CORPORATE LAW

I. HISTORICAL BACKGROUND
1. Philippine Corporate Law: 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).

2. The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became
effective on 1 April 1906. It had various piece-meal amendments during its 74-
year history. It rapidly became antiquated and not adapted to the changing times.

3. The Corporation Code

The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It
adopted various corporate doctrines enunciated by the Supreme Court under the
old Corporation Law. It clarified the obligations of corporate directors and officers,
expressed in statutory language established principles and doctrines, and
provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United
States. Therefore, although we have a Corporation Code that provides for
statutory principles, Corporate Law is essentially, and continues to be, the product
of commercial developments. Much of this development can be expected to
happen in the world of commerce, and some expressed jurisprudential rules that
try to apply and adopt corporate principles into the changing concepts and
mechanism of the commercial world.

II. BASIC CONCEPTS OF CORPORATIONS

1. Definition
 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.

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  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.
- “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 is it important to know that the corporation is a juridical person?

A. To be able to know that the corporation is able to contract with others.

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.

TRI-LEVEL EXISTENCE OF THE CORPORATION

1. AGGREGATION OF ASSETS AND RESOURCES – physical assets of the
corporation; the tangibles (ex. In a grocery, the goods being sold)
2. BUSINESS ENTERPRISE OR ECONOMIC UNIT – the commercial venture; this
includes not only the tangible assets but also the intangibles like goodwill
created by the business
3. JURIDICAL ENTITY – juridical existence as a person; the primary franchise
granted by the state

Q. Why is the distinction between the three levels important?

A. Each is important in its own way as there are consequences for each. The
distinctions become important and come into play when it comes to dealing with
corporation law What are you selling or buying (and their worth) will depend upon
the particular level you choose.
EXAMPLE: If you merely want to purchase the assets and not the business, a simple
deed of sale would suffice and you will not be liable for contingent liabilities. It will
be different if you buy the business as an economic concept. SEC Regulations or
Bulk sales Law may be applied.

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RELATIONSHIPS INVOLVED IN A CORPORATE SETTING
1. JURIDICAL ENTITY LEVEL, which views the State-corporation relationship -
the state cannot destroy a corporation without observing due process of law
2. CONTRACTUAL RELATIONSHIP LEVEL: INTRA-CORPORATE LEVEL,
which considers that the corporate setting is at once a contractual relationship
on four (4) levels:
1. 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
2. Between the corporation and its shareholders or members
3. Between and among the shareholders in a common venture
4. EXTRA-CORPORATE LEVEL, which views the relationship between the
corporation and third-parties or “outsiders”, essentially governed by
Contract Law and Labor Law.
- most important level, highest form of law in this level is contract law.

THEORIES ON THE FORMATION OF CORPORATION:

- the SC has looked upon the corp. not merely as an artificial being but more as
an aggrupation of persons doing business or an underlying economic unit.
- the corp. is emerging as an enterprise bounded by economics rather than an
artificial personality bounded by forms of words in a charter, minute books &
books of accounts.
- the proposition that a corp. has an existence separate and distinct from its
membership has its limitations. (separate existence is for a particular purpose.)
there can be no corp. existence w/o persons to compose it & there can be no
association w/o associates.

(A) THEORY OF CONCESSION

- corporation – creature of the state
- limited – no other privilege may be exercised beyond grant
 To organize a corporation that could claim a juridical personality of its own and
transact business as such, is not a matter of absolute right but a privilege which
may be enjoyed only under such terms as the State may deem necessary to
impose.
 “It is a basic postulate that before a corporation may acquire juridical
personality, the State must give its consent either in the form of a special law
or a general enabling act,” and the procedure and conditions provided under
the law for the acquisition of such juridical personality must be complied with.
Although the statutory grant to an association of the powers to purchase, sell,
lease and encumber property can only be construed the grant of a juridical
personality to such an association . . . nevertheless, the failure to comply with
the statutory procedure and conditions does not warrant a finding that such
association acquired a separate juridical personality, even when it adopts sets
of constitution and by-laws.
 Since all corporations, big or small, must abide by the provisions of the
Corporation Code, then even a simple family corporation cannot claim an
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 exemption nor can it have rules and practices other than those established by
law.

TAYAG vs BENGUET CONSOLIDATED INC.

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.
- 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

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 judicial control in those instances, where a duty under the law as ascertained
in an appropriate legal proceeding is cast upon it.

B) THEORY OF ENTERPRISE ENTITY

- 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.
 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.

CORPORATE ATTRIBUTES
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”)

ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM:

Basic Advantageous Characteristics of Corporate Organization:

1. STRONG LEGAL PERSONALITY
 “A corporation is an entity separate and distinct from its stockholders. While not
in fact and in reality a person, the law treats the corporation 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.”
 The transfer of the corporate assets to the stockholder is not in the nature of a
partition but is a conveyance from one party to another. a Stockholders of F.

2. CENTRALIZED MANAGEMENT
 As can be gleaned from Sec. 23 of Corporation Code “It is the board of directors
or trustees which exercises almost all the corporate powers in a corporation.”

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  The exercise of the corporate powers of the corporation rest in the Board of
Directors save in those instances where the Corporation Code requires
stockholders’ approval for certain specific acts.

3. LIMITED LIABILITY TO INVESTORS AND OFFICERS

 One of the advantages of the corporation is the limitation of an investor’s
liability to the amount of investment, which flows from the legal theory that a
corporate entity is separate and distinct from its stockholders.
 It is hornbook law that corporate personality is a shield against personal liability
of its officers—a corporate officer and his spouse cannot be made personally
liable under a trust receipt where he entered into and signed the contract clearly
in his official capacity.
 Obligations incurred by the corporation acting through its directors, officers and
employees, are its sole liabilities.

4. FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS:

Authority granted to corporations to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his
shares, but merely authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer.

DISADVANTAGES:
1. Abuse of corporate management
2. Abuse of limited liability feature
3. High cost of maintenance
4. Double taxation

ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM:

Basic Advantageous Characteristics of Disadvantages
Corporate Organization
(i) Strong Legal Personality (i) Abuse of corporate
- entity attributable powers; management
- continuity of existence; - there is severance of
- having the right of succession, the death of control and ownership.
an individual stockholder does not affect Control will be vested with
corporate existence the BoD, thus investors
- not a natural occurrence, exists mainly have no say over the use
because the law provides for it. This is what of their investment and
distinguishes the separate juridical little voice in the
personality of a corporation from a conduct of the business
partnership. The legal personality of a corp is
strong because the law provides for the right (ii) Abuse of limited liability
of succession, surviving even w/o those who feature: this feature had
incorporated it while in a partnership the been abused and may hurt
separate juridical personality is innocent creditors.
extinguished upon the death of a partner
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 - no delectus personarum (iii) Cost of maintenance: the
formation and incorporation of
(ii) Limited Liability of Investors (provided for by a corp. entails a lot of
jurisprudence only) difficulties and costs,
- the liability of an investor is limited their particularly the requirements
investments and investors cannot be held made by the law so as to
accountable for more than what they qualify for incorporation.
invested.
- CLV: However there are a lot of ways to (iv) Double Taxation
circumvent the law and make the - Dividends received by
shareholders liable for more than his actual individuals from domestic
investment (ex. A creditor requiring the corporations are subject to
chairman or president of the company as a final 10% tax for income
joint debtor of the loan) earned on or after 1
- A trade-off to the abdication made by the January 1998
investor of his right to manage the property - Inter-corporate dividends
he had invested in the company. Under between domestic
property law, a person exercises full corporations, however,
ownership over his property but when he are not subject to any
invests it in a corporation, the owner income tax
abdicated the six “jus” of ownership - In addition, there is re-
imposition of the 10%
(iii) Free Transferability of shares “improperly accumulated
- A legal relationship is created which is more earnings tax” for holding
stable for there are laws which govern, and companies
the corp. and the stockholders are bound by - The corporations is taxed
the law. on its income and its
stockholders are taxed on
(iv) Centralized Management declared cash/property
- One of the advantages of a corp. is the dividends
limitation of an investor’s liability, this flows
from the legal theory that a corp. entity is
separate and distinct from its stockholders

Q. Is a corp. in our jurisdiction given the feature of limited liability?

A. No. The feature of limited liability is given to the stockholder and not to the
corporation.

Q. Is limited liability a normal run of things?

A. No. It is only there because in this case, it comes with the separate juridical
personality.

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.

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COMPARED WITH OTHER BUSINESS MEDIA

1. Sole Proprietorships
Sole Proprietorship Corporation
Free from many requirements and Heavily regulated; a lot of requirements
regulations in its operation imposed for registration and
incorporation
Owner has full control of his business Control of business is done by the BoD
Owner stands to lose more than what Investors have limited liability
he puts into the venture

2. Partnerships and Other Associations

- 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
Investors limited liability Contractual limited liability ( when a
limited partnership is created)
Free transfer of shares Transfer with consent of partner
Centralized management Every partner is agent

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. What are the 2 types of partnerships?

A. Regular and Joint venture

Q. Can a corporation be a partner in a regular partnership?

A. No. Because a partner must be a natural person. It is against public policy for
corporation to be a partner in a regular partnership.

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 P100M, it would be foolish to put all my eggs in one basket (if the
basket falls, all eggs break). So, I merely put P10M in one corporation and then
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 borrow the P90M while the rest of my money I pt somewhere else. If the
corporation fails, I do not lose all my P100M, I lose only my P10M. But if the corp.
succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired
from the P90M paid up loan. This is the concept of LEVERAGING, using other
people’s money to make a profit for yourself. This is why borrowing is an integral
part of corporate life and it is up to the creditors to make a diligent appraisal of the
credit standing of the corp.

Q. What is the main distinction between a corporation and a partnership?

A. A corp. is an intermingling of corporation law and contract law. On the other hand,
a partnership is purely a contractual relationship and so every time a partner dies,
the contract is actually extinguished.

Q. What is Corporation Law all about?

A. It is all about jurisprudence actually built around the 4 attributes of a corporation

Q. Can a defective attempt to form a corporation result at least in a partnership?

A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989)
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.

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- 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.

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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.

Q. What is the difference between Pioneer and Lim Tong Lim?

A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have
to possess powers of management. In Lim tong Lim, it continues its
pronouncement, by saying that if you have beneficial ownership over the business,
then you are also liable as a partner.

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.

(c) Joint Ventures

Joint venture is an association of persons or companies jointly undertaking some

commercial enterprise; generally all contribute assets and share risks. It requires
a community of interest in the performance of the subject matter, a right to direct
and govern the policy in connection therewith, and duty, which may be altered by
agreement to share both in profit and losses.

Q. What is the difference between a joint venture and a partnership?

A. A joint venture is by law a partnership because it follows the same definition as
having two or more persons binding themselves together under a common fund
with the intention of dividing the profits between themselves. Therefore, every joint
venture is a partnership. The distinction between the two is that a joint venture is
for a limited purpose only while a partnership involves an arrangement or an on-
going concern.

Q. Is it possible for a joint venture not to be a partnership?

A. Yes. When the joint venture forms a corporation, it then becomes a joint venture
corporation.

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)

(d) Cooperatives (Art. 3, R.A. No. 6938)

A cooperative is a duly registered association of persons, with a common bond of

interest, who have voluntarily joined together to achieve a lawful common social
or economic end, making equitable contributions to the capital required and

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 accepting a fair share of the risks and benefits of the undertaking in accordance
with universally accepted cooperative principles.
- Cooperatives are established to provide a strong social and economic
organization to ensure that the tenant-farmers will enjoy on a lasting basis the
benefits of agrarian reforms.

Cooperative
Separate Juridical Personality
Governed by principles of democratic
control where the members have equal
voting rights on a one-member-one vote
principle
BoD manage the affairs of the coop. But
it is the GA of full membership that
exercises all the rights and performs
all of the obligations of the coop.
Under the supervision of the coop.
Development Authority
Organized for the purpose of providing
goods and services to its members and
thus to enable them to attain increased
income and saving, etc.
Corporation
Separate Juridical Personality
SH vote their percentage share of
the stocks subscribed by them
BoD is the repository of all powers
EXCEPT for acts where the Corp. Code
requires concurrence or ratification by
the SH
Under the Supervision of the SEC
Stock Corp. for profit; Non-Stock
Corp eleemosynary (charitable,
philantrophic) purpose

e) Business Trusts (Article 1442, Civil Code) Art. 1442

Q. What is the difference between a business trust and a corporation?

A. The relationship in a business trust is essentially a trust relationship. The business
trust does not have a personality which is apart from the trustor or the
trustee/beneficiary. The concept of a separate juridical personality is absent from
a business trust.

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987

Constitution)
- The Congress shall not except by general law, provide for the formation,
organization or regulation of private corporations, Government-owned or
controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
- P.D. 1717, which created New Agrix, Inc. violates the Constitution which
prohibits the formation of a private corporation by special legislative act which
is neither owned nor controlled by the government, since NDC was merely
required to extend a loan to the new corporation, and the new stocks of the
corporation were to be issued to the old investors and stockholders of the
insolvent Agrix upon proof of their claims against the abolished corporation.

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 - Congress cannot enact a law creating a private corporation with a special
charter, and it follows that Congress can create corporations with special
charters only if such corporations are government-owned or controlled.

Q: What distinguishes a public corporation from a private corporation owned by the

government?
A: It is not ownership which distinguishes a public corporation from a private
corporation. It is the civil service eligibility of its employees and if the financial
records are subject to the examination of the Commission on Audit. A public
corporation is created by its charter whereas a private corporation is created under
the Corporation Code.

2. CORPORATION AS A PERSON:
1. Entitled to Due Process: The due process clause is universal in its application
to all persons without regard to any differences of race, color, or nationality.
Private corporations, likewise, are “persons” within the scope of the guaranty
insofar as their property is concerned.
2. Equal Protection Clause
3. 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.
- 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.

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
13
 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.

(d) But Not Entitled to Privilege Against Self incrimination

- “It is elementary that the right against self-incrimination has no application to
juridical persons.”
- While an individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a corporation,
vested with special privileges and franchises, may refuse to show its hand when
charged with an abuse of such privilege.

Q: Why is a corporation entitled to equal protection but not the right against self-
incrimination?
A: Any individual is entitled to equal protection whether they be juridical or natural.
The corporation being in the same class should be treated equally. However, the
right to self-incrimation is not extended to corporation because:
1. The right is meant to prevent individuals from having to lie under oath in order
to protect his interest. It is to protect the individual from having to commit
perjury just to keep himself from going to jail. However, if a corporation lies
under oath, who would you bring to jail when in fact, a corporation is just a legal
fiction.
2. The corporation is subject to the reportorial requirements of the law. The
corporation being a mere creature of the State is subject to the whims of its
Creator. The corporation powers are limited by law.
CLV: Beats me! Perhaps such right is attributable to the moral dimension of an
individual, and since the corporation is of an amoral personality, such right may
not be attributable to it.

14
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), vs. PCGG

Facts:
 Challenged in this special civil action of certiorari and prohibition by a private
corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by President Corazon C.
Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and acts done, in accordance
with said executive orders by the Presidential Commission on Good Government
and/or its Commissioners and agents, affecting said corporation
 The PCGG was tasked to sequester the BASECO thru Executive Orders 1 and 2
of President Cory Aquino
 The PCGG was able to take over the BASECO and terminate its executive
employees and requested to have the following documents of the said company.
Such as (Stock transfer book, Legal documents, Minutes of the meetings,
Financial statements, and the likes)
 Petitioner contends that he cannot produce the said documents due to it is an
infringement of its right against self incrimination.

ISSUE: WON documents ask in by PCGG would vitiate their right against self
incrimination.

RULING:
 BASECO also contends that its right against self incrimination and
unreasonable searches and seizures had been transgressed by the Order of
April 18, 1986 which required it "to produce corporate records from 1973 to 1986
under pain of contempt of the Commission if it fails to do so." The order was
issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of
the PCGG's power to "issue subpoenas requiring * * the production of such
books, papers, contracts, records, statements of accounts and other documents
as may be material to the investigation conducted by the Commission, " and
paragraph (3), Executive Order No. 2 dealing with its power to "require all
persons in the Philippines holding * * (alleged "ill-gotten") assets or properties,
whether located in the Philippines or abroad, in their names as nominees,
agents or trustees, to make full disclosure of the same * *." The contention lacks
merit.
 it is elementary that the right against self-incrimination has no application to
juridical persons.
 While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested
with special privileges and franchises, may refuse to show its hand when
charged with an abuse ofsuchprivileges
 At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order
No. 14 assures protection to individuals required to produce evidence before
the PCGG against any possible violation of his right against self-incrimination.

15
 It gives them immunity from prosecution on the basis of testimony or information
he is compelled to present. As amended, said Section 4 now provides that —
xxx xxx xxx The witness may not refuse to comply with the order on the basis
of his privilege against self-incrimination; but no testimony or other information
compelled under the order (or any information directly or indirectly derived from
such testimony, or other information) may be used against the witness in any
criminal case, except a prosecution for perjury, giving a false statement, or
otherwise failing to comply with the order. Relevant jurisprudence is also cited
by the Solicitor General. 114
 corporations are not entitled to all of the constitutional protections which private
individuals have. * * They are not at all within the privilege against self-
incrimination, although this court more than once has said that the privilege runs
very closely with the 4th Amendment's Search and Seizure provisions.It is also
settled that an officer of the company cannot refuse to produce its records in its
possession upon the plea that they will either incriminate him or may incriminate
it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the
Solicitor General's).
 The corporation is a creature of the state. It is presumed to be incorporated for
the benefit of the public. It received certain special privileges and franchises,
and holds them subject to the laws of the state and the limitations of its charter.
Its powers are limited by law. It can make no contract not authorized by its
charter. Its rights to act as a corporation are only preserved to it so long as it
obeys the laws of its creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has exceeded its powers. It
would be a strange anomaly to hold that a state, having chartered a corporation
to make use of certain franchises, could not, in the exercise of sovereignty,
inquire how these franchises had been employed, and whether they had been
abused, and demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation which
is charged with a criminal violation of the statute may plead the criminality of
such corporation as a refusal to produce its books. To state this proposition is
to answer it. While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises may refuse to show
its hand when charged with an abuse of such privileges.
 The constitutional safeguard against unreasonable searches and seizures finds
no application to the case at bar either. There has been no search undertaken
by any agent or representative of the PCGG, and of course no seizure on the
occasion thereof.

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.

16
4. Liability for Torts
- A corporation is civilly liable in the same manner as natural persons for torts,
because the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master
be a natural person or a corporation, and whether the servant or agent be a
natural or artificial person. That a principal or master is liable for every tort which
he expressly directs or authorizes, is just as true of a corporation as a natural
person.

PNB v COURT OF APPEALS

Facts: Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the
agricultural year 1956- 1957. Since, she did not need it, she agreed to allow Mr.
Jacobo Tuazon to use the said quota for consideration of 2,500. Her sugar cannot be
exported without sugar quota allotments. Sometimes, however a planter harvests less
sugar than her quota so her excess quota is used by her mother who pays for it. This
is her arrangement with Mr. Tuazon. At the time of the agreement, she was indebted
to PNB of San Fernando, Pampanga. Her indebtedness was known as a crop loan
and was secured by her sugar crop, and since her quota was mortgaged to PNB, her
arrangement with Mr. Tuazon had to be approved by the bank. Upon presentment of
the lease arrangement, the PNB branch manager revised it by increasing the lease
amount to P2.80 per picul for a total of P2,800. Such increase was agreed to by both
Rita and Jacobo. However, when it was presented to the Board of Directors for
approval, they further increased the amount to P3.00 per picul. Jacobo asked for the
reconsideration but he was denied the same. The matter stood as it was until Jacobo
informed Rita and PNB that he had lost interest in pursuing the deal. In the meantime,
the debt of Rita with the PNB matured. Since she had a surety agreement with the
Philippine American General Insurance Co. Inc. (Philamgen), the latter paid her
outstanding debt. Philamgen in turn demanded from Rita the amount which they paid
the bank. Instead of paying the bank, Rita claimed that she told Philamgen that she
did not consider herself indebted to the bank since she had an agreement with Jacobo
Tuazon. When such was discontinued, she failed to realized the income with which
she could have paid her creditors. Philamgen filed a complaint for the collection of
sum of money against Rita. Rita implicated PNB as a third party defendant claiming
that her failure to pay was due to the fault or negligence of PNB.

Issue: WON PNB is liable for the damage caused to Rita. Held:
- There is no question that Rita’s failure to utilize her sugar quota was due to the
disapproval of the lease by the Board of Directors of the petitioner, thus PNB
should be held liable.
- The Board justified the increase to P 3.00 per picul by saying that it was the
prevalent rate at that time. However, there was no proof that any other person was
willing to lease the sugar quota allotment of Rita for a price higher than P2.80 per
picul. Just because there are isolated transactions where the lease price was
P3.00 per picul does not mean that there are always ready takers.
- While PNB had the ultimate authority of approving or disapproving the proposed
lease since the quota was mortgaged to the bank, the latter certainly cannot
17
 escape its responsibility of observing precaution and vigilance which the
circumstances of the case justly demanded in approving or disapproving the lease
of said sugar quota.
- According to Art. 19 of the Civil Code, “[e]very person must in the exercise of his
rights and the performance of his duties, act with justice, give everyone his due
and observe honesty and good faith.” This the petitioner failed to do. As a
consequence, Art. 21 states, [a]ny person who willfully causes loss or injury to
another in a manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
- On the liability of the corporation, the court ruled that, “[a] corporation is civilly
liable in the same manner as natural persons for torts, because generally
speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master
be a natural person or artificial person. All of the authorities agree that a principal
or master is liable for every tort which he expressly directs or authorizes, and this
is just as true of a corporation as of a natural person. A corporation, is liable
therefore, whenever a tortuous act is committed by an officer or agent under
express direction or authority from the stockholders or members acting as a body,
or generally, from the directors as the governing body.

NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not
every tortuous act committed by an officer can be ascribed to the corporation as its
liability, for it is reasonable to presume that in the granting of authority by the
corporation to its agent, such a grant did not include a direction to commit tortuous
acts against third parties. Only when the corporation has expressly directed the
commission of such tortuous act, would the damages resulting therefrom be
ascribable to the corporation. And such a direction by the corporation, is manifested
either by its board adopting a resolution to such effect, as in this case, or having taken
advantage of such a tortuous act the corporation, through its board, expressly or
impliedly ratifies such an act or is estopped from impugning such an act.
- Our jurisprudence is wanting as to the definite scope of “corporate tort.”
Essentially, “tort” consists in the violation of a right given or the omission of a
duty imposed by law; a breach of a legal duty. The failure of the corporate
employer to comply with the law-imposed duty under the Labor Code to grant
separation pay to employees in case of cessation of operations constitutes tort
and its stockholder who was actively engaged in the management or operation
of the business should be held personally liable.

Q: When is a corporation liable for tort?

A: A corporation is liable for tort when: (a) the act is committed by an officer or agent
(2) under express direction of authority from the stockholders or members acting
as a body or through the Board of Directors.

Q: How can authority given to the agent of the corporation be determined?

A: Either by: (a) such direction by the corporation is manifested, by its board adopting
a resolution to such effect (b) by having takien advantage of such a tortious act,
18
 the corporation through its board, has expressly or impliedly ratified such an act
or estopped from impugning the same.

Q: What is a derivative suit?

A: Since, the act of the board is essentially that of the corporation and therefore
corporate assets cannot escape enforcement of the award of damage to the tort
victim. As a remedy, the stockholders may institute a derivative suit against the
responsible board members and officers for the damages suffered by the
corporation as a result of the tort suit.

5. CORPORATE CRIMINAL LIABILITY

WEST COAST LIFE INS. CO. v HURD

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.

Issue: WON corporations can be held criminally liable.

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 or powers.

19
PEOPLE VS TAN BOON KONG
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.

Issue: WON the defendant as manager may be held criminally liable.

Held: Ruling reversed. Case remanded. 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
20
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
21
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.

- 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.
- 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.

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.

RECOVERY OF MORAL AND OTHER DAMAGES

- A corporation, being an artificial person, cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis for moral damages under Art. 2217 of the Civil Code.
However, a corporation may have a good reputation which, if besmirched, may be
a ground for the award of moral damages.
- corporation may recover moral damages if it “has a good reputation that is
debased, resulting in social humiliation” is an obiter dictum. Recovery of a
corporation would be under Articles 19, 20 and 21 of the Civil Code, but which
requires a clear proof of malice or bad faith.

ABS-CBN BROADCASTING CORP. v. CA (301 SCRA 589) January 21, 1999

Facts:
 ABS-CBN and VIVA executed a Film Exhibition Agreement whereby VIVA gave
ABS-CBN an exclusive right to exhibit some VIVA films. According to the
agreement, ABS-CBN shall have the right of first refusal to the next 24 VIVA films
22
 for TV telecast under such terms as may be agreed upon by the parties, however,
such right shall be exercised by ABS-CBN from the actual offer in writing.
 Del Rosario (Executive Producer), offered ABS-CBN, a list of 3 film packages from
which ABS-CBN may exercise its right of first refusal. ABS-CBN, however through
VP Mrs. Concio, tick off only 10 titles they can purchase among which is the film
“Maging Sino Ka Man” which is one of the subjects of the present case, therefore,
it did not accept the said list as per the rejection letter authored by Mrs. Concio
sent to Del Rosario.
 Subsequently, Del Rosario approached Mrs. Concio with another list, proposing
to sell to ABS-CBN airing rights for P60M but no agreement was reached.
 Four days later, Del Rosario and Mr. Graciano Gozon, Senior VP of Finance of
Republic Broadcasting Corporation (RBS/Channel 7) discussed the terms and
conditions of VIVA’s offer. A day after that, Mrs. Concio sent the draft of the
contract between ABS-CBN and VIVA which contained a counter-proposal. VIVA’s
Board of Directors rejected the counter-proposal as it would not sell anything less
than the package. After said rejection, ABS-CBN closed a deal with RBS including
the 14 films previously ticked off by ABS-CBN.
 Consequently, ABS-CBN filed a complaint for specific performance with prayer for
a writ of preliminary injunction and/or TRO against RBS, VIVA and Del Rosario.
RTC then enjoined the latter from airing the subject films. RBS posted a P30M
counterbond to dissolve the injunction.
 Later on, the trial court as well as the CA dismissed the complaint holding that
there was no meeting of minds between ABS-CBN and VIVA, hence, there was
no basis for ABS-CBN’s demand, furthermore, the right of first refusal had
previously been exercised.
 Hence, the present petition, ABS-CBN argued that an agreement was made
during the meeting of Mr. Lopez and Del Rosario jotted down on a “napkin” (this
was never produced in court). Moreover, it had yet to fully exercise its right of first
refusal since only 10 titles were chosen from the first list. As to actual, moral and
exemplary damages, there was no clear basis in awarding the same.

Issue: WON a contract was perfected between ABS-CBN and VIVA and WON moral
damages may be awarded to a corporation

Held: Both NO.

 A qualified acceptance, or one that involves a new proposal, constitutes a counter-
offer and is a rejection of the original offer. Consequently, when something is
desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms
of the offer annuls the offer.
 For such officers to be deemed fully clothed by the corporation to exercise a power
of the Board, the latter must specially authorize them to do so. That Del Rosario
did not have the authority to accept ABS-CBN’s counter-offer was best evidenced
by his submission of the draft contract to VIVA’s Board of Directors for the latter’s

23
 approval. In any event, there was between Del Rosario and Lopez III no meeting
of minds
 The award of moral damages cannot be granted in favor of a corporation because,
being an artificial person and having existence only in legal contemplation, it has
no feelings, no emotions, no senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be experienced only by one having a
nervous system. The statement that a corporation may recover moral damages if
it “has a good reputation that is debased, resulting in social humiliation” is an obiter
dictum. On this score alone the award for damages must be set aside, since RBS
is a corporation.

COMETA V. CA (1999) G.R. No. 124062 January 21, 1999

FACTS:
 1979: State Investment Trust, Inc (SITI), formerly State Investment House, Inc.
(SIHI) extended loans in various amounts to Guevent Industrial Development
Corp. (GIDC) which failed to pay when due.
 A rehabilitation plan where GIDC mortgaged its property but it still defaulted
resulting in a foreclosure sale where SITI is the highest bidder.
 GIDC filed in the RTC alleging irregularities in the foreclosure of the mortgages
and the sale of properties to petitioner SITI which ended with a compromise
agreement wherein HBI offered to purchasea and SITI agreed
 RTC AND CA: compelled SITI to accept HBI's offer to purchase
 HBI applied to the Housing and Land Use Regulatory Board for a permit to develop
the property submitting an affidavit by SITTI president Cometa releasing the
mortgage.
 Cometa denied executing an affidavit as supported by the NBI's finding that it is
forged. Cometa filed a complaint for falsification of public document against HBI
president Guevara
 RTC: dismissed
 HBI filed a complaint for malicious prosecution against petitioners Cometa and
SITI alleging that it was filed with the sole intent of harassing and pressuring
Guevara, in his capacity as chairman of GIDC, to give in to their illicit and malicious
desire to appropriate the remaining unsold properties of GIDC
 Cometa and SITI answered that the action seeks to impose a penalty on the right
to litigate and for that reason is unconstitutional and against settled public policy
 RTC and CA: denied since without malice
 It is contended that HBI is not a real-party-in-interest, whatever interest it may have
being purely speculative.

ISSUE: Whether or not HBI is a real-party-in-interest

HELD: YES.
 Section 11 of Rule 3 of the Rules of Court provides: Misjoinder and non-joinder
of parties. Misjoinder of parties is not a ground for dismissal of an action. Parties
24
 may be dropped or added by order of the court or on motion of any party or on
its own initiative at any stage of the action and on such terms as are just.
 Given the foregoing rule, the fact that Guevara, in his capacity as president of
HBI, filed HBIs application to sell at the HLURB and it was in the same capacity
and in connection with the application that he was criminally charged, and the
allegations in the complaint including that stating that by the filing of the criminal
case against Guevara, the application of HBI with the HLURB for a regular
license to sell the condominium units . . . had been delayed, resulting in the
corresponding delay in the sale thereof on account of which plaintiffs incurred
over runs in development, marketing and financial costs and charges, resulting
in actual damages, the deferral by public respondent of petitioners motion to
drop HBI as party plaintiff cannot be said to have been attended with grave
abuse of discretion. It bears emphasis that the phraseology of Section 11 of
Rule 3 is that parties may be dropped . . . at any stage of the action.
 It is true that a criminal case can only be filed against the officers of a corporation
and not against the corporation itself. It does not follow from this, however, that
the corporation cannot be a real-party-in-interest for the purpose of bringing a
civil action for malicious prosecution.

CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED

Section 123
Foreign corporation - 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.
– Primary Test
2. Control test – nationality determined by the nationality of the majority
stockholders, wherein control is vested.
- W/N it can engage in nationalized activities or industries
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.
- Jurisdiction to enforce tax laws

Importance of determining the nationality of the corporation - It is necessary so

as to determine whether or not a corporation can enter into various transactions
or engage in different industries. And also, the legal fiction supporting a
corporation is valid only within Philippine territory.

25
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.

Q: What is the implication of having a primary test and a secondary test?

A: Simply put, if a corporation does not pass the first test, which the place of
incorporation test, automatically it is deemed to be a foreign corporation. However,
having passed the first test, the nationality of the corporation may have been
established but this does not mean that the corporation is entitled to enter every
single economic sector of the Philippines. The control test determines now
whether the corporation fulfills the equity requirements of the Constitution. In doing
this, the other tests are made such as: war-time test, investment test and
grandfather rule.

EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in:

Exploitation of Natural Resources (Sec. 140)

Stock ownership in certain corporations –

- 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, 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.
- 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

26
 activity, the export potential, as well as the other factors which are germane to
the realization and promotion of business and industry.

Sec. 2 Art. XII

- All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife,
flora and fauna and other natural resources are owned by the State.
- With the exception of agricultural lands, all other national resources shall under
the full control and supervision of the State.
- The State may directly undertake such activities or it may enter into co-
production, joint venture, or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty percentum of whose
capital is owned by such citizens. Such agreements may be for a period not
exceeding 25 years, renewable for not more than 25 years, and under such
terms and conditions as may be provided by law.
- In cases of water rights for irrigation, water supply, fisheries, or industrial uses
other than the development of water power, beneficial use may be the measure
and limit of the grant.
- The State shall protect the nation’s marine wealth in its archipelagic waters,
territorial sea, and exclusive economic zone, and reserve its use and enjoyment
exclusively to Filipino citizens.
- The Congress may, by law, allow small-scale utilization of natural resources by
Filipino citizens, as well as cooperative fish farming, with priority to subsistence
fishermen and fishworkers in rivers, lakes, bays and lagoons
- The President may enter into agreements with foreign-owned corporations
involving either technical or financial assistance for large-scale exploration,
development and utilization of minerals, petroleum and other mineral oils
according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In
such agreements, the State shall promote the development and use of local
scientific and technical resources.
- The President shall notify the Congress of every contract entered into in
accordance with this provision within thirty days from its execution.

ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC

Facts:
- Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed a
deed of sale of a parcel of land located in the same city, in favor of the Roman
Catholic Apostolic Administrator of Davao Inc.,(RCADI) is corporation sole
organized and existing in accordance with Philippine Laws, with Msgr. Clovis
Thibault, a Canadian citizen, as actual incumbent.
- Registry of Deeds Davao (RD) required RCADI to submit affidavit declaring that
60% of its members were Filipino Citizens.
- As the RD entertained some doubts as to the registerability of the deed of sale,
the matter was referred to the Land Registration Commissioner (LRC) en
consulta for resolution, RCADI is not qualified to acquire land in the Philippines
27
 in the absence of proof that at leat 60% of the capital, properties or assets of
the RCADI is actually owned or controlled by Filipino citizens.
- LRC also denied the registration of the Deed of Sale in the absence of proof of
compliance with such requisite. RCADI’s Motion for Reconsideration was
denied. Aggrieved, the latter filed a petition for mandamus.

Issue: Whether or not the corporation sole named the Roman Catholic Apostolic
Administrator of Davao, Inc., is qualified to acquire private agricultural lands

Held: YES. RCADI is qualified.

 It has been shown before that:
1. The corporation sole, unlike the ordinary corporations which are formed by no
less than 5 incorporators, is composed of only one persons, usually the head
or bishop of the diocese, a unit which is not subject to expansion for the
purpose of determining any percentage whatsoever;
2. The corporation sole is only the administrator and not the owner of the
temporalities located in the territory comprised by said corporation sole;
3. Such temporalities are administered for and on behalf of the faithful residing in
the diocese or territory of the corporation sole; and
4. The latter, as such, has no nationality and the citizenship of the incumbent
ordinary has nothing to do with the operation, management or administration
of the corporation sole, nor effects the citizenship of the faithful connected with
their respective dioceses or corporation sole.
5. Corporation sole is not subject to the nationality test, it must be further qualified
to mean that this is the case only insofar as the control test is concerned.
Nationality is irrelevant insofar as this test is concerned. However, it becomes
relevant when the place of incorporation comes into play since the case never
sought to touch the place of incorporation test.

- The registration of the donation of land to an unincorporated religious organization,

whose trustees are foreigners, would violate constitutional prohibition and the
refusal would not be in violation of the freedom of religion clause. The fact that the
religious association “has no capital stock does not suffice to escape the
constitutional inhibition, since it is admitted that its members are of foreign
nationality. . . and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of Filipino citizens.”
- In view of these peculiarities of the corporation sole, it would seem obvious that
when the specific provision of the Constitution invoked by respondent
Commissioner (section 1, Art. XIII), was under consideration, the framers of the
same did not have in mind or overlooked this particular form of corporation. If this
were so, as the facts and circumstances already indicated tend to prove it to be so,
then the inescapable conclusion would be that this requirement of at least 60 per
cent of Filipino capital was never intended to apply to corporations sole, and the
existence or not a vested right becomes unquestionably immaterial.

28
NOTE: The Roman Catholic Church is a corporation by prescription, with
acknowledged juridical personality inasmuch as it is an institution which antedated
almost a thousand years any other personality in Europe, and which existed when
Grecian eloquence still flourished in Antioch and when idiots were still worshipped in
the temple of Mecca. Since it is a corporation by prescription, it has no nationality,
and hence, the nationality test does not apply.

PUBLIC UTILITIES (Sec. 11 Art. XII)

- No franchise, certificate or any other form of authorization for the operation of public
utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum
of whose capital is owned by such citizens, nor shall such franchise, certificate or
authorization be exclusive in character or for a longer period than fifty years.
- Neither shall any such franchise or right be granted except under the condition that
it shall be subject to amendment, alteration or repeal by the Congress when the
common good so requires.
- The State shall encourage equity participation in public utilities by the general
public.
- The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens
of the Philippines.
NOTE: Stock ownership must at least be 60% Filipino but management must be 100%
Filipino for such corporation to operate in industries concerning public utilities.

PEOPLE v QUASHA
Facts:
 William H. Quasha - a member of the Philippine bar, committed a crime of
falsification of a public and commercial document for causing it to appear that
Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005
% of the subscribed capital stock of Pacific Airways Corp. (Pacific) when in reality
the money paid belongs to an American citizen whose name did not appear in the
article of incorporation,
 to circumvent the constitutional mandate that no corp. shall be authorize to operate
as a public utility in the Philippines unless 60% of its capital stock is owned by
Filipinos.
 Found guilty after trial and sentenced to a term of imprisonment and a fine
 Quasha appealed to this Court
 Contentions:
o Primary purpose: to carry on the business of a common carrier by air, land or water
o Baylon did not have the controlling vote because of the difference in voting power
between the preferred shares and the common shares

ISSUE: For a corporation to be entitled to operate a public utility is it necessary that it

be organized with 60 per cent of its capital owned by Filipinos from the start?

29
HELD: No.
- 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 moment for determining whether a corporation is entitled to operate as a
public utility is when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the corporation has
already come into being and not while it is still being formed. And at that
moment, the corporation must show that it has complied not only with the
requirement of the Constitution as to the nationality of its capital, but also with
the requirements of the Civil Aviation Law if it is a common carrier by air, the
Revised Administrative Code if it is a common carrier by water, and the Public
Service Law if it is a common carrier by land or other kind of public service.

Primary franchise refers to that franchise which invests a body of men with corporate
existence
 right to exist as such, is vested in the individuals who compose the corporation
and not in the corporation itself and cannot be conveyed in the absence of a
legislative authority so to do.

Secondary franchise is the privilege to operate as a public utility after the corporation
has already come into being
- special or secondary franchises are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary
franchises as are charged with a public use.

 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.

Q: Why are we studying Quasha?

A: This case makes a distinction with the grant by the government of primary and
secondary franchise. As far as doctrinal pronouncements are concerned, any and
all type of corporations may be incorporated, so long as the requirements for
incorporation are fulfilled and that its purpose is lawful and not contrary to law or
30
 public policy. The violation of equity requirements with regard to entry into
nationalized sectors as provided by the Constitution come only into play when the
secondary franchise is granted. In granting the secondary franchise
considerations of equity are now made.

TATAD v GARCIA
Facts
 government planned to build a railway transit line along EDSA.
 No bidding was made but certain corporations were invited to prequalify. The only
corporation to qualify was the EDSA LRT Consortium which was obviously formed
for this particular undertaking.
 An agreement was then made between the government, through the Department
of Transportation and Communication (DOTC), and EDSA LRT Consortium. The
agreement was based on the Build-Operate-Transfer scheme provided for by law
(RA 6957, amended by RA 7718).
 Under the agreement, EDSA LRT Consortium shall build the facilities, i.e.,
railways, and shall supply the train cabs. Every phase that is completed shall be
turned over to the DOTC and the latter shall pay rent for the same for 25 years.
By the end of 25 years, it was projected that the government shall have fully paid
EDSA LRT Consortium. Thereafter, EDSA LRT Consortium shall sell the facilities
to the government for $1.00.
 However, Senators Francisco Tatad, John Osmeña, and Rodolfo Biazon opposed
the implementation of said agreement as they averred that EDSA LRT Consortium
is a foreign corporation as it was organized under Hongkong laws; that as such, it
cannot own a public utility such as the EDSA railway transit because this falls
under the nationalized areas of activities. The petition was filed against Jesus
Garcia, Jr. in his capacity as DOTC Secretary.

Issue: Whether or not the EDSA LRT III, a public utility, can be owned by a foreign
corporation.

Held: YES.
 The Constitution requires a franchise for the operation of a public utility; however,
it does not require a franchise before one can own the facilities needed to operate
a public utility so long as it does not operate them to serve the public. There is a
clear distinction between “operation” of a public utility and the ownership of the
facilities and equipment used to serve the public.
 In law, there is a clear distinction between the “operation” of a public utility and the
ownership of the facilities and equipment used to serve the public. Ownership is
defined as a relation in law by virtue of which a thing pertaining to one person is
completely subjected to his will in everything not prohibited by law or the
concurrence with the rights of another. The exercise of the rights encompassed in
ownership is limited by law so that a property cannot be operated and used to
serve the public as a public utility unless the operator has a franchise. The
operation of a rail system as a public utility includes the transportation of

31
 passengers from one point to another point, their loading and unloading at
designated places and the movement of the trains at pre-scheduled times.
 In sum, private respondent will not run the light rail vehicles and collect fees from
the riding public. It will have no dealings with the public and the public will have no
right to demand any services from it. Even the mere formation of a public utility
corporation does not ipso facto characterize the corporation as one operating a
public utility. The moment for determining the requisite Filipino nationality is when
the entity applies for a franchise, certificate or any other form of authorization for
that purpose.

Q: How does the case of Quasha differ from the case of Tatad?
A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such
is given while Tatad tells us that it does not matter to whom the franchise is given
but what matters is who actually operates the utility. The latter case tells us that
restrictions are not on the assets of the corporations but on the enterprise itself,
thus control determines nationality and not the beneficiaries.

Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)

- The ownership and management of mass media shall be limited to citizens of the
Philippines, or to corporations, cooperatives or associations, wholly-owned and
managed by such citizens. The Congress shall regulate or prohibit monopolies in
commercial mass media when the public interest so requires. No combination in
restraint of trade or unfair competition shall be allowed.
- Mass media includes the gathering, transmission of news, information,
messages, signals and forms of written, oral and all visual communication and
shall embrace the print medium, radio, television, films, movies, advertising in all
its phases and their business managerial. It does not include commercial
telecommunications because such is a public utility.
- The Constitutional requirements are much stricter for it requires that socks are
100% Filipino owned and managed.

Cable Industry:
- “Cable TV operations shall be governed by E.O. No. 205, s. 1987. If CATV
operators offer public telecommunications services, they shall be treated just like
a public telecommunications entity.” (NTC Memo Circular No. 8-9-95)
- Cable TV as “a form of mass media which must, therefore, be owned and
managed by Filipino citizens, or corporations, cooperatives or associations,
wholly-owned and managed by Filipino citizens pursuant to the mandate of the
Constitution.”
- The National Telecommunications Commission which regulates and supervises
the cable television industry in the Philippines under Sec. 2 of EO 436 series of
1997 has provided under the NTC Memorandum Circular No. 8-9-95 under item
920(a) thereof provides that “[c]able TV operations shall be governed by E.L. No.
205 series of 1987. If CATV operators offer public telecommunications services,
they shall be treated just like public telecommunications industry.”

32
 - Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue
from Allied Broadcasting Inc. v. Federal Communications Commission 435 F.2d
70 considered CATV as “a form of mass media, which must therefore be owned
and managed by Filipinos, or corporations, cooperatives or associations, wholly-
owned and managed by Filipino citizens pursuant to the mandate of the
Constitution.”

ADVERTISING BUSINESS (Sec. 11(2) Art. XVI)

Advertising industry - impressed with public interest and shall be regulated by law
for the protection of consumers and promotion of the general welfare.
- Only Filipino citizens or corporations or associations at least seventy percentum
of the capital of which is owned by such citizens shall be allowed to engage in the
advertising industry.
- The participation of foreign investors in the governing body of entities in such
industry shall be limited to their proportionate share in the capital thereof, and all
the executive and managing officers of such entities must be citizens of the
Philippines.
- Only Filipino citizens or corporations or associations at least seventy percent of
the capital shall be allowed to engage in the advertising industry. It also provides
that the participation of foreign investors in the governing body shall be limited to
their proportionate share in the capital thereof, and all the executive and managing
officers of such entities must be citizens of the Philippines.

WAR-TIME TEST

FILIPINAS COMPANIA DE SEGUROS vs. CHRISTERN HUENEFELD and CO.,

INC. 89 Phil 54

FACTS
- Christern Huenefeld and Co., Inc., after payment of corresponding premium,
obtained from the petitioner, Filipinas Cia de Seguros fire policy covering
merchandise contained in a building located at Binondo, Manila.
- during the Japanese military occupation, the building and insured merchandise
were burned.
- In due time, the respondent submitted to the petitioner its claim under the policy.
- petitioner refused to pay the claim on the ground that the theory of the petitioner is
that the insured merchandise was burned after the policy issued in 1941 had
ceased to be effective because the outbreak of the war between United States and
Germany on December 10, 1941, and that the payment made by the petitioner to
the respondent corporation during the Japanese military occupation was under
pressure.

ISSUE: Whether or not the respondent corporation is a corporation of public enemy.

33
RULING:
 Since the majority of stockholders of the respondent corporation were German
subjects, the respondent became an enemy of the state upon the outbreak of the
war between US and Germany.
 The Philippine Insurance Law (Act No 2427, as amended), in Section 8, provides
that “anyone except a public enemy may be insured”. It stands to reason that an
insurance policy ceases to be allowable as soon as an insured becomes a public
enemy.
 The respondent having an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by the petitioner had
ceased to be valid and enforceable, and since the insured good were burned
during the war, the respondent was not entitled to any indemnity under said policy
from the petitioner.
 However, elementary rule of justice (in the absence of specific provisions in the
Insurance Law) require that the premium paid by the respondent for the period
covered by its policy from December 11, 1941, should be returned by the
petitioner.

INVESTMENT TEST AS TO “PHILIPPINE NATIONALS” (Sec. 3a of the FIA)

Philippine national - as it refers to a corporate entity shall mean a corporation

organized under the laws of the Philippines of which at least 60% percent of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines.
Basis for Voting Shares - In this aspect, FIA is more liberal than the Constitution
which did not specify as to what type of share the 60% Filipino-ownership
requirement pertained to. FIA, in this aspect, only referred to voting shares.
However, it provides that were a corporation and its non-Filipino stockholders
own stocks in a SEC-registered enterprise, at least 60% of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by
citizens of the Philippines and at least 60% of the members of the Board of
Directors of both corporations must be citizens of the Philippines, in order that a
corporation shall be considered a Philippine national. The law therefore limits the
test to voting shares, but however makes it more stringent when it comes to actual
control by making a double 60% rule requirement as to both holding and held
company, as well as their Board of Directors.

Q: Why should not we infer that the 60% Filipino ownership requirement of the
Constitution as pertaining to voting shares?
A: Elementary rule of Statutory Construction that when the law does not distinguish,
neither should we. Moreover, the right to vote is not the only right granted to
stockholders, as the right to file suits against the Board of Directors is granted to
them.

34
Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign
investors with respect to voting stocks and 40% Foreign investors with respect to
non-voting stocks, under the FIA, is it a Philippine national?
A: Yes, since FIA limits its scope to voting stocks.

Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80%
Filipino (16) and 20% Foreign (4), is it a Philippine national? Can it therefore own land
under the Constitution?
A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects
that FIA runs contrary to the Constitution, which is the supreme law of the land, the
former shall not apply.

GRANDFATHER RULE
- Shares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be
counted as of Philippine nationality.
- applies only for purposes of resolving issues on investments. The SEC was quick
to add: “however, while a corporation with 60% Filipino and 40% foreign equity
ownership is considered a Philippine national for purposes of investment, it is not
qualified to invest in or enter into a joint venture agreement with corporations or
partnerships, the capital or ownership of which under the constitution of other
special laws are limited to Filipino citizens only. A joint venture arrangement would
mean that such corporation has become a partner and is deemed then to be acting
or involving itself in the operations of a nationalized activity by the acts of the local
partners by virtue of the principle of mutual agency applicable to partnerships.
- There seems to be a conflict as to the applicability of the SEC Rule and to that of
the Foreign Investments Act but each in itself has advantages and disadvantages,
since both require stringent requisites for a corporation to avail of its privileges.
But under the present scenario, the FIA is believed to be the default rule having
been enacted more recently that the SEC Rule.

GRANDFATHER RULE – a method by which the percentage of Filipino equity in

corporations engaged in nationalized or partly nationalized areas of activity provided
for under the Constitution and other national laws is accurately computed, in cases
where corporate shareholders are part of the ownership structure by considering the
nationality of the second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder.

Q: When is the GFR applied?

A: The GFR is applied in cases where the corporation has corporate stockholders
with alien stockholdings, otherwise, if the rule is not applied, the presence of such
corporate srockholders could diminish the effective control of Filipinos.

35
 1. SITUATION #1 – Silahis International Hotel, the capital stock of which is 69%
owned by another corporation Hotel Properties Inc. and 31% owned by
Filipinos. Hotel Properties in turn is 53% alien-owned and 47% Filipino-owned.
The SEC through the GFR stated that Silahis International Hotel can engage in
partly nationalized business because the Filipino equity in said corporation is
63.43% while the foreign equity in said corporation is 36.57%.

SILAHIS INTERNATIONAL HOTEL

Hotel Properties Inc. 69% 1.) 53% Foreign
47% Filipino
Filipino stockholdings 31%
47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in
Silahis)
TOTAL: 63.43%

2. 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.

GFR requisites:
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.

36
Up to what level do you apply the grandfather rule?

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
- 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 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
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
- 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.

Issue: W/N San Jose Petroleum is entitled to Parity Rights

Held: NO
- It is not owned or controlled directly by US citizens because it is owned and
controlled by Panamanian corporation;
- 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;
- 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;

37
- 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;
- The word indirectly should not be unduly stretched in application.
- 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.

SPECIAL CLASSIFICATIONS
- Sec. 140 Stock ownership in certain corporations (Same as Exception part)

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE

VEIL OF CORPORATE FICTION

A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND

DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS

CORPORATION –artificial being created by operation of law, having the right of

succession, and the powers, attributes, and properties expressly authorized by law or
incident to its existence.

Art. 44. The following are juridical persons:

1. The State and its political subdivisions;
2. Other corporations, institutions and entities for public interest or purpose, created
by law; their personality begins as soon as they have been constituted according
to law;
3. 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.
Importance of Protecting Main Doctrine:
 The separate juridical personality includes the right of succession, limited
liability, centralized management, and generally free transferability of shares of
stock. Therefore, an undermining of the separate juridical personality of the
corporation such as the application of the piercing doctrine, necessarily dilutes
any or all of those attributes.

FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF

PIERCING THE VEIL OF CORPORATE FICTION FOCUS ON?
1) Centralized management
- Centralized management is not a natural occurrence. It is a creation of statute
under Sec. 23 of the Corporation Code Compared to partnerships, partnerships
have mutual agency under delectus personarum.
38
 - Mutual agency is more of a natural occurrence since here the partner is a co-
owner of the assets of the partnership, maintaining his control over his property.
In property law, there is what is called the seven juses of ownership.
- In partnership however, a partner retains all this seven juses, albeit as a co-
owner, through mutual agency.
- However, in a corporation, a stockholder abdicates his jus dispossidendi, jus
abutendi, etc. as to the property he is placing inside a corporation retaining only
to himself his jus fruendi, as to the dividends of his stocks.
- This is unnatural since a person is entitled to full use, enjoyment or
dispossession of his property.
- But since under the Corporation Code, centralized management is provided
therefore it is the means by which a corporation acts and conducts it business.
- As such, the piercing doctrine is not directed at the attribute of centralized
management, because in most instances, investors in a corporation hand the
management of the business of the corporation to professionals.
- To do away with the central management would place the investors who had
taken no active part in the conduct of the corporation to be liable as partners
with mutual agency.
2) Free transferability of assets
- Shares of stock represent (1) right to profits/dividends (2) voting right (3)
contingent right which recognizes a proprietary right of a mere aliquot share in
the proceeds after dissolution and distribution of corporate assets.
- Therefore a stockholder is neither owner nor co-owner of assets of a
corporation.
- The assets of a stockholder are distinct from the assets of a corporation.
- The stockholders have no control in the dispossession or acquisition of assets
(only as to their voting capacity in the management of the corporation).
- The stockholders however have the right to freely dispose of his shares of stock
to any and all person who may purchase it.
- There the corporation has no control.
- Applying the piercing doctrine as to the free transferability of his assets cannot
be done since jurisprudence points out that the piercing doctrine is a remedy of
last resort.
- If a third party claimant has a claim as to the assets to be disposed of or acquired
by a corporation can be afforded in other remedies whether it be intra or inter
corporate.
3) Limited Liability and Separate Legal Personality
- Therefore it can be concluded that the piercing doctrine is directed at the limited
liability attribute of the corporation (in consonance with the separate juridical
personality attribute).
- The piercing doctrine in a way undermines the separate juridical personality of
a corporation allowing a party to look behind the veil of corporate fiction to
remedy a claim or fraud.
- In looking behind the veil, a plaintiff seeks to make somebody liable for a claim
either based on tort, breach of contract, etc.

39
 - Since a corporation can only act through its agents; it is the same agents that
are to be held liable.
- Therefore the attribute of limited liability cannot be availed of in a piercing case
since it is this attribute that is undermined so as a wrong can be remedied.

CLV: In viewing the main doctrine of separate juridical personality as to the piercing
doctrine, the main doctrine actually pertains to equity. Equity refers to the part of the
rights or interest an individual has in a corporation. Equity is comprised of two main
parts which is (1) enterprise and (2) assets. It is the enterprise or the conduct of the
business which in effect undermines equity. Assets are those brought in by the
stockholders during the formation of the corporation or may have been acquired
during its existence. They are inanimate objects that require human intervention to
move or be used. Thus, it can be said that it is not the assets that undermine equity
which bring about piercing. When an enterprise is conducted in fraud or in
perpetuation of a wrong the equity of the corporation is undermined. Since, a
corporation must act through its agents, so the corporation being the principal,
commissions these agents to act under that special commission. If an agent acts
beyond the commission of the principal (as provided under its by-laws) it is the actor
that should be held liable not the corporation, since the corporation for all of its juridical
existence is still abstract and a corporeal actor acts for it. Also a corporation cannot
undermine equity, only the actors. So when these actors undermine equity, they lose
limited liability and may be held liable. Therefore, the basis of piercing is on the
enterprise not on equity or its assets. Piercing regulates the enterprise of the
corporation.

 A corporation, upon coming into existence, is invested by law with a personality

separate and distinct from those persons composing it as well as from any other
legal entity to which it may be related. This separate and distinct personality is,
however, merely a fiction created by law for conveyance and to promote the ends
of justice.
 One of the advantages of a corporate form of business organization is the limitation
of an investor’s liability to the amount of the investment. This feature flows from the
legal theory that a corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may be used only for
legitimate purposes. On equitable considerations, the veil can be disregarded
when it is utilized as a shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego or business
conduit of a person or an instrumentality, agency or adjunct of another corporation.

APPLICATIONS:

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.

40
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
- 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.

Issue: W/N foreclosing creditor could be held liable for unpaid wages

Held: NO
- 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.
- Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
- Mere substantial identity of incorporators of two corporations does not necessarily
imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence
of clear and convincing evidence to show that the corporate personalities were
used to perpetuate fraud, or circumvent the law, the corporations are to be rightly
treated as distinct and separate from each other.
- Having interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other
public policy considerations.

41
STOCKHOLDERS OF F. GUANZON AND SONS, INC V. REGISTER OF DEEDS
OF MANILA (1962)

FACTS:
- 5 stockholders of the F. Guanzon and Sons, Inc. executed a certificate of
liquidation of the assets of the corporation, dissolution and distribution among
themselves in proportion to their shareholdings, as liquidating dividends, corporate
assets, including real properties
- Register of Deeds of Manila denied the registration of the certificate of liquidation:
 The number of parcels not certified to in the acknowledgment;
o P430.50 Reg. fees need be paid;
o P940.45 documentary stamps need be attached to the document;
 The judgment of the Court approving the dissolution and directing the
disposition of the assets of the corporation need be presented
 Commissioner of Land Registration overruled ground No. 7 and sustained
requirements Nos. 3, 5 and 6.
- Stockholders appealed - contend that the certificate of liquidation is not a
conveyance or transfer but merely a distribution of the assets of the corporation
which has ceased to exist for having been dissolved

ISSUE: W/N certificate merely involves a distribution of the corporation's assets (or
should be considered a transfer or conveyance)

HELD: NO. affirm the resolution appealed from

- Corporation - juridical person distinct from the members composing it.
- Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members.
- While shares of stock constitute personal property they do not represent property
of the corporation.
- A share of stock only typifies an aliquot part of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and
equity but its holder is NOT the owner of any part of the capital of the corporation
nor entitled to possession
- The stockholder is not a co-owner or tenant in common of the corporate property

GOOD EARTH EMPORIUM INC. VS COURT OF APPEALS 194 SCRA 544

Facts:
- A lease contract, dated October 16, 1981, was entered into by and between
Roces-Reyes Realty Inc. as lessor, and Good Earth Emporium Inc. (GEE) as
lessee for a term of three years
- The building which was the subject of the contract of lease is a five story building
located at the corner of Rizal Avenue and Bustos Street in Sta. Cruz, Manila.
- the lessee had defaulted in the payment of rentals, as a consequence of which,
private respondent Roces-Reyes Realty Inc. filed an ejectment case against
herein petitioners
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- petitioners were ordered to vacate the premises and surrender the same to the
plaintiffs.
- Contention: payment made by GEE to the Roces brothers constitute payment to
private respondent corporation which would result to the extinguishment of the
obligation.

Issue: Whether or not payment made constitute payment to private respondent

Held: No.
- Payment shall be made to the person in whose favor the obligation has been
constituted, on his successor in interest or any person authorized to receive it.
- supposed payments were not made to Roces-Reyes Realty Inc. or to its
successors in interest nor is there positive evidence that payment was made to a
person authorized to receive it. No such proof was submitted but merely inferred
by the RTC from Marcos Roces having signed the lease contract as President
which was witnessed by Jesus Marcos Roces.
- The latter, however, was no longer President or even an officer of the Roces-
Realty Inc at the time he received the money and signed the sale with pacto de
retro. He, in fact denied being in possession of authority to receive payment for
the respondent corporation nor does the receipt show that he signed in the same
capacity as he did in the lease contract at a time when he was President for
respondent corporation.
- A corporation has a personality distinct and separate from its individual
stockholders or members. Being an officer or stockholder of a corporation does
not make one’s property also of the corporation, and vice-versa, for they are
separate entities.
- Share owners are in no legal sense the owners corporate property which is owned
by the corporation as a distinct legal person. As a consequence of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or
credit of the stockholder, nor is the stockholder’s debt or credit that of the
corporation.

SULO NG BAYAN VS. ARANETA [GR L-31061, 17 August 1976]

Facts:
- Sulo ng Bayan, Inc. filed an accion de revindicacion against Gregorio Araneta
Inc. (GAI), Paradise Farms Inc., National Waterworks & Sewerage Authority
(NAWASA), Hacienda Caretas Inc., and the Register of Deeds of Bulacan to
recover the ownership and possession of a large tract of land in Bulacan,
registered under the Torrens System in the name of GAI, et. al.'s predecessors-
in-interest (who are members of the corporation).
- GAI filed a motion to dismiss the amended complaint on the grounds that (1)
the complaint states no cause of action; and (2) the cause of action, if any, is
barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas,
Inc. filed motions to dismiss based on the same grounds.

43
 - NAWASA did not file any motion to dismiss. However, it pleaded in its answer
as special and affirmative defenses lack of cause of action by Sulo ng Bayan
Inc. and the barring of such action by prescription and laches.
- the trial court issued an Order dismissing the (amended) complaint.
- Sulo ng Bayan filed a motion to reconsider the Order of dismissal, arguing
among others that the complaint states a sufficient cause of action because the
subject matter of the controversy in one of common interest to the members of
the corporation who are so numerous that the present complaint should be
treated as a class suit. The motion was denied by the trial court in its Order
- Sulo ng Bayan appealed to the Court of Appeals. On 3 September 1969, the
Court of Appeals, upon finding that no question of fact was involved in the
appeal but only questions of law and jurisdiction, certified the case to the
Supreme Court for resolution of the legal issues involved in the controversy.

Issue:
1. Whether the corporation (non-stock) may institute an action in behalf of its
individual members for the recovery of certain parcels of land allegedly owned
by said members, among others.
2. Whether the complaint filed by the corporation in behalf of its members may be
treated as a class suit

HELD:
1. No. It is a doctrine well-established and obtains both at law and in equity that a
corporation is a distinct legal entity to be considered as separate and apart from
the individual stockholders or members who compose it, and is not affected by
the personal rights, obligations and transactions of its stockholders or members.
The property of the corporation is its property and not that of the stockholders,
as owners, although they have equities in it. Properties registered in the name
of the corporation owned by it as an entity separate and distinct from its
members. Conversely, a corporation ordinarily has no interest in the individual
property of its stockholders unless transferred to the corporation even in the
case of a one-man corporation. It has not been claimed that the members have
assigned or transferred whatever rights they may have on the land in question
to the plaintiff-corporation. Absent of any showing of interest, therefore, a
corporation, like plaintiff-appellant herein, has no personality to bring an action
for and in behalf of its stockholders or members for the purpose of recovering
property which belongs to said stockholders or members in their personal
capacities.

2. No. In order that a class suit may prosper, the following requisites must be
present: (1) that the subject matter of the controversy is one of common or
general interest to many persons; and (2) that the parties are so numerous that
it is impracticable to bring them all before court. Here, there is only one plaintiff,
and the plaintiff corporation does not even have an interest in the subject matter
of the controversy, and cannot, therefore, represent its members or

44
 stockholders who claim to own in their individual capacities ownership of the
said property.

Being Corporate Officer

- Being an officer or stockholder of a corporation does not by itself make one's
property also of the corporation, and vice-versa, for they are separate entities, and
that shareholders are in no legal sense the owners of corporate property which is
owned by the corporation as a distinct legal person.
- The mere fact that one is president of the corporation does not render the property
he owns or possesses the property of the corporation, since that president, as an
individual, and the corporation are separate entities.
- It is hornbook law that corporate personality is a shield against personal liability
of its officers—a corporate officer and his spouse cannot be made personally
liable under a trust receipt where he entered into and signed the contract clearly
in his official capacity.

Dealings Between Corporation and Stockholders:

- The fact that the majority stockholder had used his own money to pay part of the
loan of the corporation cannot be used as the basis to pierce. “It is understandable
that a shareholder would want to help his corporation and in the process, assure
that his stakes in the said corporation are secured.”
- Use of a controlling stockholder’s initials in the corporate name is not sufficient
reason to pierce the corporate veil, since by that practice alone does it mean that
the said corporation is merely a dummy of the individual stockholder. A corporation
may assume any name provided it is lawful, and there is nothing illegal in a
corporation acquiring the name or as in this case, the initials of one of its
shareholders.
- The mere fact that a stockholder sells his shares of stock in the corporation during
the pendency of a collection case against the corporation, does not make such
stockholder personally liable for the corporate debt, since the disposing
stockholder has no personal obligation to the creditor, and it is the inherent right
of the stockholder to dispose of his shares of stock anytime he so desires.
- Just because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the
conduit of the other, thus piercing the veil of corporate fiction.
- The creation by DBP as the mother company of the three mining corporations to
manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value, does not indicate fraud or
wrongdoing and will not constitute application of the piercing doctrine.
- The facts that two corporations may be sister companies, and that they may be
sharing personnel and resources, without more, is insufficient to prove that their
separate corporate personalities are being used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370
SCRA 208 (2001).

45
On Privileges Enjoyed: The tax exemption clause in the charter of a corporation
cannot be extended to nor enjoyed by even its controlling stockholders.

Obligations and Debts: Corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder's debt or credit that of the corporation.
- A corporation has no legal standing to file a suit for recovery of certain parcels
of land owned by its members in their individual capacity, even when the
corporation is organized for the benefit of the members.
- Stockholders have no personality to intervene in a collection case covering
the loans of the corporation since the interest of shareholders in corporate
property is purely inchoate.
- The majority stockholder cannot be held personality liable for the attorney’s fees
charged by a lawyer for representing the corporation.
- Even when the foreclosure on the corporate assets was wrongful done,
stockholders have no standing to recover for themselves moral damages;
otherwise, it would amount to the appropriation by, and the distribution to, such
stockholders of part of the corporation’s assets before the dissolution of the
corporation and the liquidation of its debts and liabilities.
- The obligations of a stockholder in one corporation cannot be offset from the
obligation of the stockholder in a second corporation, since the corporation has
a separate juridical personality.

PIERCING THE VEIL OF CORPORATE FICTION:

1. Source of Incantation: The notion of corporate entity will be pierced or
disregarded and the individuals composing it will be treated as identical if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; or as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders.
2. Nature of Doctrine

TRADERS ROYAL BANK v COURT OF APPEALS

Facts:
- Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of
Central Bank Certificate of Indebtedness (CBCI) with a face value of 500,000.
- Such was then transferred to Philippine Underwriters Finance Corporation
(Philfinance) under a Detached Assignment. Philfinance entered into a repurchase
agreement with Traders Royal Bank over the CBCI whereby TRB buys the CBCI
and Philfinance will repurchase it on April 27, 1981 for 519,361.11
- Upon the default of Philfinance TRB sought to register the CBCI in its name. CB
refused to register and transfer the CBCI due to the adverse claim of Filriters.
(Filriters interjected the defense that Alfredo Banaria Senior VP of Filriters without
any board resolution, knowledge or consent of the board of directors executed the
detached assignment in favor of Philfinance.
- Subsequently, Alberto Fabella, Senior VP Comptroller and Pilar Jacobe Senior VP
Treasury, of Filriters and of Philfinance executed similar forms transferring the
CBCI to TRB. As such the transfers were null and void.)
46
- TRB then went to the RTC of Manila and filed for mandamus to compel CB to
register. Petitioner argued that the CBCI was a negotiable instrument and that it
was a holder in due course. It also contended that Philfinance owned 90% of
Filriter’s equity and the two corporations have identical officers, this demanding
the application of the doctrine of piecing the veil of corporate fiction as to give
validity to the transfer of the CBCI.

Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.

Held:
- The CBCI is not a negotiable instrument because it lacks the words of negotiability.
It is payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to
TRB should have put the latter on guard as to the title of Philfinance to dispose of
the CBCI.
- Also the assignment of Filriters toPhilfinance was fictitious as the same is without
consideration and was contrary to the rules of CB Circular 70 which provides that
any assignment shall not be valid unless made by the registered owner in person
or by a duly authorized representative in writing. Philfinance merely borrowed the
CBCI from Filriters a sister corporation to guarantee financing corporations.
- The doctrine of piecing the corporate veil is an equitable remedy which may only
be awarded in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a corporation
is a mere alter ego or business conduit of a person.
- It requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to or distinguishes
one corporation from a seemingly separate one, were it not for the existing
corporate fiction.
- The court must be sure that the corporate fiction was misused.. It is the protection
of innocent 3rd parties dealing with corporate entity that the law seeks to protect
by this doctrine.
- In this case, other than the allegation that Filriters is 90% owned by Philfinance
and the identity of one shall be maintained as to the other, there is nothing else
which could lead the court under the circumstances to disregard their separate
corporate personalities.
- There is no showing that TRB was defrauded at all when it acquired the subject
certificate of indebtedness from Philfinance.
- The fact that Philfinance owns a majority share in Filriters is not by itself a ground
to disregard their independent corporate entities. In Liddel & Co. Inc. v. CIR mere
ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not itself a sufficient reason to disregard the
fiction of separate corporate personalities.
- TRB being a commercial bank which deals with corporate entities with
circumstances showing that the agents are acting in excess of corporate authority
may not hold the corporation liable. This is only fair as everyone must in the
exercise of his rights and in the performance of his duties, act with justice, give
everyone his due and observe honesty and good faith.
47
- When the legal fiction of 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.
- Piercing the veil of corporation fiction is warranted only in cases when the separate
legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, such that in the case of two corporations, the law will regard the
corporation as merged into one.
- The legal fiction of separate corporate existence is not at all times invincible and
the same may be pierced when employed as a means to perpetrate a fraud,
confuse legitimate issues, or used as a vehicle to promote unfair objectives or to
shield an otherwise blatant violation of the prohibition against forum-shopping.
While it is settled that the piercing of the corporate veil has to be done with caution,
this corporate fiction may be disregarded when necessary in the interest of justice.
- The nature of the piercing doctrine is to disregard the separate juridical personality
of a corporation and to hold the actors or the stockholders of the corporation liable
for a wrong committed or a liability avoided. In our lessons in corporation law, we
distinguish the cause of the piercing because it would explain of piercing is
properly done. The Supreme Court does not go into an explanation or direct
attribution as to cause of the piercing which at times cause confusion, so to clarify
matters we classify the piercing case into three namely: (1) fraud (2) alter ego and
(3) remedy.
- In the cases of fraud, the piercing is done because there is a wrong committed.
Therefore, a person behind the wrong must be held liable which in a corporation
are the directors, since the corporation acts through them. A piercing of the
corporate veil in fraud cases is for the purpose of making the directors directly
liable. In fraud cases, the SC looks into the circumstances of the case searching
for elements of malice or evil motive. An absence of such an evil motive, the courts
will not allow piercing. An example would be the case of TRB v. CA where the
Court did not allow piercing because there was no injury caused. Also in the Umali
case, the court did not allow piercing because the main intent was to annul a real
estate mortgage under an allegation of fraud and not to hold the Directors liable.
In both cases, piecing was not the proper remedy, even if fraud was actually
alleged because the fraud committed was not attributed directly to the acts of the
agents of the corporation.
- In alter ego cases, the allegation does not go into fraud or malicious intent but a
disrespect for the corporate fiction. Here, the corporation is being used as a
conduit or front for the activities of a person, whether natural or juridical, in order
to avoid liability or gain advantage over another without really employing fraud.
Here, if piercing is allowed then the corporate existence of the conduit corporation
is disregarded and the person or corporation behind the corporation shall be
considered as one and the liability of one is the liability of the other. The main
intent here is not to make the board of directors of the conduit corporation liable
but to make the corporation behind the existence of the conduit liable. It is the
objective of the Corporation Code to foster public convenience in sanctioning the
creation of a corporation not as a means or private convenience where it is to be

48
 used by other corporations or individuals as a means to circumvent liability or
cause a disruption of normal business practice in dealing with corporations.
- Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court
may grant piercing as an equitable remedy, but such is usually resorted to as a
reason in consonance with fraud or alter ego cases. As such it is of purely judicial
discretion.

The three cases may appear together in one application:

FRAUD – to prevent wrong

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.

(b)Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and
is not available when other remedies are still available.

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.
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 - 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:
a. used to defeat public convenience, justify wrong, protect fraud, or defend
crime
b. made as a shield to confuse legitimate issued
c. where a corporation is the mere alter ego or business conduit of a person
d. 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.

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- 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 circumvention of any liability.

Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make
the officer or another corporation pecuniarily liable for corporate debts (?).

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.
- Union and Indophil excecuted a CBA
- 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
51
 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.

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FRANCISCO MOTORS CORPORATION V. CA AND SPS. MANUEL

Facts:
- Petitioner Francisco Motors Corp filed a complaint to recover from respondent
spouses Manuel the unpaid balance of the jeepney bought by the latter from them.
- As their answer, respondent spouses interposed a counterclaim for unpaid legal
services by Gregorio Manuel which was not paid by petitioner corporation’s
directors and officers.
- Respondent Manuel alleges that he represented members of the Francisco family
who were directors and officers of herein petitioner corporation in an intestate
estate proceeding but even after its termination, his services were not paid.
- The trial court ruled in favor of petitioner but also allowed respondent spouses’
counterclaim. CA affirmed.

Issue: Whether or not petitioner corporation may be held liable for the liability incurred
by its directors and officers in their personal capacity.

Ruling: NO.
- In our view, however, given the facts and circumstances of this case, the doctrine
of piercing the corporate veil has no relevant application here. Respondent court
erred in permitting the trial court’s resort to this doctrine.
- In the case at bar, instead of holding certain individuals or persons responsible for
an alleged corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned.
- Hence, it appears to us that the doctrine has been turned upside down because
of its erroneous invocation.
- Note that according to private respondent Gregorio Manuel his services were
solicited as counsel for members of the Francisco family to represent them in the
intestate proceedings over Benita Trinidad’s estate.
- These estate proceedings did not involve any business of petitioner.
- Furthermore, considering the nature of the legal services involved, whatever
obligation said incorporators, directors and officers of the corporation had incurred,
it was incurred in their personal capacity.
- When directors and officers of a corporation are unable to compensate a party for
a personal obligation, it is far-fetched to allege that the corporation is perpetuating
fraud or promoting injustice, and be thereby held liable therefore by piercing its
corporate veil.

53
BOYER – ROXAS VS. COURT OF APPEALS

FACTS:
- When Eugenia V. Roxas died, her heirs formed a corporation under the name and
style of Heirs of Eugenia V. Roxas, Inc. using her estate as the capital of the
corporation, the private respondent herein.
- It was primarily engaged in agriculture business, however it amended its purpose
to enable it to engage in resort and restaurant business.
- Petitioners are stockholders of the corporation and two of the heirs of Eugenia. By
tolerance, they were allowed to occupy some of the properties of the corporation
as their residence.
- However, the board of directors of the corporation passed a resolution evicting the
petitioners from the property of the corporation because the same will be needed
for expansion.
- At the RTC, private respondent presented its evidence averring that the subject
premises are owned by the corporation. Petitioners failed to present their evidence
due to alleged negligence of their counsel. RTC handed a decision in favor of
private respondent.
- Petitioners appealed to the Court of Appeals but the latter denied the petition and
affirmed the ruling of the RTC. Hence, they appealed to the Supreme Court. In
their appeal, petitioners argues that the CA made a mistake in upholding the
decision of the RTC, and that their occupancy of the subject premises should be
respected because they own an aliquot part of the corporation as stockholders,
and that the veil of corporate fiction must be pierced by virtue thereof.

ISSUE
1. Whether petitioner’s contention were correct as regards the piercing of the
corporate veil.
2. Whether petitioners were correct in their contention that they should be respected
as regards their occupancy since they own an aliquot part of the corporation.

HELD
1.Petitioner’s contention to pierce the veil of corporate fiction is untenable. As aptly
held by the court: “The separate personality of a corporation may ONLY be
disregarded when the corporation is used as a cloak or cover for fraud or illegality,
or to work injustice, or when necessary to achieve equity or when necessary for the
protection of creditors.”
2. As regards petitioners contention that they should be respected on their occupancy
by virtue of an aliquot part they own on the corporation as stockholders, it also fails
to hold water. The court held that “properties owned by a corporation are owned by
it as an entity separate and distinct from its members. While shares of stocks are
personal property, they do not represent property of the corporation. A share of
stock only typifies an aliquot part of the corporation’s property, or the right to share
in its proceeds to that extent when distributed according to law and equity, but its
holder is not the owner of any part of the capital of the corporation. Nor is he entitled

54
 to the possession of any definite portion of its property or assets. The holder is not
a co-owner or a tenant in common of the corporate property.”

GREGORIO ARANETA, INC VS TUASON DE PATERNO AND JOSE VIDAL

Facts:
- This is between a purchasers, the seller, and the mortgagee of a residential land
in Santa Mesa, Manila.
- Tuason is the owner of said land which was subdivided into city lots and occupied
by lessees w/ a contract of lease which were to expire w/ stipulation that they have
priority in buying if owner decide to sell.
- Tuason obtained from Jose Vidal loans 90k 1st mortgage on the aforesaid property
and additional 30k and 20k laster payment was for 2 years and the 2nd and last for
4 years.
- A separate written agreement was not registered and was destroyed (Penalidad
del Documento de Novacion de EstaFecha) Tuason decided to sell the entire
property for 400k in negotiation with Gregorio Araneta which made a contract
called "Promesa de Compra y Venta" and identified as Exhibit "1"
- So, letters were given to the lessees on the option to buy which making payments
and given their deeds of conveyance. Some tenants there remained
unencumbered, except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18 which
have an aggregate area of 14,810.20 square meters; and on December 2, 1943,
Paz Tuason and Gregorio Araneta, Inc. executed with regard to these lots an
absolute deed of sale, the terms of which, except in two respects, were similar to
those of the sale to the lessees.
- This deed, copy of which is attached to the plaintiff's complaint as Exhibit A,
provided, lots are being sold by the Vendor to the Vendee separately at the prices
mentioned in par (6) of the aforesaid contract "Promesa de Compra y Venta,"
making a total sum of P139,083.32, 90%, the Vendor acknowledges to have
received by virtue of the advance and remaining upon executionof said contract.
Checks of BPI.
- Before the execution of the deed, the day following the signing of the agreement
to buy and sell,Tuason had offered to Vidal the check for P143,150 mentioned in
Exhibit A, in full settlement of her mortgage obligation, but the mortgagee had
refused to receive that check or to cancel the mortgage, contending that by the
separate agreement before mentioned payment of the mortgage was not to be
effected totally or partially before the end of four years from April, 1943.
- Which through Atty. Alfonso Ponce Enrile, commenced an action against the
mortgagee. But the action never came on for trial the checks were destroyed
during the war operations in January or February, 1945; and neither reconstituted
afterward. Later gave occasion to the breaking off the schemes outlined in Exhibits
1 and A.
- The instant action begun by Gregorio Araneta, Inc. to compel Paz Tuason to
deliver to the plaintiff a clear title to the lots described in Exhibit A free from all
liens and encumbrances, and a deed of cancellation of the mortgage to Vidal.
Vidal came by summons.
55
Issue: W the deed of sale (exhibit A) between Gregorio and Tuason was valid?

SC: Yes.
- That the sale was not contingent on the cancellation of vidal’s mortgage. *The trial
court admitting the existence of the relation of principal and agent between Paz
Tuason and Jose Araneta, pointed out that not Jose Araneta but Gregorio Araneta,
Inc. was the purchaser, and the well-known distinction between the corporation
and its stockholders.
- The court opined that the sale to Gregorio Araneta, Inc. was not a sale to Jose
Araneta the agent or broker. Gregorio Araneta, Inc. had long been organized and
engaged in real estate business.
- The corporate entity was not used to circumvent the law or perpetrate deception.
- There is no denying that Gregorio Araneta, Inc. entered into the contract for itself
and for its benefit as a corporation.
- The contract and the roles of the parties who participated therein were exactly as
they purported to be and were fully revealed to the seller.
- There is no pretense, nor is there reason to suppose, that if Paz Tuason had
known Jose Araneta to Gregorio Araneta, Inc's president, which she knew, she
would not have gone ahead with the deal.
- From her point of view and from the point of view of public interest, it would have
made no difference, except for the brokerage fee, whether Gregorio Araneta, Inc.
or Jose Araneta was the purchaser.
- Under these circumstances the result of the suggested disregard of a technicality
would be, not to stop the commission of deceit by the purchaser but to pave the
way for the evasion of a legitimate and binding commitment buy the seller.
- The principle invoked by the defendant is resorted to by the courts as a measure
or protection against deceit and not to open the door to deceit. "The courts," it has
been said, "will not ignore the corporate entity in order to further the perpetration
of a fraud."

ADELIO C. CRUZ VS QUITERIO L. DALISAY

Facts:
- A sworn complaint was filed by Adelio Cruz charging Quiterio Dalisay, Senior
Deputy Sheriff of Manila, with malfeasance in office, corrupt practices and serious
irregularities allegedly committed as follows:
a. Respondent attached and/or levied the money belonging to complainant Cruz
when he was not himself the judgment debtor in the final judgment of an
NLRC case sought to be enforced but rather the company known as
“Qualitrans Limousine Service, Inc.”; and
b. Respondent also caused the service of the alias writ of execution upon
complainant who is a resident of Pasay City, despite knowledge that his
territorial jurisdiction covers Manila only and does not extend to Pasay City.
- Respondent in his reply explained that when he garnished complainant’s cash
deposit at the Philtrust bank he was merely performing a ministerial duty.

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- And that while it is true that said writ was addressed to Qualitrans Limousine
Service, Inc., it is also a fact that complainant had executed an affidavit before the
Pasay City assistant fiscal stating that he is the owner/ president of Qualitrans.
Because of that declaration, the counsel for the plaintiff in the labor case advised
him to serve notice of garnishment on the Philtrust bank.

Issue: Whether or not the personal property of Cruz (complainant) is properly levied
or attached as owner of the corporation?

Held: NO.
- Respondent’s actuation in enforcing a judgment against complainant who is not a
judgment debtor in the case calls for disciplinary action.
- What is incumbent upon respondent is to ensure that only the portion of a decision
ordained or decreed in the dispositive part should be the subject of the execution.
- The tenor of the NLRC judgment and the implementing writ is clear enough. It
directed Qualitrans Limousine Service, Inc. in its judgment and not the owner
thereof.
- Respondent, however, choose to “pierce the veil of corporate entity” usurping a
power belonging to the court and assumed improvidently that since the
complainant is the owner/president of Qualitrans Limousine Service, Inc., they are
one and the same. It is a well settled doctrine both in law and equity that as a legal
entity, a corporation has a personality distinct and separate from its individual
stockholders or members.
- The mere fact that one is president of the corporation does not render the property
he owns or possesses the property of the corporation, since that president, as an
individual, and the corporation are separate entities.

Basis Must Be Clear Evidence:

- To disregard the separate juridical personality of a corporation, it is elementary
that the wrongdoing cannot be presumed and must be clearly and convincingly
established. The organization of the corporation at the time when the relationship
between the landowner and the developer were still cordial cannot be used as a
basis to hold the corporation liable later on for the obligations of the landowner to
the developer under the mere allegation that the corporation is being used to
evade the performance of obligation by one of its major stockholders.
- The mere assertion by a Filipino litigant against the existence of a “tandem”
between two Japanese corporations cannot be the basis for piercing, which can
only be applied by showing wrongdoing by clear and convincing evidence.
- To disregard the separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established. It cannot be presumed. In this case,
the Court finds that the Remington failed to discharge its burden of proving bad
faith on the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate veil.
- The party seeking for the piercing of the corporate veil has the burden of
presenting clear and convincing evidence to justify the setting aside of the
separate corporate personality rule.
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- Application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from an erroneous
application.

Not Applicable to Theorizing:

- Piercing of the veil of corporate fiction is not allowed when it is resorted under a
theory of co-ownership to justify continued use and possession by stockholders of
corporate properties.
- The piercing doctrine is an equitable remedy available only to persons outside the
corporation. It cannot be availed of stockholders within the corporation forming part
of the corporation. In comparison, CLV uses the Story of the Wall. This wall is the
main doctrine, designed both to protect the stockholders by virtue of the attribute
of limited liability and to hide from prying eyes the inner workings of the corporation.
Stockholders are inside these walls. Piercing the veil of corporate fiction is like a
battering ram that creates a hole through this wall to allow third persons to look into
the corporation to see if there is a wrong committed inside those walls. A
stockholder being inside the fort are afforded other remedies, they have intra-
corporate remedies to avail of.
- The piercing doctrine cannot be availed of to dislodge from SEC’s jurisdiction a
petition for suspension of payments filed under P.D. 902-A, on the ground that the
petitioning individuals should be treated as the real petitioners to the exclusion of
the petitioning corporate debtor. “The doctrine of piercing the veil of corporate
fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine
only applies when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime.”

Applicable to “Third-Parties”:
- That respondents are not stockholders of the sister corporations does not make
them non-parties to this case, since it is alleged that the sister corporations are
mere alter egos of the directors-petitioners, and that the sister corporations
acquired the properties sought to be reconveyed to FGSRC in violation of
directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will
be pierced and the individuals composing it will be treated as identical if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; or as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders. a Gochan v. Young, 354 SCRA 207 (2001).

(g) Piercing is a power belonging to the court and cannot be assumed

improvidently by a sheriff (?).

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CONSEQUENCES AND TYPES OF PIERCING CASES:
- 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, or the particular obligation for which the doctrine was applied.
- Classification of Piercing Cases:
- Rundown on Piercing Application: This Court pierced the corporate veil to
ward off a judgment credit, to avoid inclusion of corporate assets as part of
the estate of the decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to
shield unfair objectives to cover up an otherwise blatant violation of the
prohibition against forum shopping. Only is these and similar instances may
the veil be pierced and disregarded.
(i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong
(ii) Alter-ego Piercing: When corporate entity merely a farce since the
corporation is merely the alter ego, business conduit, or instrumentality of
a person or another entity
(iii) Equity Cases: When piercing the corporate fiction is necessary to
achieve justice or equity.
- The three cases may appear together in one application.

KOPPEL (PHIL) INC. VS YATCO

FACTS:
- Plaintiff is a corporation duly organized and existing under and by virtue of the
laws of the Philippines, with principal office in Manila, the capital stock of which is
divided into 1,000 shares of P100 each.
- The Koppel Industrial Car and Equipment company, a corporation organized and
existing under the laws of the State of Pennsylvania, United States of America,
and not licensed to do business in the Philippines, owned nine hundred and 995
shares out of the total capital stock of the plaintiff.
- The remaining 5 shares only were and are owned one each by officers of the
plaintiff corporation.
- That plaintiff, at all times material to this case, was and now is duly licensed to
engage in business as a merchant and commercial broker in the Philippines; and
was and is the holder of the corresponding merchant's and commercial broker's
privilege tax receipts.
- Exhibited H of the evidence: It is clearly understood that the intent of this contract
is that the broker shall perform only the functions of a broker as set forth above,
and shall not take possession of any of the materials or equipment applying to said
orders or perform any acts or duties outside the scope of a broker; and in no sense
shall this contract be construed as granting to the broker the power to represent
the principal as its agent or to make commitments on its behalf. The Court of First
Instance held for the defendant and dismissed plaintiff's complaint with costs to it.

ISSUE: Whether or not Koppel Philippines is a domestic corporation distinct and

separate from, and not a mere branch of Koppel Industrial Car and Equipment Co

59
RULING:
- Koppel Philippines is a mere branch, subsidiary or agency of the latter.
- A corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons.
- The corporate entity is disregarded where it 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.
- SC reasoned that, in so far as the sales involved herein are concerned, Koppel
Philippines, Inc., and Koppel Industrial Car and Equipment company are to all
intents and purposes one and the same; or, to use another mode of expression,
that, as regards those transactions, the former corporation is a mere branch,
subsidiary or agency of the latter.
- This is conclusively borne out by the fact, among others, that the amount of the
so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to
the sole, unbridled control of Koppel Industrial Car and Equipment Company.
- No group of businessmen could be expected to organize a mercantile corporation
— the ultimate end of which could only be profit — if the amount of that profit were
to be subjected to such a unilateral control of another corporation, unless indeed
the former has previously been designed by the incorporators to serve as a mere
subsidiary, branch or agency of the latter.
- Evidently, Koppel Industrial Car and Equipment Company made us of its
ownership of the overwhelming majority — 99.5% — of the capital stock of the
local corporation to control the operations of the latter to such an extent that it had
the final say even as to how much should be allotted to said local entity in the so-
called sharing in the profits.
- SC further ruled that, it cannot overlook the fact that in the practical working of
corporate organizations of the class to which these two entities belong, the holder
or holders of the controlling part of the capital stock of the corporation, particularly
where the control is determined by the virtual ownership of the totality of the
shares, dominate not only the selection of the Board of Directors but, more often
than not, also the action of that Board.
- Philippine corporation could not possibly contravene with the American
corporation in this case under Exhibit H.
- This fact necessarily leads to the inference that the corporation had at least a Vice-
President, and presumably also a President, who were not resident in the
Philippines but in America, where the parent corporation is domiciled.
- If Koppel (Philippines), Inc., had been intended to operate as a regular domestic
corporation in the Philippines, where it was formed, the record and the evidence
do not disclose any reason why all its officers should not reside and perform their
functions in the Philippines.

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R.F. SUGAY & CO vs REYES

Facts:
- Respondents Pablo Reyes and Cesar Curata suffered burns of various degrees,
while painting the building of the Pacific Products, Inc., caused by a fire of
accidental origin, resulting in their temporary disability from work.
- For said injuries they filed claims for disability and medical expenses against the
R. F. Sugay & Co., Inc., Romulo F. Sugay and the Pacific Products, Inc.
- The R. F. Sugay & Co., Inc., answered the claim, alleging that the corporation was
not the employer of the claimants but it was the Pacific Products, Inc., which had
an administration and supervision job contract with Romulo F. Sugay, who, aside
from being the President of the corporation, bearing his name, had also a business
of his own, distinct and separate from said corporation; and that the Regional
Office of the Department of Labor had no jurisdiction over the subject matter.
- Romulo Sugay voluntary appeared during the scheduled hearings and denied the
liabilities.
- Pacific Products, Inc. on the other hand averred that its business was mainly in
the manufacture and sale of lacquer and other painting materials.
- As defenses, it stated that the claimants were the employees of respondents R. F.
Sugay Construction Co., Inc., and/or Romulo F. Sugay.
- The Hearing Officer dismissed the case and exempted R. F. Sugay Construction
Co., Inc., and Romulo F. Sugay from any liability for lack of employer-employee
relationship with the claimants.
- The officer ordered Pacific Products to pay the injured workers. Pacific Products,
Inc., appealed the above decision to the Commission and Commissioner Jose
Sanchez rendered judgment affirming the compensability of the injuries and the
amounts due them, but modified the decision of the Hearing Officer, by finding that
R. F. Sugay & Co., Inc., was the statutory employer of the claimants and should
be liable to them. Pacific Products, Inc., was absolved from all responsibility. R. F.
Sugay Construction Co., Inc. filed a motion of reconsideration but the Commission
en banc denied the motion.

Issue: Is R.F. Sugay construction Co., Inc. the employer of the injured workers? Is it
liable?

Ruling:
- R.F. Sugay construction Co., Inc. is the employer of the workers.
- The Court find that the findings of facts made by the Commissioner and concurred
in by the Commission en banc are fully supported by the evidence on record which
clearly points out that R. F. Sugay & Co., is the statutory employer of the claimants.
- The decisive elements showing that it is the employer, are present, such as
selection and engagement; payment of wages; power of dismissal, and control.
- There was a faint attempt by the petitioning corporation, to evade liability, by
advancing the theory that Romulo P. Sugay, its President, was the one who
entered into a contract of administration and supervision for the painting of the
factory of the Pacific Products, Inc., and making it appear that said Romulo F.
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 Sugay acted as an agent of the Pacific Products, Inc., and as such, the latter
should be made answerable to the compensation due to the claimants.
- We, however, agree with the Commission that "the dual roles of Romulo F. Sugay
should not be allowed to confuse the facts relating to employer-employee
relationship."
- It is a legal truism that when the veil of corporate fiction is made as a shield to
perpetrate a fraud and/or confuse legitimate issues (here, the relation of employer-
employee), the same should be pierced. Verily the R. F. Sugay & Co., Inc. is a
business conduit of R. F. Sugay.

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.
- In accordance with the foregoing rule, this Court has disregarded the separate
- 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.

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.
- 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.

(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.”

(c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by
incorporating properties or the business.

Q: Why should a case be classified as a fraud case, an alter ego case, etc.?

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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.

(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.
(d) Parent-Subsidiary Relations; Affiliates:

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:

Why is there inordinate showing of alter-ego elements?

• 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.

NATIONAL MARKETING CORPORATION V. ASSOCIATED FINANCE COMPANY,

FACTS:
- ASSOCIATED, a domestic corporation, through its President, appellee Francisco
Sycip, entered into an agreement to exchange sugar with NAMARCO,
represented by its then General Manager, Benjamin Estrella, whereby the former
would deliver to the latter bags of "Victorias" and/or "National" refined sugar in
exchange for bags of "Busilak" and piculs of "Pasumil" raw sugar belonging to
NAMARCO, both agreeing to pay liquidated damages equivalent to 20% of the
contractual value of the sugar should either party fail to comply with the terms and
conditions stipulated (Exhibit A).
- Pursuant thereto, NAMARCO delivered to ASSOCIATED bars of "Busilak" and
piculs of "Pasumil" domestic raw sugar.

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- As ASSOCIATED failed to deliver to NAMARCO the bags of "Victoria" and/or
"National" refined sugar agreed upon, the latter, demanded in writing from the
ASSOCIATED either (a) immediate delivery thereof before January 20, or (b)
payment of its equivalent cash value
- As ASSOCIATED refused to deliver the raw sugar or pay for the refund sugar
delivered to it, inspite of repeated demands therefore, NAMARCO instituted the
present action in the lower court to recover the payment of the raw sugar received
by defendants from it; liquidated damages attorney’s fees, expenses of litigation
and exemplary damages, with legal interest thereon from the filing of the complaint
until fully paid.
- In their amended answer defendants, by way of affirmative defenses, alleged that
the correct value of the sugar delivered by NAMARCO to them was P259,451.09
or P13.30 per bag of 100 lbs. weight (quedan basis) and not P403,514.28 as
claimed by NAMARCO. As counterclaim they prayed for the award of P500,000.00
as moral damages, P100,000.00 as exemplary damages and P10,000.00 as
attorney’s fee.

ISSUE: The only issue to be resolved is whether, upon the facts found by the trial
court, Francisco Sycip may be held liable, jointly and severally with his co-defendant,
for the sums of money adjudged in favor of NAMARCO.

RULING:
- The foregoing facts, fully established by the evidence, can lead to no other
conclusion than that Sycip was guilty of fraud because through false
representations he succeeded in including NAMARCO to enter into the aforesaid
exchange agreement, with full knowledge, on his part, of the fact that
ASSOCIATED whom he represented and over whose business and affairs he had
absolute control, was in no position to comply with the obligation it had assumed.
- Consequently, he cannot now seek refuge behind the general principle that a
corporation has a personality distinct and separate from that of its stockholders
and that the latter are not personally liable for the corporate obligations.
- To the contrary, upon the proven facts, we feel perfectly justified in “piercing the
veil of corporate fiction” and in holding Sycip personally liable, jointly and severally
with his co-defendant, for the sums of money adjudged in favor of appellant.
- It is settled law in this and other jurisdictions that when the corporation is the mere
alter ego of a person, the corporate fiction may be disregarded; the same being
true when the corporation is controlled, and its affairs are so conducted as to make
it merely an instrumentality, agency or conduit of another.

PALACIO vs FELY TRANSPORTATION CO.

DOCTRINE: We believe that this is one case where the defendant corporation should
not be heard to say that it has a personality separate and distinct from its members
when to allow it to do so would be to sanction the use of the fiction of corporate entity
as a shield to further an end subversive of justice.

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FACTS:
- Carillo is the driver of AC-787 jeep owned and operated by defendant company.
While driving at Halcon Street, Quezon City he ran over the child of petitioner due
to recklessness and negligence.
- He suffered a simple fracture and was hospitalized and was continued to be
treated for 5 months.
- Because of his child’s injury he had to abandon his welding shop where he derives
income to support his family and was forced to sell some of his machineries for a
lower price than their value and spent such other amounts of money for litigation.
- During the prosecution of the criminal case against the driver, an attempt was
unsuccessfully made by the prosecution to prove moral damages suffered by
Palacio however the CFI still found the driver guilty beyond reasonable doubt.
- The lower court barred the judgment in the criminal case and held that the person
subsidiarily liable to pay damages is Isabel Calingasan, the employer, and not the
defendant corporation.
ISSUE: WON defendant corporation can be held liable for damages.
RULING:
- Isabelo Calingasan and defendant Fely Transportation may be regarded as one
and the same person.
- It is evident that Isabelo Calingasan's main purpose in forming the corporation was
to evade his subsidiary civil liability resulting from the conviction of his driver,
Alfredo Carillo.
- This conclusion is borne out by the fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his
two daughters.
- We believe that this is one case where the defendant corporation should not be
heard to say that it has a personality separate and distinct from its members when
to allow it to do so would be to sanction the use of the fiction of corporate entity as
a shield to further an end subversive of justice.
- Furthermore, the failure of the defendant corporation to prove that it has other
property than the jeep (AC-687) strengthens the conviction that its formation was
for the purpose above indicated.
- And while it is true that Isabelo Calingasan is not a party in this case, yet, is held
in the case of Alonso v. Villamor, this Court can substitute him in place of the
defendant corporation as to the real party in interest. This is so in order to avoid
multiplicity of suits and thereby save the parties unnecessary expenses and delay.
- Accordingly, defendants Fely Transportation and Isabelo Calingasan should be
held subsidiarily liable for P500.00 which Alfredo Carillo was ordered to pay in the
criminal case and which amount he could not pay on account of insolvency.
- The present action is not barred by the judgment of the CFI in the criminal case.
While there seems to be some confusion on part of the plaintiffs as to the theory
on which the is based — whether ex-delito or quasi ex-delito (culpa aquiliana) —
We are convinced, from the discussion prayer in the brief on appeal, that they are
insisting the subsidiary civil liability of the defendant.

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VILLA REY TRANSIT INC. VS FERRER
Facts:
- Jose M. Villarama was an operator of a bus transportation, Villa Rey Transit, with
certificates of public convenience granted by the Public Service Commission
(PSC) in Cases Nos. 44213 and 104651, authorizing him to operate 32 units on
various routes or lines from Pangasinan to Manila, and vice-versa. On January 8,
1959, he sold the aforementioned two certificates of public convenience to the
Pangasinan Transportation Company, Inc. (Pantranco), for P350,000.00 with the
condition that Villarama "shall not for a period of 10 years from the date of this
sale, apply for any TPU service identical or competing with the buyer."
- Barely three months thereafter, on March 6, 1959: a corporation, Villa Rey Transit,
Inc. (Corporation) was organized; Natividad R. Villarama (wife of Jose M.
Villarama) was one of the incorporators, and the brother and sister-in-law of Jose
M. Villarama subscribed to the stock.
- Natividad also became the treasurer of the corporation. On March 10, 1959 the
corporation was registered with the SEC. On April 7, 1959, the Corporation bought
five certificates of public convenience, forty-nine buses, tools and equipment from
one Valentin Fernando.
- They immediately applied with the PSC for its approval, praying for provisional
authority to operate the service. On May 19, 1959, the PSC granted the provisional
permit prayed for. Before the PSC could take final action on said application for
approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of
the five certificates of public convenience involved therein, pursuant to a writ of
execution issued by the Court of First Instance of Pangasinan, in favor of Eusebio
Ferrer, judgment creditor, against Valentin Fernando. On July 16, 1959, a public
sale was conducted, with Ferrer as the highest bidder.
- Ferrer sold the two certificates of public convenience to Pantranco, which
submitted the sale for approval to the PSC and prayed for provisional authority to
operate on the basis of the said certificates. Both the applications of the
Corporation and Pantranco were set for joint hearing.
- The PSC issued an order disposing that during the pendency of the cases
Pantranco shall be the one to operate provisionally the service The Corporation
elevated the matter to the Supreme Court. On November 4, 1959, the Corporation
filed in the Court of First Instance of Manila, a complaint for the annulment of the
sheriff's sale to Ferrer, the latter’s sale to Pantranco and PSC decision regarding
the issue.
- Ferrer and Pantranco averred that the Corporation had no valid title to the
certificates in question because the contract pursuant to which it acquired them
from Fernando was subject to a suspensive condition, the approval of the PSC,
has not yet been fulfilled. Thus they believed that their purchase through the
sheriff afforded them a better right.
- Pantranco, filed a third-party complaint against Jose M. Villarama, alleging that
Villarama and the Corporation, are one and the same; that Villarama and/or the
Corporation was disqualified from operating the two certificates in question by
virtue of the agreement between Villarama and Pantranco, stipulating that

66
 Villarama "shall not for a period of 10 years from the date of this sale, apply for
any TPU service identical or competing with the buyer."
- The CFI ruled in favor of the Corporation and Villarama. It held that the sheriff’s
sale was void, that the Corporation was the lawful owner of the certificates and
ordering Ferrer and Pantranco to pay attorney’s fees. It also held that Villarama
and the corporation were separate and distinct entities.

Issues:
(1) Whether the agreement that Villarama "SHALL NOT FOR A PERIOD OF 10
YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE
IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it
include existing lines?;
(2) Assuming that said stipulation covers all kinds of lines, is such stipulation valid and
enforceable?;
(3) In the affirmative, that said stipulation is valid, did it bind the Corporation?

Held:
- Although Villarama was not a stockholder or an incorporator, his wife was an
incorporator and also the treasurer of the Corporation. The evidence proved that
Villarama had actual control of the funds of the Corporation and appeared as the
actual owner and treasurer. In fact the funds of the Corporation were deposited in
his personal account
- The initial cash capitalization of P105,000 was mostly financed by Villaram through
an P85,000 personal check he issued himself. The trucks of the Corporation were
also purchased with his personal checks.
- Gasoline purchases were made in his name. His personal accounts were also paid
by the Corporation. Villarama himself admitted that he mingled the corporate funds
with his own money.
- The foregoing circumstances are strong persuasive evidence showing that
Villarama has been too much involved in the affairs of the Corporation to altogether
negative the claim that he was only a part-time general manager.
- The interference of Villarama in the complex affairs of the corporation, and
particularly its finances, are much too inconsistent with the ends and purposes of
the Corporation law, which, precisely, seeks to separate personal responsibilities
from corporate undertakings. It is the very essence of incorporation that the acts
and conduct of the corporation be carried out in its own corporate name because it
has its own personality.
- When the fiction is urged as a means of perpetrating a fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery
or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.
- We hold that the preponderance of evidence have shown that the Villa Rey Transit,
Inc. is an alter ego of Jose M. Villarama. The rule is that a seller or promisor may
not make use of a corporate entity as a means of evading the obligation of his
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 covenant. Where the Corporation is substantially the alter ego of the covenantor to
the restrictive agreement, it can be enjoined from competing with the covenantee.
- We hold the restrictive clause in the contract entered into by the latter and
Pantranco is also enforceable and binding against the said Corporation. As We
read the disputed clause, it is evident from the context thereof that the intention of
the parties was to eliminate the seller as a competitor of the buyer for ten years
along the lines of operation covered by the certificates of public convenience
subject of their transaction.
- The rule became well established that if the restraint was limited to "a certain time"
and within "a certain place," such contracts were valid and not "against the benefit
of the state." We find that although it is in the nature of an agreement suppressing
competition, it is, however, merely ancillary or incidental to the main agreement
which is that of sale. The suppression or restraint is only partial or limited: first, in
scope, it refers only to application for TPU by the seller in competition with the lines
sold to the buyer; second, in duration, it is only for ten (10) years; and third, with
respect to situs or territory, the restraint is only along the lines covered by the
certificates sold. In view of these limitations, coupled with the consideration of
P350,000.00 for just two certificates of public convenience, and considering,
furthermore, that the disputed stipulation is only incidental to a main agreement, the
same is reasonable and it is not harmful nor obnoxious to public service. The evils
of monopoly are farfetched here. There can be no danger of price controls or
deterioration of the service because of the close supervision of the Public Service
Commission.
- However, the sale between Fernando and the Corporation is valid, such that the
rightful ownership of the disputed certificates still belongs to the plaintiff being the
prior purchaser in good faith and for value thereof. In view of the ancient rule of
caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer in the
sheriff's sale was only the right which Fernando, judgment debtor, had in the
certificates of public convenience on the day of the sale.

CIR vs NORTON AND HARRISON

FACTS:
- Norton and Harrison is a corporation organized to buy and sell at wholesale and
retail all kinds of goods and merchandise. Jackbilt is also a corporation organized
on for producing concrete blocks.
- On 1948, the corporations entered into an agreement whereby Norton was made
the sole and exclusive distributor of concrete blocks manufactured by Jackbilt.
- On 1949, Norton purchased all the outstanding shares of stock of Jackbilt. This
prompted the CIR to investigate and eventually asses Norton and Harrison for
deficiency sales tax and surcharges.

ISSUE: Whether Norton and Harrison is liable for the deficiency sales tax and
surcharges.

RULING:
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- YES. The Court ruled that Norton and Jackbilt should be considered as one.
Jackbilt's outstanding stocks, board of directors, finance of operations, employees,
and compensation are all controlled by Norton and Harrison.
- Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison
and that the fiction of corporate entities, separate and distinct from each, should
be disregarded.
- This is a case where the doctrine of piercing the veil of corporate fiction, should
be made to apply.
- By being separate entities, the corporations would have to pay lesser income tax.
- The combined taxable Norton-Jackbilt income would subject Norton to a higher
tax.

TOMAS LAO CONSTRUCTION VS NLRC

FACTS:
- Petitioners were hired for various periods as construction workers in different
capacities. Within those periods, they alternately worked for petitioner TLC, T&J
and LVM Construction Corporation, altogether informally referred to as the “Lao
Group of Companies”, the three entities comprising a business conglomerate
exclusively controlled and managed by members of the Lao Family.
- TLC, T&J and LVM are engaged in the construction of public roads and bridges.
They entered joint ventures among each other and lease tools and equipment of
one another. Each one also allows the utilization of their employees by the other
two.
- In 1989, petitioners were dismissed due to non-compliance with a memorandum
which they believe is a scheme to downgrade their status from regular to
contractual employee.
- Petitioners filed a case in NLRC for illegal dismissal which is granted and ordered
the 3 corporations solidary liable for back wages and separation pay of petitioners.

ISSUE: Whether corporate veil may be pierced to held the 3 corporations solidary
liable to petitioner employees.

RULING:
- YES. The records disclose that the 3 corporations were in fact substantially owned
and controlled by members of the Lao family. A majority of the outstanding shares
of stock in LVM and T&J is owned by the Lao Family.
- T&J is 100% owned by the Lao’s as reflected in its Articles of Incorporation. The
Lao Group of Companies therefore is a closed corporation where the incorporators
and directors belong to a single family.
- The corporations were also engaged in the same line of business under one
management and use the same equipment including manpower services. Where
it appears that business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the right of third
persons, disregard the legal fiction that the corporations are distinct entities, and
treat them as identical.
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- It is held that the liability of petitioner corporation extends to the responsible
officers acting in the interest of the corporations.

5. Alter-Ego Cases:

ARNOLD vs WILLETS AND PATTERSON LTD

Facts:
- Arnold, the plaintiff and the firm, Willits & Patterson in San Francisco entered into
a (1st) written contract by which the plaintiff was employed as the agent of the firm
in the Philippine Islands for the operation of an oil mill for the period of five years
at a minimum salary of $200 per month and travelling expenses.
- Aside from his minimum salary, it was also stated in the contract that he will
receive a brokerage fee from all his sales and other profits. Also, if the business
was at a loss, Arnold would receive $400 per month.
- When Patterson retired, Willits became the sole owner of its assets. Willits
organized a new corporation by the same name in San Francisco.
- The new firm acquired all the assets of the former firm.
- He came to Manila and organized a corporation here known as Willits & Patterson,
Ltd., in and to which he again subscribed for all of the capital stock except the
nominal shares necessary to qualify the directors.
- In legal effect, the San Francisco corporation took over and acquired all of the
assets and liabilities of the Manila corporation.
- Willits signed a (2nd) new contract in the form of a letter. The purpose of which
was to more clearly define and specify the compensation which the plaintiff was to
receive for his services.
- An accounting was done and it showed that the corporation was due and owing
the plaintiff under Exhibit B the sum of P106, 277.50. The San Francisco
corporation became involved in financial trouble, and all of its assets were turned
over to a "creditors' committee."
- Arnold filed a complaint and contended that the signing of the second contract in
the manner and under the conditions in which it was signed, and through the
subsequent acts and conduct of the parties, was ratified and, in legal effect,
became and is now binding upon the defendant.
- Defendant contended that the second contract was signed but without authority. It
also alleged that Arnold owed them some money.
- The Court of First Instance rendered a decision ordering Arnold to return the
money to the corporation.

Issue: WON the corporation is bound by the contracts.

Held: YES.
- “Where the stock of a corporation is owned by one person whereby the
corporation functions only for the benefit of such individual owner, the corporation
and the individual should be deemed to be the same.”
- In the case at bar, the corporations are under Willits. When the second contract
was signed, Willits recognized that Arnold’s services were to be performed by its
70
 terms. When the new corporation was organized and created, it still treated Arnold
as its agent in the same manner as the first one.
- Hence, the new corporation was bound by the contract made under the previous
firm.

LA CAMPANA COFFEE FACTORY VS 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.

Issue: W/N the CIR has jurisdiction over the case.

Held: YES.
- 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.

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(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.

(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.
 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.
 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.
 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.
 Use of nominees to man the corporation for the benefit of the controlling
stockholder.

(c) Mixing-up Operations; Disrespect to the Corporate Entity:

 Employment of same workers; single place of business, etc., may indicate alter
ego situation.
 Where two business enterprises are owned, conducted, and controlled by the
same parties, both law and equity will, when necessary to protect the rights of
third persons, disregard the legal fiction that two corporations are distinct
entities and treat them as identical.
 Where corporate fiction was used to perpetrate social injustice or as a vehicle
to evade obligations or confuse the legitimate issues (as in this case where the
actions of management of the two corporations created confusion as to the
proper employer of claimants), it would be discarded and the two corporations
would be merged as one.
 Mixing of personal accounts with corporate bank deposit accounts.

(d) Avoidance of taxes:

YUTIVO & SONS INC. v CTA

Facts:
- Yutivo is a domestic corporation engaged in the importation and sale of hardware
supplies and equipment. It bought a number of cars and trucks from General
Motors Overseas Corporation.
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- GM paid sales tax on original sales on the basis of its selling price to Yutivo. Yutivo
paid no further tax on its sales to the public.
- Southern Motors was then organized to engage in the business of selling cars,
trucks, and spare parts with capital stock of 10,000 shares, 2,500 of which were
subscribed in equal proportion by the children of Yutivo’s incorporators.
- Under this set-up, Yutivo would purchase the cars and tucks from GM then sell
the same to SM which in turn sold them to the general public.
- Then GM withdrew its operations from the Philippines.
- Yutivo took over the importation of trucks and cars. It likewise continued to have
the previous arrangement of selling exclusively to SM which in turn paid no such
sales tax on its sales to the general public.
- The CIR made an assessment upon Yutivo and demanded a sum representing
deficiency sales tax plus surcharges claiming that the taxable sales were the retail
sales should be between SM to the general public and not the sale at wholesale
made by Yutivo to SM since the two were one and the same corporation, SM being
a mere subsidiary of Yutivo.
- CTA affirmed such a ruling and further stated that there was no legitimate purpose
in the organization of SM – apparently organized to evade the payment of taxes –
and that it was owned and controlled by Yutivo and is a mere branch, adjunct,
conduit, instrumentality or alter ego of Yutivo.

Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful
tax revenues?

Held: SM was not organized for the purpose of defrauding the government of lawful
tax revenues because:
- The intention to minimize taxes as in tax evasion when used in the context of fraud,
must be proven to exist by clear and convincing evidence amounting to more than
the mere preponderance of evidence. The evidence of the collector falls short of
such standard.
- SM was organized at a time when there was not yet tax to evade, when GM was
still the importer and was the one paying the sales tax.
- The transactions between Yutivo and SM were and have always been in the open,
embodied in private and public documents, constantly subject to inspection by tax
authorities.
- A taxpayer has the legal right to decrease the amount of what otherwise would be
his taxes altogether avoid them by means which the law permits.
- However, SM was actually owned and controlled by Yutivo to make it a mere
subsidiary or branch of the latter. SM was organized by the leading stockholders
of Yutivo. Yutivo was at all times in control if the majority stock of SM. The principal
officers of both corporations are identical. Thus, the business, financial and
management policies of both corporations could be directed towards common
ends. The funds of SM are directly remitted to Yutivo and subject to withdrawal
only of Yutivo, SM’s resources being under Yutivo’s control. The accounting
system maintained by Yutivo shows that it maintained a high degree of control
over SM accounts. All transactions between Yutivo and SM are recorded and
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 effected by mere debit or credit entries against the reciprocal account maintained
in their respective books of accounts and indicate the dependency of SM as a
branch of Yutivo
- Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded
the technical defense of separate corporate entity in order to arrive at the true
liability of Yutivo.

Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather
than an alter ego case?
A: The Court had in this case ruled as to the legitimacy of a corporation to act as to
seek means to decrease its tax liability. The difference between Yutivo and Tan Boon
Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond
the scope of his authority. In the former, evidence was seen to be insufficient as to
establish a willful desire to evade taxes.

(e) Thinly-capitalized corporations:

- The fact that a corporation has no adequate capital enough basis for piercing.
Such pronouncement limits the advantage of creating a corporation. For
example, in cases where leveraging is undertaken which is considered as a
legitimate business practice.

(f) Parent-subsidiary; Affiliated Companies:

- The person who invokes the doctrine must always be the injured party.
- Absence of proof that control over a corporation is being used by a mother
company to commit fraud or wrong, there would be no basis to disregard their
separate juridical personalities.
- If used to perform legitimate functions, a subsidiary’s separate existence shall
be respected, and the liability of the parent corporation as well as the subsidiary
will be confined to those arising in their respective businesses. Even when the
parent corporation agreed to the terms to support a standby credit agreement
in favor of the subsidiary, does not mean that its personality has merged with
that of the subsidiary.

(g) Summary of Probative Factors:

MCCONNEL VS CA
Facts:
- Park Rite Co. (PRC) leased from Rafael Perez Rosales y Samanillo a vacant lot
on Juan Luna which it used for parking motor vehicles for a consideration.
- It turned out that in operating its parking business, PRC occupied and used not
only the lot it had leased but also an adjacent lot belonging to the respondents
Padilla, without the owners' knowledge and consent. When the latter discovered
the truth around October of 1947, they demanded payment for the use and
occupation of the lot.
- A judgment was rendered ordering the Park Rite Co., Inc. to pay P7,410.00 plus
legal interest as damages from April 15, 1947 until return of the lot.
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- As restitution was not made until 31 January 1948, the entire judgment amounted
to P11,732.50.
- Upon execution, the corporation was found without any assets other than P550.00
deposited in Court. After their application to the judgment credit, there remained a
balance of P11,182.50 outstanding and unsatisfied.
- The judgment creditors then filed suit in the Court of First Instance of Manila
against the corporation and its past and present stockholders, to recover from
them, jointly and severally, the unsatisfied balance of the judgment, plus legal
interest and costs.
- The Court of First Instance denied recovery; but on appeal, the Court of Appeals
reversed, finding that the corporation was a mere alter ego or business conduit of
the principal stockholders, Cirilo Paredes and Ursula Tolentino, [as they hold
1,496 out of the 1,500 stocks] that controlled it for their own benefit, and adjudged
them responsible for the amounts demanded by the lot owners.

Issue: Whether the individual stockholders may be held liable for obligations
contracted by PRC, disregarding its corporate entity.

Held: Yes.
- Wherever circumstances have shown that the corporate entity is being used as an
alter ego or business conduit for the sole benefit of the stockholders, or else to
defeat public convenience, justify wrong, protect fraud, or defend crime.
- In the case at bar, the SC summarized the expressed findings of the CA which is
as follows:
o On or about August 22, 1947 the defendants Cirilo Paredes and Ursula
Tolentino purchased 1,496 shares of the said corporation from the original
incorporators [M. McConnel, W. P. Cochrane, Ricardo Rodriguez, Benedicto
M. Dario and Aurea Ordrecio].
o The remaining four shares were acquired by Bienvenido J. Claudio, Quintin C.
Paredes, Segundo Tarictican, and Paulino Marquez at one share each. It is
obvious that the last four shares bought by these four persons were merely
qualifying shares. It is Tolentino and Paredes who composed the so-called
Park Rite Co., Inc.
o That the corporation was a mere extension of their personality is shown by the
fact that the office of Cirilo Paredes and that of Park Rite Co., Inc. were located
in the same building, in the same floor and in the same room — at 507 Wilson
Building.
o The fact that the funds of the corporation were kept by Cirilo Paredes in his
own name. The corporation itself had no visible assets, except perhaps the toll
house, the wire fence around the lot and the signs thereon.

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CONCEPT BUILDERS Inc. v NLRC
Facts:
- Concept Builders is engaged in the construction business. Private respondents
are employed by the company as laborers, carpenters and riggers.
- In November of 1981, private respondents were served individual notices of
termination by the company.
- It stated that their contract had already expired.
- The NLRC discovered that the project for which they were hired was not yet even
finished.
- In addition to this, Concept had to hire subcontractors whose works are the same
as private respondents.
- A writ of execution was issued which was partially satisfied through the
garnishment of money from MWSS which is a debtor of Concept and the balance
was to be collected from Concept directly.
- But the sheriff reported that when the writ was to be served the guard on duty
refused it on the ground that Concept no longer owned the premises and was now
occupied by Hydro Pipes, which had the same Board of Directors as Concept.

Held: The veil may be pierced when it its just the alter ego of a person of another
corporation.
The conditions under which the juridical entity may be disregarded vary
according to the peculiar facts and circumstances of each case. No hard and fast rule
can be laid down, but there are some probative factors of identity that will justify the
application of the doctrine.

Summary probative factors:

1. stock membership by one ore common ownership of both
2. identity of directors and officers (management)
3. manner of keeping corporate books and records (management)
4. methods of conducting business (management).
- While petitioners claimed that it ceased operations in 1986, it filed an Information
Sheet with the SEC in 1987 stating that its office address is their old address. Both
information sheets were filed by Virgilio Casino, the same corporate secretary.
They had the same President, Board of Directors and substantially the same
subscribers.

(h) Guiding Principles in Alter-Ego Cases:

• Doctrine applies even in the absence of evil intent, because of the direct
violation of a central corporate law principle of separating ownership from
management;
- Doctrine in such cased is based on estoppel: if stockholders do not respect the
separate entity, others cannot also be expected to be bound by the separate
juridical entity;
• Piercing in alter ego cases may prevail even when no monetary claims are
sought to be enforced against the stockholders or officers of the corporation.

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(i) Distinction Between Fraud Piercing and Alter-ego Piercing:

EQUITY CASES:
(a) When used to confuse legitimate issues.
(b) When used to raise technicalities.

TELEPHONE ENGINEERING AND SERVICE CO., INC. VS WCC

FACTS:
- TESCO is a domestic corporation engaged in telephone manufacturing, with sister
company, Utilities Management Corporation (UMACOR). Both companies are
under the management of Jose Louis Santiago, as Exec VP and General
Manager.
- UMACOR employed Pacifico Gatus as Purchasing Agent in 1964. He was
assigned in TESCO for 2.5 months, and reported back to UMACOR. In 1967, he
contracted an illness and died eventuall of “liver cirrhosis with malignant
degeneration”.
- Pacifico’s widowed wife, Leonila Gatus, filed a Notice and Claim for Compensation
with the Workmen’s Compensation Section alleging the employment of Pacifico
under TESCO and his death of liver cirrhosis.
- The Notice and Claim was transmitted to TESCO, to which TESCO responded
with an Employer’s Report of Accident or Sickness, signed by Santiago, stating
that UMACOR was Pacifico’s employer, and that employer UMACOR would not
controvert the claim for compensation, and admitted that the deceased employee
contracted illness “in regular occupation”. Thus, the Acting Referee awarded death
benefits (5,759) and burial expenses (200) in favor of Pacifico’s heirs.
- TESCO filed a Motion for Reconsideration and Petition to Set Aside Award alleging
that the admission in the Employer’s Report was due to honest mistake and
excusable negligence, and that the illness for which compensation is sought is not
an occupational disease, hence, not compensable under the law. The MR was
denied.
- The Provincial Sheriff levied on and attached the properties of TESCO and
scheduled the sale of such at public auction. Hence, this petition seeking to annul
the award and to enjoin the Sheriff from levying and selling its properties at public
auction.
- In its Petition, TESCO asserts that there is no employer-employee relationship
between it and Pacifico Gatus.

ISSUE: Whether TESCO is liable for the compensation claim of Pacifico’s heirs when
it claims that it is not the employer of Pacifico.

HELD/RATIO. YES,
- the assertion of lack employer-employee relationship cannot be admitted at the
point of the petition before the Supreme Court anymore; the difference between
the corporate personality of TESCO and UMACOR cannot be admitted anymore
to confuse the legitimate issues in this case.

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- In TESCO’s pertinent documents – letter to Acting Referee, Motion for
Reconsideration and Petition to Set Aside Award, and Urgent Motion to Compel
the Referee to Elevate Records to Commission for Review – it represented and
defended itself as the employer of the deceased. Nowhere in the said documents
did it allege that it was not the employer.
- TESCO even admitted that it and UMACOR are sister companies operating under
one single management and housed in the same building. Although respect for
the corporate personality as such, is the general rule, there are exceptions. In
appropriate cases, the veil of corporate fiction may be pierced as when the same
is made as a shield to confuse the legitimate issues.

DUE PROCESS CLAUSE

(a) Need to bring a new case against the officer.
 A suit against individual shareholders in a corporation is not a suit against the
corporation. Failure to implead the corporations as defendants and merely
annexing a list of such corporations to the complaints is a violation of due
process for it would in effect be disregarding their distinct and separate
personality without a hearing.
 Although both lower courts found sufficient basis for the conclusion that PKA
and Phoenix Omega were one and the same, and the former is merely a conduit
of the other the Supreme Court held void the application of a writ of execution
on a judgment held only against PKA, since the RTC obtained no jurisdiction
over the person of Phoenix Omega which was never summoned as formal party
to the case. The general principle is that no person shall be affected by any
proceedings to which he is a stranger, and strangers to a case are not bound
by the judgment rendered by the court.
(b) When corporate officers are sued in their official capacity when the corporation
was not made a party, the corporation is not denied due process.
(c) Provided that evidential basis has been adduced during trial to apply the
piercing doctrine.

EMILIO CANO ENTERPRISES VS CIR

Facts:
- Honorata Cruz was terminated by Emilio Cano Enterprises, Inc. (ECEI). She then
filed a complaint for unfair labor practice against Emilio Cano, in his capacity as
president and proprietor, and Rodolfo Cano, in his capacity as manager.
- Cruz won and the Court of Industrial Relations (CIR) ordered the Canos to
reinstate Cruz plus pay her backwages with interest.
- The Canos appealed to the CIR en banc but while on appeal Emilio died.
- The Canos lost on appeal and an order of execution was levied against ECEI’s
property.
- ECEI filed an ex parte motion to quash the writ as ECEI avers that it is a
corporation with a separate and distinct personality from the Canos.
- Their motion was denied and ECEI filed a petition for certiorari with the Supreme
Court.
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ISSUE: Whether or not the judgment of the Court of Industrial Relations is correct.

HELD: Yes.
- This is an instance where the corporation and its members can be considered as
one. ECEI is a close family corporation – the incorporators are members of the
Cano family.
- Further, the Canos were sued in their capacity as officers of ECEI not in their
private capacity.
- Having been sued officially their connection with the case must be deemed to be
impressed with the representation of the corporation.
- The judgment against the Canos has a direct bearing to ECEI. Verily, the order
against them is in effect against the corporation.
- Further still, even if this technicality be strictly observed, what will simply happen
is for this case to be remanded, change the name of the party, but the judgment
will still be the same – there can be no real benefit and will only subversive to the
ends of justice.
- In this case, to hold ECEI liable is not to ignore the legal fiction but merely to give
meaning to the principle that such fiction cannot be invoked if its purpose is to use
it as a shield to further an end subversive of justice.

JACINTO VS CA
- Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of
money, signs trust receipts therefor. Jacinto absconds.
- Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced
because it was used as a shield to perpetuate fraud and/or confuse legitimate
issues.
- There was no clear cut delimitation between the personality of Jacinto and the
corporation.

V. CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
a) Public Corporation (Sec. 3, Act No. 1459).
- one formed or organized for the government or a portion of the state
- its purpose is for general good and welfare
b) Quasi-public Corporation.
- 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
c) Private Corporation (Sec. 3, Act 1459).
- one formed for some private purpose, benefit or end.

 Government’s majority shares does not make an entity a public corporation.

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 A corporation is created by operation of law under the Corporation Code while
a government corporation is normally created by special law referred to often
as a charter.
 The test to determine whether a corporation is government owned or controlled,
or private in nature is simple. Is it created by its own charter for the exercise of
a public function, or by incorporation under the general corporation law? Those
with special charters are government corporations subject to its provisions, and
its employees are under the jurisdiction of the Civil Service Commission, and
are compulsory members of the GSIS.
 While public benefit and public welfare may be attributable to the operation of
the Bases Conversion and Development Authority (BCDA), yet it is certain that
the functions it performs are basically proprietary in nature—the promotion of
economic and social development of Central Luzon, particularly, and the
country’s goal for enhancement. Therefore, the rule that prescription does not
run against the State will not apply to BCDA, it being said that when title of the
Republic has been divested, its grantees, although artificial bodies of its own
creation, are in the same category as ordinary persons.
 Although Boy Scouts of the Philippines does not receive any monetary or
financial subsidy from the Government, and its funds and assets are not
considered government in nature and not subject to audit by the COA, the fact
that it received a special charter from the government, that its governing board
are appointed by the Government, and that its purpose are of public character,
for they pertain to the educational, civic and social development of the youth
which constitute a very substantial and important part of the nation, it is not a
public corporation in the same sense that municipal corporation or local
governments are public corporation since its does not govern a portion of the
state, but it also does not have proprietary functions in the same sense that the
functions or activities of government-owned or controlled corporations, is may
still be considered as such, or under the 1987 Administrative Code as an
instrumentality of the Government, and it employees are subject to the Civil
Service Law.
 But being a GOCC makes it liable for laws and provisions applicable to the
Government or its entities and subject to the control of the Government.
 Beyond cavil, a GOCC has a personality of its own, distinct and separate from
that of the government, and the intervention in a transaction of the Office of the
President through the Executive Secretary does not change the independent
existence of a government entity as it deals with another government entity.
 The doctrine that employees of GOCCs, whether created by special law or
formed as subsidiaries under the general corporation law are governed by the
Civil Service Law and not by the Labor Code, has been supplanted by the 1987
Constitution. The present doctrine in determining whether a GOCC is subject to
the Civil Service Law is the manner of its creation, such that government
corporations created by special charter are subject the Civil Service Law, while
those incorporated under the general corporation law are governed by the Labor
Code.

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  Section 31 of Corporation Code (Liability of Directors and Officers) is applicable
to corporations which have been organized by special charters since Sec. 4 of
Corporation Code renders the provisions supplementarily applicable to all
corporations, including those with special or individual charters, such as
cooperatives organized under P.D. 269, so long as those provisions are not
inconsistent with such charters.
 Water districts can validly exists as corporate entities under PD 198, and
provided they are government-owned or controlled, and their board of directors
and other personnel are government employees subject to civil service laws and
anti-graft laws.

2. As to Place of Incorporation:
(a) Domestic Corporation - incorporated in the Philippines
(b) Foreign Corporation (Sec. 123)
- Sec. 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 its own country or state. It shall
have the right to do business in its own country or state. It shall have the right
to transact 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 authority.
- incorporated in another country and that country grants the same rights to
Filipinos in terms of doing business there; it shall have the right to transact
business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this code & a certificate of
authority from the appropriate government agency (SEC license after
obtaining BOI certificate )

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.

- Religious corporations shall be governed by this Chapter and by the general

provisions on non-stock corporations insofar as they may be applicable.
- Section 116. Religious societies. - Any religious society or religious order, or
any diocese, synod, or district organization of any religious denomination, sect
or church, unless forbidden by the constitution, rules, regulations, or discipline
81
 of the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an affirmative vote at
a meeting called for the purpose of at least two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or for the management of
its affairs, properties and estate by filing with the Securities and Exchange
Commission, articles of incorporation verified by the affidavit of the presiding
elder, secretary, or clerk or other member of such religious society or religious
order, or diocese, synod, or district organization of the religious denomination,
sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body;
3. That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of
the religious denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the corporation is to be established
and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15).

- 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.

(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.
- Section 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of incorporation
and by-laws of any educational institution.
- Section 108. Board of trustees. - Trustees of educational institutions organized
as non-stock corporations shall not be less than five (5) nor more than fifteen
(15): Provided, however, That the number of trustees shall be in multiples of 5.
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 - Unless otherwise provided in the articles of incorporation on the by- laws, the
board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only for the unexpired period. Trustees elected thereafter
to fill vacancies caused by expiration of term shall hold office for five (5) years.
A majority of the trustees shall constitute a quorum for the transaction of
business. The powers and authority of trustees shall be defined in the by-laws.
- For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations. (169a)

(d)Charitable, Scientific or Vocational Corporations

(e) Business Corporation

4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole

Section 110. Corporation sole. - For the purpose of administering and managing,
as trustee, the affairs, property and temporalities of any religious denomination, sect
or church, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such religious denomination, sect or church.

Section 111. Articles of incorporation. - In order to become a corporation sole, the

chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities and Exchange Commission
articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect
or church are not inconsistent with his becoming a corporation sole and do
not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding elder is required to be filled,
according to the rules, regulations or discipline of the religious denomination,
sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
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 - The articles of incorporation may include any other provision not contrary to law
for the regulation of the affairs of the corporation. (n)

Section 112. Submission of the articles of incorporation. - The articles of

incorporation must be verified, before filing, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any notary public.
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)

Section 113. Acquisition and alienation of property. - Any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may sell or mortgage real property held by it by obtaining
an order for that purpose from the Court of First Instance of the province where the
property is situated upon proof made to the satisfaction of the court that notice of the
application for leave to sell or mortgage has been given by publication or otherwise in
such manner and for such time as said court may have directed, and that it is to the
interest of the corporation that leave to sell or mortgage should be granted. The
application for leave to sell or mortgage must be made by petition, duly verified, by
the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole: Provided, That in cases where
the rules, regulations and discipline of the religious denomination, sect or church,
religious society or order concerned represented by such corporation sole regulate
the method of acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations and discipline shall control, and the intervention of
the courts shall not be necessary. (159a)

Section 114. Filling of vacancies. - The successors in office of any chief archbishop,
bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the
corporation sole on their accession to office and shall be permitted to transact
business as such on the filing with the Securities and Exchange Commission of a
copy of their commission, certificate of election, or letters of appointment, duly certified
by any notary public.
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 During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church incorporated as
a corporation sole, the person or persons authorized and empowered by the rules,
regulations or discipline of the religious denomination, sect or church represented by
the corporation sole to administer the temporalities and manage the affairs, estate
and properties of the corporation sole during the vacancy shall exercise all the powers
and authority of the corporation sole during such vacancy. (158a)
Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled
voluntarily by submitting to the Securities and Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
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).

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)

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.
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 On who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no corporation.

Q. Why is there piercing in a de facto corporation?

A. Piercing is allowed because the intention of the law is to protect the contracts
entered into by the corporation.

6. As to Existence of Shares (Secs. 3 and 5):

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.
Corporators in a non-stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members.

(a) Stock Corporation

(b)Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

INTRODUCTION: Corporate Contract Law à contracts shaped by corporate law.

- Form v. substance à substance prevails
- In the levels of the legal relationship, corporate contract law is used to resolve
issues between the different levels – between the juridical entity level, the contract
relationship level and the business entity level.

Q: Why is there a need to distinguish corporate contract law from contract law?
A: There is a need to distinguish between the two because there are certain
instances where an application of corporate contract law principles are in direct
conflict with contract law principles. An example would be in the situation where a
corporation is being incorporated, the corporation code in certain instances
recognize the binding effect of contracts entered into in the pre-incorporation stage.
But if contract law was strictly applied such a contract would be void since it lacks
one vital element which is consent of the contracting parties. How does a
corporation that does not exist yet give consent? This is where corporate contract
law find its relevance. The conflict between the juridical entity level is reconciled
with the contractual relationship level. (DOCTRINE: to validate the contract entered
into by the supposed corporation)
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PROMOTER’S CONTRACT à C. BY ESTOPPEL à DE FACTO or DE JURE à
DISSOLUTION
Q: In order to reach the level of corporation by estoppel, what is the essential
ingredient of such doctrine?
A: When there is a representation that a corporation exists when in fact there is none
and at least one party thought that there was a corporation.

Q: Distinguish promoter’s contract principles from the corporation by estoppel

doctrine?
A: In both the corporation does not exist. But in promoter’s contracts there is no
misrepresentation that the corporation does not yet exist. When the contracts are
entered into by persons who in behalf of the corporation, acknowledging that the
corporation does not yet exist and is still in the process of incorporation, you do not
apply the doctrine of corporation by estoppel. It is still what one may call as the
promoter’s contract. (The moment there is no corporation and contracts are
entered into under the representation that the corporation does exist then that is
the only time you apply the doctrine of corporation by estoppel.)

1. Pre-Incorporation Contracts
(a) Who Are Promoters?

“Promoter” is a person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives consideration
therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799])

CLV: The definition of promoter is important to determine the liability for promoter’s
contract. Before you can make a promoter liable, you must be able to determine who
is the promoter. He must be the one who takes initiative on the founding and
organization of the business venture which eventually ends up as the corporation
being organized.

Q: At the promoter’s stage there is no juridical personality until the SEC issues the
certificate of incorporation. Until the certificate is issued, the stage of the de facto
corporation has not yet been reached. Prior to the de facto corporation stage what
then is the status of the contract entered into by a promoter for and in behalf of the
person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given
consent to the authority of the person or agent who had undertaken the transaction.

Q: How can ratification be done?

A: Ratification can be done in two ways: (1) express ratification – a mere board
resolution making the corporation liable by accepting the contract and (2) implied
ratification – by accepting of benefits

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(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61).
- Sec. 60 Subscription contract – Any contract for the acquisition of unissued stocks
in an existing corporation or a corporation still to be formed shall be deemed as
subscription within the meaning of this Title, notwithstanding the fact that the
parties refer to it as a purchase or some other contract.
- Sec. 61 Pre-incorporation subscription – A subscription f or shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six months
from the date of subscription unless all the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to materialize within
said period or within a longer period as may be stipulated in the contract of
subscription: Provided, that no pre- incorporation subscription may be revoked
after the submission of the articles of incorporation to the SEC.

CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement.

Sec. 61 says that a pre-incorporation subscription agreement is irrevocable. The only
manner by which you can revoke it is if ALL of the other subscribing stockholders
consent to the revocation. Sec. 61 is a clear demonstration of the fact that a
promoter’s contract can be valid and even irrevocable. In the case of a pre-
incorporation subscription agreement that contract is valid because there are in fact
two parties. The party subscribed and all of the other parties who have subscribed to
the other incorporators and all of them bind themselves together to form the
corporation. That is why it is irrevocable unless the other party which is all of the other
subscribers, agree.

(c) Theories on Liabilities for Promoter's Contracts

CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

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,
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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.
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?

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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.

RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG

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
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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.
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 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 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.

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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.

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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:

ARNOLD HALL v. PICCIO

Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma
Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the Articles
of Incorporation of the Far Eastern Lumber and Commercial Co., Inc. a general lumber
business. 23,428 shares of stock were subscribed and fully paid for and certain
properties were transferred to the corporation.
The Articles of Incorporation were filed with the SEC for the issuance of the
corresponding certificates of incorporation. The corporation proceeded to do
business.
Pending the issuance of the certificates by SEC, the respondents Brown et. al.
filed before the CFI of Leyte a civil case entitled “Fred Brown v. Arnold Hall” alleging
among others, that the Far Eastern Lumber and Commercial Co. was an unregistered
partnership; that they wish to have it dissolved because of a bitter dissension among
the members, mismanagement and fraud by the managers and heavy financial
losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the
court. Judge Piccio ordered the dissolution of the company.

Held: The SEC had not issued the corresponding certificate of incorporation. All of
them know or ought to know that the personality of a corporation begins to exist only
from the moment such certificate is issued, not before. Here, the complaining
associate have not represented to the others that they were incorporated any more
than the defendant had made similar representations. Since nobody was led to
believe anything to his prejudice and damage, the principle of estoppel does not apply.
The section on de facto corporations does not apply in this case: (1) First, Far Eastern
Lumber, even its stockholders, may not probably claim in “good faith” to be a
corporation not having obtained the certificate of incorporation. Thus the immunity of
collateral attack granted to corporations claiming in good faith to be a corporation
does not apply here. (2) Second, this suit is not one in which the corporation is a party.
This is a litigation between stockholders of the alleged corporation for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders, without
intervention of the State.
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CLV: The de facto doctrine was formulated to safeguard the security of commercial
transactions whenever they involve the corporation. Parties dealing with said
corporation are secured by the fact that the transactions entered into with said
corporations may be sued upon and they can recover. That is why aside from the
other two requisites there must be a set of officers (i.e. assumption of corporate
powers) or directors because of the principle that a corporation can only act through
its officers.
- Effect as to both parties: (1) cannot deny its existence (2) liable as general
partners.
- Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2)
public is not expected to know, while the above are expected to know.
- If the other party knows of the non-existence of the corporation à there is no
estoppel.

3. Corporation by Estoppel

Sec. 21 Corporation by estoppel – All persons who assume to act as a corporation

knowing it to be without authority to do 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 any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.

SALVATIERRA v. GARLITOS
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.
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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.

ALBERT v. UNIVERSITY PUBLISHING CO.

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
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 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.
(a) Nature of Doctrine
- Founded on principles of equity and designed to prevent injustice and
unfairness, the doctrine applies when persons assume to form a corporation
and exercise corporate functions and enter into business relations with third
persons. Where no third person is involved in the conflict, there is no corporation
by estoppel. A failed consolidation therefore cannot result in a consolidated
corporation by estoppel.
- A party cannot challenge the personality of the plaintiff as a duly organized
corporation after having acknowledged same when entering into the contract
with the plaintiff as such corporation for the transportation of its merchandise.
- A person who accepts employment in an unincorporated charitable association
is estopped from alleging its lack of juridical personality.
- One who deals with an organization which is not duly incorporated is not
estopped to deny its corporate existence when his purpose is not to avoid
liability.

INTERNATIONAL EXPRESS TRAVEL v. CA

Facts: Philippine Football Federation got tickets from petitioner travel agency for the
SEA games and trips to China and Brisbane. Two partial payments were made.
Petitioners wrote to Kahn (president of the federation) demanding the completion of
the payment. Federation, through Project Gintong Alay paid the amount of P 31,000.
Then Kahn issued a personal check for P 50,000. After that, no further payments were
made.
Petitioner then sued Kahn in his personal capacity and as president of the
federation for the unpaid balance for the purchased tickets as Kahn allegedly
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guaranteed the said obligation. Kahn maintained that he did not guarantee the
payment but merely acted as an agent of the Federation which has a separate and
distinct juridical personality.
RTC: Kahn is personally liable because neither the travel agency nor Kahn
adduce any evidence proving the corporate existence of the federation. Being the
president, its corporate existence is within the knowledge of Kahn and could have
easily denied specifically the assertions of petitioner that it is a mere sports
association. Voluntary unincorporated associations have no power to enter into, or to
ratify, a contract. The contract entered into by its officers or agents in behalf of the
association is not binding or enforceable against it. Agents and officers personally
liable. CA: reversed.

Held: RA 3135 and PD 604 recognized the juridical existence of national sports
associations. The power to adopt a constitution, raise funds, acquire property, etc.
indicate that the associations may acquire juridical personality. However, such does
not automatically take place by the passage of the laws. Before a corporation may
acquire juridical personality, the state must give its consent either in the form of a
special law or a general enabling act. Nowhere can it be found in the 2 above
mentioned laws any provision creating the Philippine Football Federation.
Before an entity may be considered as a national sports association, such entity
must be recognized by the accrediting organizations – Philippine Amateur Athletic
Federation (RA 3135) and Dept. of Youth and Sports Development (PD 604).
Although a copy of the constitution of the federation was presented in court, thye same
does not prove that it had been recognized. Therefore, the federation is not a national
sports association within the purview of the laws and that Kahn is personally
responsible for the obligation.
Under the law on estoppel including that under Sec. 21 of Corporation Code,
those acting on behalf of an ostensible corporation and those benefited by it, knowing
it to be without valid existence, are held liable as general partners. a Lim Tong Lim v.
Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

- The 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
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attached. Trial court ruled that PFGI was entitled to the Writ and Chua, Yao and Lim
were jointly liable as general partners.

Held:
- 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.
- 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.
- 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.

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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”
- 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.

4. TRUST FUND DOCTRINE

- The capital stock of the corporation especially its unpaid subscriptions is a trust
fund for the benefit of the general creditors of the corporation.
a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code)
- Art. 2236 The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exceptions provided by law.
b) Nature of Doctrine:

ONG YONG v. TIU

Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First
Landlink Asia Development Corporation (FLADC) owned by the Tiu family was
threatened by the foreclosure by the PNB for their P 190 M debt. In order to stave off
the threat the Tiu family together with the Ong family agreed to restructure FLADC
and created a pre-subscription agreement and each were to maintain equal
shareholdings. The Ong family invested a total sum of P 190 M to the corporation
while the Tiu family included several real estate properties as added capital for the
restructured corporation. The Ong and Tiu families now owned 1,000,000 shares each
of FLADC. After all the debts were paid, the peace between Ong and Tiu did not last.
Tiu claimed rescission based on substantial breach by Ong upon the pre-subscription
agreement. Ong, on the other hand maintained that it was Tiu who committed the
breach because one of the properties that they were supposed to include in the
agreement was in fact already in the real estate owned by FLADC. The SEC approved
the rescission (both parties were return to status quo, P 190 M to the Ong family and
all the remaining FLADC assets to the Tiu family, which included the now finished
mall valued at more than P 1B) and the CA affirmed the decision with slight
modifications.

Held:
- Is rescission the proper remedy for an intra-corporate dispute à No, the Corporation
Code, SEC rules and even the Rules of Court provide for appropriate and adequate
intra-corporate remedies, other than rescission, in situations like this. Rescission
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 is certainly not one of them, specially if the party asking for it has no legal
personality to do so (because it is a corporation, Tiu family is not the corporation)
and the requirements of the law therefore have not been met. A contrary doctrine
will tread on extremely dangerous ground because it will allow just any stockholder,
for just about any real or imagined offense, to demand rescission of his subscription
and call for the distribution of some part of the corporate assets to him without
complying with the requirements of the Corp. Code.
- Granting rescission is a proper remedy, does it violate the TFD à Yes it will violate
the TFD and the procedures for valid distribution of assets and property under the
Corp. Code. The TFD provides that subscription to the capital stock of a
corporation constitute a fund to which the creditors have a right to look for the
satisfaction of their claims. The doctrine is the underlying principle in the procedure
for the distribution of capital assets, in the Corp. Code which allows the distribution
of corporate capital only in three instances: (1) amendments of the Articles of
Incorporation to reduce the authorized capital stock (requires Board Resolution
and stockholders’s meeting) (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings and (3)
dissolution and eventual liquidation of the corporation. 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 violation the TFD and the Corp. 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.
- 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.
- 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.
- 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.

c) To Purchase Own Shares

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
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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 (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.
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 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.”

(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
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 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.

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VII. ARTICLES OF INCORPORATION

The article of incorporation is:

1.) A CONTRACT – an agreement that gives rise to obligations:
a.) Between the corporation and the state (because it is under the AI by which the
state grants the primary franchise.) à state manifests its consent through the
SEC while the corporation manifests its consent by the filing of the AI, through
the incorporators and eventually through the Board of Directors.
b.) Between the state and stockholders
c.) Between the corporation and stockholders à the stockholders manifest their
consent through their subscription of stocks and through voting à as against the
corporation, the stockholders do not have individual standing but only standing
as a group.
d.) Among stockholders à in this situation they now have individual standing. e.)
Between the stockholders and the Board of Directors
f.) Between the corporation and the public (since the AI is a public document.)

2.) A PUBLIC DOCUMENT – because it is registered with the SEC. Such works with
the doctrine of public notice that when the public deals with the corporation, the
contents of AI binds them whether they in fact have seen the AI or not. When a
person enters into a contract or any transaction with a corporation whether or not
he has checked with the SEC the terms and conditions of the AI, he will be bound
by it. He cannot claim ignorance of the charter of the corporation.

1. Nature of Charter: The charter is in the nature of a contract between the

corporation and the government.

GOVERNMENT OF P.I. v. MANILA RAILROAD CO.

Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad
and Jose Paez, its manager to provide and equip the telegraph poles of the company
in Tarlac and La Union with crosspieces for 6 telegraph wires belonging to the
government which, it alleged, are necessary for public service between certain
municipalities. Petitioner relies on Sec. 84 of Act No. 1459 which provides that the
railroad company shall establish a telegraph line for the use of the railroad and that
such posts may be used for government wires and shall be sufficient for crosspieces
to carry the number of wires which the government may consider necessary for public
service. Petitioner contends that since 6 crosspieces are now necessary for public
service, the company should provide sufficient crosspieces. Respondent answers by
saying that the Charter of Manila Railroad (Act No. 1510) repealed Sec. 84 of Act
1459 and contended that the Government is entitled to only 4 wires.

Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Railroad
Co. constitutes a contract between the corporation and the government, it would seem
that the corporation is governed by its contract and not by the provisions of the general
law. But from a reading of the charter it will be seen that there is no indication that the
government intended to impose upon said company any other conditions or
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obligations not expressly found in the said contract or charter. Section 84 of the Corp.
Law was intended to apply to all railways in the Philippines which did not have a
special charter or contract. Act No. 1510 applies only to Manila Railroad and being a
special charter, its adoption had the effect of superseding the provisions of the
corporation law which are applicable to railroads in general.
The charter of a corporation is a contract between three parties: (1) it is a
contract between the state and the corporation to which the charter is granted (2) it is
a contract between stockholders and the state (3) it is a contract between the
corporation and its stockholders. A special charter constitutes a contract between the
corporation and the government and as such are both equally bound by its provisions.
For the State to impose an obligation or a duty upon the respondent corporation, not
expressly provided in the charter would amount to a violation of said contract. The
provisions of Act 1459 relate to the number of wires which the government may place
upon poles of the company are different and more onerous than the provisions of the
charter.

NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot
overcome the law. However in the case of GPI, its special charter overruled the Gen.
Law on the ground that the former is both a contract and a law. Thus, its charter as a
law creates an amendment to all other laws. In the same manner, if the former were
a mere contract then the case would have been decided differently.

2. Procedure and Documentary Requirements (Sec. 14 and 15)

Sec. 14 Contents of the Articles of Incorporation – All corporations organized

under this code shall file with the SEC articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by
special law.
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which is/are
the secondary purpose or purposes: Provided, that a non-stock corporation may
not include a purpose which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors and trustees which shall not be less than five nor more
than fifteen;
7. The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and
qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares to which it is divided, and in
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 case the share are par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the shares
are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities
and residences of the contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.

The SEC shall not accept the articles of incorporation of any stock corporation
unless accompanied by a sworn statement of the Treasurer elected by the subscribers
showing that at least twenty-five percent (25%) of the authorized capital stock of the
corporation has been subscribed and at least twenty-five percent (25%) of the total
subscription has been fully paid to him in actual cash and/or in property the fair
valuation of which is equal to at least twenty- five percent (25%) of said subscription,
such paid-up capital being not less than P5,000.

Sec. 15 Forms of Articles of Incorporation – Unless otherwise prescribed by

special law, articles of incorporation of all domestic corporations shall comply
substantially with the following form: …

NOTE: The form goes into the validity and enforceability of the Articles of
Incorporation.

a) As to Number and Residency of Incorporators (Sec. 10);

- Sec. 10 Number and Qualifications of Incorporators – Any number of natural
person not less than five but not more than fifteen, all of legal age and a majority
of whom are residents of the Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the incorporators of a stock corporation must
own or be a subcriber to at least one share of the capital stock of the corporation.

NOTE: Incorporators must be warm-blooded individuals for purposes of

accountability. They must not be more than fifteen for pragmatic reasons, and they
must be less than five because two and four create a deadlock, while three is not as
efficient as five. (Institution of the Board of Directors is a clear embodiment of the
corporation’s centralized management.)

b) Corporate Name

Sec. 18 Corporate Name – No corporate name may be allowed by the SEC if the
proposed name is identical or deceptively confusing or similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under
the amended name.

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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.

- Parties organizing a corporation must choose a name at their peril; and the use of
a name similar to one adopted by another corporation, whether a business or a
nonprofit organization, if misleading or likely to injure the exercise of its corporate
functions, regardless of intent, may be prevented by the corporation having a prior
right.
- Similarity in corporate names between two corporations would cause confusion to
the public especially when the purposes stated in their charter are also the same
type of business.
- Section 18 of Corporation Code expressly prohibits the use of a corporate name
which is “identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws.” The policy behind the foregoing prohibition
is to avoid fraud upon the public that will occasion to deal with the entity concerned,
the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations.
- A corporation has no right to intervene in a suit using a name, not even its acronym,
other than its registered name, as the law requires and not another name which it
had not registered.
- There would be no denial of due process when a corporation is sued and judgment
is rendered against it under its unregistered trade name, holding that “[a]
corporation may be sued under the name by which it makes itself known to its
workers.”
- A corporation may change its name by the amendment of its articles of
incorporation, but the same is not effective until approved by the SEC.
- A change in the corporate name does not make a new corporation, and has no
effect on the identity of the corporation, or on its property, rights, or liabilities.

- The name of a corporation is very important, the incorporators constituting as body

politic and corporate under the name stated in the articles of incorporation for the

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 period of time mentioned therein. Such name is fatal in commercial transactions.
The public may only know the corporation through its name.
- The name of a corporation is (1) essential to its existence (2) it cannot change its
name except in the manner provided by the statute (3) by that name alone is it
authorized to transact business and (4) it is through its name that a corporation can
sue and be sued and perform all other legal acts.
- SEC reserves the right to order a corporation to change name when it appears that
there is an identical name.

Guidelines on Corporate Names:

1.) Name must contain “Corp.” or “Inc.”
2.) Name must not tend to mislead or confuse the public and must not contain such
descriptive words as “excellent” “fair” “good”, etc.
3.) Name must not be similar to a name already used by another partnership or
corporation.
4.) If proposed name contains a word similar to a word already used as a part of
the firm name of a registered corporation, proposed name must contain two
other words different from the name of the company already registered.
5.) If name or surname used as part of corporate name, the incorporators must
have a basis for such surname; it being one of the incorporators: Otherwise,
consent of the person whose name is being used must be submitted.
6.) If it contains initials, it must contain an explanation of the meaning and
relevance or reason thereof.
7.) The use of the words “State” “Maharlika” and “Baranggay” are prohibited and
reserved for the government.

- The following words when used must at least relate to the line of business namely:
Financing and Investment. The following words are prohibited from being used
namely: National, Engineer, Architect.

c) Purpose Clause

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

109
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.

- 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 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.

d) Corporate Term (Sec. 11)

Sec. 11 Corporate Term – A corporation shall exist for a period not exceeding fifty
years (50) from the date of incorporation unless sooner dissolved or unless said
period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty years (50) in any single
instance by an amendment of the articles of incorporation in accordance with this
Code; Provided, that no extension can be made earlier than five years (5) prior to the
original or subsequent expiry dates unless there are justifiable reasons for an earlier
extension as may be determined by the SEC.

- The purpose of the limit emphasizes the contractual nature of the corporation – the
extension must be approved by the State.
- No extension of term can be effected once dissolution stage has been reached, as
it constitutes new business.

e) Principal Place of Business (Sec. 51)

Sec. 51 Place and time of meetings of stockholders or members – Stockholders’

or members’ meetings, whether regular or special, shall be held in the city or
municipality where the principal office of the corporation is located and if practicable
in the principal office of the corporation: Provided, That Metro Manila shall, for
purposes of this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated
therein.

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 All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the corporation shall be
valid even if the meeting be improperly held or called, provided all the stockholders or
members of the corporation are present or duly represented at the meeting.

IMPORTANCE: For jurisdictional purposes. The corporation cannot be allowed to file

an action in a place other than that place or in the place of residence of the defendant.
Place of residence of the corporation is the place of its principal office.
- The residence of its president is not the residence of the corporation because a
corporation has a personality separate and distinct from that of its officers and
stockholders.

f) Minimum Capitalization (Sec. 12)

Sec. 12 Minimum capital stock required of stock corporation – Stock corporations

incorporated under this Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by special law, and subject
to the provisions of the following section.

Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of
incorporation – At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation
and at least twenty-five percent (25%) of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the Board of Directors: Provided however, that in no case shall the
paid-up capital be less than five thousand pesos (P5,000).

Q: Does the Corp. Code expressly provide for a minimum requirement of the
authorized capital stock?
A: Under Sec. 12 there is no minimum requirement but the Code says that “in no case
shall the paid up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000
is the minimum.

Q: Why is the maximum capitalization required to be indicated?

A:
(1) To protect the stockholders and also it limits the issuance of capital stock and the
extent of the voting power or capacity of a stockholder
(2) Because of accountability. Whether a corporation is going to do good or bad will
depend upon the assets its holds. The only way by which the State can look at the
accountability of a corporation in terms of assets it receives is to get a maximum so
that if the corporation wants to go beyond that, it has to go back to the State.

g) Subscription and Paid-up Requirements (Sec. 13)

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Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of
incorporation – At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation
and at least twenty-five percent (25%) of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the Board of Directors: Provided however, that in no case shall the
paid-up capital be less than five thousand pesos (P5,000).

Q: What is the 25%-25% rule?

A: It means that of the authorized capital stock applied for, 25% thereof must be
subscribed.
Of the 25% subscribed thereof must be paid up. Example, a corporation is by 5
individuals and they ask for an authorized capital stock of P2M, how much must each
subscribe to? P125,000.
RATIONALE: The purpose of such a requisition is that the State may be assured of
the successful prosecution of the work and that creditors of the company may have
to the extent, at least, of the required subscription, the means of obtaining satisfaction
for their claims.

Q: Must each subscribe equally?

A: No.

NOTES:
1.) Capital Stock – the amount fixed in the AI procured to be subscribed and paid
up. It is settled that shares issued in excess of the authorized capital stock are
void.
2.) Capital – the actual property or estate of the corporation whether in money or
property. It may be higher or lower than the capital stock.
3.) Subscribed Capital Stock – the portion of the capital stock subscribed (procured
to be paid) whether or not fully paid.
4.) Subscription – the mutual agreement of the corporation and the subscriber to
take and pay for the stock of the corporation.
5.) Pre-incorporation – the stage in which each incorporator or stockholder agrees
to contribute to a proposed corporation.
6.) Par value share – one in the certificate of stock of which appears an amount in
pesos as the nominal value of shares; must be stated in the AI and par value
share cannot be issued at less than such par value, which may only be changed
by amendment.
7.) No par value share – stated in the AI that it would be issued by the corporation
and its consideration cannot be less than the issued value, which cannot be less
than five pesos (P5). Value may be fixed in any of the three ways: (1) by the
articles of incorporation (2) by the board of directors when so authorized by said
articles or by the by-laws (3) by the stockholders representing at least a majority
of the controlling stockholders.
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h) Steps and Documents Required in SEC: In addition to the AI, documents
required are:
1. Treasurer’s Affidavit – accompanied by a sworn statement of the Treasurer that
at least 25% of the capital stock authorized is subscribed and at least 25% of
such have been fully paid in cash or property – fair valuation of which is equal
at least to 25% of the said subscription, such paid-up capital not being less than
P5,000.
2. Certificate of deposit
3. Letter of authority for the SEC authorizing it to examine the bank deposit, books
of account and supporting records as to the existence and utilization of the paid-
up capital stock
4. Written undertaking to change their partnership or corporate name in case there
is another person, firm, entity wit a prior right to use of the said income or one
similar to it.

Grounds for Disapproval (Sec. 17)

Sec. 17 Grounds when articles of incorporation or amendment may be rejected

or disapproved – The SEC may reject the articles of incorporation or disapprove any
amendment thereto if the same is not in compliance with the requirements of this
Code: Provided, that the Commission shall give the incorporators a reasonable time
within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or approval”
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.

- No articles of incorporation or amendment to articles of incorporation of banks,

banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public utilities,
educational institutions and other corporations governed by special laws shall be
accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such
articles or amendment is in accordance with law.
- When the proposed articles show that the object is to organize a barrio into a
separate corporation for the purpose of taking possession and having control of all
municipal property within the incorporated barrio and administer it exclusively for
the benefit of the residents, the object is unlawful and the articles can be denied
registration.
113
- It is well to note that, if a corporation’s purpose, as stated in the Articles of
Incorporation, is lawful, then the SEC has no authority to inquire whether the
corporation has purposes other than those stated, and mandamus will lie to compel
it to issue the certificate of incorporation.”

SEC’s duty is not merely ministerial – It has been granted by PD 902-A the powers
to examine and approve or disapprove the articles of incorporation and registration of
a corporation.

4. Amendments to the Articles of Incorporation (Sec. 16).

Sec. 16 Amendment of Articles of Incorporation – Unless otherwise prescribed by

this Code or by special law and for legitimate purposes, any provision or matter stated
in the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing
at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this Code, or the vote or
written assent of at least 2/3 of the members if it be a non-stock corporation.
 The original and amended articles together shall contain all provisions required
by law to set out in the articles of incorporation. Such articles, as amended shall
be indicated by underscoring the change or changes made, and a copy thereof
duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members shall
be submitted to the SEC
 The amendments shall take effect upon their approval by the SEC or from the
date of the filing with the said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the corporation.

NOTES: The matter to be amended, even if it does not concern the Board, must
always be concurred with by the Board. More importantly, the impetus to amend must
always come from the Board. The stockholders merely ratify such amendment. Such
is the case because the Board constitutes the centralized management. The impetus
of the Board comprises the obligatory force of the contracts entered into.
 2/3 votes are needed in AI while a majority is needed in amending by laws à
Such is the case to make it easier to amend by-laws.

5. Commencement of Corporate Existence (Sec. 19).

Sec. 19 Commencement of corporate existence – A private corporation formed or

organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the SEC issues a certificate of
incorporation under its official seal and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the period of time
114
mentioned therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law.

VIII. BY-LAWS

1. Nature and Functions (a Gokongwei v. SEC, 89 SCRA 337 [1979]; a Peña 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:
 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
115
 & 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.
 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.
 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.
 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.
 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.
 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.
 The SC grants the petition regarding Gokongwei’s petition to examine the book
and records of SMC
 However, it sustained the validity of the amendment to the by-laws without
prejudice to the question of actual disqualification of Gokongwei to run if elected to
sit as SMC director being decided, after proper hearing by the SMC BoD, whose
decisions shall be appealable to the SEC & to the SC, unless disqualified, the
prohibiton in the said by-laws will not apply to Gokongwei.

116
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
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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.

Q. Distinguish by-laws from AoI

A. The AoI is not an internal document that binds the parties to a corporate setting. It
is also a document that binds the State. The BL is an intramural document, its
supposed to bind the inner workings of a corp.

Q. Are the AoI and BL public documents?

A. Yes, both are public documents because they are not valid and binding without the
approval of the SEC

Q. Does the BL have to be approved by the SEC?

A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code
expressly requires the approval of the SEC to be binding upon the SHs and
members. Absent the codal provision, it is binding because of a corp.’s inherent
power to adopt its own by-laws.

Q. Do BL bind the public?

A. As a general rule, BL provisions do not bind the public, except if the third person
has knowledge of the BL provision.

(a) Common Law Limitations on By-Laws

(i) By-Laws Cannot Be Contrary to Law and Charter
 A by-law provision granting to a stockholder permanent seat in the Board of
Directors is contrary to the provision in Corporation Code requiring all members
of the Board to be elected by the stockholders. Even when the members of the
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 association may have formally adopted the provision, their action would be of
no avail because no provision of the by-laws can be adopted if it is contrary to
law.
(ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of
By-laws.
 Authority granted to a corporation to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his
shares, but merely authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer.
 By-laws are intended merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the charter of the
corporation.

(iii) By-Law provisions cannot discriminate

(b) Binding Effects on By-laws:

China Banking Corp. v. Court of Appeals

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
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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.”

PMI COLLEGES v. NLRC

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.
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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.

2. Adoption Procedure (Sec. 46)

Section 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws
for its government not inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members in case of non-
stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of
the corporation, subject to the inspection of the stockholders or members during office
hours. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the Securities
and Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by- laws shall be approved
and signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
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
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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.”
3. Contents (Sec. 47)

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this
Code, other special laws, and the articles of incorporation, a private corporation may
provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of
the stockholders or members;
3. The required quorum in meetings of stockholders or members and the manner
of voting therein;
4. The form for proxies of stockholders and members and the manner of voting
them;
5. The qualifications, duties and compensation of directors or trustees, officers and
employees;
6. The time for holding the annual election of directors of trustees and the mode
or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other
than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs. (21a)

4. Amendments (Sec. 48)

- Power to amend may be delegated to the BoD

Section 48. Amendments to by-laws. - The board of directors or trustees, by a

majority vote thereof, and the owners of at least a majority of the outstanding capital
stock, or at least a majority of the members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal any by-laws or
adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or
two-thirds (2/3) of the members in a non-stock corporation may delegate to the board
of directors or trustees the power to amend or repeal any by-laws or adopt new by-
laws: Provided, That any power delegated to the board of directors or trustees to
amend or repeal any by-laws or adopt new by-laws shall be considered as revoked
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whenever stockholders owning or representing a majority of the outstanding capital
stock or a majority of the members in non-stock corporations, shall so vote at a regular
or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the corporation,
and a copy thereof, duly certified under oath by the corporate secretary and a majority
of the directors or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of incorporation and
original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code.

 “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.”

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity

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.

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;
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 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.
Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by
its articles of incorporation and except such as necessary or incidental to the exercise
of the powers so conferred.
A corporation has only such powers as are expressly granted to it by law and
by its articles of incorporation, those which may be incidental to such conferred
powers, those reasonably necessary to accomplish its purposes and those which may
be incident to its existence.

a) Classification of Corporate Powers:

EXPRESS IMPLIED INCIDENTAL
These powers given to a Those powers that exist as Those powers that:
corporation either: a necessary consequence a.) attach to a corporation
a.) By clear or express of: at the moment of its
provision of the law. a.) the exercise of express creation
 Some of the other powers of the b.) without regard to its
powers expressly corporation or express powers or
granted under Sec. 36 b.) the pursuit of its particular primary
are considered to be purpose as provided for purposes and
inherent or incidental in the article of c.) is said to be inherent in
powers which even if not incorporation it as a legal entity or a
given by express grant legal organization.
are nevertheless  the management of a
deemed to be within the corporation, in the  Powers that go into the
capacity of the foreign absence of express very nature and extent of
entities (such as the restrictions, has a corporation’s juridical
power to adopt by-laws) discretionary authority to entity cannot be
enter into contracts or presumed to be
b.) By the charter or transactions which may incidental or inherent
articles of incorporation. be deemed reasonably powers. This juridical
 Express grant of necessary or incidental entity is State-grant and
authority from the board to its business purpose. cannot be altered or
of directors needed to amended without State
validly bind the authority (egs. right of
corporation. succession, right to
merger)
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 Thus the SC held that
absent any board
resolution authorizing an
officer or any person to
exercise express powers
given to a corporation
such as filing a suit on its
behalf, such an action is
invalid.
 The power of a
corporation to sue and be
sued in any court is
lodged with the board of
directors that exercise its
corporate powers.
 By-laws are not a
source of powers.
 Art. 46 of the Civil Code Sub-paragraph 11 of Sec. Sec. 2 of the Corp. Code
expressly provides for 36 provide that a provides the corporation
the powers of a corporation has the power as having “the powers,
corporation as a juridical and capacity to “exercise attributes and properties
personality possesses. such powers as may be expressly authorized by
 Sec.36 of the essential or necessary to law or incident to its
Corporation Code carry out its purpose or existence.”
expressly enumerates purposes as stated in its
the ten powers which a articles of incorporation.
corporation may
exercise.
 Sec.45 of the
Corporation Code
recognizes other powers
provided in the Article of
Incorporation.
 Generally exercised by Generally, purely Generally, purely
the Board of Directors members of the Board of members of the Board of
with exception to certain Directors exercise this. Directors exercise this.
instances where
shareholders’ assent are
needed.

 Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent

authority and of (2) estoppel.
 One has to look at the corporation as a person before the law because of the
(1) issue of consent and (2) liability – who commits itself to obligation. The state

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 only gives a corporation limited powers and not general powers as an individual
has because of the consent and liability.

(b) Where Corporate Power Lodged

 A corporation has no power except those expressly conferred on it by the
Corporation Code and those that are implied or incidental to its existence. In
turn, a corporation exercises said powers through its board of directors and/or
its duly authorized officers and agents. . . In turn, physical acts of the
corporation, like the signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws or by a specific
act of the board of directors.
 Unless otherwise provided by the Corporation Code, corporate powers are
exercised by the Board of Directors, which they may delegate to either an
executive committee, officers or contracted managers. The delegation, except
for the executive committee, must be for specific purposes, which makes the
officers the agents of the corporation, and accordingly the general rules of
agency as to the binding effects of their acts would apply. For such officers to
be deemed fully clothed by the corporation to exercise a power of the Board,
the latter must specially authorize them to do so.

PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate

powers (sec. 23)
 The source of power of the board of directors is therefore primary and not
delegated power from the stockholders or members of the corporation.
However, there are specified instances in the Corporation Code where the
particular exercise of power of the corporation by the board, in order to be
binding and effective, requires the consent and ratification of the stockholders
or members, on one hand, and the State, on the other hand.

IN CONSONANCE WITH CONTRACT LAW PRINCIPLES – in conformity with the

principles of contract law, that a party cannot relieve himself from the contractual
terms and conditions, much less amend or alter them, without the consent or approval
of the other party or parties.

EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is

required, majority rules. The consent or dissent of the stockholders is recognized by
their majority vote or their qualified two-thirds as the case may be which would bind
even those who abstained or dissented. For those who dissented, there is a way out
for them by way of exercising their appraisal right (depending on the issue).

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2. ULTRA VIRES DOCTRINE

(a) Concept and Types (Sec. 45)

Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by
its articles of
incorporation and except such as necessary or incidental to the exercise of the powers
so conferred.
- Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires
Doctrine that provides that the corporation cannot exercise powers beyond what
had been granted to it by statute or by its articles of incorporation except such as
necessary or incidental to the exercise of powers so conferred. It was meant to
control and regulate the actions of corporations.

BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles)

1. A corporation is a creature of the law and has only such powers and privileges as
are granted by the State – the ultra vires doctrine is a product of the theory of
concession as provided in Sec. 2.
2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders
or members – such duty dictates that the corporation engage only in transactions
to which the stockholders and members bind themselves by way of the provisions
of the purposes clause. This is also necessarily include an obligation not to enter
into transactions which violate the law.

TEST TO DETERMINE ULTRA VIRES – Whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to the express
powers and reasonably necessary to their exercise. The strict terms “direct and
immediate” refers to the business of the corporation while the liberal terms “fairly
incident” and “reasonably necessary” with reference to the powers of the corporation.
With regard to the business of the corporation as the reference point, much latitude is
given to the corporation to enter into various contracts as long as they have logical
relation to the pursuit of such business. On the other hand, when the purpose clause
used limiting words that Court will hold such corporation to such limited business.

POLICIES SUPERVENING IN ULTRA VIRES ISSUES – Acts not per se illegal,

liberal interpretation.
1.) PUBLIC CONVENIENCE – if corporation contracts are strictly construed, the
public would be inconvenienced by having to verify and enter into contractual
safeguards when entering into contracts with corporations. As such liberal
construction is afforded to such corporate contracts.
2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS – setting aside the
corporate contract on the ground of ultra vires would contravene the
expectations of both parties who entered into the contract expecting to be
bound.

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 3.) PRINCIPLE OF BUSINESS JUDGMENT – the court will not sit in judgment to
substitute their business judgment for that of the directors; and that as much as
possible, directors in the exercise of their business judgment, should be given
leeway to adopt corporate policies and to engage in transactions as they deem
best for the corporation.
4.) NATURE OF BUSINESS OF OPERATIONS – it is impossible to anticipate all
possible contingencies at the time the Articles are drawn thus there would be a
need to amend or revise the Articles to keep abreast with the various aspects
of the business.

ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER
SE
- Illegal acts of a corporation are those acts which are contrary to law, morals, or
public order or contravenes some rule of public policy or public duty are void. Such
acts or contracts cannot be the basis of any court action nor acquire validity by
performance, ratification or estoppel.
- Ultra vires acts are those which are not illegal and void ab initio but are within the
scope of the articles of incorporation are merely voidable and may become binding
and enforceable when ratified by stockholders. Said ratification cures the infirmity
of the corporate act and makes it valid and enforceable.

TYPES OF ULTRA VIRES CASES

1.) acts or contracts which are per se illegal as being contrary to law à VOID
2.) acts done beyond the powers of the corporation as provided for in the law or its
articles of incorporation; and à VOID or VOIDABLE?
3.) acts or contracts entered into in behalf of the corporation by persons who have
no corporate authority à UNENFORCEABLE

- Ultra vires acts of the second type are void as between the corporation and the
State or in the first level of corporate existence while it is merely voidable in the
third level because of public policy. The public who deals in good faith with the
corporation has the right to expect that the obligation entered into shall be complied
with.
- 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.”

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
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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.
(b) Ratification of Ultra Vires Acts: (a Pirovano 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]; a Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).

PIROVANO DE LA RAMA STEAMSHIP CO. INC.

Facts: The story began with Enrico Perovano becoming President of the Dela Rama
Corporation. Under his management, the corporation grew into a multi-million
company until his death. Don Esteban dela Rama who owned and controlled the stock
of the corporation, distributed his shareholdings among his five daughters including
Estefania. The company has a bonded indebtedness amounting to P7,500 in 1940
but had assets/capitals of P15 M as of 1941 which were mortgaged as security for the
debt to the National Development Corp. This bonded indebtedness was converted to
non-voting preferred shares of the company under the condition that they would bear
a fixed cumulative divisor of 6% per annum and this was carried out in 1949. NDC
now had the right to be represented by four out of nine members in the Board of
Directors. It was in 1946 that the Board of Directors adopted the questioned resolution
where the corporation ser aside P400,000 to the four minor children with the sum
convertible into shares of stock. Lourdes de la Rama later learned that since the
company shares of stock was actually 3.6 times their par value, the company would
in effect be giving them an amount totaling to P1,440,000 and that stocks if were given
to the children, the voting strength of the De la Rama daughters would be adversely
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affected. This caused Lourdes to ask for the cancellation and waiver of her pre-
emptive rights. Don Esteban then advised the corporate secretary that the resolution
be nullified due to the misunderstanding as to its implications.
In 1947, the Board adopted a resolution changing the form of donation from
4,000 shares to merely a renunciation in favor of the children of the corporate right,
titles and interests as beneficiary to the proceeds of the life insurance policy subject
to the condition that proceeds be retained by the company as a loan with 5% interest
($321,500). Estefania as guardian of the children, accepted the donation in their
behalf. Said donation was formally ratified in 1949 after Estefania bought a house in
New York for $75,000. In 1950 Osmena Jr. husband of Lourdes de la Rama
addressed an inquiry to the SEC asking for an opinion regarding the donation. SEC
opined that the donation was void because the corporation could not dispose of its
assets by gifts. Therefore, it acted beyond the scope of its powers. Thus, the
stockholders revoked the donation on this ground.
With these revocation, plaintiff as represented by Estefania their mother, seek t
enforce this resolutions adopted by the Board of Directors and Stockholders of De la
Rama Steamship Co. giving to said children the proceeds of the insurance policies of
the deceased with the company as the beneficiary. The company contends that the
resolution and the contract executed pursuant thereto are ultra vires and if valid, the
obligation to pay the amount given is not yet due and demandable. Plaintiffs won in
the lower court, hence this petition.

Issue: WON the said Board of Director’s resolution was an ultra vires act?
Held: The grant or donation in question is remunerative in nature and was given in
consideration of the services rendered by the heirs’ father to the corporation. The
donation has already been perfected such that the corporation could no loner rescind
it. It was embodied in a Board Resolution. Representatives of the corporation and
even its creditors as the NDC have given their concurrence. The resolution was
actually carried out when the corporation and Estefania entered into an agreement
that the proceeds will be entered as a loan. Estefania accepted the donation and such
was recorded by the corporation. The Board of Directors approved Estefania’s
purchase of the house in New York. Company stockholders formally ratified the
donation.
The donation was a corporate act carried out by the corporation not only with
the sanction of the Board of Directors but also of its stockholders. The donation has
reached a stage of perfection which is valid and binding upon the corporation and
cannot be rescinded unless there exists legal grounds for doing so. The SEC opinion
nor the subsequent Board Resolution are not sufficient reasons to nullify the donation.
The donation is also not an ultra vires act. The corporation was given broad and
unlimited powers to carry out the purpose for which it was organized which includes
the power to (1) invest and deal with corporate money not immediately required in
such manner as from time to time may be determined (2) aid in any other manner to
any person, association or corporation of which any obligation is held by this
corporation. The donation undoubtedly comes within the scope of this broad power.
An ultra vires act is (1) an act contrary to law, morals, or public order or
contravene some rules of public policy or duty. It cannot acquire validity by
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performance, ratification, estoppel. It is essentially void (2) those within the scope of
the Articles of Incorporation and not always illegal. It is merely voidable and may
become binding and enforceable when ratified by stockholders.
Since it is not contended that the donation is illegal or contrary to any of the
expressed provisions of the Articles of Incorporation nor prejudicial to the creditors of
the corporation, said donation even if ultra vires is not void and if voidable, its infirmity
has been cured by ratification and subsequent atcs of the corporation. The corporation
is now estopped or prevented from contesting the validity of the donation. To allow
the corporation to undo what it has done would be most unfair and contravene the
well-settled doctrine that the defense of ultra vires cannot be se up or availed of in
any completed transaction.

NOTE: The ratification of the stockholders of the donation made is the key in this case.
Because such ratification is meant to protect the contractual relationship or interest of
stockholders.

CRISOLOGO-JOSE v. COURT OF APPEALS

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
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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.

HARDEN v. BENGUET CONSOLIDATED MINING

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
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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.)

(i) Theory of Estoppel or Ratification

- The principle of estoppel precludes a corporation and its Board of Directors from
denying the validity of the transaction entered into by its officer with a third party
who in good faith, relied on the authority of the former as manager to act on behalf
of the corporation.
- In order to ratify the unauthorized act of an agent and make it binding on the
corporation, it must be shown that the governing body or officer authorized to ratify
had full and complete knowledge of all the material facts connected with the
transaction to which it relates. Ratification can never be made on the part of the
corporation by the same person who wrongfully assume the power to make the
contract, but the ratification must be by the officer or governing body having
authority to make such contract.
- The admission by counsel on behalf of the corporation of the latter’s culpability for
personal loans obtained by its corporate officers cannot be given legal effect when
the admission was “without any enabling act or attendant ratification of corporate
act,” as would authorize or even ratify such admission. In the absence of such
ratification or authority, such admission does not bind the corporation.
- Doctrine of Laches or “Stale Demands”: The principle of laches or “stale demands”
provides that the failure or neglect, for an unreasonable and unexplained length of
time, to do that which by exercising due diligence could or should have been done
earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it either has abandoned it
or declined to assert it.

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PRINCIPLE OF ESTOPPEL à It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for taking such action. Here it is
fair that the resolution be upheld at least on the ground of estoppel.
- Ratification (a) the act must be consummated and not executory (b) creditors
are not prejudiced or all of them have given their consent (c) rights of the public or
the State are not involved (d) all the stockholders must give their consent.

(ii) Theory of Apparent Authority (Art. 1883, Civil Code;a Prime White Cement
Corp. v. IAC, 220 SCRA 103, 113-114 [1993]; a Francisco v. GSIS, 7 SCRA 577
[1963]; a Yao Ka Sin Trading v. CA, 209 SCRA 763 [1992]).
- Outward appearance, the agent’s apparent representation yields to the principal’s
true representation and the contract is considered as entered into between the
principal and the third person.
- Due what seems to be and what happens otherwise.

Q: Upon whom is placed the burden of discovering that the agent has no authority?
A: In view of the authority of apparent authority, the third person dealing with the
corporation is not given the burden of discovering whether the agent has authority or
not. It is also therefore reasonable in a case where an officer of a corporation has
made a contract in its name, that the corporation should be required, if it denies the
authority of the officer, to state such defense in its answer, since it allows the plaintiff
to be appraised of the fact that the agent’s authority is contested; and he is given an
opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved.

NOTE: The theory of apparent authority is classified into two types by which such may
be manifested or proved, which are by position and by circumstance. The burden of
proof mentioned above applies to the second classification.
PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT
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.

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 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

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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 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
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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.
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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.
- 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.
- 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.
- 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.
- 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.
- 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.

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
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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
was denied they were not declared in default in connection with the cross-claim and
that no1 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.

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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.

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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 diminution of the capital stock or of the
incurring, creating, or increasing of any bonded3 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.

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 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
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 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.
- 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.
- 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

143
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.

144
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.

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.
145
- 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 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

146
necessary to accomplish its primary purpose as stated in the articles of incorporation,
the approval of the stockholders or members shall not be necessary.

DE LA RAMA v. MA-AO SUGAR CENTRAL CO.

Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President,
subscribed P300,000 worth of capital stock of the Philippine Fiber Processing Co. Inc.
They allege that the time of the first two payments were made there was no board
resolution authorizing the investment and that it was only before the third payment
that the President was so authorized by the Board of Directors. De la Rama also
contends that even assuming, arguendo, that the said Board Resolutions are valid,
the transaction is still wanting in legality, no resolution having been approved by the
affirmative vote of the stockholders holding shares in the corporation, entitling them
to at least 2/3 of the voting power.

Issue: WON the investment of corporate funds of Ma-ao were in violation of

corporation law.
Held: Investment of corporate funds in another corporation if done in pursuance of
the corporate purpose, does not need the approval of the stockholders, but where the
purchase of the shares of another corporation is done solely for investment and not
to accomplish the purpose of its incorporation, the vote of approval of the stockholders
is necessary. The investment made in Philippine Fiber was upheld by the SC.
Philippine Fiber was engaged in the manufacture of bags or investments in another
corporation engaged in the manufacture of bags. Since the sugar central is engaged
in the manufacture of sugars, sugar bags necessarily would come under the purview
of its needs under the regular course of business

- Any corporation whatever its primary purpose has a choice of placing such fund
either in a savings or time deposit account or in money market placements, or
treasury bills, or even in shares of stocks of other corporations which are traded in
the stock exchange. The exercise of such business judgment on the part of the
board in consistency with the primary purpose, since it is expected even from the
stockholders to believe, that it is within the ordinary business discretion of the
Board to place the corporation’s investible fund in the form of investment that would
yield the best possible return to the corporation and would not require the
ratification of the stockholders or members each time.
- Hotel Corporation invest 2M in 10M Bagoong Company à in this case while it
contemplates a situation where the Board exercises ordinary business discretion,
such investment would run contrary to the relationship of the Board to the
stockholders whereby they engaged to manage the hotel corporation alone, and
whereby they vowed to devote all their time and all their effort in such corporation.
By investing in 20% of another corporation, said Board obtained a very big role in
the management of such corporation, hence such would run contrary to its
obligation to the stockholders to take care of the business enterprise of the hotel
corporation and not any other corporation’s business enterprise. As such, it would
need a ratificatory vote of 2/3 of the stockholders.

147
- Hotel Company invest 2M in 100B San Miguel Corporation à in this case, the
ratificatory vote is not needed since such is really within the ordinary business
discretion of the Board. And by investing only in a relatively minimal share in the
assets of another company, it does not really engage in the business enterprise of
another corporation, hence, they still afford priority to the business enterprise of
the hotel corporation.

(g) Declare Dividends

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 dividend due on delinquent stock 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 paid
subscription is fully paid: Provided further, that no stock dividend shall be issued
without the approval of stockholders representing not less than 2/3 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 100%
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 its/his
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 when there is need for special reserve for probable
contingencies.

NIELSON & CO. v. LEPANTO CONSOLIDATED MINING CO.

Facts: In 1937, Lepanto entered into a management contract with Nielson. In this
agreement, Nielson was to manage and operate the Mankayan mining claim of
Lepanto in consideration for (a) P2,500 a month and (b) 10% of dividends declared
and paid. In 1941, Lepanto declared dividends amounting to P175,000 10%of which
Nielson was entitled to P17,500. Lepanto however never paid Nielson a cent. During
the liberation in 1945, Lepanto unilaterally terminated the management contract with
Nielson. In 1958, Nielson instituted an action for its 10% share in the dividends
declared by Lepanto in 1941. The suit reached the SC and it decided against Lepanto
in 1941. The suit between Nielson and Lepanto was suspended in 1942 when the US
Army bombarded the Mankayan mining claims, thus preventing Nielson from
complying with its obligation (i.e. operating and managing the claim). The tribunal
further said that the contract remained suspended even after the war was over in 1945
until 1948 when the mines were fully operational; and that the management contract
still had five years to go from 1948. Thus, the SC stated that Nielson was entitled to
10% of the dividend declarations in 1949 and 1950 worth P3M. Lepanto sought
reconsideration of SC’s decision in 1966. It raised two main points at issue namely:
(1) What is the nature of the management contract? Is it one of agency and hence
148
terminable at the principal’s will or is it a contract of lease of services which may be
terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock
dividend even though Lepanto is not a stockholder?

Held: The management contract is a contract for lease of service. (1) The theory of
agency was raised only on reconsideration which is a belated move by Lepanto (2)
Agency is premised on representation while lease of service is based on employment.
While an agent can execute juridical acts in behalf of his principal ; an employee under
a lease of service can only perform non-juridical acts or only material acts. (3) Since
the acts of Nielson (exploration, purchase, etc.) are subject to general control and
approval of the Board of Directors of Lepanto and cannot create, modify, extinguish
business relations between Lepanto and Nielson, these acts can only be considered
as material acts done for an employer for compensation. The contract, is therefore, a
contract of lease of services. Being such a contract, it cannot be revocable at the will
of the employer. The contract specifically provided that Lepanto can cancel the
contract only: a.) upon the 90-day written notice and b.) for Nielson’s failure to operate
and develop the mining claims for any cause except those causes due to the acts of
God.
Since the war and the bombardment constitute acts of God, they cannot be
considered as grounds to terminate the contract. In fact, the contract is deemed
suspended from 1942 to 1948 when neither of the parties could comply with their
obligations under it. Under its terms, the contract is suspended in cases of fortuitous
events. And such terms must be interpreted to mean that a period equal to the period
of suspension must be added to the original term of the contract by way of extension.
Thus, from 1948 the contract still had five more years. And by virtue of this extension,
Nielson is entitled to 10% of the dividends declared in 1949 and 1950.

Stock dividend is the amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can loosely be termed as
the “trust fund” of the corporation.

h) Enter into Management Contracts

Sec. 44 Power to enter into management contracts – No corporation shall

conclude a management contract with another corporation unless such contract shall
have been approved by the board of directors and by stockholders owning at least
the majority of the outstanding capital stock, or by at least a majority of the members
in the case of a non-stock corporation of both managing and the managed corporation
at a meeting duly called for that purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and managed
corporations own or control more than 1/3 of the total outstanding capital stock 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 the management
contract must be approved by the stockholders of the managed corporation owning
at least 2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of
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the members in the case of a non-stock corporation. No management contract shall
be entered into for a longer period than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to mange or operate all or substantially all of the
business of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided however, That such service contracts
or operating agreements which relate to exploration, development, exploitation or
utilization of natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations.

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.
- 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.
- A corporation organized to engage as a lending investor cannot engage in
pawbroker.
- A mining company has not power to engage in real estate development.
- 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.

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.

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.
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
150
 because the prevailing practice in the corporation was to explicitly authorize an
officer to contract loans in behalf of the corporation.

c. 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.
- 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, 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.
- 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
- For counsel to sign the certification for the corporation, he must specifically be
authorized by the Board of Directors.

(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.

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.
151
 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.

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 STATUTORY WITH OR WITHOUT
POWER PROCEDURE
REQUIREMENT APPRAISAL RIGHT
- Power to shorten - Approved by a majority - Written notice to each stockholder - Extension à Yes,
or extend vote of the Board of such constitutes a novation
corporate term Directors (majority of the of the contract. Shortening
(Sec. 37) quorum) à No, but not because such is
- Ratified by at least 2/3 of inherent, because such is not
the OCS or 2/3 of inherent as it constitutes an
members in a non-stock alteration of the powers
corporation. granted it by the State.
- Power to increase - Approved by a majority - Written notice to each - ▪Increase à None, dilutes the
capital stock and vote of the Board of stockholders Special worth of
also the power to Directors (majority of - documentary requirements - the stock, defeats the purpose
decrease capital quorum) - Prior approval of the SEC; SEC shall of the increase.
stock (Sec. 38) - Ratified by at least 2/3 of not accept for filing unless with a - Decrease à None, because in
the OCS sworn statement by treasurer effect there is a return of part of
that 25- investments of the
- 25 rule complied with stockholders
- SEC approval triggers effectivity
Power to incur, Approved by a majority vote Written notice None – drains the corporation of
create or of the Board of Directors Prior approval of the SEC financial resources contrary to
increase (majority of quorum) Supporting documents required: the purpose for which the
indebtedness (Sec. 1) trust indenture with a trustee power is exercised.
38) ▪ Ratified by at least 2/3 of bank
the OCS 2) underwriting agreement
SEC INTERIM ▪ Bonds registered with the SEC
GUIDELINES à
Corporation must have:

153
 ▪ Minimum net worth of P25
M at the
time of the filing of the
application
▪ Have been in
operation for at
least 3 years
▪ Must fulfill financial ratio
mandated by
SEC in interim
guidelines
Power to sell, 1) Of all or substantially (1) Must comply with the Bulk Sales Yes, such a sale does not
dispose, lease, all of its property Law necessarily leas to a
encumber (Sec. ▪ Majority vote of Board of ▪ Listing the corporate creditors dissolution of the corporation
40) Directors and the amount and nature of their and return of the residual value
(majority of quorum) claims of the corporation. Such is
ALL à Quantitative ▪ Ratified or approved by ▪ Failure renders transaction void afforded as a matter of equity
Test 2/3 of the OCS or 2/3 of the (2) If no ratificatory vote of and fairness.
SUBSTANTIALLY members stockholders, it is an utra vires act of
ALL à ▪ Relates to the primary the third kind
Qualitative Test purpose.
(purpose for which
it was 2) Exception to Sec. 40 –
incorporated) if the sale is necessary
in the usual and
regular course of business
or if proceeds of the sale or
other disposition of such
property and assets be
appropriated for the

154
 conduct of its remaining
businesses
▪ Majority vote of Board of
Directors
(business judgment rule
▪ Does not relate to primary
or secondary purpose
Power to purchase ▪ Must be for a legitimate purpose – example: None
own shares (Sec. (1) eliminate fractional shares arising out of stock dividends
41) (2) collect or compromise an indebtedness to the corporation
arising out of unpaid subscription in a delinquency sale, and to
Buy back of shares purchase delinquent shares during said sale and
(i) decrease the (3) to pay dissenting or withdrawing stockholders exercising
cost of doing appraisal right
business (ii)
Taken from URE only except redeemable shares
perpetuate control
of the enterprise.
Power to invest Approved by a majority vote Written notice of the proposed Yes, because minus
corporate funds in of the Board of investment and the time and place of the ratificatory vote the contract
another Directors majority of meeting shall be addressed to each or transaction falls under the
corporation or quorum) Ratified by at stockholder or member at his place of realm of ultra vires
business or for least 2/3 of the OCS residence as shown in the books of transactions of
any other purpose As a general rule, section the the third type.
(Sec. 42) 42 applies if the corporation and deposited to the
investment is for addressee in the Post Office with
secondary or other than postage prepaid or served
the personally.
primary purpose.
Except if the

155
 investment is reasonably
necessaryto
accomplish its primary
purpose as stated in the
Articles of
Incorporation, approval of
the stockholders is not
necessary as it is included
in the Business
Judgment of Board of
Directors
Power to ▪ Cash dividends ▪ Sec. 43 prohibits stock corporation Yes.
declare dividends (1) Absolute majority of From retaining surplus profits in
(Sec. 43) Board of Directors à in excess of 100% of their paid-up
accordance with the capital stock, EXCEPT:
Business Judgment Rule (1) When justified by definite
(2) Only declared out of corporate expansion projects or
the URE which shall be programs as
payable in cash, in approved by the Board of Directors
property or in stock (2) When corporation is prohibited
(3) However, cash under any loan agreement from
dividends due on declaring dividends without its
delinquent shares shall be consent and such consent has not
first applied to the unpaid yet been secured or
balance while stock (3) when it can be clearly shown that
dividends shall be withheld such retention is necessary under
until fully paid the OCS at special circumstances obtaining in
a regular or special the corporation such as when there is
meeting called for that need for special reserved for
purpose profitable contigencies

156
Power to enter into ▪ Approved by absolute majority of the Board of Directors
management ▪ Approved by stockholders owning majority of the OCS
contracts (Sec. 44)
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

EXCEPT if the corporation is organized primarily as management

company.
▪ Not for a period longer than five years for any one term.

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IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE
VEIL OF CORPORATE FICTION

MAIN DOCTRINE: a corporation has a personality separate and distinct from its
stockholders or members

CORPORATION –artificial being created by operation of law, having the right of

succession, and the powers, attributes, and properties expressly authorized by law or
incident to its existence.

Art. 44. The following are juridical persons:

4. The State and its political subdivisions;
5. Other corporations, institutions and entities for public interest or purpose, created
by law; their personality begins as soon as they have been constituted according
to law;
6. 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.

Importance of Protecting Main Doctrine:

 The separate juridical personality includes the right of succession, limited
liability, centralized management, and generally free transferability of shares of
stock. Therefore, an undermining of the separate juridical personality of the
corporation such as the application of the piercing doctrine, necessarily dilutes
any or all of those attributes.

FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF

PIERCING THE VEIL OF CORPORATE FICTION FOCUS ON?
1) Centralized management
- Centralized management is not a natural occurrence. It is a creation of statute
under Sec. 23 of the Corporation Code Compared to partnerships, partnerships
have mutual agency under delectus personarum.
- Mutual agency is more of a natural occurrence since here the partner is a co-
owner of the assets of the partnership, maintaining his control over his property.
In property law, there is what is called the seven juses of ownership.
- In partnership however, a partner retains all this seven juses, albeit as a co-
owner, through mutual agency.
- However, in a corporation, a stockholder abdicates his jus dispossidendi, jus
abutendi, etc. as to the property he is placing inside a corporation retaining only
to himself his jus fruendi, as to the dividends of his stocks.
- This is unnatural since a person is entitled to full use, enjoyment or
dispossession of his property.
- But since under the Corporation Code, centralized management is provided
therefore it is the means by which a corporation acts and conducts it business.

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 - As such, the piercing doctrine is not directed at the attribute of centralized
management, because in most instances, investors in a corporation hand the
management of the business of the corporation to professionals.
- To do away with the central management would place the investors who had
taken no active part in the conduct of the corporation to be liable as partners
with mutual agency.
2) Free transferability of assets
- Shares of stock represent (1) right to profits/dividends (2) voting right (3)
contingent right which recognizes a proprietary right of a mere aliquot share in
the proceeds after dissolution and distribution of corporate assets.
- Therefore a stockholder is neither owner nor co-owner of assets of a
corporation.
- The assets of a stockholder are distinct from the assets of a corporation.
- The stockholders have no control in the dispossession or acquisition of assets
(only as to their voting capacity in the management of the corporation).
- The stockholders however have the right to freely dispose of his shares of stock
to any and all person who may purchase it.
- There the corporation has no control.
- Applying the piercing doctrine as to the free transferability of his assets cannot
be done since jurisprudence points out that the piercing doctrine is a remedy of
last resort.
- If a third party claimant has a claim as to the assets to be disposed of or acquired
by a corporation can be afforded in other remedies whether it be intra or inter
corporate.
3) Limited Liability and Separate Legal Personality
- Therefore it can be concluded that the piercing doctrine is directed at the limited
liability attribute of the corporation (in consonance with the separate juridical
personality attribute).
- The piercing doctrine in a way undermines the separate juridical personality of
a corporation allowing a party to look behind the veil of corporate fiction to
remedy a claim or fraud.
- In looking behind the veil, a plaintiff seeks to make somebody liable for a claim
either based on tort, breach of contract, etc.
- Since a corporation can only act through its agents; it is the same agents that
are to be held liable.
- Therefore the attribute of limited liability cannot be availed of in a piercing case
since it is this attribute that is undermined so as a wrong can be remedied.

CLV: In viewing the main doctrine of separate juridical personality as to the piercing
doctrine, the main doctrine actually pertains to equity. Equity refers to the part of the
rights or interest an individual has in a corporation. Equity is comprised of two main
parts which is (1) enterprise and (2) assets. It is the enterprise or the conduct of the
business which in effect undermines equity. Assets are those brought in by the
stockholders during the formation of the corporation or may have been acquired
during its existence. They are inanimate objects that require human intervention to
move or be used. Thus, it can be said that it is not the assets that undermine equity
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which bring about piercing. When an enterprise is conducted in fraud or in
perpetuation of a wrong the equity of the corporation is undermined. Since, a
corporation must act through its agents, so the corporation being the principal,
commissions these agents to act under that special commission. If an agent acts
beyond the commission of the principal (as provided under its by-laws) it is the actor
that should be held liable not the corporation, since the corporation for all of its juridical
existence is still abstract and a corporeal actor acts for it. Also a corporation cannot
undermine equity, only the actors. So when these actors undermine equity, they lose
limited liability and may be held liable. Therefore, the basis of piercing is on the
enterprise not on equity or its assets. Piercing regulates the enterprise of the
corporation.

 A corporation, upon coming into existence, is invested by law with a personality

separate and distinct from those persons composing it as well as from any other
legal entity to which it may be related. This separate and distinct personality is,
however, merely a fiction created by law for conveyance and to promote the ends
of justice.
 One of the advantages of a corporate form of business organization is the limitation
of an investor’s liability to the amount of the investment. This feature flows from the
legal theory that a corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may be used only for
legitimate purposes. On equitable considerations, the veil can be disregarded
when it is utilized as a shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego or business
conduit of a person or an instrumentality, agency or adjunct of another corporation.

APPLICATIONS:

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.

DBP v NLRC
- Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
- Mere substantial identity of incorporators of two corporations does not necessarily
imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence
of clear and convincing evidence to show that the corporate personalities were
used to perpetuate fraud, or circumvent the law, the corporations are to be rightly
treated as distinct and separate from each other.
- Having interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other
public policy considerations.

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STOCKHOLDERS OF F. GUANZON AND SONS, INC V. REGISTER OF DEEDS
OF MANILA (1962)
- Corporation - juridical person distinct from the members composing it.
- Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members.
- While shares of stock constitute personal property they do not represent property
of the corporation.
- A share of stock only typifies an aliquot part of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and
equity but its holder is NOT the owner of any part of the capital of the corporation
nor entitled to possession
- The stockholder is not a co-owner or tenant in common of the corporate property

GOOD EARTH EMPORIUM INC. VS COURT OF APPEALS 194 SCRA 544

- Payment shall be made to the person in whose favor the obligation has been
constituted, on his successor in interest or any person authorized to receive it.
- supposed payments were not made to Roces-Reyes Realty Inc. or to its
successors in interest nor is there positive evidence that payment was made to a
person authorized to receive it. No such proof was submitted but merely inferred
by the RTC from Marcos Roces having signed the lease contract as President
which was witnessed by Jesus Marcos Roces.
- The latter, however, was no longer President or even an officer of the Roces-
Realty Inc at the time he received the money and signed the sale with pacto de
retro. He, in fact denied being in possession of authority to receive payment for
the respondent corporation nor does the receipt show that he signed in the same
capacity as he did in the lease contract at a time when he was President for
respondent corporation.
- A corporation has a personality distinct and separate from its individual
stockholders or members. Being an officer or stockholder of a corporation does
not make one’s property also of the corporation, and vice-versa, for they are
separate entities.
- Share owners are in no legal sense the owners corporate property which is owned
by the corporation as a distinct legal person. As a consequence of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or
credit of the stockholder, nor is the stockholder’s debt or credit that of the
corporation.

SULO NG BAYAN VS. ARANETA [GR L-31061, 17 August 1976]

- No. It is a doctrine well-established and obtains both at law and in equity that a
corporation is a distinct legal entity to be considered as separate and apart from
the individual stockholders or members who compose it, and is not affected by
the personal rights, obligations and transactions of its stockholders or members.
The property of the corporation is its property and not that of the stockholders,
as owners, although they have equities in it. Properties registered in the name
of the corporation owned by it as an entity separate and distinct from its
members. Conversely, a corporation ordinarily has no interest in the individual
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 property of its stockholders unless transferred to the corporation even in the
case of a one-man corporation. It has not been claimed that the members have
assigned or transferred whatever rights they may have on the land in question
to the plaintiff-corporation. Absent of any showing of interest, therefore, a
corporation, like plaintiff-appellant herein, has no personality to bring an action
for and in behalf of its stockholders or members for the purpose of recovering
property which belongs to said stockholders or members in their personal
capacities.
- No. In order that a class suit may prosper, the following requisites must be
present: (1) that the subject matter of the controversy is one of common or
general interest to many persons; and (2) that the parties are so numerous that
it is impracticable to bring them all before court. Here, there is only one plaintiff,
and the plaintiff corporation does not even have an interest in the subject matter
of the controversy, and cannot, therefore, represent its members or
stockholders who claim to own in their individual capacities ownership of the
said property.

Being Corporate Officer

- Being an officer or stockholder of a corporation does not by itself make one's
property also of the corporation, and vice-versa, for they are separate entities, and
that shareholders are in no legal sense the owners of corporate property which is
owned by the corporation as a distinct legal person.
- The mere fact that one is president of the corporation does not render the property
he owns or possesses the property of the corporation, since that president, as an
individual, and the corporation are separate entities.
- It is hornbook law that corporate personality is a shield against personal liability
of its officers—a corporate officer and his spouse cannot be made personally
liable under a trust receipt where he entered into and signed the contract clearly
in his official capacity.

Dealings Between Corporation and Stockholders:

- The fact that the majority stockholder had used his own money to pay part of the
loan of the corporation cannot be used as the basis to pierce. “It is understandable
that a shareholder would want to help his corporation and in the process, assure
that his stakes in the said corporation are secured.”
- Use of a controlling stockholder’s initials in the corporate name is not sufficient
reason to pierce the corporate veil, since by that practice alone does it mean that
the said corporation is merely a dummy of the individual stockholder. A corporation
may assume any name provided it is lawful, and there is nothing illegal in a
corporation acquiring the name or as in this case, the initials of one of its
shareholders.
- The mere fact that a stockholder sells his shares of stock in the corporation during
the pendency of a collection case against the corporation, does not make such
stockholder personally liable for the corporate debt, since the disposing
stockholder has no personal obligation to the creditor, and it is the inherent right
of the stockholder to dispose of his shares of stock anytime he so desires.
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- Just because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the
conduit of the other, thus piercing the veil of corporate fiction.
- The creation by DBP as the mother company of the three mining corporations to
manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value, does not indicate fraud or
wrongdoing and will not constitute application of the piercing doctrine.
- The facts that two corporations may be sister companies, and that they may be
sharing personnel and resources, without more, is insufficient to prove that their
separate corporate personalities are being used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370
SCRA 208 (2001).

On Privileges Enjoyed: The tax exemption clause in the charter of a corporation

cannot be extended to nor enjoyed by even its controlling stockholders.

Obligations and Debts: Corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder's debt or credit that of the corporation.
- A corporation has no legal standing to file a suit for recovery of certain
parcels of land owned by its members in their individual capacity, even
when the corporation is organized for the benefit of the members.
- Stockholders have no personality to intervene in a collection case
covering the loans of the corporation since the interest of shareholders in
corporate property is purely inchoate.
- The majority stockholder cannot be held personality liable for the
attorney’s fees charged by a lawyer for representing the corporation.
- Even when the foreclosure on the corporate assets was wrongful done,
stockholders have no standing to recover for themselves moral damages;
otherwise, it would amount to the appropriation by, and the distribution to,
such stockholders of part of the corporation’s assets before the dissolution
of the corporation and the liquidation of its debts and liabilities.
- The obligations of a stockholder in one corporation cannot be offset from
the obligation of the stockholder in a second corporation, since the
corporation has a separate juridical personality.

PIERCING THE VEIL OF CORPORATE FICTION:

3. Source of Incantation: The notion of corporate entity will be pierced or
disregarded and the individuals composing it will be treated as identical if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; or as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders.
4. Nature of Doctrine

TRADERS ROYAL BANK v COURT OF APPEALS

- The doctrine of piecing the corporate veil is an equitable remedy which may only
be awarded in cases when the corporate fiction is used to defeat public
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 convenience, justify wrong, protect fraud or defend crime or where a corporation
is a mere alter ego or business conduit of a person.
- It requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to or distinguishes
one corporation from a seemingly separate one, were it not for the existing
corporate fiction.
- The court must be sure that the corporate fiction was misused.. It is the protection
of innocent 3rd parties dealing with corporate entity that the law seeks to protect
by this doctrine.
- In this case, other than the allegation that Filriters is 90% owned by Philfinance
and the identity of one shall be maintained as to the other, there is nothing else
which could lead the court under the circumstances to disregard their separate
corporate personalities.
- There is no showing that TRB was defrauded at all when it acquired the subject
certificate of indebtedness from Philfinance.
- The fact that Philfinance owns a majority share in Filriters is not by itself a ground
to disregard their independent corporate entities. In Liddel & Co. Inc. v. CIR mere
ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not itself a sufficient reason to disregard the
fiction of separate corporate personalities.
- TRB being a commercial bank which deals with corporate entities with
circumstances showing that the agents are acting in excess of corporate authority
may not hold the corporation liable. This is only fair as everyone must in the
exercise of his rights and in the performance of his duties, act with justice, give
everyone his due and observe honesty and good faith.
- When the legal fiction of 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.
- Piercing the veil of corporation fiction is warranted only in cases when the separate
legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, such that in the case of two corporations, the law will regard the
corporation as merged into one.
- The legal fiction of separate corporate existence is not at all times invincible and
the same may be pierced when employed as a means to perpetrate a fraud,
confuse legitimate issues, or used as a vehicle to promote unfair objectives or to
shield an otherwise blatant violation of the prohibition against forum-shopping.
While it is settled that the piercing of the corporate veil has to be done with caution,
this corporate fiction may be disregarded when necessary in the interest of justice.
- The nature of the piercing doctrine is to disregard the separate juridical personality
of a corporation and to hold the actors or the stockholders of the corporation liable
for a wrong committed or a liability avoided. In our lessons in corporation law, we
distinguish the cause of the piercing because it would explain of piercing is
properly done. The Supreme Court does not go into an explanation or direct
attribution as to cause of the piercing which at times cause confusion, so to clarify
matters we classify the piercing case into three namely: (1) fraud (2) alter ego and
(3) remedy.
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- In the cases of fraud, the piercing is done because there is a wrong committed.
Therefore, a person behind the wrong must be held liable which in a corporation
are the directors, since the corporation acts through them. A piercing of the
corporate veil in fraud cases is for the purpose of making the directors directly
liable. In fraud cases, the SC looks into the circumstances of the case searching
for elements of malice or evil motive. An absence of such an evil motive, the courts
will not allow piercing. An example would be the case of TRB v. CA where the
Court did not allow piercing because there was no injury caused. Also in the Umali
case, the court did not allow piercing because the main intent was to annul a real
estate mortgage under an allegation of fraud and not to hold the Directors liable.
In both cases, piecing was not the proper remedy, even if fraud was actually
alleged because the fraud committed was not attributed directly to the acts of the
agents of the corporation.
- In alter ego cases, the allegation does not go into fraud or malicious intent but a
disrespect for the corporate fiction. Here, the corporation is being used as a
conduit or front for the activities of a person, whether natural or juridical, in order
to avoid liability or gain advantage over another without really employing fraud.
Here, if piercing is allowed then the corporate existence of the conduit corporation
is disregarded and the person or corporation behind the corporation shall be
considered as one and the liability of one is the liability of the other. The main
intent here is not to make the board of directors of the conduit corporation liable
but to make the corporation behind the existence of the conduit liable. It is the
objective of the Corporation Code to foster public convenience in sanctioning the
creation of a corporation not as a means or private convenience where it is to be
used by other corporations or individuals as a means to circumvent liability or
cause a disruption of normal business practice in dealing with corporations.
- Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court
may grant piercing as an equitable remedy, but such is usually resorted to as a
reason in consonance with fraud or alter ego cases. As such it is of purely judicial
discretion.

The three cases may appear together in one application:

FRAUD – to prevent wrong
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.

(b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and
is not available when other remedies are still available.
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 UMALI v. COURT OF APPEALS
- Under the doctrine of piecing the veil of corporate entity, when valid ground exists.
the following effects would be produced:
4. legal fiction that a corporation is an entity with a juridical personality separate
and distinct from its members or stockholders may be disregarded
5. in such cases, the corporation will be considered as a mere association of
person
6. 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:
e. used to defeat public convenience, justify wrong, protect fraud, or defend
crime
f. made as a shield to confuse legitimate issued
g. where a corporation is the mere alter ego or business conduit of a person
h. 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
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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 circumvention of any liability.

Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make
the officer or another corporation pecuniarily liable for corporate debts (?).

INDOPHIL TEXTILE MILL WORKERS UNION v CALICA

- 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.

FRANCISCO MOTORS CORPORATION V. CA AND SPS. MANUEL

- In our view, however, given the facts and circumstances of this case, the doctrine
of piercing the corporate veil has no relevant application here. Respondent court
erred in permitting the trial court’s resort to this doctrine.
- In the case at bar, instead of holding certain individuals or persons responsible for
an alleged corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned.
- Hence, it appears to us that the doctrine has been turned upside down because
of its erroneous invocation.
- Note that according to private respondent Gregorio Manuel his services were
solicited as counsel for members of the Francisco family to represent them in the
intestate proceedings over Benita Trinidad’s estate.
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- These estate proceedings did not involve any business of petitioner.
- Furthermore, considering the nature of the legal services involved, whatever
obligation said incorporators, directors and officers of the corporation had incurred,
it was incurred in their personal capacity.
- When directors and officers of a corporation are unable to compensate a party for
a personal obligation, it is far-fetched to allege that the corporation is perpetuating
fraud or promoting injustice, and be thereby held liable therefore by piercing its
corporate veil.

BOYER – ROXAS VS. COURT OF APPEALS

- 1.Petitioner’s contention to pierce the veil of corporate fiction is untenable. As
aptly held by the court: “The separate personality of a corporation may ONLY
be disregarded when the corporation is used as a cloak or cover for fraud or
illegality, or to work injustice, or when necessary to achieve equity or when
necessary for the protection of creditors.”
- As regards petitioners contention that they should be respected on their
occupancy by virtue of an aliquot part they own on the corporation as
stockholders, it also fails to hold water. The court held that “properties owned
by a corporation are owned by it as an entity separate and distinct from its
members. While shares of stocks are personal property, they do not represent
property of the corporation. A share of stock only typifies an aliquot part of the
corporation’s property, or the right to share in its proceeds to that extent when
distributed according to law and equity, but its holder is not the owner of any
part of the capital of the corporation. Nor is he entitled to the possession of any
definite portion of its property or assets. The holder is not a co-owner or a tenant
in common of the corporate property.”

GREGORIO ARANETA, INC VS TUASON DE PATERNO AND JOSE VIDAL

- That the sale was not contingent on the cancellation of vidal’s mortgage. *The trial
court admitting the existence of the relation of principal and agent between Paz
Tuason and Jose Araneta, pointed out that not Jose Araneta but Gregorio Araneta,
Inc. was the purchaser, and the well-known distinction between the corporation
and its stockholders.
- The court opined that the sale to Gregorio Araneta, Inc. was not a sale to Jose
Araneta the agent or broker. Gregorio Araneta, Inc. had long been organized and
engaged in real estate business.
- The corporate entity was not used to circumvent the law or perpetrate deception.
- There is no denying that Gregorio Araneta, Inc. entered into the contract for itself
and for its benefit as a corporation.
- The contract and the roles of the parties who participated therein were exactly as
they purported to be and were fully revealed to the seller.
- There is no pretense, nor is there reason to suppose, that if Paz Tuason had
known Jose Araneta to Gregorio Araneta, Inc's president, which she knew, she
would not have gone ahead with the deal.

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- From her point of view and from the point of view of public interest, it would have
made no difference, except for the brokerage fee, whether Gregorio Araneta, Inc.
or Jose Araneta was the purchaser.
- Under these circumstances the result of the suggested disregard of a technicality
would be, not to stop the commission of deceit by the purchaser but to pave the
way for the evasion of a legitimate and binding commitment buy the seller.
- The principle invoked by the defendant is resorted to by the courts as a measure
or protection against deceit and not to open the door to deceit. "The courts," it has
been said, "will not ignore the corporate entity in order to further the perpetration
of a fraud."

ADELIO C. CRUZ VS QUITERIO L. DALISAY

- Respondent’s actuation in enforcing a judgment against complainant who is not a
judgment debtor in the case calls for disciplinary action.
- What is incumbent upon respondent is to ensure that only the portion of a decision
ordained or decreed in the dispositive part should be the subject of the execution.
- The tenor of the NLRC judgment and the implementing writ is clear enough. It
directed Qualitrans Limousine Service, Inc. in its judgment and not the owner
thereof.
- Respondent, however, choose to “pierce the veil of corporate entity” usurping a
power belonging to the court and assumed improvidently that since the
complainant is the owner/president of Qualitrans Limousine Service, Inc., they are
one and the same. It is a well settled doctrine both in law and equity that as a legal
entity, a corporation has a personality distinct and separate from its individual
stockholders or members.
- The mere fact that one is president of the corporation does not render the property
he owns or possesses the property of the corporation, since that president, as an
individual, and the corporation are separate entities.

Basis Must Be Clear Evidence:

- To disregard the separate juridical personality of a corporation, it is elementary
that the wrongdoing cannot be presumed and must be clearly and convincingly
established. The organization of the corporation at the time when the relationship
between the landowner and the developer were still cordial cannot be used as a
basis to hold the corporation liable later on for the obligations of the landowner to
the developer under the mere allegation that the corporation is being used to
evade the performance of obligation by one of its major stockholders.
- The mere assertion by a Filipino litigant against the existence of a “tandem”
between two Japanese corporations cannot be the basis for piercing, which can
only be applied by showing wrongdoing by clear and convincing evidence.
- To disregard the separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established. It cannot be presumed. In this case,
the Court finds that the Remington failed to discharge its burden of proving bad
faith on the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate veil.

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- The party seeking for the piercing of the corporate veil has the burden of
presenting clear and convincing evidence to justify the setting aside of the
separate corporate personality rule.
- Application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from an erroneous
application.

Not Applicable to Theorizing:

- Piercing of the veil of corporate fiction is not allowed when it is resorted under a
theory of co-ownership to justify continued use and possession by stockholders of
corporate properties.
- The piercing doctrine is an equitable remedy available only to persons outside the
corporation. It cannot be availed of stockholders within the corporation forming part
of the corporation. In comparison, CLV uses the Story of the Wall. This wall is the
main doctrine, designed both to protect the stockholders by virtue of the attribute
of limited liability and to hide from prying eyes the inner workings of the corporation.
Stockholders are inside these walls. Piercing the veil of corporate fiction is like a
battering ram that creates a hole through this wall to allow third persons to look into
the corporation to see if there is a wrong committed inside those walls. A
stockholder being inside the fort are afforded other remedies, they have intra-
corporate remedies to avail of.
- The piercing doctrine cannot be availed of to dislodge from SEC’s jurisdiction a
petition for suspension of payments filed under P.D. 902-A, on the ground that the
petitioning individuals should be treated as the real petitioners to the exclusion of
the petitioning corporate debtor. “The doctrine of piercing the veil of corporate
fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine
only applies when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime.”

Applicable to “Third-Parties”:
- That respondents are not stockholders of the sister corporations does not
make them non-parties to this case, since it is alleged that the sister
corporations are mere alter egos of the directors-petitioners, and that the
sister corporations acquired the properties sought to be reconveyed to
FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The
notion of corporate entity will be pierced and the individuals composing it
will be treated as identical if the corporate entity is being used as a cloak
or cover for fraud or illegality; as a justification for a wrong; or as an alter
ego, an adjunct, or a business conduit for the sole benefit of the
stockholders. a Gochan v. Young, 354 SCRA 207 (2001).

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(g) Piercing is a power belonging to the court and cannot be assumed
improvidently by a sheriff (?).

CONSEQUENCES AND TYPES OF PIERCING CASES:

- 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, or the particular obligation for which the doctrine was applied.
- Classification of Piercing Cases:
- Rundown on Piercing Application: This Court pierced the corporate veil to
ward off a judgment credit, to avoid inclusion of corporate assets as part of
the estate of the decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to
shield unfair objectives to cover up an otherwise blatant violation of the
prohibition against forum shopping. Only is these and similar instances may
the veil be pierced and disregarded.
(iv) Fraud Piercing: When corporate entity used to commit fraud or do a
wrong
(v) Alter-ego Piercing: When corporate entity merely a farce since the
corporation is merely the alter ego, business conduit, or instrumentality of
a person or another entity
(vi) Equity Cases: When piercing the corporate fiction is necessary to
achieve justice or equity.
- The three cases may appear together in one application.

KOPPEL (PHIL) INC. VS YATCO

- A corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons.
- The corporate entity is disregarded where it 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.
- SC reasoned that, in so far as the sales involved herein are concerned, Koppel
Philippines, Inc., and Koppel Industrial Car and Equipment company are to all
intents and purposes one and the same; or, to use another mode of expression,
that, as regards those transactions, the former corporation is a mere branch,
subsidiary or agency of the latter.
- This is conclusively borne out by the fact, among others, that the amount of the
so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to
the sole, unbridled control of Koppel Industrial Car and Equipment Company.
- No group of businessmen could be expected to organize a mercantile corporation
— the ultimate end of which could only be profit — if the amount of that profit were
to be subjected to such a unilateral control of another corporation, unless indeed
the former has previously been designed by the incorporators to serve as a mere
subsidiary, branch or agency of the latter.

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- Evidently, Koppel Industrial Car and Equipment Company made us of its
ownership of the overwhelming majority — 99.5% — of the capital stock of the
local corporation to control the operations of the latter to such an extent that it had
the final say even as to how much should be allotted to said local entity in the so-
called sharing in the profits.
- SC further ruled that, it cannot overlook the fact that in the practical working of
corporate organizations of the class to which these two entities belong, the holder
or holders of the controlling part of the capital stock of the corporation, particularly
where the control is determined by the virtual ownership of the totality of the
shares, dominate not only the selection of the Board of Directors but, more often
than not, also the action of that Board.
- Philippine corporation could not possibly contravene with the American
corporation in this case under Exhibit H.
- This fact necessarily leads to the inference that the corporation had at least a Vice-
President, and presumably also a President, who were not resident in the
Philippines but in America, where the parent corporation is domiciled.
- If Koppel (Philippines), Inc., had been intended to operate as a regular domestic
corporation in the Philippines, where it was formed, the record and the evidence
do not disclose any reason why all its officers should not reside and perform their
functions in the Philippines.

R.F. SUGAY & CO vs REYES

- It is a legal truism that when the veil of corporate fiction is made as a shield to
perpetrate a fraud and/or confuse legitimate issues (here, the relation of employer-
employee), the same should be pierced. Verily the R. F. Sugay & Co., Inc. is a
business conduit of R. F. Sugay.

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.
- In accordance with the foregoing rule, this Court has disregarded the separate
- 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.

b) 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.
- 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.
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 - 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.

(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.”

(c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by
incorporating properties or the business.

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.

(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.
(d) Parent-Subsidiary Relations; Affiliates:

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.

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 (e) Guiding Principles in Fraud Cases:

Why is there inordinate showing of alter-ego elements?

• 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.

NATIONAL MARKETING CORPORATION V. ASSOCIATED FINANCE COMPANY,

- Consequently, he cannot now seek refuge behind the general principle that a
corporation has a personality distinct and separate from that of its stockholders
and that the latter are not personally liable for the corporate obligations.
- To the contrary, upon the proven facts, we feel perfectly justified in “piercing the
veil of corporate fiction” and in holding Sycip personally liable, jointly and severally
with his co-defendant, for the sums of money adjudged in favor of appellant.
- It is settled law in this and other jurisdictions that when the corporation is the mere
alter ego of a person, the corporate fiction may be disregarded; the same being
true when the corporation is controlled, and its affairs are so conducted as to make
it merely an instrumentality, agency or conduit of another.

PALACIO vs FELY TRANSPORTATION CO.

DOCTRINE: We believe that this is one case where the defendant corporation should
not be heard to say that it has a personality separate and distinct from its members
when to allow it to do so would be to sanction the use of the fiction of corporate entity
as a shield to further an end subversive of justice.

VILLA REY TRANSIT INC. VS FERRER

- Although Villarama was not a stockholder or an incorporator, his wife was an
incorporator and also the treasurer of the Corporation. The evidence proved that
Villarama had actual control of the funds of the Corporation and appeared as the
actual owner and treasurer. In fact the funds of the Corporation were deposited in
his personal account
- The interference of Villarama in the complex affairs of the corporation, and
particularly its finances, are much too inconsistent with the ends and purposes of
the Corporation law, which, precisely, seeks to separate personal responsibilities
from corporate undertakings. It is the very essence of incorporation that the acts
and conduct of the corporation be carried out in its own corporate name because it
has its own personality.
- When the fiction is urged as a means of perpetrating a fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery
or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.
- We hold that the preponderance of evidence have shown that the Villa Rey Transit,
Inc. is an alter ego of Jose M. Villarama. The rule is that a seller or promisor may
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 not make use of a corporate entity as a means of evading the obligation of his
covenant. Where the Corporation is substantially the alter ego of the covenantor to
the restrictive agreement, it can be enjoined from competing with the covenantee.
- We hold the restrictive clause in the contract entered into by the latter and
Pantranco is also enforceable and binding against the said Corporation. As We
read the disputed clause, it is evident from the context thereof that the intention of
the parties was to eliminate the seller as a competitor of the buyer for ten years
along the lines of operation covered by the certificates of public convenience
subject of their transaction.
- The rule became well established that if the restraint was limited to "a certain time"
and within "a certain place," such contracts were valid and not "against the benefit
of the state." We find that although it is in the nature of an agreement suppressing
competition, it is, however, merely ancillary or incidental to the main agreement
which is that of sale. The suppression or restraint is only partial or limited: first, in
scope, it refers only to application for TPU by the seller in competition with the lines
sold to the buyer; second, in duration, it is only for ten (10) years; and third, with
respect to situs or territory, the restraint is only along the lines covered by the
certificates sold. In view of these limitations, coupled with the consideration of
P350,000.00 for just two certificates of public convenience, and considering,
furthermore, that the disputed stipulation is only incidental to a main agreement, the
same is reasonable and it is not harmful nor obnoxious to public service. The evils
of monopoly are farfetched here. There can be no danger of price controls or
deterioration of the service because of the close supervision of the Public Service
Commission.
- However, the sale between Fernando and the Corporation is valid, such that the
rightful ownership of the disputed certificates still belongs to the plaintiff being the
prior purchaser in good faith and for value thereof. In view of the ancient rule of
caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer in the
sheriff's sale was only the right which Fernando, judgment debtor, had in the
certificates of public convenience on the day of the sale.

CIR vs NORTON AND HARRISON

- Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison
and that the fiction of corporate entities, separate and distinct from each, should
be disregarded.
- This is a case where the doctrine of piercing the veil of corporate fiction, should
be made to apply.
- By being separate entities, the corporations would have to pay lesser income tax.
- The combined taxable Norton-Jackbilt income would subject Norton to a higher
tax.

TOMAS LAO CONSTRUCTION VS NLRC

- YES. The records disclose that the 3 corporations were in fact substantially owned
and controlled by members of the Lao family. A majority of the outstanding shares
of stock in LVM and T&J is owned by the Lao Family.

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- T&J is 100% owned by the Lao’s as reflected in its Articles of Incorporation. The
Lao Group of Companies therefore is a closed corporation where the incorporators
and directors belong to a single family.
- The corporations were also engaged in the same line of business under one
management and use the same equipment including manpower services. Where
it appears that business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the right of third
persons, disregard the legal fiction that the corporations are distinct entities, and
treat them as identical.
- It is held that the liability of petitioner corporation extends to the responsible
officers acting in the interest of the corporations.

5. Alter-Ego Cases:

ARNOLD vs WILLETS AND PATTERSON LTD

- “Where the stock of a corporation is owned by one person whereby the corporation
functions only for the benefit of such individual owner, the corporation and the
individual should be deemed to be the same.”
- In the case at bar, the corporations are under Willits. When the second contract
was signed, Willits recognized that Arnold’s services were to be performed by its
terms. When the new corporation was organized and created, it still treated Arnold
as its agent in the same manner as the first one.

LA CAMPANA COFFEE FACTORY VS KAISAHAN NG MANGGAGAWA

- 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.

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(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.

(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.
 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.
 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.
 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.
 Use of nominees to man the corporation for the benefit of the controlling
stockholder.

(c) Mixing-up Operations; Disrespect to the Corporate Entity:

 Employment of same workers; single place of business, etc., may indicate alter
ego situation.
 Where two business enterprises are owned, conducted, and controlled by the
same parties, both law and equity will, when necessary to protect the rights of
third persons, disregard the legal fiction that two corporations are distinct
entities and treat them as identical.
 Where corporate fiction was used to perpetrate social injustice or as a vehicle
to evade obligations or confuse the legitimate issues (as in this case where the
actions of management of the two corporations created confusion as to the
proper employer of claimants), it would be discarded and the two corporations
would be merged as one.
 Mixing of personal accounts with corporate bank deposit accounts.

(d) Avoidance of taxes:

YUTIVO & SONS INC. v CTA

- The intention to minimize taxes as in tax evasion when used in the context of fraud,
must be proven to exist by clear and convincing evidence amounting to more than
the mere preponderance of evidence. The evidence of the collector falls short of
such standard.

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- SM was organized at a time when there was not yet tax to evade, when GM was
still the importer and was the one paying the sales tax.
- The transactions between Yutivo and SM were and have always been in the open,
embodied in private and public documents, constantly subject to inspection by tax
authorities.
- A taxpayer has the legal right to decrease the amount of what otherwise would be
his taxes altogether avoid them by means which the law permits.
- However, SM was actually owned and controlled by Yutivo to make it a mere
subsidiary or branch of the latter. SM was organized by the leading stockholders
of Yutivo. Yutivo was at all times in control if the majority stock of SM. The principal
officers of both corporations are identical. Thus, the business, financial and
management policies of both corporations could be directed towards common
ends. The funds of SM are directly remitted to Yutivo and subject to withdrawal
only of Yutivo, SM’s resources being under Yutivo’s control. The accounting
system maintained by Yutivo shows that it maintained a high degree of control
over SM accounts. All transactions between Yutivo and SM are recorded and
effected by mere debit or credit entries against the reciprocal account maintained
in their respective books of accounts and indicate the dependency of SM as a
branch of Yutivo
- Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded
the technical defense of separate corporate entity in order to arrive at the true
liability of Yutivo.

Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather
than an alter ego case?
A: The Court had in this case ruled as to the legitimacy of a corporation to act as to
seek means to decrease its tax liability. The difference between Yutivo and Tan Boon
Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond
the scope of his authority. In the former, evidence was seen to be insufficient as to
establish a willful desire to evade taxes.

(e) Thinly-capitalized corporations:

- The fact that a corporation has no adequate capital enough basis for
piercing. Such pronouncement limits the advantage of creating a
corporation. For example, in cases where leveraging is undertaken which
is considered as a legitimate business practice.

(f) Parent-subsidiary; Affiliated Companies:

- The person who invokes the doctrine must always be the injured party.
- Absence of proof that control over a corporation is being used by a
mother company to commit fraud or wrong, there would be no basis to
disregard their separate juridical personalities.
- If used to perform legitimate functions, a subsidiary’s separate existence
shall be respected, and the liability of the parent corporation as well as the
subsidiary will be confined to those arising in their respective businesses.
Even when the parent corporation agreed to the terms to support a
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 standby credit agreement in favor of the subsidiary, does not mean that
its personality has merged with that of the subsidiary.

(g) Summary of Probative Factors:

MCCONNEL VS CA
- Wherever circumstances have shown that the corporate entity is being used as an
alter ego or business conduit for the sole benefit of the stockholders, or else to
defeat public convenience, justify wrong, protect fraud, or defend crime.
o That the corporation was a mere extension of their personality is shown by the
fact that the office of Cirilo Paredes and that of Park Rite Co., Inc. were located
in the same building, in the same floor and in the same room — at 507 Wilson
Building.
o The fact that the funds of the corporation were kept by Cirilo Paredes in his
own name. The corporation itself had no visible assets, except perhaps the toll
house, the wire fence around the lot and the signs thereon.

CONCEPT BUILDERS Inc. v NLRC

- The conditions under which the juridical entity may be disregarded vary according
to the peculiar facts and circumstances of each case. No hard and fast rule can
be laid down, but there are some probative factors of identity that will justify the
application of the doctrine.

Summary probative factors:

5. stock membership by one ore common ownership of both
6. identity of directors and officers (management)
7. manner of keeping corporate books and records (management)
8. methods of conducting business (management).

- While petitioners claimed that it ceased operations in 1986, it filed an Information

Sheet with the SEC in 1987 stating that its office address is their old address. Both
information sheets were filed by Virgilio Casino, the same corporate secretary.
They had the same President, Board of Directors and substantially the same
subscribers.

(h) Guiding Principles in Alter-Ego Cases:

• Doctrine applies even in the absence of evil intent, because of the direct
violation of a central corporate law principle of separating ownership from
management;
- Doctrine in such cased is based on estoppel: if stockholders do not respect the
separate entity, others cannot also be expected to be bound by the separate
juridical entity;
• Piercing in alter ego cases may prevail even when no monetary claims are
sought to be enforced against the stockholders or officers of the corporation.

(i) Distinction Between Fraud Piercing and Alter-ego Piercing:

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EQUITY CASES:
(a) When used to confuse legitimate issues.
(b) When used to raise technicalities.

TELEPHONE ENGINEERING AND SERVICE CO., INC. VS WCC

- the assertion of lack employer-employee relationship cannot be admitted at the
point of the petition before the Supreme Court anymore; the difference between
the corporate personality of TESCO and UMACOR cannot be admitted anymore
to confuse the legitimate issues in this case.
- In TESCO’s pertinent documents – letter to Acting Referee, Motion for
Reconsideration and Petition to Set Aside Award, and Urgent Motion to Compel
the Referee to Elevate Records to Commission for Review – it represented and
defended itself as the employer of the deceased. Nowhere in the said documents
did it allege that it was not the employer.
- TESCO even admitted that it and UMACOR are sister companies operating under
one single management and housed in the same building. Although respect for
the corporate personality as such, is the general rule, there are exceptions. In
appropriate cases, the veil of corporate fiction may be pierced as when the same
is made as a shield to confuse the legitimate issues.

DUE PROCESS CLAUSE

(a) Need to bring a new case against the officer.
 A suit against individual shareholders in a corporation is not a suit against the
corporation. Failure to implead the corporations as defendants and merely
annexing a list of such corporations to the complaints is a violation of due
process for it would in effect be disregarding their distinct and separate
personality without a hearing.
 Although both lower courts found sufficient basis for the conclusion that PKA
and Phoenix Omega were one and the same, and the former is merely a conduit
of the other the Supreme Court held void the application of a writ of execution
on a judgment held only against PKA, since the RTC obtained no jurisdiction
over the person of Phoenix Omega which was never summoned as formal party
to the case. The general principle is that no person shall be affected by any
proceedings to which he is a stranger, and strangers to a case are not bound
by the judgment rendered by the court.
(b) When corporate officers are sued in their official capacity when the corporation
was not made a party, the corporation is not denied due process.
(c) Provided that evidential basis has been adduced during trial to apply the
piercing doctrine.

EMILIO CANO ENTERPRISES VS CIR

- This is an instance where the corporation and its members can be considered as
one. ECEI is a close family corporation – the incorporators are members of the
Cano family.

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- Further, the Canos were sued in their capacity as officers of ECEI not in their
private capacity.
- Having been sued officially their connection with the case must be deemed to be
impressed with the representation of the corporation.
- The judgment against the Canos has a direct bearing to ECEI. Verily, the order
against them is in effect against the corporation.
- Further still, even if this technicality be strictly observed, what will simply happen
is for this case to be remanded, change the name of the party, but the judgment
will still be the same – there can be no real benefit and will only subversive to the
ends of justice.
- In this case, to hold ECEI liable is not to ignore the legal fiction but merely to give
meaning to the principle that such fiction cannot be invoked if its purpose is to use
it as a shield to further an end subversive of justice.

V. CLASSIFICATIONS OF CORPORATIONS

In Relation to the State:

1. Public Corporation (Sec. 3, Act No. 1459).
- one formed or organized for the government or a portion of the state
- its purpose is for general good and welfare

2. Quasi-public Corporation
- it is granted the same powers as a private corp. but they have no incorporators,
SH’s or members, has its own charter
- example: A water district, although established as a corporation, it was
established for the greater good and with no stockholdersGOCC. They are also
placed under the jurisdiction of the LWUA not the SEC

3. Private Corporation (Sec. 3, Act 1459).

- formed for some private purpose, benefit, aim, or end

 Government’s majority shares does not make an entity a public corporation.

 A corporation is created by operation of law under the Corporation Code while a
government corporation is normally created by special law referred to often as a
charter.
 Manner of Creation: The test to determine whether a corporation is government
owned or controlled, or private in nature is simple. Is it created by its own charter
for the exercise of a public function, or by incorporation under the general
corporation law? Those with special charters are government corporations subject
to its provisions, and its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the GSIS.
 While public benefit and public welfare may be attributable to the operation of the
Bases Conversion and Development Authority (BCDA), yet it is certain that the
functions it performs are basically proprietary in nature—the promotion of
economic and social development of Central Luzon, particularly, and the country’s
goal for enhancement. Therefore, the rule that prescription does not run against
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 the State will not apply to BCDA, it being said that when title of the Republic has
been divested, its grantees, although artificial bodies of its own creation, are in the
same category as ordinary persons.
 Although Boy Scouts of the Philippines does not receive any monetary or financial
subsidy from the Government, and its funds and assets are not considered
government in nature and not subject to audit by the COA, the fact that it received
a special charter from the government, that its governing board are appointed by
the Government, and that its purpose are of public character, for they pertain to
the educational, civic and social development of the youth which constitute a very
substantial and important part of the nation, it is not a public corporation in the
same sense that municipal corporation or local governments are public
corporation since its does not govern a portion of the state, but it also does not
have proprietary functions in the same sense that the functions or activities of
government-owned or controlled corporations, is may still be considered as such,
or under the 1987 Administrative Code as an instrumentality of the Government,
and it employees are subject to the Civil Service Law.
 But being a GOCC makes it liable for laws and provisions applicable to the
Government or its entities and subject to the control of the Government.
 Beyond cavil, a GOCC has a personality of its own, distinct and separate from that
of the government, and the intervention in a transaction of the Office of the
President through the Executive Secretary does not change the independent
existence of a government entity as it deals with another government entity.
 The doctrine that employees of GOCCs, whether created by special law or formed
as subsidiaries under the general corporation law are governed by the Civil
Service Law and not by the Labor Code, has been supplanted by the 1987
Constitution. The present doctrine in determining whether a GOCC is subject to
the Civil Service Law is the manner of its creation, such that government
corporations created by special charter are subject the Civil Service Law, while
those incorporated under the general corporation law are governed by the Labor
Code
 Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to
corporations which have been organized by special charters since Sec. 4 of
Corporation Code renders the provisions supplementarily applicable to all
corporations, including those with special or individual charters, such as
cooperatives organized under P.D. 269, so long as those provisions are not
inconsistent with such charters.
 Water districts can validly exists as corporate entities under PD 198, and provided
they are government-owned or controlled, and their board of directors and other
personnel are government employees subject to civil service laws and anti-graft
laws.

As to Place of Incorporation:
1. Domestic Corporation - incorporated in the Philippines
2. Foreign Corporation (Sec. 140)
- SEC. 140. Definition and Rights of Foreign Corporations. For purposes
of this Code, a foreign corporation is one formed, organized or existing under
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 laws other than those of the Philippines' and whose laws allow Filipino
citizens and corporations to do business in its own country or State. It shall
have the right to transact business in the Philippines after obtaining a license
for that purpose in accordance with this Code and a certificate of authority
from the appropriate government agency.
- incorporated in another country and that country grants the same rights to
Filipinos in terms of doing business there; it shall have the right to transact
business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this code & a certificate of
authority from the appropriate government agency (SEC license after
obtaining BOI certificate)

As to Purpose of Incorporation:
1. 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.
2. Religious Corporation (Secs. 107 and 114)

SEC. 107. Classes of Religious Corporations. - Religious corporations may be

incorporated by one (1) or more persons. Such corporations may be classified into
corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general
provisions on nonstock corporations insofar as applicable.

SEC. 114 Religious Societies. -Unless forbidden by competent authority, the

Constitution, pertinent. rules, regulations, or discipline of the religious denomination,
sect or church of which it is a part, any religious society, religious order, diocese, or
synod, or district organization of any religious denomination, sect or church, may,
upon written consent and/or by an affirmative vote at a meeting called for the purpose
of at least two -thirds of (2/3) of its membership, incorporate for the administration of
its temporalities or for the the management of its affairs, properties, and estate by
filing with the Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious society or
religious order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
a. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect
or church;
b. That at least two-thirds (2/3) of its membership has given written consent
or has voted to incorporate, at a duly convened meeting of the body;
c. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization is not forbidden by competent
authority or by the Constitution, rules, regulations or discipline of the
religious denomination, sect or church of which it forms part;
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 d. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
e. The place within the Philippines where the principal office of the
corporation is to be established and located; and
f. The names, nationalities, and residence addresses of the trustees, not
less than five (5) nor more than fifteen (15), elected by the religious society
or religious order, or the diocese, synod, or district organization to serve
for the first year or such other period as may be prescribed by the laws of
the religious society or religious order, or of the diocese, synod, or district
organization.

 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.

3. Educational Corporations (Secs. 105, 106; Sec. 25, B.P. Blg. 232)

SEC. 105. Incorporation. - Educational corporations shall be governed by special

laws and by the general provisions of this Code.

SEC. 106. Board of Trustees. - Trustees of educational institutions organized as

nonstock corporations shall not be less than five (5) nor more than fifteen (15):
Provided, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or bylaws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as
soon as organized, so classify themselves that the term of office of one-fifth (1/5) of
their number shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers and authority of trustees shall be
defined in the bylaws.
For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.

Section 25. Establishment of Schools - All schools shall be established in

accordance with law. The establishment of new national schools and the conversion
of existing schools from elementary to national secondary or tertiary schools shall be
by law: Provided, That any private school proposed to be established must
incorporate as an non-stock educational corporation in accordance with the provisions
of the Corporation Code of the Philippines. This requirement to incorporate may be
waived in the case of family-administered pre-school institutions.

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 4. Charitable, Scientific or Vocational Corporations
5. Business Corporation

As to Number of Members:
1. Aggregate Corporation - separate legal entity formed by several individual
persons
2. Corporation Sole (Secs. 107 to 113 CC)

SEC. 107. Classes of Religious Corporations. - Religious corporations may be

incorporated by one (1) or more persons. Such corporations may be classified into
corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general
provisions on nonstock corporations insofar as applicable.

SEC. 108. Corporation Sole. - For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi, or other presiding elder of such religious denomination, sect or church.

SEC. 109. Articles of Incorporation. - In order to become a corporation sole, the

chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any religious
denomination, sect or church must file with the Commission articles of incorporation
setting forth the following:
a. That the applicant chief archbishop, bishop, priest, minister, rabbi, or
presiding elder represents the religious denomination, sect or church
which desires to become a corporation sole;
b. That the rules, regulations and discipline of the religious denomination,
sect or church are consistent with becoming a corporation sole and do not
forbid it;
c. That such chief archbishop, bishop, priest, minister, rabbi, or presiding
elder is charged with the administration of the temporalities and the
management of the affairs, estate and properties of the religious
denomination, sect or church within the territorial jurisdiction, so described
succinctly in the articles of incorporation;
d. The manner by which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi, or presiding elder is required to
be filled, according to the rules, regulations or discipline of the religious
denomination, sect or church; and
e. The place where the principal office of the corporation sole is to be
established and located, which place must be within the territory of the
Philippines.

The articles of incorporation may include any other provision not contrary to law for
the regulation of the affairs of the corporation.

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SEC. 110. Submission of the Articles of Incorporation. - The articles of
incorporation must be verified, by affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi, or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi, or presiding
elder, duly certified to be correct by any notary public.
From and after filing with the 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, Qr
presiding elder shall become a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or church theretofore administered or
managed as such chief archbishop, bishop, priest, minister,
rabbi, or presiding elder shall be personally held in trust as a corporation sole, for the
use, purpose, exclusive benefit and on behalf of the religious denomination · sect or
church including hospitals, schools, colleges, orphan asylums'. parsonages, and
cemeteries thereof.

SEC. 111. Acquisition and Alienation of Property. - A corporation sole may

purchase and hold real estate and personal property for its church, charitable,
benevolent, or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may sell or mortgage real property held by it by obtaining
an order for that purpose from the Regional Trial Court of the province where the
property is situated upon proof that the notice of the application for leave to sell or
mortgage has been made through publication or as directed by the Court, and that it
is in the interest of the corporation that leave to sell or mortgage be granted. The
application for leave to by sell the or mortgage must be made by petition, duly verified,
by the chief archbishop, bishop, priest, minister, or rabbi, or presiding elder acting as
corporation sole, and may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole: Provided, That in cases where
the rules, regulations, and discipline of the religious denomination, sect or church,
religious society, or order concerned represented by such corporation sole regulate
the method of acquiring, holding, selling, and mortgaging real estate and personal
property, such rules, regulations and discipline shall govern, and the intervention of
the courts shall
not be necessary.

SEC. 112. Filling of Vacancies. - The successors in office of any chief archbishop,
bishop, priest, minister, rabbi, or presiding elder in a corporation sole shall become
the corporation sole on their accession to office and shall be permitted to transact
business as such upon filing a copy of their commission, certificate of election or
letters of appointment, duly certified by any notary public with the Commission.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi, or
presiding elder of any religious denomination, sect or church incorporated as a
corporation sole, the person or persons authorized by the rules, regulations or
discipline of the religious denomination, sect or church represented by the corporation
sole to administer the temporalities and manage the affairs, estate, and properties of
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the corporation sole shall exercise all the powers and authority of the corporation sole
during such vacancy.

SEC. 113. Dissolution. -A corporation sole may be dissolved and its affairs settled
voluntarily by submitting to the Commission a verified declaration of dissolution,
setting forth:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church; and
d. 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 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. One Person Corporation

ONE PERSON CORPORATIONS

SEC. 115. Applicability of Provisions to One Person Corporations. -The

provisions of this Title shall primarily apply to One Person Corporations. Other
provisions of this Code apply suppletorily, except as otherwise provided in this Title.

SEC. 116. One Person Corporation. -A One Person Corporation is a corporation

with a single stockholder: Provided, That only a natural person, trust, or an estate may
form a One Person Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed
companies, and non-chartered governmentowned and -controlled corporations may
not incorporate as One Person Corporations: Provided, further, That a natural person
who is licensed to exercise a profession may not organize as a One Person
Corporation for the purpose of exercising such profession except as otherwise
provided under special laws.

SEC. 117. Minimum Capital Stock Not Required for One Person Corporation. -
A One Person Corporation shall not be required to have a minimum authorized capital
stock except as otherwise provided by special law.

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SEC. 118. Articles of Incorporation. - A One Person Corporation shall file articles
of incorporation in accordance with the requirements under Section 14 of this Code.
It shall likewise substantially contain the following:
a. If the single stockholder is a trust or an estate, the name, nationality, and
residence of the trustee, administrator, executor, guardian, conservator,
custodian, or other person exercising fiduciary duties together with the
proof of such authority to act on behalf of the trust or estate; and
b. Name, nationality, residence of the nominee and alternate nominee, and
the extent, coverage and limitation of the authority.

SEC. 119. Bylaws. - The One Person Corporation is not required to submit and file
corporate bylaws.

SEC. 120. Display of Corporate Name. - A One Person Corporation shall indicate
the letters "OPC" either below or at the end of its corporate name.

SEC. 121. Single Stockholder as Director, President. - The single stockholder shall
be the sole director and president of the One Person Corporation.

SEC. 122. Treasurer, Corporate Secretary, and Other Officers. - Within fifteen (15)
days from the issuance of its certificate of incorporation, the One Person Corporation
shall appoint a treasurer, corporate secretary, and other officers as it may deem
necessary, and notify the Commission thereof within five (5) days from appointment.
The single stockholder may not be appointed as the corporate secretary.
A single stockholder who is likewise the self-appointed treasurer of the corporation
shall give a bond to the Commission in such a sum as may be required: Provided,
That the said stockholder/treasurer shall undertake in writing to faithfully administer
the One Person Corporation's funds to be received as treasurer, and to disburse and
invest the same according to the articles of incorporation as approved by the
Commission. The bond shall be renewed every two (2) years or as often as may be
required.

SEC. 123. Special Functions of the Corporate Secretary. - In addition to the

functions designated by the One Person Corporation, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the
corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the
single stockholder, which notice shall be given no later than five (5) days
from such occurrence;
c. Notify the Commission of the death of the single stockholder within five
(5) days from such occurrence and stating in such notice the names,
residence addresses, and contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a
meeting and advise the legal heirs with regard to, among others, the
election of a new director, amendment of the articles of incorporation, and
other ancillary and/or consequential matters.
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SEC. 124. Nominee and Alternate Nominee. - The single stockholder shall
designate a nominee and an alternate nominee who shall, in the event of the single
stockholder's death or incapacity, take the place of the single stockholder as director
and shall manage the corporation's affairs.
The articles of incorporation shall state the names, residence addresses and contact
details of the nominee and
alternate nominee, as well as the extent and limitations of their authority in managing
the affairs of the One Person Corporation.
The written consent of the nominee and alternate nominee shall be attached to
the application for incorporation. Such consent may be withdrawn in writing any time
before the death or incapacity of the single stockholder.

SEC. 125. Term of Nominee and Alternate Nominee. -When the incapacity of the
single stockholder is temporary, the nominee shall sit as director and manage the
affairs of the One Person Corporation until the stockholder, by self determination,
regains the capacity to assume such duties.
In case of death or permanent incapacity of the single stockholder, the nominee shall
sit as director and manage the affairs of the One Person Corporation until the legal
heirs of the single stockholder have been lawfully determined, and the heirs have
designated one of them or have agreed that the estate shall be the single stockholder
of the One Person Corporation.
The alternate nominee shall sit as director and manage the One Person Corporation
in case of the nominee's inability, incapacity, death, or refusal to discharge the
functions as director and manager of the corporation, and only for the same term and
under the same conditions applicable to the nominee.

SEC. 126. Change of Nominee or Alternate Nominee. - The single stockholder

may, at any time, change its nominee and alternate nominee by submitting to the
Commission the names of the new nominees and their corresponding written consent.
For this purpose, the articles of incorporation need not be amended.

SEC. 127. Minutes Book. - A One Person Corporation shall maintain a minutes book
which shall contain all actions, decisions, and resolutions taken by the One Person
Corporation.

SEC. 128. Records in Lieu of Meetings. - When action is needed on any matter, it
shall be sufficient to prepare a written resolution, signed and dated by the single
stockholder, and recorded in the minutes book of the One Person Corporation. The
date of recording in the minutes book shall be determined to be the date of the meeting
for all purposes under this Code.

SEC. 129. Reportorial Requirements. - The One Person Corporation shall submit
the following within such period as the Commission may prescribe:
a. Annual financial statements audited by an independent certified public
accountant: Provided, That if the total assets or total liabilities of the
corporation are less than Six hundred thousand pesos (P600,000.00), the
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 financial statements shall be certified under oath by the corporation's
treasurer and president;
b. A report containing explanations or comments by the president on every
qualification, reservation, or adverse remark or disclaimer made by the
auditor in the latter's report;
c. A disclosure of all self-dealings and related party transactions entered into
between the One Person Corporation and the single stockholder; and
d. Other reports as the Commission may require.

For purposes of this provision, the fiscal year of a One Person Corporation shall be
that set forth in its articles of incorporation or, in the absence thereof, the calendar
year.
The Commission may place the corporation under delinquent status should the
corporation fail to submit the reportorial requirements three (3) times, consecutively
or intermittently, within a period of five (5) years.

SEC. 130. Liability of Single Shareholder. - A sole shareholder claiming limited

liability has the burden of affirmatively showing that the corporation was adequately
financed.
Where the single stockholder cannot prove that the property of the One Person
Corporation is independent of the stockholder's personal property, the stockholder
shall be jointly and severally liable for the debts and other liabilities of the One Person
Corporation.
The principles of piercing the corporate veil applies with equal force to One Person
Corporations as with other corporations.

SEC. 131. Conversion from an Ordinary Corporation to a One Person

Corporation. - When a single stockholder acquires all the stocks of an ordinary stock
corporation, the latter may apply for conversion into a One Person Corporation,
subject to the submission of such documents as the Commission may require. If the
application for conversion is approved, the Commission shall issue a certificate of
filing of amended articles of incorporation reflecting the conversion. The One Person
Corporation converted from an ordinary stock corporation shall succeed the latter and
be legally responsible for all the latter's outstanding liabilities as of the date of
conversion.

SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock

Corporation. - A One Person Corporation may be converted into an ordinary stock
corporation after due notice to the Commission of such fact and of the circumstances
leading to the conversion, and after compliance with all other requirements for stock
corporations under this Code and applicable rules. Such notice shall be filed with the
Commission within sixty (60) days from the occurrence of the circumstances leading
to the conversion into an ordinary stock corporation. If all requirements have been
complied with, the Commission shall issue a certificate of filing of amended articles of
incorporation reflecting the conversion.

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In case of death of the single stockholder, the nominee or alternate nominee shall
transfer the shares to the duly designated legal heir or estate within seven (7) days
from receipt of either an affidavit of heirship or self-adjudication executed by a sole
heir, or any other legal document declaring the legal heirs of the single stockholder
and notify the Commission of the transfer. Within sixty (60) days from the transfer of
the shares, the legal heirs shall notify the Commission of their decision to either wind
up and dissolve the One Person Corporation or convert it into an ordinary stock
corporation.
The ordinary stock corporation converted from a One Person Corporation shall
succeed the latter and be legally responsible for all the latter's outstanding liabilities
as of the date of conversion.

As to Legal Status:
1. De Jure Corporation
2. De Facto Corporation (Sec. 19)

SEC. 19. 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.

3. Corporation by Estoppel (Sec. 20)

SEC. 20. 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 its lack of corporate personality as a defense. Anyone who assumes
an obligation to an ostensible corporation as such cannot resist performance thereof
on the ground that there was in fact no corporation.

Q. Why is there piercing in a de facto corporation?

A. Piercing is allowed because the intention of the law is to protect the contracts
entered into by the corporation.

As to Existence of Shares (Secs. 3 and 5):

1. Stock Corporation
2. Non-Stock Corporation

SEC. 3. Classes of Corporations. - Corporations formed or organized under this

Code may be stock or nonstock corporations. Stock corporations are those which
have capital stock divided into shares and are authorized to distribute to the holders
of such shares, dividends, or allotments of the surplus profits on the basis of the
shares held. All other corporations are nonstock corporations.
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SEC. 5. Corporators and Incorporators, Stockholders and Members. -
Corporators are those who compose a corporation, whether as stockholders or
shareholders in a stock corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.

CORPORATE CONTRACT LAW

 In the levels of the legal relationship, corporate contract law is used to resolve
issues between the different levels – between the juridical entity level, the
contract relationship level and the business entity level.

Q: Why is there a need to distinguish corporate contract law from contract law?
A: There is a need to distinguish between the two because there are certain instances
where an application of corporate contract law principles are in direct conflict with
contract law principles. An example would be in the situation where a corporation is
being incorporated, the corporation code in certain instances recognize the binding
effect of contracts entered into in the pre-incorporation stage. But if contract law was
strictly applied such a contract would be void since it lacks one vital element which is
consent of the contracting parties. How does a corporation that does not exist yet give
consent? This is where corporate contract law find its relevance. The conflict between
the juridical entity level is reconciled with the contractual relationship level.
(DOCTRINE: to validate the contract entered into by the supposed corporation)

Q: In order to reach the level of corporation by estoppel, what is the essential

ingredient of such doctrine?
A: When there is a representation that a corporation exists when in fact there is none
and at least one party thought that there was a corporation.

Q: Distinguish promoter’s contract principles from the corporation by estoppel

doctrine?
A: In both the corporation does not exist. But in promoter’s contracts there is no
misrepresentation that the corporation does not yet exist. When the contracts are
entered into by persons who in behalf of the corporation, acknowledging that the
corporation does not yet exist and is still in the process of incorporation, you do not
apply the doctrine of corporation by estoppel. It is still what one may call as the
promoter’s contract. (The moment there is no corporation and contracts are entered
into under the representation that the corporation does exist then that is the only time
you apply the doctrine of corporation by estoppel.)

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Pre-Incorporation Contracts
- Who Are Promoters?

“Promoter” is a person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives consideration
therefor.

CLV: The definition of promoter is important to determine the liability for promoter’s
contract. Before you can make a promoter liable, you must be able to determine who
is the promoter. He must be the one who takes initiative on the founding and
organization of the business venture which eventually ends up as the corporation
being organized.

Q: At the promoter’s stage there is no juridical personality until the SEC issues the
certificate of incorporation. Until the certificate is issued, the stage of the de facto
corporation has not yet been reached. Prior to the de facto corporation stage what
then is the status of the contract entered into by a promoter for and in behalf of the
person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given
consent to the authority of the person or agent who had undertaken the transaction.

Q: How can ratification be done?

A: Ratification can be done in two ways:
1. Express ratification – a mere board resolution making the corporation liable by
accepting the contract and
2. Implied ratification – by accepting of benefits

Nature of Pre-incorporation Agreements

SEC. 59. Subscription Contract. - Any contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that the parties
refer to it as a purchase or some other contract.

SEC. 60. Pre-incorporation Subscription. - A subscription of shares in a corporation

still to be formed shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the revocation, or
the corporation fails to incorporate within the same period or within a longer period
stipulated in the contract of subscription. No pre-incorporation subscription may be
revoked after the articles of incorporation is submitted to the Commission.

CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement.

Sec. 61 says that a pre-incorporation subscription agreement is irrevocable. The only
manner by which you can revoke it is if ALL of the other subscribing stockholders
consent to the revocation. Sec. 61 is a clear demonstration of the fact that a
promoter’s contract can be valid and even irrevocable. In the case of a pre-
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incorporation subscription agreement that contract is valid because there are in fact
two parties. The party subscribed and all of the other parties who have subscribed to
the other incorporators and all of them bind themselves together to form the
corporation. That is why it is irrevocable unless the other party which is all of the other
subscribers, agree.

CASE: BAYLA vs SILANG TRAFFIC CO. INC

The Court held that for their stocks to be forfeited to the corporation, a demand must
first be given by the corporation for the payments due on or before July 31. It did not
automatically revert to the corporation. Under Article 1100 of the Civil Code, persons
obliged to deliver or do something are not in default until the moment the creditor
demands of them judicially or extra-judicially the fulfillment of their obligation. The
current situation does not fall under the any of the exceptions. The contract itself did
not expressly provide that the failure of the purchaser to pay any installment would
give rise to forfeiture and cancellation without the necessity of any demand from the
seller. In fact, it states that there would be a 6% interest on deferred payments which
shows that there was no intention of automatic forfeiture and cancellation of contract.
As such, the Court reversed the decision of the Court of Appeals and ordered Silang
Traffic Co. to refund the petitioners’ money.

LIABILITIES FOR PROMOTER’S CONTRACTS

CASE: CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

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.
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.

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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.

RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG

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.

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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
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 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

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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.

De Facto Corporation (Sec. 19)

SEC. 19. 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.

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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.

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
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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).

Elements

ARNOLD HALL v. PICCIO

The SEC had not issued the corresponding certificate of incorporation. All of them
know or ought to know that the personality of a corporation begins to exist only from
the moment such certificate is issued, not before. Here, the complaining associate
have not represented to the others that they were incorporated any more than the
defendant had made similar representations. Since nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply.
The section on de facto corporations does not apply in this case:
1. First, Far Eastern Lumber, even its stockholders, may not probably claim in “good
faith” to be a corporation not having obtained the certificate of incorporation. Thus
the immunity of collateral attack granted to corporations claiming in good faith to
be a corporation does not apply here.
2. Second, this suit is not one in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between stockholders, without intervention of the
State.

CLV: The de facto doctrine was formulated to safeguard the security of commercial
transactions whenever they involve the corporation. Parties dealing with said
corporation are secured by the fact that the transactions entered into with said
corporations may be sued upon and they can recover. That is why aside from the
other two requisites there must be a set of officers (i.e. assumption of corporate
powers) or directors because of the principle that a corporation can only act through
its officers.
 Effect as to both parties: (1) cannot deny its existence (2) liable as general
partners.
 Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2)
public is not expected to know, while the above are expected to know.
 If the other party knows of the non-existence of the corporation à there is no
estoppel.

Corporation by Estoppel

SEC. 20. 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,
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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 its lack of corporate personality as a defense. Anyone who assumes
an obligation to an ostensible corporation as such cannot resist performance thereof
on the ground that there was in fact no corporation.

SALVATIERRA v. GARLITOS
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.

ALBERT v. UNIVERSITY PUBLISHING CO.

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.
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 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.

Nature of Doctrine
 Founded on principles of equity and designed to prevent injustice and
unfairness, the doctrine applies when persons assume to form a corporation
and exercise corporate functions and enter into business relations with third
persons. Where no third person is involved in the conflict, there is no corporation
by estoppel. A failed consolidation therefore cannot result in a consolidated
corporation by estoppel.
 A party cannot challenge the personality of the plaintiff as a duly organized
corporation after having acknowledged same when entering into the contract
with the plaintiff as such corporation for the transportation of its merchandise.
 A person who accepts employment in an unincorporated charitable association
is estopped from alleging its lack of juridical personality.
 One who deals with an organization which is not duly incorporated is not
estopped to deny its corporate existence when his purpose is not to avoid
liability.

LOZANO v DE LOS SANTOS

DOCTRINE: Jurisdiction is fixed by law and is not subject to the agreement of the
parties. It cannot be acquired through or waived, enlarged or diminished by, any act
or omission of the parties, neither can it be conferred by the acquiescence of the court.

The grant of jurisdiction to the SEC must be viewed in the light of its nature and
function under the law. This jurisdiction is determined by a concurrence of two
elements:
1. The status or relationship of the parties; - Requires that the controversy must
arise out of intracorporate or partnership relations between and among
stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members
or associates, respectively; and between such corporation, partnership or
association and the State in so far as it concerns their individual franchises
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 2. The nature of the question that is the subject of their controversy. - Requires that
the dispute among the parties be intrinsically connected with the regulation of the
corporation, partnership or association or deal with the internal affairs of the
corporation, partnership or association.

There is no intracorporate nor partnership relation between petitioner and private

respondent. The controversy between them arose out of their plan to consolidate their
respective jeepney drivers' and operators' associations into a single common
association. This unified association was, however, still a proposal. It had not been
approved by the SEC, neither had its officers and members submitted their articles of
consolidation is accordance with Sections 78 and 79 of the Corporation Code.
Consolidation becomes effective not upon mere agreement of the members but only
upon issuance of the certificate of consolidation by the SEC.
The KAMAJDA and SAMAJODA to which petitioner and private respondent belong
are duly registered with the SEC, but these associations are two separate entities.
The dispute between petitioner and private respondent is not within the KAMAJDA
nor the SAMAJODA. It is between members of separate and distinct associations.
Petitioner and private respondent have no intracorporate relation much less do they
have an intracorporate dispute. The SEC therefore has no jurisdiction over the
complaint.
The doctrine of corporation by estoppel advanced by private respondent cannot
override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to
the agreement of the parties. It cannot be acquired through or waived, enlarged or
diminished by, any act or omission of the parties, neither can it be conferred by the
acquiescence of the court.
Corporation by estoppel is founded on principles of equity and is designed to prevent
injustice and unfairness. It applies when persons assume to form a corporation and
exercise corporate functions and enter into business relations with third person.
Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation, who therefore know that it has not been
registered, there is no corporation by estoppel.

Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”

 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.

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TRUST FUND DOCTRINE
 The capital stock of the corporation especially its unpaid subscriptions is a trust
fund for the benefit of the general creditors of the corporation.

 Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil

Code): Art. 2236 The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exceptions provided by law.

Nature of Doctrine:
- 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.
- 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.
- 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

BOMAN ENVIRONMENTAL DEV. CORP. V. CA

Fajilan’s suit against the corporation to enforce the latter’s promissory note or compel
the corporation to pay for his shareholdings is cognizable by the SEC alone which
shall determine whether such payment will not constitute a distribution of corporate
assets to a stockholder in preference over creditors of the corporation. The SEC has
exclusive supervision, control and regulatory jurisdiction to investigate whether the
corporation has unrestricted retained earnings to cover the payment for the shares,
and whether the purchase is for a legitimate corporate purpose as provided in
Sections 41 and 122 of the Corporation Code.
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 equity 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.

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NTC vs CA
The law in point is clear and categorical. The basis for computation of the fee to be
charged by NTC on PLDT is the capital stock subscribed or paid and not the property
and equipment.
It bears stressing that it is not the NTC that imposed such a fee. It is the legislature
itself. Since Congress has the power to exercise the State inherent powers of Police
Power, Eminent Domain and Taxation, the distinction between police power and the
power to tax, which could be significant if the exercising authority were mere political
subdivisions, would not be of any moment when, as in the case under consideration,
Congress itself exercises the power. All that is to be done would be to apply and
enforce the law when sufficiently definitive and not constitutional infirm.

To Purchase Own Shares

SEC. 8. Redeemable Shares. - Redeemable shares may be issued by the

corporation when expressly provided in the articles of incorporation. They are shares
which may be purchased by the corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of stock representing the
shares, subject to rules and regulations issued by the Commission.

SEC. 40. Power to Acquire Own Shares. - Provided that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired, a stock corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including the following cases:
a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.

SEC. 42. 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, property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholders until their
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the
purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred percent (100%) of their paidin capital stock, except:

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 a. when justified by definite corporate expansion projects or programs
approved by the board of directors; or
b. when the corporation is prohibited under any loan agreement with
financial institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been secured; or
c. 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. 139. Corporate Liquidation. -Except for banks, which shall be covered by the
applicable provisions of Republic Act No. 7653, otherwise known as "The New Central
Bank Act", as amended, and Republic Act No. 3591, otherwise known as the
Philippine Deposit Insurance Corporation Charter, as amended, every corporation
whose charter expires pursuant to its articles of incorporation, is annulled by forfeiture,
or whose corporate existence is terminated in any other manner, shall nevertheless
remain as a body corporate for three (3) years after the effective date of dissolution,
for the purpose of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, dispose of and convey its property, and 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. 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.
Except as otherwise provided for in Sections 93 and 94 of this Code, 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 in favor of the national
government.
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.

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.”

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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.”
 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 ).

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 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.

PHILTRUST CO VS RIVERA
A corporation has no power to release an original subscriber to its capital stock
from the obligation of paying for his shares, without a valuable consideration for such
release; and as against the creditors a reduction of the capital stock can take place
only in the manner and under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary.
In the case before us, the resolution releasing the shareholders from their
obligation to pay 50% of their respective subscriptions was an attempted withdrawal
of so much capital from the fund upon which the company’s creditors were entitled
ultimately to rely and, having been effected without compliance with the statutory
requirements, was wholly ineffectual.

Corporation Law (Act No. 1459)

Section 17. No corporation shall increase or diminish its capital stock, or incur, create,
or increase any bonded indebtedness unless, at a stockholders' meeting regularly
called for the purpose, two-thirds of the entire corporate capital stock subscribed shall
favor the increase or diminution of the capital stock, or a majority of the subscribed
capital stock shall favor the incurring, creating, or increasing of any bonded
indebtedness. Written or printed 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, creating, or increasing of any bonded
indebtedness is to be considered must be addressed to each stockholder at his place
of residence as shown by the books of the corporation and registered and deposited
so addressed in the post-office with postage prepaid.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and secretary of the stockholders'
meeting showing compliance with the requirements of this section, the amount of the
increase or diminution of the capital stock, or the bonded indebtedness to be incurred,
created, or increased, the actual indebtedness of the corporation on the day of the
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meeting, the amount of stock represented at the meeting, and the vote authorizing
the increase or diminution of the capital stock or the incurring, creating, or increasing
of any bonded indebtedness. One of the duplicate certificates shall be kept on file in
the office of the corporation and the other shall be filed in the office of the Chief of the
Division of Archives, Patents, Copyrights, and Trade-Marks of the Executive Bureau
and attached by him to the original articles of incorporation. From and after the filing
of the duplicate certificate with the chief of the said division the capital stock shall
stand increased or diminished and the incurring, creating, or increasing of any bonded
indebtedness authorized as the certificate may declare.
The Chief of the said Division of Archives, Patents, Copyrights, and Trade-Marks shall
be entitled to collect the sum of twenty pesos for filing said duplicate certificate.

STEINBERG VS VELASCO
The action of the board in purchasing the stock from the corporation and in declaring
the dividends on the stock was all done at the same meeting of the board of directors.
The directors were permitted to resign so that they could sell their stock to the
corporation. The authorized capital stock was P20,000 divided into 2,000 shares of
the par value of P10 each, which only P10,030 was subscribed and paid. Deducting
the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up
stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only.
R acted on assumption that it appeared from the books of the corporation that it had
accounts receivable of the face value of P19,126.02, therefore it had a surplus over
and above its debts and liabilities. However, there is no stipulation as to the actual
cash value of those accounts, and it does appear from the stipulation that, P12,512.47
of those accounts had but little value. The corporation did not then have an actual
bona fide surplus from which the dividends could be paid, and that the payment of
them in full at the time would affect the financial condition of the corporation. Because
of this, the directors did not act in good faith or that they were grossly ignorant of their
duties. Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.

VII. ARTICLES OF INCORPORATION

NATURE OF THE CHARTER

GOVERNMENT OF P.I. v. MANILA RAILROAD CO.

- Act No. 1510 is the charter of Manila Railroad Company and constitute a contract
between it and the Governmemnt, it would seem that the company is governd by
its contract and not by the provisions of any general law upon questions covered
by said contract.
- Government cannot impose upon said company any conditions or obligations found
in any general law, which does not expressly modify said contract
- Act No. 1510 is a special charter of the respondent company. It constitutes a
contract between the respondent company and the state; and the state and the
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 grantee of a charter are equally bound by its provisions. For the state to impose an
obligation or a duty upon the respondent company, which is not expressly provided
for in the charter (Act No. 1510), would amount to a violation of said contract
between the state and the respondent company.
- The charter of a corporation is a contract between three parties:
1. it is a contract between the state and the corporation to which the charter is
granted;
2. it is a contact between the stockholders and the state and
3. it is also a contract between the corporation and its stockholders.

NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot
overcome the law. However in the case of GPI, its special charter overruled the Gen.
Law on the ground that the former is both a contract and a law. Thus, its charter as a
law creates an amendment to all other laws. In the same manner, if the former were
a mere contract then the case would have been decided differently.

PROCEDURE AND DOCUMENTARY REQUIREMENTS (SEC. 13 AND 14)

Requirements of Articles of Incorporation:

1. File with the Commission
2. In any of the official languages,
3. Duly signed and acknowledged or authenticated,
4. In such form and manner as may be allowed by the Commission - may be filed
in the form of an electronic document, in accordance with the Commission's
rules and regulations on electronic filing.
5. Containing substantially the required matters

Contents
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being formed.
Where a corporation has more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and the secondary purpose or
purposes:
Provided, That a nonstock corporation may not include a purpose which would change
or contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist, if the corporation has not elected
perpetual existence;
5. The names, nationalities, and residence addresses of the incorporators;
6. The number of directors, which shall not be more than fifteen (15) or the number
of trustees which may be more than fifteen (15);
7. The names, nationalities, and residence addresses of persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected
and qualified m accordance with this Code;
8. If it be a stock corporation:
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 a. amount of its authorized capital stock,
b. number of shares into which it is divided,
c. par value of each,
d. names, nationalities, and residence addresses of the original subscribers,
e. amount subscribed and paid by each on the subscription
f. statement that some or all of the shares are without par value, if
applicable;
9. If it be a nonstock corporation:
a. amount of its capital,
b. names, nationalities, and residence addresses of the contributors,
c. amount contributed by each
10. Such other matters consistent with law and which the incorporators may deem
necessary and convenient.
11. Arbitration agreement may be included

FORM OF ARTICLES OF INCORPORATION. -Unless otherwise prescribed by

special law, the articles of incorporation of all domestic corporations shall comply
substantially with the following form:

(Corporations which will engage in any business or activity reserved for Filipino
citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens
to less than the required percentage of capital stock as provided by existing laws shall
be allowed or permitted to be recorded in the proper books of the corporation, and
this restriction shall be indicated in all stock certificates issued by the corporation."

AS TO NUMBER AND RESIDENCY OF INCORPORATORS (SEC. 10)

Number of Incorporators:
GR: Any person, partnership, association or corporation, singly or jointly with others
but not more than fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes
XPN: natural persons who are licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a profession, shall not be allowed
to organize as a corporation unless otherwise provided under special laws.

Qualifications of Incorporators:
1. Incorporators who are natural persons must be of legal age. ·
2. Each incorporator of a stock corporation must own or be a subscriber to at least
one (1) share of the capital stock.

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CORPORATE NAME (SECS. 17, 13(1))

Corporate Name allowed:

1. distinguishable from a name already reserved or registered for the use of another
corporation;
2. not protected by law; or
3. not contrary to law, rules and regulations,

A name is not distinguishable even if it contains one or more of the following:

a. The word "corporation", "company", "incorporated", "limited", "limited liability",
or an abbreviation of one of such words; and
b. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations,
different tenses, spacing, or number of the same word or phrase.

When Corporate Name not allowed:

1. The Commission, upon determination, may summarily order the corporation to
immediately cease and desist from using such name and require the corporation
to register a new one.
2. cause the removal of all visible signages, marks, advertisements, labels, prints
and other effects bearing such corporate name.
3. If the corporation fails to comply with the Commission's order, the Commission
may hold the corporation and its responsible directors or officers in contempt
and/or hold them administratively, civilly and/or criminally liable under this Code
and other applicable laws and/or revoke the registration of the corporation.

PURPOSE CLAUSE (SECS. 13(2) AND 41)

Power to Invest Corporate Funds in Another Corporation or Business or for Any

Other Purpose:
1. approved by a majority of the board of directors or trustees
2. ratified by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two-thirds (2/3) of the members in the
case of nonstock corporations, at a meeting duly called for the purpose.
3. Notice of the proposed investment and the time and place of the meeting shall
be addressed to each stockholder or member at the place of residence as
shown in the books of the corporation and deposited to the addressee in the
post office with postage prepaid, served personally, or sent electronically in
accordance with the rules and regulations of the Commission on the use of
electronic data message, when allowed by the bylaws or done with the consent
of the stockholders
- any dissenting stockholder shall have appraisalobject in writing and demand for payment of their
share
right as provided in this Code
- 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.

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CORPORATE TERM: A corporation shall have perpetual existence unless its articles
of incorporation provides otherwise.

Prior to Effectivity of the Code: Corporations with certificates of incorporation

issued prior to the effectivity of this Code, and which continue to exist, shall have
perpetual existence, unless the corporation, upon a vote of its stockholders
representing a majority of its outstanding capital stock, notifies the Commission that
it elects to retain its specific corporate term pursuant to its articles of incorporation
without prejudice to the appraisal right of dissenting stockholders in accordance with
the provisions of this Code.

Extension or Shorten by Amendment: That no extension may be made earlier than

3 years prior to the original or subsequent expiry date unless there are justifiable
reasons for an earlier extension as may be determined by the Commission and shall
take effect only on the day following the original or subsequent expiry date.

Revival of Certificate of Incorporation: Term has expired:

1. Apply for a revival of its corporate existence
2. Together with all the rights and privileges under its certificate of incorporation
and subject to all of its duties, debts and liabilities prior to its revival
3. Upon approval by the commission, the corporation shall be deemed revived and
a certificate of revival of corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides otherwise.
4. Accompanied by a favorable recommendation of the appropriate government
agency in cases of banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service business, and
other financial intermediarieshave huge liquidity or capitalization requirement

Principal Place of Business: located within the Philippines;

Minimum Capitalization: Stock corporations shall not be required to have a minimum

capital stock, except as otherwise specifically provided by special law.

Subscription (Sec. 13, h) – no general minimum requirement

STEPS AND DOCUMENTS REQUIRED IN SEC (SEC. 18)

Registration and Incorporation:

1. A person or group of persons desiring to incorporate shall submit the intended
corporate name to the Commission for verification.
2. If the Commission finds that the name is distinguishable from a name is allowed,
the name shall be reserved in favor of the incorporators.
3. incorporators shall then submit their articles of incorporation and bylaws to the
Commission.
4. Issuance of the certificate of incorporation if fully complied
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Commencement of Corporate Existence: date the Commission issues the
certificate of incorporation under its official seal

GROUNDS FOR DISAPPROVAL (SEC. 16)

Disapproval:
1. Commission may disapprove the articles of incorporation or any amendment
thereto if the same is not compliant with the requirements of this Code
2. Commission shall give the incorporators, directors, trustees, or officers a
reasonable time from receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment.
3. No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, preneed, insurance and trust companies,
NSSLAs, pawnshops, and other financial intermediaries shall be approved by the
Commission unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or amendment is in
accordance with law.

Grounds for Disapproval:

a. Articles of incorporation or any amendment thereto is not substantially in
accordance with-the form prescribed herein;
b. Purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral or contrary to government rules and regulations;
c. Certification concerning the amount of capital stock subscribed and/or paid is
false; and
d. Required percentage of filipino ownership of the capital stock under existing
laws or the Constitution has not been complied with.

AMENDMENTS TO THE ARTICLES OF INCORPORATION (SEC. 15).

Stock Corporation:
1. majority vote of the board of directors or trustees
2. vote or written assent of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders after meeting called for the purpose

Nonstock corporation: vote or written assent of majority of the trustees and at least
two-thirds (2/3) of the members.

Indication of Amendment:
1. underscoring the change or changes made
2. copy thereof duly certified under oath by the corporate secretary and a majority
of the directors or trustees
3. statement that the amendments have been duly approved by the required vote
of the stockholders or members, shall be submitted to the Commission.

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 When: unless otherwise prescribe by the Code or Special Law

Effectivity: upon their approval by the Commission or from the date of filing with the
said Commission if not acted upon within six (6) months from the date of filing for a
cause not attributable to the corporation.

COMMENCEMENT OF CORPORATE EXISTENCE (SEC. 18 – Registration)

VIII. BY-LAWS

NATURE AND FUNCTIONS

Gokongwei v. SEC, 89 SCRA 337 [1979];

- 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.
- 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.
- 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.
- 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.
- 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.
- 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
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 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.

Peña v. CA, 193 SCRA 717 [1991])

- 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.
- 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 by virtue of a prior notice
of a special meeting. There was no quorum to validly transact business since, the
amended by-laws, 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.
- 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.

By-Laws: 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

Q. Distinguish by-laws from AoI

A. The AoI is not an internal document that binds the parties to a corporate setting. It
is also a document that binds the State. The BL is an intramural document, its
supposed to bind the inner workings of a corp.

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COMMON LAW LIMITATIONS ON BY-LAWS
(i) Cannot Be Contrary to Law and Articles of Incorporation
 A by-law provision granting to a stockholder permanent seat in the Board of
Directors is contrary to the provision in Corporation Code requiring all
members of the Board to be elected by the stockholders.
(ii) cannot be unreasonable or be contrary to the nature of by-laws.
 cannot restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to
be followed in effecting transfer.
(iii) cannot discriminate.

BINDING EFFECTS ON BY-LAWS

China Banking Corp. v. Court of Appeals, 270 SCRA 503 [1997]

- 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.

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.”

PMI Colleges v. NLRC, 277 SCRA 462 [1997])

- 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

216
 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.

ADOPTION PROCEDURE (SEC. 45)

1. affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of
nonstock corporations, shall be necessary
2. signed by the stockholders or members voting for them
3. kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours
4. copy thereof, duly certified by a majority of the directors or trustees and
countersigned by the secretary of the corporation, shall be filed with the
Commission and attached to the original articles of incorporation.
5. The Commission shall not accept for filing the bylaws 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 bylaws or
amendments are in accordance with law.
Filed prior to incorporation: bylaws may be adopted and filed prior to incorporation;
in such case, such bylaws shall be approved and signed by all the incorporators and
submitted to the Commission, together with the articles of incorporation.

Effectivity: only upon the issuance by the Commission of a certification that the
bylaws are in accordance with this Code.

CONTENTS (SEC. 46)

1. time, place and manner of calling and conducting regular or special meetings of
the directors or trustees;
2. time and manner of calling and conducting regular or special meetings and mode
of notifying the stockholders or members thereof;
3. required quorum in meetings of stockholders or members and the manner of
voting therein;
4. modes by which a stockholder, member, director, or trustee may attend meetings
and cast their votes; (new, may be done thru electronic means)
5. form for proxies of stockholders and members and the manner of voting them;
6. directors' or trustees' qualifications, duties and responsibilities, the guidelines for
setting the compensation of director's or trustees and officers, and the maximum
number of other board representations that an independent director or trustee
may have which shall, in no case, be more than the number prescribed by the
Commission;
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 7. time for holding the annual election of directors or trustees and the mode or
manner of giving notice thereof;
8. manner of election or appointment and the term of office of all officers other than
directors or trustees;
9. penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of issuing stock certificates; and
11. Such other matters as may be necessary for the proper or convenient transaction
of its corporate affairs for the promotion of good governance and anti-graft and
corruption measures.
12. An arbitration agreement may be provided in the bylaws pursuant to Section 181
of this Code.

AMENDMENTS / REPEAL / ADOPTION OF NEW BYLAWS (SEC. 47)

1. majority of the board of directors or trustees, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the members
of a nonstock corporation
2. at a regular or special meeting duly called for the purpose
3. file with the Commission
4. if applicable, the stockholders' or members' resolution authorizing the
delegation of the power to amend and/or adopt new bylaws, duly certified under
oath by the corporate secretary and a majority of the directors or trustees.
5. Accompanied by recommendation of appropriate government agency

Delegate: The owners of 2/3 of the outstanding capital stock or 2/3 of the members
in a nonstock corporation may delegate to the board of directors or trustees the power
to amend or repeal the bylaws or adopt new bylaws
- any power delegated to the board of directors or trustees to amend or repeal the
bylaws or adopt new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or
majority of the members shall so vote at a regular or special meeting
- automatic revocation: meeting to amend by-laws

Effectivity: upon the issuance by the Commission of a certification that the same is
in accordance with this Code and other relevant laws.

 There may be joint meetings between directors/ trustees and the stockholder and
members to amend bylaws which should be indicated in the notice for such meeting

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

Civil Code, 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.

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SEC. 35. Corporate Powers and Capacity. - Every corporation incorporated under
this Code has the power and capacity:
1. sue and be sued in its corporate name;
2. have perpetual existence unless the certificate of incorporation provides
otherwise;
3. adopt and use a corporate seal;
4. amend its articles of incorporation in accordance with the provisions of this
Code;
5. adopt bylaws, 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 nonstock corporation;
7. 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 transaction of the lawful business of
the corporation may reasonably and necessarily require, subject to the
limitations prescribed by law and the Constitution;
8. enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;
9. make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That
no foreign corporation shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
11. exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.

Ultra Vires Acts - No corporation shall possess or exercise corporate powers other
than those conferred by this Code or by its articles of incorporation
- which are not illegal and void ab initio but are within the scope of the articles of
incorporation are merely voidable and may become binding and enforceable
when ratified by stockholders. Said ratification cures the infirmity of the
corporate act and makes it valid and enforceable.

XPN: necessary or incidental to the exercise of the powers conferred

Implied Powers:
1. exercise of express powers of the corporation or
2. pursuit of its purpose as provided for in the article of incorporation
Incidental Powers:
1. attach to a corporation at the moment of its creation
2. without regard to its express powers or particular primary purposes and
3. said to be inherent in it as a legal entity or a legal organization

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Corporate power is lodged
- exercised by the Board of Directors, which they may delegate to either an
executive committee, officers or contracted managers
- delegation, except for the executive committee, must be for specific purposes,
which makes the officers the agents of the corporation, and accordingly the
general rules of agency as to the binding effects of their acts would apply. For
such officers to be deemed fully clothed by the corporation to exercise a power
of the Board, the latter must specially authorize them to do so.

Primary Rule: The Board of Directors/Trustees is the repository of all corporate

powers, therefore primary and not delegated power from the stockholders or
members of the corporation.
XPN: specified instances in the Corporation Code where the particular exercise of
power of the corporation by the board, in order to be binding and effective, requires
the consent and ratification of the stockholders or members, on one hand, and the
State, on the other hand.

Test to determine ultra vires – Whether the act in question is:

1. in direct and immediate furtherance of the corporation’s business
2. fairly incident to the express powers and reasonably necessary to their exercise.

TYPES OF ULTRA VIRES CASES

1. acts or contracts which are per se illegal as being contrary to law VOID
2. acts done beyond the powers of the corporation as provided for in the law or its
articles of incorporation; VOID or VOIDABLE
3. acts or contracts entered into in behalf of the corporation by persons who have
no corporate authority UNENFORCEABLE

Theory of Estoppel - precludes a corporation and its Board of Directors from denying
the validity of the transaction entered into by its officer with a third party who in good
faith, relied on the authority of the former as manager to act on behalf of the
corporation.

Ratification - In order to ratify the unauthorized act of an agent and make it binding
on the corporation, it must be shown that the governing body or officer authorized to
ratify had full and complete knowledge of all the material facts connected with the
transaction to which it relates. Ratification can never be made on the part of the
corporation by the same person who wrongfully assume the power to make the
contract, but the ratification must be by the officer or governing body having authority
to make such contract.

Doctrine of Laches or “Stale Demands”: failure or neglect, for an unreasonable

and unexplained length of time, to do that which by exercising due diligence could or
should have been done earlier, or the negligence or omission to assert a right within
a reasonable time, warrants a presumption that the party entitled to assert it either
has abandoned it or declined to assert it.
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Theory of Apparent Authority ascertained through:
1. 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. acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his ordinary powers.
Burden of discovering that the agent has no authority - third person dealing with
the corporation is not given the burden of discovering whether the agent has authority
or not.
- It is also therefore reasonable in a case where an officer of a corporation has
made a contract in its name, that the corporation should be required, if it denies
the authority of the officer, to state such defense in its answer, since it allows
the plaintiff to be appraised of the fact that the agent’s authority is contested;
and he is given an opportunity to adduce evidence showing either that the
authority existed or that the contract was ratified and approved.

Theory of apparent authority is classified into two types: manifested or proved

1. by position
2. by circumstance

Implied ratification takes various forms

1. silence or acquiescence
2. by acts showing approval or adoption of the contract
3. by acceptance and retention of the benefits flowing therefrom.

- 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.
- 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.
- As between two innocent parties, the one who made it possible for the wrong to
be done should be the one to bear the resulting loss.
- 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.
- 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.

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Specific (Express) Powers

Power to Extend or Shorten Corporate Term:

1. majority vote of the board of directors or trustees,
2. ratified at a meeting by the stockholders or members representing at least 2/3
of the outstanding capital stock or of its members.

Right of Appraisal. -Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of the shares

When exercised:
1. Amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class,
or of extending or shortening the term of corporate existence;
2. Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this code;
3. Merger or consolidation; and
4. Investment of corporate funds for any purpose other than the primary purpose of
the corporation.

Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded

Indebtedness: certificate must be signed by:
1. Majority of the directors of the corporation
2. Countersigned by the chairperson
3. Secretary of the stockholders' meeting, setting forth:
a. Approved by a majority vote of the board of directors and by two-thirds (2/3)
of the outstanding capital stock at a stockholders' meeting duly called for the
purpose.
b. Amount of the increase or decrease of the capital stock;
c. In case of 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 and addresses 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 the 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 therefor
authorized;
d. Bonded indebtedness to be incurred, created or increased;
e. Amount of stock represented at the meeting; and
f. Vote authorizing the increase or decrease of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
g. Approval of the commission, and where appropriate, of the philippine
competition commission. The application with the commission shall be made
within 6 months from the date of approval of the board of directors and
stockholders, which period may be extended for justifiable reasons.
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 h. Accompanied by a 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 the increase in capital stock has been subscribed and that at
least 25% of the amount subscribed has been paid in actual cash to the
corporation or that property, the valuation of which is equal to 25% of the
subscription, has been transferred to the corporation
i. Effect shall not prejudice the rights of corporate creditors.

 Nonstock corporations may incur, create or increase bonded indebtedness when

approved by a majority of the board of trustees and of at least 2/3 of the members
in a meeting duly called for the purpose.

Sale or Other Disposition of Assets:

1. by a majority vote of its board of directors or trustees
2. sale of all or substantially all of the corporation's properties and assets, including
its goodwill, computed based on its net asset value, as shown in its latest
financial statements, must be authorized by the vote of the stockholders
representing at least 2/3 of the outstanding capital stock, or at least 2/3 of the
members, in a stockholders' or members' meeting duly called for the purpose
- Nonstock corporations - majority of the trustees
- Nothing in this section is intended to restrict the power of and 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
the corporation or if the proceeds of the sale or other disposition of such property
and assets shall be appropriated for the conduct of its remaining business.

Power to Invest Corporate Funds in Another Corporation or Business or for Any

Other Purpose.
- majority of the board of directors or trustees
- ratified by the stockholders representing at least 2/3 of the outstanding capital
stock, or by at least 2/3 of the members in the case of nonstock corporations, at
a meeting duly called for the purpose.
XPN: 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.

Power to Declare Dividends:

1. Out of the unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding stock held
by them
2. Any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholders until their unpaid subscription
is fully paid

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 3. No stock dividend shall be issued without the approval of stockholders
representing at least 2/3 of the outstanding capital stock at a regular or special
meeting duly called for the purpose.

GR: Stock corporations are prohibited from retaining surplus profits in excess of
one hundred percent (100%) of their paid-in capital stock
XPN:
1. Justified by definite corporate expansion projects or programs approved
by the board of directors; or
2. Prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their
consent, and such consent has not yet been secured; or
3. Retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies.

Power to Enter into Management Contract

- approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members
in the case of a nonstock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose
- approved by the stockholders of the managed corporation owning at least 2/3
of the total outstanding capital stock entitled to vote, or by at least 2/3 of the
members in the case of a nonstock corporation.

1. where a stockholder or stockholders representing the same interest of both the

managing and the managed corporations own or control more than 1/3 of the
total outstanding capital stock 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
Restriction: No management contract for a period longer than 5 years for any 1 term.

DIRECTORS, TRUSTEES AND OFFICERS

The Board of Directors or Trustees of a Corporation; Qualification and Term.

- Directors - term of 1 year
- Trustees - term not exceeding 3 years

Independent Director -for corporations vested with public interest at least 20% of the
board:
1. Corporations namely those whose securities are registered with the
Commission, corporations listed with an exchange or with assets of at least Fifty
million pesos and having 200 or more holders of shares. each holding at least
100 shares of a class· of its equity shares;

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 2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, preneed, trust and insurance companies, and other financial
intermediaries· and
3. Other corporations engaged in businesses vested with public interest, as may
be determined by the Commission, after taking into account relevant factors
which are germane to the objective and purpose of requiring the election of an
independent director, such as the extent of minority ownership, type of financial
products or securities issued or offered to investors, public interest involved in
the nature of business operations, and other analogous factors.
- person who, apart from shareholdings and fees received from the corporation, is
independent of management and free from any business or other relationship
which could, or could reasonably be perceived to materially interfere with the
exercise of independent judgment in carrying out the responsibilities as a director.

- The well-known rule is that courts cannot undertake to control the discretion of
the board of directors about administrative matters as to which they have
legitimate power of, action and contracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere unless
such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority.

Corporate Officers:
a. president, who must be a director;
b. treasurer, who must be a resident;
c. secretary, who must be a citizen and resident of the Philippines; and
d. such other officers as may be provided in the bylaws.
e. If the corporation is vested with public interest, the board shall also elect
a compliance officer.

Prohibition: The same person may hold two (2) or more positions concurrently,
except that no one shall act as president and secretary or as president and treasurer
at the same time, unless otherwise allowed in this Code.

Corporate Ratification - cleanses the contract from all its defects from the moment
it was constituted

Bogus board: acts or contracts void because of the lack of “consent”.

Executive Committees - composed of at least 3 directors, who may act, by majority

vote of all its members, on such specific matters within the competence of the board,
as may be delegated to it in the bylaws or by majority vote of the board
XPN:
1. Approval of any action for which shareholders' approval is also required;
2. Filling of vacancies in the board;
3. Amendment or repeal of bylaws or the adoption of new bylaws;

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 4. Amendment or repeal of any resolution of the board which by its express terms
is not amendable or repealable; and
5. Distribution of cash dividends to the shareholders.

Business Judgment Rule: Board members and officers who purport to act for and
in behalf of the corporation, keep within the lawful scope of their authority in so acting
and act in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts. Those acts, when they are such a nature and are done
under such circumstances, are properly attributed to the corporation alone and no
personal liability is incurred by such officers and Board members.
- If the cause of the losses is merely error in business judgment, not amounting to
bad faith or negligence, directors and/or officers are not liable. For them to be held
accountable, the mismanagement and the resulting losses on account thereof are
not the only matters to be proven; it is likewise necessary to show that the directors
and/or officers acted in bad faith and with malice in doing the assailed acts.
- SEC and the courts are barred from intruding into business judgements of
corporations, when the same are made in good faith

Bad faith - imports a dishonest purpose or some moral obliquity and conscious doing
of a wrong, a breach of a known duty through some motive or interest or ill-will
partaking of the nature of fraud.

Validity and reasonableness of a by-law is purely a question of law. Whether the

by-law is in conflict with the law of the land, or with the charter of the corporation or is
in legal sense unreasonable and therefore unlawful is a question of law.
- corporation has authority prescribed by law to prescribe the qualifications of
directors. It has the inherent power to adopt by-laws for its internal government,
and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs.

Doctrine of Corporate Opportunity - where the director is employed in the service

of a rival company, he cannot serve both, but must betray one or the other. The
amendment in this case serves to advance the benefit of the corporation and is good.
Corporate officers are also not permitted to use their position of trust and confidence
to further their private needs, and the act done in furtherance of private needs is
deemed to be for the benefit of the corporation.

ELECTION OF DIRECTORS AND TRUSTEES

GR: each stockholder or member shall have the right to nominate any director or
trustee who possesses all of the qualifications and none of" the disqualifications

XPN: when the exclusive right is reserved for holders of founders' shares

- When so authorized in the bylaws or by a majority of the board of directors, the

stockholders or members may also vote through remote communication or in
absentia: Provided, That the right to vote through such modes may be exercised
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 in corporations vested with public interest, notwithstanding the absence of a
provision in the bylaws of such corporations. A stockholder or member who
participates through remote communication or in absentia, shall be deemed
present for purposes of quorum.
- The election must be by ballot if requested by any voting stockholder or member.

Stockholders entitled to vote shall have the right to vote the number of shares of
stock standing in their own names in the stock books of the corporation at the time
fixed in the bylaws or where the bylaws are silent, at the time of the election.

Cumulative Voting:
1. vote such number of shares for as many persons as there are directors to
be elected;
2. cumulate said shares and give 1 candidate as many votes as the number
of directors to be elected multiplied by the number of the shares owned; or
3. distribute them on the same principle among as many candidates as may
be seen fit

Prohibitions:
1. total number of votes cast shall not exceed the number of shares owned by the
stockholders as shown in the books of the corporation multiplied by the whole
number of directors to be elected
2. no delinquent stock shall be voted

Report of Election:
- Within 30 days after the election - secretary, or any other officer of the corporation,
shall submit to the Commission, the names, nationalities, shareholdings, and
residence addresses of the directors, trustees and officers elected.
- non-holding of elections - within 30 days from the date of the scheduled election.
The report shall specify a new date for the election, which shall not be later than
60 days from the scheduled date.
- no new date has been designated, or if the rescheduled election is likewise not
held, the Commission may, upon the application of a stockholder, member,
director or trustee, and after verification of the unjustified non-holding of the
election, summarily order that an election be held.
- die, resign or in any manner cease to hold office - within 7 days from knowledge

Election and Term of Trustees:

- not be more than 15
- Term - not more than 3 years
- Except with respect to independent trustees of nonstock corporations vested
with public interest, only a member of the corporation shall be elected as trustee.

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Vacancies in the Office of Director or Trustee
- vacancy is due to term expiration, the election shall be held no later than the day
of such expiration at a meeting called for that purpose
- vacancy arises as a result of removal by the stockholders or members, the election
may be held on the same day of the meeting authorizing the removal and this fact
must be so stated in the agenda and notice of said meeting
- In all other cases, the election must be held no later than 45 days from the time
the vacancy arose.
- A director or trustee elected to fill a vacancy shall be referred to as replacement
director or trustee and shall serve only for the unexpired term of the predecessor
in office.

Emergency Board - vacancy prevents the remaining directors from constituting a

quorum and emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation, the vacancy may be temporarily filled
from among the officers of the corporation by unanimous vote of the remaining
directors or trustees.
- The remedy is quo warranto to question the legality and proper qualification of
persons elected to the board.

Removal of Directors or Trustees:

- 2/3 of the outstanding capital stock, or in a nonstock corporation, by a vote of at
least 2/3 of the members entitled to vote
- at regular meeting after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting.
- Removal may be with or without cause: Provided, That removal without cause may
not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 23 of this Code.

Directors' or trustees' meetings

- Notice of regular or special meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least 2 days prior to the
scheduled meeting, unless a longer time is provided in the bylaws. A director or
trustee may waive this requirement, either expressly or impliedly.
- Directors or trustees cannot attend or vote by proxy at board meetings.

Quorum:
- based on the number of outstanding voting stocks
- non-stock corporations, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum during members’
meetings. Dead members shall not be counted.
- Abstention: presumed to be counted as an affirmative vote insofar as it may be
construed as an acquiescence in the action of those who voted affirmatively; but
such presumption, being merely prima facie would not hold in the face of clear
evidence to the contrary

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Compensation of Directors or Trustees: shall not receive any compensation in their
capacity as such, except for reasonable per diems

XPN: stockholders representing at least a majority of the outstanding capital stock or

majority of the members may grant directors or trustees with compensation and
approve the amount thereof at a regular or special meeting.

Restriction: In no case shall the total yearly compensation of directors exceed 10% of
the net income before income tax of the corporation during the preceding year.
- Directors or trustees shall not participate in the determination of their own per
diems or compensation.

- in order to hide behind the business judgment rule, you have to show that you
made an informed decision based on some principle of business. If you pull
numbers out of thin air or cast votes without doing due diligence, then the courts
can overturn your decisions
Dealings of Directors, Trustees or Officers with the Corporation or their spouses
and relatives within the fourth civil degree of consanguinity or affinity is voidable,
unless
1. The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
2. The vote of such director or trustee was not necessary for the approval of the
contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board, with
at least a majority of the independent directors voting to approve the material
contract; and
5. In case of an officer, the contract has been previously authorized by the board
of directors.

- first 3 conditions set forth in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for the purpose

Contracts Between Corporations with Interlocking Directors:

- contract is fair and reasonable
- shall not be invalidated on that ground alone except in cases of fraud
- voidable insofar as the latter corporation or corporations are concerned
- Stockholdings exceeding 20% of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.

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Corporate Officers: The general principles of agency govern the relation between
the corporation and its officers or agents, subject to the articles of incorporation, by-
laws, or relevant provisions of law —when authorized, their acts bind the corporation,
otherwise, their acts cannot bind it.
- A mere manager not so named in the by-laws does is not an officer of the
corporation
- corporate officer position and issues of reinstatement would be within the
jurisdiction of the SEC and not the NLRC.
- “office” is created by the charter of the corporation and the officer is elected by the
directors or stockholders
- “employee” usually occupies no office and generally is employed not by action of
the directors or stockholders but by the managing officer of the corporation who
also determines the compensation to be paid to such employee
- corporate officer’s dismissal is always a corporate act, or an intra-corporate
controversy, and the nature is not altered by the reason or wisdom with which the
Board of Directors may have in taking such action.
- SEC has jurisdiction over intra-corporate affairs regarding the election or
appointment of officers of a corporation.

Rule on Corporate Officer’s Power to Bind the Corporation

GR: the acts of corporate officers within the scope of their authority are binding on the
corporation, but when these officers exceeded their authority, their actions cannot
bind the corporation, unless it has ratified such acts or is estopped from disclaiming
them.

Corporate Secretary
- custodian of corporate records—he keeps the stock and transfer book and
makes proper and necessary entries therein
- register valid transfers of stock in the books of the corporation; and in the event
he refuses to comply with such duty, the transferor-stockholder may rightfully
bring suit to compel performance.
- When a Secretary’s Certificate is regular on its face, it can be relied upon by a
third party who does not have to investigate the truths of the facts contained in
such certification; otherwise business transactions of corporations would
become tortuously slow and unnecessarily hampered.

Corporate Treasurer
- to receive and keeps funds of the corporation, and to disburse them in accordance
with the authority given him by the board or the properly authorized officers
- cannot bind the corporation in a sale of its assets
- When the corporation categorically denies ever having authorized its treasurer to
sell the subject parcel of land, the buyer had the burden of proving that the
treasurer was in fact authorized to represent and bind the allegedly selling
corporation in the transaction

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Liabilities of corporate officers:
- The general rule is that corporate officers are not personally liable for their official
acts unless it is shown that they have exceeded their authority

Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when:
1. He assents to a patently unlawful act of the corporation;
2. Guilty of bad faith or gross negligence in directing its affairs;
3. for conflict on interest resulting in damages to the corporation, its stockholders or
other persons;
4. He consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
5. He agrees to hold himself personally and solidarily liable with the corporation; or
6. He is made, by a specific provisions of law, to personally answer for his corporate
action.

Special Provisions in Labor Laws

- Under the Labor Code, in the case of corporations, it is the president who
responds personally for violation of the labor pay laws.
- when a corporate officer acts in behalf of a corporation pursuant to his authority,
is “a corporate act for which only the corporation should be made liable for any
obligations arising from them.”
- Only the responsible officer of a corporation who had a hand in illegally
dismissing an employee should be held personally liable for the corporate
obligations arising from such act.
- A president cannot be held solidarily liable personally with the corporation
absent evidence of showing that he acted maliciously or in bad faith.

XI. STOCKHOLDERS AND MEMBERS

- Shareholders Not Creditors of the Corporation
- capital stock of a corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with it on the credit
of its capital stock.
- shares of a corporation do not constitute an indebtedness of the corporation to
the stockholder and, therefore, the latter is not a creditor of the former for such
shares.

Subscription Contract. - Any contract for the acquisition of unissued stock in an

existing corporation or a corporation still to be formed

Rights of Unpaid Shares - Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.

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 Pre-incorporation Subscription. - A subscription of shares in a corporation still to
be formed shall be irrevocable for a period of at least 6 months from the date of
subscription, unless all of the other subscribers consent to the revocation, or the
corporation fails to incorporate within the same period or within a longer period
stipulated in the contract of subscription. No pre-incorporation subscription may be
revoked after the articles of incorporation is submitted to the Commission.

- subscription for shares of stock does not require an express promise to pay the
amount subscribed, as the law implies a promise to pay on the part of the
subscriber.
- stock subscription is a subsisting liability from the time the subscription is made,
since it requires the subscriber to pay interest quarterly from that date unless he
is relieved from such liability by the by--‐‐laws of the corporation
- When insolvency supervenes upon a corporation and the court assumes
jurisdiction to wind it up, all unpaid stock subscriptions become payable on
demand, and are at once recoverable in an action instituted by the assignee or
receiver appointed by the court
- In the absence of restrictions in its character, a corporation, under its general
power to contract, has the power to accept subscriptions upon any special terms
not prohibited by positive law or contrary to public policy, provided they are not
such as to require the performance of acts which are beyond the powers
conferred upon the corporation by its character, and provided they do not
constitute a fraud upon other subscribers or stockholders, or upon persons who
are or may become creditors of the corporation.
- no corporation shall issue stock or bonds except in exchange for actual cash
paid to the corporation or for property actually received by it at a fair valuation
equal to the par value of the stock or bonds so issued."

Consideration for Stocks. - Stocks shall not be issued for a consideration less than
the par or issued price thereof.

Consideration for the issuance of stock may be:

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion;
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration.

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Where the consideration is other than actual cash, or consists of intangible property
such as patents or copyrights, the valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval of the Commission.
XPN: Shares of stock shall not be issued in exchange for promissory notes or future
service.

- The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred by the
articles of incorporation or the bylaws, or if not so fixed, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting
duly called for the purpose.

Watered Stocks
a. consents to the issuance of stocks for a consideration less than its par or issued
value;
b. consents to the issuance of stocks for a consideration other than cash, valued
in excess of its fair value; or
c. having knowledge of the insufficient consideration, does not file a written
objection with the corporate secretary

Liability of Directors - liable to the corporation or its creditors, solidarily with the
stockholder concerned for the difference between the value received at the time of
issuance of the stock and the par or issued value of the same.

Interest on Unpaid Subscriptions - from the date of subscription, if no rate of interest

is fixed in the subscription contract, the prevailing legal rate shall apply.

Payment of Balance of Subscription. - Subject to the provisions of the subscription

contract, the board of directors may, at any time, declare due and payable to the
corporation unpaid subscriptions and may collect the same or such percentage
thereof, in either case, with accrued interest, if any, as it may deem necessary.
- Failure to pay on such date shall render the entire balance due and payable and
shall make the stockholder liable for interest at the legal rate on such balance,
unless a different interest rate is provided in the subscription contract.
- If no payment is made within 30 days from the said date, all stocks covered by
the subscription shall thereupon become delinquent and shall be subject to sale

Delinquency Sale. - board of directors may, by resolution

- not be less than 30 days nor more than 60 days from the date the stocks become
delinquent.
- Notice sent to every delinquent and published
- sold at a public auction to such bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share

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 - no bidder - corporation may, bid for the same, and the total amount due shall
be credited as fully paid in the books of the corporation.
- Title to all the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said corporation

When Sale May be Questioned: party holding the stock the sum for which the same
was sold, with interest from the date of sale at the legal rate.
- No such action shall be maintained unless a complaint is filed within 6 months
from the date of sale.

Ground:
1. irregularity or defect in the notice of sale
2. sale itself of the delinquent stock, unless the party seeking to maintain such
action first pays or tenders to the

Effect of Delinquency: not

1. entitled to vote
2. represented at any stockholder's meeting
3. entitled to any of the rights of a stockholder except the right to dividends
- until and unless payment is made by the holder of such delinquent stock for the
amount due on the subscription with accrued interest, and the costs and
expenses of advertisement, if any.

Certificate of Stock - capital stock of corporations shall be divided into shares for
which certificates signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation shall be
issued in accordance with the bylaws

Transfer of Shares - Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the owner, his
attorney-in-fact, or any other person legally authorized to make the transfer.
- No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or
certificates, and the number of shares transferred.
- No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

- Certificates of stock or of stock dividends are quasi negotiable instruments.

They may be given in pledge or mortgage to secure an obligation. They are
transferable, when properly indorsed, by mere delivery, and by estoppel against
the corporation or against prior holders, as good a title to the transferee as if
they were negotiable. It is to the public interest that such use should be
simplified and facilitated by placing them as nearly as possible on the plane of
commercial paper.

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Issuance of Stock Certificates. - No certificate of stock shall be issued to a
subscriber until the full amount of the subscription together with interest and expenses
(in case of delinquent shares), if any is due, has been paid.

Lost or Destroyed Certificates: publish a notice and shall state that after the
expiration of one (1) year from the date of the last publication, if no contest has been
presented to the corporation regarding the certificate of stock, the right to make such
contest shall be barred and the corporation shall cancel the lost, destroyed or stolen
certificate of stock in its books.
- registered owner files a bond or other security as may be required, effective for a
period of 1 year
- certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such the
transferee thereof is justified in believing that it belongs to the holder and transferor.
- only the transfer or absolute conveyance of the ownership of the title to a share
need be entered and noted upon the books of the corporation in order that such
transfer may ba valid, therefore, inasmuch as a chattel mortgage of the aforesaid
title is not a complete and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the corporation is not necessary
requisite to its validity.
- When the corporation is party to the transaction and it accepts the notice duly given
to it, then it binds the corporation, even in the transfer of ownership; most especially
if the corporation already recognized the transferee as the owner. With the latter
situation, the corporation can no longer assert non-registration. However, when the
corporation is not a party to the transaction, then the corporation cannot be bound
by the notice
- The registration of transfers of shares of stock upon the books of the corporation
is required as a condition precedent to their validity against the corporation and
third parties, is also applicable to unissued shares held by the corporation in
escrow

The reasons for the registration are:

1. to enable the corporation to know at all times who its actual stockholders are,
because mutual rights and obligations exist between the corporation and its
stockholders;
2. to afford to the corporation an opportunity to object or refuse its consent to the
transfer in case it has any claim against the stock sought to be transferred, or for
any other valid reason; and
3. to avoid fictitious or fraudulent transfers.

- The usual practice is for the stockholder to sign the form on the back of the stock
certificate. The certificate may thereafter be transferred from one person to
another. If the holder of the certificate desires to assume the legal rights of a
shareholder to enable him to vote at corporate elections and to receive
dividends, he fills up the blanks in the form by inserting his own name as
transferee. Then he delivers the certificate to the secretary of the corporation so

235
 that the transfer may be entered in the corporation's books. The certificate is
then surrendered and a new one issued to the transferee.
- Without the stock certificate, which is the evidence of ownership of corporate
stock, the assignment of corporate shares is effective only between the parties
to the transaction.

Right to Vote of Secured Creditors and Administrators

- In case a stockholder grants security interest in his or her shares in stock
corporations, the stockholder-grantor shall have the right to attend and vote at
meetings of stockholders, unless the secured creditor is expressly given by the
stockholder-grantor such right in writing which is recorded in the appropriate
corporate books.
- Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.

RIGHTS OF STOCKHOLDERS AND MEMBERS

Share of stock only typifies an aliquot part of the corporation’s property, or the right
to share in its proceeds to that extent when distributed according to law and equity,
but the holder is not the owner of any part of the capital [properties] of the corporation,
nor is he entitled to the possession of any definite portion of its assets
- interest of each stockholder consists in the right to a proportionate part of the
profits whenever dividends are declared by the corporation, during its existence,
under its charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts

Certificate of stock: The certificate is not stock in the corporation but is merely
evidence of the holder’s interest and status in the corporation, his ownership of the
share represented thereby, but is not in law the equivalent of such ownership.

Preemptive Rights - All stockholders of a stock corporation shall enjoy preemptive

right to subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto

XPN: shall not extend to shares issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares issued in good faith
with the approval of the stockholders representing 2/3 of the outstanding capital stock,
in exchange for property needed for corporate purposes or in payment of a previously
contracted debt.
- Although it can validly be withdrawn, it cannot be done in breach of fiduciary
duties such as to perpetuate control over the corporation

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Non-transferability of Membership in Non-Stock Corporation
- personal and nontransferable, unless the articles of incorporation or the bylaws
otherwise provide.
- Membership shall be terminated in the manner and for the causes provided in
the articles of incorporation or the bylaws

Restriction on Transfers: contractual undertaking on restriction of transfer of shares

that has a reasonable business purpose and limited in coverage is valid and binding

Right of Refusal - does not compel the corporation to buy back the shares from the
stockholder, and held that “in the absence of a similar contractual obligation and of a
legal provision applicable thereto, it is logical to conclude that it would be unjust and
unreasonable to compel the corporation to comply with a non-exisent or imarignary
obligation
- Shares of corporate stock being regarded as property, the owner of such shares
may, as a general rule, dispose of them as he sees fit, unless the corporation
has been dissolved, or unless the right to do so is properly restricted, or the
owner's privilege of disposing of his shares has been hampered by his own
action.

Remedy If Registration Is Refused

- Mandamus will not lie to compel the corporate secretary to register the transfer
of shares in the corporate books when the petitioner is not the registered
stockholder nor does he hold a power of attorney from the latter. This is under
the general rule that as between the corporation on the one hand and its
shareholders on other, the corporation looks only to its books for the purpose of
determining who its shareholders are, so that a mere indorsee of a certificate of
stock, claiming to be the owner, will not necessarily be recognized as such by
the corporation and its officers, in absence of express instructions of the
registered owner to make such transfer to the indorsee, or a power of attorney
authorizing such transfer
- Period to Enforce. – Considering that the law does not prescribe a period within
which the registration of purchase of shares should be effected, the action to
enforce the right does not accrue until there has been a demand and a refusal
concerning the transfer

Power to Declare Dividends

Dividend - portion of the profits of the enterprise which the corporation, by its
governing agents, sets apart for ratable division among the holders of it capital stock—
it is a payment, and the right thereto is an incident of ownership of stock
- Although stock certificates grant the stockholder the right to receive quarterly
dividends of 1%, cumulative and participating, the stockholders do not become
entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividends

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“Interest Bearing Stocks”, - corporation agrees absolutely to pay interest before
dividends are paid to the common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only

Right to Vote and to Attend Meetings

- right to vote is inherent in and incidental to the ownership of corporate
stocks
- unissued stocks may not be voted or considered in determining whether a
quorum is present in a stockholders’ meeting, or whether a requisite
proportion of the stock of the corporation is voted to adopt a certain
measure or act.
- Only stock actually issued and outstanding may be voted
- Until challenged successfully in proper proceedings, a registered
stockholder has a right to participate in any meeting, and in the absence of
fraud the action of the stockholders’ meeting cannot be collaterally
attacked on account of such participation, even if it be shown later on that
the shares had been previously sold (but not recorded).

Amendment of Articles of Incorporation - majority vote of the board of directors or

trustees and the vote or written assent of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders

Merger and consolidation (Sec. 76).

- majority vote of each of the board of directors or trustees of the constituent
corporations of the plan of merger or consolidation, the same shall be submitted
for approval by the stockholders or members of each of such corporations at
separate corporate meetings duly called for the purpose
- affirmative vote of stockholders representing at least 2/3 of the outstanding
capital stock of each corporation in the case of stock corporations or at least 2/3
of the members in the case of nonstock corporations shall be necessary for the
approval of such plan. Any dissenting stockholder may exercise the right of
appraisal
- if after the approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the right of appraisal shall be extinguished.
- Any amendment to the plan of merger or consolidation may be made: Provided,
That such amendment is approved by a majority vote of the respective boards
of directors or trustees of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least 2/3 of the outstanding
capital stock or of 2/3 of the members of each of the constituent corporations.
Such plan, together with any amendment, shall be considered as the agreement
of merger or consolidation.

Amendment to Bylaws
- majority of the board of directors or trustees, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the members
238
 of a nonstock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal the bylaws or adopt new bylaws
- owners of 2/3 of the outstanding capital stock or 2/3 of the members in a
nonstock corporation may delegate to the board of directors or trustees the
power to s1mend or repeal the bylaws or adopt new bylaws
- any power delegated to the board of directors or trustees to amend or repeal
the bylaws or adopt new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock
or majority of the members shall so vote at a regular or special meeting.

Voting in Case of Joint Ownership of Stock: consent of all the co-owners unless
there is a written proxy, signed by all the co-owners, authorizing one (1) or some of
them or any other person to vote such share or shares
- when the shares are owned in an "and/or" capacity by the holders thereof, any
one of the joint owners can vote said shares or appoint a proxy therefor.

Voting Right for Treasury Shares: no voting right as long as such shares remain in
the Treasury.

- When shares are pledged by means of endorsement in blank and delivery of

the covering certificates to a loan, the pledgee does not become the owner
thereof simply by the failure of the registered stockholder to pay his loan.
Consequently, without proper foreclosure, the lender cannot demand that the
shares be registered in his name.

Regular Meetings of Stockholders or Members

- held annually on a date fixed in the bylaws, or if not so fixed, on any date after
April 15 of every year as determined by the board of directors or trustees
- written notice of regular meetings shall be sent to all stockholders or members
of record at least twenty-one (21) days prior to the meeting, unless a different
period is required in the bylaws, law, or regulation

Special meetings of stockholders or members

- held at any time deemed necessary or as provided in the bylaws
- at least one (1) week written notice shall be sent to all stockholders or
members, unless a different period is provided in the bylaws, law or regulation.
- general waivers of notice in the articles of incorporation or the bylaws shall not
be allowed
- attendance at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called
or convened.

Quorum in Meetings:
- based on the totality of the shares which have been subscribed and issued
whether it be founders’ shares or common shares
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 - stock and transfer book cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares which have been subscribed,
more so when the articles of incorporation show a significantly larger amount of
shares issued and outstanding as compared to that listed in the stock and
transfer book

Rights to Inspect and Copy: incident of ownership of the corporate property,

whether this ownership or interest be termed an equitable ownership, a beneficial
ownership or a quasi-ownership. The right of inspection is predicated upon the
necessity of self-protection on the part of the stockholder

Limitations on the Right

1. it should be exercised at reasonable hours on business days;
2. the person demanding the right to examine and copy excerpts from the
corporate records and minutes has not improperly used any information
secured through any previous examination of records; and
3. the demand is made in good faith or for a legitimate purpose

- Although it includes the right to make copies, does not authorize bringing the
books or records outside of corporate premises
- Does not include the right of access to minutes until such minutes have been
written up and approved by the directors

Stock transfer agent - engaged principally in the business of registering transfers of

stocks in behalf of a stock corporation

Right to Financial Statements: within 10 days from receipt of their written request
- At the regular meeting of stockholders or members, the board of directors or
trustees shall present to such stockholders or members a financial report of the
operations of the corporation for the preceding year
- if the total assets or total liabilities of the corporation are less than Six hundred
thousand pesos (P600,000.00), or such other amount as may be determined
appropriate by the Department of Finance, the financial statements may be
certified under oath by the treasurer and the president.

- The Commission may place the corporation under delinquent status in case of
failure to submit the reportorial requirements three (3) times, consecutively or
intermittently, within a period of five (5) years.

Visitorial Power and Confidential Nature of Examination Results. -The

Commission shall exercise visitorial powers over all corporations, which powers shall
include the examination and inspection of records, regulation and supervision of
activities, enforcement of compliance, and imposition of sanctions

How Appraisal Right is exercised: written demand on the corporation for the
payment of the fair value of shares held within 30 days from the date on which the
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vote was taken: Provided, That failure to make the demand within such period shall
be deemed a waiver of the appraisal right.
- If, within 60 days from the approval of the corporate action by the stockholders,
the withdrawing stockholder and the corporation cannot agree on the fair value
of the shares, it shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another by the
corporation, and the third by the two (2) thus chosen. The findings of the majority
of the appraisers shall be final, and their award shall be paid by the corporation
within thirty (30) days after such award is made
- Restriction: no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover such
payment:

Effect of Demand and Termination of Right: all rights accruing to such shares,
including voting and dividend rights, shall be suspended except the right of such
stockholder to receive payment of the fair value thereof
- if the dissenting stockholder is not paid the value of the said shares within thirty
(30) days after the award, the voting and dividend rights shall immediately be
restored.

When Right to Payment Ceases:

- No demand for payment under this Title may be withdrawn unless the
corporation consents thereto.
1. demand for payment is withdrawn with the consent of the corporation
2. proposed corporate action is abandoned or rescinded by the corporation or
disapproved by the Commission where such approval is necessary
3. Commission determines that such stockholder is not entitled to the appraisal
right,

Who Bears Costs of Appraisal: borne by the corporation, unless the fair value
ascertained by the appraisers is approximately the same as the price which the
corporation may have offered to pay the stockholder, in which case they shall be
borne by the latter

Notation on Certificates: Within ten (10) days after demanding payment for shares
held, a dissenting stockholder shall submit the certificates of stock representing the
shares to the corporation for notation that such shares are dissenting shares. Failure
to do so shall, at the option of the corporation, terminate the rights

Derivative Suits - action brought by minority shareholders in the name of the

corporation to redress wrongs committed against the corporation, for which the
directors refuse to sue. It is a remedy designed by equity and has been the principal
defense of the minority shareholders against abuses by the majority
- whole purpose of the law authorizing a derivative suit is to allow the
stockholders/member to enforce rights which are derivative (secondary) in
nature, i.e., to enforce a corporate cause of action.
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 GR: In the absence of a special authority from the Board of Directors to institute a
derivative suit for and in behalf of the corporation, the president or managing director
is disqualified by law to sue in her own name.
- An individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stocks in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to
be sued, or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party
in interest

Requisites of Derivative Suit

1. the party bringing suit should be a shareholder during the time of the act or
transaction complained of, the number of shares not being material;
2. the party has tried to exhaust intra- corporate remedies, relief, but the latter has
failed or refused to heed his plea; and
3. the cause of action actually devolves on the corporation; the wrongdoing or harm
having been or being caused to the corporation and not to the particular
stockholder bringing the suit.
4. No appraisal rights are available for the act or acts complained of; and

Exhaustion of Intra-Corporate Remedies: made a demand on the Board of

Directors for the appropriate relief, but the latter has failed to or refused to heed his
plea.

- When the Board of Directors in a Corporation is under the complete control of

the principal defendants in the case and it is obvious that a demand upon the
board of directors to institute an action and prosecute the same effectively would
be useless, the action may be brought by one or more of the stockholders
without such demand

Nature of Relief
- derivative suit must have cause of action for the benefit of the corporation.
- When the relief prayed for do not pertain to the corporation, then it is an
improper derivative suit
- It is a remedy designed by equity for those situations where the management,
through fraud, neglect of duty, or other cause, declines to take the proper and
necessary steps to assert the corporation's rights

Rules of Distribution on assets of a nonstock corporation

1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefor;
2. Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with such requirements;
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3. Assets received and held by the corporation subject to li mitations permitting their
use only for charitable, religious, benevolent, educational or similar purposes, but
not held upon a condition requiring return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to 1 or more corporations, societies
or organizations engaged in activities in the Philippines substantially similar to
those of the dissolving corporation according to a plan of distribution adopted
pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the
bylaws, to the extent that the articles of incorporation or the bylaws determine the
distributive rights of members, or any class or classes of members, or provide for
distribution; and
5. In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may be
specified in a plan of distribution adopted pursuant to this Chapter.

Plan of Distribution of Assets. - A plan providing for the distribution of assets,

consistent with the provisions of this Title, may be adopted by a nonstock corporation
in the process of dissolution

Donations to Accredited Nongovernment Organizations

- The level of administrative expense of which shall in no case to exceed thirty
percent (30%) of the total expenses;
- The assets of which, in the event of dissolution, would be distributed to another
non-profit domestic corporation organized for similar purpose or purposes, or to
the state for public purpose, or would be distributed by a court to another
organization to be used in such manner as in the judgment of said court shall
best accomplish the general purpose for which the dissolved organization was
organized.

Non-government organization - a non-profit domestic corporation organized and

operated exclusively for scientific, research, educational, character-building and youth
and sports development, health, social welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income of which inures to the benefit of any
private individual;

Manner of Voting; Proxies

- votes are received before the corporation finishes the tally of votes.
- stockholder or member who participates through remote communication or in
absentia shall be deemed present for purposes of quorum.
- Proxies shall be in writing, signed and filed, by the stockpolder or member, in
any form authorized in the bylaws and received by the corporate secretary within
a reasonable time before the scheduled meeting.
- Unless otherwise provided in the proxy form, it shall be valid only for the meeting
for which it is intended. No proxy shall be valid and effective for a period longer
than five (5) years at any one time.
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Proxy solicitation involves the securing and submission of proxies
Proxy validation concerns the validation of such secured and submitted proxies

Voting Trust Agreements: for the purpose of conferring upon a trustee or trustees
the right to vote and other rights pertaining to the shares for a period not exceeding
five (5) years at any time
- in the case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding five (5) years but
shall automatically expire upon full payment of the loan
- must be in writing and notarized, and shall specify the terms and conditions
thereof.
- certified copy of such agreement shall be filed with the corporation and with the
Commission; otherwise, the agreement is ineffective and unenforceable
- No voting trust agreement shall be entered into for purposes of:
1. circumventing the laws against anti-competitive agreements,
2. abuse of dominant position,
3. anti-competitive mergers and acquisitions,
4. violation of nationality .and capital requirements
5. perpetuation of fraud.

Pooling Agreements or Shareholders’ Agreements: Agreements duly signed and

executed by and among all stockholders before the formation and organization of a
close corporation shall survive the incorporation and shall continue to be valid and
binding between such stockholders if such be their intent, to the extent that such
agreements are consistent with the articles of incorporation, irrespective of where the
provisions of such agreements are contained, except those required to be embodied
in said articles of incorporation.

CAPITAL STRUCTURE: SHARES OF STOCK

Power of the Corporation to Issue Shares of Stock: lodged in the board of directors
and no stockholders’ meeting is required to consider it because additional issuances
of shares of stock does not need approval of the stockholders—what is only required
is the board resolution approving the additional issuance of shares.

Outstanding capital stock - total shares of stock issued to subscribers or

stockholders whether or not fully or partially paid (as long as there is binding
subscription agreement) except treasury shares

Paid-up capital - portion of the authorized capital stock which has been both
subscribed and paid

Capital refers to the value of the property or assets of a corporation

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Capital subscribed - total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and
can be more than, the par value of the shares, the amount that the corporation
receives, inclusive of the premium if any, in consideration of the original issuance of
the shares.

Investment - expenditure to acquire property or other assets in order to produce

revenue
placing of capital or laying out of money in a way intended to secure income or profit
from its employment.

Advances for Future Subscription - receivable account and does not form part of
the capital stock of the corporation since it does not correspond to any particular
issuance of shares of stock.

Payments on advance subscriptions - cannot as yet be deemed part of paid-up

capital, technically speaking, because its capital stock has not yet been legally
increased.

Classification of Shares
- No share may be deprived of voting rights except those classified and issued
as "preferred" or "redeemable" shares,
- Holders of nonvoting shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating, or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.

- vote required to approve a particular corporate act shall be deemed to refer only
to stocks with voting rights.
- banks, trust, insurance, and preneed companies, public utilities, building and
loan associations, and other corporations authorized to obtain or access funds
from the public, whether publicly listed or not, shall not be permitted to issue no-
par value shares of stock.
- Shares of capital stock issued without par value shall be deemed fully paid and
nonassessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto

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 - no-par value shares must be issued for a consideration of at least Five pesos
(P5.00) per share
- entire consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.

Common Shares - represents the residual ownership interest in the corporation

Preferred shares of stock - issued by a corporation may be given preference in the

distribution of dividends and in the distribution of corporate assets in case of
liquidation, or such other preferences
- issued only with a stated par value
- entitle the shareholder to some priority on dividends and asset distribution
- In the absence of provisions in the articles of incorporation denying voting rights
to preferred shares, preferred shares have the same voting rights as common
shares.
- only preferred or redeemable shares can be deprived of the right to vote.
Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid

Interest Bearing Stocks - corporation agrees absolutely to pay interest before

dividends are paid to common stockholders

Redeemable Shares. - shares which may be purchased by the corporation from the
holders of such shares upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation, and upon
such other terms and conditions stated in the articles of incorporation and the
certificate of stock representing the shares, subject to rules and regulations issued by
the Commission.
- repurchase, a reacquisition of stock by a corporation which issued the stock in
exchange for property, whether or not the acquired stock is cancelled, retired or
held in the treasury

Founders' Shares: may be given certain rights and privileges not enjoyed by the
owners of other stocks.
- Where the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years from the date
of incorporation

Treasury Shares. - shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation through purchase, redemption,
donation, or some other lawful means
- may again be disposed of for a reasonable price fixed by the board of directors.
- may be used for a variety of corporate purposes, such as for a stock bonus plan
for management and employees, or for acquiring another company.

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 - While held in the company’s treasury, the stock earns no dividends and has no
vote in company affairs.

Dividends - any distribution made by a corporation to its shareholders out of its

earnings or profits
- stock dividend constitutes income if its gives the shareholder an interest
different from that which his former stockholdings represented
- Reduction of capital stock cannot be employed to avoid the corporation’s
obligations under the Labor Code

XVII. CLOSE CORPORATION

Close corporation, within the meaning of this Code, is one whose articles of
incorporation provides that:
a. all the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding 20;
b. all the issued stock of all classes shall be subject to 1 or more specified
restrictions on transfer permitted by this Title; and
c. the corporation shall not list in any stock exchange or make any public offering
of its stocks of any class.

XPN: Notwithstanding the foregoing, a corporation shall not be deemed a close

corporation when at least 2/3 of its voting stock or voting rights is owned or controlled
by another corporation which is not a close corporation within the meaning of this
Code.

Negative Lists:
1. mining or oil companies,
2. stock exchanges,
3. banks,
4. insurance companies,
5. public utilities,
6. educational institutions and
7. corporations declared to be vested with public interest

When board meeting is unnecessary or improperly held: Unless the by-laws

provide otherwise, any action by the directors of a close corporation without a meeting
shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the
directors; or
2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiesce of all the stockholders; or

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 4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.

- If a directors' meeting is held without proper call or notice, an action taken

therein within the corporate powers is deemed ratified by a director who failed
to attend, unless he promptly files his written objection with the secretary of the
corporation after having knowledge thereof."

Articles of Incorporation. - may provide forpermissive:

1. A classification of shares or rights, the qualifications for owning or holding the
same, and restrictions on their transfers, subject to the provisions of the following
section;
2. A classification of directors into one (1) or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. Greater quorum or voting requirements in meetings of stockholders or directors
than those provided in this Code.
4. business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision continues
in effect, no meeting of stockholders need be called to elect directors
5. officers or employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.

Preemptive Right in Close Corporations: extend to all stock to be issued, including

reissuance of treasury shares, whether for money, property or personal services, or
in payment of corporate debts, unless the articles of incorporation provide otherwise.

Amendment of Articles of Incorporation: affirmative vote of at least two-thirds (2/3)

of the outstanding capital stock, whether with or without voting rights, or of such
greater proportion of shares as may be specifically provided in the articles of
incorporation

Validity of Restrictions on Transfer of Shares

- must appear in the articles of incorporation, in the bylaws, as well as in the
certificate of stock; otherwise, the same shall not be binding on any purchaser
in good faith.
- shall not be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated.
- If, upon the expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder may sell
their shares to any third person.

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 Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions.
Conclusive Presumption of Notice: corporation may, at its option, refuse to register
the transfer in the name of the transferee:
1. the person's ineligibility to be a stockholder of the corporation; or
2. that the transfer of stock would cause the stock of the corporation to be held by
more than the number of persons permitted under its articles of incorporation; or
3. that the transfer violates a restriction on transfer of stock, the corporation may, at
its option, refuse to register the transfer in the name of the transferee.

XPN: transfer of stock has been consented to by all the stockholders of the close
corporation, or if the close corporation has amended its articles of incorporation

Agreements by Stockholders: No provision in a written agreement signed by the

stockholders, relating to any phase of corporate affairs, shall be invalidated between
the parties on the ground that its effect is to make them partners among themselves.

- Failure of the corporate employer to comply with the duty under the Labor Code
to grant separation pay to employees in case of cessation of operations
constitutes tort and its stockholder who was actively engaged in the
management or operation of the business should be held personally liable

Deadlocks: if the directors or stockholders are so divided on the management of the

corporation's business and affairs that the votes required for a corporate action cannot
be obtained, with the consequence that the business and affairs of the corporation
can no longer be conducted to the advantage of the stockholders generally, the
Commission, upon written petition by any stockholder, shall have the power to
arbitrate the dispute.

In the exercise of such power, authority of the Commission

1. cancelling or altering any provision contained in the articles of incorporation,
bylaws, or any stockholders' agreement;
2. cancelling, altering or enjoining a resolution or act of the corporation or its board of
directors, stockholders, or officers;
3. directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action;
4. requiring the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its.
books, or by the other stockholders;
5. appointing a provisional director;
6. dissolving the corporation; or
7. granting such other relief as the circumstances may warrant.

Provisional director - impartial person who is neither a stockholder nor a creditor of

the corporation or any of its subsidiaries or affiliates, and whose further qualifications,
if any, may be determined by the Commission.

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 - not a receiver of the corporation and does not have the title and powers of a
custodian or receiver.
- shall have all the rights and powers of a duly elected director, including the right
to be notified of and to vote at meetings of directors until removed by order of
the Commission or by all the stockholders.

Withdrawal of Stockholder or Dissolution of Corporation. - any stockholder may,

for any reason, compel the corporation to purchase shares held at fair value,
- may, by written petition to the Commission, compel the dissolution of such
corporation whenever any acts of the directors, officers, or those in control of
the corporation are illegal, fraudulent, dishonest, oppressive or unfairly
prejudicial to the corporation or any stockholder, or whenever corporate assets
are being misapplied or wasted.

XIX. ONE PERSON CORPORATION

One Person Corporation - corporation with a single stockholder: Provided, That only
a natural person, trust, or an estate may form a One Person Corporation.

XPN:
1. Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed
companies, and non-chartered GOCC
2. Natural person who is licensed to exercise a profession for the purpose of
exercising such profession

- Minimum Capital Stock Not Required for One Person Corporation

- not required to submit and file corporate bylaws.
- indicate the letters "OPC" either below or at the end of its corporate name.
- single stockholder shall be the sole director and president of the One Person
Corporation.

Corporate Officers. - Within 15 days from the issuance of its certificate of

incorporation, the One Person Corporation shall appoint a treasurer, corporate
secretary, and other officers as it may deem necessary, and notify the Commission
thereof within 5 days from appointment.
- single stockholder may not be appointed as the corporate secretary.
- single stockholder who is likewise the self-appointed treasurer of the corporation
shall give a bond to the Commission in such a sum as may be required:
- bond shall be renewed every 2 years or as often as may be required.

Special Functions of the Corporate Secretary:

1. Be responsible for maintaining the minutes book and/or records of the corporation;
2. Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than 5 days from such occurrence;

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3. Notify the Commission of the death of the single stockholder within 5 days from
such occurrence and stating in such notice the names, residence addresses, and
contact details of all known legal heirs; and
4. Call the nominee or alternate nominee and the known legal heirs to a meeting and
advise the legal heirs with regard to, among others, the election of a new director,
amendment of the articles of incorporation, and other ancillary and/or
consequential matters.

Nominee and Alternate Nominee Designation

- in the event of the single stockholder's death or incapacity, take the place of the
single stockholder as director and shall manage the corporation's affairs.
- Such consent may be withdrawn in writing any time before the death or
incapacity of the single stockholder.
- In case of death or permanent incapacity of the single stockholder, the nominee
shall sit as director and manage the affairs of the One Person Corporation until
the legal heirs of the single stockholder have been lawfully determined, and the
heirs have designated one of them or have agreed that the estate shall be the
single stockholder of the One Person Corporation.

Liability of Single Shareholder. - A sole shareholder claiming limited liability has the
burden of affirmatively showing that the corporation was adequately financed.
- Where the single stockholder cannot prove that the property of the One Person
Corporation is independent of the stockholder's personal property, the
stockholder shall be jointly and severally liable for the debts and other liabilities
of the One Person Corporation.

XIX. FOREIGN CORPORATION

Foreign Corporations - formed, organized or existing under laws other than those of
the Philippines' and whose laws allow Filipino citizens and corporations to do business
in its own country or State. It shall have the right to transact business in the Philippines
after obtaining a license for that purpose in accordance with this Code and a certificate
of authority from the appropriate government agency.

Doing Business
1. soliciting orders, purchases, service contracts, opening offices, whether called
"liaison" offices or branches;
2. appointing representatives or distributors who are domiciled in the Philippines
for a period or periods totaling 180 days or more;
3. participating in the management, supervision or control of any domestic
business firm, entity or corporation in the Philippines
4. other act or acts that imply a continuity of commercial dealings or arrangements
and contemplate to that extent the performance of acts or works, or the exercise
of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization
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Not be deemed to include:
1. mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of rights as such investor;
2. having a nominee director or officer to represent its interests in such corporation;
3. appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account

Issuance of a License
- to transact business in the Philippines to the applicant for the purpose or
purposes specified in such license.
- Within sixty (60) days after the issuance of the license to transact business in
the Philippines, the licensee, except foreign banking or insurance corporations,
shall deposit with the Commission for the benefit of present and future creditors
of the licensee in the Philippines, securities satisfactory to the Commission,
consisting of bonds or other evidence of indebtedness of the Government of the
Philippines, its political subdivisions and instrumentalities, or of GOCC and
entities, shares of stock or debt securities that are registered under RA No.
8799. otherwise known as "The Securities Regulation Code", shares of stock in
domestic corporations listed in the stock exchange, shares of stock in domestic
insurance companies and banks, any financial instrument determined suitable
by the Commission, or any combination thereof with an actual market value of
at least P500,000.00 or such other amount that may be set by the Commission:
Provided, however, That within 6 months after each fiscal year of the licensee,
the Commission shall require the licensee to deposit additional securities or
financial instruments equivalent in actual market value to 2% of the amount by
which the licensee's gross income for that fiscal year exceeds Ten million pesos.
- Commission shall also require the deposit of additional securities or financial
instruments if the actual market value of the deposited securities or financial
instruments has decreased by at least 10% of their actual market value at the
time they were deposited.

Requirements to be Imposed by the Board: on the alien or the firm, association,

partnership, corporation or other form of business organization that is not organized
or existing under the laws of the Philippines
1. To appoint a citizen of the Philippines, of legal age, good moral character
and reputation, and sound financing standing, as resident agent, who shall be
authorized to accept summons and other legal process in behalf of the
applicant;
2. To establish an office in the Philippines and to notify the Securities and
Exchange Commission in writing of the applicant's exact address and of every
contemplated transfer thereof or of the opening of new offices, at least fifteen
(15) days before the same are to be effected; and once effected, not later than
ten (10) days afterwards;
3. To bring assets into the Philippines to constitute the capital of the office or
offices, of such kind and value as the Board may deem necessary to protect

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 those who may deal with the applicant, and to maintain that capital unimpaired
during the period it does business in the Philippines;
4. To present prior proof that citizens of the Philippines and corporations or
other business organizations organized or existing under the laws of the
Philippines are allowed to do business in the country or individual state within
the federal country of which applicant is a citizen or in which it is domiciled:
Provided, however, That if the state or country of domicile of the applicant
imposes on, or requires of, Philippine nationals other conditions, requirements
or restrictions besides those set forth in this Code, the Board of Investments
shall impose the said other conditions, requirements or restrictions on the
applicant, if in its judgment, the imposition thereof shall foster the sound and
balanced development of the national economy on a self-sustaining basis;
5. To submit to the Securities and Exchange Commission certified copies of
applicant's charter and by-laws and all amendments thereto, if any, with their
translation into an official language within twenty (20) days after their adoption
or after the grant of the prescribed certificate by the Board of Investments and
annually of applicant's financial statements showing all assets, liabilities and net
worth and results of operations, setting out separately those pertaining to the
branch office;
6. To keep a complete set of accounting records with the resident agent,
which shall fully and faithfully reflect all transactions within the Philippines, and
to permit inspections thereof by the Securities and Exchange Commission, the
Bureau of Internal Revenue and the Board of Investments;
7. To give priority to resident creditors as against non-resident creditors and
owners or stockholders in the distribution of assets within the Philippines upon
insolvency, dissolution or revocation of the license;
8. To give the Securities and Exchange Commission at least six (6) months
advance notice in writing of applicant's intention to stop doing business within
the Philippines; and to give such public notice thereof as the Securities and
Exchange Commission may require for the protection of resident creditors and
others dealing with the applicant; and
9. Not to terminate any franchise, licensing or other agreement that applicant
may have with a resident of the Philippines authorizing the latter to assemble,
manufacture or sell within the Philippines the products of the applicant, except
for violation thereof or other just cause and upon payment of compensation and
reimbursement of investment and other expenses incurred by the licensee in
developing a market for the said products: Provided, however, That in case of
disagreement, the amount of compensation or reimbursement shall be
determined by the country where the licensee is domiciled or has its principal
office who shall require the applicant to file a bond in such amount as, in its
opinion, is sufficient for this purpose.

Amended License: changes its corporate name, or desires to pursue other or

additional purposes in the Philippines

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Rationale for Requiring License to Do Business: subject the foreign corporation
doing business in the Philippines to the jurisdiction of our courts and not to prevent
the foreign corporation from performing single acts, but to prevent it from acquiring
domicile for the purpose of business without taking the necessary steps to render it
amenable to suit in the local courts

Jurisprudential Concepts of "Doing Business":

1. if a foreign corporation does business in the Philippines without a license, it cannot
sue before Philippine courts;
2. if a foreign corporation is not doing business in the Philippines, it needs no license
to sue before Philippine courts on an isolated transaction or on a cause of action
entirely independent of any business transaction;
3. if a foreign corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with said corporation may be
estopped from challenging the foreign corporation’s corporate personality in a suit
brought before the Philippine courts; and
4. if a foreign corporation does business in the Philippines with the required license,
it can sue before Philippine courts on any transaction

Doing business Test: continuity of commercial dealings and arrangements and the
performance of acts or works or the exercise of some of the functions normally
incident to the purpose or object of a foreign corporation’s organization

Unrelated or Isolated Transactions

- A foreign corporation needs no license to sue before Philippine courts on an
isolated transaction
- Single or isolated acts, contracts, or transactions of foreign corporations are not
regarded as a carrying on of business
- Even a series of transactions which are occasional, incidental and casual—not of
a character to indicate a purpose to engage in business—do not constitute the
doing or engaging in business as contemplated by law

"Contract Test" of Doing Business

- foreign corporation must actually transact business in the Philippines, that is,
perform specific business transactions within the Philippine territory on a
continuing basis in its own name and for its own account

- where a single act or transaction of a foreign corporation is not merely incidental

or casual but is of such character as distinctly to indicate a purpose to do other
business in the State, such act constitutes doing business within the meaning
of statutes prescribing the conditions under which a foreign corporation may be
served with summons.

Doing Business Without a License: shall not be permitted to maintain or intervene

in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine
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courts or administrative tribunals on any valid cause of action recognized under
Philippine laws.

Pari Delicto Doctrine: The local party to a contract with a foreign corporation that
does business in the Philippines without license cannot maintain suit against the
foreign corporation as the foreign corporation cannot maintain suit, under the principle
of pari delicto.

- a party is estopped to challenge the personality of a corporation after having

acknowledged the same by entering into a contract with it. And the doctrine of
estoppel to deny corporate existence applies to a foreign as well as to domestic
corporations. One who has dealt with a corporation of foreign origin as a
corporate entity is estopped to deny its corporate existence and capacity.
- The provision prohibits, not merely absence of the prescribed license, but it also
bars a foreign corporation "doing business" in the Philippines without such
license access to Philippine courts.
- When it is shown that a foreign corporation is doing business in the Philippines,
summons may be served on
1. its resident agent designated in accordance with law;
2. if there is no resident agent, the government official designated by law to
that effect; or
3. any of its officers or agent within the Philippines.

- For purposes of venue involving a foreign corporation, its “residence” includes

the country where it exercises corporate functions or the place where its
business is done.

Stipulation on Venue: When the contract sued upon has a venue clause within the
Philippines, it is deemed a confirmation by the foreign corporation, even though not
doing business in the Philippines, to be sued in local courts

Pleading "Doing" and "Not Doing" of Business: The fact that a foreign corporation
is not doing business in the Philippines must be alleged if a foreign corporation desires
to sue in Philippines courts under the “isolated transactions rule.”

Resident Agent: either an individual residing in the Philippines or a domestic

corporation lawfully transacting business in the Philippines
- must be of good moral character and of sound financial standing
- Being a resident agent of a foreign corporation does not mean that he is
authorized to execute the requisite certification against forum shopping—while
a resident agent may be aware of actions filed against his principal (a foreign
corporation doing business in the Philippines), he may not be aware of actions
initiated by its principal, whether in the Philippines or abroad

Law Applicable. -A foreign corporation lawfully doing business in the Philippines shall
be bound by all laws, rules and regulations applicable to domestic corporations of the
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same class, except those which provide for the creation, formation, organization or
dissolution of corporations or those which fix the relations, liabilities, responsibilities,
or duties of stockholders, members, or officers of corporations to each other or to the
corporation.
Revocation of License. - Without prejudice to other grounds provided under special
laws, the license of a foreign corporation to transact business in the Philippines may
be revoked or suspended by the Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required
by this Title;
3. Failure, after change of its resident agent or address, to submit to the
Commission a statement of such change as requited by this Title;
4. Failure to submit to the Commission an authenticated copy of any amendment
to its articles of incorporation or bylaws or of any articles of merger or
consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or
other document submitted bv such corporation pursuant to this Title;
6. Failme to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for
which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting on behalf of any
foreign corporation or entity not duly licensed to do business in the Philippines;
or
9. Any other ground as would render it unfit to transact business in the Philippines.

Withdrawal of Foreign Corporations:

a. All claims which have accrued in the Philippines have been paid, compromised
or settled;
b. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions, have
been paid; and
c. Petition for withdrawal of license has been published once a week for 3
consecutive weeks in a newspaper of general circulation in the Philippines.

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XX. PENALTY PROVISIONS OF THE CODE

General Penalty: fine of not less than P10,000,00 but not more than One million
pesos
- committed by a corporation, the same may, after notice and hearing, be
dissolved in appropriate proceedings before the Commission: Provided, That
such dissolution shall not preclude the institution of appropriate action against
the director, trustee, or officer of the corporation responsible for said violation

Disqualification of Directors, Trustees or Officers: within five (5) years prior to the
election or appointment as such, the person was:
a. Convicted by final judgment:
1. Of an offense punishable by imprisonment for a period exceeding six (6)
years;
2. For violating this Code; and
3. For violating Republic Act No. 8799, otherwise known as "The Securities
Regulation Code";
b. Found administratively liable for any offense involving fraudulent acts; and
c. By a foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to those enumerated in paragraphs (a) and (b) above

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