What are de facto corporations?

The third requisite, exercising corporate powers in good faith, means the corporation's members and officers were unaware of the defects in their incorporation. If they knew of the defects but continued to exercise powers, they cannot be considered a de facto corporation.

Attorney Marie Cris introduces the topic of de facto corporations. A de facto corporation exists for practical purposes but lacks full legal corporate existence against the state, having not complied with all legal requirements. In contrast, a de jure corporation has substantially complied with all requirements and is recognized by the state, receiving a certificate of incorporation from the SEC.

For an entity to be considered a de facto corporation, three requisites must be met: 1) a valid law exists under which the corporation can be incorporated (e.g., the Revised Corporation Code); 2) a bona fide attempt was made to organize under such law (e.g., filing articles of incorporation with the SEC); and 3) there was an actual, good faith exercise of corporate powers conferred by that law.

Defects that can result in a de facto corporation include failure to state all required matters in the articles of incorporation, having more than 15 incorporators, an incorporator not being of legal age, a name resembling an existing corporation, or late filing of bylaws. These defects, if inadvertently overlooked by the SEC resulting in a certificate of incorporation, lead to de facto status. Crucially, a certificate of incorporation is required for de facto status; without it, it's not even a de facto corporation.

Understanding de facto status is important because members still have rights, such as limited liability for stockholders, similar to a de jure corporation. A de facto corporation is considered a corporation against third persons, meaning its contracts are binding and it is taxed like a de jure corporation.

The key difference lies in how the state regards them. The state recognizes a de jure corporation's existence, but not a de facto corporation's. The state can challenge and dissolve a de facto corporation through a quo warranto proceeding, a direct action by the Solicitor General to question the corporation's valid existence.

Section 19 of the Revised Corporation Code states that a corporation claiming good faith incorporation cannot have its corporate existence questioned collaterally in a private suit. Only the state, through the Solicitor General via a quo warranto proceeding, can directly attack a corporation's existence. A private individual cannot use a corporate defect as a defense in another lawsuit, as this constitutes a collateral attack.

The state is the only entity that can initiate a direct proceeding because it is the state's right that has been 'invaded' or 'usurped,' as it is the state that grants permission for corporate existence. If the state remains silent about a de facto corporation's existence, private individuals cannot use this against the corporation.