Classification of Corporation (Sec.

3)
SEC. 3. Classes of Corporations. – Corporations formed or organized under this Code may be stock or
nonstock corporations. Stock corporations are those which have capital stock divided into shares and
are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits
on the basis of the shares held. All other corporations are nonstock corporations.

 Stock Corporations: These corporations have capital stock divided into shares and are
authorized to distribute dividends or surplus profits to shareholders based on the shares they
hold.

 Nonstock Corporations: All other corporations that do not have capital stock divided into shares
and do not distribute dividends are considered nonstock corporations.

Parties Involved: F.F. Cruz & Company, Inc. (Petitioner) vs. Authority of the Freeport Area of Bataan
(AFAB), represented by Deogracias G.P. Custodio (Respondent).

FACTS:
The Authority of the Freeport Area of Bataan (AFAB) filed complaints before the Regional Trial Court
(RTC), asserting that it was exempt from paying docket fees because it was a government
instrumentality.
AFAB claimed it was a government instrumentality because it does not have the characteristics of a
GOCC (such as having stockholders, shares, or members), it operates with governmental and regulatory
functions, and it enjoys a level of operational autonomy that aligns with the legal definition of a
government instrumentality.
AFAB argued that it was created specifically to manage and operate the Freeport Area of Bataan,
focusing on governmental and regulatory functions. It performs roles such as regulating public utilities,
services, and infrastructure within the Freeport, which are inherently governmental in nature.
It functions as a self-reliant and self-sustaining entity, which aligns with the characteristics of a
government instrumentality rather than a GOCC.
The petitioner contended that AFAB's claim of being a government instrumentality was incorrect and
that it should not be exempt from these fees.
The petitioner referred to the specific provisions in AFAB’s charter (Republic Act No. 9728, also known as
the "Freeport Area of Bataan Act of 2009") that mention the capitalization of AFAB. According to Section
21 of this Act, AFAB's capitalization includes a government contribution of ₱2.5 billion, along with other
assets. This was referred to as "capital stock" which is a fundamental characteristic of a stock
corporation.
RTC Decision: Classified AFAB as a GOCC and ordered it to pay docket fees.
Court of Appeals Decision: Overturned the RTC's ruling, classifying AFAB as a government
instrumentality, exempting it from paying docket fees.
ISSUE:
Whether AFAB is classified as a Government-Owned or Controlled Corporation (GOCC) or a government
instrumentality, which affects its obligation to pay docket fees in legal cases.
RULING:
AFAB as a Government Instrumentality: The Supreme Court upheld the Court of Appeals' decision,
ruling that AFAB is a government instrumentality vested with corporate powers, not a GOCC and as a
government instrumentality, AFAB is exempt from the payment of legal or docket fees.
The court held that AFAB has capital stock, but this capital is not divided into shares. This is a critical
point because stock corporations typically have capital stock divided into shares, which are held by
shareholders entitled to dividends. Since AFAB's capital stock is not divided into shares, it does not meet
the criteria for being classified as a stock corporation.
No Stockholders or Members: The court also emphasized that AFAB does not have stockholders or
members, which are essential characteristics of stock and non-stock corporations, respectively. A non-
stock corporation must have members, and AFAB lacks this feature.
Purpose and Functions: The court recognized that AFAB was created to manage and operate the
Freeport Area of Bataan, performing governmental and regulatory functions. These functions include
regulating public utilities, providing licenses for educational and medical institutions, and maintaining
law and order within the Freeport Area, among others. These activities are inherently governmental and
align with the nature of a government instrumentality.
Therefore, AFAB does not qualify as either a stock or non-stock corporation and is classified as a
government instrumentality with corporate powers, exempting it from paying docket fees.
***
 The court relied on the definitions provided in the Administrative Code of 1987 (Executive
Order No. 292). According to Section 2(10) of the Code, a government instrumentality is
defined as:
"Any agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy, usually through a
charter."
 In contrast, a GOCC is defined in Section 2(13) of the same Code as:
"Any agency organized as a stock or non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least fifty-one (51) percent of its capital stock."

Corporation Created by Special law (Sec.4)

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

PNOC-Energy Development Corp. vs. National Labor Relations Commission

FACTS:
 Danilo Mercado was employed by the Philippine National Oil Company-Energy Development
Corporation (PNOC-EDC) starting August 13, 1979. He held various positions, including clerk,
general clerk, and shipping clerk.
 Mercado was transferred to PNOC-EDC's establishment in Palimpinon, Dumaguete, Oriental
Negros on September 5, 1984.
 On June 30, 1985, Mercado was dismissed from his position. His last monthly salary was
P1,585.00, with an additional living allowance of P800.00.
Grounds for Dismissal:
 Alleged Acts of Dishonesty:
o Nipa Shingles Purchase: On April 12, 1985, Mercado was ordered to purchase 1,400
nipa shingles for P1,680.00. He allegedly only paid P1,000.00 to the supplier, Mrs.
Leonardo Nodado, and appropriated the remaining P680.00 for personal use.
o Discount Not Reported: Mercado supposedly failed to report a P70.00 discount offered
by the supplier.
 o Rubber Stamp Fabrication: On March 28, 1985, Mercado was instructed to contract
services for the fabrication of rubber stamps for P28.66. He allegedly paid only P20.00
and pocketed the remaining P8.66.
 Violations of Company Rules:
o Mercado was absent from work without leave on June 5, 1985, which caused disruption
and delay in company activities.
o On June 15, 1985, he went on vacation leave without prior approval, against company
policy.
Complaint for Illegal Dismissal:
 On September 23, 1985, Mercado filed a complaint against PNOC-EDC for illegal dismissal,
retirement benefits, separation pay, unpaid wages, and other claims before the NLRC's Regional
Arbitration Branch No. VII in Cebu.
Labor Arbiter’s Decision:
 The Labor Arbiter ruled in favor of Mercado, ordering his reinstatement with full back wages,
payment of his personal savings account, and awarding damages and attorney’s fees.
Appeal to NLRC:
 PNOC-EDC appealed the decision, arguing that being a government-owned and controlled
corporation, the NLRC had no jurisdiction over the case. The appeal was dismissed by the NLRC,
affirming the Labor Arbiter's decision.
ISSUES:
Whether the NLRC had jurisdiction over employment matters involving PNOC-EDC, a
government-owned and controlled corporation.

RULING:
The Supreme Court ruled that under the 1987 Constitution, government-owned or controlled
corporations without original charters, such as PNOC-EDC, are subject to the provisions of the Labor
Code, and thus, the NLRC had jurisdiction over the case. This ruling was consistent with the case of
PNOC-EDC vs. Leogardo where it was established that corporations like PNOC-EDC, incorporated under
the General Corporation Law, are governed by the Labor Code and not the Civil Service Law.
Since PNOC-EDC was incorporated under the General Corporation Law and did not have an original
charter, it was ruled that it is subject to the provisions of the Labor Code. This meant that employment
matters involving PNOC-EDC fell within the NLRC's jurisdiction.

PUBLIC AND PRIVATE CORPORATION

PRIVATE CORPORATION - A private corporation is organized for private purposes and operates for the
benefit of its stockholders or members. It is formed by individuals or entities for business or non-profit
activities.
PUBLIC CORPORATION - While the Corporation Code does not use the term "public corporation"
explicitly, public corporations are generally those that serve governmental functions or operate under
governmental control. They are usually established to perform public duties, such as utility services or
other functions deemed necessary for public interest.

National Coal Company v. Collector of Internal Revenue (G.R. No. L-22619, December 2, 1924)
Background
 Plaintiff: National Coal Company
o Created by Act No. 2705 of the Philippine Legislature on March 10, 1917, with the
purpose of developing the coal industry in the Philippine Islands. The government of the
 Philippine Islands holds a majority of the shares (29,809 out of 30,000 shares), but the
company is considered a private corporation.
 Defendant: Collector of Internal Revenue
o Responsible for collecting taxes on behalf of the government.
Key Facts
1. Establishment and Operations:
o The National Coal Company was established to develop coal resources in the Philippine
Islands.
o On October 18, 1917, the Governor-General issued Proclamation No. 39 withdrawing
coal-bearing public lands from settlement, entry, sale, or other disposition. This
proclamation was aimed at protecting these lands but did not grant exclusive rights to
any entity for mining operations.
2. Tax Dispute:
o The company mined 24,089.3 tons of coal between July 1920 and March 1922.
o The company paid a specific tax of P0.50 per ton under section 1496 of the
Administrative Code on December 15, 1922. This section of the Administrative Code
prescribed a tax on coal and coke produced or manufactured in the Philippine Islands.
o The company argued that it should be taxed under Act No. 2719 instead, which provides
for a different tax regime for coal-bearing lands.
3. Claims for Refund:
o The National Coal Company filed a complaint to recover P12,044.68, which it paid under
protest as a specific tax on coal. It claimed exemption from this tax based on provisions
of Act No. 2719 and sought a refund.
4. Legal Arguments:
o Plaintiff’s Argument:
 The company contended that section 15 of Act No. 2719, which applies to coal-
bearing lands owned by persons, firms, or corporations, should govern its tax
liability. It argued that it should be taxed according to this act because it was
engaged in mining coal from lands reserved by proclamation, which it
considered as falling under this act.
o Defendant’s Argument:
 The Collector of Internal Revenue argued that the company should be subject to
the tax under section 1496 of the Administrative Code. The argument was based
on the fact that the company was neither the owner nor the lessee of the coal-
bearing lands and thus should not be exempt from the specific tax.
5. Evidence and Findings:
o The company had no formal lease or permission from the Secretary of Agriculture and
Natural Resources to mine the coal. The mining operations were based solely on the
proclamation which did not provide specific rights to the National Coal Company.
o The company did not have ownership or formal lease agreements for the lands from
which it mined coal, as evidenced by the lack of documentation and permissions.

Issues
 Tax Exemption Claim: The primary issue was whether the National Coal Company, as a private
corporation, was subject to taxes under section 15 of Act No. 2719 or under section 1496 of the
Administrative Code.
Court’s Ruling
Corporate Status:
 Private Corporation Definition: The court determined that the National Coal Company was a
private corporation despite the government being the majority stockholder. The mere fact of
government ownership did not automatically classify it as a public corporation. The court
emphasized that the corporation did not have any special status or privileges that would
differentiate it from other private corporations in terms of tax liability.

 The Court emphasized that the National Coal Company, despite being majority-owned by the
government, is considered a private corporation. It was created under Act No. 2705 and
operates under the same corporate laws applicable to other private corporations.

 As a private corporation, it does not possess any special powers or privileges beyond those
granted by its charter and the general corporation laws. It has no greater rights in mining
operations compared to other private entities.

 The Court did not explicitly define or discuss public corporations in detail in this case. However,
it implied that a public corporation typically refers to entities created to serve a governmental
function or to manage public resources and assets directly.

 The National Coal Company was found to be a private entity because its primary purpose was to
engage in coal mining and development, rather than performing a governmental function
directly. The mere fact that the government was the majority stockholder did not transform it
into a public corporation.

OPEN AND CLOSE CORPORATION

OPEN CORPORATION - one in which all the members or corporations have a vote in the
election of the directors and other officers.
CLOSE CORPORATION - A close corporation, within the meaning of this Code, is one whose articles of
incorporation provide that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not exceeding
twenty (20).
2. All the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title.
3. The corporation shall not list in any stock exchange or make any public offering of any
of its stock of any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation
within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil
companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance
with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
https://www.lexanimo.com/2020/07/15/ii-classes-of-corporation/
https://oercommons.org/authoring/19413-law-on-corporation/2/view

II. Classes of Corporation

SEC. 3. Classes of Corporations. – Corporations formed or organized under this Code may be
stock or nonstock corporations. Stock corporations are those which have capital stock divided
into shares and are authorized to distribute to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the shares held. All other corporations are
nonstock corporations.

REQUISITES FOR CLASSIFICATION AS STOCK CORPORATION

1. They have a capital stock dividend into shares; and
2. That they are authorized to distribute dividends or allotments as surplus profits to its
stockholders on the basis of the shares held by each of them.

SIGNIFICANCE: Profits obtained by a non-stock corporation cannot be distributed as dividends

but are used merely for the furtherance of their purpose or purposes.

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

Example of corporations under Sec. 4:

 Philippine National Oil Company,
 National Development Company,
 Philippine Export and Foreign Loan Guarantee Corporation
 GSIS.

These are government-owned or controlled, operating under a special law or charter. SEC
registration is not required for them to acquire legal and juridical personality because they owe
their own existence not by virtue of their compliance with the requirements of registration
under the Corporation Code but by virtue of the law that specially created them.

Does NLRC have jurisdiction for cases involving employment with GOCC’s?

The test whether a government-owned or controlled corporation is subject to Civil Service Law
is the manner of its creation.

1. Those created by special charter are subject to its provision

2. Those created under the General Corporation Law are subject to the provisions of the Labor
Law.
Thus, in the case of PNOC having its special charter, but its subsidiary, PNOC-EDC, having been
incorporated under the General Corporation Law was held to be a GOCC whose employees are
subject to the provisions of the Labor Code.
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991)

OTHER CLASSES OF CORPORATIONS

Public and Private Corporations

1. Public Corporation – those formed or organized for the government of a portion of the State
or any of its political subdivisions and which have for their purpose the general good and
welfare. Strictly speaking, a public corporation is one that is created, formed, or organized
for political or governmental purposes with political powers to be exercised for purposes
connected with the public good in the administration of the civil government.

2. Private Corporations – those formed for some private purpose, benefit, aim or end. They are
created for the immediate benefit and advantage of the individuals or members composing it
and their franchise may be considered as privileges conferred by the State to be exercised
and enjoyed by them in the form of the corporation.

Ecclesiastical and Lay Corporations

1. ECCLESIASTICAL OR RELIGIOUS CORPORATIONS – corporations exclusively organized for

spiritual purposes or for administering properties held for religious ones. They are organized
to secure public worship or perpetuating the right of a particular religion.

2. LAY CORPORATIONS – are those organized for purposes other than religion. They may
further be classified as:
1. ELEEMOSYNARY: created for charitable and benevolent purposes such as those
organized for the purpose of maintaining hospitals and houses for the sick, aged or
poor.

2. CIVIL: organized not for the purpose of public charity but for the benefit, pecuniary
or otherwise, of its members.

Aggregate and Sole Corporations

1. AGGREGATE CORPORATIONS – those composed of a number of individuals vested with

corporate powers

2. CORPORATION SOLE – those consist of one person or individual only and who are made as
bodies corporate and politic in order to give them some legal capacity and advantage which,
as natural persons, they cannot have. Under the Code, a corporation sole may be formed by
the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder or
religious denominations, sects, or churches.
Close and Open Corporations

1. CLOSE CORPORATIONS – those whose shares of stock are held by a limited number of
persons like the family or other closely-knit group. No public investors and the shareholders
are active in the conduct of corporate affairs. (Sec. 95, Revised Corporation Code)

2. OPEN CORPORATIONS – those formed to openly accept outsiders as stockholders or

investors. They are authorized and empowered to list in the stock exchange and to offer their
shares to the public such that stock ownership can widely be dispersed.

Domestic and Foreign Corporations

1. DOMESTIC CORPORATIONS – those organized or created under or by virtue of the Philippine

laws, either by legislative act or under the provisions of the General Corporation Law.

2. FOREIGN CORPORATIONS – those formed, organized or existing under laws other than the
Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own
country or State. It shall have the right to transact business in the Philippines after obtaining
a license for that purpose in accordance with this Code and a certificate of authority from the
appropriate government agency (Sec. 140, Revised Corporation Code).

Parent/Holding Company, Subsidiary, and Affiliates

1. PARENT OR HOLDING COMPANY – a corporation that controls another corporation or

several other corporations known as its subsidiaries. These corporations confine their
activities to owning stocks and supervising the management of other companies. A holding
company usually owns a controlling interest (more than 50% of the voting stock) in the
companies whose stocks it holds. Compared with an investment company which is active in
the sale or purchase of shares of stocks or securities, parent or holding companies have
passive portfolio and hold the securities merely for purposes of control and management.

2. SUBSIDIARY CORPORATIONS – a corporation which is being controlled by a parent or

holding corporation by owning the majority of shares of the subsidiary corporation. A
subsidiary corporation is an independent and separate juridical entity or personality, distinct
from its parent company, hence any claim or suit against the subsidiary does not bind
the parent or vice versa.

3. AFFILIATES – are those corporations that are subject to common control and operated as
part of a system. They are sometimes called sister companies since the stockholdings of a
corporation is not substantial enough to control the former.
Example: XYZ company is owned by X, Y, and Z where 30% held by X, 30% held by Y, and 40%
by Z. Thus, – X, Y and Z are called affiliates.

Quasi-public Corporations
 Otherwise called public service corporations. These are private corporations that have
accepted from the state the grant of a franchise or contract involving the performance
of public duties. The term is sometimes applied to corporations which are not strictly
public in the sense of being organized for governmental purposes, but whose operations
contribute to the convenience or welfare of the general public.

Example: telegraph and telephone companies, water companies, electric companies.

De Jure, De Facto, Corporation by Estoppel

1. DE JURE – juridical entities created or organized in strict or substantial compliance with statutory
requirements of incorporation and whose rights to exist as such cannot be successfully attacked even
by the State in a quo warranto proceeding. They are, in effect, incorporated by strict adherence to the
provisions of the law of their creation.

2. DE FACTO – are those which exist by the virtue of an irregularity or defect in the organization or
constitution or from some omission to comply with the conditions precedent by which corporations de
jure are created, but there was colorable compliance with the requirements of the law under which they
might be lawfully incorporated for the purpose and powers assumed, and user of the rights claimed to
be conferred by law. Its existence can only be attacked by the direct action of quo warranto
proceedings.SEC. 19. De facto Corporations. – The due incorporation of any corporation claiming in
good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may
be made by the Solicitor General in a quo warranto proceeding.

3. CORPORATION BY ESTOPPEL – those which are so defectively formed as not to be either de jure or de
facto corporations but which are considered as corporations in relation only to those who cannot deny
their corporate existence due to their agreement, admission, or conduct.SEC. 20. Corporation by
Estoppel. – All persons who assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use its
lack of corporate personality as a defense. Anyone who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on the ground that there was in fact no
corporation.

NATIONALITY
Tests to Determine Nationality of a Corporation

1. Incorporation test – Determined by the state of incorporation, regardless of the nationality of the
stockholders.
2. Domiciliary test – Determined by the principal place of business of the corporation.
3. Control test – Determined by the nationality of the controlling stockholders or members. This test is
applied in times of war.
4. Grandfather rule – Nationality is attributed to the percentage of equity in the corporation used in
nationalized or partly nationalized area.
The control test was adopted by the Foreign Investment Act of 1991 (RA 7042) as a general guideline in
determining the nationality of corporations engaged in a nationalized activity.

Who are considered as Philippine Nationals under the Foreign Investment Act of 1991

1. Individuals:
o Citizens of the Philippines.
2. Corporations or Partnerships:
o Corporations, partnerships, or associations organized under Philippine laws that are at
least 60% owned by citizens of the Philippines.
o If the stockholders in a corporation or members of a partnership are themselves
corporations, at least 60% of the capital stock or interest in each of these corporations
or partnerships must be owned by Philippine citizens.
3. Trustees:
o Trustees of funds or securities, if at least 60% of the beneficiaries of such trust are
Philippine citizens.
o For joint accounts, whether for profit or not, the percentage share of Philippine citizens
must be at least 60%.
4. Filipino-controlled Entities:
o Any entity controlled by Philippine nationals, meaning the right to elect a majority of the
board of directors or other governing bodies is held by citizens of the Philippines.

These provisions ensure that Philippine nationals maintain significant control over certain businesses
and industries in the country, particularly in those sectors where foreign ownership is restricted.

- In this case, all of the shares shall be recorded as owned by Filipinos. But if less than 60%,
or say, 50% of the capital stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and
the other 50,000 shall be recorded as belonging to aliens.

 Corporations organized abroad and registered as doing business in the Philippines under the
Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos.

Grandfather Rule

 Applies only when the 60-40 Filipino-foreign equity ownership is in doubt. “Doubt” refers to
various indicia that the “beneficial ownership” and “control” of the corporation do not in fact
reside in Filipino shareholders but in foreign stakeholders.

 The method by which the percentage of Filipino equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate shareholders are present, by
attributing the nationality of the second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder. Thus, to arrive at the actual Filipino ownership and
 control in a corporation, both the direct and indirect shareholdings in the corporation are
determined.

Nationalized Activities

The term “capital” under Section 11, Article XII of the 1987 Constitution refers to shares with
voting rights, as well as with full beneficial ownership, which must be owned and held by
citizens of the Philippines.
(vote + ownership = control)

 Legal title without beneficial title of stocks is not sufficient to meet the ownership requirement

100% Filipino Owned

Zero percent (0%) foreign equity)

1. Cooperatives (Art. 26, Ch. III, R.A. 6938);2.

2. Manufacture of Firecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183)

3. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological

weapons and Anti- personnel mines (Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines).4.

4. Mass media except recording5.

5. Utilization of Marine resources (Sec. 2, Art. XII, Constitution);6.

6. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (Sec. 8, Art. II,
Constitution);7.

7. Cockpits (Sec. 5, P.D. 449);8.

8. Small-scale Mining (Sec. 3, R.A. 7076);9.

9. Private Security agencies (Sec. 4, R.A. 5487);10.

10. Retail trade enterprises with paid-up capital of less than US$2.5 M (Sec. 5, R.A. 8762)

80 % Filipino Owned
Up to twenty percent (20%) foreign equity)

1. Private Radio Communications network (R.A. 3846).

75 % Filipino Owned
Up to twenty percent (25%) foreign equity)
 1. Contracts for the construction and repair of Locally funded public works (Sec. 1, CA 541, LOI 630)
except:

a. infrastructure/development projects covered in R.A. 7718; and b.

b. projects which are foreign-funded or assisted and required to undergo

international competitive bidding (Sec. 2[a], R.A. 7718);

2. Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442);3.

3. Contracts for the construction of Defense-related structures (Sec. 1, CA 541).4.

4. Under the Flag Law, in the purchase of articles for the Government, preference shall be given to
materials and supplies produced, made, or manufactured in the Philippines, and to domestic
entities. Domestic entities mean any citizen of the Philippines or commercial company at least
75% of the capital of which is owned by citizens of the Philippines (Sec.1, CA 138)

70 % Filipino Owned
Up to twenty percent (30%) foreign equity)

1. Advertising (Art. XVI, Constitution)2.

2. Corporations engaged in pawnshop business (Sec. 8, P.D. 114)

60 % Filipino Owned
Up to twenty percent (40%) foreign equity)

1. Contracts for the supply of materials, goods, and commodities to GOCC, agency, or municipal
corporation (Sec. 1, R.A. 5183);

2. Ownership of private Lands (Sec. 7, Art. XII, Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A.
9182);3.

3. Ownership/establishment and administration of Educational institutions (Sec. 4, Art.

XIV, Constitution);4.

4. Adjustment Companies (Sec. 323, P.D. 613);5.

5. Culture, production, milling, processing, trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, Rice and corn and the by-products thereof (Sec. 5,
P.D. 194);6.

6. Exploration, development, and utilization of Natural resources (Sec. 2, Art. XII, Constitution);7.

7. Ownership of Condominium units where the common areas in the condominium project are co-
owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726).8.

8. Operation and management of public Utilities (Sec. 11, Art. XII, Constitution; Sec. 16, CA 146);9.
 9. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise
(Sec. 11, Art. XII, Constitution; Sec. 2a, R.A. 7718);10.

10. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring PNP
clearance (R.A. 7042 as amended by R.A. 8179);11.

11. Operation of Deep sea commercial fishing vessel (Sec. 27, R.A. 8550)

12. Corporations engaged in Coastwise shipping (Sec. 806, P.D. 1464)

40 % Filipino Owned
Up to twenty percent (60%) foreign equity)

1. Financing companies regulated by the SEC(Sec. 6, R.A. 5980 as amended by R.A. 8556);2.

2. Investment houses regulated by the SEC(Sec. 5, P.D. 129 as amended by R.A. 8366).

1. Control Test
The Control Test is the primary method used to determine a corporation's
nationality. Under this test, a corporation is considered a "Philippine national" if
at least 60% of its capital stock outstanding and entitled to vote is owned and
controlled by Filipino citizens.
Example:
 Scenario: Corporation A is engaged in a business where foreign ownership is restricted
to 40%. Corporation A has 100,000 shares, with 60,000 shares owned by Filipino citizens
and 40,000 shares owned by foreign nationals.

 Application: Since 60% of the capital stock is owned by Filipinos, Corporation A is

considered a Philippine national under the Control Test.

2. Grandfather Rule
The Grandfather Rule is applied when there are doubts about the true
ownership and control of a corporation. This rule traces the ownership of shares
in a corporation through its layers of ownership, down to the ultimate individual
owners, to ensure that Filipino ownership is not merely nominal.
Example:
 Scenario: Corporation B has 60% of its shares owned by Corporation C, which is 60%
Filipino-owned and 40% foreign-owned. The remaining 40% of Corporation B’s shares
are directly owned by foreign nationals.
  Application: Under the Grandfather Rule, the effective Filipino ownership in Corporation
B is calculated by multiplying the Filipino ownership in Corporation C (60%) by the
percentage of shares Corporation C owns in Corporation B (60%). This results in an
effective Filipino ownership of 36% (0.60 x 0.60) from Corporation C and 0% from the
direct foreign ownership, making the total effective Filipino ownership only 36%.
Therefore, Corporation B would be considered a foreign corporation.

3. Beneficial Ownership Test

This test examines who truly benefits from the ownership of shares. If shares are
nominally owned by Filipinos, but the economic benefits or voting rights are
effectively controlled by foreigners, the corporation may be classified as a
foreign entity.
Example:
 Scenario: Corporation D has 60% of its shares held by Filipinos, but the dividends and
voting rights associated with these shares are assigned to foreign entities through
various agreements.

 Application: Even though the shares are nominally Filipino-owned, the foreign entities
effectively control the corporation. Thus, Corporation D may be considered a foreign
corporation under the Beneficial Ownership Test.

4. Corporate Layering
Corporate Layering involves examining the structure of ownership when a
corporation is owned by other corporations. Each layer must meet the 60-40
Filipino ownership requirement to ensure that control remains with Philippine
nationals.
Example:
 Scenario: Corporation E is owned 60% by Corporation F, which is 60% owned by
Corporation G, which is 60% owned by Filipino individuals.

 Application: To determine if Corporation E is Filipino, you would examine each layer:

o Corporation F: 60% Filipino-owned.
o Corporation G: 60% Filipino-owned.
o Effective Filipino ownership in Corporation E = 0.60 x 0.60 x 0.60 = 21.6%.

 Since effective Filipino ownership is less than 60%, Corporation E would be considered a
foreign corporation.

5. Liberal Interpretation of the Control Test

 While the Control Test is generally favored, if there are concerns about
circumvention of ownership rules through complex structures, the Grandfather
Rule may be applied as a check.
Example:
 Scenario: Corporation H claims to be 60% Filipino-owned under the Control Test, but
the SEC suspects that foreign interests control the company through indirect means.

 Application: The Grandfather Rule is applied to trace ownership and verify if the Filipino
ownership is genuine or merely nominal. If the rule reveals that control is effectively
foreign, Corporation H may be classified as a foreign corporation.

Conclusion:
These tests ensure that corporations classified as Philippine nationals are genuinely controlled
by Filipinos, particularly in industries where foreign ownership is restricted. The application of
these tests can vary depending on the complexity of the corporate structure and the nature of
ownership and control.

Roy III vs. Herbosa

Facts
The case revolves around the interpretation and application of the 60-40 Filipino ownership
requirement in public utilities as mandated by Section 11, Article XII of the 1987 Philippine
Constitution. This provision requires that at least 60% of the "capital" of public utility
corporations be owned by Filipino citizens.
Background:
1. The Gamboa Decision: In 2011, the Supreme Court issued a ruling in Gamboa v.
Finance Secretary Teves (Gamboa Decision), which clarified the meaning of the term
"capital" in Section 11, Article XII of the Constitution. The Court ruled that the 60%
Filipino ownership requirement should apply not only to the total outstanding capital
stock of a corporation but specifically to shares that have voting rights in the election of
directors.

2. SEC Memorandum Circular No. 8 (SEC-MC No. 8): Following the Gamboa Decision,
the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 8,
Series of 2013 (SEC-MC No. 8). This circular aimed to implement the Supreme Court’s
ruling by specifying that the 60% Filipino ownership requirement must be met for both:
o The total number of outstanding shares of stock entitled to vote in the election of
directors.
o The total number of outstanding shares of stock, whether or not they are entitled
to vote.
Filing of the Case:
3. Petition by Jose M. Roy III: Jose M. Roy III, believing that SEC-MC No. 8 did not
properly implement the Gamboa Decision, filed a petition before the Supreme Court. He
argued that the circular failed to enforce the constitutional mandate by not uniformly
applying the 60-40 ownership requirement to all classes of shares, regardless of their
 voting rights or privileges. Roy claimed that this interpretation would allow foreign
entities to control public utility corporations through shares that do not have voting rights
but have significant economic benefits.

4. Concerns over Public Utilities: The issue was of significant concern because it involved
the ownership and control of public utility corporations in the Philippines, particularly the
Philippine Long Distance Telephone Company (PLDT). If foreign entities were allowed
to own more than 40% of any class of shares, it could lead to foreign control over these
corporations, which would be contrary to the Constitution’s intent to protect national
interest.
Roy's petition sought judicial intervention to compel the SEC to enforce the 60-40 Filipino
ownership requirement across all types of shares, thereby ensuring that Filipinos would retain
control over public utilities. The petition was initially dismissed, leading Roy to file a Motion for
Reconsideration, which is the subject of the final resolution in the case.
Issues
1. Procedural Issues:
o Whether the petitioners, including Roy, had the requisite standing (locus standi) to file
the petition.
o Whether there was a failure to establish a case or controversy, and whether the rule on
the hierarchy of courts was violated.
o Whether indispensable parties, such as other public utility corporations and their
shareholders, were improperly omitted from the petition.
2. Substantive Issues:
o Whether the SEC committed grave abuse of discretion in issuing SEC-MC No. 8, and
whether this circular was in compliance with the Gamboa Decision.
o Whether the Gamboa Decision's interpretation of "capital" was correctly applied in SEC-
MC No. 8.
o Whether the Court should reconsider its ruling that the Gamboa Decision did not make
a categorical ruling on the meaning of "capital" for all public utilities, but only in respect
to PLDT.
Ruling
The Supreme Court denied the Motion for Reconsideration filed by Jose M. Roy III with finality,
addressing both procedural and substantive grounds:
1. Procedural Grounds:
o The Court reiterated that the petitioners failed to sufficiently establish their standing to
bring the case. The case was dismissed due to the lack of a clear case or controversy, a
violation of the rule on the hierarchy of courts, and the failure to implead indispensable
parties such as other public utility corporations and their shareholders. These entities,
which were directly affected by the interpretation of the term "capital," were not given
the opportunity to defend their interests, which constituted a fatal procedural flaw.
2. Substantive Grounds:
o The Court found no grave abuse of discretion on the part of the SEC in issuing
SEC-MC No. 8. The circular was found to be in compliance with the Gamboa
Decision, which required that 60% of the voting rights and the beneficial
ownership of 60% of the outstanding capital stock must be held by Filipino
citizens. The Court clarified that the Gamboa Decision did not mandate a uniform
 application of the 60-40 ownership requirement to each class of shares, but rather
to the totality of the corporation's capital stock.

o The Court emphasized that the SEC, as the agency with expertise in corporate
law, was the appropriate body to determine the compliance of public utility
corporations with the constitutional ownership requirement. The Court also
pointed out that the Gamboa Decision had already attained finality, and Roy's
petition could not be treated as a continuation of that case.

o The Court highlighted that the interpretation of "capital" as requiring Filipino

ownership of at least 60% of all shares with voting rights was in line with the
Constitution’s intent to prevent foreign control of public utilities. The Court
rejected Roy's argument that the decision had limited application to PLDT alone,
clarifying that the ruling applied to all public utilities.

o The Court declined to speculate on the treatment of specific shares held by trust
funds, stating that these matters should be addressed by the SEC in the first
instance based on actual facts.

Given these findings, the Supreme Court denied the Motion for Reconsideration with finality and
ordered the immediate issuance of entry of final judgment. No further pleadings or motions
would be entertained in the case.

The case of Narra Nickel Mining and Development Corp., Tesoro Mining and
Development, Inc., and McArthur Mining, Inc. vs. Redmont Consolidated Mines Corp.
revolves around the dispute over the nationality of mining corporations and their eligibility to
engage in mining operations in the Philippines, particularly concerning the application and
approval of Mineral Production Sharing Agreements (MPSAs).
Detailed Facts:
1. Background and MPSA Applications:
o Redmont Consolidated Mines Corp. (Redmont), a domestic corporation, became
interested in exploring and mining areas in Palawan in December 2006. Upon inquiry
with the Department of Environment and Natural Resources (DENR), Redmont
discovered that these areas were already covered by MPSA applications from Narra
Nickel Mining and Development Corp. (Narra), Tesoro Mining and Development, Inc.
(Tesoro), and McArthur Mining, Inc. (McArthur).
o McArthur’s MPSA Application: McArthur's predecessor, Sara Marie Mining, Inc. (SMMI),
applied for an MPSA and Exploration Permit (EP) with the Mines and Geosciences
Bureau (MGB) of DENR Region IV-B. McArthur later acquired these permits from SMMI,
including MPSA-AMA-IVB-153 for 1,782 hectares in Bataraza, Palawan, and EPA-IVB-44
for 3,720 hectares in the same municipality.
o Narra’s MPSA Application: Narra acquired its MPSA from Alpha Resources and
Development Corp. and Patricia Louise Mining & Development Corp. (PLMDC), covering
3.277 hectares in Narra, Palawan.
 o Tesoro’s MPSA Application: SMMI also applied for an MPSA labeled as MPSA-AMA-IVB-
154 (formerly EPA-IVB-47) for 3,402 hectares in Narra, Palawan. This was later
transferred to Tesoro.
2. Redmont’s Legal Challenge:
o On January 2, 2007, Redmont filed petitions before the DENR Panel of Arbitrators (POA)
seeking to disqualify Narra, Tesoro, and McArthur from obtaining MPSAs, alleging that
at least 60% of their capital stock was owned by MBMI Resources, Inc. (MBMI), a
Canadian corporation. Redmont argued that this made the petitioners foreign
corporations, disqualifying them from holding MPSAs under Philippine law.
3. Petitioners’ Defense:
o The petitioners asserted that they were "qualified persons" under the Philippine Mining
Act of 1995, which allows corporations with at least 60% Filipino ownership to engage in
mining activities. They argued that MBMI's minority stake (40%) in the petitioners did
not make them foreign-owned under the "control test" prescribed by the Foreign
Investments Act of 1991.
o Additionally, the petitioners contended that their nationality was irrelevant as they had
applied for Financial or Technical Assistance Agreements (FTAAs), which could be
granted to foreign-owned corporations. They also challenged the POA's jurisdiction over
the issue of nationality and claimed that Redmont lacked the standing to sue since it had
no pending claim or application over the areas in question.
4. POA’s Decision:
o On December 14, 2007, the POA ruled in favor of Redmont, declaring the petitioners as
foreign corporations effectively controlled by MBMI and invalidating their MPSAs. The
POA also recommended opening the areas covered by the MPSAs to other qualified
applicants, including Redmont.
5. Appeal to the Mines Adjudication Board (MAB):
o The petitioners appealed the POA's decision to the Mines Adjudication Board (MAB),
reiterating their status as qualified persons and informing the MAB that they had
converted their MPSA applications to FTAAs. The MAB found merit in their appeal,
reversing the POA's decision on September 10, 2008, and dismissing Redmont's
petitions.
6. Further Legal Actions by Redmont:
o Redmont continued to challenge the petitioners' status by filing a complaint with the
Securities and Exchange Commission (SEC) seeking the revocation of their certificates of
registration, arguing they were foreign-owned corporations engaged in mining in
violation of Philippine laws. Redmont also sought injunctive relief from the Regional
Trial Court (RTC) of Quezon City to suspend the MAB proceedings.
7. Court of Appeals (CA) Decision:
o On appeal by Redmont, the Court of Appeals (CA) partially granted Redmont's petition,
upholding the POA's finding that Narra, Tesoro, and McArthur were foreign corporations
under the "grandfather rule" based on their corporate structures and the significant
influence of MBMI. However, the CA found that the POA’s declaration voiding the
MPSAs was improper and left the matter of FTAA applications for determination by the
Secretary of the DENR.
8. Office of the President (OP) Ruling:
o The Office of the President later canceled and revoked the petitioners' FTAAs, agreeing
with Redmont's assertions that the petitioners had violated various laws, including
 constitutional provisions on foreign ownership and the Small Scale Mining Law. The OP's
decision was affirmed by the CA, and the petitioners’ appeal of this ruling was pending
before the Supreme Court at the time of the case.
9. Supreme Court Petition:
o The petitioners filed a petition for review on certiorari before the Supreme Court,
challenging the CA's ruling on several grounds, including the mootness of the case due
to the conversion of their MPSA applications to FTAA applications, the CA's jurisdiction,
allegations of forum shopping by Redmont, and the application of the "grandfather rule"
in determining their nationality.
ISSUE I: Whether McArthur Mining, Tesoro Mining, and Narra Nickel are considered Filipino
or foreign corporations under Philippine law, especially given their ownership structure and
MBMI's involvement.
Ruling: The Supreme Court ruled that McArthur Mining, Tesoro Mining, and Narra Nickel are
to be considered foreign corporations.
Basis:
 Foreign Control: The court found that MBMI Resources, Inc. (MBMI), a Canadian corporation,
controlled more than 60% of the equity interests in these petitioners. According to the
Philippine Mining Act of 1995, corporations engaging in mining activities must be at least 60%
Filipino-owned. Since MBMI's control over the petitioners was significant enough to affect their
nationality status, the petitioners were effectively deemed foreign corporations.
 Control Test and Grandfather Rule: The Court applied both the control test and the grandfather
rule to determine true ownership. The control test considers whether a corporation is Filipino if
at least 60% of its capital is owned by Filipino citizens. However, given the evidence of MBMI's
influence and ownership, the court determined that this test alone was insufficient and that the
grandfather rule was also necessary.
ISSUE II: Whether the grandfather rule should be applied to determine the true ownership of the
petitioners.
Ruling: The Supreme Court upheld the application of the grandfather rule to determine the true
ownership of McArthur Mining, Tesoro Mining, and Narra Nickel.
Basis:
 Need for Thorough Assessment: The grandfather rule was deemed necessary due to the
complex corporate structures and evidence suggesting potential circumvention of the law. The
rule requires tracing ownership through all layers of corporate structures to ensure compliance
with Filipino ownership requirements.
 Suspicious Corporate Arrangements: The court noted that the petitioners' corporate
arrangements involved MBMI in a manner that obscured true ownership and control. Therefore,
applying the grandfather rule was essential to address these complexities and verify compliance
with the 60% Filipino ownership requirement.
 Legal Precedents: The court emphasized that despite the control test being a standard method,
the grandfather rule remains relevant in cases involving multi-layered corporate structures and
foreign influence. This approach helps prevent legal circumvention and ensures that ownership
regulations are enforced.
  In summary, the Supreme Court determined that McArthur Mining, Tesoro Mining, and
Narra Nickel are foreign corporations due to MBMI’s control. The application of the
grandfather rule was upheld to provide a thorough assessment of the true ownership and
prevent evasion of Philippine ownership laws.

CORPORATIONS AND INCORPORATIONS, STOCKHOLDERS AND MEMBERS (Sec.5)

SEC. 5. Corporators and Incorporators, Stockholders and Members.

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

Components of Corporation

 CORPORATORS- who compose a corporation as stockholders or members.

-Any person who is a part of a corporation.

 STOCK CORPORATION- stockholders

 MEMBERS- non stock, have no capital stock.

 INCORPORATORS- founders of corporation.

 THE FOUNDING CORPORSTORS- started corporation

Now take note: All incorporators are corporators but not all corporators are
incorporators’ kasi may mga corporators such as stockholders or members na
pumasok na after the formation of the corporation, kasi itong mga incorporators sila
yung nagform ng corporation in the first place.

o corporators naman yung iba sakanila incorporators tas yung iba naman hindi.

 CORPORATION- pwede siyang magissued ng maraming class of shares

-corporation must have one class with complete voting rights.

Classification of shares may be made remembered by the incorporators

 INCORPORATORS- pipili ng type of share (common or preffered)

--Magkano ba ang par value kung ito ba ay common share, kung kailangan ba
nating mag issued ng no par value.
 Corporation has the power to classify its shares depending on the need of
the business.

 STOCKHOLDERS- owners of the shares of stock in a stock corporation they are considered as
the owners of corporation.

-residual interest sila/ they are also called shareholders/ they may be natural
or juridical persons.

BOARD OF DIRECTORS OR BOARD TRUSTEES

 BOARD OF TRUSTEES- group of volunteers who preside over a nonprofit organization or

charitable foundation, they usually have other careers and often provide their advisement for
free.

Board of directors-
work in public or
private
corporation, group of
appointed professionals-
responsibility is to hire
CEOs and other
company
leaders
Corporate officers
--President na magiging
director
--isang treasurer na hindi
maaaring magin director
--secretary na magiging
resident and citizen of
the
Philippines, ay maaaring
ilaan para sa mga batas.
--And If the corporation
is vested with public
interest. The board
shall also elect a
compliance
officer. Also sila din yung
mga high-level managers
or executives within
the corporation na
nagsasagawa at
nagpapatupad ng mga
layuning
itinakda ng board.
Subscribers- so persons
who have agreed to
take
and pay for original.
--buy shares of stocks
Note: subscribers may
not be stockholders
magiging stockholders
lang sila from the time
that
their subscriptions are
accepted by the
corporation.
Underwriter- investment
banker. Remember they
will exert yung best
efforts to market all of
part of
an issue which he has
offered for sale or has
purchased from
controlling stockholder.
So
remember these are
the persons who
comprise the
corporation.
Promoters- are persons
alone or with others
that
organize a corporation.
Find in subscribers, find
incorporators, to the
articles of incorporation
so if
the corporation is
organized under general
law’s
they will draft the
document, they will
situate the
necessary document is
presented to the sec
for
recording and a
certificate of
incorporation is
issued.
--promoters will
promote the company.
So yun
yung kailangan niyong
tandaan. Maghahanap
sila
ng subscribers ,
maghahanap sila ng
incorporators
magbebenta sila ng
mga shares even
before the
corporation is established
.
Board of directors-
work in public or
private
corporation, group of
appointed professionals-
responsibility is to hire
CEOs and other
company
leaders
Corporate officers
--President na magiging
director
--isang treasurer na hindi
maaaring magin director
--secretary na magiging
resident and citizen of
the
Philippines, ay maaaring
ilaan para sa mga batas.
--And If the corporation
is vested with public
interest. The board
shall also elect a
compliance
officer. Also sila din yung
mga high-level managers
or executives within
the corporation na
nagsasagawa at
nagpapatupad ng mga
layuning
itinakda ng board.
Subscribers- so persons
who have agreed to
take
and pay for original.
--buy shares of stocks
Note: subscribers may
not be stockholders
magiging stockholders
lang sila from the time
that
their subscriptions are
accepted by the
corporation.
Underwriter- investment
banker. Remember they
will exert yung best
efforts to market all of
part of
an issue which he has
offered for sale or has
purchased from
controlling stockholder.
So
remember these are
the persons who
comprise the
corporation.
Promoters- are persons
alone or with others
that
organize a corporation.
Find in subscribers, find
incorporators, to the
articles of incorporation
so if
the corporation is
organized under general
law’s
they will draft the
document, they will
situate the
necessary document is
presented to the sec
for
recording and a
certificate of
incorporation is
issued.
--promoters will
promote the company.
So yun
yung kailangan niyong
tandaan. Maghahanap
sila
ng subscribers ,
maghahanap sila ng
incorporators
magbebenta sila ng
mga shares even
before the
corporation is established
.
Board of directors-
work in public or
private
corporation, group of
appointed professionals-
responsibility is to hire
CEOs and other
company
leaders
Corporate officers
--President na magiging
director
--isang treasurer na hindi
maaaring magin director
--secretary na magiging
resident and citizen of
the
Philippines, ay maaaring
ilaan para sa mga batas.
--And If the corporation
is vested with public
interest. The board
shall also elect a
compliance
officer. Also sila din yung
mga high-level managers
or executives within
the corporation na
nagsasagawa at
nagpapatupad ng mga
layuning
itinakda ng board.
Subscribers- so persons
who have agreed to
take
and pay for original.
--buy shares of stocks
Note: subscribers may
not be stockholders
magiging stockholders
lang sila from the time
that
their subscriptions are
accepted by the
corporation.
Underwriter- investment
banker. Remember they
will exert yung best
efforts to market all of
part of
an issue which he has
offered for sale or has
purchased from
controlling stockholder.
So
remember these are
the persons who
comprise the
corporation.
Promoters- are persons
alone or with others
that
organize a corporation.
Find in subscribers, find
incorporators, to the
articles of incorporation
so if
the corporation is
organized under general
law’s
they will draft the
document, they will
situate the
necessary document is
presented to the sec
for
recording and a
certificate of
incorporation is
issued.
--promoters will
promote the company.
So yun
yung kailangan niyong
tandaan. Maghahanap
sila
ng subscribers ,
maghahanap sila ng
incorporators
magbebenta sila ng
mga shares even
before the
corporation is established
.
 BOARD OF DIRECTORS- work in public or private corporation, group of appointed
professionals-responsibility is to hire CEOs and other company leaders

CORPORATE OFFICERS

 --President na magiging director

 --isang treasurer na hindi maaaring magin director

 --secretary na magiging resident and citizen of the Philippines, ay maaaring ilaan

para sa mga batas.

 --And If the corporation is vested with public interest. The board shall also elect a
compliance officer. Also sila din yung mga high-level managers or executives within the
corporation na nagsasagawa at nagpapatupad ng mga layuning itinakda ng board.

 SUBSCRIBERS- so persons who have agreed to take and pay for original.

--buy shares of stocks

Note: subscribers may not be stockholders magiging stockholders lang sila from
the time that their subscriptions are accepted by the corporation.

 UNDERWRITER- investment banker. Remember they will exert yung best efforts to market all
of part of an issue which he has offered for sale or has purchased from controlling
stockholder. So remember these are the persons who comprise the corporation.

 PROMOTERS- are persons alone or with others that organize a corporation. Find in
subscribers, find incorporators, to the articles of incorporation so if the corporation is
organized under general law’s they will draft the document, they will situate the necessary
 document is presented to the sec for recording and a certificate of incorporation is
issued.

 promoters will promote the company. So yun yung

kailangan niyong tandaan. Maghahanap sila ng subscribers ,
maghahanap sila ng incorporators magbebenta sila ng mga
shares even before the corporation is established .

Registration of Articles of Incorporation and By-Laws

1. What is a Corporation?

A juridical person created by operation of law and registered with the Securities
and Exchange Commission.

2. What is a stock corporation?

A corporation with authorized capital stock dividend into shares of stock either
with or without par value. A stock corporation is engaged in income generating
activities and is authorized to declare dividends.

3. What is a non-stock corporation?

A corporation with no authorized capital stock. It is organized for charitable,

religious, educational, professional, cultural, fraternal, literary, scientific, social
civil service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combinations thereof.

4. When is a corporation deemed to have a juridical personality?

A corporation is deemed imbued with juridical personality from the time the
Certificate of Incorporation is issued by the Securities and Exchange Commission.

5. What are the requirements for registration of a corporation?

A. Stock Corporation

B. Non-Stock Corporation

C. Foreign Corporation

6. Where can the proposed corporate or partnership name be verified?

The proposed corporate or partnership name can be verified online via Iregister
 system of SEC; or thru Name Verification Unit at G/F Secretariat Building, PICC
Complex, Roxas Boulevard Pasay City; or thru Satellite Offices and SEC Extension
Offices.

7. If the proposed name is verified and reserved online, does this still need
confirmation from Name Verification Unit or SEC Satellite/Extension Offices?

Company names reserved online must be confirmed at the Name Reservation

Unit, G/F Secretariat Building, PICC Complex, Roxas Boulevard Pasay City or at
any of the SEC Satellite Offices within four (4) calendar days from date of online
reservation. Non-confirmation of reservation within the specified period will
forfeit the online reservation. Confirmation is required because the Corporation
Code of the Philippines, Sec. 18 provides that No corporate name may be
allowed by the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. Compliance therewith compels us to
personally determine if reserve names are not deceptively or confusingly similar
or patently deceptive or confusing to other registered entities. After
confirmation, applicant must secure a Reservation Payment Confirmation. A
mere Reservation Notice is not sufficient for the acceptance of any application
for registration, or change of name of a corporation or partnership. Once the
Reservation Payment Confirmation has been issued, the reservation fee must be
paid at the Cashier, SEC Main Office or at any of the designated Landbank
branches.

8. If the proposed name has been allowed for use, would there be fees required to
reserve and where shall the payment be made?

Yes.To reserve a name the SEC collects P100.00 as reservation fee for thirty days.
The payment can be thru SEC Cashier or thru on collection systems of Landbank.

9. Does SEC have online fill-out form for the AI-BL?

A. Stock Corporation

B. Non-Stock Corporation

C. Foreign Corporation

10. What are the contents of the AI?

The contents of the AI are the following:

a)The name of the corporation
b)The specific purpose or purposes for which the corporation is being
 incorporated
c)The place where the principal office of the corporation is to be located, which
must be within the Philippines
d)The term of which the corporation is to exist
e)The names, nationalities and residences of the incorporators
f)The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15)
g)The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and
qualified
h)If it be a stock corporation, the amount of its authorized capital stock in lawful
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 amount
subscribed and paid by each on his subscription, and if some or all of the shares
are without par value, such fact must be stated.
i)If it be a non-stock corporation, the amount of its capital, the names,
nationalities of the contributors and the amount contributed by each
j)The name of the treasurer-in-trust
k)Tranfer clause
l)Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient

11. Is there a rule on the approval of the corporate and partnership names?

Yes. The Corporation Code of the Philippines provides in Section 18 that no

corporate name may be allowed by the SEC if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or
contrary to existing laws.

12. Does SEC have guidelines on the approval of corporate and partnership names?

Yes. In implementing Section 18 of the Corporation Code, the Commission has

adopted Guidelines in the approval of corporate and partnership names.

13. What do you mean by incorporators?

Are the individual persons originally forming the corporation and are the
signatories in the Articles of Incorporation.

14. What are the requirements on incorporators?

All incorporators must be natural persons, of legal age, their number must be at
least five (5) and not more than fifteen (15), every incorporator is subscriber of
 at least one share, and majority of the incorporators are residents of the
Philippines.

15. Are foreigners allowed as incorporators?

Yes provided that all requirements for incorporators are complied with and
provided further that the business activity of the corporation is not fully reserved
for Filipino ownership.

16. Can all incorporators be foreigners?

Yes. Provided that all the requirements for incorporators under the Corporation
Code are complied with and this is true for registration under the Foreign
Investment Act of 1991 as amended by RA 8179.

17. How many Directors/trustees may a corporation have?

For a stock corporation, the number of directors must be at least five (5) but not
more than fifteen (15). For a non-stock corporation, the number of trustees must
be at least five (5) and could be more than fifteen. For religious societies, the
number of trustees must be at least five (5) but not more than fifteen (15). For
non-stock educational corporation, the number of trustees must be at least five
(5) but not more than fifteen (15) and the number of trustees must be in
multiples of five (5). And, for a corporation sole, the trustee is only one (1).

18. What are the requirements on directors/trustees?

a)Natural person and is of legal age

b)Compliant with the required number required under the Corporation Code
c)Majority of the directors are residents of the Philippines
d)Holder of at least one share or a member in case of non-stock corporations
e)Not convicted by final judgement of an offense punishable by imprisonment
for a period exceeding six years, or a violation of the Code committed within five
(5) years prior to the date of his election or appointment.

19. What is the difference between directors and trustees?

For stock corporations, the appropriate term is “director”. For non-stock

corporations the appropriate term is “trustees”. In a non-stock corporations
however, the trustees may be called by other than trustees (i.e. directors)
provided that the term used is identified as such in the Articles of Incorporation
referring to trustees.

20. Can foreigners be elected as director?

 Yes. Except in corporations whose business activities are hundred percent
reserved for Filipinos.

21. Is there any limit on the number of seat for foreigners in the board?

Yes. If the business activity is partly nationalized, the number of seat for
foreigners in the board of directors is in proportion of their present foreign
equity to the number of directors as stated in the Articles of Incorporation. Also,
the number of their seats should not exceed the proportion of the allowable
foreign equity to the number of the directors in the AI in accordance with Anti-
Dummy Law.

22. If the corporation is registered under the Foreign Investment Act, can foreigners
be all the directors?

Yes. It is subject however to compliance with the requirements of the

Corporation Code on Directors (i.e. majority are residents of the Philippines).

23. Can foreigner sit as trustee in a non-stock corporation?

Yes. If its a non-stock corporation and is engaged in partially nationalized

activities, the foreigners number of seat in the trustees should be compliant with
the provision of Anti-Dummy Law.

24. Is there any requirement of the Corporation Code on primary purpose and
secondary purposes to be indicated in the Articles of Incorporation?

Yes. Under Sec. 15 of the Code it states that if there is more than one purpose,
indicate primary and secondary purpose.

25. Is there any limit on number of secondary purposes?

None. As many secondary purposes a corporation would like to engage except if

the business activities in the primary and secondary are prohibited by existing
laws to be in the Articles of Incorporation of one and the same corporate entity.

26. What are business activities not allowed to be in the primary and secondary
purposes at the same time?

a)Business activities of overseas recruitment and travel agency cannot be in

single entity pursuant ot the implementing rules and regulations of the Labor
Code of the Philippines;
b)A corporation sole or religious society and school as the school should be
incorporated distinct with a religious corporation.
27. Are there business activities that no foreign’s ownership is allowed?

Yes. These business activities are fully reserved to Filipino citizens as follow:
a)Mass Media
b)Practice of professions
c)Retail trade enterprises with paid-up capital of less than US$2,500,000
d)Private Security Agencies
e)Small scale mining
f)Utilization of marine resources in archipelagic waters, territorial sea, and
exclusive eonomic zone as well as small-scale utilization of natural resources in
rivers, lakes, bays and lagoons
g)Ownership, operation and management of cockpits
h)Manufacture of firecrackers and other pryrotechnic devices.

28. Are there business activities wherein up to twenty five percent (25%) foreigners
ownership is allowed?

Yes. Participation of foreigners to the extent of 25% is allowed in the following:

a)Private radio communications network
b)Private recruitment whether for local of overseas recruitment
c)Contract for the construction and repair of locally funded public works
d)Contracts for the construction of defense related structures.

29. Are there business activities wherein up to thirty percent foreigner’s ownership is
allowed?

Yes. It’s the business activity of advertising.

30. Are there business activities wherein up to forty percent of foreigner’s owenship is
allowed?

Yes. These business activities are as follows:

a)Exploration, development and utilization of natural resources

b)Ownership of private lands
c)Operation of public utilities
d)Educational institutions other than those established by religious groups and
mission boards
e)Culture, production, milling, processing, trading except retailing of rice and
corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-
products thereof
f)Contracts for the supply of materials, goods and commodities to government-
owned or controlled corporation, company, agency or municipality
g)Facility operator of an infrastructure or a development facility requiring a
public utility franchise
 h)Operation of deep-sea commercial fishing vessel
i)Adjustment companies
j)Ownership of condominium units
k)Manufacture, repair, storage, and/or distribution of products and/or
ingredients requiring Philippine National Police (PNP) Clearance
l)Manufacture, repair, storage and/or distribution of products requiring
Deparment of National Defense (DND) clearance
m)Manufacture and distribution of dangerous drugs
n)Sauna and steam bathhouses, massage clinics and like other activities
regulated by law because of risks posed to public health and morals
o)Domestic market enterprises with paid-in equity capital of less than the
equivalent of US$200,000
p)Domestic market enterprises, which involved advanced technology or employ
at least fifty direct employees with paid-in equity capital or less than the
equivalent of US$100,000

31. Are there business activities wherein foreigner’s ownership could be more than
forty (40) percent up to one hundred percent?

Yes.
a)Export enterprises and
b)Domestic market enterprises with paid-in equity capital of at least the
equivalent of US$200,000
c)Domestic market enterprises, which involved advanced technology or employ
at least fifty direct employees with paid-in equity capital of at least the
equivalent of US$100,000

32. Are practices of professions allowed in corporate form?

The general rule is NO. However, there are practices of professions allowed now
in corporate form as follow
a)Practice of architecture
b)Practice of interior design
c)Practice of real estate services
d)Practice of customs brokerage

33. What is authorized capital stock?

This is the total amount of shares a corporation is allowed to issue if the shares
have a par value. If the shares do not have a par value, the corporation does not
have an authorized capital stock but it has an authorized number of shares it
may issue.

34. What is subscribed capital stock?

 It refers to the total number of shares issued or subscribed by the stockholders.

35. What do you mean by pre-incorporation subscription?

It refers to the required number of shares to be subscribed for purposes of

incorporation. The pre-incorporation subscription should be stated in the
Articles of Incorporation.

36. Is there a minimum amount of subscribed capital stock?

Yes. Under the Corporation Code, at least 25% of the amount subscribed must
be paid-up.

37. Is there a minimum amount of paid-up capital stock?

Yes. Under the Corporation Code, at least 25% of the amount subscribed must
be paid-up and in no case be less than Five Thousand (P5,000.00) Pesos. The
foregoing amount however shall not apply, if there is a law, rule or regulation of
other regulatory agencies requiring a higher minimum paid-up capital.

38. What is paid-in capital?

It refers to the amount paid by subcribers over and above the par value of shares
or the issue value in no-par value shares.

39. What are the considerations for issuance of shares?

Under Sec. 62 of the Corporation Code, stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance 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 and
necessary or convenient for its use and lawful purposes at a fair valuation equal
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;
and
(6)Outstanding shares exchanged for stocks in the event of reclassification or
conversion. Where the consideration is other than actual cash, or consists of
intangible property such as patents or copyrights, the valuation thereof: shall
intially be determined by the incorporators or the board of directors, subject to
the approval by the Securities and Exchange Commission.
40. What is contributed capital?

It refers to the amount contributed to non-stock corporations.

41. Is there a minimum amount for contributed capital in non-stock corporations?

Any amount will suffice as a general rule. However, in the case of registration of
a “foundation”, the minimum contributed capital is P1,000,000.00. The amount
is required to be deposited in the bank in the name of the treasurer-in-trust. For
registration, a bank certificate of deposit is required for the P1,000,000.00.

42. If the payment is other than cash for shares, what are the additional requirements
for each and every consideration for the issuance of shares?

The additional requirements are as follow:

a.Land and/Building/Condominium unit
1. Detailed schedule of the property showing the registered owner, location
area, TCT/CC No., tax declaration No., and the basis of transfer value
(appraised/market value/assessed value/zonal value) certified by the treasurer
2. Copy of TCT/CCT and tax declaration sheet certified by Register of Deeds and
Assessor’s Office, respectively
3. Latest zonal value certfied by BIR, if transfer value is based on zonal value
4. Appraisal report by authorized appraiser, if transfer value is bases on
appraised value (not more than 6 month old)
5. Deed of assignment
6. If property is mortgaged, submit mortgagee/credits certification on the
outstanding loan balance and written consent to the transfer of property
7. For assignment of building where assignsor is nor owner of the land, submit
lease contract on land and consent of landowner to the transfer
8. Affidavit of Undertaking by an incorporator of the corporation to submit the
proof of transfer to the corporation within the prescribed period
a.Untitled Lands
1. Certification of the Barangay Chairman where the property is located, and at
least two (2) adjoinining property owners or possessors, attesting that the
subject land had been in the possessor’s open, peaceful, continuous and
uninterrupted exclusive possession in the concept of an owner for at least thirty
(30) years and the possessor had been introduced improvements thereof, if any
2. Duplicate original or certified true copies of the tax declaration sheets
3. Latest realty tax receipts
4. Affidavit by the transferor attesting continuous and open possession of the
property and that the property is not tenanted
5. Affidavit of Non-Tenancy executed by Barangay Chairman of place where the
property is located
6. Duplicate original or certified true copies of any deed, conveyance, mortgage,
lease or other voluntary instrument affecting the property recorded in the
Register of Deeds for the province or city where the land is situated
7. Affidavit executed by the transferor attesting to the:
a. Existence (or non-existence) of easements over the untitled property
b. Kind/description of the easement and its location
c. Whether the transferor is the dominant estate or the servient estate, by virtue
of such easements
8. Under oath undertaking of the tranferor/subscriber to answer for any liability
that the corporation might incur by virtue of the acceptance of said property as
paid-up capital
9. Clearance or certification from the Department of Agrarian Reform (DAR)
attesting the following:
a. There is no other claimant to the untitled land
b. It has not issued any Certificate of Land Ownership Award (CLOA) over the
property to any other party or
c. The land is exempt from the coverage of the Comprehensive Agrarian Reform
Program (CARP)
10. Blue print Survey of the Plan as approved by the Bureau of Lands
11. Detailed schedule of the property showing its registered owner, location,
area, tax declaration number and the basis of tranfers value (market
value/assessed value/zonal value or appraised value)
12. Latest zonal valuation certified by BIR, if transfer value is based on zonal
value
13. Appraisal report by authorized appraiser, if transfer value is based on
appraised value (not more than 6 month old)
14. Deed of assignment
15. Affidavit of undertaking to submit certified true copy of the original
certificate of title in the name of tranferee-corporation within one (1) year from
the date of receipt of the approval of the application
c.Inventories/Furniture/Personal Properties
1. Detailed schedule of the properties showing the description and the transfer
value certified by the treasurer
2. Deed of assignment
d.Heavy Equipment and Machinery
1. Detailed schedule of the property showing the description and transfer value
certified by the treasurer
2. Appraisal report by authorized appraiser (not more than 6 month old). If the
property is imported, valuation-report with description of the property by the
Bangko Sentral ng Pilipinas.
3. Deed of assignment
e.Shares of Stock
1. Detailed schedule of the shares of stock showing the name of stockholder,
stock certificate number, number of shares and the basis of transfer value
whether market or book value certified by the treasurer
2. Audited financial statements of the investee company as of the last fiscal year
stamped received by BIR and SEC
3. Deed of Assignment
4. Certification by the Corporate Secretary of the investee company that the
shares of stock are outstanding in the name of assignor
5. Photocopy of the stock certificate (present original for verification)
6. Latest market quotation in newspaper or certification from stock
exchange/broker as to latest market price of the shares of stock (if listed in the
Stock Exchange)
7. Affidavit of Undertaking by an incorporator of the corporation to submit the
required proof of the transfer within the prescribed period
f.Motor Vehicle
1. Detailed schedule of the motor vehicle showing the registered owner,
make/model, plate number, chassis number, motor number, certificate of
registration number and market value certified by the treasurer
2. Photocopy of the Certificate of Registration and latest Official Receipt of
Registration (present the original for verification)
3. Appraisal report by authorized appraiser (not more than six month old)
4. Deed of assignment
5. Affidavit of undertaking by an incorporator of the corporation to submit the
required proof of transfer within the prescribed period
g.Sea Vessel/Aircraft
1. Detailed schedule of the vessel/aircraft showing registered owner, registry
number, technical description, and appraised value certified by the treasurer
2. Certified true copy of the certificate of ownership
3. Appraisal report by authorized appraiser (not more than 6 month old)
4. Certificate of seaworthiness/airworthiness issued by appropriate government
agency
5. Deed of assignment
6. Affidavit of Undertaking by an incorporator of the corporation to submit the
required proof of transfer within the prescribed period
h.Intangible
1. Photocopy of the System Purchase Agreement or any documents as proof of
ownership (for a software)
2. Copy of certificate of Registration of Intellectual Property Rights, mining
permit for mining claims or rights
3. Appraisal report by an accredited appraisal company or licensed Filipino
mining engineer for mining rights/claims (not more than 6 month old)
4. Deed of Assignment
i.Net Assets (by way of conversion of single proprietorship/partnership into
corporation or by spin-off)
1. Audited Financial Statements (AFS) of single
proprietorship/partnership/division of a corporation for spin-off as of last fiscal
year
2. Long-form audit report of item no. 1
3. Deed of Assignment of the assets and liabilities to the corporation
4. List of creditors showing the amount due to each creditor as of date of the AFS
certified by the auditor or certified under oath by the company accountant and
written consent of creditors
5. Detailed schedule of properties with certificate of registration/title and their
 respective book values certified by the company accountant
6. Photocopy of the certificate of registration of the motor vehicles (present
original for verification)
7. Copy of TCT/CCT and tax declaration sheets certified by the Register of Deeds
and Assessor’s Office, respectively
8. Photocopy of stock certificate (present original for verification)
9. DTI Certificate of Registration (for single proprietorship)
10. Affidavit of Undertaking by an incorporator of the corporation to submit the
required proof of transfer within the prescribed period

43. What are the classifications of shares of stock?

The shares of stock may be classified as common, founders, preferred, par or no-
par value shares, voting or non-voting shares and redeemable shares.

44. What are the features of common shares?

Common shares must always be voting shares. Common shares can be par value
shares or no-par shares.

45. What are the features of preferred shares?

Preferred shares must always be par value shares. Preferred shares can be
voting or non-voting shares. The preferred shareholders may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in distribution of dividends, or such other preferences as may be
stated in the articles of incorporation.

46. What are the features of founders’shares?

Founders’shares classified as such in the articles of incorporation may be given

certain rights and privileges not enjoyed by the owners of other stocks, provided
that where the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange Commission. The five-
year period shall commence from the date of the aforesaid approval by the
Securities and Exchange Commission.

47. What are the features of redeemable shares?

Redeemable shares may be issued by the corporation when expressly so

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

48. What are the features of no-par value shares?

Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto. Shares without par value may
not be issued for a consideration less than the value of Five (5.00) pesos per
share. The entire consideration received by the corporation for its no-par value
shares shall not be available for distribution as dividends.

49. Are there corporate entities not allowed to issue no-par value shares?

Yes. They are banks, trust companies, insurance companies, public utilities, and
building and loan associations.

50. Do we allow domestic corporations as hundred percent owned by foreigners?

Yes. The registration will be under the Foreign Investment Act of 1991 (FIA), as
amended by R.A. 8179. The Foreign Investment Negative List will serve as guide
to allow registration. The corporation may be registered as export or as domestic
market enterprise.

51. What is an export enterprise under FIA?

The term “export enterprise” shall mean an enterprise wherein a manufacturer,

processor or service (including tourism) enterprise exports sixty percent (60%) or
more of its output, or wherein a trader purchases products domestically and
exports sixty percent (60%) or more of such purchases.

52. What is domestic market enterprise under FIA?

The term “domestic market enterprise” shall mean an enterprise, which

produces goods for sale, or renders services to the domestic market entirely or if
exporting portion of its output fails to consistency export at least sixty percent
(60%) thereof.

53. What are the requirements for treasurer?

Treasurer must be Filipino citizen in corporations with fully or partly nationalized

business activities in view of the provisions of the Anti-Dummy Law. However, in
non-nationalized business activities, the foreigner is allowed as treasurer.
54. What is a transfer clause?

It is stated as follows in the articles of incorporation: No transfer of stock or

interest which shall reduce the ownership of Filipino citizens to less than the
required percentage of the capital stock as provided by existing laws shall be
allowed or permitted to be recorded in the proper books of the corporation and
this restriction shall be indicted in all stock certificates issued by the corporation.

55. When is a transfer clause required in the articles of incorporation?

It is required to be set forth in the articles of incorporation of corporations which

will engage in any business or activity reserved for Filipino citizens.

56. Is there a need to have AI notarized?

Yes. Notarial Acknowledgement of the Articles of Incorporation is required under

the Corporation Code.

57. What are the contents of By-laws?

A private corporation may provide in its by-laws for:

(1)The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
(2)The time and manner of calling and conducting regular or special meeting of
the stockholders or members;
(3)The required quorum in meeting of stockholders or member and the manner
of voting therein;
(4)The form for proxies of stockholders and members and the manner of voting
them;
(5)The qualifications, duties and compensation of directors or trustees, officers
and employees;
(6)The time for holding the annual election of directors or trustees and the mode
of manner of giving notice thereof
(7)The manner of election or appointment and the term of office of all officers
other than directors or trustees;
(8)The penalties for violation of the by-laws;
(9)In the case of stock corporation, the manner of issuing stock certificates; and
(10)Such other matters as may be necessary for the proper or convenient
transactions of its corporate business and affairs.

58. What is the requirement on annual meeting?

The annual meeting date should be a specific date (i.e. January 28).

59. What is the requirement on the fiscal year?

 The fiscal year could be calendar year or a twelve-month period.

61. If the BL is filed after incorporation, what are the requirements?

Three copies of By-laws signed by stockholders representing majority of the

outstanding capital stock or majority of the members in case of non-stock
corporation and the adooption was certified by majority of the board and the
corporate secretary that the by-laws was adopted by the votes required under
the Corporation Code.

60. Can BL be filled simultaneous with the Articles of Incorporation?

Yes. The By-laws must be signed by all of the incorporators.

CONCEPT OF Share or Stock

1. Share of Stock
 Definition: A share of stock represents an ownership interest in a corporation. Each share
entitles the holder to certain rights, such as voting, dividends, and a claim on the company’s
assets in the event of liquidation.
 Example: If a corporation issues 1,000 shares, owning one share means you own 1/1,000th of
the company.

2. Capital Stock
 Definition: Capital stock refers to the total amount of stock a corporation is authorized to issue
under its charter. This includes both common and preferred stock. It represents the total value
of the shares that can be issued to shareholders.
 Example: A corporation's charter authorizes it to issue 1,000,000 shares of common stock and
200,000 shares of preferred stock. The capital stock in this case is the aggregate of these
amounts, representing the total potential ownership distribution.

3. Subscribed Capital Stock

 Definition: Subscribed capital stock is the portion of the capital stock that shareholders have
agreed to purchase but have not yet fully paid. It represents the commitment by shareholders to
invest in the company.
  Example: If a corporation is authorized to issue 1,000 shares and shareholders commit to buying
500 shares, the subscribed capital stock is the value of these 500 shares, even if payment is still
pending.

4. Paid-Up Capital Stock

 Definition: Paid-up capital stock is the amount of money that shareholders have actually paid to
the corporation for their shares. This is part of the subscribed capital stock that has been fully
paid for.
 Example: If shareholders have committed to purchasing 500 shares but have paid for only 300
shares, the paid-up capital stock is the value of these 300 shares. The remaining 200 shares are
part of the subscribed but unpaid capital.

5. Issued Capital Stock

 Definition: Issued capital stock is the portion of the capital stock that has been distributed to
shareholders. This includes both paid-up and unpaid shares but excludes shares that are
authorized but not yet issued.
 Example: If a corporation has authorized 1,000,000 shares and has issued 600,000 shares to
shareholders, the issued capital stock is the value of these 600,000 shares.

6. Outstanding Capital Stock

 Definition: Outstanding capital stock refers to the total number of shares that are currently held
by shareholders, excluding any shares that have been repurchased by the corporation or are
held in the treasury.
 Example: If a corporation has issued 600,000 shares but has repurchased 50,000 shares, the
outstanding capital stock is 550,000 shares.

7. Unissued Capital Stock

 Definition: Unissued capital stock refers to the portion of the authorized capital stock that has
not yet been issued or distributed to shareholders. These shares are authorized but remain in
reserve and may be issued in the future.
 Example: If a corporation is authorized to issue 1,000,000 shares but has only issued 600,000
shares, the unissued capital stock is 400,000 shares.

Summary with Examples:

1. Share of Stock: Represents ownership; if you own 100 shares out of 1,000 total shares, you own
10% of the company.
2. Capital Stock: Total authorized stock; if a company can issue 1,000,000 shares, that is its capital
stock.
3. Subscribed Capital Stock: Shares committed but not fully paid; if 200 shares are promised but
only 100 are paid, the subscribed capital stock is the value of 200 shares.
4. Paid-Up Capital Stock: Shares that are fully paid; if 100 shares are fully paid out of 200
subscribed shares, the paid-up capital stock is the value of 100 shares.
5. Issued Capital Stock: Shares distributed; if 500,000 out of 1,000,000 authorized shares are
issued, the issued capital stock is the value of 500,000 shares.
6. Outstanding Capital Stock: Shares held by shareholders; if 500,000 shares are issued and 50,000
are repurchased, the outstanding capital stock is 450,000 shares.
7. Unissued Capital Stock: Authorized but not yet issued; if 1,000,000 shares are authorized and
600,000 are issued, the unissued capital stock is 400,000 shares.
1. Classification of Shares
1.1 Par Value Shares vs. No Par Value Shares
 Par Value Shares
o Definition: Shares with a par value have a nominal value assigned to them in the
corporate charter. This value is the minimum price at which the shares can be issued.
o Key Points:
 Par value represents the minimum legal capital per share.
 The par value is often a small amount (e.g., ₱1 or ₱0.01 per share).
 It does not necessarily reflect the market value of the shares.
o Example: If a share has a par value of ₱1, it means that the company cannot issue that
share for less than ₱1.
 No Par Value Shares
o Definition: Shares issued without a par value do not have a nominal value assigned.
They are issued based on the value agreed upon by the corporation and the
shareholders.
o Key Points:
 Flexibility in pricing as there is no minimum value requirement.
 Total value of no par value shares is based on the amount paid for them.
 o Example: If a share is issued at ₱10 but has no par value, the company can issue it at any
value agreed upon by the corporation and the shareholder.
1.2 Voting Shares vs. Non-Voting Shares
 Voting Shares
o Definition: Shares that provide the shareholder with voting rights in the corporation’s
meetings, typically on issues like electing directors or approving major decisions.
o Key Points:
 Generally, common shares are voting shares.
 Shareholders use voting rights to influence corporate governance.
o Example: Common shares usually carry voting rights, allowing shareholders to vote on
board elections or significant corporate changes.
 Non-Voting Shares
o Definition: Shares that do not grant voting rights to shareholders. These are typically
issued to provide certain financial benefits without the right to vote on corporate
matters.
o Key Points:
 Often preferred shares or special classes of common shares.
 Provides a way to raise capital without diluting control.
o Example: Preferred shares may be non-voting but offer fixed dividends, making them
attractive to investors seeking income without control over corporate decisions.
1.3 Common Shares vs. Preferred Shares
 Common Shares
o Definition: Shares that represent ownership in the company and typically provide voting
rights. Common shareholders may receive dividends and have a residual claim on assets
in the event of liquidation.
o Key Points:
 Common shares often carry voting rights.
 Dividends are variable and not guaranteed.
 Shareholders have a claim on residual assets after all other claims have been
satisfied.
o Example: An investor purchasing common stock in a company may receive dividends
that vary based on the company's profitability and has voting rights.
 Preferred Shares
 o Definition: Shares that offer certain preferences over common shares, such as fixed
dividends and priority in the event of liquidation, but often lack voting rights.
o Key Points:
 Typically provide fixed dividends.
 Priority claim on assets over common shareholders.
 May have special rights or conditions attached.
o Example: Preferred shares might guarantee a fixed dividend of ₱5 per share, with no
voting rights.
1.4 Founder’s Shares
 Definition: Shares issued to the founders of the corporation, often carrying special rights or
privileges. These are typically issued at the start-up phase.
 Key Points:
o May carry enhanced voting rights or other benefits.
o Used to reward or incentivize founders.
 Example: Founders might receive shares with 10 votes per share, compared to 1 vote per share
for other shareholders.
1.5 Redeemable Shares
 Definition: Shares that the corporation has the right to repurchase or redeem at a future date,
either at the option of the corporation or the shareholder.
 Key Points:
o Can be redeemed at a predetermined price.
o Provides flexibility for both the corporation and the shareholder.
 Example: A corporation issues redeemable shares with a provision that allows it to repurchase
the shares at ₱15 each after 5 years.
1.6 Treasury Shares
 Definition: Shares that were issued and subsequently repurchased by the corporation. These
shares are held by the corporation itself and are not considered in calculating dividends or
voting rights.
 Key Points:
o Not included in outstanding shares.
o Can be reissued or canceled.
 Example: A corporation buys back 10,000 of its own shares and holds them in its treasury. These
shares are not considered in the total outstanding shares for dividend distribution or voting.
Summary with Examples:
 Par Value Shares: Issued with a set minimum value (e.g., ₱1 per share).
 No Par Value Shares: Issued without a set value, based on the agreed price (e.g., issued at ₱10
each).
 Voting Shares: Common shares typically provide voting rights.
 Non-Voting Shares: Preferred shares that provide financial benefits but no voting rights.
 Common Shares: Ownership shares with voting rights and variable dividends.
 Preferred Shares: Shares with fixed dividends and priority in liquidation but no voting rights.
 Founder’s Shares: Special shares issued to founders with unique rights or privileges.
 Redeemable Shares: Shares that can be repurchased by the corporation at a future date.
 Treasury Shares: Shares repurchased by the corporation and held in its own treasury.