SEC. 1.

Title of the Code

This law is called the "Revised Corporation Code of the Philippines". It became effective on
February 23, 2019.

SEC. 2. Corporation Defined

A corporation is like a "made-up person" created by law. This "person" has its own rights, powers,
and properties, just like a real person. It also has the ability to continue even if the people who
created it change.

What does it mean that a corporation is an artificial being?

A corporation is treated like a separate legal person from the people who run or own it. This means it
can:

● Enter into contracts.

● Own property.
● Sue and be sued.

But it's different from a human being—it exists only because the law allows it to. The people who
own or run the corporation (called shareholders or directors) are usually not responsible for the
corporation’s debts or actions.

Characteristics of a Corporation:

1. Artificial being: It’s created by law, not born like a person.

2. Created by law: It exists because the government gave it the right to exist.
3. Right of succession: It continues even if shareholders or directors change.
4. Powers from law: It can only do what the law allows it to do.

Government-Owned or Controlled Corporation (GOCC)

A GOCC is a company owned or controlled by the government. For it to be considered a GOCC:

● It must be a stock or non-stock corporation.

● The government must own at least 51% of the company's shares or have enough control over
its decisions.

Piercing the Veil of Corporate Fiction

This is a legal principle where courts can ignore the separate legal personality of a corporation and
treat the people behind it as responsible for its actions. This happens only in cases where:

1. The corporation is used to commit fraud or cheat others.

2. The corporation is controlled in such a way that it has no separate will or existence from its
owners.
3. This control caused harm to others.

Example: If a business owner creates two companies but uses one to hide assets or avoid paying
debts, the court may decide to "pierce the veil" and hold the owner or both companies responsible.

Problem Scenarios

1. Oil Import Case:

○ U Corp. imported oil but didn’t pay all the taxes.
○ O Corp., a company owned 100% by U Corp., was also involved.
○ The question was whether O Corp. should also be liable for U Corp.’s unpaid taxes.
2. Answer: The court decided not to pierce the corporate veil because there was no proof that O
Corp. was being used to avoid paying taxes or commit fraud. U Corp. was still seen as a
separate entity responsible for its own debts.

Doctrine of Piercing the Corporate Veil – Use with Caution

Courts must be very careful when using this doctrine. It should only be applied when it's proven that
the separate existence of the corporation was used for fraud or wrongdoing.

Example of Piercing the Corporate Veil

The court may pierce the corporate veil in these situations:

● A company was set up just to avoid paying debts.

● To cover up fraud.
● To shield unfair actions.

Example Case: E Bank lent money to H Corp. When H Corp. couldn’t pay, G Corp., a company
owned by the same people, was asked to pay too. The court looked at the relationship between H
Corp. and G Corp. and found they were so connected that they could be treated as one company for
the purpose of paying the debt.

Succession (Artificial Succession)

In the context of a corporation, artificial succession refers to the continuation of a corporation's legal
status, even when there are changes in ownership or management. This means that the corporation
remains a separate legal entity regardless of the individuals involved in its operations.

Powers of a Corporation

A corporation has only the powers that are:

1. Expressly granted by the Corporation Code or special laws, and

2. Implied or incidental to its existence.
These powers are exercised by the corporation through its board of directors or its
authorized officers and agents.

Right of a Corporation to Own Property

When a corporation acquires property, it belongs to the corporation, not to the stockholders or
members. A corporation is considered a juridical entity, meaning it has a legal personality separate
and distinct from its individual members.

SEC. 3.

Classes of Corporations

1. Stock Corporations
○ Corporations with capital stock divided into shares.
○ Authorized to distribute dividends or surplus profits based on the shares held.
2. Example:
○ Government-Owned or Controlled Corporations (GOCCs) like Land Bank of the
Philippines and Development Bank of the Philippines are stock corporations. Other
examples include the Philippine Crop Insurance Corporation and the Philippine
International Trading Corporation.
3. Non-Stock Corporations
○ Corporations where no part of the income is distributable as dividends to members,
trustees, or officers.
○ Any profit made must be used to further the corporation's goals.
4. Example:
○ St. Luke’s Medical Center, Inc. is a non-stock, non-profit charitable institution.

MIAA: Is It a Stock or Non-Stock Corporation?

In the case of Manila International Airport Authority (MIAA) v. Court of Appeals, the Supreme
Court clarified that MIAA is neither a stock nor a non-stock corporation because:

● It has no capital stock divided into shares, meaning it does not have stockholders or voting
shares (hence, not a stock corporation).
● It has no members, which is required to be considered a non-stock corporation. Also, MIAA
remits a portion of its gross income to the National Treasury, which is inconsistent with how
non-stock corporations operate.

As a public utility, MIAA is an instrumentality of the government and does not qualify as a
government-owned or controlled corporation under the Corporation Code.

Other Classes of Corporations

1. As to Purpose:
○ Public Corporation:
A corporation created by the government to manage and govern a specific part of the
state, aimed at promoting the general good and welfare.
Example: Local government units like cities and municipalities.
○ Private Corporation:
Formed for private purposes, typically for profit or a specific private benefit.
Example: Commercial businesses or private companies.
○ Government-Owned or Controlled Corporation (GOCC):
A corporation that is owned by the government, either wholly or partially. In the case of
stock corporations, the government must own at least 51% of the capital stock.
Example: Land Bank of the Philippines, Government Service Insurance System (GSIS).
○ Quasi-Public Corporation:
A private corporation that has been granted a franchise or contract by the state to
perform public duties. Despite this, it is organized for profit.
Examples: Utility companies such as electric, power, and transportation providers (e.g.,
power distribution companies or railway operators).

As to Legal Right to Corporate Existence:

1. De Jure Corporation:
A corporation that has been created in strict or substantial conformity with all the mandatory
statutory requirements for incorporation. Its right to exist as a corporation cannot be
successfully challenged or questioned, even by the state in a direct proceeding.
Key Point: It is a legally recognized corporation with full legal standing.
2. De Facto Corporation:
A corporation that claims in good faith to be a corporation and operates as such, even though
there may be some minor irregularities in its incorporation process. Its corporate status cannot
be questioned in a private suit, but the state, through the Solicitor General, can challenge its
existence in a quo warranto proceeding.
Key Point: It is allowed to operate as a corporation unless formally challenged by the
government.
 3. Corporation by Estoppel:
Occurs when individuals act as a corporation without proper authority, knowing they are not
legally incorporated. They can be held personally liable for the debts and liabilities incurred in
the name of the so-called "corporation."
Key Point: Those acting without authority as a corporation can be treated as general partners
and held responsible for any debts or obligations.
4. Corporation by Prescription:
A corporation that has operated and exercised corporate powers for a long period without
interference from the government. Over time, its right to exist as a corporation becomes
recognized, even without formal legal recognition.
Key Point: Long-standing, unchallenged operation leads to implicit recognition by the state.

As to Laws of Incorporation:

1. Domestic Corporation:
A corporation incorporated under the laws of the Philippines. It follows the legal requirements
and provisions of the Philippine Corporation Code.
2. Foreign Corporation:
A corporation formed, organized, or existing under the laws of a foreign country. For it to do
business in the Philippines, the laws of the foreign country must also allow Filipino citizens or
businesses to operate within its jurisdiction.

As to Laws of Incorporation:

1. Domestic Corporation:
A corporation incorporated under the laws of the Philippines. It follows the legal requirements
and provisions of the Philippine Corporation Code.
2. Foreign Corporation:
A corporation formed, organized, or existing under the laws of a foreign country. For it to do
business in the Philippines, the laws of the foreign country must also allow Filipino citizens or
businesses to operate within its jurisdiction.

As to Whether They Are Open to the Public or Not:

1. Open Corporation:
A corporation that is open to any person who wishes to become a stockholder or member.
There are generally no restrictions on stock ownership, making it accessible to the public.
2. Close Corporation:
A corporation whose articles of incorporation include specific limitations:
○ The corporation’s issued stock, excluding treasury shares, is held by no more than a
specified number of people (not exceeding 20).
○ The issued stock is subject to one or more restrictions on its transfer.
○ The corporation cannot list its shares on a stock exchange or make a public offering of
its stock.
 3. Key Features: Close corporations typically operate more like private businesses with tighter
control over ownership and management.

As to Relationship of Management and Control:

1. Parent/Holding Corporation:
A corporation that holds stock in another corporation primarily to control or influence its
operations and decision-making. It typically owns a significant percentage of the subsidiary’s
voting shares.
2. Subsidiary Corporation:
A corporation where more than 50% of the voting stock is controlled, either directly or
indirectly, by another corporation (the parent corporation). The parent corporation uses this
control to influence the subsidiary's business and strategic decisions.

As to the Number of Persons Who Compose Them:

1. Corporation Aggregate:
A corporation that consists of more than one member or shareholder. This is the most common
form of corporation, where multiple individuals or entities own shares or have membership.
2. Corporation Sole:
A type of corporation that consists of a single person, typically for the purpose of managing
and administering the affairs, property, and temporalities of a religious denomination, sect, or
church. The individual acts as a trustee, ensuring the continuity of ownership and management
for the religious organization.

As to Whether They Are for Religious Purposes or Not:

1. Ecclesiastical Corporation:
A corporation that is specifically organized for religious purposes, such as managing church
property or supporting religious activities.
2. Lay Corporation:
A corporation formed for purposes other than religion, often focusing on secular or
non-religious activities, such as business or social objectives.

As to Whether They Are for Charitable Purposes or Not:

1. Eleemosynary Corporation:
A corporation established for charitable purposes, with the goal of benefiting the public or
specific groups, such as through philanthropy, education, or healthcare. Examples include
foundations and non-profit organizations.
2. Civil Corporation:
A corporation organized primarily for business or profit-oriented purposes, engaging in
 commercial activities with the aim of generating financial returns for its shareholders or
members.

SEC. 4. Corporations Created by Special Laws or Charters

Corporations can be created either by general law or by special law. Corporations created by special
laws or charters, such as government-owned or controlled corporations (GOCCs), are governed
primarily by those special laws, and only secondarily by the Corporation Code of the Philippines.

General Law vs. Special Law

● General Law: For private corporations, the Corporation Code sets the requirements that
need to be complied with to form a corporation. Once the requirements are fulfilled, the
corporation is formed and acquires its legal status.
● Special Law: Government-owned corporations are typically created through special laws or
charters, often known as "chartered corporations." These corporations are required to serve
the common good and meet the test of economic viability, as mandated by Section 16, Article
XII of the 1987 Constitution.

SEC. 5. Corporators and Incorporators, Stockholders and Members

Key Components of a Corporation:

1. Corporators:
○ The people who compose the corporation, whether as stockholders in a stock
corporation or members in a non-stock corporation.
2. Incorporators:
○ The original stockholders or members who are mentioned in the Articles of
Incorporation as the individuals who formed the corporation.
3. Stockholders (Shareholders):
○ Owners of shares in a stock corporation.
4. Members:
○ The corporators of a non-stock corporation.
5. Board of Directors or Board of Trustees:
○ The Board of Directors governs a stock corporation, while the Board of Trustees
governs a non-stock corporation.
6. Corporate Officers:
○ These include the president (who must be a director), the treasurer, and the secretary
(who must be a resident and citizen of the Philippines). A compliance officer is also
required if the corporation is vested with public interest.
7. Subscriber:
○ A person who agrees to take and pay for unissued shares of a corporation.
8. Underwriter:
 ○ A person who guarantees the distribution and sale of securities issued by another
company.
9. Promoter:
○ An individual who initiates the formation and organization of a corporation by bringing
together incorporators, procuring subscriptions, and setting the process of incorporation
in motion.

Formation of a Domestic Corporation:

● Two (2) to fifteen (15) incorporators may organize a corporation.

● Each incorporator must own at least one share in a stock corporation or be a member in a
non-stock corporation.
● Incorporators can be natural persons or entities like SEC-registered partnerships or domestic
corporations.
● Each incorporator signing the Articles of Incorporation must indicate the capacity in which they
are signing (e.g., incorporator or representative of an entity).

One Person Corporation (OPC):

● A corporation that can have a single stockholder and a sole director.

Section 6: Classification of Shares

1. Classification of Shares:
○ Shares in stock corporations can be divided into classes or series, with varying rights,
privileges, or restrictions. The classification must be clearly stated in the corporation’s
Articles of Incorporation.
○ All shares are generally equal unless otherwise specified.
2. Voting Rights:
○ No share may be deprived of voting rights unless it's classified as preferred or
redeemable shares, but there must always be a class or series of shares with full voting
rights.
○ Non-voting shares are entitled to vote in important matters like:
■ Amendments to the Articles of Incorporation.
■ Adoption or amendment of bylaws.
■ Sale or disposition of corporate assets.
■ Incurring corporate debts.
■ Increase or decrease of capital stock.
■ Merger or consolidation.
■ Investment in another corporation.
■ Dissolution of the corporation.
3. Par Value and No-Par Value Shares:
○ Par value shares have a fixed value stated in the Articles of Incorporation.
 ○ No-par value shares can be issued but for no less than ₱5 per share, except in certain
industries (banks, trust companies, insurance, etc.) that cannot issue no-par shares.
4. Preferred Shares:
○ Preferred shares may have priority in dividend distribution and in corporate liquidation.
They must have a stated par value and can have their terms set by the board, provided
it's filed with the SEC.
5. Doctrine of Equality of Shares:
○ All shares are equal unless the Articles of Incorporation state otherwise.

Voting Rights in Different Contexts

● Stock Corporations: The right to vote is inherent in stock ownership. Only issued shares can
be voted; unissued stocks or treasury shares cannot be considered.
● Non-Stock Corporations: Members vote as individuals, with each member typically having
one vote, unless the Articles of Incorporation or bylaws state otherwise.

Example Problem Analysis:

In the case where Class "B" shareholders were denied voting rights by the Articles of Incorporation of
M Corp., the court concluded that, unless Class "B" shares are clearly identified as preferred or
redeemable, they cannot be deprived of voting rights. The right to vote is inherent in stock ownership,
and the inclusion of the phrase "except as otherwise provided by law" in the Articles of Incorporation
suggests that the law being referred to is the Corporation Code. Since the Code prohibits the
deprivation of voting rights for non-preferred, non-redeemable shares, Class "B" shareholders have
the right to vote.

Section 7: Founders' Shares

1. Definition:
○ Founders' shares are a special class of shares classified in the Articles of Incorporation.
They can be given specific rights and privileges not available to other shareholders,
such as enhanced dividend payments or other benefits.
2. Limitation on Founders' Shares:
○ If founders' shares are given exclusive rights to vote and be voted for in the election of
directors, this right can only be valid for a maximum of five years from the date of
incorporation.
○ This right cannot be granted if it violates certain laws, such as:
■ The Anti-Dummy Law (Commonwealth Act No. 108)
■ The Foreign Investments Act of 1991 (Republic Act No. 7042)
■ Other relevant laws that may affect the legality of such exclusive rights.

In essence, founders' shares can offer special privileges, but the right to control corporate elections is
limited and regulated to ensure compliance with specific laws.

Section 8: Redeemable Shares

 1. Definition:
○ Redeemable shares are typically preferred shares that the corporation can buy back
from shareholders after a fixed period or at the option of the corporation or the
shareholder, at a predetermined redemption price. This buyback (or redemption)
involves the repurchase of shares by the corporation for cancellation.
2. New Provisions:
○ The current code allows the redemption of shares even if there are no unrestricted
retained earnings. This is an exception to the general rule that a corporation can only
buy its own shares using its current earnings.
○ However, after redemption, the corporation must still have sufficient assets to cover its
debts and liabilities, including the capital stock. Redemption is not allowed if it causes
the corporation to become insolvent or unable to pay its debts as they become due.
3. Limitations on Redeemable Shares:
○ Explicit Provision: Redeemable shares must be specifically stated in the articles of
incorporation.
○ Terms and Conditions: The details regarding redemption must be clearly outlined both
in the articles of incorporation and on the stock certificates.
○ Voting Rights: Redeemable shares may be deprived of voting rights if indicated in the
articles of incorporation.
○ Insolvency: Redemption cannot occur if it would cause insolvency or financial
instability.
4. Retained Earnings:
○ Retained earnings refer to the accumulated profits of a corporation after dividends have
been paid. It represents the earnings that the corporation has kept rather than
distributed to shareholders.
5. Types of Redeemable Shares:
○ Compulsory: The corporation is required to redeem the shares.
○ Optional: The corporation has the option, but is not obligated, to redeem the shares.

Problem Scenario:

In this scenario, Y Corp. secured a loan from X Bank and issued preferred shares instead of the full
loan amount. The stock certificates allowed X Bank to redeem these shares, but only at its option.
When Y Corp. attempted to compel redemption, X Bank argued it could not be forced to do so, citing
financial regulations from the Central Bank that prohibited redemption due to X Bank's financial
instability.

Answer:
The stock certificate gives the option to redeem the shares to X Bank, making it an optional
redemption. Thus, Y Corp. cannot compel X Bank to redeem the shares. Furthermore, the Central
Bank's directive to prohibit redemption due to X Bank’s financial condition was valid, as it aimed to
prevent financial instability. Redemption cannot occur if it jeopardizes the financial health of the bank,
in line with the limitation that redemption should not cause insolvency.

6. Reissuance of Redeemed Shares:

 ○ Redeemable shares, once redeemed, are typically retired and cannot be reissued
unless reissuance is explicitly allowed in the articles of incorporation.
7. Trust Fund Doctrine:
○ This doctrine holds that a corporation's capital stock subscriptions form a "trust fund" for
creditors, ensuring that creditors have a source of repayment. Under this principle,
capital distribution (like redeeming shares) is restricted to protect corporate creditors.

Section 9: Treasury Shares

1. Definition:
○ Treasury shares are stocks that have been issued and fully paid for but were later
reacquired by the issuing corporation. The reacquisition can happen through purchase,
redemption, donation, or other lawful means. These shares are still owned by the
corporation but are not considered outstanding shares and are held in the company's
treasury.
2. Rights Denied to Treasury Shares:
○ Treasury shares do not have:
■ Voting rights: They cannot be used to influence corporate decisions, such as
electing the board of directors.
■ Dividend rights: They are not entitled to receive dividends distributed to
shareholders.
3. Sale of Treasury Shares:
○ Treasury shares can be resold by the corporation, typically at a price set by the board
of directors. If these shares are sold below their original par value, they are not
considered watered stock.
4. Watered Stocks:
○ Watered stock refers to stocks issued for less than their par value or for non-cash
consideration overvalued at the time of issuance. This only applies to the original
issuance of shares.
○ Note: Since treasury shares have already been issued and fully paid for, selling them
for less than their original price does not make them watered stock.