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Corporation Law Before Midterms Reviewer
Corporation Law Before Midterms Reviewer
I. HISTORICAL BACKGROUND
1. Philippine Corporate Law:2 Sort of Codification of American Corporate Law
Under American sovereignty, attention was drawn to the fact that there was no entity in
Spanish law exactly corresponding to the notion "corporation" in English and American law;
the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the
American corporation into the Philippines as the standard commercial entity and to hasten the
day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of
codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141
(1933).
1Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines.
2The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate
Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.
grant is conferred. A corporation will be formed only when 5 individual persons , as incorporators, agree to form a corporat
II. CONCEPTS
See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No.
2, June 1994)
1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
Sec. 2 Corporation defined – A corporation is an artificial being created by operation of law,
having the rights of succession and the powers attributes and properties, expressly
authorized by law or incident to its existence.
Art. 44(3) The following are juridical persons – Corporations, partnerships and associations for
private interest or purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member.
Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws
creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the provisions
of this Code concerning partnerships.
Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of
their organization.
Art. 1775 Association and societies, whose articles are kept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall
have no juridical personality, and shall be governed by the provisions relating to co-ownership
corporation is an artificial being created by operation of law. It has a personality separate
and distinct from the persons composing it, as well as from any other legal entity to which it
may be related. PNB v. Andrada Electric & Eng’ring Co., 381 SCRA 244 (2002).
- “an artificial being” - a person created by law or by state; legal fiction
- “created by law” – its existence is dependent upon the onsent or grant of the state
EXCEPT corporation by estoppel and de facto corporation
- the definition of a corporation is merely a guide and does not really provide for the
basis of a corporation
Q. Why does the definition of a corporation involve a statement “creature of the law”?
A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of limited
existence, outside its powers, it does not exist.
(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
relationship on four (4) levels:
• Between the corporation and its agents or
representatives to act in the real world, such as its
directors and its officers, which is governed also by the
Law on Agency
• Between the corporation and its shareholders or
members
• Between and among the shareholders in a common
venture
B) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and
third-parties or “outsiders”, essentially governed by Contract Law and Labor Law.
- most imporatant level, highest form of law in this level is contract law.
FACTS:
- Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her
domiciliary administrator & left, among others, 2 stock certificates covering 33, 002
shares of stock of appellant Benguet Consolidated, Inc.
- Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust
to surrender to ancilliary administrator the stock certificates to satisfy the legitimate
claims of local creditors. However, County Trust refused.
- The lower court then presided by Judge Santos ruled that :
1. stock certificates are considered lost for all purposes of admin. & liquidation
of the Philippine estate of Perkins
2. said certificates are cancelled
3. directs said corp. To issue new certificates in lieu thereof, the same to be
delivered by aid corp. to either Tayag or the Probate division of this court.
- An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on
the ground that the certificates of stock are existing and in possession of County
Trust. They also assert that there was a failure to observe certain requirements of
its by-laws before new stock certificates could be issued.
ISSUE: Whether or not Benguet properly pursued the appeal?
HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by
order.
- the challenged order represents a response & express a policy arsing out of a
specific problem, addressed to the attainent of specific ends by the use of specific
remedies, w/ full & ample support from legal doctrines of weight and significance.
Formally adopts the concession theory; corp w/o imprimatur outside state grant.
wn set of by laws etc., the corp would still have to obey the order of the state by Ve and Ocfe 2A
virtue of a primary franchise given by the state. AndRevised Bagtas
it is within Reviewer
the power of the state to grant it or not. But5 once granted
pplication of EET – corp- as A
reality of the group as a social & legal entity independent of state recognition
disagreement ensued between the ancilliary and the domiciliary & concession.
admin to who ws
entitled the certificate of stocks
- The CFI ordered County Trust to produce and deposit the stocks with the court w/c
wasn’t complied with Thus the order of the CFI.
- Benguet didn’t dispute Tayag’s authority to gain control & possession of all the
he corp. life of its own tellsassets
it to goofand
themultiply
decedent w/n the Phil.
profitably. The corp. like every Juan and Maria given life by God acts on its
- Corporation is an artificial being created by operation of law. It owes it life to the
state its birth being purely dependent on its will.
- Flether: “A corp. is not in fact and in reality a person, but the law treats it as though
it were a person by process of fiction, or by regarding it as an artificial person
distinct and separate from its individual stockholders.
- There is thus a rejection of Gierke’s genossenchaft theory. A corp as known to Phil.
Jurisprudence is a creature w/o any existence until it has received the imprimatur of
the state acting according to law. It is logically inconceivable therefore that it will
have rights and privileges of a higher priority than that of its creator. More than that
it cannot legitimately refuse to yield obedience to acts of its state organs, certainly
not excluding the judiciary, whenever called upon to do so.
- Corporate by-laws must yield to judicial order
- As a matter of fact, a corp. once it comes into being comes more often w/n the ken
of the judiciary than the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.
c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343
[1947])
- juridical personality
- contractual relation between 5 or more individuals
- recognize existence of an aggregation of individuals (enterprise entity)
A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself as a
collective body, it waives no constitutional immunities and perquisites appropriate to such
a body. PSE v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity, such as
to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v.
Jarencio, 163 SCRA 205 (1988).
5. Four Corporate Attributes Based on Section 2:
A) A CORPORATION IS AN ARTIFICIAL BEING (“Ability to Contract and Transact”)
- a person created by law or by state; a legal fiction
B) CREATED BY OPERATION OF LAW (“Creature of the Law”)
- its existence is dependent upon the consent or grant of the state EXCEPT corporation
by estoppel and de facto corporation
C) WITH RIGHT OF SUCCESSION (“Strong Juridical Personality”)
- the corporation exist despite the death of its members as a corporation has a
personality separate and distinct from that of its individual stockholders. The separate
personality remains even if there has been a change in the members and stockholders
of the corporation.
D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS
EXISTENCE (“Creature of Limited Powers”)
(b) Disadvantages:
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) High cost of maintenance
(iv) Double taxation
Q. If limited liability as shown in a corporation setting good for the investors, does it mean that
delectus personarum is a bad thing?
A. No. It is good in one way, since persons are bound by the contracts they enter into.
a) Sole Proprietorships
Owner has full control of his business Control of business is done by the
and fiat. Just because the BoD are to be elected by the stockholders does not mean that the former derives its powers fro
BoD
(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of
the partners, even in case of failure to comply with requirements of Art. 1772 first
paragraph.
Art. 1775 Association and societies, whose articles are kept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall
have no juridical personality, and shall be governed by the provisions relating to co-
ownership
Corporation Partnership
Separate legal personality Separate legal personality
Q. How does the contractual management of a corp. compare with the management of a
partnership?
A. Every partner, in the absence of a stipulation in the articles of partnership, binds the
partnership as every partner is an agent of the others (delectus personarum). In a
corporation, only the BoD and not the stockholders can bind the corporation.
Q. If limited liability is something that can be contracted in a partnership, why did the legislature put
such limited liability as an attribute of a corporation? If the feature of limited liability cots money
then why not take it out? Why not eave it up to the investors who can decide if they want limited
liability or not?
A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have
Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668)
Facts:
- In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern
Airlines, a single proprietorship.
- On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts
and one set f necessary spare parts for the total price of $109,00. Both arrived in
Manila
- On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety
bond in behalf of Lim, principal, for the balance price for the aircrafts and spare
parts.
- Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and
Constancia Maglana contributed some funds in the purchase of the above aircrafts
and spare parts. The funds were supposed to be their contributions to anew
corporation proposed by Lim to expand his airline business. They executed
indemnity agreements in favor of Pioneer, one signed by Maglana and the other
jointly signed SAL, BORMAHECO and Cervantes: where they principally agree and
bind themselves jointly and severally to indemnify pioneer.
- On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel
mortgage as security for the suretyship in favor of Pioneer. The deed was duly
registered with the Manila RoD and with the Civil Aeronautics Administration.
- Lim defaulted on his subsequent installments prompting JDA to request payment
from the surety. Pioneer paid about P298,000
- Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses
and Maglana filed a third party complaint claiming that they are co-owners of the
aircraft. Pioneer later filed a petition for judicial foreclosure and an application for a
writ of preliminary attachment against Lim, the Cervanteses, BORMAHECO and
Maglana.
- In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were not
privy to the contracts signed by Lim.
- The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the
other defendants. On appeal, the CA affirmed.
ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to reimbursement of
amounts given by Lim?
HELD:
Lim’s assertions: The failure of respondents to incorporate, a de facto partnership
among them was created, and that as a consequence of such relationship all must share in
the losses and/or gains of the venture in proportion to their contribution.
PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of PARTNERS INTER SE. Thus, where persons associate
themselves together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corp. w/n the statute, they become in legal
effect partners inter se, and their rights as members of the company to the property acquired by the
company will be recognized.
However, such a relationship does not exist, for ordinary persons cannot be made to assume
the relation of partners, as between themselves, when their purpose is that no partnership shall exist
and should be implied only when necessary to do justice between the parties: thus, one who takes
no part except to subscribe for stock in a proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in business under the name of the
pretended corp., so as to be liable as such in an action for settlement of the alleged partnership and
contribution.
- the records show that Lim received the amount of P151,000 representing the
participation of BORMAHECO and Maglana
- it was clear that Lim never intended to form a corp with them but they were duped
into giving their money
- no de facto corp. was created
Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a
partnership inter se is created or a corporation by estoppel?
A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In
the case at bar, there was no intent on the other parties to enter into a partnership but a corporation.
As to the Cervanteses & BORMAHECO, they cannot be considered to have entered even into a
partnership inter se, since there was no intention to do so and to be held liable as such.
But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the
corporate name and actively participated in the activities of the corporation, then they are to be held
liable as partners.
Q. Why are we taking up Pioneer? Why were they not liable?
A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively
participated in the conduct of the business, the SC held in this case that to be able to be held liable
the person should possess powers of management.
Revised Bagtas Reviewer by Ve and Ocfe 2A 13
Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They
failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment.
The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non-
existent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived
his right to cross-examine and present evidence because he failed to appear while Lim filed a
counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale
of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ
and Chua, Yao and Lim were jointly liable as general partners.
Held:
1.) Lim was contesting that the CA ruled that there was a partnership in the Compromise
Agreement and alleges that he had no direct participation in the negotiations and was merely
leasing F/B Lourdes to Chua and Yao à Facts found by the TC and CA showed that there was
a partnership formed by the three of them. They initially purchased two boats through a loan
from Lim’s brother and as security, was placed in the name of Lim Tong Lim. The repairs and
supplies were shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim
for nullity of commercial documents, reformation of contracts and declaration of ownership of
fishing boats…which was settled amicably. In the Compromise Agreement, it was revealed
that they intended to pay the loan from Jesus Lim by selling the boats and to divide among
them the excess or loss. Therefore it was clear that a partnership existed which was not solely
based on the agreement. It was merely an embodiment of the relationship among parties.
2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration
papers of the boats, including F/B Lourdes where the nets were found à As found by the
lower courts, the boats were registered to Lim only as security for the loan that was granted
to the partnership by the brother of Lim, which was not an uncommon practice. Aside from
the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed
he was merely leasing the boats to Chua and Yao.
3.) Lim contests his liability by saying that only those who dealt in the name of the ostensible
corporation should be held liable. His name was not in any of the contracts and never dealt
with PFGI à Sec. 21 – All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof; Provided however that when any such ostensible
corporation is sued, on any transaction entered by it as a corporation or ant tort committed
by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even
if the ostensible corporate entity is proven to be non-existent, a party may be estopped from
denying its corporate existence because an unincorporated association has no personality
and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law. It cannot create agents or confer authority on another to act
on its behalf. Thus, those who act or purport to act as its representatives do so without
authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside
F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the
attachment because it has effectively interfered with the use of the vessel. Though
technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previously had an existing relationship
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel.
CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.
Q. Does the requirement of registration needed in a partnership also required in a joint venture?
A. No. Only in a partnership is registration required (Art. 1772, Civil Code)
Cooperative Corporation
Separate Juridical Personality
Governed by principles of SH vote their percentage share of
democratic control where the the stocks subscribed by them
members have equal voting rights
on a one-member-one vote principle
BoD manage the affairs of the coop. BoD is the repository of all powers
But it is the GA of full membership EXCEPT for acts where the Corp.
that exercises all the rights and Code requires concurrence or
performs all of the obligations of the
Revised Bagtas Reviewer by Ve and Ocfe 2A 15
coop. ratification by the SH
Under the supervision of the coop. Under the Supervision of the SEC
Development Authority
Organized for the purpose of Stock Corp. for profit; Non-Stock
providing goods and services to its Corp eleemosynary (charitable,
members and thus to enable them philantrophic) purpose
to attain increased income and
saving, etc.
(b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).
(c) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable
searches and seizures, but its officers have no cause of action to assail the legality of the
seizures, regardless of the amount of shares of stock or of the interest of each of them in
said corporation, and whatever the offices they hold therein may be, because the
corporation has a personality distinct and separate from those of said officers. Stonehill v.
Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate for such body. Its property cannot be taken without compensation;
can only be proceeded against by due process of law; and is protected against unlawful
discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from
Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.
Q: Why is a corporation entitled to the rights of due process and equal protection?
CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection
the law grants to an individual. A corporation is entitled to due process and equal protection
by virtue of the juridical personality given by the State through the primary franchise of the
corporation. The constitution did not distinguish whether the term “person” in Sec. 1 Art. III of
the Constitution refers to an individual or a juridical entity, which therefore extends to private
corporations within the scope of the guaranty.
Q: Why is the corporation entitled to the protection against unreasonable searches and
seizures? A: The corporation being entitled to due process and equal
protection is the consequence of the State’s grant of a primary franchise to a corporation. It
emanates from the Theory of Concession, whereby the government recognizes not only the
separate juridical personality of the corporation but also grants unto it all the rights and
protections that a natural individual would possess which includes the right to due process
and equal protection.
However, a corporation is also entitled to protection against unreasonable searches
and seizures. This right however does not emanate from the grant of the State by way of
primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that
regardless of Section 2 of the Corporation Code, a corporation is still for all intents and
purposes an association of individuals under an assumed name and with a distinct legal
personality. In organizing itself as a collective body, it waives no constitutional immunities for
such body. (1) Its properties cannot be taken without just compensation (2) it can only be
proceeded against by due process of law (3) it is protected against unlawful discrimination.
In the same line of reasoning, although a corporation is a legal fiction, a search and
seizure involves physical intrusion into the premises of the corporation, and therefore also
intrudes into the personal and business privacy of the stockholders or members who compose
it. It can be seen that the right of the individual against unreasonable searches and seizures is
extended to corporations upon whom they are members.
3. Practice of Profession
Corporations cannot engage in the practice of a profession since they lack the moral and
technical competence required by the PRC.
A corporation engaged in the selling of eyeglasses and which hires optometrists is not
engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International
Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002).
Facts:
The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California,
doing business regularly and legally in the Philippines. An information was filed against the
plaintiff corporation as well as John Northcott and Manue Grey charging the said corporation and
said individuals with the crime of libel. The controversy started when Northcott, as general
manager for the Philippines of said company and John Grey who was an agent and employee of
the company, conspired to release certain circulars containing foul statements against Insular Life
Company claiming that the Insular Life was then and there in a dangerous financial condition on
the point of going into insolvency, to the detriment of the policy holders of the said company, and
of those with whom said company have and had business transactions. The plaintiffs then filed a
motion to quash summons sent by the Judge, on the ground that the court had no jurisdiction
over said company, there being no authority in court for the issuance of the processes. Moreover,
plaintiffs alleged that under the laws of the Philippines, the court has no power or authority to
proceed against a corporation, criminally, to bring it into court for the purpose of making it
amenable to criminal laws.
Held:
No. While the courts have inherent powers which usually go with courts of general jurisdiction, it
was held that under circumstances of their creation, they have only such authority in criminal
matters as is expressly conferred upon them by statute or which is necessary to imply from such
authority in order to carry out fully and adequately the express authority conferred. The SC did
not feel that Courts have authority to created new procedure and new processes of criminal law.
Although, there are various penal laws in the Philippines which the corporation may violate, still
the SC does not believe that the courts are authorized to go to the extent of creating special
procedure and processes for the purpose of carrying out the penal statutes, when the legislative
itself has neglected to do so. This is true since the courts are creatures of the statute and have
only powers conferred upon them by statute. Philippines courts have no common law jurisdiction
Revised Bagtas Reviewer by Ve and Ocfe 2A 21
or powers.
Facts:
During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in
the purchase and sale of sugar, bayon, copra, and other native products and as such must pay
internal revenue taxes upon is sales. However, he only declared 2.3 million in sales but in
actuality the sales amounted to 2.5 million, therefore failing to declare for the purpose of taxation
about 200,000, not having paid the government 2,000 in taxes. Upon filing by the defendant of a
demurrer, the lower court judge sustained said motion on the ground that the offense charged
must be regarded as committed by the corporation and not its officials.
The court held that the judge erred in sustaining the motion because it is contrary to a great
weight of authority. The court pointed out that, a corporation can act only through its officers and
agents where the business itself involves a violation law, the correct rule is that all who
participate in it are criminally liable. In the present case, Tan Boon Kong allegedly made a false
return for purposes of taxation of the total amount of sales for year 1924. As such, the filing of
false returns constitutes a violation of law. Him being the author of the illegal act must be held
liable.
SIA v PEOPLE
Facts:
The facts reveal that in 1963, the accused Jose Sia was the general manager of Metal
Manufacturing Company of the Philippines engaged in the manufacturing of steel office
equipment. When the company was in need of raw materials to be imported from abroad, Sia
applied for a letter of credit to import steel sheets from Tokyo, Japan, the application being
directed to Continental Bank and was opened in the amount of $18,300. According to the
Continental Bank, the delivery of the steel sheets was only permitted upon the execution of the
trust receipt. While according to Sia, the steel sheets were already delivered and were even
converted to equipment before the trust receipt was signed by him. However, there is no
question that when the bill of exchange became due, neither the accused nor his company made
payments, despite demands of the bank. On appeal, Sia contends that he should not be held
liable.
Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf
of his company.
Held:
NO. The Court disputed the reliance of the lower court and the CA on the general principle that for
a crime committed by a corporation, the responsible officers thereof would personally bear the
criminal liability, as enunciated in Tan Boon Kong. The latter provides that: “[t]he corporation was
directly required by law to do an act in a given manner and the same law makes the person who
fails to perform the act in the prescribed manner expressly liable criminally. The performance of
an act is an obligation directly imposed by the law on the corporation. Since it is a responsible
officer or officers of the corporations who actually perform the act for the corporation, they must
of necessity be the ones to assume the criminal liability; otherwise this liability as created by the
law would be illusory, and the deterrent effect of the law, negated.
The Court concluded that the cited case does not fall squarely with the circumstances
surrounding Sia since the act alleged to be a crime is not in the performance of an act directly
ordained by law to be performed by the corporation. The act is imposed by the agreement of the
parties in pursuit of the business. The intention of the parties is therefore a factor determinant of
whether a crime or a civil obligation alone is committed. The absence of a provision of the law
even in the RPC making Sia criminally liable as the president of his company created a doubt that
must be ruled in his favor according to the maxim, that all doubts must be resolved in favor of the
accused.
CONTRASTING THE THREE CASES
In the case of West, the court in effect enunciated that for a person to proceed criminally
against a corporation, it was necessary that express provisions of law be enacted, specifically
providing that a corporation may be proceeded against criminally and brought to court.
But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the
case of Tan Boon Kong provided that since a corporation acts through its officers and agents,
any violation of law by any of the actors of the corporation in the conduct of its business
involves a violation of law, the correct rule is that all who participate in it are liable. In making
actors liable, the court here said attaching criminal liability to the fiction cannot be done
since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a
being since it lacks its own mind.
To apply the doctrine of separate juridical personality would allow criminals to use the
corporation as a shield or cloak to hide their criminal activities behind such.
However, the liability of officers were delineated in case of Sia where the court held that the
responsible officer is personally liable is personally liable for crimes committed by the
corporation only in a situation where the corporation was directly required by law to do an act
in a given manner, and the same law makes the person who fails to perform the act in the
prescribed manner expressly liable criminally.
NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors,
the law is currently undergoing changes such that juridical persons are also defined as offenders
of criminal acts, as with the case of the Anti-Money Laundering Act.
Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of
establishments – In default of the persons criminally liable, innkeepers, tavern-keepers and
any other person or corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances or some general or
special police regulation shall have been committed by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or
theft within their houses from guests lodging therein, or for the payment of the value
therefore, provided that such guests shall have notified in advance the innkeeper himself, or
the person representing him, of the deposit of such goods within the inn; and shall
furthermore have followed the directions which such innkeeper or his representative may
have given them with respect to the care of and vigilance over such goods. No liability shall
attach in case of robbery with violence against or intimidation of persons unless committed
by the innkeeper’s employees.
Art. 103 of the RPC: Subsidiary civil liability of other persons – The subsidiary liability
established in the next preceding article shall also apply to employers, teachers, persons and
corporations engaged in any kind of industry for felonies committed by their servants, pupils,
workmen, apprentices, or employees in the discharge of duties.
No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39
SCRA 303 (1971).
When a criminal statute forbids the corporation itself from doing an act, the prohibition
extends to the board of directors, and to each director separately and individually. People v.
Concepcion, 44 Phil. 129 (1922).
While it is true that a criminal case can only be filed against the officers and not against
the corporation itself, it does not follow that the corporation cannot be a real-party-in-interest
for the purpose of bringing a civil action for malicious prosecution for the damages incurred
by the corporation for the criminal proceedings brought against its officer. Cometa v. Court of
Appeals, 301 SCRA 459 (1999).
Revised Bagtas Reviewer by Ve and Ocfe 2A 23
Q: Why can the corporation be held liable for tortuous acts done by its agent but not for
criminal acts done outside its authority?
A: Crime is not within the corporate contemplation while negligence is. Negligence could be
part of every transaction. It is an integral part of corporate transactions. For as long as people
comprise the corporation, it is within the contemplation of every corporate act.
Section 123: Definition and rights of foreign corporations – For the purposes of this Code, a
foreign corporation is one formed, organized or existing under any laws other than those of
the Philippines and whose laws allow Filipino citizens and corporations to do business in the
Philippines after it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate government
agency.
There are three tests to determine the nationality of the corporation, namely:
1.) Place of incorporation – that a corporation is of the nationality of the country under whose
laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code.
2.) Control test – nationality determined by the nationality of the majority stockholders, wherein
control is vested.
Situation #1: 51% Filipino 49% Japanese à Under the control test, the nationality
cannot be determined because for a group of stockholders to exercise control over a
corporation it is required by the Corporation Code that they at least control 60% of the
corporation. à Why 60%? Because under the Corporation Code for a group of persons
to incorporate a corporation, at least 5 persons are required by law. A majority of the 5
is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is
majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person.
Situation #2: 60% Filipino 40% Japanese à Under the control test, this is considered a
Filipino corporation.
3.) Principal place of business – applied to determine whether a State has jurisdiction over the
existence and legal character of a corporation, its capacity or powers, internal organizations,
capital structure, rights and liabilities of directors.
Q: It was said that the place of incorporation is the primary test to determine the nationality of
the corporation, why then are there other tests used?
A: There are certain aspects of the Philippine economy that require that the controlling test in
corporations engaging in said type of business be that of Filipinos. The nationalized economic
sectors are primarily focused at making Filipino interests benefit directly from the bounties of this
country. The place of incorporation test need not have been expressly provided by the
Constitution since it is an integral part of our law specifically the power of Congress to grant
primary franchise to corporations. The place of incorporation test is deemed the primary test. It is
a true test of nationality. Being a creature of law of the place where it was incorporated, the
corporation cannot escape said law. By providing for the control test, the Constitution is providing
for a secondary test to determine which corporations are entitled to entry in nationalized sectors.
PEOPLE v QUASHA
Facts:
William Quasha, a member of the Philippine Bar was charged with falsification of public and
commercial documents in the CFI. He was entrusted with the preparation and registration of
the articles of incorporation of Pacific Airways Corporation but he caused it to appear that
Arsenio Baylon, a Filipino had subscribed to and was the owner of 60% of subscribed capital
stock. Such was not case because the real owners of said portions were really American
citizens. The purpose of such false statement was to circumvent the Constitutional mandate
that no corporation shall be authorized to operate as a public utility in the Philippines unless
60% of its capital is owned by Filipinos.
Held:
The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation
that Baylon was a mere trustee of the Americans, thus giving the impression that Baylon
subscribed to 60% of the capital stock. But contrary to the lower court’s assumption, the
Constitution does not prohibit the mere formation of a public utility corporation without the
required proportion of Filipino capital. What it does prohibit is the granting of a franchise or
other form of authorization for the operation of a public utility to a corporation already in
existence but without the requisite proportion of Filipino capital. From the language of the
text, the terms “franchise”, “certificate”, and “other form of authorization” are qualified by the
phrase “for the operation of public utility.” As such, these terms cannot and do not refer to the
corporation’s primary franchise, which vests a body of men with corporate existence, but to its
secondary franchise, or the privilege to operate as public utility after the corporation has
already gone into being.
Primary franchise refers to that franchise which invests a body of men with corporate
existence, while the secondary franchise is the privilege to operate as a public utility after the
corporation has already come into being.
For the mere formation of the corporation, such revelation was not essential and the
corporation law does not require it. Therefore, Quasha was under no obligation to make it. In
the absence of such obligation and of the alleged wrongful intent, Quasha cannot be legally
convicted of the crime with which he is charged. A corporation formed with capital that is
entirely alien may subsequently change the nationality of its capital through transfer of shares
to Filipino citizens. The converse may also happen. Thus for a corporation to be entitled to
operate a public utility, it is not necessary that it be organized with 60% of its capital owned
by Filipinos from the start. Said condition, may at any time be attained through the necessary
transfer of stocks. The moment for determining whether a corporation is entitled to operate as
public utility is when it applies for a franchise, certificate or any other form of authorization for
that purpose and that can only be done after the corporation has already come into being not
while being formed.
SITUATION #2 –Whether or not there may be an investment made by Pinoy Inc. in Mass
Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a
Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a corporation
registered in the Philippines 60% of which is owned by Maria, a Filipino, while 40% is
owned by George, a German.
Q: Can Pinoy, Inc. enter into the operation of a television station?
A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24%
of Pinoy is owned by George. But under the present investment regime of the Philippines, the
FIA provides that corporations which are 60% owned by Filipino citizens shall be considered of
Philippine nationality. It is defined under said law that for the purposes of investment such a
corporation of 60% Filipino and 40% foreign equity is allowed to invest in a corporation
engaged in a nationalized sector.
Q: Does this not contradict the very provisions of the Constitution?
A: It does not because the main purpose of such provision of the law is to spur investments
into the Philippine economy. What it specifically prohibits is for a corporation with a foreign
equity to engage in nationalized industries. Note the difference in the use of terms, namely
“to engage” as opposed to “to invest.” Engaging in nationalized industries involve direct
participation in the exploitation or use of natural resources or entry into protected industries
vested with public interest. This is what is prohibited from being entered into by non-
nationals.
Q: When should the GFR be applied?
A: It should be applied when two requisites are met: (1) when there is involved a nationalized
or partly nationalized sector of Philippine economy and (2) when there is tierring, meaning the
corporation is partly-owned by another corporation.
Up to what level do you apply the grandfather rule? (aPalting v. San Jose
Petroleum Inc., 18 SCRA 924 [1966])
PALTING v. SAN JOSE PETROLEUM
Facts:
San Jose Petroleum filed with the SEC a sworn registration statement for the registration and
licensing for sale in he Philippine voting trust certificate representing 2 million shares of its
capital stock of a par value of $0.35/share at P1/share. It was alleged that the proceeds
thereof will be used to finance the operations of San Jose Oil Co. which has 14 petroleum
exploration concessions in various provinces. It was expressly conditioned that instead of
stock certificates, registered or bearer-voting trust certificates from voting trustees
(Americans) will be given. San Jose Petroleum amended the application from P2M to P5M at
Revised Bagtas Reviewer by Ve and Ocfe 2A 33
reduced offering at P0.70/share.
Palting, et.al filed with the SEC an opposition to said registration on the following grounds: (1)
the tie-up between SJP, a Panamanian corporation and SJO, a domestic corporation violates
the Constitution, the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to
transact business in the Philippines (3) the sale of shares is fraudulent (4) the issuer is based
on unsound business principles (sic).
SJP claimed that it was a “business enterprise” enjoying parity rights, with respect to mineral
resources in the Philippines, which may be exercised pursuant to the Laurel-Langley
Agreement, through a medium, the SJO. It contends that giving SJO financial assistance did
constitute transaction of business in the Philippines.
SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. the majority
interest of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in
turn owned by Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under
the laws of Venezuela.
Under the Constitution, the exploitation of natural resources shall be limited to citizens of the
Philippines or to corporations or associations at least 60% of the capital of which is owned by
such citizens. However, this right was earlier extended to US citizens by virtue of the Parity
Agreement. Said US citizens can either directly or indirectly own or control the business
enterprise.
Held:
San Jose Petroleum is not entitled to Parity Rights: (1) It is not owned or controlled directly by
US citizens because it is owned and controlled by Panamanian corporation; (2) Neither can it
be said that it is indirectly owned and controlled by US citizens because the controlling
corporation is in turn owned by two Venezuelan corporations; (3) Although the two
Venezuelan corporations claim to be owned by stockholders residing in the US, there is no
showing that said stockholders were US citizens; (4) Even granting that these stockholders
are US citizens, it is still necessary to establish that their different states allow Filipino
corporations and citizens to engage in the exploitation of natural resources. However, there is
no such proof to this; (5) The word indirectly should not be unduly stretched in application.
Q: Why are we studying Palting?
A: It is because Palting enunciated the doctrine that for a corporation to comply to the
nationalization requirements of the Constitution, the equity requirements establishing the
nationality of the controlling interest in the corporation should not be stretched to absurdity.
The application of the GFR to determine the nationality of the ultimate controller of a subject
corporation cannot go beyond the level of what is reasonable.
(h) Special Classifications (Sec. 140)
Sec. 140 Stock ownership in certain corporations – Pursuant to the duties specified by
Article XIV of the Constitution, the National Economic Development Authority shall,
from time to time, make a determination of whether the corporate vehicle has been
used by any corporation of by business or industry to frustrate the provisions thereof
or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed
necessary, a report of its findings, including recommendations for their prevention or
correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to the individuals or groups of individuals related
to each other by consanguinity or affinity or by close business interests, or whenever it
is necessary to achieve national objectives, prevent illegal monopolies or combinations
in restrain or trade, to implement national economic policies declared in laws, rules
and regulations designed to promote the general welfare and foster economic
development.
In recommending to the Batasang Pambansa corporations, business or industries to be
declared vested with a public interest and in formulating proposals for limitations on
stock ownership, the National Economic and Development Authority shall consider the
type and nature of the industry, the size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as the other factors which are germane to the realization
and promotion of business and industry.
3. Applications:
Revised Bagtas Reviewer by Ve and Ocfe 2A 37
(a) Majority Equity Ownership and Interlocking Directorship:
Ownership of a majority of capital stock and the fact that majority of directors of a
corporation are the directors of another corporation creates no employer-employee
relationship with the latter's employees. aDBP v. NLRC, 186 SCRA 841 (1990)
DBP v NLRC
Facts:
Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its iron smelting
and steel manufacturing business. To secure the loan, PSC mortgaged to DBP real properties
and chattels with its President Marcelo as co-obligor Because of this DBP became the majority
stockholder of PSC with stockholdings of P 31M out of P 60 M subscribed and paid up capital
stock and took over PSC’s management. PSC failed to pay and DBP foreclosed on the
mortgaged realties and chattels. 40 alleged unpaid employees filed a petition for involuntary
insolvency in the RTC against PSC and DBP. Said employees were employed by Olecram
Mining Corp., Jose Panganiban Ice Plant and Cold Storage, Inc. all impleaded as co-
respondent. They filed another complaint with the DOLE against PSC for non-payment of
salaries, 13th month pay, incentive leave and separation pay. DBP was impleaded because the
employees considered DBP as the parent company of PSC. Since the DBP was the biggest
creditor of PSC, it held majority of stock and involved in management through Board of
Directors, DBP was considered to be by the employees as their employer. DBP was invoked
absence of E-E relationship in its Answer. The labor arbiter held DBP as liable for unpaid
wages due to PSC’s foreclosure which it caused as foreclosing creditor. NLRC sustained this,
hence, this petition.
Held:
DBP as foreclosing creditor could not be held liable for unpaid wages, etc. of the employees of
PSC. The fact that DBP is a majority stockholder of PSC and PSC are from DBP does not
sufficiently indicate the existence of an E-E relationship between the terminated employees of
PSC and DBP. Said workers have no cause of action against DBP and the labor arbiter does
not have jurisdiction to take cognizance of said case.
Hence, ownership of a majority of capital stock and the fact the majority of directors of a
corporation are the directors of another corporation creates no E-E relationship with the
latter’s employees.
PIERCING DOCTRINE ALTER EGO – disrespect for the corporate fiction and to defeat public
convenience
EQUITY – to do justice
The application of the doctrine to a particular case does not deny the corporation of legal
personality for any and all purposes, but only for the particular transaction or instance for
which such doctrine was applied.
(a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. aPNB v. Ritratto Group, Inc., 362
SCRA 216 (2001).
(b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. aUmali v. Court of Appeals, 189 SCRA
529 (1990).
UMALI v. COURT OF APPEALS
Facts:
The Castillo family is the owner of a parcel of land which was given as security for a loan from the
DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made
known to Santiago Rivera, the nephew of plaintiff Mauricia Meer vda. De Castillo and president of
Slobec Realty Dev. Corp. Rivera proposed to them the conversion into a subdivision lot of the four
parcels of land adjacent to the mortgaged property to raise the money. The Castillos agreed so a
MOA was executed between Slobec represented by Rivera and the Castillos. Rivera obliged himself
to pay the Castillos P70T after the execution of the contract and P400T after the property had been
converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of
Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T
payable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mortgage
over the said equipment as security for the unpaid balance. As further security, Slobec obtained
through the Insurance Corporation of the Philippines a Surety Bond in favor of Counter-Guaranty with
REM executed by Rivera as president of Slobec and the Castillos as mortgagors and ICP as
mortgagee. The Caterpillar Tractorwas delivered to Slobec.
Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the
properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was
issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of
ICP. The mortgagors had one year from the registration of the sale to redeem the property but they
failed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to Philippine
Machinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself the
title of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate the
property. The Castillos refused to do so. Subsequently, Umali the administratix of the properties of
Castillos filed an action for annulment of titles. They countered that all the transaction starting from
the Agreement of Counter-Guaranty with REM are void for being entered into in fraud. They seek to
pierce the veil of corporate entity of Bormaheco, ICP and PM Parts alleging that these corporations
employed fraud in causing the foreclosure and subsequent sale of their land. The lower court ruled in
favor of Umali. This was reversed by the CA.
Held:
The SC is not convinced that the contract entered into by the parties are fraudulent.
Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following
effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality
separate and distinct from its members or stockholders may be disregarded (2) in such cases, the
corporation will be considered as a mere association of person (3) the members or stockholders of
the corporation will be considered as the corporation, making them liable directly. It is only
applicable when corporate fiction is: (1) used to defeat public convenience, justify wrong, protect
fraud, or defend crime (2) made as a shield to confuse legitimate issued (3) where a corporation is
the mere alter ego or business conduit of a person (4) where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality., agency , conduit
or adjunct of another corporation.
The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure
proceedings may be declared a nullity under the circumstances in the case at bar. Petitioners are
merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained
without having to disregard the aforesaid corporate fiction attaching to the respondent corporations.
Petitioners also fail to establish by clear and convincing evidence that private respondents were
purposely formed and operated, with the sole intention of defrauding the latter. The facts showed
that the surety of ICP is good only for 12 months therefore the surety had already expired. The
failure of ICP to give notice renders ICP to have no right to foreclosure. In this case, piercing need not
be resorted to.
Q: Why is Umali seeking to pierce the corporate entity?
A: Umali is seeking to have the veil pierced because it would have shown that the contracts entered
into were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP &
PM parts to acquire the property of Umali through the foreclosure of the mortgage by ICP. However,
the court belied such allegation because the mere fact that the business of two or more corporations
are interrelated is not a justification for disregarding their separate personalities, absent a sufficient
showing that the corporate entity was purposely used as a shield to defraud creditors and third
persons of their rights.
Q: Why are we studying Umali?
A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to
annul the foreclosure of the mortgage. The Court found no reason to pierce since the main objective
was not in consonance with the remedy of piercing in a fraud case would do, which was to hold the
Board of Directors liable. Piercing is not allowed unless the remedy sought is to make the officer or
another corporation pecuniary liable for corporate debts.
Q: What if it was based on alter ego?
A: The probative factor show that no alter ego existed since there was no disrespect of the corporate
fiction, the corporations each having its own way of conducting business. Even if it may be that they
compliment one another in their business conduct, it does not form enough basis for their
Revised Bagtas Reviewer by Ve and Ocfe 2A 43
circumvention of any liability.
(c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the
officer or another corporation pecuniarily liable for corporate debts (?). Umali v. CA, 189
SCRA 529 (1990); aIndophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697
(1992).
INDOPHIL TEXTILE MILL WORKERS UNION v CALICA
Facts:
Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive
bargaining unit of all rank and file employees of Indophil Textile Mills. On April 1987, the Union and
Indophil excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil
Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired
workers according to its criteria and standards. Sometime in July 1989, the workers of Acrylic
unionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilities
built and set up by Acyrlic should be considered as an extension or expansion of Indophil pursuant to
Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and
installations and to any extension and expansion thereat. The union sough that Acrylic be considered
part of the bargaining unit.
Their contention is that the articles of incorporation of the two corporation establish that the two
entities are engaged in the same kind of business, which is the manufacture and sale of yarns of
various counts and kinds and of other materials of kindred character or nature. Furthermore, they
emphasize that the two corporations have practically the same incorporators, directors and officers.
Also the two corporation have their facilities in the same compound. That many of Indophil’s own
machineries such as dyeing machines, reeler, broiler, were transferred to and are now being used by
the Acrylic plant. That services of a number of units, departments or sections of private respondents
are provided by Acrylic and that the employees of Indophil are the same persons manning and
servicing the units of Acrylic. Both parties submitted the issue to LA Calica. Calica ruled for Indophil
and stated that Acrylic is not extension of Indophil an hence their CBA does not extend to the
employees of Acrylic.
Issue: WON Acrylic is a separate and distinct entity from Indophil for purposes of union
representation. WON the operations in Acrylic are an extension or expansion of Indophil.
Held:
Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate
legitimate business purpose. Indophil engages in the manufacture of yarns while Acrylic is to
manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in various kinds
of yarns. Two corporations cannot be treated as single bargaining unit just because they have
related businesses.
The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the
application of the CBA. However the CA held that said doctrine is only used on the existence of valid
grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that
sometimes the employees of Indophil are the same persons manning and providing for auxiliary
services to the units of Acrylic, and that the physical plants, offices, and facilities are situated in the
same compound. It is the SC’s considered opinion that these facts are not sufficient to justify the
piercing of the corporation veil of Acrylic. Furthermore, the legal entity is disregarded only if sought
to hold the officers and stockholders liable. In the instant case, the Union does not seek relief from
Indophil.
LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA
Facts:
Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade
name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized
the family corporation. La Campana Coffee Factory with its principal office located in Gawgaw
Packing. Prior to said information, Tan Tong entered into a CBA with the labor union of La
Campana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng La
Campana with an authorization from the DOLE to become an affiliate of the larger union.
Kaisahan with 66 members presented a demand for higher wages and more privileges to La
Campana Starch and Coffee Factory. The demand was not granted and the DOLE certified the
issue to the CIR. La Campana filed a motion to dismiss alleging that the action was directed
against two different entities with distinct personalities. This was denied, hence this petition.
Held:
La Compana Gawgaw and La Campana Factory are operating under one single management or as
one business though with two trade names. The coffee factory is a corporation and by legal fiction,
an entity separate and apart from the persons composing it namely, Tan Tong and his family.
However, the concept of separate corporate personality cannot be extended to a point beyond
reason and policy when invoked in support of an end subversive of this policy and will be disregarded
by the courts.
A subsidiary company which is created merely as an agent for the latter may sometimes
be regarded as identical with the parent corporation especially if the stockholders or officers
of the two corporations are substantially the same or their systems of operation unified. The
facts showed that they had one management, one payroll prepared by the same person,
laborers were interchangeable, there is only one entity as shown by the signboard ad in
trucks, packages and delivery forms and the same place of business.
The attempt to make the two factories appear as two separate businesses when in reality
they are but one, is but a device to defeat the ends of the law and should not be permitted to
prevail.
WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw
has only 14 employees and only 5 are members of Kaisahan.
Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of Indophil
when in fact the same circumstances in La Campana exist?
A: It may seem that the facts and circumstances are nearly the same between the two cases but the
remedies are different. La Campana sought the protection of separate juridical personality so as it
may not fall under the jurisdiction of the CIR, there being a clear intent to be excused from the
coverage of Labor Laws which conferred the CIR’s jurisdiction over the issue at hand. Although there
was no intent to defraud, the creation of La Campana Coffee Factory was meant to excuse itself from
CIR jurisdiction. However, in Indophil the facts of the case show that there was no clear showing that
Indophil meant to use Acrylic as a means of circumventing Labor Laws. Altough the CBA between
Indophil and its union provides that any expansion of Indophil’s operations would also be covered by
the CBA, Acrylic is an altogether different business. What showed that there was no intent by
Indophil or Acrylic to circumvent labor laws is when Acrylic entered into a CBA with its own
employees. There was clear independence of action between the relation of Indophil and Acrylic as to
their respective employees, each constituting its own bargaining unit.
4. Fraud Cases:
When the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. aFrancisco v. Mejia, 362 SCRA 738 (2001).
In accordance with the foregoing rule, this Court has disregarded the separate
Revised Bagtas Reviewer by Ve and Ocfe 2A 47
personality of the corporation were the corporate entity was used to escape liability to third
parties. In this case, however, we do not find any fraud on the part of the Marinduque
Mining and its transferees to warrant the piercing of the corporate veil. DBP v. Court of
Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control
over the business and affairs of the corporation, entered into a contract with another
corporation through fraud and false representations, such stockholder shall be liable
soidarily with co-defendant corporation even when the contract sued upon was entered
into on behalf of the corporation. aNamarco v. Associated Finance Co., 19 SCRA 962
(1967).
CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable
for acts done in behalf of the principal. However, when a wrong done by a corporation is
through a person in its behalf, piercing makes both of them liable. In fact, an agents who
commits a crime or fraud can be held liable despite the agency relation.
Where the corporation is used as a means to appropriate a property by fraud which
property was later resold to the controlling stockholders, then piercing should be
allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).
(b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegation
that the corporations true purpose is to avoid payment by the incorporating spouses of
the estate taxes on the properties transferred to the corporations: “With regard to
their claim that Ellice and Margo were meant to be used as mere tools for the
avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce
the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted.” Gala v. Ellice Agro-Industrial Corp., 418
SCRA 431 (2003).
(c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by
incorporating properties or the business. aPalacio v. Fely Transportation Co., 5 SCRA
1011 (1962).
Q: Why should a case be classified as a fraud case, an alter ego case, etc.?
A: In fraud cases, it is necessary that the petitioners seek to enforce the claim against the
stockholders or corporate officers. Since, in fraud cases only one act of fraud is necessary to
hold them liable whereas in an alter ego case, a series of transaction has to proven before
they may be held liable.
When used to avoid a contractual commitment against non-competition. aVilla Rey
Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
(e) Avoiding Legal Restrictions:
The corporate veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the majority in
direct actions or as the minority in a derivative suit, cannot be allowed to trifle with
court processes, particularly where the corporation itself has not been remiss in
vigorously prosecuting or defending corporate causes and in using and applying
remedies available to it. First Philippine International Bank v. Court of Appeals, 252
SCRA 259 (1996).
(d) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue
v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278
SCRA 716 [1997]).
Q: Why is there an inordinate showing of the alter ego elements?
A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be
considered in order to distinguish between a case of fraud or alter ego. There may be an
inordinate showing of alter ego elements but that does not necessarily make it an alter ego
case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud
cases, the alter ego concept pertains to employing the corporation even for a single
transaction to do evil while in pure alter ego cases, the courts go into systematic findings of
utter disregard and disrespect of the separate juridical personality of the corporation.
(e) Guiding Principles in Fraud Cases:
4Why is there inordinate showing of alter-ego elements? 3
• There must have been fraud or an evil motive in the affected
transaction, and the mere proof of control of the corporation by
itself would not authorize piercing; and
• The main action should seek for the enforcement of pecuniary
claims pertaining to the corporation against corporate officers or
stockholders.
5. Alter-Ego Cases:
(a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely
one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002); MR Holdings,Ltd. V. Bajar, 380 SCRA 617
(2002); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc.
v. NLRC, 257 SCRA 149 (1996).
(b) Using Corporation as Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit
of such individual owner, the corporation and the individual should be deemed the
same. aArnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).
When corporation is merely an adjunct, business conduit or alter ego of another
corporation, the fiction of separate and distinct corporation entities should be
disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
Where a debtor registers his residence to a family corporation in exchange of
shares of stock and continues to live therein, then the separate juridical personality
may be disregarded. PBCom v. CA, 195 SCRA 567 (1991).
Neither has it been alleged or proven that Merryland is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency
conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and
Merryland are interrelated, this alone is not justification for disregarding their separate
personalities, absent any showing that Merryland was purposely used as a shield to
defraud creditors and third persons of their rights. Francisco v. Mejia, 362 SCRA 738
(2001).
Use of nominees to man the corporation for the benefit of the controlling
stockholder. Marvel Building v. David, 9 Phil. 376 (1951).
(i) Distinction Between Fraud Piercing and Alter-ego Piercing: aLipat v. Pacific
Banking Corp., 402 SCRA 339 (2003).
6. Equity Cases:
(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc.
V. WCC, 104 SCRA 354 (1981).
(b) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965).
b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437
(1991);
- marriage of both a public and a private corp.
- it is granted the same powers as a private corp. but they have no
incorporators, SH’s or members
- example: A water district, although established as a corporation, it was
established for the greater good and with no stockholders. They are also
placed under the jurisdiction of the LWUA not the SEC
3. As to Purpose of Incorporation:
(a) Municipal Corporation – LGU’s
- can sue be sued without their consent ( as provided for by the LGC)
- in certain instances considered as an adjunct to the national government but has been
recognized to have a personality separate and distinct from the national government.
(b) Religious Corporation (Secs. 109 and 116)
Section 109. Classes of religious corporations. - Religious corporations
may be incorporated by one or more persons. Such corporations may
be classified into corporations sole and religious societies.
Since in matters purely ecclesiastical the decisions of the proper church tribunals are
conclusive upon the civil tribunals, then a church member who is expelled from the
membership by the church authorities, or a priest or minister who is by them deprived of his
sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).
Revised Bagtas Reviewer by Ve and Ocfe 2A 55
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
Section 106. Incorporation. - Educational corporations shall be
governed by special laws and by the general provisions of this Code.
(n)
From and after the filing with the Securities and Exchange Commission
of the said articles of incorporation, verified by affidavit or affirmation,
and accompanied by the documents mentioned in the preceding
paragraph, such chief archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and all temporalities,
estate and properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in trust
by him as a corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs.
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni
Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold
alienable lands of the public domain, because of the constitutional prohibition qualifying
only individuals to acquire land and the provision under the Public Land Act which applied
only to Filipino citizens or natural persons, has been expressly overturned in Director of
Land v. IAC, 146 SCRA 509 (1986).3
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
Section 20. De facto corporations. - 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.
(c) Corporation by Estoppel (Sec. 21)
3Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168
SCRA 165 (1988).
Section 21. Corporation by estoppel. - All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages incurred
or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
Sec. 3 Classes of Corporation – Corporations formed or organized under this Code may be
stock or non-stock corporations. Corporations 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 are stock corporations. All other corporations
are non-stock corporations.
Sec. 5 Corporations and incorporators, stockholders and members – Corporators are those
who compose a corporation, whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the said properties to
secure his loan – 1st mortgage to PNB: P8000; 2nd mortgage to PNB: P7000; and 3rd mortgage to
Bauzon: P2900 which was registered and annotated on the titles of the property. In 1930 Tabora sold
said parcels to Cagayan Fishing Development Co., said to be under process of incorporation, subject
to the mortgages and with the condition that title will not be transferred until the corporation has
paid Tabora’s indebtedness. Cagayan Fishing filed its Articles of Incorporation with the Bureau of
Commerce. The Board of Directors adopted a resolution authorizing its President Ventura to sell the
four parcels of land to Sandiko with the condition that he would shoulder the mortgage debts.
Sandiko issued promissory notes to that effect. When Sandiko failed to comply with the obligation,
the corporation filed a recovery suit. The lower court held that the contract is void since it was
entered into with a corporation that has no corporate existence at the time the properties were
transferred to it.
Issue: WON Sandiko can be held liable for the mortgage debt?
Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot be held liable
for the mortgage debt since there was no valid sale of the property, since at the time when Cagayan
supposedly acquired the property, it still had no juridical personality to acquire property. There was
no transfer of lots from Tabora to Cagayan since Cagayan was only incorporated five months after
the sale.
1.) A corporation should have full and complete organization and existence as an entity before it can
enter into any kind of contract or transact any business. A corporation until organized has no being,
franchises or faculties nor do those engaged in bringing it into being have no power to bind it by
contract, unless so authorized by the charter.
Revised Bagtas Reviewer by Ve and Ocfe 2A 61
2.) The contract entered into was not between Tabora and the corporation instead it was between
Tabora, as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporation
was still non-existent. These promoters could not have acted as agents for a projected corporation
since that which had no legal existence could have no agent. Although a corporation has no life until
organized, it does not mean that under no circumstances may the act of promoters of a corporation
be ratified by the corporation if and when subsequently organized. But said doctrine of ratification is
not applicable here.
3.) Cagayan could not have and did not acquire the four parcels of land. It follows that it did not
possess any reluctant right to dispose of them by sale to Sandiko. It was not even a de facto
corporation at the time of transfer so that it does not have the personality to enter into contracts.
4.) Some peculiar circumstances: (a) Tabora formed a corporation by himself, wife and others but
subscribed to P45,000 of P48,700 (capital stock subscribed); (b) the lands remained in Tabora’s
name despite the sale to the corporation and Sandiko regarded Tabora as the owner; (c) Ventura
signed the contract in behalf of Tabora; (d) P/N issued by Sandiko was payable to the corporation to
avoid being attached by Tabora’s creditors.
Q: Why are we studying Cagayan?
A: This case espouses the element of contract law which is the lack of the element of consent;
there being one party, the corporation, lacking a juridical personality; the contract was thus
declared void. Cagayan and Rizal provides us the doctrine that promoter’s contract must be
adopted and ratified by the corporation. If the act of the promoter’s is ratified then that act is
binding on the corporation.
CLV: The court here dismissed the action against Sandiko on the basis that at the time the properties
were sold to the corporation, it had no legal existence, therefore, it could not purchase anything.
Having bought nothing when it sold the said properties to Sandiko, it had in fact nothing to sell –
therefore there was no valid assumption of loans and neither were there promissory notes supported
by valid consideration.
Q: What if Sandiko was aware at the time that the contract was entered that the corporation did not
exist? What if the corporation invokes the doctrine of the corporation by estoppel so that Sandiko
could not raise the defense that at the time the fraud was committed, the corporation has no juridical
personality? A: Remember
that the doctrine of corporation by estoppel is only applicable if at least one of the parties knew that
a corporation existed when in fact it did not. In this case, the doctrine cannot apply because nobody
was in the belief that it existed at the time when fraud was being committed. Even Tabora himself
knew from the start that at the time of the transfer, the corporation did not exist.
Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public Service
Commission, a certificate of public convenience for the installation, operation and management of an
electric light, heat, and power service in Morong, Rizal. PSC required Rizal light to show cause why it
should not be penalized for violation of the conditions of its CPC and for failure to comply with
directions to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancellation
and revocation of Rizal’s CPC and forfeiture of its franchise. The order of revocation was set aside
when it was known that the company representative failed to appear due to illness.
The municipality of Rizal formally asked the PSC to revoke Rizal’s CPC and forfeiture of its franchise.
PSC found that Rizal failed to comply with its directive and violated the conditions of the CPC. PSC
ordered the cancellation and revocation of Rizal’s CPC and the forfeiture of its franchise.
Later, Morong Electric, having been granted a franchise by the Municipality of Morong, filed with the
PSC an application for CPC. It later brought up the issue that Morong Electric had no legal personality
because its certificate of incorporation was issued only on October 17, 1962, while the application
was filed on September 10,1962. The motion to dismiss was denied on the ground that Morong
Electric is a de facto corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this petition.
Held: Decision affirmed.
Under the law, before any CPC may be granted, three requisites must be present: (1) citizen of the
Philippines or the US or a corporation, co-partnership, association or joint-stock co. constituted and
organized under the laws of the Philippines, 60% at least of the stock or paid up capital of which
belongs entirely to citizens of the Philippines or the US; (2) financially capable of undertaking the
service; (3) prove that the operation of the public service proposed will promote public interest.
Petitioner contend that until a corporation has come into being, by the issuance of a certificate of
incorporation by the SEC, it cannot enter into any contract as a corporation and that its application
was null and void for being done prior to said issuance.
Its contention that Morong Electric, at the moment of application and grant of franchise did not yet
have a legal personality is correct. The legal existence of Morong Electric began upon issuance of the
certificate of incorporation before said time, the incorporators cannot be considered as de facto
corporation.
But the fact that Morong Electric at the moment of the application and grant of franchise was
granted does not render the franchise invalid because Morong later obtained its certificate of
incorporation and accepted the franchise in accordance with the terms and conditions thereof. While
a franchise cannot take effect until the grantee corporation is organized, the franchise, may,
nevertheless be applied for before the company is fully organized.
The incorporation of Morong and its acceptance of the franchise as shown by its action in prosecuting
the application filed with the PSC for the approval of said franchise, not only perfected a contract
between the Municipality of Morong and Morong Electric.
CLV: The theory used here by the SC to validate the contract is the continuing offer theory. A grant of
the franchise according to the SC, prior to the time that the corporation actually existed is like a
conditional grant that will be effective upon the corporation’s becoming a legal entity. Prior to that, it
is merely a continuing offer (on the part of the government).
CARAM Jr. v CA
Facts: Baretto and Garcia contracted the services of plaintiff Arellano to prepare a project study for
the organization of Filipinas Orient Airways. For failure to pay such services, Arellano sued the
corporation, Baretto and Garcia and petitioner Fermin and Rosa Caram as stockholders. They were
held solidarily liable with their co-defendants. Hence, this petition.
Peitioner Canson claims that said decision finds no support because they were mere investors in the
corporation later created. They should not be held solidarily liable with the corporation, who has a
separate juridical personality.
Held: Petition granted.
The services were acquired by virtue of the request of Baretto and Garcia so that a report can be
represented to financiers. Petitioners are not really involved in the initial steps that finally led to the
incorporation of Filipinas Orient Airways which were being directed by Baretto. Petitioners were
merely among the financiers whose interest was to be invited and who were persuaded to invest in
the airline.
There was no showing that Filipinas was a fictitious corporation and did not have a separate juridical
personality to justify making the petitioner, as principal stockholders, responsible for its obligations.
As a bona fide corporation, Filipinas should alone be liable for its corporate acts as duly authorized by
its officers and directors. Thus, petitioner could not have been personally liable for the compensation
claimed by Arellano.
CLV: The case tried to distinguish participation of a promoter from that of a promotee, in a venture
that actually becomes a corporation late on. Not every person, who participates in a venture that will
later become a corporation is a promoter.
Q: How do you distinguish a participation of a promoter from that of a promotee who acts
together to form a corporation?
A: The promotees are merely passive investors. A plan is given to them and if they like it, they
invest. Promoters are the active participants. They found and they organize the corporation.
According to Caram only the promoters should be liable. The SC held that a mere promotee
(those who merely subscribe to the shares of stock) should not be held liable for a promoter’s
Revised Bagtas Reviewer by Ve and Ocfe 2A 63
contract (just as an ordinary stockholder after a corporation has already been incorporated
cannot be held liable for more that beyond his investment).
CLV: Remember that once a corporation is formed, it usually follows that all promoter’s contracts get
ratified because the corporation actually arises out of these contracts. The corporation usually has no
choice. It rarely rejects the contracts for such would be commercial suicide. Once the corporation is
formed, the promoter’s contract of the corporation (if the latter accepts) and not the promoter’s. This
is why the promoter, once the corporation accepts, escapes liability. Remember that a promoter in a
promoter’s contract signs not in his own name but always for and in behalf of the corporation.
Q: What are the three theories in pre-incorporation contracts?
Theory #1 – Therefore, since a promoter’s contract is really the promoter’s own, the only reason why
the corporation, once it is organized becomes liable is when the corporation adopts it as its own. The
promoter’s real contract theory is one of the three theories by which to validate a contract prior to
incorporation.
Theory #2 – The 2nd theory as adopted by Jurisprudence is what is termed as a continuing offer. The
continuing offer that exists as to the time of the issuance of the certificate of incorporation. And if it
is accepted, then the offer means the acceptance, and there arises a contract.
Theory #3 – Once the promoter enters into a contract for and in behalf of a non-existent principal,
the promoter becomes personally liable like an agent who acts without authority from the principal.
The contract entered into then is valid unless the agent acted without authority. But it is possible for
the contract to be adopted by the principal by accepting it.
In all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of the
promoter’s contract – so that the people will be willing to risk without much fear, investing their
money into a venture prior to the incorporation of a company or a corporation.
Q: Promoter v. Agent
A: The promoters are not the corporation itself, and although they may be regarded, for
certain purposes as sustaining to the corporation a relationship similar to that of an agent,
strictly speaking they cannot be regarded as such, there being at that time no existing
principal.
Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirely
disinterested, while persons engaged in promotion expect to receive and seek to obtain a liberal
award or profit for their initiative.
3. De Facto Corporation (Sec. 20)
Sec. 20 De Facto Corporations – 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.
Every corporation is deemed de jure until proven otherwise.
De Jure Corporation – formed in accordance with law; perfectly incorporated; consequences:
separate juridical personality and perfect liability.
De Facto Corporation – formed also in accordance with law but falls short of the requirements
provided by law. Such is awarded a separate juridical personality, it may thus enter into
contracts, it may sue and be sued (note: third parties may sue the corporation, incorporators
may sue but the corporation cannot sue). Note also that such has imperfect liability à only
the actors will be held liable. In proceeding against such, compliance with due process must
be had.
The doctrine of de facto corporation applies as to the first level relationship (as between the
State and corporations) and also to the third level of relationship (as between third persons
and corporations). If it primarily concerns the first level, why does it draw its vitality from the
third level? Because without such, transactions shall have no effect but with such, despite the
defects, the contracts are valid and enforceable. But because of its primary relation to the
first level, third persons cannot question the legal personality of such de facto corporation.
Only the State through a quo warranto proceeding may do such.
Not all corporations which lack elements are de facto corporations.
Elements for Existence of De Facto Corporation:
1) Valid law under which it is incorporated: The Corporation Code
2) Attempt in good faith to incorporate – colorable compliance: The corporation must have filed
its Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. The
minimum requirement for this requisite is the issuance of a certificate such that even if you
honestly believed that you incorporated (and all the other requisites are present), it is still not
a de facto corporation.
The above is need to prove reliance in good faith.
If any of the above element is absent can the principle be invoked by third persons?
No, but they may have a remedy under the principle of corporation by estoppel. Can
such be used in all instances? No, when both parties knew that no corporation existed,
such may not be invoked.
Issuance of certificate of incorporation – minimum requirement under this number.
3) Assumption of corporate powers: Minimum requirement: election of the Board of Directors.
Q: Why must there be an election of the BoD?
A: The basic principle is a de facto corporation is a mutual going about of the transaction in good
faith. Since the corporation has a juridical personality, the only way by which it can be said that
there was good faith in entering a transaction is that there must be a BoD by which a corporation
can act. If there is no BoD there is no good faith on the part of the corporation because it knows
that it can only act through the BoD not on the part of the parties dealing with the corporation
because it knows that there must be BoD for the corporation to bind itself. This is also important
because this is by which the corporation manifests itself. (Remember: notion of a ghost – A ghost
manifest itself through signs, in the same manner, a corporation manifests its existence through
the existence of the BoD).
(a) Elements: aArnold Hall v. Piccio, 86 Phil. 634 (1950).
Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of lease with Philippine
Fibers Producers Co., Inc. allegedly a corporation duly organized and existing under the Philippine
laws, as represented by its President Refuerzo. The land will be leased for ten years and the lessor
would be entitled to 30% of the net income accruing from the harvest of any crop.
The alleged corporation did not comply with said obligation. Salvatierra filed with the CFI a complaint
against PFPC for accounting, rescission and damages. The corporation defaulted and the court
rendered judgment in favor of Salvatierra. The court issued a writ of execution and the three parcels
of land under the name of Refuerzo were attached because no property of PFPC was found available.
Refuerzo filed a motion claiming that the decision was null and void since there was no allegation of
his personal liability. The court granted the motion and released his land from attachment. Hence,
this petition by Salvatierra.
Held: The failure of Salvatierra to specify Refuerzo’s personal liability was due to the fact that
Salvatierra was under the impression that PFPC, represented by Refuerzo was a duly registered
corporation, but subsequently, inquiry with the SEC yielded otherwise. While as a general rule, a
person who has contracted or dealt with an association in such a way as to recognize its existence as
a corporate body is estopped from denying the same in an action arising out of such transaction or
dealing. Yet, this doctrine is inapplicable where fraud takes a part in said transaction. Here Refuerzo
gave no confirmation of denial as to PFPC’s juridical personality and Salvatierra was made to believe
that the corporation was duly organized.
The grant of separate juridical personality to corporations refer merely to registered corporations and
cannot be made applicable to the liability of members of an unincorporated association. Since an
organization which, before the law, is non-existent and has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation, it cannot
create agents or confer authority on another to ct in its behalf, thus, those who act or purport to act
as its representatives or agents do so without authority and at their own risk.
A person acting or purporting to act in behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered into or for other
acts performed as such agent.
Here, Refuerzo as president of the unregistered corporation was the spirit behind the consummation
of the lease contract, thus, his liability cannot be limited or restricted to that imposed upon corporate
SH’s. In acting on behalf of a corporation, which he knew to be unregistered, he assumes the risk of
reaping the consequential damages or resultant rights, if any arising from the transaction.
Facts: The University Publishing Co. Inc. through its President Jose Aruego entered into a contract
with Mariano Albert whereby the corporation agreed to pay a certain sum in installments for the
exclusive right to publish his revised commentaries in the RPC and for his share in the previous sale
of the book’s first edit edition. The corporation failed to pay the second installment thereby making
the whole amount due and demandable (i.e. there was an acceleration clause). Albert then sued the
corporation.
The lower court rendered judgment in favor of Albert and a writ of execution was issued against the
corporation. Albert however, petitioned for a writ of execution against Aruego, as the real defendant,
stating that there is no such entity as University Publishing Co. Inc. Albert annexed to his petition a
certification from the SEC saying that their records contain no such registered corporation.
The corporation countered by saying that Aruego is not a party to this case and that, therefore,
Albert’s petition should be denied. The corporation countered by saying that Aruego is not a party to
this case, and that therefore, Albert’s petition should be denied. The corporation, actually did not
want Aruego to be declared a party to the present case is because there would be no need to
institute a separate action against Aruego to be declared a party to the present case is because
there would then be a need to institute a separate action against Aruego; and if this is done, Aruego
can set up the defense of prescription under the Statute of Limitations.
Held:
1.) The corporation cannot invoke the doctrine of estoppel. The fact of non-registration of the
corporation has not been disputed because the corporation only raised the point that it and
not Aruego is the party defendant thereby assuming that the corporation is an existing
corporation with an independent juridical personality. HOWEVER, precisely on account of non-
registration, it cannot be considered a corporation not even a corporation de facto. It has
therefore no personality separate from Aruego; it cannot be sued independently. The estoppel
doctrine has not been invoked and even if it had been, it is not applicable to the case at bar:
(a) Aruego had represented a non-existing entity and induced not only Albert but also the
court to believe in such representation (b) He signed the contract as president of the
corporation stating that this was a corporation duly organized and existing under the laws of
the Philippines. One who induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter set up against
his victim the principle of corporation by estoppel.
2.) Aruego is the real defendant as he had control over the proceedings. Had Aruego been named
as party defendant instead of or together with the corporation, there would be no room for
debate as to his personal liability. Since he was not so named, matters of due process have
arisen. Parties to a suit are persons who have a right to control the proceedings, to make
defense, to adduce and cross-examine witnesses and to appeal from a decision. In the case at
bar, Aruego, was and in reality, the one who answered and litigated through his own firm as
counsel. He was in fact, if not on name, the defendant. Clearly then Aruego had his day in
court as the real defendant and due process of law has been substantially observed.
3.) Aruego is the real party in interest because he reaped the benefits from the contract.
4The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case
pertained to a commercial partnership which required registration in the registry under the terms of the Code of
Commerce).
Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They
failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment.
The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non-
existent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived
his right to cross-examine and present evidence because he failed to appear while Lim filed a
counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale
of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ
and Chua, Yao and Lim were jointly liable as general partners.
Held:
4.) Lim was contesting that the CA ruled that there was a partnership in the Compromise
Agreement and alleges that he had no direct participation in the negotiations and was merely
leasing F/B Lourdes to Chua and Yao à Facts found by the TC and CA showed that there was
a partnership formed by the three of them. They initially purchased two boats through a loan
from Lim’s brother and as security, was placed in the name of Lim Tong Lim. The repairs and
supplies were shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim
for nullity of commercial documents, reformation of contracts and declaration of ownership of
fishing boats…which was settled amicably. In the Compromise Agreement, it was revealed
that they intended to pay the loan from Jesus Lim by selling the boats and to divide among
them the excess or loss. Therefore it was clear that a partnership existed which was not solely
based on the agreement. It was merely an embodiment of the relationship among parties.
5.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration
papers of the boats, including F/B Lourdes where the nets were found à As found by the
lower courts, the boats were registered to Lim only as security for the loan that was granted
to the partnership by the brother of Lim, which was not an uncommon practice. Aside from
the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed
he was merely leasing the boats to Chua and Yao.
6.) Lim contests his liability by saying that only those who dealt in the name of the ostensible
corporation should be held liable. His name was not in any of the contracts and never dealt
with PFGI à Sec. 21 – All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof; Provided however that when any such ostensible
corporation is sued, on any transaction entered by it as a corporation or ant tort committed
by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even
if the ostensible corporate entity is proven to be non-existent, a party may be estopped from
denying its corporate existence because an unincorporated association has no personality
and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law. It cannot create agents or confer authority on another to act
on its behalf. Thus, those who act or purport to act as its representatives do so without
authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside
F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the
attachment because it has effectively interfered with the use of the vessel. Though
technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previously had an existing relationship
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel.
CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.
(b) Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
Revised Bagtas Reviewer by Ve and Ocfe 2A 69
When the incorporators represent themselves to be officers of the corporation which
was never duly registered with the SEC, and engage in the name of the purported
corporation in illegal recruitment, they are estopped from claiming that they are not liable
as corporate officers under Sec. 25 of Corporation Code which provides that all persons
who assume to act as a corporation knowing it to be without authority to do so shall be
liable as general partners for all the debts, liabilities and damages incurred or arising as a
result thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R. No. 117010,
18 April 1997 (unpub).
Under the trust fund doctrine, the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate creditors.
Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for satisfaction.
Until the liquidation of the corporation, no part of the subscribed capital stock may be
turned over or released to the stockholder (except in the redemption of the redeemable
shares) without violating this principle. Thus dividends must never impair the subscribed
capital stock; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefore.
NTC v. Court of Appeals, 311 SCRA 508 (1999).
The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equtiy in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v.
CA, 167 SCRA 540 (1988).
c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v.
Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929])
Sec. 8 Redeemable Shares – Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. They may be purchased or taken up
by the corporation upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such terms and
conditions as may be stated in the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing said shares.
Sec. 41 Power to acquire own shares – A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired: (1) to eliminate fractional shares arising out of stock dividends; (2) to collect or
compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shared sold during said sale; and 3) to pay
dissenting or withdrawing stockholders entitled to the payment for their shares under the
provisions of this Code.
Sec. 43 Power to declare dividends – The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash,
in property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stocks shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid subscription is fully paid:
Provided further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds of the outstanding capital stock at a
regular or special meeting duly called for that purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
Revised Bagtas Reviewer by Ve and Ocfe 2A 71
(100%) per cent of their paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the board of directors; or (2) when
the corporation is prohibited under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends without his/her consent and
such consent has not yet been secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.
Sec. 122 Corporate Liquidation – Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close it affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such conveyance by the corporation of
its property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities.
(d) Rescission of Subscription Agreement Based on Breach
The violation of terms embodied in a subscription agreement, with are personal
commitments, do not constitute legal ground to rescind the subscription agreement
since such would violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code. “In the instant case,
the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since the rescission of a
subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed.” Ong Yong v. Tiu, 401 SCRA 1 (2003).
(e) Distribution of Corporate Assets
“The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo ‘to prevent further squabbles and
future litigations’ unless the indispensable conditions and procedures for the protection of
the corporate creditors are followed. Otherwise, the ‘corporate peace’ laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors’
turn to engage in ‘squabbles and litigations’ should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.” Ong Yong v. Tiu, 401 SCRA 1
(2003).
The trust fund doctrine applies in the following cases: (1) where the corporation has
distributed its capital among the stockholders without providing for the payment of creditors
(2) where it had released subscribers to capital stock from their subscription receivables (3)
where it had transferred corporate property in fraud of its creditors and (4) where the
corporation is insolvent.
Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and
their liquidation when it provides that “except by decrease of capital stock and as otherwise
allowed by this Code, no corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities.” (2) SEC Rules governing
Redeemable and Treasury Shares expressly adopts the doctrine as follows, “the outstanding
capital stock of a corporation, including unpaid subscriptions, shall constitute a trust fund for
the benefit of its creditors which shall not be returned to the stockholders by repurchase of
shares or otherwise, except in the manner as provided for under the Corporation Code and
this rules.
Coverage of Trust Fund Doctrine – adopted the two precursors of the trust fund doctrine which
is the a.) capital impairment rule and the b.) profit rule. A fixed capital must be preserved for
protecting the claims of creditors so that dividend distributions to stockholders should be
limited to profits earned or accumulated by the corporation. In a solvent corporation, the trust
fund doctrine encompasses only the capital stock.
1.) Coverage of capital stocks – covers “capital stock;” the protection by the doctrine upon
corporation not in a state of insolvency but only up to the extent of the “capital stock” of the
corporation.
2.) Retained earnings – although part of the stockholder’s equity, do not constitute part of the
“capital stock.” It is not covered by the doctrine. The corporation is at liberty to declare and
pay out dividends from its assets.
3.) Outstanding capital stock – total shares of stock issued to subscribers or stockholders
whether or not fully or partially paid (as long as there is a binding subscription agreement)
except treasury shares (Sec. 137 ).
4.) Par value stock – capital stock represented by aggregate par value of all shares issued and
subscribed. If par value shares are sold at premium, excess is not treated as legal
capital/capital stock but can be declared as stock dividends. This stock dividends fall within
the ambit of the Trust Fund doctrine.
5.) No par value stock – legal capital = total consideration received for the shares of stock. Entire
consideration for no par value stock treated as capital and not available for distribution as
dividends.
Funds received by a corporation – to cover subscription payment on increase in authorized capital
stock prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is
still withdrawable by any of the subscribers at any time before issuance of the corresponding shares
of stock, unless there is a pre-subscription to the contrary.
c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry,
40 Phil. 541 [1919])
Sec. 42 Power to invest corporate funds in another corporation or business or for any other
purpose – Subject to the provisions of this Code, a private corporation may invest its funds in
any other corporation or business or for any other purpose other than the primary purpose for
which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of
the members in case of non-stock corporations, at a stockholders’ or members meeting duly
called for the purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addresse in the post office with
postage prepaid, or served personally: Provided: That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not be necessary.
“The best proof of the purpose of a corporation is its articles of incorporation and by-
laws. The articles of incorporation must state the primary and secondary purposes of
the corporation, while the by-laws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of
said purpose.” Therefore, the Court brushed aside the contention that the corporations
were organized to illegally avoid the provisions on land reform and to avoid the
payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).
Significance: It confers as well as limits the powers which a corporation may exercise. Other
reasons: (1) prospective investors shall know the kind of business the corporation deals with
(2) management shall know the limits of its action (3) a third party can know whether his
dealing with the corporation is within the corporate functions and powers (4) also, for the
Revised Bagtas Reviewer by Ve and Ocfe 2A 77
administrative supervision and monitoring of the State, to determine which particular agency
shall have jurisdiction over the operations of the corporation.
The purpose must be lawful, having only one primary purpose and many secondary purposes.
1.) That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
2.) That the purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral or contrary to government rules and regulations;
3.) That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or
paid is false.
4.) That the percentage of ownership of the capital stock to be owned by the citizens of the
Philippines has not been complied with as required by existing laws or the Constitution.
VIII. BY-LAWS
See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2,
June 1994).
1. Nature and Functions (aGokongwei v. SEC, 89 SCRA 337 [1979]; aPeña v. CA, 193 SCRA
717 [1991])
FACTS:
In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also,
Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, the
presidne tand controlling stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei tried
to get a seat in the SMC BoD but was rejected by the SH’s n the grounds that he was engaged in a
competitive business and his securing a seat in the BoD would subject SMC to great disadvantages.
On September 18, 1976 repondent SH’s amended the by-laws of SMC, Gokongwei contends
that:
1. the BoD acted without authority & in usurpation of the power of the SH’s since the
computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of
1976
2. The authority granted in 1961 was also extended in 1962 & 1963 when said authority was
supposed to cease to exist
3. Prior to said amendment, petitioner had all the qualifications as Director & that as a
substitute SH he has the right to vote & be voted as director & that in amending the by-
laws, the corp. purposely provided for Gokongwei’s disqualification& deprived him of his
vested right.
4. Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & that
provision allowing the BoD to consider such factors as business & family relations is
unreasonable & oppressive, thus void.
Gokongwei prays that the amended by laws be declared null & void. He also wanted to
inspect and get a copy of certain documents pertaining to the corp. The SEC allowed him to see the
minutes of the meeting only. So he filed an MR & a petition with the SC due to the alleged deliberate
inability of the SCE to action on his petition.
The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he
should not sit as such if elected until there is a decision on the validity of the by-laws.
The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in
allowing him to sit in the BoD, he would have access to SMC trade secrets and plans. It says that the
amended by laws were adopted to preserve & protect SMC from danger which was based in its right
for self-preservation.
ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or
election to the BoD of SMC are valid and reasonable?
HELD:
1. Every corp. has the inherent right to adopt by-laws for its internal government & to
regulate the conduct & prescribe the rights and duties of its members towards itself &
among themselves in reference to the management of its affairs. This is expressly
recognized by Sec. 21 of the Corp. Code & has been enunciated in Gov’t vs. El Hogar.
2. Any person who buys stocks in a corp. does so with the knowledge that its affairs are
dominated by a majority of the stockholders & that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the AoI & By-laws. A
stockholder is said to have parted with his right to regulate the disposition of his property
which he invested in the corporation. Thus, no contract between the SHs and corp. was
infringed.
3. Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written
assent of the Sh’s representing at least t 2/3 of the subscribed capital stock. If it changes,
diminishes or restricts the rights of SHs, the dissenting minority has only the right to
object in writing & demand payment of their share. Petitioner has no vested right to be
elected director.
4. A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance
of corporate affairs & property & hence, of the property interests of SHs. Equity
recognizes that SHs are properties of corporate interest & are ultimately the only
beneficiaries thereof. Thus, he cannot serve 2 adverse masters without detriment to one
of them He cannot utilize his inside information & strategic position to his own
preferment.
5. An amendment to the by-laws which renders a SH ineligible to be a director, if he be also a
director in a competitor corp. has been sustained valid. This is based on the principle that
where the director is employed in the service of a rival corp he cannot serve both but
must betray one or the other. Such an enactment merely advances the benefit of the corp
& for its own good. Corporate officers are not permitted to use their position of trust &
confidence to further their private interests.
6. DOCTRINE OF CORPORATE OPORTUNITY – rests on the unfairness of an officer or director
taking advantage of an opportunity for his own personal profit where the interest of the
corporation calls for protection. Here BoD members have access to marketing strategies,
pricing structure, budget for expansion, R&D sources of funding, availability of personnel,
mergers & tie-ups, etc. The questioned amendment of the y-laws was done to prevent the
creation or an oppositor for an officer or director of SMC, also an officer of a competing
corp. from taking advantage of the information which he as director to promote his
individual corporate interests to the detriment of SMC, it would be hard to avoid any
possibility of Gokongwei’s taking advantage of his position as SMC director.
7. The SC grants the petition regarding Gokongwei’s petition to examine the book and
records of SMC
Pe?a vs. CA
FACTS:
PAMBUSCO original owners of the lots in question, mortgaged the same to DBP in
consideration of P935,000. This mortgage was foreclosed and said properties were awarded to
Rosita Peña as highest bidder in the foreclosure sale. The Board of PAMBUSCO, through three of its
members resolved to assign its to one of its members, Atty. Joaquin Briones, to execute and sign a
deed of assignment for and in behalf of PAMBUSCO in favor of any interested party. Thus, Briones
executed a deed of Assignment of PAMBUSCO’s redemption right over the subject lots in favor of
Marelino Enriquez. The latter then redeemed the said properties and a certificate of redemption
dated Aug. 15, 1975 was issued. Enriquez executed a deed of absolute sale of the subject properties
in favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue.
Peña wrote the sheriff notifying him that the redemption was not valid as it was made under a
void deed of assignment. She then requested the recall of the said redemption and a restraint on
any registration or transaction regarding the lots. Defendant Peña through counsel wrote the sheriff
asking for execution of a deed of final sale in her favor on the ground that the one year period of
redemption has long elapsed without any valid redemption having been exercised. Plaintiff Yap
wrote defendant Peña asking for payment for back rentals in the amount of P42,750.00 for the use
and occupancy of the land and house. Later, the spouses Yap were prompted to file the instant case
on the ground that being registered owners, they have the right to enforce their right to possession
against defendant who has been allegedly in unlawful possession thereof.
It was contended that plaintiffs could not have acquired ownership over the subject properties
under a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could
not have become the owner of the properties in question by redeeming the same under a void deed
of assignment. The defense was that since the deed of assignment executed by PAMBUSCO in favor
of Enriquez was void ab initio for being an ultra vires act of its board of directors and for being
without any valuable consideration, it could not have had any legal effect. TC found for petitioner.
CA reversed.
HELD:
In order that the SEC can take cognizance of a case, the controversy must pertain to any of
the following relationships:
a. between corp., partnership or assoc. and the public
b. between the corp. and its SH, members, officers
c. between corp. and the state in so far as its franchise, permit or license to operate is
concerned
d. among the stockholders, partners or associates themselves.
Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO.
Consequently, the issue of the validity of the series of transactions may be resolved only by
the regular courts.
The by-laws of a corporation are its own private laws which substantially have the same
effect as the laws of the corporation. They are in effect written into the charter. In this sense,
they become art of the fundamental law of the corporation which the corporation and its
directors and officers must comply with. Only three out of five directors of PAMBUSCO
convened on November 19, 1974 by virtue of a prior notice of a special meeting. There was
no quorum to validly transact business since, under Section 4 of the amended by-laws herein
above reproduced, at least 4 members must be present to constitute a quorum in a special
meeting of the BoD. The AoI or by-laws of the corp. may fix a greater number than the
majority than the majority of the number of board members to constitute the quorum
necessary for the valid transaction f business. Being a dormant corp. for several years, it was
highly irregular, if not anomalous, for a group of three individuals representing themselves to
be the directors of respondent PAMBUSCO to pass a resolution disposing of the only
remaining asset of the corporation in favor of a former corporate officer. The latest list of SH
of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors
were among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right
of PAMBUSCO by virtue of the questions ed resolution was not approved by the required
number of SHs under the law, the said resolution, as well as the subsequent assignment
executed assigning to respondent Enriquez the said right of redemption should be struck
down as null and void.
As the “rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it,” by-
laws are indispensable to corporations. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and management of
corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
FACTS:
Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate
to petitioner China Banking. Petitioner wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books. Later, Calapatia obtained a loan of P20,000 from
petitioner, payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner. Due to Calapatia’s failure to pay his obligation, petitioner
filed a petition for extra-judicial foreclosure. Petitioner informed VGCCI of the above-
mentioned foreclosure proceedings and requested that the pledged stock be transferred to its
name. However, VGCCI wrote petitioner expressing its inability to accede to petitioner’s
request due to Calapatia’s unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as
the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati
for the nullification. The RTC dismissed the case for lack of jurisdiction over the subject matter on
the theory that it involves an intra-corporate dispute.
Petitioner filed a complaint with the SEC. The Commission en banc believed that appellant-
petitioner had a prior right over the pledged share and because of pledgor’s failure to pay the
principal debt upon maturity, appellant-petitioner could proceed with the foreclosure sale of the
pledged share. The auction sale conducted by appellee-respondent Club was declared null and void.
The CA rendered its decision nullifying and setting aside the orders of the SEC and its hearing
officers on the ground of lack of jurisdiction over the subject. The CA declared that the controversy
between CBC and VGCCI is not intra-corporate.
HELD:
VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its by-
laws which provides that after a member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the club. It is pursuant to this provision that VGCCI also
sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument
by asserting that its corporate by-laws could prevail. The SEC therefore took proper cognizance of
the instant case.
Moreover, VGCCI completely disregarded petitioner’s right as pledgee. It even failed to give
petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In
defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues that
the G.R. is that third persons are not bound by the by-laws of a corporation since they are not privy
to thereto. The exception to this is when 3rd persons have actual or constructive knowledge of the
same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when
petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share
foreclosed. Thus, the petitioner purchased the said share subject to the right of the PR to sell the
said shares for reasons of delinquency and the right of PR to have a first lien on said shares as these
rights are provided for in the by-laws very clearly.
In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said 3rd party and the shareholder was entered into,
in this case, at the time the pledge agreement was executed. Petitioner’s belated notice of said by-
laws at the time of the foreclosure will not suffice. By-laws signify the rules and regulations of
private laws enacted by the corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers with relation thereto and among
themselves in their relation to it. The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among themselves.
Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is
not the case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot
bind China Bank. However, one may argue in the same way in Land Titles, where banks are required
to go beyond the face of the title as they are institutions endowed with public interest; in this case
China Bank should have inquired into such by-laws before entering into the transactions mentioned.
“Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated the
corporation’s by-laws. Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same.” aPMI Colleges v. NLRC, 277
SCRA 462 (1997).
FACTS:
PMI is an educational institution offering courses on basic seaman training and other marine-
related courses hired private respondent as contractual instructor with an agreement that the latter
shall be paid at an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR and
other instructors were compensated for services rendered during the first three periods of the above-
mentioned contract. However, for reasons unknown to PR, he stopped receiving payment for the
succeeding rendition of services.
Repeated demands having likewise failed, PR was soon constrained to file a complaint
seeking payment for salaries earned. PMI contended that classes in the courses offered which
complainant claimed to have remained unpaid were not held in the school premises of PMI. Only PR
knew whether classes were indeed conducted. Later in the proceedings, petitioner manifested that
Mr. Tomas Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board
clarifying the case of PR and stating therein that under PMI’s by-laws, only the Chairman is
authorized to sign any employment contract. A decision was rendered by the Labor Arbiter finding
for PR. The NLRC affirmed.
HELD:
The contract would be invalid just because the signatory was not the chairman which
allegedly violated PMI by-laws but since by-laws operate merely as internal rules among the stock
holders, they cannot affect or prejudice 3rd persons who deal with the corporation in good faith unless
they have knowledge of the same. No proof appears on record that PR ever knew anything about the
provisions of said by-laws. Petitioner itself merely asserts the same without even bothering to attach
a copy or excerpt thereof to show that there is such a provision. That this allegation has never been
denied by PR does not necessarily signify admission.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any
bank, banking institution, building and loan association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)
There can be no automatic dissolution simply because the incorporators failed to file the
required by-laws under Sec. 46 of Corporation Code. There is no outright “demise” of
corporate existence. Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the same.” Loyola Grand Villas
Homeowners v. CA, 276 SCRA 681 (1997).
3. Contents (Sec. 47)
4. The form for proxies of stockholders and members and the manner
of voting them;
6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;
“Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in
the exercise of management prerogative or business judgment. However this right, extensive as it
may be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it
would enable an employer to remove any employee from his employment by the simple expediency
of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence
of a specified event.” Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469
(1998).
First Type Ultra Vires: An ultra vires act is one committed outside the object for
which a corporation is crated as defined by the law of its organization and therefore
beyond the power conferred upon it by law. The term “ultra vires“ is “distinguished from
an illegal act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.” aAtrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS
Facts: Hi-Cement through the corporate signatories (De Leon – treasurer, Delas Alas – chairman)
issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four
checks to Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all
four checks because the payment was stopped. Atrium filed with the RTC an action for collection of
the proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry
and Hi-Cement pay Atrium jointly and severally the value of the four checks plus interest. The CA on
the other hand absolved Hi-Cement from liability.
Issue: WON De Leon was not authorized to issue the checks
WON the issuance of the checks were ULTRA VIRES ACTS
Held: De Leon was authorized and such issuance is not an ultra vires act.
Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a
rule, the act of issuing checks is within the ambit of a valid corporate act. And securing a loan to
finance the activities of the corporation is not an ultra vires act. While an ultra vires act is one
committed outside the object or which a corporation is created as defined by law of its organization
and therefore beyond the power conferred upon it by law, the act pertained to in the case is not an
illegal act.
De Leon on the other hand was negligent in confirming that such checks were issued to ET
Henry as payment for their company’s debt with the former. That is why she was held to be
personally liable to Atrium.
Second Type Ultra Vires: When the President enters into speculative contracts,
without prior board approval, and without subsequent submission of those contracts to the
Board for approval or ratification, nor were the transactions included in the reports of the
corporation, such contracts do not bind the corporation. It must be pointed out that the
Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
(b) Ratification of Ultra Vires Acts: (aPirovano v. De la Rama Steamship Co., Inc., 96 Phil.
335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining
Co., 3 SCRA 361 [1963]; aCrisologo Jose v. Court of Appeals, 177 SCRA 594 [1989];
aHarden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).
Facts: Atty. Benares was the President of Movers Enterprise while Ricardo Santos Jr. was the Vice-
President. On April 1980 Atty. Benares in accommodation of his clients, the spouses Jaime and Clarita
Ong issued a check drawn against Traders Royal Bank in the amount of 45,000 payable to Crisologo-
Jose. Since the check was under the account of the corporation, the president and the treasurer
should sign the check. But since the treasurer was not available, Benares asked Santos to be the
alternate signatory. The check was issued to Crisologo-Jose in consideration of the waiver of
Crisologo over a certain property which the GAIA agreed to sell to the clients of Benares (spouses
Ong) with the understanding that upon approval of the compromise agreement with the spouses
Ong, the check will be encashed accordingly. However, the compromise agreement was not
approved within the expected period. So Benares replaced the check with another one with the same
amount also payable to Jose. When petitioner deposited the check, it was dishonored for insufficiency
of fund. Petitioner filed criminal complaint for violation of BP 22. Meanwhile, during the preliminary
investigation, Santos tendered cashiers check in payment of the dishonored check but petitioner
refused to accept it. Santos then encashed the check and deposited the money to the Clerk of Court.
Incidentally, Benares purchased the cashier’s check and gave it to the plaintiff to be applied as
payment of the dishonored check. RTC held that it was not persuaded to believe that consignation is
applicable here. So the complaint was dismissed. CA reversed and set aside such decision. Petitioner
contends that the accommodation party in this case is Mover Enterprises and not private respondent
who merely signed the check in a representative capacity.
Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable on
the accommodation instrument.
Held: No. Corporation is not liable. The provisions of the NIL which holds an accommodation party
liable on the instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, it does not apply to corporations which are
accommodation parties This is because issue or endorsement of negotiable paper by a corporation
without consideration and for the accommodation is an ultra vires act.
By way of a corporation, an officer or agent may do so ONLY IF specifically authorized to do so. But
where the facts show that the accommodation involved was for their personal account, undertaking
or purpose and the creditor was aware thereof.
NOTE: That while the public is not required to know that one is authorized or not to bind the
corporation for a certain obligation and that while the contract may be enforced even without
authority because the public dealing in good faith has the right to expect that the obligation entered
into shall be complied with, such doctrine does not apply when the dealing public in the first place is
in bad faith, as in this case; that is why the corporation was not bound to such accommodation
agreement.
Facts: Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for the
purpose of engaging in the mining of gold in the Philippines and their respective properties lie
only a few miles apart. The original stockholders of Balatoc were unable to supply the means
for profitable operation thus, its board ordered a suspension of all work. A general meeting of
the stockholders approved to establish a committee to find investors. The committee in turn
approached Bean, President and General manager of Benguet to secure the necessary capital
for the development of the Balatoc properties. The management of both companies executed
a contract where Benguet was to proceed with the development and construction of a milling
plant for the mine and to erect a power plact. In return, Benguet would receive from Balatoc
shares of par value of P600,000 in payment of the first 600,000 to be advanced to it.
By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc stockholders have
been receiving large dividends. Harden and two other stockholders filed a suit against Benguet,
Balatoc and the officers to annul the certificate covering P600,000 shares of Balatoc issued to
Benguet and to recover a large sum of money alleged to have been unlawfully collected by Benguet
and to annul the contract. The trial court dismissed the complaint, hence this petition.
Issue: WON it is lawful for Benguet to hold any interest in another mining corporation?
Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining from being
interested in any other corporation engaged in mining. This was amended by Act No. 3518 which
now provided that a corporation is prohibited to hold more than 15% of the OCS of another
corporation. The Corp. Law did not contain any clause directly penalizing the acts of a corporation or
member in an interest contrary to Sec. 13 of Act 1459. The penalties imposed by the Corp. Law are
of such nature that they can be enforced only by a criminal prosecution or by an action of quo
warranto which can only be maintained by the Atty. General. Benguet Co. has committed no civil
wrong against the plaintiff stockholders and if a public wrong is committed, the directors of Balatoc
and plaintiff Harden himself were the active inducers of the commission of that wrong. The contracts
have been performed on both sides and there is no possibility of undoing what has been done.
Plaintiffs then invoke Art. 1305 which declares that an innocent party to an illegal contract may
recover anything that he may have given while he is not bound to fulfill any promise he may have
made. Supposing this is applicable, the general remedy provided by Art. 1305 cannot be invoked
where a special remedy is supplied in special law.
In as much as the corporation law prohibits the acquisition by one mining corporation of any interest
in another and that these were enacted in the exercise of general police power of the government, it
results that where a corporation does so, the stockholders cannot maintain an action to annul the
contract by which such interest was acquired. The remedy must be sought in a criminal proceeding
or quo warranto action instituted by the government. Until thus assailed in a direct proceeding, the
contract by which the interest was acquired will be treated as valid as between the parties.
NOTE: We are studying Harden because of the pronouncement that even where corporate contracts
are illegal per se, when only public or government policy is at stake and no private wrong is
committed, the courts will leave the parties as they are in accordance with their original contractual
expectations. (The only contracts that the courts will touch are contracts which are void for being
illegal per se.)
Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its
chairman and president of the corporation to supply 20,000 bags of white cement per month for five
years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract
unless new conditions are accepted providing for a new price formula. The dealing director sued for
specific performance on the contract.
Held: The Court held that under both the Corporation Law then and the present Corporation Code,
the doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those
provided by law. Although it cannot completely abdicate its powers and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its president or any of its
officers. In the absence of such express delegation, a contract entered into by its President on behalf
of the corporation may still bind the corporation if the Board should ratify the same expressly or
impliedly.
Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or
adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom.
Even in the absence of express or implied authority by ratification, the President as a general rule
may bind the corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances. These rules are basic but general and flexible. Applies where
the President is dealing with third persons but different where a director is dealing with his own
corporation.
The court herein held that the director holds a position of trust and as such he owes a duty of loyalty
to his corporation and his contracts with the corporation must always be at reasonable terms,
otherwise the contract is void or voidable at the instance of the corporation. The court here found the
terms of the Dealership Agreement were unreasonable for the corporation and that the unfairness in
the contract was a basis which renders a contract entered into the President without authority from
the Board, void or voidable, although it may have been in the ordinary course of business.
NOTE: The President as the highest office of the corporation, by practice and jurisprudence embodies
apparent authority. On the other hand, the general manager on its own may or may not embody
such authority depending on the circumstances that go with it. The corporate secretary and lawyer
enjoy no such presumption because their positions do entail much commercial significance.
FRANCISCO v. GSIS
Facts: Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows (Vic-Mari Compound)
for a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest per
annum compounded monthly. In 1959 GSIS extrajudicially foreclosed the mortgage on the ground of
default of payment in the amount of P32,000 ( total payment amounted to P130,000) where GSIS
was also the buyer. Atty. Francisco, the father of Trinidad proposed to the General Manager of GSIS
to pay P30,000 of the P52,000 and asked that the foreclosure be set aside and for GSIS to take over
the administration of the mortgaged property and to collect installments due on the unpaid purchase
price for more than 31 house and lot payees to be applied to the arrearage and the loan. The GSIS
approved this and Atty. Francisco was notifed by telegram. GSIS accepted a check for P30,000 and
remittances totaling to P44,121.29 for which the corresponding OR’s were issued. GSIS then sent 3
letters signed by the GM asking a proposal for the payment of the debt since the 1yr. Period for
redemption had expired.
Atty. Francisco protested and brought to the attention of GSIS the concluded contract and its
acceptance by telegram. GSIS replied asking payment for various expenses and that the telegram
should be disregarded for its failure toe express the content of a board resolution due to error of its
minor employees in the sending of the telegram. The approval was apparently conditioned on Atty.
Francisco’s agreement to pay all expenses incurred in foreclosure. GSIS held that the remittances
were insufficient so that GSIS consolidated title to the compound in its name. Hence, this suit for
specific performance and damages. The lower court ruled in favor of Francisco.
Held: The SC finds no reason for altering the conclusion that the offer of compromise made by
Francisco had been validly accepted and was binding on the defendant GSIS. The terms of the offer
were clear and the acceptance of the proposal was signed by the GM Andal. The telegram hinted on
no anomaly and was within Andal’s apparent authority.
Corporation transactions would speedily come to a standstill where every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular
they should appear on their face.
If a corporation knowingly permits one of its officers or any other agent within the scope of an
apparent and thus holds him out to the public as possessing power to do those acts, the corporation
will as against any one who has in good faith dealt with the corporation through such agent be
estopped from denying such authority. Hence, even if it were the Board Secretary who sent the
telegram, the corporation could not evade the binding effect produced by the telegram. The
corporation had sufficient notice of the allegedly unauthorized telegram when it pocketed the
P30,000 but kept silent about it.
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his
employment and in relation to matters within the scope of his authority is notice to the corporation,
whether he communicates such knowledge or not.
The silence taken together with the unconditional acceptance of 3 other substantial remittances of
the original agreement constitute a binding ratification of the original agreement. Ratification may be
effected expressly or tacitly. There is tacit ratification if with knowledge of the reason which renders
it voidable and such reason having ceased, to a person who has a right to invoke it should execute
an act which necessarily implies an intention to waive his right.
As between two innocent parties, the one who made it possible for the wrong to be done should be
Revised Bagtas Reviewer by Ve and Ocfe 2A 99
the one t bear the resulting loss.
YAO KA SIN TRADING v. COURT OF APPEALS
Facts:
Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading represented by its
manager Yao. It quoted the following P24.30/94 lbs. Bag net FOB CEBU; P24.30/94 lbs. Bag FOB
Asturias; 45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issued
a check for P243,000, PWCC Board of Directors disapproved the same. On July 5, 1973 PWCC
informed YKS of the disapproval. However with respect to the 10,000 bags of cement. YKS accepted
without protest. On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or taking
delivery of not less than 10,000 bags of cement. On September 10, 1973 YKS insisted on the delivery
of the 45,000 bags of cement. On December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an
action for specific performance with the CFI. It was discovered that PWCC by-laws give the Chairman
and the President the power to execute and sign for and in behalf of the corporation all contracts or
agreements which the corporation enters into subject to the qualification that all his actuations shall
be given to the Board of Directors of the corporation. PWCC contends that Mr. Maglana was not
authorized to make any offer and sign a contract in behalf of the corporation and only the Board has
the power to do so. The lower court ruled in favor of YKS but the CA reversed. Hence, this peition.
Issue: WON the contract originally entered into by PWCC through President Maglana, binds the
corporation despite the rejection of the Board of Directors.
Held:
The by-laws do not confer upon the President, the authority to enter into contracts independently of
the Board of Directors. The fact that contracts are signed through the President was only meant to
expedite its execution but still presupposes a prior act of the corporation, through the Board of
Directors. No greater authority can be implied from such express, but limited, delegated authority. It
may be presumed that the President has authority to make contracts if he is given general control
and supervision over affairs of the corporation. But here, there is a general manager charged with
direct management of the business which Mr. Maglana was not involved in.
The doctrine on apparent authority provide that if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent 3rd persons dealing in good faith
with such officers or agents. This apparent authority may result from: (1) the general manager by
which the corporation holds out an officer or agents as having power to act (2) the acquiescence in
his acts of a particular nature, with actual or constructive knowledge thereof, whether with or without
the scope of power. However, YKS failed to prove that PWCC indeed clothed Mr. Maglana with
apparent power. PWCC also showed that no contract can be signed by the President without the
Board of Directors’ approval (and clearance from the NIDC representative and legal counsel). The
first contract is at most unenforceable.
The first contract was disapproved and rejected by the Board of Directors which at the same time
considered the P243,000 received by Maglana as payment for 10,000 bags of cement, treated as an
entirely different contract. YKS had in fact agreed to this by accepting the delivery receipt without
protest.
NOTE: Under the doctrine of apparent authority and under the sub-classification of apparent
authority by circumstance, the first contract is unenforceable because PWCC effectively proved
through clear and convincing evidence that their President cannot bind the corporation without
authorization from the Board of Directors, so not the burden shifted upon YKS for him to provide for
such circumstances which have led him to believe that the President has such apparent authority to
bind the corporation; however such was not effectively discharged by YKS, that is why the first
contract is unenforceable. Also, it is most important to note, that the contract for 10,000 bags of
cement is enforceable because such is a contract of sale entered into by the President in the regular
course of business of the corporation. However, the 45,000 bags contract is unenforceable because it
is a contract of dealership which is in the extraordinary course of the business of the corporation.,
hence, not within the purview of the apparent authority of the President.
NOTE: By-laws can bind third parties only when they have knowledge of such, otherwise, such may
not bind third parties. In the same manner, knowledge of a third person of such by-laws may bind the
corporation.
If a corporation knowingly permits one of its officers to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to do those
acts, the corporation will, as against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent’s authority. Soler v. Court of Appeals,
358 SCRA 57 (2001).
The authority of a corporate officer dealing with third persons may be actual or
apparent . . . the principal is liable for the obligations contracted by the agent. The
agent’ apparent representation yields to the principal's true representation and the
contract is considered as entered into between the principal and the third person. First
Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable.
Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).
Apparent authority may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act, or, in other words
the apparent authority to act in general with which is clothes them; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment
Industries v. Court of Appeals, 403 SCRA 452 (2003).
When a banking corporation, when an officers arranges a credit line agreement and
forwards the same to the legal department at its head officer, and the bank did no
disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals,
G.R. No. 159352, 14 April 2004.
A corporation cannot disown its President’s act of applying to the bank for credit
accommodation, simply on the ground that it never authorized the President by the lack
of any formal board resolution. The following placed the corporation and its Board of
Directors in estoppel in pais: Firstly, the by-laws provides for the powers of the
President, which includes, executing contracts and agreements, borrowing money,
signing, indorsing and delivering checks; secondly, there were already previous
transaction of discounting the checks involving the same personalities wherein any
enabling resolution from the Board was dispensed with and yet the bank was able to
collect from the corporation. aNyco Sales Corp. v. BA Finance Corp., 200 SCRA 637
(1991).
NYCO SALES CORPORATION v BA FINANCE CORPORATION
Facts:
Rufino Yao was the President and General Manager of Nyco Sales Corporation which was engaged in
the business of selling construction materials. Nyco Sales through Yao was approached by Santiago
and Renato Fernandez on behalf of Sanshell Corporation requesting for credit accommodation since
Nyco had discounting privileges with BA Finance. The Fernandezes wen to Yao for the purpose of
discounting their post-dated BPI check worth P60,000 made payable to Nyco. The discounting
process agreed upon was that Nyco through Yao endorsed the check to BA Finance then BA Finance
would issue a check payable to Nyco for which Nyco would then endorse it to Sanshell. With the
exchange of checks, the parties agreed to a Deed of Assignment executed by Nyco in favor of BA
Finance the subject of which was the check. The Deed contained a Continuing Suretyship Agreement
at the back whereby the Fernandezes unconditionally guaranteed to BA Finance full and prompt
payment and discharge of any and all indebtedness of Nyco. BPI check was dishonored which
therefore led BA Finance to report it to the Fernadezes. They then issued another check, this time
from Security Bank which was also dishonored. Despite repeated demands, Nyco and Fernandezes
failed to settle their obligation which prompted BA Finance to file an action in court. TC ruled against
Nyco and the Fernandezes to pay jointly and severally. Nyco’s cross-claim against the Fernadezes
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was denied they were not declared in default in connection with the cross-claim and that no 1
evidence was presented (it was also mentioned that Nyco should have impleaded Sanshell by way of
a third party complaint and not a cross-claim). CA affirmed the TC with modifications.
Issue: WON Nyco can be held liable for its President unauthorized acts.
Held:
Nyco as an assignor-vendor warranted that both the credit itself (its existence and legality) and the
person of the debtor (his solvency) according to Article 1628of the NCC. Therefore, any breach of the
warranties, the assignor should be held answerable. It is of no question that the assignor is liable for
the invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA
Finance with Sanshell as debtor. BA Finance is actually enforcing the assignment. The check is
merely an incidental matter and so Nyco is not being held liable for both the BPI and the Security
Bank check but rather the deed of assignment. The issue on no notice of dishonor was given is belied
not only by the formal demand letter but also the findings of the TC that Yao and the Fernandezes
had frequent contacts before, during and after dishonor. There is no novation because there was no
express agreement that BA Finance;s acceptance with Security Bank check will discharge Nyco from
liability. Neither is there incompatibility because both checks were given precisely to terminate a
single obligation.
Nyco disowned the President’s acts claiming that it had not authorized Yao to apply to BA Finance for
credit accommodation saying that it did not issue a board resolution giving such authority. However,
the by-laws clearly provide for the power of its President, which include executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the
corporation. Also, there was already a prior transaction of discounting checks involving the same
parties wherein any enabling resolution from Nyco was dispensed with and yet BA was still able to
collect from Nyco and Sanshell was able to discharge of its liabilities. Therefore, that places Nyco
under estoppel in pais which arises when one, by his acts, representations or admissions, or by his
silence when he ought to speak out, intentionally or through culpable negligence, induce another to
believe certain facts to exist and such other rightfully relies on such belief, so that he will be
prejudiced if the former is permitted to deny the existence of such fact..
Per its Secretary’s Certificate, the foundation had given its President ostensible and
apparent authority to inter alia deal with the respondent Bank, and therefore the
foundation is estopped from questioning the President’s authority to obtain the subject
loans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals, G.R.
No. 126006, 29 January 2004.
3. Express Powers
a) Enumerated Powers (Secs. 36)
Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has
the power and capacity:
1.) To sue and be sued in its corporate name;
2.) Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3.) To adopt and use a corporate seal;
4.) To amend its articles of incorporations in accordance with the provisions of this
Code;
5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend or
repeal the same in accordance with this Code;
6.) In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7.) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transactions of the lawful business of the corporation
may reasonably and necessary require, subject to the limitations prescribed by law
and the Constitution;
8.) To enter into merger or consolidation with other corporations as provided in this
Code;
9.) To make reasonable donations, including those for the public welfare or hospital or
charitable, cultural, scientific, civic or similar purposes: Provided, That no
corporation, domestic or foreign shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10.)To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11.)To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1])
Sec. 37 Power to extend or shorten corporate term – A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by majority vote of
the board of director or trustees and ratified at a meeting by the stockholders representing at
least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-
stock corporation. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with
postage prepaid or served personally. Provided, that in case of extension of corporate term,
any dissenting stockholder may exercise his appraisal right under the conditions provided in
this code.
Sec. 81[1] Instances of appraisal right – Any stockholder of a corporation shall have the right
to dissent and demand payment of all the fair value of his shares in the following instances: In
case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or rights of any stockholder class of shares, or of authorizing
preferences in any respect superior to those outstanding shares of any class, or of extending
or shortening the term of the corporate existence.
Such power only concerns the Juridical Entity Level – such extending or shortening of the term
of the corporation tampers with the powers given the corporation by the State.
Q: Why should such extension or shortening require the ratificatory vote of stockholders when
this does not concern the business enterprise level but the juridical entity level?
A: Such in effect is an amendment of the articles of incorporation, and any amendment to
such would always require the consent of the State and of the corporation’s stockholders.
They also have a say in this because the extension or shortening of the corporate term
affects these stockholder’s investments.
Q: Why do stockholders not have appraisal right with respect to the shortening of the
corporate term whereas they do in the extension of the corporate term?
A: Actually, there is a seeming conflict between Sec. 37 which makes no mention of
stockholder’s appraisal right with respect to the shortening of the corporate term while Sec.
81(1) refers to such. CLV tells us that stockholders should be afforded an appraisal right even
in the case of the shortening of the corporate term because it is not enough to talk of free
transferability of interests when you dissent to the decrease because such concerns ones
expectations with respect to the business enterprise.
c) Increase or Decrease Capital Stock (Sec. 38)
Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness – No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
diminution of the capital stock or of the incurring, creating, or increasing of any bonded 3
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and
countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed the names, nationalities, residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each., and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating, or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing any bonded indebtedness
authorized, as the certificate of filing may declare Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to 25% of the subscription: Provided
further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness or increase the same with
the approval by a majority vote of the board of trustees and of at least 2/3 of the members in
a meeting duly called for that purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
The policy behind the non-granting of appraisal right with respect to the increase and
decrease of the capital of the corporation is the fact that every stockholder should come into
the corporation setting aware that the expediencies of corporate life may require that
eventually the corporation may need to increase capitalization to fund its operations or
expansions, and needs to look primarily into its equity investors to fund the same.
In the increase, a stockholder may always sell his stock if he dissents to the increase of the
capital stock. Moreover, such appraisal right may defeat the purpose of the corporation in
increasing the funds; by increasing the funds for survival, if you grant the appraisal right in
effect you pay out capital when you seek to keep more money inside.
In the decrease of capital stock, why appraise when in effect you will be returning capital to
your stockholders.
Despite the board resolution approving the increase in capital stock and the receipt of
payment on the future issues of the shares from the increased capital stock, such funds do
not constitute part of the capital stock of the corporation until approval of the increase by
SEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission, 260
SCRA368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union
members, amounts to nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital
through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora,
151 SCRA 355 (1987).
Why do you need the consent of the stockholders when you increase or decrease capital
stock? When you increase the capital stock, stockholders have to put in more money to
maintain their proportionate interest in the corporation, as such the increase dilutes the value
of the stock they have prior to such increase. Moreover, such increase affects their rights as
in their voting capacity, their sharing in the dividends, their participation in the management,
the extent of their participation in the dissolution of the corporation, etc. The consent of the
stockholders is needed because such change once again affects their contractual expectation
when they first entered into the corporation.
But in decreasing capital stock, why do you again need the consent of the stockholders
whereas in effect they will be receiving part of their investment? Such once again affects their
contractual expectation when they first entered into the corporation.
d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)
Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness – No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and
countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:
1. That the requirements of this section have been complied with;
2. The amount of the increase or diminution of the capital stock;
3. If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed the names, nationalities, residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each., and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;
4. Any bonded indebtedness to be incurred, created or increased;
5. The actual indebtedness of the corporation on the day of meeting;
6. The amount of stock represented at the meeting; and
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
7. The vote authorizing the increase or diminution of the capital stock, or the 5
incurring, creating, or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing any bonded indebtedness
authorized, as the certificate of filing may declare Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to 25% of the subscription: Provided
further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness or increase the same with
the approval by a majority vote of the board of trustees and of at least 2/3 of the members in
a meeting duly called for that purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
Bond – security representing denominated units of indebtedness issued by a corporation to
raise money or capital obliging the issuer to pay the maturity value at the end of a specified
period which should be not less than 360 days. That is why not all indebtedness of the
corporation require the ratification of the stockholders, only bonded indebtedness require the
ratification of the stockholders.
A bond in contrast to a promissory note represents a unit of a large indebtedness, whereas a
promissory note represents a single indebtedness and may stand on its own. Mostly all
properties of the corporation i.e. the business enterprise comprise of the security of such
bonded indebtedness.
The SEC also require that a company has a minimum net worth of P25 M at the time of the
filing of the application and must have been in operation for three years.
(e) Sell or Dispose of Assets (Sec. 40)
Sale by Board of Trustees of the only corporate property without compliance with Sec.
40 of Corporation Code requiring ratification of members representing at least two-thirds
of the membership, would make the sale null and void. Islamic Directorate v. Court of
Appeals, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).
Sec. 40 Sale or other disposition of assets – Subject to the provisions of existing law on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments for the payment
of money or other property or consideration as its board of directors or trustees deem
expedient, when authorized by the vote of stockholders representing at least 2/3 of the
outstanding capital stock, or in the case of non-stock corporation, by the vote of at least 2/3
of the members, in a stockholders’ or members’ meeting duly called for that purpose. Written
notice of the proposed action and of the time and place of the meeting shall be addressed to
each stockholder or members at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid paid, or
served personally: Provided, that any dissenting stockholder may exercise his appraisal right
under the conditions provided for in the Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was organized.
After such authorization or approval by the stockholders or members, the board of directors
or trustees, may nevertheless, in its discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of property and assets subject to the rights of third
parties under any contracting relating thereto without further action or approval by the
stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
NOTE: When the transaction is in the normal course of business, it only needs the majority of
the quorum of the Board of Director to approve such transaction. However, when such is in
the extraordinary course of the business as in the disposition of all or substantially all of the
assets of the corporation, such needs the vote of the absolute majority of the Board of
Directors plus the ratification of 2/3 vote of stockholders representing at least 2/3 of the
outstanding capital stock of the corporation in case it is a stock corporation, or in the case of
a non-stock corporation, 2/3 of the members.
This case is one of the exceptions to the rule where the stockholders have proprietary
interests in the business enterprise. This is also an exception to the rule that generally the
Board of Directors have the power to bind the, and transact for the corporation.
If transactions are entered into relating to this section without the ratification of the
stockholders, such transaction is void for it is illegal per se as it runs contrary to Sec. 40 of the
Corporation Code.
Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth of
investment, will such transaction need the ratification of the stockholders and the absolute
majority vote of the Board? Yes, since it concerns substantially all of the assets of the
corporation as such formula pertains to the capacity of the corporation to earn. The absence
of such ratification violates the social compact as between the stockholders and the
corporation. Such sale violates the contractual expectation of these stockholders, and as
such, their ratification must be availed of before it may be entered into. The same is also the
case, if San Miguel decides to share the P 4B and retain the Pale Pilsen formula.
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; aDe la Rama
v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969])
Sec. 42 Power to invest corporate funds in another corporation or business or for any other
business purpose – Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of the board of directors or trustees
and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or
at least by 2/3 of the members in the case of non-stock corporations, at a stockholders’ or
members’ meeting duly called for that purpose. Written notice of the proposed investment
and the time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided however,
That where the investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
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4. Implied Powers
When the articles expressly provide that the purpose of the corporation was to “engage in
the transportation of person by water,” such corporation cannot engage in the business of
land transportation, which is an entirely different line of business, and, for which reason, may
not acquire any certificate of public convenience to operate a taxicab service. Luneta Motor
Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to
undertake stevedoring services to unload coal into its pier since it is not reasonably necessary
for the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawbroker.
Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio
Pael v. Court of Appeals, 372 SCRA 587 (2001).
An officer who is authorized to purchase the stock of another corporation has implied
power to perform all other obligations arising therefrom such as payment of the shares of
stock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
5. Incidental Powers
The act of issuing checks is within the ambit of a valid corporate act, for it as for securing
a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corp. v. CA, 353 SCRA 23 (2001).
6. Other Powers
a) Sell Land and Other Properties
When the corporation’s primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the
corporation acting through its officers, much less when acting through the treasurer.
Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold through an
agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan
Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight
Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA
190 (2003).
b) Borrow Funds
The power to borrow money is one of those cases where even a special power of
attorney is required under Art. 1878 of Civil Code. There is invariably a need of an
enabling act of the corporation to be approved by its Board of Directors. The argument
that the obtaining of loan was in accordance with the ordinary course of business
usages and practices of the corporation is devoid of merit because the prevailing
practice in the corporation was to explicitly authorize an officer to contract loans in
behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).
a. Power to Sue
Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an
injured party, its power to sue is lodged with its Board of Directors. A minority stockholder
who is a member of the Board has no such power or authority to sue on the corporation’s
behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals,
352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002).
Where the corporation is real party-in-interest, neither administrator or a project
manager could sign the certificate against forum-shopping without being duly authorized
by resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230
[2001]), nor the General Manager who has no authority to institute a suit on behalf of the
corporation even when the purpose is to protect corporate assets. (Central Cooperative
Exchange Inc. v. Enciso, 162 SCRA 706 [1988]).
When the power to sue is delegated by the by-laws to a particular officer, such officer
may appoint counsel to represent the corporation in a pre-trial hearing without need of a
formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
For counsel to sign the certification for the corporation, he must specifically be
authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003);
Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003).
(d) Provide Gratuity Pay for Employees
Providing gratuity pay for employees is an express power of a corporation under the
Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising
from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247
SCRA 183, 192 (1995).
(e) Donate
(f) Enter Partnership or Joint Venture. aTuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC
Opinion, dated 29 February 1980.
TUASON & CO. v. BOLANOS
Facts:
JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. filed a complaint in
the CFI for recovery of possession of registered land situated in Tatalon, QC against Quirino Bolanos.
Defendant in his answer claims through prescription and that the registration of said land was
obtained through fraud. The CFI ruled in favor of the plaintiff and declared that defendant had no
right to the land. Hence, this appeal.
Issue: WON the case should have been dismissed on the ground that it was not brought by the real
party in interest?
Held:
No, the rules of court require that an action be brought in the name of but not necessarily by the real
party in interest. In fact,the practice really is for the attorney-at-law to bring the action and file the
complaint in plaintiff’s name which was done her. And while it is true that the complaint also states
that the plaintiff is represented herein by its managing partner G. Araneta Inc. another corporation,
there is nothing against one corporation being represented by another person, natural or juridical in
a suit in court.
Revised Bagtas Reviewer by Ve and Ocfe 2A 11
1
The contention that G. Araneta Inc. cannot act as managing partner on the theory that it is illegal for
two corporations to enetr into a partnership is without merit for the true rule is that though a
corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture
with another where the nature of the venture is inline with the business authorized by is charter.
There is nothing in the record to show that the venture which plaintiff is represented by G. Araneta is
not inline with the corporate business of either corporation.
The SEC rule provides in an Opinion, that the right of the corporation to engage as a limited
partner (not a general partner, meaning that its liability is limited to the amount of investment it
pours into the partnership). But such a power to engage in a partnership must be specifically
provided for in the corporation’s charter.
HOWEVER where:
(1) Stockholders representing the same interest
of both managing and the managed corporation
own or control more than 1/3 of the total OCS
entitled to vote of the managing corporation OR
(2) Where a majority of the members of the
Board of Directors of the managing corporation
also constitute a majority of the members of the
Board of Directors of the managed corporation.
Then it must be approved by the stockholders of
the managed corporation owning at least 2/3 of
the OCS