Corporation Law: The Revised Corporation Code of the Philippines - Sec 13 & Sec 14

   THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE II -  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS


SEC. 13. Contents of the Articles of Incorporation. – 
All corporations shall file with the 
Commission articles of incorporation in any of the official languages, duly signed and 
acknowledged or authenticated, in such form and manner as may be allowed by the Commission, 
containing substantially the following matters, except as otherwise prescribed by this Code or by 
special law:
(a) The name of the corporation; 
(b) The specific purpose or purposes for which the corporation is being formed. Where a 
corporation has more than one stated purpose, the articles of incorporation shall indicate the 
primary purpose and the secondary purpose or purposes: Provided, That a nonstock corporation 
may not include a purpose which would change or contradict its nature as such; 
(c) The place where the principal office of the corporation is to be located, which must be 
within the Philippines; 
(d) The term for which the corporation is to exist, if the corporation has not elected 
perpetual existence;
(e) The names, nationalities, and residence addresses of the incorporators;
(f) The number of directors, which shall not be more than fifteen (15) or the number of 
trustees which may be more than fifteen (15); 
(g) The names, nationalities, and residence addresses of persons who shall act as directors 
or trustees until the first regular directors or trustees are duly elected and qualified in accordance 
with this Code; 
(h) If it be a stock corporation, the amount of its authorized capital stock, number of shares 
into which it is divided, the par value of each, names, nationalities, and residence addresses of the 
original subscribers, amount subscribed and paid by each on the subscription, and a statement that 
some or all of the shares are without par value, if applicable; 
(i) If it be a nonstock corporation, the amount of its capital, the names, nationalities, and 
residence addresses of the contributors, and amount contributed by each; and
(j)Such other matters consistent with law and which the incorporators may deem necessary 
and convenient.

An arbitration agreement may be provided in the articles of incorporation pursuant to 
Section 181 of this Code.

The articles of incorporation and applications for amendments thereto may be filed with the Commission in the form of an electronic document, in accordance with the Commission’s rules and regulations on electronic filing.


SEC. 14. Form of Articles of Incorporation. – 
Unless otherwise prescribed by special law, the articles of incorporation of all domestic corporations shall comply substantially with the following form:

The undersigned incorporators, all of legal age, have voluntarily agreed to form a (stock) (nonstock) corporation under the laws of the Republic of the Philippines and certify the following: 

First: That the name of said corporation shall be “_______________, Inc., Corporation or OPC”; 

Second: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); 

Third: That the principal office of the corporation is located in the City/Municipality of ______________________, Province of _______________________, Philippines; 

Fourth: That the corporation shall have perpetual existence or a term of ______________ years from the date of issuance of the certificate of incorporation; 

Fifth: That the names, nationalities, and residence addresses of the incorporators of the corporation are as follows:
Name     Nationality     Residence
-             -                      -

Sixth: That the number of directors or trustees of the corporation shall be _________________; and the names, nationalities, and residence addresses of the first directors or trustees of the corporation are as follows:
Name     Nationality     Residence
-             -                      -

Seventh: That the authorized capital stock of the corporation is ______________ PESOS (P________), divided into _____ shares with the par value of ____________ PESOS (P_______________) per share. (In case all the shares are without par value): That the capital stock of the corporation is __________________________ shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of __________________________ shares, of which _______________________ shares have a par value of _________________ PESOS (P____________) each, and of which _______________________ shares are without par value.

Eighth: That the number of shares of the authorized capital stock above-stated has been subscribed as follows:

 Name of Subscriber      Nationality No. of Shares     Subscribed Amount      Subscribed      Amount Paid

(Modify No. 8 if shares are with no-par value. In case the corporation is nonstock, Nos. 7 and 8 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities, and residence addresses of the contributors or donors and the respective amount given by each.)

Ninth: That _____________________ has been elected by the subscribers as Treasurer of the Corporation to act as such until after the successor is duly elected and qualified in accordance with the bylaws, that as Treasurer, authority has been given to receive in the name and for the benefit of the corporation, all subscriptions, contributions or donations paid or given by the subscribers or members, who certifies the information set forth in the seventh and eighth clauses above, and that the paid-up portion of the subscription in cash and/or property for the benefit and credit of the corporation has been duly received. 

Tenth: That the incorporators undertake to change the name of the corporation immediately upon receipt of notice from the Commission that another corporation, partnership or person has acquired a prior right to the use of such name, that the name has been declared not distinguishable from a name already registered or reserved for the use of another corporation, or that it is contrary to law, public morals, good customs or public policy.

Eleventh: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): “No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of 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 indicated in all stock certificates issued by the corporation.” 

IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this ................... day of .............................., 20........... in the City/Municipality of ........................................, Province of ................................................., Republic of the Philippines.

 (Names and signatures of the incorporators) 
_______________________________________
(Name and signature of Treasurer)

NOTES 

1. Articles of Incorporation as Charter and Contract.

  • The Articles of Incorporation has been described as a document that defines the charter of the corporation stating its name, purpose or purposes, its capital stock, as well as the description of its governing board and other stipulations under Sections 13 and 14 of the RCCP.
  • The Articles of Incorporation defines the contractual relationships between the:
    • State and the corporation
    • stockholders and the State
    • corporation and its stockholders
  • The contents of the Articles of Incorporation are binding, not only on the corporation, but also on its shareholders. 
    • Thus, if the Articles of Incorporation indicates that at the time of incorporation, the incorporators were bona fide stockholders of 700 founders' shares and 76 common shares, the same cannot be questioned just because the stock and transfer book states a different number. 
    • If the Articles of Incorporation states that there are 776 issued and outstanding shares, the same is binding on all stockholders even if less is specified in the stock and transfer book. 
  • The Articles of Incorporation also binds the State. 
    • The State cannot disregard the provisions of the Articles without any valid reason. It cannot whimsically revoke the Articles of Incorporation.
  • The Articles of Incorporation constitutes the constitution of a corporation. 
    • When anyone decides to join a corporation, he does so conscious of the conditions under which he joins. 
    • If he joins, then he agrees to those conditions. 
    • If he cannot agree to those conditions, he is not compelled to join.
  • An entry in the Articles of Incorporation is evidence of the factual stipulations therein. 
    • For instance, the recitals in the Articles of Incorporation that there are unpaid subscriptions are proof against the stockholders. 
    • If the shareholder alleges that he or she has fully paid the subscription, he or she must substantiate the averment of full payment, as well as counter the recitals found in the Articles of Incorporation that the subscription were only partly paid.

2. Substantial Compliance.

  • General Rule: The Articles of Incorporation must comply with the form prescribed by Articles 13 and 14 of the RCCP.
  • Exception: However, substantial compliance may not affect the de jure existence of the corporation. Section 13 provides that the Articles of Incorporation must contain "substantially" the matters indicated therein.
  • The RCCP recognizes that special laws and the Code itself may require strict compliance with certain provisions. 
    • Thus, a corporate name and a purpose clause in the Articles of Incorporation are indispensable. 
    • Special laws may likewise impose additional provisions for strict compliance such as minimum capitalization requirements.

3. Name

  • Just like the names of natural persons the name of the corporation is necessary for identification purposes. 
  • The Supreme Court explained that the very law of their creation and continue existence requires each to adopt and certify a distinctive name. 
    • The incorporators constitute a body politic and corporate under the name stated in the certificate
    • A corporation has the power of succession under its corporate name. 
    • The name of the corporation is therefore essential to its existence.
  • A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. 
    • It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field.
  • A name is peculiarly important as necessary to the very existence of a corporation.
    • Its name is one of its attributes, an element of its existence, and essential to its identity.
  • A corporation must have a name by which it is to sue and be sued and do all legal acts.
    • The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person.
    • The right to use its corporate name is as much a part of the corporate franchise as any other privilege.
  • A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him.
    • A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another.
  • The right to use its name is, just like other privileges, part of the franchise granted to the corporation.
    • The corporate name is necessarily included in the enjoyment of the franchise. 
    • Hence, a corporate name cannot be levied upon because it is inseparable from the primary franchise.
  • Before the Articles of Incorporation of the prospective corporation is drafted, it is advisable to verify with the SEC if the proposed name of the corporation is still available for registration. 
    • If available, reservation can be made for a limited period after payment of the required fees. 
    • However, the reservation and notice of availability of the corporate name shall not constitute an approval of the use of such name.
  • The name of the corporation need not reflect the purpose of the corporation. 
    • The purpose of the name is for identification and not to give an indication of its purpose.

4. Purpose Clause

  • The purpose clause is important in order to assure that persons who invest in corporate entities would be aware of the business the corporation is designed to engage in.
  • The purpose or purposes for which the corporation is to be formed must be grouped into Primary and Secondary Purposes. 
    • Primary Purpose 
      • must be only one.
      • determines the classification of a corporation
    • Secondary Purposes 
      • may be several.
      • other purposes not allied or incidental to the Primary Purpose should be classified as Secondary Purposes. 
  • It is necessary to specify the two kinds of purposes in order to determine which investment of corporate funds would require the authority of both the Board and stockholders under Section 41 of the RCCP.
  • General Rule: Primary Purpose determines the classification of a corporation.
  • Exception: Where the corporation actually engages in one of its secondary purposes, it may also be classified in accordance with the secondary purpose/s.
    • Example:
      • A corporation is a mining corporation if mining is its primary purpose.
      • Where mining is the secondary purpose, it may be considered a mining corporation only when it undertakes its mining purpose and is actually engaged in it.
      • If the purpose of a corporation is to establish, operate, manage, hold, own or invest in corporations or entities engaged in mining activities, the corporation is in the nature of a holding company and thus cannot engage in the business of mining by itself.
  • There should be a specification of the corporate purpose with sufficient clearness to define with certainty the scope of the business or undertaking prescribed and to enable one to see that the purpose specified is one provided for by the statute. 
    • A statement that the object of the corporation is to carry on any business that it may deem profitable or in other vague terms is not sufficient. 
    • If the manner of conducting the proposed business is to be stated, vague and general terms are to be avoided also.
  • Not all the powers need to be described in the Articles of Incorporation. Other powers are either implied or incidental.
    • The purposes of a corporation as set forth in the Articles of Incorporation are not to be limited by the words of a single clause, but are to be ascertained by the reading of the entire declaration. 
    • All the clauses shall be considered together and in association with one another in determining what the corporation may do although that part expressing the object of the corporation is first referred to.

4.01 Rationale of Purpose Clause

  • The purpose clause included in the Articles of Incorporation in order that:
    1. The person who intends to invest his money in the business will know where and in what kind of business or activity his money will be invested;
    2. The directors and officers will be informed regarding the scope of business they are authorized to act; and
    3. A third person will be aware if the transaction he has with the corporation is within the authority of the corporation.

4.02 General Limitation

  • The purposes of a corporation must not be unlawful. 
    • Although the Articles of Incorporation may imply with the formal requirements of law, the SEC may reject the Articles of Incorporation because the purpose is not legally acceptable.
  • The general limitations imposed on the purpose clause re:
    1. It cannot be created or formed for a purpose or function of which a corporate body is incapable. 
      • For example, generally, a corporation cannot be incorporated for the purpose of practicing a profession. Corporations cannot possess human personal qualifications for the practice of profession.
    2. It cannot be created for a purpose that is contrary to law, morals, or public policy. 
      • For example, the corporation cannot be organized for the purpose of creating a municipal corporation. Obviously, a corporation cannot also be created for the purpose of engaging in prostitution business.
    3. It cannot be organized for two or more incompatible purposes.
      • There may be non-allied purposes but they must not be incompatible. For example, the General Banking Law expressly prohibits banks from being engaged in insurance business.
    4. The corporation may not be organized for a purpose that is contrary to its nature. 
      • For example, a non-stock non-profit corporation cannot have as its secondary purpose the manufacturing of goods to be sold on wholesale or retail.
  • Section 13 of the RCCP (previously Section 14 of the Corporation Code) provides that a non-stock corporation may not include a purpose that would change or contradict its nature as such. 
    • In this connection, Section 87 of the RCCP (Section 88 of the Corporation Code) provides that a non-stock corporation "may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title [Title XI] governing particular classes of non-stock corporations."

4.02  Questions Regarding the Purpose

  • The best proof of the purpose of a corporation is its Articles of Incorporation.
    • If the purpose stated therein is lawful, then the Securities and Exchange Commission has no authority to inquire whether the corporation has purposes other than those stated and mandamus will lie to compel the SEC to issue the certificate of incorporation.
  • It is also a well-established rule that collateral attack on the legality of the purpose of the corporation is not allowed in this jurisdiction. 
    • Thus, a party in a case for damages cannot impugn the legality of the purpose of the corporation. 
    • A case should be filed to directly attack the purpose of the corporation.

5. Principal Office

  • The Articles of Incorporation must state the principal office where the corporation shall hold office which must be within the Philippines.
  • However, SEC rules require the location of the principal office to be specifically identified.
    • Circular No. 3, Series of 2006 provides that, in accordance with the disclosure requirements under existing laws, all corporations applying for registration must state in their Articles of Incorporation the specifics of their principal office which shall include, if feasible, street number, street name, barangay, city or municipality and the specific address of the incorporator, director, or trustee.
    • If practicable, the name or the building should also be designated. ''Metro Manila" shall no longer be allowed as principal office. 
    • Filing that does not comply with this requirement is deemed non-compliant and is considered as not filed.
  • The SEC justified the specific requirement by explaining that:
    • Show cause letters and the like issued by the Commission have to be addressed to the specific place where the principal office of the corporation is to be found so that these can be suitably received by the parties. 
    • Facilitation of the addressee's receipt of any and all communications, as well as the proper service of court and other processes, are sought. 
    • Other government agencies, as well as the public, rely on the Commission to provide accurate and up-to-date information regarding corporations registered with it.
Existing Corporations and Partnerships
  • All existing corporations and partnerships whose existing address in their Articles of Incorporation or articles of partnership, indicate only a general address as their principal office address such that the articles merely indicate the city, town or municipality or Metro Manila are required to amend their articles of incorporation or articles of partnership to reflect specific addresses. Otherwise, a one-time penalty can be imposed.
Moved to Another Location
  • If the corporation's principal address is already complete and specific but the corporation has moved to another location within the same city or municipality, the corporation is not required to file an amended Articles of Incorporation. 
    • Instead, it must declare its new or current specific address in the General Information Sheet (GIS) within 15 days from the transfer to its new location.
  • However, the corporation must submit an amended Articles of Incorporation if the new address is in another city or municipality.
  • The practice before the issuance of SEC Circular No. 3, Series of 2006 was to indicate the town or city where the principal place of business is located. 
    • The practical benefit of this is that there is no more need to amend the Articles of Incorporation before the corporation can transfer its specific principal office so long as the new office is in the same town or city. 
    • Under present rules, amendment is not necessary only if the corporation will transfer to a new address within the same municipality or city.
  • The issue regarding the principal office was discussed in the Senate.
    • Requiring a specific address for purposes of determining the venue of the actions and jurisdiction over the corporation for tax and other purposes, may not be consistent with ease of doing business because it will not allow the corporation to move to other premises within the same city or municipality.
5.01 Importance of Principal Office.
  • The principal office of the corporation is considered its place of residence. 
  • There may be rules of law that are focused on the residence of corporations. 
    • For example, residence may be important for tax purposes, to determine the venue in cases or even in determining if proper notice was served.
    • The principal place of business may determine the venue of court cases involving corporations. 
    • It may also determine if service of summons and notices was properly made.
    • The principal place of business is likewise the place where chattel mortgage over shares of stocks in the corporation should be registered.
    • Additionally, unless otherwise provided for, the meetings of stockholders or members shall be conducted in the city or municipality where the principal place of business is located, and if practicable in the principal office of the corporation.
  • It is not necessary that all the businesses of the corporation be conducted in the principal place of business. 
    • For instance, the principal place of business of a corporation manufacturing goods may be different from the place of the factory.
6. Corporate Term. 
  • The term of existence of a corporation is now perpetual under the RCCP. 
  • As earlier explained, however, a corporation may also choose to have a fixed term. 
    • It has been explained that where the term of a corporation expires but instead of liquidating its affairs it continues the business in good faith, not knowing that the term has expired, some courts hold that it may be deemed a corporation de facto. 
    • It may also be regarded as a corporation by estoppel under certain circumstances.
7. Incorporators. 
  • The Articles of Incorporation contains the names, nationalities, and residence addresses of the incorporators. 
    • All incorporators must sign and acknowledge the Articles of Incorporation together with the treasurer. 
    • The Articles of Incorporation is defective if not all incorporators acknowledged the same before the notary public.
  • Necessarily, the names of incorporators specified in Article 13(e) of the RCCP must refer to their legal names, not fictitious names or aliases, which they have no authority to use.
8. Directors. 
  • Section 13 requires a statement of the number of directors, which shall not be more than fifteen (15). 
  • The number of directors cannot exceed 15 even after the incorporation. 
  • For a non-stock corporation, the number of trustees, which may be more than fifteen (15) should be indicated in the Articles of Incorporation.
  • The Articles of Incorporation states 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 in accordance with the RCCP. 
    • This means that the original directors originally appearing in the Articles of Incorporation need not necessarily be the regular directors elected after the issuance of the certificate of incorporation.
9. Capital Stock. 
  • It is mandatory to state the authorized capital stock, the number of shares into which it is divided and par value of the shares, in lawful money of the Philippines if shares have par value. 
    • authorized capital stock,
    • the number of shares into which it is divided, and 
    • par value of the shares
  • If the shares have no par value, only number of shares need be stated. 
    • authorized capital stock, and
    • the number of shares into which it is divided
  • Both the RCCP and the Corporation Code do not impose a minimum capital stock.
  • Unlike the Corporation Code, the RCCP does not provide for a minimum subscribed capital and paid up capital. 
    • It is worth mentioning though that the Corporation Code required a minimum subscribed capital and paid-up capital for the following reasons:
      • To serve as an assurance that there will be successful prosecution of the business of the corporation; and 
      • To assure the creditors that they have means of obtaining satisfaction of their claims to the extent of the subscription. 
  • With respect to the shares comprising the capital stock, the same may be divided into classes or series of shares or both and any of such classes or series of shares may have rights, privileges or restrictions, as may be provided for in the Articles of Incorporation. 
    • This is subject to the limitation that no share may be deprived of voting rights except preferred or redeemable shares and that there shall always be a class or series of shares which have complete voting rights. 
    • Any or all of the shares may have a par value or have no par value, as provided in the Articles of Incorporation. 
    • Shares of stock without par value may not be issued for a consideration less than P5.00 per share. 
  • The names, nationalities, and residence addresses of the original subscribers, and the respective amounts subscribed and paid by each of them must also be stated in the Articles of Incorporation. 
    • The total amount on account of subscriptions shall be stated except where the capital stock consists of no par value shares, in which case the subscriptions must be fully paid.
10. Paid-up Capital. 
  • Paid-up capital is that portion of the authorized capital stock that has been subscribed and paid.
    • To illustrate, the authorized capital stock of a corporation is worth Pl Million and the total subscription amounts to P250,000.00 while the total amount paid for the subscription is P200,000.00. The latter amount, P200,000.00 is the paid-up capital or what should accurately be termed as ''paid-up capital stock.''
    • Thus, not all funds or assets received by the corporation can be considered paid-up capital. 
    • Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid up.
Minimum Requirements
  • The paid-up capital may be subject to different minimum requirements under special laws. 
    • It is necessary that there is a treasurer elected by the subscribers authorized to receive for and in the name of and for the benefit of the corporation all subscriptions paid or given by the subscribers.
    • It should be noted that although the submission of a certificate of deposit is not presently required, it is still necessary that there is actual paid-up capital. 
      • Hence if the payment is in cash, it is still good practice to deposit the sum with a bank in the name of the proposed corporation, or in the name of the treasurer-in-trust for the corporation who will after all issue the Treasurer's certification incorporated in the Articles of Incorporation as its Ninth clause.
Property as Paid-up Capital
  • If the paid-up capital consists of property, verification of its ownership, physical existence, and reasonableness of the valuation at which it is being transferred to the corporation is made by the SEC. 
    • Documents to support ownership such as:
      • Original/Transfer Certificate of Title, and Tax Declaration with respect to land
      • Certificate of registration with respect to motor vehicles and motor vessels, and 
      • other documents to support the ownership of the properties are required to be submitted. 
    • If any of the properties used as paid-up capital is mortgaged or otherwise encumbered, written consent of the mortgagee is necessary. 
    • If the transfer value of the property is higher than the cost or assessed value, an appraisal report prepared by a licensed appraiser is required.
  • The Guidelines Covering the Use of Properties that Require Ownership Registration as Paid-Up Capital of Corporation provides that where the payment made is in the form of land, the applicant corporation shall submit to the SEC proof of the transfer of the certificate of ownership thereon, in the name of the transferee corporation within 120 days from the date of approval of the application, extendible for justifiable reasons.
  • The non-submission of the certificate of ownership or proof of registration within the given period shall be sufficient ground for the revocation of the application approved by the SEC.
Conversion to Corporation
  • If a going concern like a single proprietorship or partnership is being converted into a corporation, financial statements duly certified by an independent Certified Public Accountant (CPA), as  well as the long form audit report of the certifying CPA is required. Likewise, written consent of creditors must be submitted.
  • A Deed of Assignment executed by the owner, proprietor, or partners in case of partnership, transferring the properties, as well as other assets and liabilities in favor of the corporation is required. 
  • The Deed of Assignment covering real estate properties must be presented for primary entry to the Register of Deeds where the property is located. 
Forms of Payment
  • The SEC prescribed the documentary requirements for the different modes of satisfying the paid-up capital requirement. 
  • Payment of subscription may be in the form of enumerated under Section 61 of the RCCP.  These may include:
    1. Cash;
    2. Land, Building or Condominium Unit; 
    3. Untitled land; 
    4. Inventories, Furniture, and Personal Properties;
    5. Heavy Equipment and Machinery; 
    6. Shares of Stock; 
    7. Motor Vehicles; 
    8. Sea Vessel and Aircraft; 
    9. Intangibles (like intellectual property rights or mining rights); and
    10. Net Assets by way of Conversion of single proprietorship/partnership into corporation or by way of Spin-Off. 
  • All these different forms of payment have corresponding documentary requirements.
11. Treasurer's Certification. 
  • The Ninth clause of the Articles of Incorporation must state the name of the Treasurer who has been elected by the subscribers to act as such until after the successor is duly elected and qualified in accordance with the By-laws and that as Treasurer, he or she has been given the authority to receive in the name and for the benefit of the corporation, all subscriptions, contributions or donations paid or given by the subscribers or members, who certifies the information set forth in the Seventh and Eighth clauses of the Articles of Incorporation, and that the paid-up portion of the subscription in cash and/or property for the benefit and credit of the corporation has been duly received. 
  • The Treasurer is responsible for the certification because the Treasurer also signs the Articles of Incorporation. Thus, the Treasurer may be made liable if the information stated in the Seventh and Eighth clauses are false. 
12. Effect if Sole Proprietorship is Organized. 
  • A single proprietorship may be organized as a corporation. 
  • In such case, it is required that Deed of Assignment that must specify the liabilities of the sole proprietorship that are being assumed by the new corporation.
  • The corporation would not be liable if there is no assumption of obligation. 
  • In the same manner, in order for a corporation to be able to file suit and claim the receivables of its predecessor business like a single proprietorship, it must show proof that the corporation had acquired the assets and liabilities of the single proprietorship.
  • Where an individual or sole trader organizes a corporation to take over his business and all his assets, and it becomes in effect merely an alter ego of the incorporator, the corporation, either on the grounds of implied assumption of the debts, or on the grounds that the business is the same and is merely being conducted under a new guise, is liable for the incorporator's pre-existing debts and liabilities. 
    • Clearly, where the corporation assumes or accepts the debt of its predecessor in business it is liable and if the transfer of assets is in fraud of creditors it will be liable to the extent of the assets transferred. 
    • The corporation is not liable on an implied assumption of debts from the receipt of assets:
      • where the incorporator retains sufficient assets to pay the indebtedness, or 
      • where none of his assets are transferred to the corporation, or 
      • where, although all the assets of the incorporator have been transferred, there is a change in the persons carrying on the business and the corporation is not merely an alter ego of the person to whose business it succeeded.

13. Foreign Equity. 
  • For corporations that will engage in any business that is fully or partly reserved for Filipino citizens, the following provision shall be included: "No transfer of interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital shall be allowed or permitted to be recorded in the proper books. This restriction shall be printed in all the stock certificates of the corporation." 
  • There are nationalization laws that are in force in the Philippines. 
    • There are businesses that are fully nationalized and businesses that are only partly nationalized. 
  • The percentage of equity participation of foreigners is reflected in the Eleventh Foreign Negative List (Executive Order No. 65, Series of 2018, hereinafter referred to Negative List) promulgated by the President. 
    • The Negative List was issued pursuant to Section 8 of Republic Act No. 7042 also known as the Foreign Investments Act of 1991, as amended by Republic Act No. 8179, which requires the formulation of a Regular Foreign Investment Negative List covering investment areas/activities which may be opened to foreign investors and/or reserved to Filipino nationals.
  • Section 8 of Republic Act No. 7042 provides that the Negative List shall have two component lists: 
    • List A 
      • which shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws; 
        • included for instance are activities where the foreign equity is limited to 40% by the Constitution like:
          1. exploration, development and utilization of natural resources
          2. operation of public utilities
          3. educational institutions 
          4. facility operators of a BOT Project requiring a public utility franchise
      • List B 
        • which contains the areas of activities and enterprises regulated pursuant to law.
        • the amendments to List B after the promulgation of the First Regular Negative List shall not be made more often than every two years.
    • Nationalized Industries:
      • Domestic Market Enterprise
      • Retail Business 
      • Mass Media
      • Real Estate

    13.01. Domestic Market Enterprise. 
    • Under Republic Act No. 7042, foreigners are limited to 40% equity in a Domestic Market Enterprise if the paid-in equity capital is less than US $200,000.00. 
      • Domestic Market Enterprise
        • means an enterprise that produces goods for sale, renders service or otherwise engages in any business in the Philippines.
    • The threshold paid-in capital is US $100,000.00 if the Domestic Market Enterprise involves advance technology. 
    • Holding companies are included within the term Domestic Market Enterprise. 
      • A holding company which will own shares of stock of foreign-registered corporations only can still be considered domestic market enterprise if the act of a holding company of owning, operating and/or managing its foreign subsidies or affiliates will be done in the Philippines.
    13.02. Retail Business 
    • Retail business is limited to Filipinos depending on the capitalization.
    • Section 3(1) of Republic Act No. 8762, otherwise known as the Retail Trade Liberalization Act of 2000, provides that:
      • Retail Trade 
        • shall mean any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption. 
    • The restriction under Republic Act No. 8762 shall not apply to the following sales: 
      1. Sales by manufacturer, processor, laborer, or worker, to the general public of products manufactured, processed or produced by him if his capital does not exceed One hundred thousand pesos (Pl00,000.00);
      2. Sales by a farmer or agriculturist selling the products of his farm, regardless of capital; 
      3. Sales in restaurant operations by a hotel owner or innkeeper regardless of the amount of capital: provided, that the restaurant is incidental to the hotel business;
      4. Sales though a single outlet owned by a manufacturer of products manufactured, processed or assembled in the Philippines,. irrespective of capitalization;
      5. Sales to industrial and commercial users who use the products bought (a) to render service to the general public or (b) to manufacture goods sold by them; and
      6. Sales to the government or its agencies and government-owned and controlled corporations. 
    • To constitute a retail business, the following requisites must be present: 
      1. The person or entity must be selling merchandise, commodities or goods;
      2. The sale must be direct to the general public; and 
      3. The merchandise, commodities or goods are for consumption.
    • Sale of goods is not retail if it is a mere incident to the primary purpose of the corporation as in the case of sale of food in a restaurant and sale of goods in a gift shop inside a hotel. 
      • Consistently, if the primary purpose of a corporation is the operation of a gym, sale of drinks, sundry apparel, and hygiene articles is incidental to the primary purpose and is not pursued as an independent business. Gym operation involves transacting with gym members or guests that need to be attired properly, require hydration and rehydration, and make use of the shower facilities of the gym.
      • Opening a pharmacy inside a hospital is also not engaging in retail under the same principle.
      • Similarly, sale of spare parts as an incident to the operation of regular maintenance and repair services to vehicles is not retail.
      • Similarly, the sale of prescription glasses and frames by optometrist may be considered incidental to the rendering of optometry services.
    • The items must be sold to the final and end users of the product. 
      • This element of retail business necessarily involves the subject of the retailer's activities or what he is selling, i.e. consumption goods or consumer goods.
        • Consumer goods
          • Goods that are used or bought for use primarily for personal, family or household purposes.
          • Such goods are not intended for resale or further use in the production of other products. 
          • In other words, consumer goods are goods, which by their very nature:
            • are ready for consumption by the final end users of a product;
            • directly satisfy human wants and desires; and
            • are needed for home and daily life.
          • Thus, sale of vouchers or gift certificates that are intended for the purchase of goods is not considered retail.
        • Producer goods
          • Goods (as tools and raw material) that are factors in the production of other goods and that satisfy wants only indirectly and are also called auxiliary goods, instrumental goods, and intermediate goods.
          • They are by their very nature not sold to the public for consumption. As such, the sale of producer goods used for industry or business is classified as a  wholesale transaction. 
        • Wholesaling 
          • Selling to retailers or jobbers rather than to consumers or a sale in large quantity to one who intends to resell. 
    • Examples of not retail business, hence, it does not fall within the ambit of the Retail Trade Nationalization Law:
      • Sale of industrial machinery - a diesel-generating unit - to be used in a coconut central, may be classified as sale of "production or producer goods" since the diesel-generating unit is not a consumer item. 
      • Sale of industrial cranes and cutting tools to firms engaged in construction, mining and similar activities.
      • Sale of motorbikes to industrial users or fleet users.
      • Sale of equipment and instruments to hospitals and laboratories.
      • Products to be used by real estate developers such as door control, automatic and revolving door, glass fittings and systems, room dividing systems and other similar goods are considered producer goods.
      • The sale of telecommunications and service processing equipment to banking institutions and service contractors can likewise be considered sale of production goods.
        • The sale of mobile phone parts and accessories and other related materials, as replacement does not constitute retail trade for corporations engaged in' the business of repair, assembling, maintenance, support and other services relating to mobile phones and other telecommunications equipment. The sale of replacement parts and accessories is an integral part of the repair business. 
        • Auction of jewelry does not come within the purview of retail business as defined under Republic Act No. 8762 since the goods are not sold directly or readily available to the general public but only to those who are invited to participate in competitive bidding process. The target clients need not be final end users. On the other hand, sale to qualified employees of the producer is also not sale to the general public, hence, the same is not retail.
        • Where a prosthetics business is not retail if it involves entails tailor fitting of artificial limbs based on unique customized design, fabrication and assembly, which in turn depends upon the unique body measurements of the customer. The contract involved is contract for a piece of work and not sale.
      • Catering business is considered retail. 
        • The end-users for events are those celebrating birthdays, anniversaries, weddings, and the like. Thus, selling to group of customers involves selling to the public. 
        • Catering cannot be treated as incidental to the function of events organizer because catering constitutes the biggest expense in events.
      13.03. Mass Media
      • The Philippine Constitution reserves ownership of mass media corporations to Filipinos. 
      • Mass media
        • means gathering, transmission of news, information, messages, signals and forms of written, oral, and all visual communications and shall embrace the print medium, radio, television, film, movies, wire and radio communication services, and advertising in all its phases.
      • Presidential Decree No. 1018, Sec. 1:
        • The term "mass media" refers to the print medium of communication, which includes all newspapers, periodicals, magazines, journals, and publications and all advertising therein, and billboards, neon signs and the like, and the broadcast medium of communication, which includes radio and television broadcasting in all their aspects and all other cinematographic or radio promotions and advertising
      • The dissemination of information need not be to the general public but also to any portion thereof. 
        • The Department of Justice opined that "the distinctive feature of mass media undertaking is the dissemination of information and ideas to the public or a portion thereof."
        • For instance, a corporation is a mass media corporation even if it is engaged solely in a specialized publication particularly in the publication and distribution of education books and magazines confined to primary and secondary students.
        • A corporation is also a mass media corporation if it is engaged in the business of subleasing advertising space or structure to others because it provides a medium to disseminate or convey advertising message to the public.
      13.04. Real Estate Companies
      • Only corporations at least 60% of the outstanding capital stock of which belongs to Filipinos can own land. This limitation is expressly provided for in the Constitution. 
        • Thus, corporation cannot own land if more than 40% of the outstanding capital stock belongs to foreigners. 
        • It follows therefore that the foreign shareholders of a real estate company that is engaged in the business of owning land so that it can sell or lease the same cannot hold more than 40% of the capital stock.
      • However, the prohibition in the Constitution is limited to private land and land of the public domain. 
      • Land is not the only real property under Article 415 of the New Civil Code. 
        • General Law: Corporations can still own real properties like houses or buildings unless specifically prohibited by law even if more than 40% of its outstanding capital belongs to foreigners.
        • Exception: Condominium units because foreign interest in the condominium corporation should not exceed 40%.
      • With respect to a non-stock corporation, its nationality in relation to the provision on land acquisition is computed on the basis of nationality of its members and not based on the capital contribution of the members. 
        • However, the voting rights of the members should likewise be considered.
      13.05. Anti-Dummy Law.
      • It is well to point out in this connection that violation of the requirements of the pertinent nationalization law is subject to the criminal liability under Commonwealth Act No. 108, as amended, entitled "An Act to Punish Acts of Evasion of the Laws on the Nationalization of Certain Rights, Franchises or Privileges" otherwise known as The Anti-Dummy Law. 
      • Hence, the Articles of Incorporation that is submitted to the SEC may be rejected if there is patent non-compliance with the Anti-Dummy Law and the different nationalization requirements.
      14. Other Provisions. 
      • Other provisions may be inserted in the Articles of Incorporation as long as they are not contrary to law, morals, good customs, public order, and public policy. 
      • For example, a provision giving the right of first refusal to the shareholders may be inserted in the Articles of Incorporation.
      • The SEC likewise allows certain prohibitions on stockholders to be stated in the Articles of Incorporation. Thus, the SEC allowed a provision that disallows any shareholder from engaging in a competing business.
      15. Summary of New Rules.
      To summarize, the new requirements under the RCCP with respect to the contents of the of Incorporation are as follows:
      • Corporate Name
        • The term OPC should be included in the corporate name if the corporation is a One Person Corporation.
      • Incorporators
        • Incorporators can be a natural person, partnership, corporation or association; 
        • One incorporator is sufficient; and 
        • There is no residency requirement for incorporators
      • Term
        • The term can be perpetual or a fixed term. 
        • The default rule is that the term is perpetual.
      • Treasurer's Certification 
        • A separate treasurer's affidavit is no longer required but the certification of the treasurer is now incorporated in the Ninth clause of the Articles of Incorporation.
      • Undertaking to Change Corporate Name
        • It is no longer required to submit a separate undertaking but the contents of the undertaking are now included in the Tenth clause of the Articles of Incorporation.
      • Signatories
        • The incorporators and the treasurer sign the Articles of Incorporation. 
      • Directors and Trustees
        • There is no more minimum number of directors and trustees. 
        • The exceptions are educational corporations and religious societies which still require a minimum of five trustees.
        • There is no more residency requirement for directors.
      • Subscribed and Paid-Up Capital
        • Subscribed and paid-up capital are now both in the Eighth clause of the new form under Section 14 of the RCCP. 
        • There is no longer any required minimum subscribed and paid-up capital unless special laws provide otherwise.
      Questions:
      Q: The articles of incorporation to be registered in the Securities and Exchange Commission contained the following provisions: 
       "First Article. The name of the corporation shall be Toho Marketing Company." 
      "Third Article. The principal office of the corporation shall be located in Region III, in such municipality therein as its Board of Directors may designate." 
      "Seventh Article. The capital stock of the corporation is One Million Pesos (Pl,000,000.00), Philippine Currency." 
      What are your comments and suggested changes to the proposed articles? 

      A: 
      The name of the corporation should be amended to include any of the following words, "Inc.," "Incorporated" "Corporation" or "Corp." Section 1 of SEC Memorandum Circular No. 14, Series of 2000 requires any one of those words to be included in the name of the Corporation. 
      The form of the Articles of Incorporation under Section 14 of the RCCP also calls for the use of the words "Inc.," "Corporation," or "OPC" (for One Person Corporations). 

      The Third Article does not comply with the requirements of the law and SEC rules on the address of the corporation. The RCCP provides that the Articles of Incorporation must state the place where the principal office of the corporation is to be established or located, which place must be within the Philippines. The RCCP also requires inclusion in the Articles of Incorporation of the City/Municipality and Province where the principal office of the corporation is located. SEC Memorandum Circular No. 6, Series of 2016 dated June 9, 2016 further requires a specific address. For purposes of complying with the RCCP and SEC requirements, it is not enough to state the Region where the principal office is located. 

      The Seventh Article 1s incomplete. Section 14(8) of the Corporation Code (Section 13[h], RCCP) provides that if the corporation is a stock corporation, the Articles of Incorporation must contain the amount of its authorized capital stock, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, and if some or all of the shares are without par value, such fact must also be stated. The names, nationalities, and residence addresses of the original subscribers and amount subscribed and paid by each must also be stated in the Articles. (1990 Bar)

      Q: While the incorporation papers of XYZ, Inc. were pending before the Securities and Exchange Commission (SEC) for approval, A, the designated Treasurer in the Articles of Incorporation held real estate property worth P20,000.00 which E turned over for shares he (E) purchased in XYZ, Inc. Before the certificate of incorporation could be issued, H, who claims to be the owner of the said real estate property, filed an action against XYZ, Inc. for the recovery of possession of the same. Will H's suit prosper? Why?

      A: No. H's suit will not prosper. The issuance of the Certificate of Incorporation is an indispensable requisite for the existence of a corporation. In the given problem, the incorporation papers of XYZ, Inc. were still pending before the Securities and Exchange Commission for approval. Hence, XYZ, Inc. is not yet a corporation and has no juridical personality in order to have the power to sue or be sued in any court. (1978 Bar)

      Q: May a corporation composed entirely of aliens be organized and incorporated in the Philippines? Explain. (1970 Bar)

      A: Yes, if nationalization laws do not require ownership by Filipinos. The RCCP does not provide for a citizenship requirement. There are businesses that are allowed to be owned by foreigners. As long as the Constitution and special laws do not impose a maximum equity participation of foreigners, the directors and incorporators of a corporation can all be foreigners. For instance export enterprises may generally be 100% foreign­ owned. However, there are corporations where the Constitution or special laws require that at least a 60% or a higher percentage of the outstanding capital stock to be owned by citizens of the Philippines. For example, Filipinos must own at least 60% of the outstanding capital in public utilities and corporations that own land. In these cases, the corporation cannot be composed entirely of aliens.

      Q: The proposed Articles of Incorporation of X Corporation provides: "That none of the stockholders shall engage in a similar, competing or antagonistic business or activity as that to which the corporation is primarily engaged in. The foregoing restriction must appear at the back of all certificates of corporation." Is the provision valid and binding?

      A: Yes, the provision is valid. The provision constitutes a reasonable exercise of corporate authority since a corporation under the principle of self-preservation, has the inherent right to preserve and protect itself by excluding competitors or hostile interest. The provision seeks to prevent a stockholder from creating an opportunity to take advantage of the information which he may have acquired as such to promote his individual interest to the prejudice of the corporation and other stockholders. The provision is binding on the stockholders because the Articles of Incorporation is a contract between the shareholder and the corporation as well as the State. Any person who intends to acquire a share in the corporation does so with knowledge  that its affairs are governed by the provisions of the Articles of Incorporation. (SEC Opinion dated August 12, 1998, SEC Bulletin Vol. XXXIIL No. 1, June 1999)

      Q: May the composition of the board of directors of the National Power Corporation (NPC) be validly reduced to three? Explain your answer fully. 

      A: Yes, the composition of the board of directors of the National Power Corporation may be validly reduced to three under the Revised Corporation Code. Section 13(f) of the Revised Corporation Code provides that there, must be not more than 15 directors. There is no minimum number of directors required under the Revised Corporation Code. The same is true even if NPC is a government owned or controlled corporation created by special law because the provisions of the Revised Corporation Code apply suppletorily to NPC. (2008 Bar) 

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