The Law Student’s Introduction to: The Revised Corporation Code of the Philippines

This is for law students who have absolutely no background in corporations or corporate law, and are about to take Corporation Law. Here are a few things I wish I knew before taking the class.

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The Corporation

Of course, we start with the corporation. In the Philippines, the primary governing law is the Revised Corporation Code of the Philippines (RCCP), or R.A. 11232.

This is what you will study. If you’re asking yourself, What should I expect in Corp. Law? The answer is really just the provisions of the RCCP, jurisprudence on provisions of the RCCP, and SEC Memorandum Circulars. No cool bonus laws, at least in my experience.

The RCCP defines a corporation as “an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.” (Sec. 2) The definition is a mouthful, but it can be divided into four parts:

1. It is an artificial being. This means it isn’t a natural person, unlike you and me. But as an artificial being (or a juridical person), the corporation is considered a person in the eyes of the law. That also means it has a separate personality from the natural persons who govern and comprise it. As a consequence, the corporation is generally responsible for its obligations, so its stockholders or members (the natural persons) are protected and cannot be held liable for corporate obligations.
2. It is created by operation of law. This means the law gives it its personality, so it basically has to follow what the law says.
3. It has the right of succession. This means that it remains the same artificial being even if there are changes in its stockholders or members. It doesn’t become a new corporation just because all its stockholders or members got replaced.
4. It has the powers, attributes, and properties which are either (a) expressly authorized by law, or (b) incidental to its existence. This means that corporations have limited powers, attributes, and properties. They have only those (1) expressly authorized/granted by law, or (e) incidental to its existence (i.e., incidental to the fact that it is a corporation). For example, corporations can’t get married, since the law doesn’t expressly grant that, nor is it incidental to its existence.

Corporations need to file Articles of Incorporation. (Sec. 13) The Articles is a required document for the formation of a corporation, and it governs the corporation and its components. Anyway, you can see it as the Constitution of the corporation. The Articles contains the corporation name, purpose, office, term, incorporators, etc. The full list of its contents of the Articles can be found in Sec. 13, which you should go through to get a better understanding of what it is.

Anyway, under the RCCP (unlike before) one person can create a corporation (Sec. 116). It’s pretty cool because unlike in a single proprietorship where the owner is basically personally liable all the time for business obligations, in a one person corporation, the single stockholder can be protected and have the corporation held liable instead.

A corporation generally has perpetual existence, unless a specific corporate term is elected (Sec. 11). In other words, there is no limit for how long a corporation can exist. It goes on forever unless otherwise terminated.

Stocks and Shares (this one, I really wish I understood at first)

Corporations may be either Stock or Non-stock. (Sec. 3)

(We’ll divide this definition, don’t worry) Under Sec. 3, 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 corporation are non-stock corporations.

Again, another overwhelming definition for those with no background of corporations. I don’t know why our lawmakers prefer constructing their sentences that way.

Let’s divide the definition of stock corporations. It has two elements: stock corporations (a) have capital stock divided into shares, and (b) are authorized to distribute dividends or surplus profits to the shareholders.

If one or both elements are missing, then the corporation is non-stock.

For letter (a), there are two concepts: capital stock, and shares.

Under Sec. 13, the Articles of Incorporation of a stock corporation must contain the amount of its authorized capital stock and the number of shares into which it is divided.

What is an authorized capital stock? It has been defined as the amount fixed in the Articles to be subscribed and paid by the stockholders of the corporation.

Basically, it is a number (in pesos) provided in the Articles, which will be divided into shares. The shares are sold to shareholders. So the shareholders own shares of stock. They own a share of the stock of the corporation. (In case this is a little confusing, I have an illustrated example at the end of this part, if that helps!)

For example, in the Articles, let’s say that the authorized capital stock of a corporation is P1,000,000. It is divided into 1,000 shares. Hence, the corporation can issue until 1,000 shares. If all 1,000 shares are already issued to other people (who are called stockholders or shareholders), the corporation can no longer issue shares, unless it increases the authorized capital stock of the corporation, which can be done by amending the Articles.

How much do the shares cost? It depends. There are several values that are important. We’ll focus on par value and market value. There are different kinds of shares, but for simplicity, let’s assume all the shares are common shares (which are shares with no extra privileges) with par value.

So first, par value. This is the amount (in pesos) assigned to a share, under the Articles. Thus, as in our example earlier, the authorized capital stock is P1,000,000; the stock is divided into 1,000 shares; the par value of each share is P1,000 (because P1,000,000 authorized capital stock divided by 1,000 shares = P1,000).

As you can see, the par value is just the number assigned to each share, according to the Articles. It does not absolutely dictate how much a share is sold. It’s just the minimum price.

On the other hand, the value that dictates how much a share is actually sold is the the market value. Thus, the market value can be equal to or greater than the par value. The market value is affected by the economy and income and other external factors.

Excuse the terrible handwriting. I hope this little illustration helps!

Also, shareholders do not exactly own the corporation, nor do they own what the corporations own. The way I like to understand it, the shares they own kind of represent their interest in the extra income (which they receive when dividends are declared; see next paragraph) of the corporation, or their interest in the properties of the corporation if the corporation dissolves. So the shareholders don’t own what the corporation owns.

For letter (b), how do dividends work? Dividends are declared by the Board of Directors. When dividends are declared, the shareholders receive cash, property, or (more) shares, simply because they own a share (Sec. 42). So they’re basically payments to the shareholders. The time of dividend declaration is generally up to the Board of Directors of the corporation. It doesn’t have to be yearly.

So that’s a basic introduction on stock corporations.

As for non-stock corporations, remember how stock corporations have (a) and (b)? Well, non-stock corporations just don’t have both. They can have (a) or (b) or neither, but not both. That’s really it. For a few differences: non-stock corporations do not have shareholders, but they have members. They don’t have a Board of Directors, but they have a Board of Trustees (it’s pretty much just the name that’s different for directors vs trustees).

Shareholders; Incorporators; Board of Directors/Trustees; Officers

• You already know who the shareholders are — they own shares of stock. They don’t really do much, but they get to vote in certain very important instances, like elections of directors, amending the Articles, voluntary dissolution of the corporation, etc. In non-stock corporations, their equivalent are the members.
• Incorporators organize the corporation. They’re like the first shareholders or members of the corporation, so they remain incorporators forever (even when they’re not shareholders or members anymore, but when they’re not shareholders or members, they can’t do what the shareholders or members do; they just have the title of incorporator and nothing else really). Incorporators can be natural persons, partnerships, associations, or corporations. Incorporators cannot exceed 15 in number. (Sec. 10) Anyway, the corporation can have more than 15 shareholders or members after incorporation.
• The Board of Directors (or in a non-stock corporation, the Board of Trustees) exercise corporate powers, conduct all business, and control all properties of the corporation. Directors must own at least 1 share of the stock corporation; trustees must be members of the non-stock corporation. (Sec. 22) Basically, they make the big decisions for the corporation.
• Corporate officers include the President (who must be a director), treasurer, secretary, and other officers. They manage the corporation. They’re more of the day-to-day, hands-on operations guys, while the Board decides on the major stuff once in a while.

Heads up

Here’s a list of some issues that seem to show up often in exams (and a few topics with links you can go through), so it would help if you read on them:

• Whether or not a corporation complies with nationality requirements (because some corporations require a minimum percentage of Filipino ownership) — read on the control test and the grandfather test
• Whether or not piercing the veil is proper (or whether or not a component of the corporation should be liable, instead of just the corporation) — read on the three-pronged control test and alter ego doctrine
• Whether or not a meeting was properly held (which is important because it determines whether or not the action pursuant to the meeting is valid) — read Title VI of the RCCP for meetings, and Sec. 28 on emergency boards
• Whether or not X is a de facto corporation (Sec. 19)
• Whether or not X is a corporation by estoppel (Sec. 20)
• Whether or not the stockholder can exercise his appraisal right — read Title X of the RCCP
• Also, memorize the definition of a corporation. It’s in Sec. 2.

That’s really the basics that are important to understand before going through Corporation Law. If you understand these, it becomes easier to understand all the other topics. I hope that wasn’t too basic. For someone with n0 experience like me when I took the class, these are just the things I wish I understood back then. Disclaimer: everything I’ve explained is based on how I understood them, and I’m only human. I placed sources, so you can check them to verify! If I made a mistake or if there’s a new doctrine, please leave a comment with a source and I’ll correct the error immediately!

If you want a more in depth discussion on certain Philippine law topics, leave a comment!