I. Business Organizations: Corporations
A. Corporations
1. General Principles
a. Nature and Attributes of Corporations
In Philippine law, corporations are primarily governed by Republic Act No. 11232 or the Revised Corporation Code of the Philippines. Understanding the nature and attributes of corporations involves analyzing their key characteristics, which distinguish them from other business entities, such as partnerships or sole proprietorships.
1. Definition and Legal Personality
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. This definition is derived from Section 2 of the Revised Corporation Code. As an artificial person, a corporation enjoys several rights and obligations akin to those of a natural person, though it only exists in contemplation of law and through the act of incorporation.
The key concept here is that a corporation is a legal entity separate and distinct from its shareholders, directors, and officers. This principle of separate legal personality allows the corporation to:
- Own property in its own name;
- Enter into contracts;
- Sue and be sued;
- Borrow and lend money;
- Pay taxes independently from its shareholders.
2. Limited Liability
One of the most important features of a corporation is limited liability. Under this principle, the liability of the shareholders is limited only to the extent of their capital contribution. They are generally not personally liable for the obligations and debts of the corporation. This protects personal assets from being seized to satisfy corporate debts, which is a key advantage of doing business in corporate form.
Exceptions to limited liability, however, exist under the doctrine of piercing the corporate veil. If the corporation is used for fraud, to defeat public convenience, or is merely an alter ego of its owners, the courts may disregard the separate personality of the corporation and hold its shareholders or directors personally liable.
3. Right of Succession
A corporation has perpetual existence, unless otherwise provided in its articles of incorporation or unless dissolved by law. This means that the corporation's existence is not affected by the death, incapacity, or withdrawal of any of its shareholders or directors. This attribute gives stability and continuity to the corporate entity, making it an attractive business vehicle.
With the enactment of the Revised Corporation Code, corporations are no longer limited to a 50-year term. Unless a specific term is stipulated in the articles of incorporation, corporations now enjoy perpetual existence by default.
4. Centralized Management
A corporation’s business and affairs are generally managed by a Board of Directors (or Trustees, in the case of non-stock corporations), which is elected by the shareholders. The Board has the duty to set the overall direction of the corporation and to make policy decisions.
The centralized nature of corporate management means that the shareholders do not directly manage the day-to-day operations of the corporation. Instead, they exercise control by voting for the Board of Directors during annual meetings. This separation of ownership and management is one of the defining characteristics of a corporation.
5. Transferability of Shares
Ownership in a corporation is represented by shares of stock. A key feature of shares in a corporation is their transferability. Shares can generally be sold or transferred without affecting the existence or operations of the corporation. The Revised Corporation Code, however, allows corporations to impose reasonable restrictions on share transfers, which may be stipulated in the bylaws or stockholders' agreements.
The ease of transferability of shares increases liquidity and makes the corporation an attractive option for investors. Stockholders are free to sell their shares without needing the consent of the other shareholders or the corporation, subject to applicable laws and regulations.
6. Capacity to Act and Enter into Contracts
A corporation, as a juridical entity, has the power to:
- Enter into contracts and obligations;
- Borrow or lend money;
- Issue bonds, debentures, and other securities;
- Purchase or hold real and personal property in its own name;
- Sell or otherwise dispose of property.
These powers must be exercised in accordance with the corporation’s purpose as stated in its articles of incorporation. Any act outside the corporation’s stated purpose is considered ultra vires, meaning it is beyond the powers of the corporation, and such acts may be void or unenforceable.
The Board of Directors exercises these powers, and acts within the scope of its authority to bind the corporation in transactions with third parties.
7. Capital Structure
The capital structure of a corporation consists of its authorized capital stock, subscribed capital, and paid-up capital:
- Authorized capital stock is the maximum amount of shares that a corporation is authorized to issue, as stated in its articles of incorporation.
- Subscribed capital refers to the portion of the authorized capital stock that investors or shareholders have agreed to buy.
- Paid-up capital is the actual amount that has been paid by the shareholders towards their subscriptions.
The corporation must follow strict formalities when raising capital and issuing shares, in compliance with both the Revised Corporation Code and the Securities Regulation Code, particularly for publicly-listed companies.
8. Doctrine of Corporate Opportunity
The doctrine of corporate opportunity provides that directors and officers must not take for themselves business opportunities that should belong to the corporation. They are under a fiduciary duty to act in the best interest of the corporation, and any breach of this duty may result in personal liability.
If a director or officer diverts a business opportunity that should have belonged to the corporation for personal gain, the corporation can recover the profits from the director, or it may compel the director to account for any benefit derived.
9. Corporate Powers
Under Section 35 of the Revised Corporation Code, a corporation has certain express powers, including:
- To sue and be sued in its corporate name;
- To adopt and use a corporate seal;
- To amend its articles of incorporation;
- To adopt bylaws and amend them;
- To make donations for public welfare or charitable purposes;
- To establish pension, retirement, and other employee benefit plans;
- To exercise powers conferred by law or necessary for carrying out its purposes.
10. Doctrine of Separate Juridical Personality
The doctrine of separate juridical personality allows the corporation to maintain its own identity separate from that of its shareholders. This separation means that the corporation can sue or be sued in its own name, own assets in its own right, and bear responsibility for its own liabilities. The shareholders are insulated from the direct consequences of corporate activities.
The piercing of the corporate veil, as mentioned earlier, is an exception to this doctrine, applied in cases where the corporation is being used to evade legal obligations, commit fraud, or to act as an alter ego of the shareholders.
Conclusion
Corporations under Philippine law are powerful business vehicles, endowed with attributes such as separate legal personality, limited liability, right of succession, and centralized management. The Revised Corporation Code of the Philippines has modernized corporate governance practices, enabling corporations to enjoy perpetual existence, have flexible capital structures, and encourage more inclusive business practices. At the same time, corporate officers and directors are held to high fiduciary standards, and the doctrine of piercing the corporate veil ensures that the corporate form is not abused for illegitimate purposes.