REVISED CORPORATION CODE A. Corporation definition A corporation is an artificial being1 created by operation of law2, having the right of succession3 and the powers, attributes, and properties expressly authorized by law or incident to its existence.4 Attributes 1. It is an artificial being. - Having a personality separate and distinct from the stockholders or members - Corporation commences upon the issuance of its certificate of incorporation. Exception: Doctrine of Piercing the Veil of corporate entity or corporate fiction - - A doctrine that can disregard the separate personality of a corporation due to the following actions: o Defeat public convenience o Justify a wrong o Protect fraud, or o Defend a crime o Alter ego cases ▪ Where a corporation is merely a farce If disregarded, the corporation will be treated as an association of persons and the stockholders or members will be considered as the corporation. 2. It is created by operation of law. - A corporation does not come into existence by the mere agreement of the parties. - Persons desiring to form a private corporation must comply with the requirements of the law governing its creation. 3. It has the right of succession. - A corporation continues to exist for the period for which it has been formed regardless of changes in the ownership of its stocks or in its membership. - Its existence is not affected by the death, insolvency, or incapacity of the individual stockholders or members. 4. It has the powers, attributes and properties expressly authorized by law or incident to its existence. Doctrine of limited capacity - A corporation can exercise only the powers expressly conferred upon it by law and its articles of incorporation, those implied from such powers expressly granted, and those that are incident to its existence. - Any act exercised outside of such powers is unauthorized and considered ultra vires. Similarities between partnership a corporation and a 1. Both have a separate juridical personality. 2. Both are artificial persons. (Having no bodily existence, and can only act through agents) 3. Both are composed of a group of persons with the exception of a corporation sole. 4. A partnership is taxed as a corporation, with the exception of a general professional partnership. Distinctions partnership between a corporation and a Point of Corporation Partnership Comparison Manner of Created by Created by creation operation of mere law agreement of the parties Number of Formed by 5 May be formed organizers or more by 2 or more persons but persons not exceeding 15, except a corporation sole Right of Has the right No right of succession of succession succession Powers Can only May exercise exercise the any power powers provided it is expressly authorized by authorized by the partners law or and is not incident to its contrary to law, existence morals, good customs, public order or policy Management Acts through Acts through all its board of the general directors partners each one of whom is Liability members debts of Stockholders for or members are not liable for the obligations of the corporation Commencement Commences of existence on the date of the issuance of its certificate of incorporation Transferability of interest Stockholders can transfer their shares to another person without the consent of the other stockholders Term of May exist for a existence period not exceeding 50 years Dissolution Cannot be dissolved without the consent of the State Firm name A corporation may adopt a firm name provided it is not identical or deceptively similar to any registered firm name or contrary to existing laws. Governing laws Corporation Code considered an agent of the partnership unless otherwise agreed General partners are liable with their separate assets for partnership debts Commences upon the execution of partnership contract, unless a different date is set by the partners Partners cannot transfer their interest to a third person without the consent of the other partners May be formed for an indefinite period May be dissolved by the partners A limited partnership is required to add the word ‘Ltd.’ to its name. B. Classification of corporations 1. As to whether shares of stock are issued or not Stock Non-stock 2. As to the state or country under whose laws it was created: Laws of Incorporation Domestic Foreign Incorporated under Philippine laws - Formed, organized and existing under any laws other than those of the Philippines - Whose laws allow Filipino citizens and corporations to do business in its own country 3. As to number of persons composing them Corporation aggregate - Composed of more than one corporator Corporation sole - Composed of only one person, like a bishop or rabbi 4. As to whether its purpose is public or private Public Private Civil Code - Has capital divided into shares - Authorized to distribute dividends or allotments of the surplus profits on the basis of shares held - No part of the income of which is distributable as dividends to its members, trustees or officers: Provided, that any profit which a nonstock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized - Organized for the government of a portion of the state which have for their purpose the general good and welfare, like provinces, cities, municipalities and barangays - Formed for a private purpose or end, benefit, or aim, like Jollibee Foods Corporation This classification includes the following: 1. Government-owned or controlled - Created under a special law other than those for the government of a portion of the State, such as the Land Bank, GSIS, etc. - Formed under the Corporation Code where the government owns at least a majority of its outstanding voting capital stock - May be performing governmental or proprietary function 2. Quasi-public - Organized for profit which are granted a franchise by the State to perform public service, such as Meralco Some defects that will result in the creation of a de facto corporation are: 1. When majority of the incorporators are not residents of the Philippines 2. When the name of the corporation is similar to that of an existing corporation or one that is protected by law 3. When the acknowledgement is defective 3. As to whether its purpose is religious or not However, the following will preclude even the existence of a de facto corporation: Ecclesiastical or Formed for a religious purpose religious Lay Formed for a purpose other than ecclesiastical or religious 4. As to whether its purpose is charitable or not Eleemosynary Organized for public charity Civil Organized for business or profit 5. As to their legal right to corporate existence De jure De facto - Created in strict compliance with all the legal requirements - Whose right to exist as a corporation cannot be successfully attacked in a direct proceeding for that purpose by the State - Defectively created but there is an exercise of corporate rights and franchise resulting from an attempt in good faith to incorporate on the part of its members - Has all the powers of a de jure corporation but its due existence can be attacked directly in a quo warranto proceeding For a de facto corporation to exist, the following conditions must be present: 1. There must be a valid law under which it is incorporated. 2. There must be an attempt in good faith to incorporate. 3. There must be an actual exercise of corporate powers. 4. A certificate of incorporation is issued despite a defect in its incorporation. 1. Absence of articles of incorporation 2. Failure to file the articles of incorporation 6. As to their relation to another corporation or other corporations: Control Parent or holding Subsidiary - Owns the share of another corporation - Having power, directly or indirectly, over the latter including the election of the directors thereof - Whose shares of stock are owned by another corporation 7. As to whether its shares may be held by the public or not Close Open Whose shares are limited to a few and restricted as to their transfer, and not listed in any stock exchange Whose shares are open to the public such as those whose shares are listed in the stock exchanges 8. Other classifications Corporation prescription Corporation estoppel by - Has exercised corporate powers for such a length of time without interference by the State - Which by fiction of law, is given the status of a corporation by Which is in reality not a corporation but is considered as one with respect to those who are precluded by their admission or conduct from denying its existence Liability of persons assuming to act as a corporation and those dealing with it (Sec. 21) 1. All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred arising as a result thereof. 2. Any person who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. C. Nationality of corporations Foreign Corporation definition (Sec. 140) - - one formed, organized or existing under laws other than those of the Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own country or State shall have the right to transact business in the Philippines after obtaining a license for that purpose in accordance with this Code and a certificate of authority from the appropriate government agency. Tests to determine nationality of a corporation Incorporation test - Primary test under Philippine jurisdiction - Test where a corporation is considered a national of the country under whose laws it was incorporated Control test - Test used to determine the (Liberal rule) eligibility of a corporation, which has foreign equity participation in its ownership structure, to engage in nationalized or partly nationalized activities Wholly/Partly nationalized industries - No foreign equity – mass media by mandate of the 1987 constitution - Up to 25% foreign equity – private recruitment, whether for local or overseas employment by mandate of PD No. 442 - Up to 40% foreign equity – ownership of private lands by mandate of the Constitution - If a corporation is at least 60% Filipino-owned, then all shares (100%) are recorded as Filipino (domestic) shares. Grandfather rule - If a corporation is less than (Strict rule) 60% Filipino-owned, then the corresponding percentage belonging to Filipino shall be the only shares to be recorded as Filipino shares - Applied to corporations where the 60-40 Filipino-foreign ownership is in doubt D. Corporate juridical personality Doctrine of separate juridical personality Can a General rule: NO corporation be Exception: a partner in a a. The authority to enter into a partnership? partnership relation is expressly conferred by the charter of (or) the articles of incorporation of the corporation and the nature to be undertaken by the partnership is in line with the business of the corporation. b. If it is a foreign corporation, it must obtain a license to transact business in the Philippines. Is a corporation YES, whenever a tortuous act is liable for committed by an officer or agent TORTS? under the express direction or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing body. Is a corporation General rule: NO liable for - Since a corporation is a mere CRIMES? legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice, in such case the responsible officers would be criminally liable. Can corporation RECOVER DAMAGES? Exception: - If the penalty of the crime is only fine or forfeiture of license or franchise a General Rule: YES Exception: Moral Damages Excp. to the Excp.: - The corporation may recover moral damages because, under item 7 of Article 2219, it expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation. The said provision does not specify if the injured party is a natural or juridical person, hence, the application. - When the corporation has a reputation that is debased, resulting in its humiliation in the business realm. Doctrine of Piercing the Veil of corporate entity or corporate fiction - - Refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts. A doctrine that disregards the separate personality of a corporation Grounds for application of doctrine Defeat of convenience public When the corporate fiction is used as a vehicle for the evasion of existing obligation Fraud cases When the corporate entity is used to justify a wrong, protect fraud, or defend a crime Alter ego cases When corporation is merely a farce, alter ego, business conduit, instrumentality, agency or adjunct of a person or another entity. Equity cases When piercing the corporate veil/ fiction is necessary to achieve justice or equity. Test in determining applicability Control or Where one corporation is so Instrumentality organized and controlled and Rule its affairs are conducted so that in fact, a mere instrumentality or adjunct of the other (principal corporation) - The fiction of corporate entity of the instrumentality may be disregarded. Fraud Test This requires that parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful - It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harm the creditor. “Totality of Circumstances Test” may be applied or considered. Harm or Causal This requires the plaintiff to Connection show that the defendant’s Test control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. - There must be a causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred or damage incurred by the plaintiff. - “Totality of Circumstances Test” may be applied or considered.
