CORPORATION LAW
ATTY. AMANTE A. LIBERATO
A. INTRODUCTION
Legislative and Historical Background of
Philippine Corporate Law
 Corporation Law (Act No. 1459)- first
general law on corporations in the
Philippines
-passed by the Philippine Commission in
1906 and took effect on April 1 , 1906
-codification of the American law on
corporations
-repealed in1980 by Batas Pambansa
Blg. 68 (Corporation Code of the
Philippines) which took effect on May 1,
1980
Corporation Code- applies to all
corporations already in existence at the
time the Code took effect. It is consistent
with the mandate under Sec. 1 Art. XII of
the Constitution for Congress to
prescribe all the criteria for the
“formation, organization, or regulation “
of private corporations in general law
applicable to all without discrimination.
PURPOSE OF CORPORATE LAW
a) Provide for the formation and organization
of corporations
b) define their powers
c) fix the duties of the directors and other
officers thereof
d) declare the rights and liabilities of
shareholders and members
e) prescribe the conditions under which
corporations may transact
f) seeks to regulate both relations between
groups as well as their rights once they
have joined the group
g) to lay down rules and regulations of the
organization of corporations with a view to
the protection of the public interest , but
at the same time, promote the economic
and social development of the country ,
through the development of the corporate
vehicle as a means of doing business the
Philippines.
h) this would spread the benefits of
prosperity among all the people ,especially
the employees of the corporations and
associations which may be organized
under the aegis of the Corporation Code.
GENERAL RULE: Corporation Code is a PRIMARY
LAW
EXCEPT: Becomes SUPPLETROY LAW in
BANKS- governed by General Banking
Law and the New Central Bank Act
NOTE : As between general and special law , the
latter shall prevail – generalia specialibus non
derogant
B. DEFINITION AND ATTRIBUTES OF A
CORPORATION
1. Statutory Definition
Sec. 2 Corporation defined--- A
corporation is an artificial being
created by operation of law ,
having the right of succession and
the powers, attributes and
properties expressly authorized by
law or incident to its existence
NOTES: CJ Marshall – Corporations is an
artificial being, invisible , intangible and
existing only in contemplation of the law
ATTRIBUTES: ( A-C-R-P)
1. It is an ARTIFICIAL BEING
2. It is created by operation of law
3. It has the right of succession
4. it has powers, attributes expressly
authorized by law or incident of its
existence.
2.1 Artificial Being
Concession Theory- it owes its life to the State
and its birth is purely dependent on the State’s
will.
2.1.1 Doctrine of Corporate Entity( separate
personality)
A corporation has a personality separate and
distinct from its members. It has a personality
separate and distinct from the persons composing
it as well as from that of any other entity to which
it is related. This separate juridical personality is
recognized under the NCC because its Art. 44
specifies corporations among those considered as
juridical persons with juridical personality
,separate and distinct from that of each
shareholder or member.
ART. 45 of NCC- Private Corporations are
regulated by laws of general application on
the subject
Art.46 of NCC- 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.
Properties registered in the name of the
corporation are owned by it as an entity
separate and distinct from those who
compose it.
CASES:
a.) Secosa et.al. vs. Heirs of Erwin Suarez
Francisco , G.R No. 160039, January 29, 2004
A corporation has a personality separate
and distinct from its members. It has a
personality separate and distinct from the
persons composing it as well as from that
any other entity to which it may be
related.
b.) PNB vs. Aznar , G.R No. 171805 , May
30,2011
The interest of the shareholder in the
corporation is indirect, contingent and
inchoate. (PNB v. Aznar) The interest of the
shareholder on a particular property becomes
actual, direct and existing only upon
liquidation of the assets of the corporation
and the same property is assigned to the
share holder concerned
2.1.1.1 Nationality
GENERAL RULE: Corporation cannot be
considered a citizen as the term "citizen" is
understood in political law.
In political law, citizenship is membership
in body politic, which carries with it the
duty of allegiance to the State and the
exercise of political rights, like the right of
suffrage and right to hold public office, as
well as the duty to render military service
when required to by the State. In this
sense, the term citizenship is limited to
natural persons because by the very essence of
the duty of allegiance to the state and the exercise
of political rights, only natural persons are capable
of performing said acts.
 Two principal tests for determining if a
corporation is foreign or domestic,
namely:
 Aggregate Test- which requires
looking into the nationality, domicile,
or residence of the individuals who
control the corporation
-aka Control Test
 Entity Test- which looks to the
nation where the corporation was
incorporated.
-aka Place of Incorporation Test
or Incorporation Test
a. Incorporation Test
NOTES: The norm that is expressed in the
Corporation Code is the Entity or Place of
Incorporation Test.
Section 123 of the Corporation Code
provides that 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. As explained in one case,
the sovereignty by which a corporation
was created, under whose laws it was
organized, determines its national
character, and the fact that some of its
incorporators were residents and citizens
 of a foreign country does not change this
rule.
b. Control Test (Sec. 3(a), RA 7042, as
amended )
NOTES: Contemplated by the SEC is said to
have been adopted under Section 3 of
Republic Act (RA.) No. 7042 as amended by
R.A. 8179 otherwise known as the Foreign
Investment Act of 1991 which provides that a
corporation shall be considered a "Philippine
National" if it is (1) a corporation organized
under Philippine laws of which 60% of the
capital stock outstanding and entitled to vote
is owned and held by Filipino Citizens; or (2) a
Corporation organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the
capital stocks entitled to vote belong to
Filipinos.
Section 1 (b) of the amendments to the
Implementing Rules and Regulations of R.A.
7042 expressly provides that the control test
shall be applied
*Where a corporation and its non-Filipino
stockholders own stocks in an SEC registered
enterprise, at least 60% of the capital stock
outstanding and entitled to vote of each 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 each
of both corporations must be citizens of the
Philippines, in order that the corporation shall
be considered a Philippine national.
EXAMPLE: X Corporation owns 70% of the
outstanding shares, entitled to vote in A
corporation. The 70% shares outstanding
entitled to vote in X corporation are owned by
Mr. A, a Filipino and four (4) of its five (5)
directors are also Filipinos. A corporation is a
Philippine National in this example.
However, corporation A is not a Philippine
National if 70% of the shares outstanding
entitled to vote in X corporation (which owns
70% of A corporation) belong to Japanese
nationals. Corporation A is also not a
Philippine National even if only 40% of the
shares outstanding entitled to vote in X
Corporation belong to aliens but more than
60% of its directors are aliens (e.g. 4 of 5
directors are aliens). b. The test for
compliance with the nationality requirement is
based on the total outstanding capital stock
irrespective of the amount of the par value of
shares and whether or not the shares are fully
or partially paid.
*Preferred shares, voting shares as well as
non-voting shares are likewise considered in
the computation because they all form part of
the outstanding capital stock.
*Special laws may exceptionally limit the
computatione to a certain type of shares. For
example, Section 6 of RA No. 5980 as
amended limits the computation to voting
shares.
*The SEC likewise clarified that the test that
should be applied is the Control Test and not
the "Grandfather Rule."
c. Grandfather Rule (less than 60% Filipino
ownership)
NOTES: It is a method of determining the
nationality of corporation which in turn is
owned by another corporation by breaking
down the equity structure of the
shareholders of the corporation.
The SEC en banc voted and decided to do
away with the strict computation the so-
called Investment Test otherwise known as
the "Grandfather Rule” in determining the
nationality of corporations with foreign
equity in accordance with the Opinion of
the Department of Justice No. 18 series of
1989 dated January 19, 1989.
However, the Department of Justice and
the Securities and Exchange Commission
still apply the "Grandfather Rule" in some
cases because of the qualification in the
 opinion to the effect that if the percentage The legal and beneficial ownership of 60
of Filipino ownership in the corporation or percent of the outstanding capital stock
partnership is less than 60%, only the must rest in the hands of Filipinos in
number of shares corresponding to such accordance with the constitutional
percentage shall be counted as of mandate. Full beneficial ownership of 60
Philippine Nationality. percent of the outstanding capital stock,
coupled with 60 percent of the voting
GRANDFATHER RULE CONTROL TEST rights, is constitutionally required for the
States grant of authority to operate a
The percentage of No such public utility. The undisputed fact that the
Filipino equity in the computation is PLDT preferred shares, 99.44% owned by
corporation is necessary and the Filipinos, are non-voting and earn only
computed by total shareholdings 1/70 of the dividends that PLDT common
attributing the in the subsidiary shares earn, grossly violates the
nationality of the may, in proper constitutional requirement of 60 percent
second or even cases, be Filipino control and Filipino beneficial
subsequent tier of considered as ownership of a public utility.
ownership to totally Filipino
In short, Filipinos hold less than 60
determine the owned even if some
percent of the voting stock, and earn less
nationality of the of the shareholders
than 60 percent of the dividends, of
corporate shareholder in the shareholder
PLDT. This directly contravenes the express
corporation are not
command in Section 11, Article XII of the
It involves the Filipinos. Under the
Constitution that [n]o franchise, certificate,
computation of Control Test, a
or any other form of authorization for the
Filipino ownership of a corporation shall be
operation of a public utility shall be
corporation in which considered a
granted except to x x xcorporations
corporation of partly Filipino corporation
x x x organized under the laws of the
Filipino and partly if the Filipino
Philippines, at least sixty per centum of
foreign equity owns ownership of its
whose capital is owned by such citizens
capital stock. The capital is at least
percentage of shares 60% and where the
held by the second 60-40 Filipino-alien
b.) Narra Nickel Mining Development Corp
corporation in the first shareholding is not
vs. Redmont Consolidated Mines Corp. ,
is multiplied by the in doubt
G.R No. 195580, April 21, 2014
latter's own Filipino
The "control test" is still the prevailing
equity, and the
mode of determining whether or not a
product of these
corporation is a Filipino corporation, within
percentages is
the ambit of Sec. 2, Art. II of the 1987
determined to be the
Constitution, entitled to undertake the
ultimate Filipino
exploration, development and utilization of
ownership of the
the natural resources of the Philippines.
subsidiary corporation
When in the mind of the Court there is
doubt, based on the attendant facts and
CASES:
circumstances of the case, in the 60-40
a.) Gamboa vs. Teves , G.R No. 176579, June
Filipino-equity ownership in the
8,2011 and October 9, 2012
corporation, then it may apply the
"grandfather rule."
2.1.1.2 Constitutional Rights
NOTES: corporation is to person, is proper
cases, within the due process and equal
protection clause of the Constitution.
Just, like a natural person it cannot be
deprived of its life and property without
due process of law.
*As an artificial being and as a mere
creature of law, a corporation cannot
exercise Constitutional rights that are not
consistent with its nature as a mere
artificial being or rights that are not
available because the corporation’s life is
just a concession of the State.
Thus, corporation cannot claim that it, is
entitled to protection &the due process
clause for the protection of liberty.
A corporation is entitled to the right
against unreasonable searches and
seizure.
A corporation is but an association of
individuals under an assumed name and
with its legal entity. In organizing itself as a
collective body, it waives no
constitutional immunities appropriate to
such body.
The right pertains to the corporation as a
separate entity, hence, only the
corporation,and not its officers in their
personal capacity, is the real party in
interest, and to question an alleged
unreasonable search and seizure. Where
properties of the corporation are
unlawfully seized, the right that is invaded
is the right of the corporation and not the
right of its officers and stockholders
Right against self-incrimination has no
application to juridical persons.
CASES:
a.) Bache & Co., Inc. vs. Ruiz , G.R. No. L-
32409, February 27, 1971
Thus, the warrants authorized the search
for and seizure of records pertaining to all
business transactions of petitioners herein,
regardless of whether the transactions
were legal or illegal. The warrants
sanctioned the seizure of all records of the
petitioners and the aforementioned
corporations, whatever their nature, thus
openly contravening the explicit command
of our Bill of Rights — that the things to be
seized be particularly described — as well
as tending to defeat its major objective:
the elimination of general
warrants."cralaw virtua1aw library
While the term "all business transactions"
does not appear in Search Warrant No. 2-
M-70, the said warrant nevertheless tends
to defeat the major objective of the Bill of
Rights, i.e., the elimination of general
warrants, for the language used therein is
so all-embracing as to include all
conceivable records of petitioner
corporation, which, if seized, could
possibly render its business inoperative.
b.) Smith Bell & Co. vs. Natividad , G.R. No.
15574, September 17, 1912
While Smith, Bell & Co. Ltd., a corporation
having alien stockholders, is entitled to the
protection afforded by the due-process of
law and equal protection of the laws clause
of the Philippine Bill of Rights,
nevertheless, Act No. 2761 of the
Philippine Legislature, in denying to
corporations such as Smith, Bell &. Co.
Ltd., the right to register vessels in the
Philippines coastwise trade, does not
belong to that vicious species of class
legislation which must always be
condemned, but does fall within
authorized exceptions, notably, within the
purview of the police power, and so does
 not offend against the constitutional
provision.
c.) Stonehill vs. Diokno , 20 SCRA 383 (1967)
The Government's action in gaining
possession of papers belonging to the
corporation did not relate to nor did it
affect the personal defendants. If these
papers were unlawfully seized and thereby
the constitutional rights of or any one
were invaded, they were the rights of the
corporation and not the rights of the other
defendants. Next, it is clear that a question
of the lawfulness of a seizure can be raised
only by one whose rights have been
invaded. Certainly, such a seizure, if
unlawful, could not affect the
constitutional rights of defendants whose
property had not been seized or the
privacy of whose homes had not been
disturbed; nor could they claim for
themselves the benefits of the Fourth
Amendment, when its violation, if any, was
with reference to the rights of another
d.) Bataan Shipyard & Engineering Co., PCGG,
G.R. No. L- 75885, May 27, 1987
PCGG issued an order requiring BASECO to
produce corporate records in the exercise
of its powers under Executive Order No. 2
to require all persons in the Philippines
holding alleged ill gotten wealth of
President Ferdinand Marcos and his
alleged cronies to make full disclosure of
the same. BASECO questioned the order
alleging that there was violation of its right
against unreasonable searches and seizure
and self-incrimination. The Supreme Court
rejected the argument because there was
in fact no search and seizure in the case
and BASECO as a corporation is not
entitled to the right against self-
incrimination
2.1.1.3 Civil and Criminal Liabilty
NOTES:
1.) Tort Liability- A corporation is civilly liable
in the same manner as a natural person
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 a corporation, and whether the
servant or agent be a natural 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 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
* The liability of corporations may either
be vicarious or direct personal obligation
and may arise out of different sources of
obligation.
Thus, the liability of a corporation may be
based on contract. Under the liable based
on contract if the breach primary rule of
attribution, the corporation directors.
Direct corporate responsibility may be
imposed under Article 2176
*
*Vicarious liability may be based on
quasi-delict under Article 2180 of the New
Civil Code, delict under Article 102 Revised
Penal Code and under Article 104 of the
Revised Penal Code for innkeepers or
hotelkeepers.
A single act or omission may give rise to
different sources of obligations and may
warrant the award of damages. Tort
obligation may even concur with contractual
obligation. This is subject to proscription
against double recovery.
 2..) Criminal Liability- No criminal action can
lie against a corporation under the present
rules. This is consistent the traditional view in
Spanish law.
Spanish laws from which the criminal law
rules and principles in the Philippines were
largely derived, does not allow a corporation
to be proceeded against.
A corporation cannot commit felonies
described under the Revised Penal Code
because artificial beings are incapable of
intent. Neither can a corporation perform any
overt act.
The officers of the corporation may be held
liable. It is settled that an officer of a
corporation can be held criminally liable for
acts or omissions done in behalf of the
corporation only where the law directly
requires the corporation 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.
Although the performance of an act is an
obligation directly imposed on a corporation,
the responsible officer who actually
performed the act must of necessity be the
one to assume criminal liability; otherwise
this liability as created by the law would be
illusory, and the deterrent effect of the law.
The same rule applies to stockholders. Before
a stockholder may be held criminally liable for
acts committed by the corporation, it must be
shown that he had knowledge of the criminal
act committed in the name of the corporation
and that he took part in the same or gave his
consent to its commission, whether by action
or inaction.
The criminal statute itself may expressly
provide or may identify the persons who are
criminally liable.
CASES:
a.) PNB vs. CA, 83 SCRA 237, May 18, 1978
b.) Professional Services , Inc. vs. CA, G.R No.
126297, February 11,2008
Supreme Court sustained the liability of
hospitals based on the doctrine of corporate
responsibility.
The duty of providing quality medical service
is no longer the sole prerogative and
responsibility of the physician. This is because
the modern hospital now tends to organize a
highly professional medical staff whose
competence and performance need also to
be monitored by the hospital commensurate
with its inherent responsibility to provide
quality medical care. Such responsibility
includes the proper supervision of the
members of its medical staff.
Accordingly, the hospital has the duty to
make a reasonable effort to monitor and
oversee the treatment prescribed and
administered by the physicians practicing in
its premises
The corporate negligence doctrine imposes
sever 11 duties on a hospital:
(i) to use reasonable care in the mainte-
nance of safe and adequate facilities and
equipment:
(ii) to select and retain only competent
physicians
(iii)to oversee as to patient care all persons
practice medicine within its walls. and
(iv.) to formulate. adopt, and enforce
adequate inks and policies to ensure quality
care for its patient.
These special tort duties arise from the
special relationship existing between. a
hospital or nursing home and its patients,
which are based on the vulnerability of the
physically or mentally ill persons and their
inability to provide care for themselves.
c.) Child Learning Center., Inc.vs. Tagario ,
G.R. No. 150920, November 25,2005
A pre-schooler was trapped inside a small
toilet in the third floor of a school building.
 The child panicked and banged and kicked
the door several times while shouting for
help. When no help came, the child
opened the window to call for help.
Tragically, in the process of opening the
window, the child went right through and
fell down three stories.
The child suffered multiple serious injuries.
The school was made directly and primarily
liable under Article 2176. The liability is not
vicarious because the obligation to provide
safe facilities is imposed directly on the
corporation (school).
d.) Sia vs. People , 121 SCRA 655, April 28,
1983
Crime was estafa under the Revised Penal
Code for the alleged failure to return the
goods covered by a trust receipt or to
account for the proceeds of the sale of the
same goods. The Supreme Court acquitted
the president who signed the trust receipt
in question explaining that "in the absence
of an express provision of law making the
petitioner liable for the criminal offense
committed by the corporation of which he
is a president as in fact there is no such
provision in the Revised Penal Code under
which the petitioner is being prosecuted,
the existence of criminal liability on his
part may not be said to be beyond any
doubt.
e.) Espiritu Jr. vs. Petron Corporation , G.R.
No.170891, November 28
f.) Gosiaco vs. Ching ,G.R. No. 173807, April
16,2009
The third paragraph of Section 1 of BP Big.
22 or Anti-Bouncing Checks Law states:
Where the check is drawn by a
corporation, company or entity, the person
or persons who actually signed the check
in behalf of such drawer shall be liable
under this Act.
In other words, "when a corporate officer
issues a worthless check in the corporate
name he may be held personally liable for
violating a penal statute. The statute
imposes criminal penalties on anyone who
with intent to defraud another of money
or property, draws or issues a check on any
bank with knowledge that he has no
sufficient funds in such bank 'to meet the
check on presentment. Moreover, the
personal liability of the corporate officer is
predicated on the principle that he cannot
shield himself from liability from his own
acts on the ground that it was a corporate
act and not his personal act.
g.) Ching vs, Secretary of Justice, 481 SCRA,
626, February 6,2006
The principle making corporate officers
and employees criminally liable "applies
whether or not the crime requires the
consciousness of wrongdoing. It applies to
those corporate agents who themselves
commit the crime and to those, who, by
virtue of their managerial positions or
other similar relation to the corporation,
could be deemed responsible for its
commission, if by virtue of their
relationship to the corporation, they had
the power to prevent the act.
Moreover, all parties active in promoting a
crime, whether agents or not, are
principals. Whether such officers or
employees benefited by their delictual acts
is not a touchstone of their In the criminal
liability. Benefit is not an operative fact.
A corporate officer cannot protect himself
behind a corporation where he is actual,
present and efficient actor.
2.1.1.4 Recovery of Moral Damages
NOTES: The award of moral damages cannot
be granted in favor of a corporation
because, being artificial person and having
existence only in legal contemplation, it
has no feelings, no emotions and no
senses. It cannot, therefore experience
physical suffering and material anguish,
which can be experienced only by one
having a nervous system.
It is believed that the better rule is to
disallow award of moral damages to juridical
entities like corporations even for
besmirched reputation and defamation.
This rule is consistent with the very nature of
moral damages. The award of moral damages
aims the restoration within the limits possible
of the spiritual status quo ante. It is
predicated on the presence of injury that is
incapable of pecuniary estimation like
physical suffering, mental anguish and other
similar injury.' The award of moral damages is
justified only if there is moral suffering and
physical suffering.
*all the cases when moral damages may be
awarded under Article 2219 of the New Civil
Code "immediately suggest physical or moral
suffering.” Hence,award of moral damages
predicated on besmirched reputation or
defamation is justified only if there is moral
suffering on the part of the plaintiff. This is
possible only in the case of natural persons.
Consequently, an artificial being like a
corporation cannot be awarded moral
damages because it does not have a spiritual
status quo; -J. CAPISTRANO
*besmirched reputation cannot cause mental
anguish to a corporation unlike in the case of
a natural person , for a corporation has no
reputation in the sense that an individual has,
and besides, it is inherently impossible for
corporation to suffer moral anguish- Judge
Sanco
*This is not to say that the commercial
reputation of a corporation cannot be
besmirched or defamed. Courts may still find
that the reputation of a corporation was
besmirched but they may not award moral
damages in favor of the corporation.
Damages must be limited to ACTUAL,
NOMINAL, TEMPERATE, EXEMPLARY
DAMAGES and ATTORNEY’S FEES.
CASES:
a.) ABS-CBN Broadcasting vs. CA,301 SCRA
572, January 21,1999
Observation in the said two (2) cases
regarding the right of a corporation to
moral damages is an obiter dictum
b.) Filipinas Broadcasting Network vs. Ago
Medical and Educational center ,448 SCRA
413, January 17,2005
A corporation can be an offended party in
a defamation case and it can recover moral
damages under Article 2219 (7) of the Civil
Code
c.) Manila Electric Co. vs. TEAM Corp, 540
SCRA 62, December 13,2007
The Supreme Court observed that as a
rule, a corporation is not entitled to moral
damages because, not being a natural
person, it cannot experience physical
suffering or sentiments like wounded
feelings, serious anxiety, mental anguish
and moral shock. The only exception to
this rule is when the corporation has a
reputation that is debased, resulting in its
humiliation in the business realm.
d.) Crystal vs. Bank of PI , G.R. No. 172428,
November 28,2008
The Supreme Court reiterated that the
ruling in Manero and Mambulao were
mere obiter dicta. However, the Supreme
Court did not eliminate the possibility that
moral damages may be awarded to
corporations observing that "(i)ndeed,
while the Court may allow the grant of
moral damages to corporations, it is not
automatically granted; there must still be
proof of then of the factual basic of the
damage and its causal relation to the
defendant's acts. This is so because moral
damages, though incapable of pecuniary
estimation, are in the category of an award
designed to compensate the claimant for
actual injury suffered and not to impose a
penalty on the wrongdoer
e.) UP vs. Dizon , G.R. No. 171182, August
23,2012
 2.1.1.5 Practice of Profession
A corporation cannot engage in the practice
of a profession
CASES:
a.) Samahan ng Optometrists vs. Acebedo
International Corp., 270 SCRA 298 (1997)
b.) Alfafara vs. Acebedo Optical Company ,
381 SCRA 293(2002)
2.1.2 Doctrine of piercing the veil of corporate
fiction
NOTES: Basic in corporate law is the principle that
a corporation has a separate personality distinct
from its stockholders and from other corporations
to which it may be connected. It is a fiction
created by law with the intent that it should be
treated as true.
The corporation’s separate juridical personality
may be disregarded when there is an abuse of the
corporate form.
examples:
 when the corporate identity is used
to defeat public convenience , justify
wrong , protect fraud , or defend crime.
 where corporation is a mere alter
ego or business conduit of a persons
 where a 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
*legal fiction of a separate corporate
personality, for reasons of public policy and in the
interest of justice , will be justifiably set aside.
2.1.2.1 Fraud Piercing
Fraud –there is a fraud if there is a
deception that would lead an ordinarily
prudent man into error after taking the
circumstances into account.
CASES:
a.) Concept Builders , Inc. vs. NLRC , 257
SCRA 149, May 29,1996
b.) Enriquez Security Services Inc. vs.
Cabotaje , G.R. No. 147993, July
21,2006
Security guard used to work for a
dissolved corporation . After
dissolution , the guard was
transferred to a new corporation .
when the guard retires , the time
that he worked for the dissolved
corp. was not included in the length
of service which will be used for the
purpose of determining his
retirement pay .
RULING: The attempt because to
make the 2 security agencies as
separate entities, when in reality
they were one , was a devise to
defeat the law. The veil of corporate
fiction was disregarded because the
same was used to perpetrate
injustice or as a vehicle to evade
obligations.
2.1.2.2 Alter ego piercing
NOTES:Piercing the veil of corporate
fiction is justified under the Alter Ego
Doctrine if there is such unity of interest
and ownership that the separate
personalities of the corporation and the
individual no longer exist. The interest of
equity will be served if the separate
personality of the corporation will be
disregarded.
Thus, when the 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.
CASES:
a.) Heirs of Pajarillo vs. CA, GR Nos.
150056-57, October 19,2007
Alter Ego doctrine was applied to
make the controlling shareholder who
is also operations manager and the
 corporation itself liable for the
obligations of a sole proprietorship.
The sole proprietorship was
transformed into a corporation and
the franchise was transferred to the
corporation. The corporation was
established after the sole
Proprietorship was charged by the
union with unfair labor practice, illegal
deductions , illegal dismissal an
violation of labor standard laws.
It was established that sole
corporation was a mere continuation
and successor of the sole
proprietorship. the sole proprietorship
was transformed into a family
corporation in a surreptitious attempt
to evade the charges of the union.
b.) Tomas Lao Construction vs. NLRC ,
G.R.No. 116781, September 5,1997
The High Court ruled that where it appears
that the businesses of three corporations
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 the three corporations are distinct
entities and treat them as identical. It was
established that the three corporations
were in fact substantially owned and
controlled by the members of one family;
that the directors also belong to the same
family; the corporations were engaged in
the same line of business; there was only
one management; the corporations use the
same manpower services; and the
corporations use the same equipment
c.) General Credit Corporation vs. Alsons
Development , 513 SCRA 225, January
29,2007
The Alter Ego doctrine was applied
because of the presence of numerous
circumstances that support the conclusion
that the corporation was an adjunct of the
subsidiary corporation.
Thus, there was commonality of directors,
officers and stockholders; there was
sharing of office; there were financing and
management arrangement between the
two companies allowing a corporate
officer of the first corporation to handle
the other; there was virtual domination if
not control wielded by the same officer
over the finances, and business policies
and practices of the subsidiary.
RULING: it behooves the corporation
officer "as a matter of law and equity, to
assume the legitimate financial obligation
of a cash strapped subsidiary corporation
which it virtually controlled to such a
degree that the latter became its
instrument or agent
2.1.1.3 Equity Piercing
Piercing the corporate fiction is necessary to
attain justice and equity
CASE: Telephone Engineering &
Service Co. Inc vs. WCC, 104 SCRA 354 (1981)
2.1.1.4 Other Cases
a.) Francisco Motors vs. CA, 309 SCRA 72,
June 5,1999
The SC likewise rued that there was no
reason to pierce the veil of corporate
fiction because there was no evidence
that the corporation was perpetuating
fraud or promoting.
The rationale behind piercing
corporation’s identity in a given case is
to remove the barrier between the
corporation from the persons
comprising it to thwart the fraudulent
and illegal schemes of those who use
the corporate personality as a shield
for undertaking certain proscribed
activities.
b.) Sarona vs. NLRC, et al., G.R. No.
185280 January 18,2012

c.) Wensha Spa Center , Inc. vs. Yung ,
G.R. No. 185122, August 16,2010
d.) Hi- Cement & Holdings Corp. vs.
Insular Bank of Asia and America, G.R.
No. 132403
e.) Enriquez Security Services Inc.vs.
Cabotaje , G.R. No. 147993, July
21,2006
2.2 Created by Operation of Law
2.2.1 Created by Special law
Sec. 4- Corporations created by special
laws or charters. – Corporations created
by special laws or charters shall be
governed primarily by the provisions of
the special law or charter creating them
or applicable to them, supplemented by
the provisions of this Codes insofar as
they are applicable.
2.2.2. Created under a general law
Sec. 16 , Art.XII of the 1987 Constitution
2.3 Right of Succession
NOTES: Among the most important are
immortality, and, if the expression may be
allowed, individuality; properties by which a
perpetual succession of persons are considered
the same, and may act as a single individual.
They enable a corporation to manage its own
affairs, and to hold property without the
perplexing intricacies, the hazardous and
endless necessity, of perpetual conveyances for
the purpose of transmitting it from hand to
hand.
It is chiefly for the purpose of clothing bodies of
men in succession with these qualities and
capacities that corporations were invented, and
are in use.
By these means, a perpetual sucession of
individuals are capable of acting for the
promotion of the particular object, like one
immortal being. Hence, one of the distinctive
features of a corporation is the right of
succession which is also known as perpetual
succession.
*Perpetual succession -continuous existence
which enables a corporation to
manage its affairs, and hold property
without the necessity of perpetual
conveyances, for purposes of transmitting
it. By reason of this quality, this ideal and
artificial person remains, in its legal entity
and personality, the same, though
frequent changes may be made of its
members.
-
CASE: SME Bank Inc. vs. De Guzman , G.R. Nos.
184517 AND 186641 , October 8, 2013
2.4. Possess powers , attributes and properties
2.4.1. Theory of special capacities
The fourth attribute of the corporation that
it has the powers, attributes expressly
authorized by law or incident to its existence is
recognition of what is known as the Theory of
Special Capacities. The powers of the
corporation are given by law and it cannot
exercise powers that are not so given. In fine,
the powers of the corporation are only those
that are expressly provided for, implied
powers, and incidental powers.
The Theory of Special Capacities should be
distinguished from the Theory of General
Capacities under which a corporation may
exercise any and all powers that may be
exercised by natural persons.
2.4.2. Theory of general capacities