LECTURE ON

CORPORATION AND
BASIC SECURITIES
LAW
BY LABOR ARBITER LEILANIE BRAZA ORO
General Provisions
CORPORATION- artificial being created by operation of law having the right of
succession, and the powers, attributes and properties expressly authorized by law
and incident to its existence (Sec. 2).

THEORIES ON THE FORMATION OF A CORPORATION:

• CONCESSION THEORY – juristic principle in the creation of corporation, under which

a corporation is an artificial creature without any existence until it has received the
imprimatur of the state acting according to law, through the SEC.
• THEORY OF CORPORATE ENTERPRISE OR ECONOMIC UNIT – corporation not merely
an artificial being, but more as an aggrupation of persons doing business, or an
underlying business unit.
• ETHNOLOGICAL THEORY – Corporate idea is the product of no one people, and no
one country but on the contrary, developed more or less independently, in varying
forms among the several ethnological units.
• IMITATIVE THEORY OF JURAL DEVELOPMENT – the formation of private corporation
for certain purposes is permitted on the condition that they did not operate in
violation of laws of the state.
TITLE OF THE CODE

THE CORPORATION CODE OF THE

PHILIPPINES
I HISTORICAL BACKGROUND OF THE CORPORATION CODE

• CURRENT LAW – REPUBLIC ACT NO. 11232 entitled An Act Providing for
the Revised Corporation Code of the Philippines signed on 20 Feb. 2019,
and published in the Official Gazette on 21 February 2019.

Previously, the law is BATAS PAMBANSA BLG 68 , which took effect on 1 May
1980. It adopted various corporate doctrines enunciated by the Supreme
Court under the old Corporation Law. It clarified the obligations of corporate
directors and officers, expressed in statutory language established
principles and doctrines, and provided for a chapter on close corporations

• It supplants Act No. 1459 known as the Corporation Law enacted on 1

March 1906, which took effect on 1 April 1906.
Constitutional basis: Article XII Section 16 of the Constitution
• The Philippine Corporate Law When the Philippines
came under American sovereignty, attention was drawn
to the fact that there was no entity in Spanish law
exactly corresponding to the notion ―corporation‖ in
English and American law; the Philippine Commission
enacted the Corporation Law (Act No. 1459), to
introduce the American corporation into the Philippines
as the standard commercial entity and to hasten the
day when the sociedad anónima of the Spanish law
would be obsolete. The statute is a sort of codification
of American Corporate Law. Harden v. Benguet
Consolidated Mining Co., 58 Phil. 141 (1933).
The first corporate statute, the Corporation Law, or Act
No. 1459, became
effective on 1 April 1906. It had various piece-meal
amendments during its 74
year history. It rapidly became antiquated and not
adapted to the changing time
Scope of the Code
• Provides for the incorporation, organization and regulation of
private corporations, both stock and non-stock, including
educational and religious corporations;
• Defines powers and duties for their dissolution;
• Fixes the duties and liabilities of directors or trustees and
other officers thereof;
• Declares the rights and liabilities of stockholders or members;
• Prescribes the conditions under which corporations including
foreign corporations may transact business;
• Provides for violations of the Corporation Code; and
• Repeals all laws and parts of laws in conflict and inconsistent
with the Code.
Theories on Formation of
Corporation
Theory of Concession (Tayag v. Benguet
Consolidated Inc., 26 SCRA 242
[1968])
To organize a corporation that could claim a juridical
personality of its own and transact business as such, is
not a matter of absolute right but a privilege which may
be enjoyed only under such terms as the State may
deem necessary to impose (Ang Pue & Co. v. Sec. of
Commerce and Industry, 5 SCRA 645 [1962]).
• Before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special
law or a general enabling act, and the procedure and
conditions provided under the law for the acquisition of
such juridical personality must be complied with. The
failure to comply with the statutory procedure and
conditions does not warrant a finding that such association
achieved the acquisition of a separate juridical
personality, even when it adopts sets of constitution and
by-laws. xInternational Express Travel & Tour Services, Inc.
v. Court of Appeals, 343 SCRA 674 (2000).
Theories on Formation of
Corporation
Theory of Enterprise Entity (Berle, Theory of Enterprise Entity, 47 Col. L.
Rev. 343 [1947])
Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity,
such as the use of separate personality to avoid the execution of the property of
a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).
A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself
as a collective body, it waives no constitutional immunities and perquisites
appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of Appeals,
281 SCRA 232 (1997)
FRANCHISES OF CORPORATION

PRIMARY FRANCHISE – the franchise to exist

as a corporation.
SECONDARY FRANCHISE – right or privilege
conferred upon existing corporation, such as
to use the streets of a municipality to lay
pipes or tracks, or operate a messenger and
express delivery service.
 DISTINCTION BETWEEN PRIMARY
AND SECONDARY FRANCHISE
1. refers to the franchise of being or existing as a 1. refers to the exercise of rights as for example, the right of
corporation, i. e., possessing a unity and eminent domain or the partial appropriation of public property
continuity of existence

2. vested in the individuals who compose the 2. It is deemed to vest in the corporation
corporation and is essential to a corporation de
jure.

3. it cannot be sold or transferred because it is 3. It may be sold or transferred; sue or be sued; subject to sale on
inseparable from the corporation itself. execution, subject to levy provided such sale is decreed or
ordered in judgment and is effective only when sale is confirmed
by court often due notice.
 Definition of Corporation Code
(Sec. 2 of the Corporation Code)
ATTRIBUTES OF A CORPORATION
•It is an artificial being.
•It is created by operation of law.
•It enjoys the right of succession.
•It has the powers, attribute and properties expressly authorized by law or
incident to its existence.
Note: Corporation as an artificial personality:

Discussion (see de Leon’s book) : as to liability for debt/ ownership of credit

As to right to bring actions
As to the right to acquire and possess property
As to liability for contracts
As to tax exemption/ liability
Changes in individual membership
As to liability under exceptional circumstances
• DOCTRINE OF SEPARATE PERSONALITY
 A corporation has a personality separate and distinct from that of its stockholders or
members.
PIERCING THE DOCTRINE OF THE VEIL OF CORPORATE FICTION
 Allows the state to disregard for certain justifiable reasons the fiction of juridical personality
for the corporation, separate and distinct from the persons composing it.
THREE CLASSES OF PIERCING:
1 Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong
2 Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter
ego, business conduit or instrumentality of a person or another corporation
INSTRUMENTALITY RULE: Here, one corporation is so organized and controlled and its affairs
are conducted so that it is in fact, a mere instrumentality or adjunct of the other, the fiction of
the corporate entity of the “instrumentality” may be disregarded. The control necessary to
invoke the rule is not mere majority or even complete stock control but such domination of
finances, policies, practices that the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is, but a conduit for its principal.
3 Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity

Corporation as a creation of law or by operation of law-

Special authority or grant by the state is required
Governing general/ special laws
CLASSES OF CORPORATION (SEC. 3)
REQUISITES OF DE FACTO CORPORATION:
• The existence of a valid law under which it may be incorporated;
• An attempt in good faith to incorporate;
• Use of corporate powers; and
• Issuance of certificate of incorporation by the SEC as a minimum requirement of
continued good faith.
C. Corporation by estoppel – groups of persons which holds itself out as a corporation and enters
into a contract with a 3rd person on the strength of such appearance. It cannot be permitted to
deny its existence in an action under said contract (Sec. 21).
D. Corporation by prescription – body that though not lawfully organized as a corporation, has been
duly recognized by immemorial usage as a corporation, with rights and duties maintainable at law.
5. AS TO EXISTENCE OF SHARES OF STOCK
A. stock corporation – a corporation in which capital stock is divided into shares and is authorized to
distribute to holders thereof of such shares dividends or allotments of the surplus profits on the
basis of the shares held. (Sec. 3).
B. Non-stock corporation – not issue stocks and not distribute dividends to their members, for public
good and welfare.
6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL
A. Parent or Holding corporation - it is one which controls another as a subsidiary by the power to
elect management. It is one which holds stocks in other companies for purposes of control rather
than for mere investment. It has a passive portfolio merely holding securities for control and
management, as distinguished from an active investment policy which has an active portfolio
buying and selling securities
 TWO KINDS OF SUBSIDIARIES
B. subsidiary corporation
1 MAJORITY OWNED SUBSIDIARY – where one corporation owns 51%-94% of the
capital stock of another corporation.
2 WHOLLY OWNED SUBSIDIARY – where one corporation holds 95% to 100% of the
capital stock of another corporation.
Affiliates – company which is subject to common control of a mother holding company
and operated as part of the system.
Parent and subsidiary corporation - separate entities with power to contract with
each other. The board of directors of the parent company determines its representatives
to attend and vote in the stockholder’s meeting of its subsidiary. The stockholders of the
parent company demand representation in the board meetings of its subsidiary. The
board of directors of the parent or holding company has the prerogative to choose its
nominees in the board of directors or its subsidiary.

7. AS TO PLACE OF INCORPORATION
Domestic corporation- corporation formed, organized or existing under laws
Foreign Corporation – a corporation formed , organized or existing under any laws
other than those of the Philippines and whose laws allow Filipino citizens and corporation
to do business in its own country or state (Section 123).
CLASSES OF CORPORATION
(SEC. 3)
8. As to the number of persons composing it
a. Corporation aggregate
b. Corporation sole
9. As to whether they are for religious purpose or not
c. Ecclesiastical
d. Lay corporation
10. as to whether they are for charitable purposes or not
e. Eleemosynary
f. Civil
11. as to whether theya re corporations in a true sense or only in a limited sense
g. True corporation
h. Quasi-corporation
Corporation by prescription
corporation by estoppel
OTHER CORPORATIONS

1 Close Corporation
2 Special Corporation
3 educational corporation
4 Religious corporation
5 Corporation sole
6 Religious societies
• RULE ON CONVERSION
• STOCK CORPORATION TO NON-STOCK
An existing stock corporation may be converted into a non-stock corporation by
mere amendments of its articles of incorporation.

• CONVERSION OF NON-STOCK CORPORATION TO STOCK CORPORATION

Mere amendment of the articles would not suffice as it would change its very
nature from non-profit to monetary gain. It is fundamental that the non-stock
corporation be dissolved first. A non-stock corporation only holds its funds in trust
for carrying out the objectives expressed in its charter. The conversion without
dissolving it first would be tantamount to distribution of its assets or income to its
members inasmuch as after its conversion, the asset of the non-stock corporation
would now be treated as payment to the subscriptions of the members who will
now become stockholders of the corporation. Moreover, the scheme might defraud
the public who may have given donations not for the benefit of the stockholders
but for organization purposes.
ADVANTAGES OF CORPORATION
AS AGAINST UNREGISTERED
ASSOCIATION
Enjoys perpetual succession under corporate name and in an artificial form
Can take and grant property
Can contract obligations
Can sue and be sued in its corporate name as a juridical person
Capacity to receive and enjoy common grants of privileges and immunities
no personal liability beyond value of their shares
Advantages and Disadvantages of
Corporate Form:
Four Basic Advantageous Characteristics of
Corporate Organization:
(i) Strong Legal Personality
- Entity attributable powers
- Continuity of existence
- Purpose
The corporation was evolved to make possible the aggregation and
assembling
of huge amounts of capital upon which big business depends; and has the
advantage of non-dependence on the lives of those who compose it even as it
enjoys certain rights and conducts activities of natural persons. Reynoso, IV v.
Court of Appeals, G.R. No. 116124-25, 22 November 2000
Advantages and Disadvantages of
Corporate Form:
ii) Centralized Management.
(iii) Limited Liability to Investors
One advantage of a corporate business organization is the limitation of
an
investor’s liability to the amount of the investment, which flows from
the legal
theory that a corporate entity is separate and distinct from its
stockholders. xSan
Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296
SCRA 631,
645 (1998).
(iv) Free Transferability of Units of Ownership for Investors
Advantages and Disadvantages of
Corporate Form:
Disadvantages
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) Cost of maintenance
(iv) Double taxation
 CLASSES OF CORPORATION
1 AS TO ORGANIZERS
A. public – by State only; and
B. private – by private persons alone or with the State.
2. AS TO FUNCTIONS
A. public – governmental and other functions; and
B. private – usually for profit-making functions
3. AS TO GOVERNING LAW
A. public – Special Laws; and
B. private – Law on Private Corporations
4. AS TO LEGAL STATUS/ legal right to corporate existence
A. de jure corporation – corporation organized in accordance with requirements of
law
B. de facto corporation – a corporation where there exists a flaw in its incorporation
(Sec. 20). Its existence cannot be inquired collaterally. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding (Sec. 20).