The Corporation Code of the Philippines (Final)-1

8/20/2019 The Corporation Code of the Philippines (Final)-1

1/142

1Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

THE CORPORATION CODE OF THE PHILIPPINES

CHAPTER 1: INTRODUCTION

KINDS OF BUSINESS ORGANIZATION

1. SOLE PROPRIETORSHIP – one conducted for profit by a lone orsingle individual who owns all assets, personally owes and answers allthe liabilities or suffers all the losses and enjoys all the profits to theexclusion of others.

ADVANTAGES DISADVANTAGES

Eliminates the bureaucratic processcommon in corporations where theboard of directors must sit as abody to have a valid transaction.The proprietor makes his owndecisions and can act without delay.

Unlimited personal liability of theproprietor

Proprietor owns all the profitswithout having to share the same

Capital is limited by the proprietor’spersonal resources

2. PARTNERSHIP – a contract where two or more persons bindthemselves to contribute money, property or industry to a common fundwith the intention of dividing the profits among themselves (Art. 1767,Civil Code).

3. JOINT VENTURE – a one-time grouping of two or more persons,natural or juridical, in a specified undertaking.

PARTNERSHIP JOINT VENTUREHas a personality separate anddistinct from the partners

Does not acquire a separate anddistinct personality from theventurers

Has for its object a general businessof particular kind, although theremay be partnership for a singletransaction

Object is an undertaking of aparticular or single transaction

Corporations, generally are notallowed to enter into partnerships*

Corporations may enter jointventures

* A corporation is generally not allowed to enter into partnerships because (1)the identity of the corporation is lost or merged with that of another; and (2)the discretion of the officials is placed in other hands other than thosepermitted by the law in its creation.

EXCEPTION to the rule is when the following conditions are met:a. The articles of incorporation expressly authorized the corporation to enternto contracts of partnership;b. The agreement or articles of partnership must provide that all the partnerswill manage the partnership; andc. The articles of partnership must stipulate that all the partners are and shallbe jointly and severally liable for all obligations of the partnership

4.

CORPORATION – an artificial being created by operation of law,having the right of succession and the powers, attributes and propertiesexpressly authorized by law or incident to its existence (Sec. 1,Corporation Code [CC])

CHAPTER 2: DEFINITION AND ATTRIBUTES

A.

DEFINITION

Sec. 2. Corporation Defined – A corporation is an artificial being createdby operation of law, having the right of succession and the powers, attributesand properties expressly authorized by law or incident to its existence.

B. ATTRIBUTES (CARP)

1.

CREATED BY OPERATION OF LAW – the formal requirement of theState’s consent through compliance with the requirements imposed by

law is necessary for its creation such that the mere agreement ofpersons composing it or intending to organize it does not warrantgrant of its independent existence as a juridical entity;

2. ARTIFICIAL BEING – it has a juridical personality, separate distinct from the persons composing it.

3. RIGHT OF SUCCESSION – unlike in a partnership, the deincapacity or civil interdiction of one or more of its stockholder doesresult in its dissolution;

4.

POWERS, ATTRIBUTES AND PROPERTIES EXPRES

AUTDHORIZED BY LAW – it can exercise only such powers andhold only such properties as are granted to it by the enabling statunlike natural persons who can do anything as they please.

LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept1994]) – Private respondent Carloto, incumbent President-Manager of prrespondent Rural Bank of Labason, alleged that he was instructerd to gManila to follow up on the Bank’s plan of payment of rediscounobligations with Central Bank’s main office, where he purchased a roundticket and phone his sister to send him P1,000 for his pocket money wLBC failed to deliver and eventually Carloto was not able to submitrediscounting documents and the Bank was made to pay the Central P32,000 s penalty interest and alleged that he suffered embarrassmenthumiliation. Respondent Rural Bank was later on joined as one of the plaand prayed for the reimbursement of P32,000. Carloto and the Bank awarded moral and exemplary damages of P10,000 and P5,000, respectiv

ISSUE: WON Rural Bank of Labason, Inc. being an artificial person shouawarded moral damages?

HELD: No. Moral damages are granted in recompense for physical suffemental anguish, fright, serious anxiety, besmirched reputation, woufeelings, oral shock, social humiliation and social injury. A corporation, ban artificial person and having existence only in legal contemplation, hafeelings, no emotions, no senses; therefore, it cannot experience physuffering and mental anguish. Mental suffering can be experienced onlone having a nervous system and it flows from real ills, sorrows and griof life – all of which cannot be suffered by respondent bank as an artiperson.

BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of

slander and other forms of defamation, a corporation is entitled to mdamages.

C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS

1.

CAPACITY TO ACT AS A SINGLE UNIT – any number of permay unite in a single enterprise without using their names, witdifficulty or inconvenience, and with the valuable right to contracsue and be sued, and to hold or convey property, in the corponame;

2. LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability stockholders are not personally liable for the debts of the corporatio

3.

CONTINUITY OF EXISTENCE – rights and obligations ocorporation are not affected by the death, incapacity or replacemethe individual members;

4. FEASIBILITY OF GREATER UNDERTAKING – it enables

individuals to cooperate in order to furnish the large amounts of canecessary to finance large scale enterprises; 5. TRANSFERABILITY OF SHARES – unless reasonably restri

shares of stocks, being personal properties, can be transferred byowner without the consent of the other stockholders;

6. CENTRALIZED MANAGEMENT – the vesting of powersmanagement and appointing officers and agents in board of diregives to a corporation the benefit of a centralized administration wis a practical business necessity in any large organization; and

7.

STANDARDIZED METHOD OF ORGANIZATION, MANAGEM AND FINANCE – which are provided under a well-drawn gen


2/142


corporation law. The corporation statutes enter into the charter contractand these are constantly being interpreted by courts. An establishedsystem of management and protection of shareholders and creditors’rights has thus been and are being evolved.

D. DISADVANTAGES 1. To have a valid and binding corporate act, formal proceedings, such as

board meetings are required; 2. The business transactions of a corporation is limited to the State of its

incorporation and may not act as such corporation in other jurisdictionunless it has obtained a license or authority from the foreign state;

3. The shareholders’ limited liability tends to limit the credit available to thecorporation as a separate legal entity;

4. Transferability of shares may result to uniting incompatible and

conflicting interests; 5. The minority shareholders have practically no say in the conduct of

corporate affairs; 6.

In large scale enterprises, stockholders’ voting rights may becomemerely fictitious and theoretical because of disinterest in management,wide-scale ownership and inaccessible place of meeting;

7. “Double taxation” may be imposed on corporate income; and 8. Corporations are subject to governmental regulations, supervision and

control including submission of reportorial requirements not otherwiseimposed in other business form.

E. CORPORATION VS. PARTNERSHIP

CORPORATION PARTNERSHIP

Created by operation of law (Sec.2&4, Corp Code)

Created by mere agreement of theparties (Art. 1767, Civil Code)

There must be at least 5ncorporations (Sec. 10), exceptcorporation sole which isncorporated by one single individual(Sec. 110)

Maybe formed by two or morenatural persons (Art. 1767)

Can exercise only such powers andfunctions expressly granted to it byaw and those that are necessary orncidental to its existence (Sec. 2,45)

Can do anything by agreement ofthe parties provided only that it isnot contrary to law, morals, goodcustoms or public order. (Art. 1306)

Unless validly delegated expressly ormpliedly, a corporation musttransact its business through theboard of directors (Sec. 23)

In the absence of an agreement tothe contrary, any one of the partiesin the partnership form of businessmay validly bind the partnership (Art.1308, par. 1)

Right of succession, it continues toexist despite the death, withdrawal,ncapacity or civil interdiction of thestockholders or members. (Sec. 3)

Based on mutual rust and the death,incapacity, insolvency, civilinterdiction or mere withdrawal ofone of the parties would result in itsdissolution (Art. 1830, par. 6 & 7)

Transferability of shares – withoutthe consent of the otherstockholders. (Sec. 63)

A partner cannot transfer his rightsor interests in the partnership so asto make the transferee a partnerwithout the consent of the otherpartners (Art. 1830, par. 6 & 7)

Limited liability – only to the extentof their subscription or theirpromised contribution.

All partners, including industrial ones(except a limited partner) are liablepro rata with all their property andafter all the partnership property hasbeen exhausted, for all partnershipliability (Art. 1813)

The term of corporate existence isimited only to fifty years and unlessextended by amendment, it shall beconsidered non-existent except forthe purpose of liquidation.

May exist for an indefinite periodsubject only to the causes ofdissolution provided for by the law ofits creation (Art. 1824)

Cannot be dissolved by mereagreement of the stockholders. Theconsent of the State is necessary fort to cease as a body corporate.

Partners may dissolve theirpartnership at will or at any timethey deem it fit (Art. 1830, par. 1(b)and par. 2)

F.

GOVERNMENT POWERS IN RELATION TO CORPORATIONS

The Corporation Code places all corporations registered under its provisiobe under the control and supervision of the Securities and ExchaCommission (Sec. 19 and 144). Its powers and functions are clearly spout in PD 902-A, as amended by RA No. 8799, otherwise known asSecurities Regulation Code.

CHAPTER 3: CLASSIFICATION OF CORPORATION

A. CLASSES OF CORPORATIONS UNDER THE CORPORATION CO

Sec. 3. Classes of corporations. - Corporations formed or organized u

this Code may be stock or non-stock corporations. Corporations which capital stock divided into shares and are authorized to distribute toholders of such shares dividends or allotments of the surplus profits onbasis of the shares held are stock corporations. All other corporationsnon-stock corporations.

REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:1. They have a capital stock dividend into shares; and 2. That they are authorized to distribute dividends or allotments as sur

profits to its stockholders on the basis of the shares held by each ofthem.

SIGNIFICANT DISTINCTION: Although a non-stock corporation existspurposes other than for profit, it does not follow that they cannot makeprofits as an incident to their operations. But a significant distinction is thprofits obtained by a non-stock corporation cannot be distributed asdividends but are used merely for the furtherance of their purpose orpurposes.

COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INCCEBU (5 SCRA 312; May 31, 1968) – Herein respondent Club operatclubhouse, a bowling alley, a golf course and a bar restaurant where it wines, liquors, soft-drinks, meals and short orders to its members and guests. The bar and restaurant was a necessary incident to the operatiothe Club and its golf course is operated mainly with funds derived membership fees and dues. Whatever profits it had were used to defraoverhead expenses and to improve its golf course. In 1951, as a resucapital surplus arising from the revaluation of its real properties, the declared stock dividends. In 1952, the BIR assessed percentage taxes ongross receipt of the Club’s bar and restaurant pursuant to Sec. 182 of theCode: “unless otherwise provided, every person engaging in a busines

which the percentage tax is imposed shall pay in full a fixed annual taP10 for each calendar year or a fraction thereof” and under Sec. “keepers of restaurant, refreshment parlors and other eating places shala tax of 3% of their gross receipts”

ISSUE: WON the Club is liable for the assessment?

HELD: No. It has been held that the liability for fixed and percentage tdoes not ipso facto attach by mere reason of the operation of a barrestaurant. For the liability to attach, the operator thereof must be engain the business as a bar keeper and restauranteur. Business , in the ordsense, is restricted to activities or affairs where profit is the purposlivelihood is the motive, and the term business when used witqualification, should be construed in its plain and ordinary meanrestricted to activities for profit or livelihood.

The fact that the Club derived profits from the operation of its bar restaurant does not necessarily convert it into a profit making enterprise.bar and restaurant are necessary adjunct of the Club to foster its purand the profits derived therefrom are necessarily incidental to the primobject of developing and cultivating sports for the healthful recreationentertainment of the stockholders and members. That a club makes pdoes not make it a profit-making club.

ISSUE2: Is the Club a stock corporation?

HELD: No. The fact that the capital of the Club is divided into shares d


3/142


not detract from the finding of the trial court that it is not engaged in thebusiness of operator of bar and restaurant. What is determinative of whetheror not the Club is engaged in such business is its object or purpose as statedn its articles and by-laws.

Moreover, for a stock corporation to exists, two requisites must becomplied with: (1) a capital stock divided into shares; and (2) anauthority to distribute to the holders of such shares, dividends orallotments of surplus profits on the basis of the shares held. In thecase at bar, nowhere it its AOI or by-laws could be found an authority for thedistribution of its dividends or surplus profits. Strictly speaking, it cannottherefore, be considered as stock corporation, within the contemplation ofthe Corporation Code.

B.

CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER

Sec. 4. Corporations created by special laws or charters . -Corporations created by special laws or charters shall be governed primarilyby the provisions of the special law or charter creating them or applicable tothem, supplemented by the provisions of this Code, insofar as they areapplicable.

Among these corporations created by special law are the Philippine NationalOil Company, the National Development Company, the Philippine Export andForeign Loan Guarantee Corporation and the GSIS. All these are governmentowned or controlled, operating under a special law or charter such thatregistration with the SEC is not required for them to acquire legal andjuridical personality. They owe their own existence as such not by virtue oftheir compliance with the requirements of registration under the Corporation

Code but by virtue of the law specially creating them.

They are primarily governed by the special law creating them. But unlessotherwise provided by such law, they are not immune from suits, it is thussettled that when the government engages in a particular business throughthe instrumentality of a corporation, it divests itself pro hoc vice of itssovereign character so as to subject itself to the rules governing privatecorporations (PNB vs. Pabolar 82 SCRA 595)

Officers and employees of GOCCs created by special laws are governed bythe law of their creation, usually the Civil Service Law. Their subsidiaries,organized under the provisions of the Corporation Code are governed by theLAbor Code. The test in determining whether they are governed by the CivilService Law is the manner of their creation.

PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) – Danilo Mercado,an employee of herein petitioner was dismissed on the ground of dishonestyand violation of company rules and regulations. He filed an illegal dismissalcomplaint before herein respondent NLRC who ruled on his favour, despitethe motion to dismiss of petitioner that the Civil Service Commission hasjurisdiction over the case.

ISSUE: WON NLRC has jurisdiction over the case?

HELD: Yes. Employees of GOCCs, whether created by special law or formedas subsidiaries under the Corporation Law are governed by the Civil ServiceLaw and not the Labor Code, under the 1973 Constitution has beensupplanted by the present Constitution.

Thus, under the present state of the law, the test in determiningwhether a GOCC is subject to the Civil Service Law is the manner ofits creation, such that government corporations created by specialcharter are subject to its provisions while those incorporated underthe General Corporation Law are not within its coverage.

PNOC has its special charter, but its subsidiary, PNOC-EDC, having beenncorporated under the General Corporation Law was held to be a GOCCwhose employees are subject to the provisions of the Labor Code.

C.

OTHER CLASSES OF CORPORATIONS

1. PUBLIC AND PRIVATE CORPORATIONS

PUBLIC CORPORATION: those formed or organized for the governmea portion of the State or any of its political subdivisions and which havtheir purpose the general good and welfare.

It is to be observed, however, that the mere fact that the undertakinwhich a corporation is engaged in is one which the State itself might einto as part of its public work does not make it a public one. Nor is thethat the State has granted property or special privileges to a corporarender it public. Likewise, the fact that some or all of the stocks incorporation are held by the government does not make it a pcorporation.

The TRUE TEST to determine the nature of a corporation is found inrelation of the body to the State. Strictly speaking, a public corporatione that is created, formed or organized for political or governmepurposes with political powers to be exercised for purposes connected the public good in the administration of the civil government.

The GOCCs are regarded as private corporations despite commisconceptions.

NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL REVE(146 Phil. 583) – Herein plaintiff brought an action for the purposrecovering a sum of money allegedly paid by it under protest to the hedefendant, a specific tax on some tons of coal. It claimed exemption taxes under Sec. 1469 of the Administrative Code which provides that “ocoal and coke shall be collected per metric ton, fifty centavos”. Of the 30shares issued by the corporation, the Philippine government is the own29,809 or substantially all of the shares of the company.

ISSUE: WON the plaintiff corporation is a public corporation?

HELD: No. The plaintiff is a private corporation. The mere fact thatgovernment happens to be a majority stockholder does not maka public corporation. As a private corporation, it has no greater rigpowers and privileges than any other corporation which might be organfor the same purpose under the Corporation Law, and certainly, it wasthe intention of the Legislature to give it a preference or right or privover other legitimate private corporation in the mining of coal.

PRIVATE CORPORATIONS: those formed for some private purpbenefit, aim or end. They are created for the immediate benefit advantage of the individuals or members composing it and their francmay be considered as privileges conferred by the State to be exercised

enjoyed by them in the form of the corporation. 2.

ECCLESIASTICAL AND LAY CORPORATIONS

ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are compexclusively of ecclesiastics organized for spiritual purposes or administering properties held for religious ones. They are organized to sepublic worship or perpetuating the right of a particular religion.

LAY CORPORATIONS: are those organized for purposes other religion. They may further be classified as:a. ELEEMOSYNARY: created for charitable and benevolent purposes as those organized for the purpose of maintaining hospitals and housethe sick, aged or poor.b. CIVIL: organized not for the purpose of public charity but for the benpecuniary or otherwise, of its members.

3. AGGREGATE AND SOLE CORPORATIONS

AGGREGATE CORPORATIONS: are those composed of a numbeindividuals vested with corporate powers.

CORPORATION SOLE: those consist of one person or individual onlywho are made as bodies corporate and politic in order to give them slegal capacity and advantage which, as natural persons, they cannot hUnder the Code, a corporation sole may be formed by the chief archbisbishop, priest, minister, rabbi, or other presiding elder or relig


4/142


denominations, sects or churches.

4. CLOSE AND OPEN CORPORATION

CLOSE CORPORATIONS: are those whose shares of stock are held by aimited number of persons like the family or other closely-knit group. Thereare no public investors and the shareholders are active in the conduct of thecorporate affairs; recognized under Sec. 96 of the Corporation Code.

OPEN CORPORATIONS: are those formed to openly accept outsiders asstockholders or investors. They are authorized and empowered to list in thestock exchange and to offer their shares to the public such that stockownership can widely be dispersed.

5.

DOMESTIC AND FOREIGN CORPORATIONS

DOMESTIC CORPORATIONS: are those organized or created under or byvirtue of the Philippine laws, either by legislative act or under the provisionsof the General Corporation Law.

FOREIGN CORPORATIONS: are those formed, organized or existing underany laws other than those of the Philippines and whose laws allow Filipinocitizens and corporations to do business in its own country or state (Sec. 123,Corporation Code).

The second part of the definition is, however, somehow misplaced since anycorporation for that matter, which is not registered under Philippine laws is aforeign corporation. Such second part was inserted only for the purpose ofqualifying a foreign corporation to secure a license and to do business in thePhilippines.

6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND AFFILIATES

PARENT OR HOLDING COMPANY : a corporation who controls anothercorporation, or several other corporations known as its subsidiaries. Holdingcompanies have been defined as corporations that confine their activities toowning stock in, and supervising management of other companies. A holdingcompany usually owns a controlling interest (more than 50% of the votingstock) in the companies whose stocks it holds. As may be differentiated frominvestment companies which are active in the sale or purchase of shares ofstock or securities, parent or holding companies have a passive portfolio andhold the securities merely for purposes of control and management.

SUBSIDIARY CORPORATIONS: those which another corporation owns at

east a majority of the shares, and thus have control.A subsidiary has an independent and separate juridical personality, distinctfrom that of its parent company, hence any claim or suit against the latterdoes not bind the former or vice versa.

AFFILIATES: are those corporations which are subject to common controland operated as part of a system. They are sometimes called “sistercompanies” since the stockholdings of a corporation is not substantial enoughto control the former. Example: 15% of ABCD Company is held by A Corp,18% by B Corp, and another 15% by C Corp. – A, B and C are affiliates.

7.

QUASI-PUBLIC CORPORATIONS

These are private corporations which have accepted from the state the grantof a franchise or contract involving the performance of public duties. The

term is sometimes applied to corporations which are not strictly public in thesense of being organized for governmental purposes, but whose operationscontribute to the convenience or welfare of the general public, such astelegraph and telephone companies, water and electric companies. Moreappropriately, they are known as public service corporations.

8.

DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL

DE JURE CORPORATIONS: are juridical entities created or organized instrict or substantial compliance with statutory requirements of incorporationand whose rights to exist as such cannot be successfully attacked even by

the State in a quo warranto proceeding. They are, in effect, incorporatestrict adherence to the provisions of the law of their creation.

DE FACTO CORPORATIONS: are those which exist by the virtue oirregularity or defect in the organization or constitution or from somission to comply with the conditions precedent by which corporation

jure are created, but there was colorabe compliance with the requirementhe law under which they might be lawfully incorporated for the purposespowers assumed, and user of the rights claimed to be conferred by lawexistence can only be attacked by a direct action of quo warrproceedings.

CORPORATION BY ESTOPPEL: those which are so defectively formenot to be either de jure or de facto corporations but which are considere

corporations in relation only to those who cannot deny their corpoexistence due to their agreement, admission or conduct.

CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATI

1.

PROMOTIONAL STAGE

This is undertaken by the organizers or promoters who bring togetherpersons interested in the business venture. They enter into contract eithetheir own names or in the name of the proposed corporation.

LIABILITY OF PROMOTERS: GENERAL RULE: a promoter, although he may assume to act for andbehalf of a projected corporation and not for himself, will be held persoliable on contracts made by him for the benefit of a corporation he intendorganize. The personal liability continues even after the formation ofcorporation unless there is novation or other agreement to release him liability. As such, the promoter may do either of the following options:

a. He may make a continuing offer on behalf of the corporation, whicaccepted after incorporation, will become a contract. In this case,promoter does not assume any personal liability, whether or not corporation will accept the offer;b. He may make a contract at the time binding himself, with theunderstanding that if the corporation, once formed, accepts or adopts thecontract, he will be relieved of responsibility; orc. He may bind himself personally and assume responsibility of looking toproposed corporation, when formed, for reimbursement.

2.

PROCESS OF INCORPORATION

Includes the drafting of the Articles of Incorporation, preparation submission of additional and supporting documents, filing with the SEC,the subsequent issuance of the Certificate of Incorporation.

CONTENTS OF THE ARTICLES OF INCORPORATION

Sec. 14. Contents of the articles of incorporation. - All corporaorganized under this code shall file with the Securities and ExchaCommission articles of incorporation in any of the official languages signed and acknowledged by all of the incorporators, containing substanthe following matters, except as otherwise prescribed by this Code ospecial law:

1. The name of the corporation;2. The specific purpose or purposes for which the corporation is b

incorporated. Where a corporation has more than one stated purpose,articles of incorporation shall state which is the primary purpose and wis/are he secondary purpose or purposes: Provided, That a non-scorporation may not include a purpose which would change or contradicnature as such;3. The place where the principal office of the corporation is to be locawhich must be within the Philippines;4. The term for which the corporation is to exist;5. The names, nationalities and residences of the incorporators;6. The number of directors or trustees, which shall not be less than fivenor more than fifteen (15);


5/142


7. The names, nationalities and residences of persons who shall act asdirectors or trustees until the first regular directors or trustees are dulyelected and qualified in accordance with this Code;8. If it be a stock corporation, the amount of its authorized capital stock inawful money of the Philippines, the number of shares into which it is divided,and in case the share are par value shares, the par value of each, the names,nationalities and residences of the original subscribers, and the amountsubscribed and paid by each on his subscription, and if some or all of theshares are without par value, such fact must be stated;9. If it be a non-stock corporation, the amount of its capital, the names,nationalities and residences of the contributors and the amount contributedby each; and10. Such other matters as are not inconsistent with law and which thencorporators may deem necessary and convenient.

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

Sec. 15. Forms of Articles of Incorporation . - Unless otherwiseprescribed by special law, articles of incorporation of all domesticcorporations shall comply substantially with the following form:

a.

PREFATORY PARAGRAPH

xxx“KNOW ALL MEN BY THESE PRESENTS:The undersigned incorporators, all of legal age and a majority ofwhom are residents of the Philippines, have this day voluntarilyagreed to form a (stock) (non-stock) corporation under the laws ofthe Republic of the Philippines”

xxx

It must specify the nature of the corporation being organized in order toprevent difficulties of administration and supervision. Thus, the corporationshould indicate whether it is a stock or a non-stock corporation, a closecorporation, corporation sole or a religious corporation.

b.

CORPORATE NAME

xxx AND WE HEREBY CERTIFY:FIRST: That the name of said corporation shall be".............................................., INC. or CORPORATION";

xxx

The name of the corporation is essential to its existence since it is through itthat it can act and perform all legal acts. Each corporation should therefore,have a name by which it is to sue and be sued and do all legal acts.

A corporation, once formed, cannot use any other name, unless it has beenamended in accordance with law as this would result in confusion and mayopen the door to fraud and evasion as well as difficulties of administrationand supervision.

Thus, the organizers must make sure that the name they intend to use as acorporate name is not similar or confusingly similar to any other namealready registered and protected by law since the SEC would refuseregistration if such be the case.

Sec. 18. Corporate name. - No corporate name may be allowed by theSecurities and Exchange Commission if the proposed name is identical ordeceptively or confusingly similar to that of any existing corporation or to anyother name already protected by law or is patently deceptive, confusing or

contrary to existing laws. When a change in the corporate name is approthe Commission shall issue an amended certificate of incorporation undeamended name.

The SEC, in implementing the above provision on corporate name, requires that a “ Verification Slip” from the Records Division ofCommission be submitted showing that the proposed name is lepermissible. If the corporate name is available for use, the SEC will allowincorporators to “reserve” it for a nominal fee for a specific period unti

AOI is filed with the SEC.

SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides

In implementing Section 18 of the Corporation Code of the Philippines

68), the following revised guidelines in the approval of corporate partnership names are hereby adopted for the information and guidelineall concerned:

1.

The corporation name shall contain the word "Corporation" its abbreviation "Corp." or "Incorporated", or "Inc.".

The partnership name shall contain the word "Company" or "Co."limited partnership, the word "Limited" or "Ltd." shall be includedcase of professional partnership, the word "Company" need not be u

2. Terms descriptive of a business in the name shall be indicative ofprimary purpose. If there are two (2) descriptive terms, the first refer to the primary purpose and the second shall refer to one ofsecondary purposes.

3. The name shall not be identical, misleading or confusisimilar to one already registered by another corporatio

partnership with the Commission or a sole proprietorship registered the Department of Trade and Industry.

If the proposed name is similar to the name of a registefirm, the proposed name must contain at least one distincword different from the name of the company alreregistered. (The Book of Sir Ladia, 2007 Edition, provides that tmust be two other words different and distinct from the name ofcompany already registered or protected by law).

4.

Business or tradename of any firm which is different from its corpoor partnership name shall be indicated in the articles of incorporatiopartnership of said firm.

5.

Tradename or trademark duly registered with the Intellectual PropOffice cannot be used as part of a corporate or partnership nwithout the consent of the owner of such tradename of trademark.

6. If the name or surname of a person is used as part o

corporate or partnership name, the consent of said persohis heirs must be submitted except of that person istockholder, member, partner of a declared national herosuch person cannot be identified or non-existent, explanation for the use of such name shall be required.

7.

The meaning of initials in the name shall be disclosed in wriby the registrant.

8. Name containing a term descriptive of a business different frombusiness of a registered company whose name also bears siterm(s) used by the former may be allowed.

9. The name should not be patently deceptive, confusingcontrary to existing laws.

10. The name which contains a word identical to a word registered name shall not be allowed if such word is coinealready appropriated by a registered firm, regardless ofnumber of the different words in the proposed name, un

there is consent from the registered firm of this firm is onthe stockholders of partners of the entity to be registered.

11. The name of an internationally known foreign corporatioone similar to it may not be used by a domestic corporawithout the consent of the former.

12. The term "Philippines" when used as part of the name subsidiary corporation of a foreign corporation shall bparenthesis: i.e. "(Philippines)" or "(Phil.)".

13. The following words shall not be used as part of a corporatpartnership names:a.

As provided by special laws:


6/142


1. "Finance", "Financing" or "Finance and Investment" by

corporations or partnerships not engaged in the financingbusiness (R.A. 5980, as amended)

2. "Engineer", "Engineering" or "Architects" as part of the

corporate name (R. A. 546 and R.A. 1582)3. "Bank", "Banking", "Banker", Building and Loan Association",

Trust Corporation", "Trust Company" or words of similarimport by corporations or associations not engaged in bankingbusiness. (R.A. 337, as amended)

4. "United Nations" in full or abbreviated form can not be part ofa corporate or partnership name (R.A. 226)

5. "Bonded" for corporations or partnerships with unlicensedwarehouse (R.A. 245)

b. As a matter of policy:1.

"Investment(s)" by corporations or partnership not organizedas investment house company or holding company.

2. "National" by all stock corporations and partnership.3.

"Asean", "Calabarzon" and "Philippines 2000".14. The name of a dissolved firm shall not be allowed to be used by other

firms within three (3) years after the approval of the dissolution of thecorporation by the Commission, unless allowed by the last stockholdersrepresenting at least majority of the outstanding capital stock of thedissolved firm.

15. Registrant corporations or partnership shall submit a letter undertakingto change their corporate or partnership name in case another person orfirm has acquired a prior right to the use of the said firm name or thesame is deceptively or confusingly similar to one already registeredunless this undertaking is already included as one of the provisions ofthe articles of incorporation or partnership of the registrant.1

RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60 Phil.549; Sept. 6, 1934) – A certificate of public convenience was issued in thename of Rural Transit Co. by the Public Service Commission despiteopposition of herein petitioner-appellant Red Line Transportation Co.. Itappears that “Red Line Transit Co.” is being used as a trade name of BahrachMotors Co.

ISSUE: Who is the real party in interest, Rural Transit Co. which appears inthe face of the application? Or Bahrach Motors, Inc. using the name of theformer as a trade name?

HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or anycourt in this jurisdiction to authorize one corporation to assume the name ofanother corporation as a trade name. Both Rural Transit and Bahrach arePhilippine corporations and the very law of their creation and continued

existence requires each to adopt and certify a distinctive name.The incorporators constitute a body politic and corporate under the namestate in the certificate (Sec. 11, Act. No. 1459). A corporation has the powerof succession in its corporate name (Sec. 13). The name of a corporation istherefore essential to its existence. It cannot change its name except in themanner provided by law. By that name alone it is authorized to transactbusiness.

The law gives a corporation on express or implied authority to assumeanother name that is unappropriated; still less that of another corporation,which is expressly set apart from it and protected by law. If any corporationshould assume at pleasure as a unregistered trade name, the name ofanother corporation, this practice would result in confusion of administrationand supervision. The policy of the law as expressed in our corporation statuteand the Code of Commerce is clearly against such a practice.

UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC. (78SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI) wasorganized. In 1954, Universal Hosiery Mills Corporation (UHMC) was alsoorganized. Both are actually distinct corporations but they engage in thesame business (fabrics). In 1963, UHMC petitioned to change its name to

1 http://www.disini.ph/res_sec__mc142000.html

Universal Mills Corporation (UMC). The Securities and Exchange Commis(SEC) granted the petition.

Subsequently, a warehouse owned by UMC was gutted by fire. News athe fire spread and investors of UTMI thought that it was UTMI’s warehthat was destroyed. UTMI had to make clarifications that it was Uwarehouse that got burned. Eventually, UTMI petitioned that UMC shoulenjoined from using its name because of the confusion it brought. The granted UTMI’s petition. UMC however assailed the order of the SEC averred that their tradename is not deceptive; that UTMI’s tradenamqualified by the word “Textile”, hence, there can be no confusion,

ISSUE: WON the SEC is correct?

HELD: Yes. There is definitely confusion as it was evident from the where the investors of UTMI mistakenly believed that it was UTwarehouse that was destroyed. Although the corporate names are not ridentical, they are indisputably so similar that it can cause, as it alreadyconfusion. The SEC did not act in abuse of its discretion when it order UMdrop its name because there was a factual evidence presented as toconfusion. Further, when UMC filed its petition for change of corporate nait made an undertaking that it shall change its name in the event that theanother person, firm or entity who has obtained a prior right to the ussuch name or one similar to it. That promise is still binding uponcorporation and its responsible officers

LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219 S610; March 5, 1993) - Lyceum of the Philippines Inc. previously obtafrom the SEC a favourable decision on the exclusive use of “Lyceum” aga

Lyceum of Baguio, Inc.. such decision assailed by the latter before thewhich was denied for lack of merit.

Armed with the Resolution of the Supreme Court, the Lyceum ofPhilippines then wrote all the educational institutions it could find usingword "Lyceum" as part of their corporate name, and advised themdiscontinue such use of "Lyceum." Unheaded, Lyceum of the Philippinstituted before the SEC an action to enforce what Lyceum of the Philippclaims as its proprietary right to the word "Lyceum." The SEC renderdecision sustaining petitioner's claim to an exclusive right to use the w"Lyceum." The hearing officer relied upon the SEC ruling in the LyceuBaguio, Inc. case.

On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, LyceumCamalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern Philipp

Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Iwhich are also educational institutions, to the SEC En Banc, the decisiothe hearing officer was reversed and set aside. The SEC En Banc didconsider the word "Lyceum" to have become so identified with Lyceum oPhilippines as to render use thereof by other institutions as productivconfusion about the identity of the schools concerned in the mind ofgeneral public. Unlike its hearing officer, the SEC En Banc held thatattaching of geographical names to the word "Lyceum" served sufficientdistinguish the schools from one another, especially in view of the fact the campuses of Lyceum of the Philippines and those of the other Lycewere physically quite remote from each other.

On appeal, the CA affirmed the deicison of the CA en banc, and dereconsideration.

ISSUE: WON private respondents can be directed to delete the w

“lyceum” from their corporate names?

HELD: No. The policy underlying the prohibition in Section 18 agthe registration of a corporate name which is "identical or deceptivelconfusingly similar" to that of any existing corporation or which is "patedeceptive" or "patently confusing" or "contrary to existing laws," isavoidance of fraud upon the public which would have occasiodeal with the entity concerned, the evasion of legal obligationsduties, and the reduction of difficulties of administration supervision over corporations.

http://www.disini.ph/res_sec__mc142000.htmlhttp://www.disini.ph/res_sec__mc142000.htmlhttp://www.disini.ph/res_sec__mc142000.htmlhttp://www.disini.ph/res_sec__mc142000.html


7/142


Herein, the Court does not consider that the corporate names of theacademic institutions are "identical with, or deceptively or confusingly similar"to that of Lyceum of the Philippines Inc.. True enough, the corporate namesof the other schools (defendant institutions) entities all carry the word"Lyceum" but confusion and deception are effectively precluded by theappending of geographic names to the word "Lyceum." Thus, the "Lyceum ofAparri" cannot be mistaken by the general public for the Lyceum of thePhilippines, or that the "Lyceum of Camalaniugan" would be confused withthe Lyceum of the Philippines. Further, etymologically, the word "Lyceum" isthe Latin word for the Greek lykeion which in turn referred to a locality on theriver Ilissius in ancient Athens "comprising an enclosure dedicated to Apolloand adorned with fountains and buildings erected by Pisistratus, Pericles andLycurgus frequented by the youth for exercise and by the philosopherAristotle and his followers for teaching."

In time, the word "Lyceum" became associated with schools and othernstitutions providing public lectures and concerts and public discussions.Thus today, the word "Lyceum" generally refers to a school or an institutionof learning. Since "Lyceum" or "Liceo" denotes a school or institution ofearning, it is not unnatural to use this word to designate an entity which isorganized and operating as an educational institution. To determine whethera given corporate name is "identical" or "confusingly or deceptively similar"with another entity's corporate name, it is not enough to ascertain thepresence of "Lyceum" or "Liceo" in both names. One must evaluate corporatenames in their entirety and when the name of Lyceum of the Philippines isjuxtaposed with the names of private respondents, they are not reasonablyregarded as "identical" or "confusingly or deceptively similar" with each other.

ISSUE2: WON the word “Lyceum” has acquired a secondary meaningalthough originally generic?

HELD: No. The Court of Appeals recognized this issue and answered it in thenegative: "Under the doctrine of secondary meaning, a word orphrase originally incapable of exclusive appropriation withreference to an article in the market, because geographical orotherwise descriptive might nevertheless have been used so longand so exclusively by one producer with reference to this articlethat, in that trade and to that group of the purchasing public, theword or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has beenreferred to as the distinctiveness into which the name or phrase hasevolved through the substantial and exclusive use of the same for aconsiderable period of time. . . . No evidence was ever presented in thehearing before the Commission which sufficiently proved that the wordLyceum' has indeed acquired secondary meaning in favor of the appellant. If

there was any of this kind, the same tend to prove only that the appellanthad been using the disputed word for a long period of time.

The number alone of the private respondents in the present case suggestsstrongly that the Lyceum of the Philippines' use of the word "Lyceum" hasnot been attended with the exclusivity essential for applicability of thedoctrine of secondary meaning. It may be noted also that at least one of theprivate respondents, i.e., the Western Pangasinan Lyceum, Inc., used theterm "Lyceum" 17 years before Lyceum of the Philippines registered its owncorporate name with the SEC and began using the word "Lyceum." It followsthat if any institution had acquired an exclusive right to the word "Lyceum,"that institution would have been the Western Pangasinan Lyceum, Inc. ratherthan Lyceum of the Philippines. Hence, Lyceum of the Philippines is notentitled to a legally enforceable exclusive right to use the word "Lyceum" ints corporate name and that other institutions may use "Lyceum" as part oftheir corporate names.

PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA 457;Feb. 21, 1992) – Petitioner is the registered owner of the trademark PHILIPSand PHILIPS SHIELD EMBLEM issued by the Philippine Patent Office. PhilipsElectric Lamp Inc. and Philips Industrial Development Inc., also petitioners,are the authorized users of such trademark.

Petitioner filed a case with SEC praying for a writ of injunction to prohibitherein respondent Standard Philips Corporation from using the word“PHILIPS” in its corporate name, which was denied. On appeal, the CAaffirmed the SEC.

ISSUE: WON Standard Philips should be directed to delete the word PHIfrom its corporate name?

HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes , 51 115 (1927), the Court declared that a corporation's right to usecorporate and trade name is a property right, a right in rem, wit may assert and protect against the world in the same manner may protect its tangible property, real or personal, against tresor conversion. It is regarded, to a certain extent, as a property rand one which cannot be impaired or defeated by subseqappropriation by another corporation in the same field (Red Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549)

A name is peculiarly important as necessary to the very existenca corporation (American Steel Foundries vs. Robertson, 269 US 372, ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792)name is one of its attributes, an element of its existence, and essential tidentity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporais that each corporation must have a name by which it is to sue be sued and do all legal acts. The name of a corporation in respect designates the corporation in the same manner as the nof an individual designates the person (Cincinnati Cooperage CoBate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10123); and the right to use its corporate name is as much a part ofcorporate franchise as any other privilege granted (Federal Securvs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; PaulinoPortuguese Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a nidentical with or similar to one already appropriated by a senior corporawhile an individual's name is thrust upon him (See Standard Oil Co. of Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977corporation can no more use a corporate name in violation ofrights of others than an individual can use his name legally acquso as to mislead the public and injure another (Armington vs. Pal21 RI 109. 42 A 308).

The statutory prohibition (under Sec. 18 of the Corporation Code) cannoany clearer. To come within its scope, two requisites must be pronamely:

(1) that the complainant corporation acquired a prior right over the ussuch corporate name; and

(2) the proposed name is either:(a) identical; or(b) deceptively or confusingly similar to that of any existing corporaor to any other name already protected by law; or(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedfrom infringement by similarity is determined by priorityadoption. In this regard, there is no doubt with respect to Petitioners' adoption of' the name ''PHILIPS" as part of its corporate name. PetitioPhilips Electrical and Philips Industrial were incorporated on 29 August and 25 May 1956, respectively, while Respondent Standard Philips was isa Certificate of Registration on 12 April 1982, twenty-six (26) years lPetitioner PEBV has also used the trademark "PHILIPS" on electrical lamall types and their accessories since 30 September 1922.

The second requisite no less exists in this case. In determining existence of confusing similarity in corporate names, the teswhether the similarity is such as to mislead a person, using ordicare and discrimination. In so doing, the Court must look to the recorwell as the names themselves. While the corporate names of PetitionersPrivate Respondent are not identical, a reading of Petitioner's corponames, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INCPHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to concthat "PHILIPS" is, indeed, the dominant word in that all the compaaffiliated or associated with the principal corporation, PEBV, are known inPhilippines and abroad as the PHILIPS Group of Companies.


8/142


Respondent’s argue that there were no evidence presented that there wasactual confusion. It is settled, however, that proof of actual confusionneed not be shown. It suffices that confusion is probably or likely tooccur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

Moreover, Given Private Respondent's underlined primary purpose in its AOI,nothing could prevent it from dealing in the same line of business of electricaldevices, products or supplies which fall under its primary purposes. Besides,there is showing that Private Respondent not only manufactured and soldballasts for fluorescent lamps with their corporate name printed thereon butalso advertised the same as, among others, Standard Philips (TSN, before theSEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). Asaptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as

part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends toshow said respondent's intention to ride on the popularity and establishedgoodwill of said petitioner's business throughout the world" (Rollo , p. 137).The subsequent appropriator of the name or one confusingly similar theretousually seeks an unfair advantage, a free ride of another's goodwill (AmericanGold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, theSEC maintains that the corporate names of Petitioners PHILIPS ELECTRICALLAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at leasttwo words different from that of the corporate name of respondentSTANDARD PHILIPS CORPORATION, which words will readily identify PrivateRespondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and PartnershipNames formulated by the SEC, the proposed name "should not be similar toone already used by another corporation or partnership. If the proposedname contains a word already used as part of the firm name or style of aregistered company; the proposed name must contain two otherwords different from the company already registered " (Emphasisours). It is then pointed out that Petitioners Philips Electrical and PhilipsIndustrial have two words different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade namewhich was registered as far back as 1922. Petitioners, therefore, have theexclusive right to its use which must be free from any infringement bysimilarity. A corporation has an exclusive right to the use of its name,which may be protected by injunction upon a principle similar tothat upon which persons are protected in the use of trademarks andtradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it

s a fraud on the corporation which has acquired a right to that name andperhaps carried on its business thereunder, that another should attempt touse the same name, or the same name with a slight variation in such a wayas to induce persons to deal with it in the belief that they are dealing with thecorporation which has given a reputation to the name (6 Fletcher [Perm Ed],pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210F 510). Notably, too, Private Respondent's name actually contains only asingle word, that is, "STANDARD", different from that of Petitioners inasmuchas the inclusion of the term "Corporation" or "Corp." merely serves thePurpose of distinguishing the corporation from partnerships and otherbusiness organizations.

The fact that there are other companies engaged in other lines of businessusing the word "PHILIPS" as part of their corporate names is no defense anddoes not warrant the use by Private Respondent of such word whichconstitutes an essential feature of Petitioners' corporate name previously

adopted and registered and-having acquired the status of a well-known markn the Philippines and internationally as well (Bureau of Patents Decision No.88-35 [TM], June 17, 1988, SEC Records).

c.

PURPOSE CLAUSE

xxxSECOND: That the purpose or purposes for which such corporationis incorporated are: (If there is more than one purpose, indicateprimary and secondary purposes);

xxx

The statement of the objects or purpose or powers in the charter repractically in defining the scope of authority of the corporate enterprisundertaking. This statement both congers and also limits the actual authof the corporate representatives.

The reasons for requiring a statement of the purposes or objects1. In order that the stockholder who contemplates on an investmentbusiness enterprise shall know within what lines of business his money be put at risks;2. So that the board of directors and management my now within lines of business they are authorized to act; and3. So that anyone who deals with the company may ascertain whethcontract or transaction into which he contemplates entering is one within

general authority of the management.

SECONDARY PURPOSE : Although the Corporation Code does not renor limit the number of purpose or purposes which a corporation may hSec. 14 thereof, requires that if it has more than one purpose, the primpurpose as well as the secondary ones must be indicated therein.

PROHIBITION : The following are prohibited by special laws for havingother purpose not peculiar to them:1. Educational, religious, and other non-stock corporations cannot includeother purpose which would change or contradict its nature or to engagany enterprise to make profits for is members;2. Insurance companies cannot engage in commercial banking at the stime, and vice-versa; and3. Stock brokers can have no other line of business not peculiar to them.

RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS :1. As a general rule, the purpose or purposes must be lawful. Hence, theis duty bound to determine the legality of the corporate purpose/s befoissues the certificate of registration;2. A corporation may not be formed for the purpose of practicing a profeslike law, medicine or accountancy, either directly or indirectly. Thesereserved exclusively for professional partnerships;3. The retail trade, where the corporate capital is less than $2.5M, or its equivalent are reserved exclusively for Filipinos, or for corporationpartnerships wholly owned by such citizen.4. As a general rule, corporations with foreign equity are not alloweengage in restaurant business but corporations with such foreign equitypurse such undertaking if it is incidental or in connection with hotel or keeping business.5. Management consultants, advisers and/or specialists, must submit

personal information sheet of the incorporators and directors in order the SEC may be able to find out or determine whether or not the applicorporation is qualified to act as such.6. As a matter of policy, financing companies are required by the SEsubmit certain additional documents together with their applicationsregistration to verify compliance with RA 8556.7. For bonded warehousing companies, an undertaking to comply withGeneral Bonded Warehousing Act must be submitted along with the AOI.8. In case the applicant proposes to engage in the business of hosand/or clinic, the purpose clause must contain the following prov

“Provided that purely medical or surgical services in connection thereshall be performed by duly qualified physician and surgeon who may or not be freely and individually contracted by the parties.” 9. In the case of Customs Brokerage business, the applicant must submilicense of at least two customs broker connected with the applicorporation;

10. Transfer Agents, Broker and Clearing Houses must submit the certifof admission to the profession of the CPA of any officer of the corporation11. Carriage of mails cannot be a purpose of a corporation unless a spfranchise has been granted to it.12. If the corporate purpose or objective includes any purpose undersupervision of another government agency, prior clearance anapproval of the concerned government agencies or instrumentalwill be required pursuant to the last paragraph of Sec. 17 of the Code.

GENERAL LIMITATIONS: 1. The purpose or purposes must be lawful;


9/142


2. The purpose must be specific or stated concisely although in broad orgeneral terms;3. If there is more than one purpose, the primary as well as the secondaryones must be specified; and4. The purposes must be capable of being lawfully combined.

d. PRINCIPAL OFFICExxx

THIRD: That the principal office of the corporation is located in theCity/Municipality of............................................, Provinceof................................................., Philippines

xxx

It must be located within the Philippines. The AOI must not only specify the

province, but also the City or Municipality where it is located. In this regard, its to be observed that the principal office may be in one place but thebusiness operations are actually conducted in other areas. The law does not,of course, require a statement of the place of corporate operations and,therefore, may be dispensed with.

The principal office serves as the residence of the corporation, and is thusmportant in: (1) venue of actions; (2) registration of chattel mortgage ofshares; (3) validity of meetings of stockholders or members in so far asvenue thereof is concerned.

CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18,1967) – The New Cagayan Grocery filed a complaint against CRS for somerregularities in the transmission of a message which changed the contextand purport causing damages. The complaint was filed in the City Court ofCagayan de Oro.

ISSUE: WON the action will prosper?

HELD: No. The action was based on tort and not upon a written contract andas such, under the Rules of Court, it should be filed in the municipality wherethe defendant or any of the defendants resides or may be served withsummons.

Settled is the principle in corporation law that the residence of acorporation is the place where the principal office is established.Since it is not disputed that CRS has its principal office in Manila, it followsthat the suit against it may properly be filed in the City of Manila.

The fact that CRS maintains branch office in some parts of the country doesnot mean that it can be sued in any of these places. To allow such would

create confusion and work untold inconveniences to the corporation.e.

TERM OF EXISTENCE xxx

FOURTH: That the term for which said corporation is to existis............... years from and after the date of issuance of thecertificate of incorporation;

xxx

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

subsequent expiry date(s) unless there are justifiable reasons for an earlierextension as may be determined by the Securities and Exchange Commission

The corporate term is necessary in determining at what point in time thecorporation will cease to exist or have lost its juridical personality. Once itceases to exist, its legal personality also expires and could not thereafter, actn its own name for the purpose of prosecuting it business.

EXTENSION : can be made not earlier than 5 years prior to the expiry dateunless there are justifiable reasons.

f.

INCORPORATORS xxx

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

NAME NATIONALITY RESIDENCE..................... ............................. ................................................. ............................. ................................................. ............................. ................................................. ............................. ................................................. ............................. ............................

xxx

Sec. 5. Corporators and incorporators, stockholders and membeCorporators are those who compose a corporation, whether as stockhoor as members. Incorporators are those stockholders or members mentioin the articles of incorporation as originally forming and composingcorporation and who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholdCorporators in a non-stock corporation are called members.

CORPORATORS apply to all who compose the corporation at any given and need not be among those who executed the AOI at the start oformation or organization.

INCORPORATORS are those mentioned in the AOI as originally forthe corporation and who are signatories in the AOI.

An incorporator may be considered as a corporator as long as he continube a stockholder or a member, but not all corporators are incorporators.

Sec. 10. Number and qualifications of incorporators. - Any numbnatural persons not less than five (5) but not more than fifteen (15), alegal age and a majority of whom are residents of the Philippines, may fa private corporation for any lawful purpose or purposes. Each ofincorporators of a stock corporation must own or be a subscriber to at one (1) share of the capital stock of the corporation.

QUALIFICATIONS OF INCORPORATORS :1. Must be natural persons. It implies that a corporation or a partner

cannot become incorporators. EXCEPTION: (1) cooperatives; corporations primarily organized to hold equities in rural banks and rightfully become incorporators thereof. It must be noted likewise thatlaw does not preclude firms and other entities from becoming stockholdesubscribers to the shares of a stock corporation. Thus, while they caqualify as incorporators, they can become corporators or stockholders.2. Of Legal Age. Minors cannot be incorporators. They may, howebecome stockholders provided they are legally represented by pareguardians or administrators.3. Must own at least 1 share.4. Majority must be residents of the Philippines. The law does not providcitizenship requirements. EXCEPT: in certain areas of activity or induwherein ownership of shares of stock are reserved wholly or partiallFilipino citizens. Hence, all incorporators may be foreigners provided majof them are residents. Note that the requirement is residence and citizenship.

g. DIRECTORS/TRUSTEESxxx

SIXTH: That the number of directors or trustees of the corporatioshall be.......... ..; and the names, nationalities and residences of tfirst directors or trustees of the corporation are as follows:

NAME NATIONALITY RESIDENCE..................... ............................. ................................................. ............................. ................................................. ............................. ............................


10/142


..................... ............................. ............................

..................... ............................. ............................xxx

DIRECTORS is the governing board in stock corporations. TRUSTEES referto non-stock corporations.

There must be at least 5 but not more than 15 directors in a privatecorporation. EXCEPTIONS: 1. Educational corporations registered as non-stock corporations whosenumber of trustees, though not less than 5 and not more than 15 should bedivisible by 5.2. In close corporations where all stockholders are considered as members ofthe board of directors (Sec. 97) thereby effectively allowing 20 members in

the board.

The by-laws of a corporation may provide for additional qualifications anddisqualifications of its members of the board of directors or trustees.However, it may not do away with the minimum disqualifications laid downby the Code. The minimum qualifications of directors and trustees in adomestic corporation are provided under the 2nd par. Of Sec. 23:

Sec. 23. The board of directors or trustees xxx

Every director must own at least one (1) share of the capital stock of thecorporation of which he is a director, which share shall stand in his name onthe books of the corporation. Any director who ceases to be the owner of ateast one (1) share of the capital stock of the corporation of which he is adirector shall thereby cease to be a director. Trustees of non-stock

corporations must be members thereof. a majority of the directors or trusteesof all corporations organized under this Code must be residents of thePhilippines.

QUALIFICATIONS OF DIRECTORS/TRUSTEES: 1. Must own at least 1 share in their own names or a member (in the case oftrustees);2. Majority must be resident of the Philippines. Even aliens may be elected asdirectors, provided that the majority of such directors are residents of thePhilippines. EXCEPT: in activities exclusively reserved to Filipino citizens likethe management of educational institutions and those governed by the RetailTrade Law.

Sec. 27. Disqualification of directors, trustees or officers. - No personconvicted by final judgment of an offense punishable by imprisonment for aperiod exceeding six (6) years, or a violation of this Code committed withinfive (5) years prior to the date of his election or appointment, shall qualify asa director, trustee or officer of any corporation.

DISQUALIFICATIONS: 1. Imprisonment for a period exceeding 6 years;2. Violation of the Corporation Code within 5 years prior to the date ofelection or appointment;3. Such other disqualifications that may be provided in the by-laws.

JOHN GOKONGWEI, JR., Petitioner ,vs.SECURITIES AND EXCHANGE COMMISSION, SAN MIGUELCORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUELORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents

(GR No. L-52129; April 21, 1980) FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with theSEC for the declaration of nullity of the by-laws etc. against the majoritymembers of the BOD and San Miguel. The amended by-laws provided for thedisqualification of competitors from nomination and election in the Board ofrectors of SMC. This was denied by the SEC.

ISSUE: Is the disqualification valid?

HELD: Yes. The Court held that a corporation has authority prescribed, by

law, the qualifications of directors. It has the inherent power to adoplaws for its internal government, and to regulate the conduct and prescthe rights and duties of its members towards itself and among themselvereference to the management of its affairs. A corporation, underCorporation law, may prescribe in its by-laws the qualificatiduties and compensation of directors, officers, and employees.person who buys stock in a corporation does so with the knowledge thaaffairs are dominated by a majority of the stockholders and he implcontracts that the will of the majority shall govern in all matters withinlimits of the acts of incorporation and lawfully enacted by-laws andforbidden by law. Any corporation may amend its by-laws by the ownethe majority of the subscribed stock. It cannot thus be said that petitiohas the vested right, as a stock holder, to be elected director, in the facthe fact that the law at the time such stockholder's right was acqu

contained the prescription that the corporate charter and the by-laws shasubject to amendment, alteration and modification. A Director standsfiduciary relation to the corporation and its shareholders, whiccharacterized as a trust relationship. An amendment to corporate by-laws which renders a stockholder ineligible todirector, if he be also director in a corporation whose business competition with that of the other corporation, has been sustaas valid. This is based upon the principle that where the directoemployed in the service of a rival company, he cannot serve both, but mbetray one or the other. The amendment in this case serves to advancebenefit of the corporation and is good. Corporate officers are alsopermitted to use their position of trust and confidence to further their prneeds, and the act done in furtherance of private needs is deemed to bthe benefit of the corporation. This is called the doctrine of corpoopportunity.

h. CAPITALIZATIONxxx

SEVENTH: That the authorized capital stock of the corporationis................................................ (P......................) PESOS in lawmoney of the Philippines, divided into............ .. shares with the pvalue of.................................. (P.......................) Pesos per shar(In case all the share are without par value):

That the capital stock of the corporation is.......................... sharwithout par value. (In case some shares have par value and somare without par value): That the capital stock of said corporationconsists of....................... shares of which...................... shares athe par value of............................. (P.....................) PESOS eachof which............................... shares are without par value.

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

Name of Subscriber Nationality No of Shares AmountSubscribed........... ............. ............. . ............. ... ............... ....................... ............. ............. . ............. ... ............... ....................... ............. ............. . ............. ... ................ ...................... ............. ............. . ............. ... ............... ....................... ............. ............. . ............. ... ............... ............

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

Name of Subscriber Amount Subscribed Total Paid-Up........... .............. ..... ................ ............ .. ........... .........

........... .............. ..... ................. ............. ....................

........... .............. ..... ................ ............ .. ........... .........

........... .............. ..... ................ ............ .. ........... .........

........... .............. ..... ................ ............ .. ........... .........

(Modify Nos. 8 and 9 if shares are with no par value. In case thecorporation is non-stock, Nos. 7, 8 and 9 of the above articles mabe modified accordingly, and it is sufficient if the articles state thamount of capital or money contributed or donated by specifiedpersons, stating the names, nationalities and residences of thecontributors or donors and the respective amount given by each


11/142


xxx

The Corporation Code requires the AOI to state the authorized capital stock,the number of shares and/or kind of shares into which the authorized capitals divided, the par value of each share, if there by any, the names,nationalities and residences of the original subscribers, and the amountsubscribed and paid by each. At least 25% of the subscribed capital must bepaid and in no case may the paid-up capital be less than P5,000.

AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articlesto be subscribed and paid-in or secured to be paid by the subscribers. It mayalso refer to the maximum number of shares that a corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares and its total

value for which there are contracts for their acquisition or subscription. It isn effect, the stockholder’s equity account showing that part of the authorizedcapital stock which has been paid or promised to be paid, or that portion ofthe authorized capital stock which has been subscribed by the subscribers orstockholders.

PAID UP CAPITAL STOCK or paid-in capital is the actual amount or valuewhich has been actually contributed or paid to the corporation inconsideration of the subscriptions made thereon. It may be in the form ofcash, property or in the form of services actually rendered to the corporationas provided under Sec. 62 of the Corporation Code:

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

following:1. Actual cash paid to the corporation;2. Property, tangible or intangible, actually received by the corporation andnecessary or convenient for its use and lawful purposes at a fair valuationequal to the par or issued value of the stock issued;3. Labor performed for or services actually rendered to the corporation;4. Previously incurred indebtedness of the corporation;5. Amounts transferred from unrestricted retained earnings to stated capital;and6. Outstanding shares exchanged for stocks in the event of reclassification orconversion.

Where the consideration is other than actual cash, or consists of intangibleproperty such as patents of copyrights, the valuation thereof shall initially bedetermined by the incorporators or the board of directors, subject to approval

by the Securities and Exchange Commission.

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

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

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

SHARES OF STOCKS AND THEIR CLASSIFICATIONS

SHARES OF STOCK designate the units into which the proprietary interestn a corporation is divided. They represent the proportionate integers orunits, the sum of which constitutes the capital stock of the corporation. It isikewise the interest or right which the owner, called the stockholders orshareholder, has in the management of the corporation, and in the surplusprofits and in case of distribution, in all of its assets remaining after thepayment of its debts.

CERTIFICATE OF STOCK is a document or instrument evidencing thenterest of a stockholder in the corporation.

Sec. 6. Classification of shares. - The shares of stock of scorporations may be divided into classes or series of shares, or both, anwhich classes or series of shares may have such rights, privilegerestrictions as may be stated in the articles of incorporation: Provided, no share may be deprived of voting rights except those classified and isas "preferred" or "redeemable" shares, unless otherwise provided in Code: Provided, further, That there shall always be a class or series of shwhich have complete voting rights. Any or all of the shares or series of shmay have a par value or have no par value as may be provided for inarticles of incorporation: Provided, however, That banks, trust compainsurance companies, public utilities, and building and loan associations not be permitted to issue no-par value shares of stock.

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

Shares of capital stock issued without par value shall be deemed fully and non-assessable and the holder of such shares shall not be liable tocorporation or to its creditors in respect thereto: Provided; That shwithout par value may not be issued for a consideration less than the v

of five (P5.00) pesos per share: Provided, further, That the econsideration received by the corporation for its no-par value shares shatreated as capital and shall not be available for distribution as dividends.

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

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

Where the articles of incorporation provide for non-voting shares in the callowed by this Code, the holders of such shares shall neverthelessentitled 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 asubstantially 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 corporatioother corporations;7. Investment of corporate funds in another corporation or businesaccordance with this Code; and8. Dissolution of the corporation.

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

PURPOSE OF CLASSIFICATION:

1. To specify and define the rights and privileges of the stockholders;2. For regulation and control of the issuance of sale of corporate secufor the protection of purchasers and stockholders.3. As a management control device.4. To comply with statutory requirements particularly those which providcertain limitations on foreign ownership.5. To better insure return on investment which can be affected throughissuance of redeemable shares or preferred shares, i.e., granting the hothereof, preference as to dividends and/or distribution of assets in casliquidation; and6. For flexibility in price, particularly, no par shares may be issued or


12/142


from time to time at different prices depending on the net worth of thecompany since they do not purport to represent an actual or fixed value.

COMMON STOCKS are the most commonly issued shares of stock of acorporation. Although no clear cut definition can be found, it has beendescribed as one which entitles it owner to an equal or pro-rata division ofprofits, if there are any, but without any preference or advantage in thatrespect over any other stockholder or class of stockholders.

A common share usually carries with it the right to vote, and frequently, theexclusively right to do so. However, where the AOI is silent, all issued andoutstanding shares shall be considered to have the right to vote and be votedfor.

PREFERRED STOCKS is a stock that gives the holder preference over theholder of common stocks with respect to the payment of dividends and/orwith respect to distribution of capital upon liquidation. LIMITATIONS imposedby the Code in the issuance of preferred stocks: (1) They can be issued onlywith a stated par value; and (2) The preference must be stated in the AOIand in the certificate of stock otherwise each share shall be, in all respect,equal to every other share.

a. PREFERENCE AS TO DIVIDENDS They have the privilege of being paid dividends first before any otherstockholders are paid theirs. The guaranty is not absolute so as to create arelation of debtor and creditor between the corporation and the holders ofsuch stock. The amount of preference is stated in the contract of subscriptionand is usually a fixed percentage or by specified amount indicated therein.

Participating and Non-Participating Preferred Shares

If the p

The Corporation Code of the Philippines (Final)-1

Documents