider, formula. Process of convening people to participate in the organization. Those responsible for promotion are all promoters. What if he only provided the elements for business organization to come to fruition but did not join? Still a promoter, no need for him to be an incorporator or subscriber. BUT experience tells us that he who actively participates in the formation, he ends up with the controlling interest in the business corporation. Incorporator must be subscriber to at least one share of stock. Why not? If he doesnt he is only a miron/audience. Mas maingay pa sa players. From the Spanish word mira, which means to watch. An incorporator occupies a special position in the incorporation. For the incorporator to have a genuine interest, there must be genuine stake in the corporation. Unless he owns a share of stock, unless he has invested in at least a share of stock of the incorporation. Are there instances that the promoter is not really kasahog? Sulsol lang. Danilo Ortigas y Ayala who own a big track of land in Sta. Rosa, Laguna. You, you form a corporation and develop my land, di na ako makikisali sa kita niyo. The idea of forming a corporation is marketed, promoted. End in view: gather all required investments and subscribers and everything necessary for the corporation to go to business. Thats what you call promotion.

8May a promoter enter into contracts? Yes, he may enter on behalf of corporation still to be formed. We discuss that in Chapter V. See Page 19. Illustration: There is a good vacant lot we can turn into a parking building with beerhouse underneath. DaniCon and Oposas dad organized the first debating and poetry reading club in the college. Ang dami niyang inincorporate. He tried convincing the owner of land to join the corporation as stockholder. But landowner refuses, you only want my land, upahan niyo na lang. It will take 2 weeks to complete the registration process, eh by the time corporation is registered, Hudyo yan, itataas na niya, or ipapaupahan sa iba. Even before the registration is done, nakipagcontract na sha. Thats called a promoters contract. What is the status of the contract? Is that valid? We will discuss what a promoter can do later. But the name may also be a business name. Who holds the registry? DTI. It may even be trade name or brand name. Who holds registry? IPO It might be copyrighted. What has copyright? Intellectual creation which is protected by law. Who holds registry? National Library

2.

Registration

If Oposa succeeded in gathering required number in his business proposal, they will now register i.e. formalize the organization of corporation as their form of business organization. What exactly do we do here? a. Drafting the AOI maraming kaduktong na documents yan and we will discuss it later

Concrete example: Theres a businessman who wanted to go to business and chose corporation as the form of business organization so he requested his lawyer to register a corporation with the SEC. Yung lawyer, hindi UP grad so ang alam lang niya, nagparehistro lang. Ano yung business nung investor? Restaurant. Gustong name? Restaurants R (baligtad pa) Us. Shadong original diba? Nagpaverify. Please check if this name has already been appropriated. Nakakuha sila ng magandang spot sa MegaMall. Nagbukas ng resto sa MegaMall so may malaking karatula sa labas. On the day of the opening, dumating ang sheriff of Mandaluyong RTC enjoining them from using the name because somebody else has registered it as business name with the DTI. What am I trying to tell you? Not simply because youve succeeded in registering a particular name as corporation name, it will not give you exclusive name as business name. In fact, you may not have the right to use it as a business name because somebody else has appropriated it with the DTI. Ganyang ganyan yung nangyari sa Dads. Sari-sari store sa admin bldg sa ilalim ng chapel ng White Plains. May Dads Corporation open Dads restaurant in Megamall? Nilapitan may-ari to benta the right to use the name. He was paid P200,000. Racket yan ng mga lawyers. Maglist down ng mga newly opened establishments sa US tas ireregister dito sa Pilipinas. Sasampalin kayo pag ginawa niyo yan! Sirs wifes case: Couturier, design ladies shoes carrying his surname as the brand name. Hindi Santos ang surname niya, mabibilang sa kamay ang may ganong apelyido. Registered na kagad by someone not having that surname. Now shes in the process of cancelling the registration of the first registrant. What am I trying to tell you? Even if corporation has succeeded in registering the corporation under the chosen name, even if corporation succeeded in registering the name of the corporation as a business name with the DTI, this corporation may still be prevented from using corporate name as a brand name. E.g. Oposa ang apelido, registered as corporation. Registered as a business name with DTI on a store na Oposa Shoes. E di ngayon ano nakalagay sa store, shoes. Nakalagay dun sa mga shoes ay Oposa. Tas sa opening, may TRO dahil registered by another owner. Ergo, to ensure that your client will have exclusive use of a particular name, you should check not only with the SEC (corporation and partnership registry), also business trade registry of DTI and then also tradename and trademark registry of IPO and lastly, the copyright registry with the National Library sa Kalaw. When name is already appropriated, the SEC will add 2 more terms to make it different. E.g. Acme, Zenith, Summit, Pinnacle, Top. Lahat ng topmost gusto nila. Acme Inc. first na naregister 1930s pa lang. Oposa also wants Acme so what he did was add two terms, hence Acme Real Estate Development Corporation. Pero kung may corporation na Acme Devt Corporation, 3 na idagdag mo. Kung gusto mo talaga magamit ang acme, isang km na ang haba. Dagdag ng 2 in order to make it different from an existing corporation. SEC also looks into the line of business. SEC has freedom in determining WON a name is confusingly deceptively similar. Wide latitude of discretion. If you do not agree with the SEC, may appeals naman under PD 902-A go to CA from SEC on petition for review on certiorari. E.g.

(1) Corporate name If you were the draftsman, whats the first thing you should do to come up with a draft of the articles? What to name this corporation? What can you use as a corporate name? Why must this business organization have a name? See S18 Can we use Pacquiao Trading Corporation? S18 gives us restriction on the name a corporation may use. May not allow if it is: [1] identical [2] deceptively or confusingly similar to that of any existing corporation because there may be unfair competition, fraud or misrepresentation to the transacting public Not just similar corporation, but may also include partnership. E.g. San Miguel Corporation and Saint (pronounced as San because its French lol) Miguel Corporation. People might part with their money or valuable resources believing they are transacting with the real SMC. Its like fraud committed by some BIR people, theres one who got charged with plunder. He registered a corporation whose acronym is BIR. Opened an account under the name of the corporation. in the application of bank account, with check payable to BIR hundreds of millions of pesos ang naideposito niya. Ano parusa niya? RP kasi wala nang death penalty. BTW, differentiate between RP and life penalty? But in the law penalizing plunder, its RP. Therefore, kapag nakaisip kayo ng pangalan and you put it in AOI and you bring it to SEC, SEC may say, Sorry naunahan na kayo. There already exists a corporation under that name. So how do we deal with it? We go to the SEC and to check whether the name has been appropriated and then reserve. But they only have registries of corporation and partnership. Pwede ka bigyan ng go signal ng SEC but later on you may not open it because it has already been appropriated by a partnership or a single proprietorship. Pwede rin open a business under that name but you may not use it as a brand name kasi appropriated in a patent office. What is in a name? A particular name May be corporate/partnership name. When used by one corporation already, cant be used by another corporation or partnership again.

9Lyceum as name of school. Lyceum University in the Intramuros has been existing as corporation for many years, owned by Laurel of Batangas. Is Lyceum a common word? Greek. Pero meron kasing isang Lyceum sa Northern Philippines University (plus two words na yun). Nag-file Lyceum University to cancel registration LNPU on the ground of similar. Natalo ang LU. It will give people a wrong notion that that Lyceum is a branch of LU in Intramuros. I dont know why they lost. Deceptively or confusingly similar yan. In order to ensure that you can use your name when the AOI is presented to the SEC, you must reserve it when available for a fee. Bakit kailangan reservation? Pwede po ba ito? Umuwi ka tas pagbalik mo naunahan ka na, may nakabantay pala. 30 or 60 day reservation. You can even renew the reservation for a fee. Shempre mas mahal pag longer. Sir maganda yung Jollibee Trading and Merchandising Corporation. Hindi yan pwede because the word is copyrighted. Thats not in the dictionary. Even if you add 100 words to it, SEC will not allow it. There are prohibited words that cannot be used in a corporation or business name. E.g. name of national heroes. What about RCBC? Rizal there is province. Wala pa yung batas prohibiting the use. Vested right so they cannot be deprived. Jose Rizal University. Term/word national cannot be part of business name of corporation that will engage in financing or banking. Why? Because mislead public that this bank is government-owned and therefore is a solid bank. Hindi yan tutumba. Hello PNB. Theres also a law which prohibits the use of name of former presidents unless its the family using the name. Parang may ganon, check niyo na lang. Theres also a law prohibiting the names appropriated by the UN as a regency. E.g. UNESCO, UNICEF. Its a protected name. Names of individuals, dead or alive, unless it is your name. SEE MAGIC NOTES to produce finished case, it will take the place of cash. Hence balance sheet. At any given time, it should always be balanced. Trust Fund Doctrine Sino CPA dito? She will be the resource person for capital structure of corporation. Where is Trust Fund Doctrine in the code? S122 last paragraph Potential SH should know until when his investment will be tied up. It is for this reason that the law requires to state the term for the existence of the corporation. Why 50 years? So that the SH may get liquidating dividends before he dies. Is there minimum length of time for the term of corporation? No minimum. Pero kung magiincorporate ka tas term of existence is only 1 year, sira ang ulo mo non. It has costs eh. Pagkakuha mo pa lang ng certification, expired na agad. Maximum is 50 but extendible for another 50 years. Extensions have no limit. (5) Names, nationality and residences of incorporators The incorporators in S10 cannot be less than 5 nor more than 15. We have already discussed the reason behind the minimum number of 5. But why is the max 15? Kinapa-kapa na lang ito. Arbitrary. Wala lang. Why are the names, nationality and residence required to appear in the articles? y Name is to identify who they are y Nationality (actually it should be citizenship) so it will be easy for SEC to regulate in enforcing nationalization laws. How would they discover if Anti-Dummy law has been violated, constitutional requirements y Residences to know if majority of incorporators are residents of the country. For them to know that, articles should show where they are residents so SEC can implement Corporation Code requirement of majority residency (6) Number of directors and trustees y Directors for stock corporation y Trustees for non-stock corporation If number of incorporators is 5, may there be 15 directors at the board? Must the incorporators correspond to the number of directors? No requirement that number of incorporators should correspond to the number of directors. Ergo, there may be more incorporators than directors in a corporation and the reverse is also true: more directors than incorporators. Therefore, it will not be uncommon for you to see articles where there are 15 incorporators and yet only 5 members of the board. HOWEVER, experience has showed us that in 90% of the cases, number of incorporators correspond with directors. GENERAL RULE: The limitation as to minimum and maximum apply to both directors/trustees and incorporators. ONLY EXCEPTION: Non-stock corporation Where the trustees may be more than 15 Anecdote: DLC was instructed by the boss to make AOI of non-stock. With 20 incorporators! Pwede yan. Isasampal ko sayo. Look at S92: only allows the TRUSTEES, not incorporators

24 November 2010(4) Term of existence Investments remain with the corporation during its term. - Why? For the protection of public who may extend credit to the corporation. Anyone who extends credit to the corporation may be presumed to have considered the capital of the corporation. Therefore, it has the right to presume that such capital will remain with the corporation until the credit has been paid. The contributions therefore of the stockholders in the capital of the corporation are held by the corporation in trust for the benefit of laymen and creditors of corporation who have right to presume that such contributions will remain with the corporation until the dissolution of the corporation. Of course, not the entire amount of those contributions are intact at any given time because corporation will need money/funds in its commercial or business operations. At the time corporation was incorporated, total contribution of SH amounted to 2M, when that corporation goes into business, it will make use of the 2M as its initial capital. When that initial capital has been used up, cash will be gone pero mapapalitan ng ibang other assets. E.g. acquire piece of land where the plant will be constructed, then that will take the place of the cash. If they use the cash

10Kailangan bang odd numbered yung members of the board? No, pwedeng even, walang sinabing bawal. HOWEVER: In case of educational institution (non-stock corporation) may sinabi diyan na dapat multiples of 5. (See S108 1st par) Non-stock corporation must be multiples of 3 if they will adopt term of office for their trustees of 3 years. Stock corporation with 1 year term, no such requirement oddnumber. But why do you always see odd-numbered? So that therell be no tie. DLC says kalokohan yun kasi assuming present lahat sila. Pano pag umabsent yung isa. (7) Names, nationality and residences of incorporators who shall acts as persons or trustees until duly elected are qualified Baka mamaya naapprove yung AOI by the SEC eh di pa nakasched yung meeting for the election of directors. In the meantime, law wants that upon the approval, there are already interim directors who shall continue and complete the organization of the corporation. They are called interim directors designated in the article till the regular directors shall have been elected and shall have qualified. (8) Authorized capital New terms: y Authorized capital stock (ACS) maximum amount of capital corporation may raise from contributions (To be discussed in Capital Structure of Corporation) y Par Value arbitrary face value given to a share of stock. Determination that value of share of stock is piso. Not necessarily market value of share, its just a bench mark. Corporation has fixed the benchmark value for its shares of stocks. So that any value below that benchmark will be a scam. It will give us the picture of the financial status of corporation, its on the red. If its above the par value, that will be a premium. Bakit tumaas? Because maybe investors want to subscribe to shares of stock of corporation. Supply and demand or net worth (assets less liabilities) net worth of share if divided by all shares. It may be bigger than value. Quick determination if corporation is making money or in the red. y SEC will be given info on WON the corporation has complied with 60-40 requirement like in ownership of land, nationalization law (educational corporation, mass media), retail trade, advertising (7030) SEC has to know who the SH are. y No par no fixed value make it easier for corporation to raise money from the subscription in shares of stocks CKs question: Corporation cannot issue its shares of stock for a price/consideration less than par (S6) What about non-stock? It has no ACS but it has capital which it needs to operate. It has to be stated in the article. Where will that come from? Contributions of the members. All those who paid membership dues must be paid therein. The law does not require all the original subscribers to sign the articles. But while only the incorporators are the signatories, most likely, the original subscribers will not contribute and will not allow their names to be included unless they have seen the articles. Assumption natin ito. Hindi natin sila pinapapirma baka di na mabasa ang articles sa dami ng pirma. Hindi lang execution page (last page where the names are typewritten above which they should sign) ang pinipirmahan jan. They must also sign the margins. Why sign the margins? What do the marginal signatures prevent? Substitution. Pero pwede pa rin silang magkonchaba na pumirma na lang ulit to sign the falsified page. Its purpose is to authenticate the page as the page originally forming the articles. SEC requires articles to be notarized (acknowledged before the notary public) - Notarial acknowledgment in S15. By the incorporators who signed the articles, b. Filing of the AOI and payment of fees ito na yung mga maraming kaduktong na documents

After the AOI is done, attach other documents: a. Treasurers affidavit because corporation code requires that at least 25% of ACS be subscribed and at least of the total subscription be fully paid.

How will SEC know this? All the subscribers are listed in the articles and their respective subscriptions are listed opposite their names. Therefore, total subscription is there found in the articles. Well see how much is subscribed vis--vis ACS. How will SEC know how much is paid? Every original SH nakalagay dun ang amount subscribed and amount paid. Pero maraming Filipino ay sinungaling. Bayad daw pero hindi bayad. Thats why law requires treasurer to execute affidavit. Why affidavit? Subjects him to perjury May nadedemanda ba dito? Meron kasi nagrarandom check ang SEC. Paminsan-minsan may nahuhuli sila. Kulong ang penalty dito. b. General information sheet Form is available online. Its included in the express lane form. Para hindi na itype ang S15. You just fill it up with information and then sign. May typewriter pa ba kayo? Itago niyo yan dahil relic na yan.

Why cant we just make a Word template? Express lane purpose is not only to make it convenient for applying corporation in drafting and making articles. Its not the only reason. To facilitate examination by the SEC. If you were the one who made the articles, SEC will scrutinize every line. Habang humahaba yan, tumatagal ang approval. They made the expresslane form and so theyre sure walang illegal dun. Expresslane Form was introduced when Monico Jacob was SEC commissioner. That innovation won an award. From a time frame of 3 weeks to incorporate a simple corporation, nareduce into 3 days. This facility helped the economy through increased commercial transactions. When DLC was in the SEC, tanggalin na rin yung expresslane form, put the template in the computer. Isang datasheet na lang ang pipirmahan. Pero ayaw naming yan, threatened yan kasi wala na sila work. Its the cooperative that prints the expresslane form. Hindi pwede ang P250 sa isang page. Member pala si sir ng cooperative. P20,000 a year. Expresslane form pa rin!

3.

Issuance by the SEC of the Certificate of Incorporation

What documents will SEC ask you when you file? y Express lane: articles and by-laws y If not express lane: pwedeng AOI lang, later the by-laws What should come with AOI? y Reservation for corporate name y Treasurers affidavit y General information sheet

11You should pay the following: y Filing fee 1/10 of 1% of ACS (P1000 for every million) y Legal research fee goes to the UP Law Center. Research daw of the UP Law faculty y Miscellaneous fees When you pay, you get official receipt. Then you get official receipt stamp. Then it will be brought to examination by examiners. Theyll check if documents are in compliance with requirements of law. Take note that in addition to those requirements, the SEC will also require presentation of the consent given by other government agencies which regulate the business of the corporation whenever the law or rules and regulation applicable require consent of regulation agency before SEC may act on application for incorporation. Basis in corporation code S17, last paragraph: Banks, insurance companies etc because they are regulated by another government agency. Enumeration in this paragraph is not exclusive. Other corporations fall under jurisdiction of other government agencies. What government agencies usually do is write to SEC and inform SEC that corporation engage should not be processed without our favorable recommendation. Tatandaan ni SEC yun. Anecdote: Law office from post-grad. Golf everyday partner. The rainmaker who looks for client. Sir doesnt play golf because hes ultrasensitive to sunrays. Good golfer is a good lawyer. Pag ganon ang kliyente madaling magbayad, hindi nag-iisip ang kliyenteng yun. Is line of business important? Under the regulation of another government entity, look at the regulation of agency if that agency requires other things to be complied with like minimum ACS. There is no minimum ACS in Corporation Code (S13). But thats bullshit because if you will look there is a P5000 reference in treasurers affidavit (S14). If minimum paid up is P5000, what is the minimum ACS a corporation may have? P5000, fully paid and fully subscribed Purpose clause in the AOI: There is a form book for that. 6 volumes lang naman. American publication. E.g. - Labor recruitment approval of POEA is needed. SEC will forward you to POEA to ask for approval if you go there without prior approval. SEC will not process your AOI. What does POEA require? Marami! Minimum ACS, cash-bond. You have to be prepared. - You cannot incorporate a travel agency unless it is with the approval of DOT. Bank unless without approval by CB. - Insurance corporation unless approved by Insurance Commission. Hospital approved by DOH. - School approved by CHED or DepEd. - Security agency regulated by an agency in Crame. - Pawnshop regulated by CB Makati law firms usually have a checklist for additional requirements by government regulatory agencies for incorporation of certain businesses, they keep it updated. Otherwise, youll look like you dont know what youre doing. Lesson: Always look at the line of business. Pick up phone and start calling. Best person to ask is the SEC. When all those approvals have been obtained and you have complied with all those additional requirements, okay lang sana kung submitting. It will be different if problem is on the minimum ACS. Suppose the regulatory agency requires higher ACS and the one provided in the AOI is lower than the required. Ano gagawin mo ngayon? Baguhin yung AOI. Hindi pwedeng additional lang na ACS. Pag winithdraw mo at ibinalik mo, magbabayad ba ulit ng filing fee? Remedy of SEC: Withdraw the AOI not the application so that you will change/modify (and not amend kasi wala pang corporation). They will note that the AOI is withdrawn for changing, not the application itself. So no more need to pay again. Unless you increase, you must pay for the deficiency which is the amending fee now (Mais question).

4.

Organization

After SEC has completed examination of articles and all accompanying documents, and SEC has been satisfied that all requirements of law has been complied with and nothing in other documents is contrary to the code or any special law/rule or regulation, SEC will approve the application for regulation. SEC will issue a certificate of incorporation. From then on, the corporation is registered and has acquired corporate personality under S19. The law does not require a corporation for all its SH to be fully subscribed, only 25%. Why 25%? Its a commercial or business reality that at the start of business that that amount of money is not needed. Gradual need yan. 25% lang ng subscribed ang talagang kailangan. Or kung yun ang kailangan, yun lang ipepaid up so therell be room for additional subscription later on without having to resort to amendment of articles. Meron ka pang unissued stock na pwedeng iissue in the future. Kung ano lang kailangan, yun muna ang paid up. The rest will just be commitment for future requirements. It will become counterproductive if fully subscribed. Effective deterrent and discourage investors to open businesses. Masisira ang cash flow. Constrict the market for investors. Mahirap kwentahin yung 30%. Yung 25% madaling kunin kasi . Arbitrary number. Feel lang nila na reasonable yun.

26 November 2010Grounds to reject an article: S17 Are the 4 grounds exclusive? No, there are other grounds for the rejection of the articles. Those are found in special laws as well as rules and regulations promulgated by the SEC. The SEC is empowered under S143 of the Corporation Code, Revised Securities Act and another one to promulgate rules and regulations in its exclusive jurisdiction to supervise corporation organized under the Code.

DEFECTIVE ATTEMPTS TO INCORPORATEIn approving or disapproving the articles of incorporation applying for registration, the SEC will examine the articles. Requirements for incorporation are classified into two: 1. Mandatory may either be: a. Total noncompliance Corporation will be either de facto or non-entity. See Hall v Piccio and Municipalty of Malabang v Benito

12b. Substantial noncompliance no effect on the status of the corporation but SEC may require him to comply with that which has not been totally complied with. Corporation will remain a de jure corporation In Municipality of Malabang v Benito, SC cited with approval the cases decided in the US on de facto corporations. Sabi ng court, not all corporations defectively formed are de facto corporations. Ano lang ang de facto? Only those which were 1. organized under a valid law who have colorable attempt to organize under that law and who 2. had exercised corporate powers in good faith are de facto corporations. 3. Lastly, there must be user of corporate power in good faith. (Must comply with these three requirements) How about corporations defectively organized not falling under that category because one of the 3 conditions for de facto existence was absent? What do we call them? They are non-entities, neither de factor nor de jure. Non-existent corporations. They never became either a de jure or a de facto corporation. What happened in that case? During the time of Diosdado Macapagal and Carlos P. Garcia, several laws were passed by congress creating new municipalities, carving out territories from existing cities and municipalities to create new ones. A municipality in Mindanao was created under this new law, i.e. Malabang. Manuel Pelaez of Misamis challenged the validity of creation of new municipality on many grounds one of which is gerrymandering. Second ground, relied upon in latest SC case reversed on motion on recon, creation of cities and municipalities kasi nacreate these cities and municipalities without compliance with the requirements of the constitution. But since youre in the Philippines, cases extend for years. Municipality was created already while the law creating it was still pending. Several years thereafter SC rendered judgment declaring the creation of the municipality as unconstitutional. What happened to the LGU now? It has entered into contracts now, it has acquired properties and liabilities. What is the status of all those transactions? Are they void, enforceable? Are those liabilities still subsisting despite the declaration of unconstitutionality of law creating the municipality? SolGen says its de facto corporation, therefore all the acts should be respected. The appointed officials who discharged their powers before law was unconstitutional are also de facto. SC says there can be no de facto corporation where they can be no de jure. Impossible to have de jure municipality of Malabang because the law itself creating the municipality has been declared unconstitutional. The first requirement for de facto corporation to exist is absent: valid law under which the corporation may be organized. There was no such valid law because it was declared unconstitutional. It creates no rights, imposes no obligation. In the eyes of the law, it did not exist at all. What kind of corporation is it now? Neither. Its a non-entity. What happens to the transactions? Respect them because the passage of the unconstitutional law and its implementation by the creation of municipality are operative facts which SC cannot close its eyes upon. They have to be respected. DLC finds the foundation of this decision as shaky. Declare non-entity pero walang effect, as if de facto pa rin cos of the operative fact. Fait accompli, nangyari na. Naimplement na ang batas. They can no longer turn the hands of time backward. Di pwede scratch scratch rewind. Problem with this: Municipality of Malabang v Benito, SC used in the municipal corporation by analogy doctrines applicable to private corporation.

2.

Directory noncompliance with this shall not affect the status of corporation when the SEC approves the articles. Non-compliance has no effect. But that doesnt mean lusot na. SEC may require him to comply even after certificate of incorporation has been issued to him. SEC will issue an order requiring newly incorporated corporation to comply albeit belatedly. Corporation will remain a de jure corporation

BUT how do we know whether a requirement is directory or mandatory? If you will look at Art. 5 of CC (Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity.), not even the CC tells us when a law is directory or mandatory. But there are some badges which somehow gives us a hint on whether or not a requirement/law is directory or mandatory. One of those badges the effect of non-compliance. If the law provides for a sanction for non-compliance with a law or a requirement, then we can conclude that such law or requirement is mandatory because there is a sanction. There is a penalty for non-compliance. It is directory when the effect does not constitute a penalty. It does not constitute punishment. If the result of noncompliance is penal in nature, or if the result or effect of non-compliance will inflict damage to the non-compliant party, then the law or requirement is mandatory. What requirements are mandatory and what are directory? Maybe we can safely assume that both those requirements are mandatory. The case of Hall v Piccio and Municipality of Malabang v Benito is instructive. Kapag total noncompliance, pwede maging defacto, pwede maging non-entity. What is the difference between de facto and de jure? y De jure corporation has all the powers of a corporation because it was properly organized y De facto corporation there is a defect in its corporation. Corporation that resulted will not be de jure. BUT it enjoys all the rights, possesses al the powers of a de jure corporation. What then is the difference between the two? The only difference is availability of a successful attack on its existence. y If the corporation is de jure, nobody can successfully attack its de jure existence. Anyone who may question its legal existence will fail. No one shall succeed to oust the corporation from its corporate existence because it is a de jure corporation. y In the case of a de facto corporation, a successful attack may be lodged before the proper tribunal. A de facto corporation may be ousted from its corporate existence. Who may attack/challenge the de jure existence of a corporation? Its stated in the law, the SolGen. When he files an action to oust a corporation form its corporate existence on the ground that its not a de jure corporation, the action is a quo warranto. Where does the SolGen file the quo warranto action to oust a de facto corporation from its corporate existence? S20 it has to be filed with regular courts. SEC has no jurisdiction. Lets see if under the RoC, who has the jurisdiction on that matter.

13Supposed Corporation Code was declared unconstitutional after several years of existence, what will happen to those private corporations during time it was not yet declared unconstitutional? They cant become de facto because existence of valid law under which the corporation may be organized is wanting. Pano na the katakot-takot na contracts? PROBLEM: (Actual case) Spouses with three children: 7, 10 and 12 years old. The husband opened a business. Nagclick ang business. Its high time for use to formalize this business so he went to SEC to obtain an expresslane form. Who are his incorporators? Sha, misis and three children who are minors. But remember the law requires the incorporators to be of legal age. Sila rin ang original subscribers. Para di disapprove ng SEC ang articles, husband misrepresented in the documents the age of the children. He falsified the document by representing that the 3 children were already of legal age. Sedula lang naman hinihingi nung araw. Articles were approved, certificate of incorporation was issued. After operating successfully for around 5 years, the husband and the wife quarreled. Si Mister ay sumakabilang bahay. May kulasisi. Away sila. Naghiwalayan na! If you want to take care of children, take them. If not, iwan. Husband controls the business. Pag galit ang tao, ano ang gustong gawin. Revenge!!! Parang sa radio. File an action against husband for falsification of public document i.e. AOI. He represented falsely that three of incorporators were of age. Notarized pa nga yan, if not falsification, perjury. Eh kasali ka rin jan! Defense: Hindi ko po alam kung ano yung pinipirmahan ko! As to criminal aspect, for sure there is a crime committed. But the question is what is the effect on the status of the corporation that was issued a certificate of incorporation? not require a quo warranto case for that corporation to be enjoined from exercising the powers of the corporation. They only need to file action/complaint to cancel/revoke the certificate of incorporation of that corporation. Any third party may file it, no need for the SolGen to act on it.

CORPORATION BY ESTOPPELMisnomer because it gives impression that created by estoppel of parties. Not correct. No corporation is created by estoppel. You cannot create a corporation by estoppel. It will simply estop the parties who held themselves as corporation from invoking the absence of the corporation as a defense to resist an action brought against them as a corporation. Illustration: Suppose 5 individuals represented themselves to a 3 party as a corporation. Proposing a contract that they were a corporation. Corporate letter head and brochures, perhaps also a fake AOI or certificate of incorporation. Trusting these people, third party entered into contract with them but in the name of the corporation. When you look at the contract, the 3P contracted with a corporation. Entity represented to be in existence by the people with whom he transacted. In every scam, when 3P had already parted with money, abscond na mga kausap niya. Walang dineliver because of this failure to comply with the end of the bargain, maghahanap si 3P ng idedemanda. File a case with the court against the corporation (kasi contract yung evidence niya). Pwede ba sabihin ngayon ng people he transacted with MTD on the ground that party-defendant have no legal personality because it does not exist as a corporation, not registered in SEC? S21, those parties who held themselves out as a corporation will be estopped from raising that as a defense, invoking absence to as defense to resist claim against them. Judgment rendered against corporation, how do we enforce that now kung wala ngang corporation and no property either? As practical/procedural matter, lawyers do this: 1. Before enter with contract with corporation, we check if theyre registered in the SEC. Pano kung hindi naicheck dahil hindi UP grad yung naunang abogado, malamang Atenean. Nung idedemanda na, no more Atenista so the UP grad files a case against him. What is the first thing you do when filing a case against corporation? Check the documents with the SEC, where the principal office is, all the latest filings insofar as that corporation is concerned. Hindi parang abogado ni Pinoy. Issue proclamation ng amnesty tas babawiin. Sloppy work! On the job training ba ito? 2. Kung nabisto niyo yung hindi nakita ng Atenista na hindi pala registered with the SEC, what do you do? Idedemanda pa rin but you include the people who transacted with you in the name of the corporation in the name of the corporation. 3. Pero kung nabisto mo nakafile na the case, then amend the complaint to include those people who transacted in the name of the corporation. When Sir supervised OLA students, they had a case like this. Student did not check and filed a case against the corporation right away. Sabi nung people they dealt with, maghabol kayo sa tambol ngayon. Pumasok ako may judgment na, so what do we do instead? Reopen proceedings? You cant execute the judgment cos no property at all. Motion for issuance of writ of execution isinama ni Sir at pumayag yung court. Nakupo UP itey. Natakot siguro the third party so nag-settle na lang. Albert v University Publishing Case you can use for this case. When you discover that no corporation towards the end of the litigation.rd

1 December 2010Bear in mind ruling in Hall v Piccio: No colorable compliance with requirements for organizing a corporation until a certificate of corporation has been issued by the SEC. Remember there are 3 requirements for a de facto corporation to exist: 1. Valid law under which the corporation may be organized 2. Colorable compliance with that law in good faith 3. User of corporate powers in good faith In Hall v Piccio, there can be no colorable compliance with law authorizing organization of that corporation until SEC has issued certificate of incorporation. Therefore, till certificate of incorporation, no de facto corporation will exists. Thats still good law. Problem left previous session: Wife filed falsification against husband. Surely, falsification was committed. Bigger issue for us is the effect of such fraud committed by the husband in the incorporation of the family corporation. Is the corporation de facto or de jure? Neither. While there is a valid law under which it was organized, there was no substantial compliance with a mandatory requirement of that law. That there be five incorporators who are all natural persons of legal age, in my opinion is a mandatory requirement of the Corporation Code. Failure to comply or substantially comply with this requirement will make the incorporation a defective corporation? What kind of defective corporation? The answer is no, because theres no colorable attempt in good faith to comply with the mandatory requirement. There was no good faith, in fact there was fraud committed by husband in the registration of the corporation. The resulting is not de jure because not substantial compliance. Neither is it de facto because no colorable compliance in good faith with requirement of the law. The corporation is a non-entity therefore it does

14When SolGen brings suit to oust it from corporate powers, the decision of the court resolved from continuing with its . incomplete sentence Para siyang dinidissolve. It will be ordered disbanded by the court. No right to exist as a corporation. no right to represent yourself to public as a corporation. We dont say dissolve kasi thats used for de jure, but the effect is just the same. In natural persons, whats the capital punishment? Punishment. Papatayin/bibitayin. Dito sa corporation, thats also the capital punishment. Bitay, then dissolved na sha. Though later on, there will be cases (esp ultra vires acts) where the court has adopted the policy not to impose penalty if the corporation can still be enjoined from performing illegal acts. BUT if the corporation is de facto, cannot be. Cause it does not lawfully exist. Though yung illegitimate child, hindi naman pinapatay. When an action is brought against non-existing corporation, what will be liability of party, had there been a corporation, what will be their liability? Limited on their promised contribution or assets of the corporation. What is liability of persons transacted with corporation? No personal liability, if at all to the extent of equity. BUT what if de facto corporation, what is the liability of de facto SH now? Same. Before ousted of corporate charter, limited liability applies. Taken care of by assets of de facto corporation. Equity capital of corporation. Pareho lang ang de jure and de facto, the only difference is availability of successful attack against personality of corporation. What is liability of individuals in corporation by estoppel? No limited liability because no corporation. Natural sila lang in their personal capacity. They acted on behalf of a non-existent principal. Principle of agency. Principal represented to public is non-existent. Under law of partnership, they are liability. Joint and solidary as joint tortfeasors. Their liability is with all their present and future property. Para silang de facto partners diyan in a general partnership. Tandaan this. You will find this handy in practice. Naeencourage ko kayong maging corporate lawyer kaya onti na lang ang nasa criminal field. Corporate na ako talaga from the start. The action to revoke registration of corporation is still with the SEC by virtue of PD 902-A, not with the regular case. Suppose complaint for revocation is successful on the ground that there was fraud in registration of corporation, pero 10 years na tumatakbo ang corporation then you file complaint is only now. SEC cannot do anything if theres fraud. What happens to the corporation now? Will it be dissolved? DLCs opinion lang naman: That will be considered as de facto partnership. If you want to pursue, we remove certificate of registration but you cannot continue using name of corporation. Thats written in S21 liable as general partners Until when will these interim members of directors serve? Until election of regular. When does regular election happen? During annual SH meeting, date of which may be found in the articles OR bylaws.

2.

Make the bylaws

Bylaws of corporation is necessary for the internal organization of the corporation. The corporation may be considered as microcosm of the society, in the political society, theres constitution and statutes. The latter cannot go against the former. Corporation is like a republic constitution is AOI and statutes is the bylaws. Thats how we describe by analogy the relationship between articles and bylaws. Bylaws provide for internal rules for relationship between board and SH, member of board and board, officers and the board, SH and another SH insofar as business transactions of corporation are concerned. When to make the bylaws? Pwedeng kasama na sa AOI? When the bylaws are submitted together with the AOI, what are the requirements? S46.Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its 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 the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)

ORGANIZATION OF THE CORPORATION3 step: Internal (not international) organization of the corporation. How does a corporation organize?rd

Pwede ring hindi sabay, in such a case, when shall the corporation adopt the bylaws? S46 30 days within one month from receipt of official notice of the issuance of the certificate of corporation What is the effect if no bylaws were filed in the SEC within or after the 1 month period? The corporation is now in violation of a provision of the code. What is the effect, will the registration be revoked? Under PD 902-A S6, violation of any provision of the code is a ground for revocation of the registration of the corporation. in the Corporation Code, merong revocation in S22 deemed dissolved

1.

Election

First step, election or constitution of its corporate officers. AOI requires applicant to name interim members of the board after the SEC has approved the articles and after it has issued certificate. Meron na agad officers yan so they can comply right away.

15Pag hindi nagsubmit ng bylaws sa SEC within 2 years, thats the time that your registration will be revoked. Hindi pa ground yung failure within 30 days. The effect is SEC will penalize. If within 2 year period, they submit bylaws, the bylaws will not be accepted unless you pay the fine. Daily fine. Pag 1 year na hindi nagfile, tens of thousands na. Pag ganun, dissolve na lang natin. Incorporate na lang tayo ulit. Hayaan na lang na mairevoke. Wait, can we use our former name again? Another requirement from the SEC not in the code: Stock and transfer book. If you dont submit, theres also penalty. Though no case yet of corporation whose registration has been revoked for failure to file a stock and transfer book. Pero yung bylaws, marami na. Revoked after 2 years. Submission of bylaws is a step/requirement for the formal organization of the corporation. Thats why para hindi na lang mapenalize, lets just submit template bylaws together with the AOI then amend it later on. Stock and transfer book is submitted after certificate of incorporation has been issued by the SEC. Ask your paralegal to submit it. Nakukuha yan sa National. It comes in different sizes. If AOI was submitted without bylaws, bylaws has to be submitted within one month. How to subm