I want to talk about de facto corporations.

So what is a de facto Corporation?

A de facto corporation is one that exists for all practical purposes as a corporation, but actually does not
have a legal right to corporate existence as against the State. IOW, it is a corporation that has not
complied with all the requirements for it to become a de jure Corporation, but it has sufficiently
complied to the point that it can be treated as a corporation as against third persons. However, the
state does not consider it as a corporation.

How about a de jure Corporation?

A de jure corporation is one that has substantially complied with all the requirements that are asked for
under your Revised Corporation Code, and it was issued a certificate of incorporation by the state
through your Securities and Exchange Commission. So a de jure Corporation for all legal intents and
purposes, that is a corporation that has complied with all or substantially all of the requirements
provided for by law and is treated as such by the state.

So it might be confusing to determine what is a de facto corporation and how it differs from a de jure
Corporation. One important thing to remember is for a de jure corporation or that which legally exists in
the eyes of the law. That is a corporation that is substantially comply with all the requirements provided
for by law, while a de facto Corporation has not substantially complied, but there is sufficient
compliance, but even then, the state still does not recognize it as a corporation. However, it may still be
considered a corporation as against third persons.

So what are the requisites for one to be considered as a de facto Corporation?

First, is that there must be a valid law under which the corporation is incorporated.

Second, there must be a bona fide attempt to organize under such law.

Third, is the actual use or exercise in good faith of corporate powers conferred by that law.

So if there is a corporation, and it can be incorporated under the Revised Corporation Code, then that is
one requirement that is already fulfilled under de facto corporation so you have now your Revised
Corporation Code under which a corporation may incorporate.

Now let's move on to the second requisite there must be a bona fide attempt to organize. A bona fide
attempt to organize. This would mean that there was a bona fide attempt to incorporate, to become a
de jure Corporation.

Again, what is a de jure Corporation?

That is a corporation that is registered with the Securities and Exchange Commission and given a
certificate of incorporation because it has substantially complied with the requirements provided for by
law.

So the second requisite for a de facto Corporation is that the incorporators actually attempted to
organize. IOW, they have actually made the articles of incorporation and they have filed it with the SEC,
because now you can see that there was really bona fide attempt to incorporate it to become a de jure
corporation.
Now, you might ask, well, why will it become a de facto Corporation, if there was a bona fide attempt to
organize or a bona fide attempt to incorporate?

It becomes a de facto corporation because perhaps inadvertently, the SEC has issued a certificate of
incorporation, but when you examine the articles of incorporation, there were defects in the
incorporation that resulted to the corporation becoming a de facto Corporation.

What defects would result to a de facto Corporation?

Defects such as failure to speak all the matters required under the Revised Corporation Code, or when
the number of incorporators is more than 15. Or perhaps one of the incorporators there is not of legal
age, or when it is found that the name of the corporation resembles another existing corporation’s
name or perhaps the bylaws were filed late.

So these defects would lead one corporation to become a de facto Corporation. If perhaps
inadvertently, the Securities and Exchange Commission may have overlooked these defects and issued
them a certificate of incorporation.

We have discussed that your Securities and Exchange Commission and have to go over the articles of
incorporation and see if there is substantial compliance, but of course, there may be some inadvertence,
they may have overlooked some matters required by law. Just like earlier we said the corporation may
have placed there more than 15 incorporators. Perhaps this was overlooked and still they were issued a
certificate of incorporation. This defect will lead one corporation to become a de facto Corporation.

Remember, there must be a Certificate of Incorporation for one to become a de facto Corporation.
Because if there is no certificate of incorporation, then it cannot even be considered as a de facto
Corporation.

If the corporation does not have its articles of incorporation or has failed to register the articles of
incorporation with the SEC, plus there is no certificate of incorporation issued by the SEC. Again, that
“corporation” cannot even be considered as a de facto Corporation.

The third requisite for one to become a de facto Corporation is the exercise of corporate powers in
good faith. IOW, the corporation or the members or stockholders of the corporation, its officers, its
directors, actually were unaware of the defects of their corporation, and because they're unaware of
the defects, they continued to exercise corporate powers.

What happens if they are aware of the defects of their corporate existence, but still continued on with
exercising corporate powers?

They cannot be considered as a de facto Corporation, because again, the third requisite for you to be
considered as a de facto Corporation is actual use of corporate powers in good faith. If you know of the
defect, then you cannot be considered in good faith.

So quick recall, what are the requisites for a corporation to become a de facto Corporation?

1. There must be a valid law allowing the corporation to be created.

Now why is it important that to determine whether the corporation is de jure corporation or a de facto
Corporation are not a corporation at all, not even a de facto Corporation?

Because there are certain rights that may still be available to members or stockholders of a de facto
Corporation. Of course, for de jure Corporation, since that corporation has substantially complied with
all the requirements provided for by law, that means that all the rights that are conferred upon it by the
Revised Corporation code, they will be able to exercise.

How about a de facto Corporation?

In terms of limited liability on the part of the stockholders that will also be available to your
stockholders in a de facto corporation. So whether de jure or de facto the limited liability of
stockholders would still become a privilege or a right even on the part of the stockholders. Of course, as
we mentioned earlier on, the de facto Corporation is for all purposes, all practical purposes, still
considered a corporation as against third persons.

That's why we said it would it will have to be determined whether it's de jure or de facto, because if it is
de jure then it is a corporation not only as against third person, but even as against the state, but a de
facto Corporation for all practical purposes, it is still considered as a corporation as against third
persons, but not as against the state.

Simply stated your de facto and your de jure corporations are essentially the same as against third
persons. The liabilities created by the de facto corporations out of the contracts that they have entered
into will have the same binding effect as if it is a de jure corporation again, as against third persons. Your
de facto Corporation is even taxed just like a de jure Corporation, and as what I mentioned earlier, on,
the stockholders in a de facto Corporation also has limited liability, just like a de jure Corporation.

The only difference between the two is how the state regards them. The de jure Corporation, the state is
bound by its corporate existence, the state is bound to respect the corporate existence, but as for the de
facto Corporation, the state will not recognize it as such, it will not recognize it as a corporation, and as
such, the state can oust it from the exercise of its powers and can even dissolve it.

So what do we call this proceeding that may be initiated by the state to question the existence of such
Corporation?

We call it the quo warranto proceeding. This is covered under Section 19 of your Revised Corporation
Code. Let us read section 19. It says

“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”.

A quo warranto proceeding is a direct proceeding initiated by the state through the Solicitor General,
the purpose of which is to look into the existence of the corporation, to look into whether such
corporation can validly exist as such.

Q: Can a private party initiate a suit as against corporation to attack its corporate existence?
A: NO. It must be the state who will bring direct proceeding as against the corporation to directly
attack the existence of such Corporation. It cannot even be collaterally attacked by the state or by any
private individual. The law is very clear on that your section 19 clearly says that the corporate existence
cannot be inquired into collaterally.

Now what is an example of a collateral attack?

Example:

Mr. X has a debt with ABC Corporation. ABC Corporation is now trying to collect from Mr. X. Now Mr. X
has come to an information that there is a defect in the corporation. He looked into the Articles of
Incorporation and then he found out that there are more than 15 incorporators in ABC Corporation.

Q: Can Mr. X Refuse to pay on the basis of the defect of ABC Corp.?

Can he now say in a suit by ABC Corporation against Mr. X, (because ABC Corporation is not trying to
collect from Mr. X), can Mr. X now say no I will not pay you because you are a de facto Corporation. You
actually do not legally exist in the eyes of the state, can Mr. X do that?

A: NO. Because that is now a collateral attack. That is now using the defect of ABC Corporation in an
entirely different suit. And what suit is that? The suit to collect money from him. That is a collateral
attack. And again, we said that your Revised Corporation Code is very clear, for attacking a corporation’s
existence, it must be done directly by the state through a quo warranto proceeding.

Why only the State? What is the reason behind this principle?

It shall only be the state because it is the State’s right that has been invaded, that has been usurped.
Why? Because it is only the state who can grant you permission to become a corporation and not a
private individual. Therefore, it should be the state who must commence or initiate a direct proceeding
precisely for that purpose. Because if the state remained silent about a certain corporation’s de facto
existence, then the law will not allow any private individual to use that as against corporation.