2. Corporation
Defined
• A corporation is an artificial being
created by operation of law,
having the right of succession and the
powers, attributes and properties
expressly authorized by law or incident
to its existence. (Sec. 2 RCCP)
3. Attributes
of a
Corporation
1. Artificial being
2. Created by operation of law
3. Has the right of succession
4. Has the powers, attributes and
properties expressly authorized by law
or incident to its existence
4. Corporation as an artificial
being
• As an artificial being, a corporation is
possessed of a personality separate and
distinct from that of a stockholder.
Under Article 46 of the Civil Code, it is a
juridical person who may acquire and
possess property of all kinds, as well as
incur obligations and bring civil or
criminal action, in conformity with the
laws and regulations of its organization.
5. Doctrine of separate entity
explained
• A corporation has a personality
separate and distinct from that of each
shareholder. This has been generally
considered as the privilege or attribute
most characteristic of the corporation.
It means that the stockholders of a
corporation are not the same as the
corporation itself. (A. Agbayani,
Commercial Law Volume III).
6. Consequences of the Doctrine of legal entity
1. Corporate property is owned by the corporation as a
distinct legal fiction, and the shareholders have only an
indirect interest in the assets and business.
2. Shareholders cannot maintain actions in their own name and
right, to recover possession of property belonging to the
corporation, or to recover the damages for its injury. The right of
action is in the corporation, and must be brought in the
corporate name by its authorized agent.
3. The right to object to the admission in evidence of documents,
papers and things illegally seized from the offices and premises
of the corporation belongs exclusively to the corporation and
may not be invoked by the corporate officers or stockholders in
the proceeding against them. (Ballantine 288-292; Fletcher 103-
132; Stonehill et al. vs. Diokno et. al. L-19550)
7. Disregard of legal fiction or ”Piercing the
veil of corporate entity.”
• When valid grounds exist the legal fiction that a
corporation is an entity separate and distinct
from its members or stockholders may be
disregarded. In such cases, the corporation will
be considered a mere association of persons. The
members or stockholders of the corporation will
be considered the same as the corporation. This
is referred to by some courts as piercing the veil
of corporate entity, or disregarding the fiction of
corporate entity or looking at the substance
rather than the form. Before the doctrine of
separate entity may be disregarded, the
wrongdoing must be clearly and convincingly
established. It cannot be presumed. (Del Rosario
vs. NLRC, 187 SCRA).
8. A corporation is created by
operation of law
• A corporation is created and
organized under a general law and
is considered a legal body with
rights and powers. It is not created
by agreement of persons.
9. Corporation has a right of succession
The corporation shall continue to exist for
the period stated in the Articles of
Incorporation, and the death of any
stockholder or director shall not dissolve
the corporation. The corporate life of a
corporation under the RCCP shall be
perpetual or unless sooner dissolved for
other causes in accordance with law.
By succession is not meant that the
corporation is immortal. It simply means that
a corporation has a continuity of existence
independent of that of its members or
shareholders. This continued existence of a
corporation is, however, limited to the period
stated in its Articles of Incorporation or in the
act creating it. Subject only to this limitation,
the death or withdrawal of the members or
stockholders of a corporation does not affect
its corporate existence. (Campus Rueda Co.
vs. Pacific Commercial Co. 44 Phil. 916)
10. Tests of nationality or citizenship of a corporation
1. Incorporation test - As a general rule, a corporation is a citizen of the state or
country by or under the laws of which it was created and exists without regard to the
citizenship of its stockholders or members. (18 C.J.SS. 388)
2. Control test - The nationality of a private corporation is determined by the
character or citizenship of its controlling stockholders. (89 Phil. 54)
3. Center of Management test or Business domicile test - A corporation has the
nationality of the state where it has its business domicile.
11. Residential and jurisdictional
requirement of a Corporation
A corporation is, for jurisdictional
purposes, a resident of the place
where its principal office or place of
business is situated.
(1 Fletcher 54)
A corporation can have no legal existence out of the
boundaries of the sovereignty by which it is created. It
exists only in contemplation of law, and by force of the
law; and where that law ceases to operate, and is no
longer obligatory, the corporation can have no
existence. Hence, it cannot, through its agents, enter
into contracts outside the jurisdiction in which it was
created, without the sanction, express or implied, of
the laws of the sovereignty where such contracts are
entered into. (Bank of Augusta vs. Earle, 13 Pet. 519)
12. Corporation and partnership
compared
a. Similarities
1. With the exception of a corporation sole,
both are composed of a group of persons.
2. Both are artificial persons.
3. Both are devoid of physical bodily
existence and as such can only act through
their respective agents.
4. Both have juridical personalities separate
and distinct from the members or
stockholders.
13. b. Distinctions
1. A partnership is created by
mere agreement of the partners;
while corporation cannot be
created by mere agreement of the
parties but requires authority
from the sovereign power, express
or implied.
2. A partnership cannot be
formed by one person; while a
corporation sole and One-
Person Corporation is formed
by one person.
3. A partnership may by
agreement of the partners do
any lawful act; while a
corporation can exercise only
the powers expressly granted
it by the law or incident to its
existence.
4. In a partnership all the
general partners are liable with
their separate property for
partnership debts; while the
members of a corporation are
not so liable.
5. A partnership may be
dissolved by the partners at any
time; while the corporation
cannot be dissolved without the
consent and authority of the
state. (1 Fletcher 18-19)
14. 6. A partnership can be formed for an indefinite period; while the corporation under the
Revised Corporation Code of the Philippines have perpetual existence, unless license to do
business is revoked based on the law.
7. In a partnership, a partner cannot transfer his interests to another without the consent
of the other partners; while a stockholder in a corporation can transfer his share to another
without the consent of the other stockholders. (18 C.J.S. 918)
8. A partnership begins from the moment of the execution of the contract of partnership;
while a corporation begins to have corporate existence and its juridical personality
acquired from the date of the issuance of the certificate of incorporation by the SEC.
9. A partnership has no right of succession; while a corporation has a right of succession.
(Sec. 2 RCCP)
10. In a partnership, all the general partners are, unless otherwise agreed, agents of the
firm; while a corporation acts through its Board of Directors. (Art. 1803, N.C.C.)
15. Advantages of a Corporation
1. CAPACITY TO ACT
AS A LEGAL ENTITY.
2. CONTINUITY OF
LIFE.
3. THE LIABILITY OF THE
STOCKHOLDERS FOR
THE DEBTS OF THE
CORPORATION IS
LIMITED TO THEIR FULLY
PAID INVESTMENT IN
THE CORPORATION.
4. THERE IS BETTER
MANAGEMENT AS
THE BEST SERVICE
MAY BE EXTRACTED
FROM THE BIGGER
MEMBERSHIP OF A
CORPORATION.
5. THERE IS MORE
UNIFIED FORM OF
CONTROL WHICH IS
REPOSED IN THE
BOARD OF
DIRECTORS.
6. TRANSFERABILITY
OF SHARES EVEN
WITHOUT THE
CONSENT OF THE
OTHER
STOCKHOLDERS.
7. THERE IS A
GREATER SOURCE OF
CAPITAL.
16. Disadvantages of a Corporation
1. A corporation is subject
to greater governmental
control.
2. Frequent and varied
reports are required of
corporations.
3. A corporation may not
engage in any other
business other than the
business specified in the
Articles of Incorporation.
4. Minority stockholders
may be at the mercy of
majority stockholders.
5. A corporation cannot
transact business in
another state unless it
obtains a license for that
purpose.
6. It involves double
taxation.
7. Outstanding stock
cannot be more than the
authorized capital stock.
8. Credit corporation is
limited on account of
limited liability of
stockholders.
9. There is a greater
possibility of abuse of
power.
17. Component parts of a Corporation
1. Incorporators -
stockholders or
members mentioned in
the Articles of
Incorporation as
originally forming and
composing the
corporation and who are
signatories thereof.
2. Corporators - those
who compose the
corporation whether
stockholders or
members.
3. Stockholders -
owners of shares in a
corporation which has
capital stock.
4. Members -
Corporators of a
corporation which has
no capital stock.
18. Component parts of a Corporation
5. Promoter - one who alone or with others
undertakes to form a corporation and to
procure for it the rights, instrumentalities,
and capital by which it is to carry out the
purposes, set forth in its charter and to
establish it as fully able to do its business.
6. Subscriber - one who has agreed to
take stock from the corporation on the
original issue of such stock. (Jones vs.
Rankin, 140 P. 1120, 19 N.M. 56)
7. Underwriter - one who, under an
agreement, made before corporate shares
are bought before the public, and in the
event the public will not take them, the
underwriter will be the one to take them. (B.
Paulino, Law on Business Organizations)
19. Different kinds of Corporations
A. Aggregate and sole
1. Corporation aggregate – one
which is or may be composed of
more than one member (18 C.J.S.
393), such as the San Miguel
Corporation.
2. Corporation sole – one which
is composed of a single member
and his successors in office. (18
C.J.S. 393) Thus, for the
administration of the
temporalities of any religious
denomination, society, or church,
and the management of the
estate and properties thereof, it
shall be lawful for the bishop,
chief priest or presiding elder of
any such religious denomination,
society or church to become a
corporation sole, unless
inconsistent with the rules,
regulations or discipline of his
religious denomination , society
or church or forbidden by
competent authority thereof.
20. B. Ecclesiastical and lay
1. Ecclesiastical corporation - one created to secure the public
worship of God (1 Bouvier Law Dict. 683), such as the Roman Catholic
Church.
2. Lay corporation - one established for temporal purposes and is
comprised of laymen (18 C.J.S. 393), such as the Toyota Motor
Corporation.
21. C. Stock and Non-stock
1. Stock corporations - those which have a
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, such as the San Miguel Corp.
2. Non-stock corporation - one in which
there is no such stock, but the membership
therein is otherwise represented (18 C.J.S.
399), such as the Manila Lions Club.
22. D. De jure and De facto
1. De jure corporation - one created in strict or
substantial conformity to the governing
corporation statutes, and whose right to exist
and act as such cannot be successfully attacked
in a direct proceeding for that purpose by the
estate. (8 Fletcher 62)
2. De facto corporation - one so defectively
created as not to be a de jure corporation, but
nevertheless the result of a bona fide attempt to
incorporate under existing statutory, authority,
coupled with the exercise of corporate powers.
(8 Fletcher 69)
23. E. Eleemosynary and civil
1. Eleemosynary corporations - those which are created for
purposes of charities, such as hospitals, schools, and the like. (1
Bouvier’s Law Dict. 683)
2. Civil corporations - those which are created to facilitate the
transaction of business (1 Bouvier’s Law Dict. 688), such as the
Atlas Consolidated Mining and Development Corporation.
24. F. Public and Private
1. Public Corporations - those formed or organized for the
government of a portion of the state, such as the City of Manila.
2. Private Corporations - those which are created wholly or in
part, for purposes of private emolument (1 Ruvier’s Law Dict.
683), such as the Amon Trading Corporation.
25. G. Domestic and Foreign
1. Domestic Corporation - a domestic corporation with
respect to a particular state or country is one created by or
existing under the laws of that state or country. (18 C.J.S.
399)
2. Foreign Corporation - one created by or existing under
the laws of some other state or country. (18 C.J.S. 399)
H. Open and Close
1. Open Corporation - one in which the general public
may become stockholders or members thereof.
2. Close Corporation - one in which the stockholders or
members are limited to a few persons such as members of
a family.
26. I. Parent and Subsidiary
1. Parent or holding Corporation
- one which is so related to
another corporation that it has the
power either directly or indirectly
through another corporation, to
elect a majority of the directors of
such other corporation.
2. Subsidiary Corporation - one
which is so related to another that a
majority of its directors can be
elected directly or indirectly, by
such other corporation.
J. Wasting assets corporation -
one the sole purpose of which is to
invest its capital in a specific
property and afterward to consume
that property or extract its value at
a profit, such as mining property, oil
or gas well. (Ballantine, 0. 587)
27. K. Affiliated corporation - one related to another by owning or being owned by common
management or by a long-term lease of its properties or other control device. An affiliation
exists between a holding or parent company and its subsidiary, or between two corporations
owned or controlled by a third. (Kohler, Dictionary for Accountants, p. 26).
L. Government owned or controlled corporations - those organized by the government or
corporations of which the government is the majority stockholder, such as the Philippine Air
Lines, Philippine National Bank, Philippine National Railways, Metro Manila Transit
Corporation, National Power Corporation, etc..
M. Corporation by Prescription - one where corporate powers have been exercised by a
body of men for such a length of time as to raise a presumption of the grant of an ancient
charter to their predecessor. (18 C.J.S. 406), such as the Roman Catholic Church).
28. Effect of ownership of stock by government
The fact that the government happens to be a
stockholder of a corporation does not make it a
public corporation.
Thus, the following corporations, Philippine Air
Lines, Philippine National Bank, Philippine National
Railways, Metro Manila Transit Corporation,
National Power Corporation, National Coal
Company, although owned and controlled by the
government, are private corporations they have no
greater powers, rights, or privileges than any other
corporation which might be organized for the same
purpose under the Corporation Law. (National Coal
Co. vs. Collector of Internal Revenue, 46 Phil. 583)
29. Effect of public nature or character
of corporate undertaking
The mere fact that the undertaking of the corporation is
one which the state itself might enter as part of its public
works, does not make the corporation a public one.
Education is a public or governmental function. Article
II, Section 17 of the Philippine Constitution of 1986
provides that the State shall give priority to education,
science and technology, arts, culture, and sports to foster
patriotism and nationalism, accelerate social progress
and promote total human liberation and development.
Thus, U.P., P.U.P., P.N.C. and the Philippine Science High
School are public corporations. But still many colleges
and universities are private corporations, such as PSBA,
U.E., F.E.U., N.U., N.C.B.A., and the University of Manila. (B.
Paulino, Law on Business Organization)
30. Test in determining whether
corporation is public or private
The test for determining whether a corporation
is public or private is dependent upon the
purpose of its creation.
If a corporation is created as an agency or
instrumentality of the state for political or public
purpose connected with the administration of
government, then it is a public corporation.
If not, the corporation is private although the
government is a stockholder or the owner of all
its capital stock.
31. Distinctions
between
public and
private
corporations
1. A public corporation is an agency or
instrumentality of the state; while a private
corporation is an agency or instrumentality of
private persons.
2. A public corporation is organized for political
or public purpose; while a private corporation is
organized for private purpose, benefit, aim and
end.
3. The officers of public corporations are
appointed by the state and are subject to
removal by the state; while the officers of private
corporations are elected by the stockholders and
are subject to removal by the stockholders.
32. BOARD OF DIRECTORS/TRUSTEES/OFFICERS
METHODS OF VOTING - Election of Directors (Sec. 23 RCCP)
Stockholders have the option to adopt any of the following:
1) Straight Voting – every stockholder may vote such number of shares as many persons as
there are directors= to be elected.
2) Cumulative Voting for One Candidate – a stockholder is allowed to concentrate his votes
and give one candidate as many votes as the number of directors to be elected multiplied by
the number of his shares shall equal.
3) Cumulative Voting by Distribution – a stockholder may cumulate his shares by
multiplying also the number of his shares by the number of directors to be elected and
distribute the same among as many candidates as he shall see fit.
33. Notes:
Cumulative voting is not available in non-stock corporations.
When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members may also vote through remote
communication or in absentia:
That the right to vote through such modes may be exercised in
corporations vested with public interest, notwithstanding the absence
of a provision in the by-laws of such corporations.
34. REMOVAL AND VACANCIES IN THE BOARD
1) It must take place either at a
regular meeting or special
meeting of the stockholders or
members called for the purpose;
2) There must be previous notice
to the stockholders or members
of the intention to remove;
3) The removal must be by vote
of the stockholders representing
2/3 of Outstanding Capital Stock
or 2/3 of members.
4) Removal without cause may
not be used to deprive minority
stockholders or members of the
right of representation to which
they may be entitled under
Section 23 of RCCP.
5) The removal of a disqualified
director shall be without
prejudice to other sanctions that
the Commission may impose on
the board of directors or trustees
who, with knowledge of the
disqualification, failed to remove
such director or trustee.
35. Filling-Up of vacancies in the Board
1. By stockholders or members - If vacancy results because of:
(i) removal; (ii) expiration of term; (iii) the ground is other than
removal or expiration of term (e.g., death, resignation,
abandonment) where the remaining directors do not constitute a
quorum; (iv) increase in the number of directors.
2. By the board - if remaining directors constitute a quorum – on
cases not reserved to stockholders or members.
36. Liability of Directors, Trustees or Officers
(Sec. 30 RCCP)
Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
38. Disloyalty of a Director
(Sec. 33 RCCP)
Where a director, by virtue of such office,
acquires a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation:
1. The director must account for and refund to
the latter all such profits, unless the act has been
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock.
2. Applicable even when the director risked one’s
own funds in the venture.
39. KINDS OF POWERS OF
CORPORATION
1) Express Powers – those expressly
authorized by the Corporation Code and other
laws, and its Articles of Incorporation or
Charter.
2) Implied Powers – those can be inferred
from or necessary for the exercise of the
express powers.
3) Incidental Powers – those that are
incidental to the existence of the corporation.
Note: There are express powers that are
incidental powers like the power to acquire
properties.
40. GENERAL POWERS (Sec. 35, RCCP)
a) sue and be sued in its corporate name;
b) succession
c) have perpetual existences unless the certificate of incorporation
provides otherwise;
d) adopt and use a corporate seal;
e) amend Articles of Incorporation;
f) adopt, amend or repeal by-laws;
g) for stock corporations – issue stocks to subscribers and to sell treasury
stocks; for non-stock corporations – admit members;
41. GENERAL POWERS (Sec. 35, RCCP)
h) purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise, deal with real and personal property, pursuant to its lawful business;
i) enter into partnership, joint-venture, merger or consolidation;
j) to make reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civil or similar purposed, provided That no foreign corporation shall give
donations in aid of any political party or candidate or for purposes of partisan political
activity;
k) to establish pension, retirement and other plans for the benefit of directors,
trustees, officers and employees; and
l) to exercise other powers essential or necessary to carry out its purposes as stated in
Art. of Incorporation.
42. SPECIFIC POWERS (Sec. 36 to Sec. 43 RCCP)
a) Extend or
shorten corporate
term
b)
Increase/decrease
Corporate Stock
c) Declare dividends
d) Incur or create
Bonded
Indebtedness
e) Deny pre-emptive
right
f) Sell or other
disposition of
corporate assets
g) Purchase or
acquire own shares
h) Invest in another
corporation,
business or any
other purpose
i) Declare dividends
j) Enter into
management
contract
k) Amend the
articles of
incorporation
