Corporation Code of the Phils.

Batasang Pambansa Blg 68

Introduction: Different forms of business organization: 1.) Individual proprietorship o Primitive form of business o Individual proprietor Operates a small business Usually with limited capital Responsible alone for its success or failure 2.) Partnership First step towards wider filed of operation o More complex organization o Ie a family affair Business too large to manage alone, bring in family members At least two men o Same business o Unite their capital to secure adequate capital to conduct business Invariably larger business unit than proprietorship Common in: o Retail trade o Professions o (limited extent) manufacturing establishments As business form, losing ground

4.) 5.)

6.)

3.) Joint stock company o Frequent in connection with larger enterprises Almost extinct (in US) th th Highly popular in England during 17 -early 18 centuries

7.)

Similarity to partnership: Formed under a contract Requires no special sanction for the state Liability of members for all companys debts Jointly and severally o Similarity to corporation In control and management Members do not directly control the company Choose a board of directors who are authorized agents and managers Change in Membership thru death or transfer of interest Company no dissolved Cooperative Association Business trust Business org less widely known Aka Massachusets trust Main feature i. Formed by a contract ii. Title to property and conduct of business is in the hands of trustees 1. Who act for a large group of beneficiaries Corporation Dominant form of organization in modern business Creature of law Rights, powers and duties derived from legislation Almost the exclusive form business organization i. In businesses of a public or quasi-public such as: 1. Public utilities 2. Railroads 3. Insurance companies 4. Banking institutions But competes with other business forms in other fields of enterprise Other business forms

Arise where different enterprises unite for a common purpose i. Whether organized in the same form or different forms Purpose: i. Maybe temporary in character = syndicate 1. A temporary alliance of individuals, firms or corporations 2. Usually for the purpose of financing an enterprise 3. After purpose has been accomplished, a. It is dissolved 4. Used largely by bankers for underwriting purposes 5. Reflects the general state of business a. If business is at a standstill= little need for them few are formed ii. Permanent association = varying forms of combinations 1. ie the trust, holding company 2. Combinations: a. Purpose: secure savings and other advantages which result from consolidation and large scale operation st 3. 1 phase, these combinations were really trusts except that corporations formed the constituent elements and beneficiaries of the trust a. This form of assoc, in some instances have been declared illegal by the courts b. So other methods have been resorted to 4. Other practices: a. Organize a new corporation

i. Which buys the individual plants it wishes to bring into the combination ii. And which becomes a single owner of all the establishments b. Creation of a holding company i. Used by the largest combinations ii. Wherein the stock of the constituent companies is bought by a unifying company which is the holding company iii. Constituent companies retain their organization intact iv. Controlled by the central corp as a stockholder 1. With power to elect directors and officers at will = have complete power over the management Trust= (by popular phraseolody) to designate any large aggregation of capital under direction and control

In Phils, business organizations provided by law are only 1.) Partnership art. 1767-1806 of civil code 2.) Corporation But NO prohibition for other forms.

Theories as to origin of coporations 1.) ethnological theory that the corporate idea is the product of no one people and no one country but developed more or less independently in varying forms among the several ethnological units o because concept of collective entity antedates that of the individual groups of men united by the reality of fiction of blood relationship into families, clans or tribes were recognized units of primitive society even before the individual was so regarded as such the corporation is in reality a manifestation of the instinct of man, existing inchoate from the earliest times and before law itself became an effective social force. Law itself has done no more than to recognize o the existence of this phase of human activity o guide its development o define its functions and relations 2.) Imitative theory Imitative theory of jural development Traces the genesis of the modern corporation to the Greece of Solon viting writings of Gaius on Roman law, passages fromt eh Pandects of Justinians. As authority for the assertion that laws fathered by the great Helenic jurist permitted the formation of private corp for certain purposes, upon the condition that they do not operate in violation of the laws of the state th Blackstone, the English jurist and torist opf the 18 century, ascribes the brith of the corp to the political necessities of

Numa Pompilius, who upon his accession to power in Rome, desiring to end the diruspting influence of the private war being waged between the Sabine and Roman factions thought it prudent and politic to measure and subdivide these two into smaller ones by instituting separate societies of every manual trade and profession

Rise and development of corporations 1.) Roman times Earliest form: Collegium = college of priests a) Had many rights and privileges which the law gives to modern corp Could hold property Sue and be sued Rights of the corp were separate from those of the individual members It existed in perpetuity It was autonomous Also has corporate form a) municipalities b) official societies engaged in state administration c) military groups d) trade and societies 2.) Medieval times Like the roman collegia: municipal and guild corporations a) Like non-stock corporations of the present day b) Embodied the idea of group working as a whole thru chosen representatives Different from present day corporations a) Though closely related to business b) More of a voluntary assoc of retailers or manufacturers in any given time c) With full legal authority to regulate the business practices of its members

d) Eventually became so autocratic in their proceedings that they became a hindrance rather than a help to progress 3.) In England Regulated companioes a) Ie Plymouth company, Hudson bay Company, East india company b) Dominant factor in british and foreing trade Chartered by the govt Were granted special privelges by their charters c) Consisted of A grant of a right to carry on A Certain kind of business In certain place conferred upon a group of persons d) Any group or a number of members jointly might exercise the right and only those who participated in the particular venture would be entitled to tis profits. Joint stock companies a) Companies conducted their operations as a unit and all the associated shared in the common profit. b) Became in effect Joint stock companies 4.) In the United States Before the revolution a) Corporations were mostly Educational Religious Military b) Not introduced into business affairs c) Entailed Exclusive privilege Carried the idea of monopoly granted by the crown th 19 century- corps began to make strides

Growth of manufacturers brought by the Napoleonic wars (manufacturing of arms/industrial revolution) Consequent rise of the investing class 1800-1835 Manufacturing companies Turnpike companies Canal and railway companies were incorporated Also banking institutions spread rapidly across the said country =corporate form of organization became thoroughly established 1811, New York First state to provide for incorporation under general laws for business pruposes 1855 Principle of limited liability was adopted in England When parliament passed a statue providing that only such companies which announce that their stockholders liability is limited shall escape the common law rule that stockholders shall be liable as partners. Abbrev of Ltd 5.) In the Philippines During Spanish Regime and Before the enactment of the former Corp Law a) Most common forms of businesses Governed by the Code of Commerce Sociedad en comandita limited partnership Sociedad regular colectiva- general partnership Most known

i. Sociedad anonimaA sociedad annima was considered a commercial partnership, a sort of a corporation, where upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical personan artificial being, invisible, intangible, and existing only in contemplation of lawwith power to hold, buy, and sell property, and to sue and be sueda corporationnot a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical persona corporation. Such inscription only operated to show that it partook of the form of a commercial corporation. xMead v. McCullough, 21 Phil. 95,106 (1911). The sociedades annimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956) Our Corporation Law recognizes the difference between sociedades annimas and corporations and will not apply legal provisions pertaining to the latter to the former Sociedad de cuentas en participacion joint account participation A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall

have no right of action against third person who contracted with the manager unless such manager formally transfers his right to them. b) Sociedad anonima most closely approaches the present day concept of corps, amongst all the then forms of commercial entities but it differs from it particularly on matters concerning organization of enterprise distribution of dividends and those in which equity intervenes for the benefit of stockholders c) all such societies and associations were abolished with the enactment of the former corp law and the new civil code save for sociedad de cuentas en participacion ( joint account participation./ joint venture?) American Occupation a) Phil Bill of 1902 Inserted provisions to control the law making power in the Phils in granting Of fracnhises Privileges And concessions Esp as to mining and corporations involved therein b) Act no. 1459 former corporation code Approved on 1906 Enacted under the guidance of The Phil Bill of 1902 Other acts of the US Congress Including some American state corporation laws Before the present Corp law (corporation code of the Philippines; may 1, 1980) the following laws were enacted affecting corporations: a) General Banking Act (RA 337)

b) Rural Banks Act (RA 7533) c) Investment company act ra 2629 d) Savings and loans association act ra 3779 e) Private doevt banks act ra 4093 f) Financing company act ra 5980 g) Investment houses law pd 129 h) Pawnshop regulation act pd 114 i) Insurance code of the phil pd 1460 6.) In modern business Growth in the past half century- leaps and bounds Almost the exclusive form business organization i. In businesses of a public or quasi-public such as: 1. Public utilities 2. Railroads 3. Insurance companies 4. Banking institutions Merits overshadow its drawbacks a) Form is flexible Control can be scientifically determined Risk is equitably apportioned Income distributed among ownered and creditors through the Various kinds of stocks and bonds And Judicious charting of charter ans by laws b) Assembles huge quantities of capital Gathered from many different quarters and provdes the means for efficiently administering it c) Possess a degree of permanence Usually Outlives the men who make and manage it

Section 1. Title of the Code. - This Code shall be known as "The Corporation Code of the Philippines Historical Background of our corp code
1.) Business associations under the Code of Commercea. Prior to 1906 i. Business assoc were partnerships and sociedades anonimas which were created by mere agreements ii. No entity in Spanish law which exactly corresponds to the notion of the corp in American law iii. Which prompted the phil commission, then legilastive body of the phils, to enact act no. 1459, a general law authorizing the creation of corporations in the phils 2.) Business associations under the former corp code a. Recognized the difference between sociedades anonimas and corporations i. Under sec 75 of said act, sociedades anonimas were made subject to the provisions of the corporation law 1. As far as such provisions were applicable 2. And were given the Option to either continue business as such corporation or to form and organize under and by virtue of the provisions of said act ii. Sec. 191 of said act expressly repealed the pertinent provisions of the Code of Commerce governing sociedad anonimas 1. With the proviso that those which elect to continue their business as such instead of reforming and organizing undetr the corporation law shall continue to be governed by the Code of Commerce as to:

their organization and method of transacting business and b. Rights of members thereof as among themselves 2. But was governed by the said code on a. Their relations to the public and public officials b. Evident purpose of enacting the said law was i. to introduce to the phils the American corporation as the standard commercial entity and ii. hasten the process of making sociedad anonimas, obsolete iii. remained practically intact except for some repeals or amendments until the enactment of BP 68 3.) Business corporation under the corporation codea. BP 68; Corporation code of the Philippines; took effect on the date of its approval May 1 1980 b. Supplants act 1459 c. Reproduced with amendments many provisions of theold corporation law d. Seeks to establish a new concept iof business corporations so that they are not merely entities established for private gain i. But effective partners of the National govt in spreading the benefits of capitalism for the social and economic development of the nation e. Significant changes one of which is the i. Grant of ample powers to the Securities and Exchange Commission 1. To enable it to exercise adequate supervision over the operations and activities of private corporations

a.

Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

Scope of the Code: 1.) Provides for the a) Incorporation b) Organization c) Regulation Of private corporations Both stock and non-stock Including religious and educational corporations 2.) Defines their powers And provide for their dissolution 3.) Fixes the Duties &Liabilities Of directors or trustees and other officers 4.) Declares the rights and liabilities of stockholders and members 5.) Prescribes the conditions under which corporations including foreign corporations may transact business 6.) Provides penalties for violations of the code 7.) Repeals all laws and parts of laws in conflict and inconsistent with the Code

Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations.

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 Statutory definition Refers only to Private corporations Corporations organized under the Corporation Code

(b) Created by operation of law (c) With right of succession (d) Only has powers, attributes and properties expressly authorized by law or incident to its existence Corporation as an artificial personality Corporation, doctrinally a legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entity to which it may be connected NOT , in fact and reality, a person but by process of fiction, the law treats it as though it were a person The stockholders or members, who are natural persons are absorbed in the corporate body, and compose the corporation but are NOT the corporation Consequences of such artificial personality 1.) Liability for acts or contracts a) GR: obligations incurred by a corp, acting through its authorized agents, are it sole liabilities b) Thus it may not also be made to answer for acts or liabilities of its stockholders/members or those of the legal entities to which it may be connected Suit against certain stockholders of a corporation cannot ipso facto be a suit against the unpleaded corporation Violates the principle of the distinct and separate personality of the corporation from tis tockholders

Judicial definitions Though terminology varies, elements are the same Most of which come American jurisprudence: 1.) an artificial being, invisible, intangible and existing only in contemplation of law 2.) An artificial being created by law and composed of individuals who subsist as a body politic under a special denomination with the capacity of perpetual succession and of acting within the scope of uits charter as a natural person 3.) A legal institution devised to confer upon the individuals of which it is composed powers priveleges and immunities which they would not otherwise possess, most important of which are: a. Continuous lega identity b. Perpetual or indefinite succession under the corporate name i. Notwithstanding successive changes by death or otherwise in the corporation or members thereof Attributes of a Corporation (a) A corporation is an artificial being

Failure to implead is a violation of its right to due process A corporate officer is not personally and solidarily liable with the corporation for the money claims of discharged and dismissed employees Unless he acted with evident malice or bad faith in terminating their employment Such dismissal if done in good faith cannot result in his personal liability All contracts entered into in its name by its regular appointed officers and agents are the contracts of the corporation and not those of the stockholders/members Corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president Stockholders credit/debt is not debt of corporation and vice versa Corporate officers cannot be held personally liable for the consequences of their acts for as long as they are for and on behalf of the corporation , Within the scope of their authority And in good faith President and manager of a corporation who entered into and signed a contract in his official capacity cannot be made liable thereunder in his personal capacity In the absence of stipulation to that effect

Property of the corporation is not the proeperty of the stockholders/members and may not be sold by the them without express authorization of its board of directors or trustees Their interest is only indirect, contingent and inchoate 2.) Liability when exceptional circumstances warrant Personal/solidary liability may be incurred by corporate agenst acting in behalf o fhte corporation oonly when exceptional circumstances warrant, such as: Director/trustee acted maliciously and in bad faith Agreed to hold himself personally and solidarily liable with the corporation o no law prohibiting a corporate officer from binding himself personally to answer a corporate debt Made by specific provision of law, personally liable for corporate action or it is proven that the officer has used the fiction of separate corporate personality to defraud a 3rd party or for wrongful ends 3.) Right to bring actionsIt may incur obligations and brign civil and criminal actions in its own name Corporation has no personality to bring an action for and in behalf of its stockholders/members for recovering property which belongs to said stockholders/members in their personal capacities Right to object to seizure of paper and documents of the corporation belongs to the corporation as a separate entity and not to its stockholders o Since legality of seizure can be contested only by the party whose rights had been violated

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. o A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by respondent bank as an artificial person. But moral damages due to a besmirched good reputation resulting in social humiliation maybe a ground for recovery of moral damages and attorneys fees o But a corporation whose credit reputation is not exactly something to be considered sound and wholesome cannot be entitle to a big amount fo moral damages o To recover moral damages it must Present Proof of existence of factual basis of the damage and establish its causal relation to the defendants acts this is so because MD are incapable of pecuniary estimation and is designed to

compensate the claimant for actual injury for purposes of venue, the place of business of the suing corporation is considered its residence o not the resident of its president 4.) Right to acquire and possess propertyAcquire an possess property of all kinds Property conveyed to or acquired by the corporation is , in law, the property of the corporation itself and not its stockholders/members Where real properties included in the inventory of the estate of the deceased are in the possession and are registered under the name of the corporation, in the absence of any cogency to pierce the veil of corporate fiction, the presumption of conclusiveness of the titles in favor of the corporation should stand unditrubed. a) Property of the corporation may not be sold to stockholders/members without the express authorization from the corporations board of directors or trustees b) While ashare of stock represents a proportionate interest in the prop of the corporation it does not vest the owner thereof, even if is the controlling shareholder, with any legal right or title to any of the properties of the corporation because ownership of that property is with the corporation not in the holders of shares of stocks c) Interest of shareholders in corporate property is purely inchoate and does not entitle them to intervene in a litigation involving corporate property d) A sheriff does not have to authority to attach the properties of the president of the judgment debtor corporation in order to enforce a writ of execution; on the ground that they are one and the same

 Mere fact that one is president of a corporation does not render his personal property, the property of the corporation Only the court has the power to pierce the veil of corporate entity. e) A tax exemption granted on a corporation cannot be extended to include the dividends paid by such corporation to its stockholders f) Agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the constitutional provision limiting land ownership to Filipinos and Filipino corporations. If the foreign ownership exceeds 40%, such is not adversely affected but the capacity of sadi corporation to own land It becomes disquilaified to own land 5.) Acquisition by court of jurisdiction In the absence of summons on the corporation, a judgement against it is void for lack of jurisdiction and lack of due process Participation of a general manager of a corporation in an action involving another corporation cannot equate to participation of the corporation for which said person is the general manager merely because said general manager is also the chairman of the board of the other corporation 6.) Changes in individual membership By death or transfer of interest of such memberships, a corporation remains unchanged and unaffected in its identity. As an entity distinct form its members or stockholders and as an artificial person, it continues to exist as such The doctrine of corporate entity fills a useful pruppose in business life Whether it be

To gain an advantage under the law of the state of incorporation To avoid or to comply with the demands of creditors To serve the creators personal or undisclosed convenience So long as that purpose is equivalent ot business activity or is followed by the carrying on of business of the corporation, the corporation remains a separate entity. Corporation as person, resident or citizen Tendency is to regard , as far as their inherent nature will permit, as on the same footing as ordinary individuals However, whether corporations are included within a statute depends upon the subject and purpose of such statute a.) As a person person prima facie implies both natural and artificial persons so GR is corporations are included Held as such in statutes concerning Attachment Taxation Usury Insolvency and banckcruptcy Limitations Prior notice to bring suit Right to appeal Allowing action of trespass Prohibiting banking business Conferring a cause of action for wrongful death

Allowing suit against usurpation of a public office or franchise Allowing a petition to quiet title and offering public lands for appropriation by all persons who enter upon them Used in statues providing suit because of the wrongful exercise of a franchise by a person When used in a definition of libel Within the meaning of section1 article 3 of the constitution No person shall be deprived of life, liberty and property without due process of law It is also entitled to t the equal protection of the laws in like manner as other persons in the same situation provided the corporation is within the jurisdiction of the state the protection of which is demanded The protection of sec 3 of bill of right sof the consti also applies to corporations, insuring the right of the people to be secured in their persons against unreasonable seizures and searches

As a collective body, it waives no constitutional immunities appropriate to such body It is also protected against unlawful discrimination As to liberty, however, as regards the constitutional provision, it only applied to natural persons so corporations are not included The constitutional provision on Self incrimination also does not apply to it o It beign granted with special privileges and franchises, it may not refuse to show its hand when charged with an abuse of such privileges b.) As a resident/ non resident Depends upon the meaning of the statute, if it is within the purpose and intent of the statue Ie statues defining jurisdiction of the courts Regarding taxation and venue

c.) As a citizen Is a status of a citizen with its rights and privileges and corresponding duties and obligations. Commonly implies membership in a political body and does not ordinarily include a corporation Unless the general purpose and import of the statue in which the term is found seem to require it No absolute and inflexible rule to deem a certain corporation a citizen for certain pruposes A corporation is a citizen within the meaning of a statue conferring rights, defining the jurisdiction of courts, or otherwise relating to citizens, if the purpose and intent of the statute renders it applicable GR, a corporation is a citizen of the country or state under the laws of which ti was created and exists without regard to the citizenship of its stockholders/members Corporation as a collection of individuals Notwithstanding the doctrine on the separate and distinct personality of a corporation from its stockholders/members A corporation is still, in fact a collection of individuals,. It really is the individuals composing it who own its property and carry on the corporate business, through the corporation and its agents, for their own profit and benefit

the doctrine on the separate and distinct personality of a corporation from its stockholders/members is merely a fiction of law introduced for the convenience in conducting the business in this privileged way recognized for many purpose o as between the stockholders/members themselves o as between them and the corporation in order to enforce and protect their rights entitled to benefits by way of dividends entitled to insist that the corporation shall keep within the powers and purposes for which it was formed and ay sue in equity , if necessary to compel it do so

Doctrine of Piercing the Veil of Corporate Fiction One of the advantages of a corporate form of business organization is the limitation of an investors liability to the amount of the investment. o This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is o utilized as a shield to commit fraud, illegality or inequity; o defeat public convenience; o confuse legitimate issues; o or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one,

were it not for the existing corporate fiction. xLim v. Court of Appeals, 323 SCRA 102 (2000). .

Rationale: to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as shield for undertaking certain proscribed activities
To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. o Presumption: stockholders and officers and the corporation are distinct entities Burden of proof lies upon the party seeking to pierce the veil

Classification of the Piercing Cases: (i) When the corporate entity is used to commit fraud or to do a wrong (fraud cases) o Also used to justify a wrong, protect fraud or defend a crime (ii) When the corporate entity is merely a farce since the corporation is merely the alter ego, business conduit or instrumentality of a person or another entity (alter ego cases); and (iii) When the piercing the corporate fiction is necessary to achieve justice or equity o As when it was used as a vehicle for the evasion of an existing obligation so as to defeat public convenience

Effect as to liability Corporation will be treated as merely an association of persons and stockholders/members will be considered as the corporation Liability will attach personally and directly to the stockholders/members Or where there are 2 corporations, they will be merged into one. o The other being regarded merely as an instrumentality, agency, conduit or adjunct of the other The application of the doctrine to a particular case does not deny
the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied o Absent proof that the separate personality of the corporation was used as shield for any wrongdoing, general rule on corporate liability should apply o Any piercing of the veil must be done with caution Where it is not sought to hold the officers and stockholders personally liable for corporate debt, even with if the fact of fraud was established, it will not be sufficient to pierce the corporate veil