Law on Corporation

Sec. 1. Title of the Code. – This Code shall be known as “The Corporation Coder of the Philippines”. 

Sec. 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.

Definition

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.

Attributes

1. It is an artificial being.

2. It is created by operation of law.

3. It has the right of succession.

4. It has only the powers, attributes and properties expressly authorized by law or incident to its existence.

Similarities between a partnership and a corporation

1. Juridical personality separate and distinct from the individuals composing it.

2. Act only through its agents.

3. Composed of an aggregate of individuals.

4. Distribute profits to those who contribute to capital.

5. May be organized only when there is a law authorizing it.

6. Subject to income tax.

Distinctions between a partnership and a corporation

Advantages of a corporate form of business organizations

1. The capacity to hold property, to contract, to sue and be sued as a legal unit or distinct entity.

2. Exemption of shareholders from individual liability.

3. Continuity of existence in spite of death or changes of members.

4. Transferability of shares.

5. Centralized management under a board of directors.

6. Standardized methods of organization, management and finance for the protection of shareholders and creditors under statutory regulations.

Disadvantages of a corporate form of business organizations

1. The limited liability of the stockholders serves to limit the credit available to the corporation.

2. The transferability of shares permits the uniting of incompatible and conflicting interests in one enterprise.

3. The minority stockholders are usually subservient to the wishes of the majority.

4. In big corporations, the stockholders’ voting rights have become largely theoretical because of widespread ownership, lukewarmness and disinterest in management, inertia, and inaccessible meeting places.

5. In large corporations, management and control has been separated from ownership.

6. By and large corporations are subject to governmental restrictions, controls, and report requirements not imposed on other forms of business organizations.

7. Corporate sphere of activity is limited in the transaction of its business to the state of the organization.

8. The corporate form involves “double taxation” on corporation income.

Sec. 3. Classes of corporations. – Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations 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 shares held are stock corporations. All other corporations are non-stock corporations.

Other kinds of corporations

1. Quasi-corporations – from the word “quasi”, meaning “as if”, are entities that are not absolutely corporations but are considered as if they were. Eg. Public boards created by law

2. Quasi-public – are entities engaged in rendering basic services of such public importance as to entitle them to certain privileges like eminent domain or use of public property. Eg. Electric, gas, water and telephone companies.

3. Government-owned or controlled – are entities organized by the government or corporations of which the government is a majority stockholder. Eg. Philippine Air Lines

4. Domestic – one incorporated under Philippine laws.

5. Foreign – one formed, organized, or existing under any laws other than those of the Philippines.

6. Corporation aggregate – one composed of more than one member or corporator.

7. Corporation sole – consists of one member or corporator and his successors.

8. Religious corporations, sole or aggregate – organized, either as sole or aggregate, to administer properties of the church.

9. Ecclesiastical – organized for religious purposes.

10. Lay – organized for a purpose other than religious

11. Eleemosynary – organized for charitable purposes.

12. Civil – are those than ecclesiastical and eleemosynary, whether public or private.

13. Close – one wherein all the outstanding stock is owned by the persons who are active in management and conduct of the business.

14. Open – one in which all the members or corporations have a vote in the election of the directors and other officers.

15. Multi-national – one having been created or organized in one state conducts business or activities across national boundaries and but subject to the legal sanctions of the countries in which they operate.

16. Non-profit – organized without contemplation of gains, profits or dividends to their members on invested capital.

17. De Jure – one created in strict or substantial conformity with the statutory requirements for incorporation and whose right to exist as a corporation cannot be successfully attacked even in a direct proceeding for that purpose by the State.

Sec. 4. Corporations created by special laws or charters. – Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.

Sec. 5. Corporators and incorporators, stockholders, and members. – Corporators are those who compose a corporation, whether as stockholders or members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

Corporators in a stock corporation are called stock-holders or shareholders. Corporators in a non-stock corporation are called members.

Components of a Corporation

1. Corporators – are those who composed a corporation, whether as stockholders of members. The term includes incorporators, stockholders or members.

2. Incorporators – are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

3. Stockholders or shareholders – are those corporators in a stock corporation.

4. Members – are those corporators in a non-stock corporation.

5. Promoters – is a self-constituted organizer who finds an enterprise or venture and helps to attract investors, form a corporation and launch it in business, all with a view to promotion profits.

Promotion – is the act of procuring the initial finances and the making of all preparations necessary to launch a corporation.

Activities of a promoter

1. The discovery and investigation of a promising business opportunity.

2. The formulation of business and financial plans.

3. Assembling the enterprise by negotiations and obtaining some control over the subject matter by option or contracts made on behalf of the proposed corporation or on his own credit.

4. The making of arrangements for financing the enterprise and the floatation of securities.

5. Arrange tactful and painless methods for getting his own reward for the task of promotion out of the prospective investors and for reimbursement for his expenses, contracts, and services without frightening away those who are expected to provide the funds.

General rule: A corporation is not bound by any agreement made by a promoter.

Exception to the rule: Unless and until the corporation approves the agreement.

Sec. 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation.

2. Adoption and amendment of by-laws.

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property.

4. Incurring, creating or increasing bonded indebtedness.

5. Increase or decrease of capital stock.

6. Merger or consolidation of the corporation with another corporation or other corporations.

7. Investment of corporate funds in another corporation or business in accordance with this Code.

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Definition

A “stock” or share of stock is one of the units into which the capital stock has been divided. It represents the interest or right that the holder of the stock or stockholder has in the corporation.

A stock certificate certifies that one is a holder or owner of a certain number of shares of stock in the corporation. It is a mere documentary evidence of the holder’s ownership of shares and a convenient instrument for the transfer of title.

Classes or series of shares of stock subject to restrictions

1. Shares shall not be deprived of voting rights except preferred or redeemable shares but non-voting shares must still be entitles to vote on matters specified in the last paragraph of Section 6 like matters relating to amendment of the articles of incorporation and dissolution of the corporation.

2. Where non-voting shares are provided for there must always be a class or series of shares with complete voting rights.

3. Banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

4. Preferred shares of stock which may be given preference in the distribution of assets in case of liquidation and distribution of dividends or other preferences may be issued only with stated par value.

5. The terms and conditions of preferred shares or series thereof may be fixed by the board of directors only when authorized by the articles of incorporation the effectivity thereof shall be reckoned from the filing of certificate with the SEC.

6. Shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share.

7. Unless otherwise provided by law the rights, privileges or restrictions on classes or series of shares must be stated in the articles of incorporation and in the stock certificates.

Classes or series of shares

1. Voting and Non-Voting Shares;

General rule: Every member of a non-stock corporation and every legal owner of shares in a stock corporation, has a right to be present and vote at all corporate meetings.

Exception to the rule: Unless there is a stipulation in contrary.

2. Par Value and No-Par Value Shares

Par value is the given fixed or definite value of a share in the articles of incorporation.

3. Common and Preferred Shares. Preferred shares of stock may be: (a) preferred as to assets; (b) preferred as to dividends. Preferred as to dividends may either be cumulative or non-cumulative, or participating or non-participating

4. Promotion Shares – are such stocks issued to those who may originally own the mining ground or valuable rights connected therewith, in consideration of their deeding the same to the mining company when the company is incorporated, or it may mean such stock as is issued to promoters.

5. Shares of Escrow – are shares subject to an escrow agreement, that is, an agreement under which the shares are deposited by the grantor or his agent with a third person, to be delivered by the depositary to the vendee or subscriber only upon the happening of certain conditions.

6. Founder’s Shares;

7. Redeemable “Callable” Shares;

8. Treasury Shares;

9. Other shares classified to comply with constitutional or legal requirements.

Instances when non-voting shares may vote

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation of business in accordance with the Corporation Code; and

8. Dissolution of the corporation.

Sec. 7. Founders’ shares. – Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission.

Definition

Founders’ shares, generally common stock, are given to the founders or promoters of a corporation in payment of money expended or services rendered in the promotion of it.

Sec. 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares.

Definition

Redeemable (“Callable”) shares of stock which are usually preferred are frequently issued subject to redemption at the option of either the corporation, the stockholder, or both, at a definite price representing premium above the amount originally paid.

Sinking fund refers to a fund set-up by the corporation where cash is gradually set aside in order to accumulate the amount necessary to meet the redemption price of redeemable shares of specified dates in the future.

Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n)

Definition

Treasury shares are owned by the corporation having been reacquired by the issuing corporation by “purchase, redemption, donation or through some other lawful means.” It has no voting rights or rights as to dividends or distributions.