COMMERCIAL LAW CORPORATIONS ‘THE REVISED CORPORATION CODE (RA. No, 11232) RA No, 11232 otherwise known as the Revised Corporation Code of the Philippines took effect on February 23, 2019, upon completion of its publication in the Manila Bulletin and the Business Mirror on Saturday, February 23, 2019. Salient changes 1. The Revised Corporation Code (RCC) removed the minimum number of -incorporators required to organize 2 corporation unlike BP 68 which mandated that the numbers of incorporators should not be less than 5. 2. The RCC allowed the formation of one-person corporation, a corporation with a single Stockholder and without a minimum authorized capttal stock required (See. 10, RCC) 2. A corporation shall now have perpetual existence unless otherwise stated in theit articles of incorporation, Existing corporations with certificates of incorporation issued prior to the effecivity of the RCC shall also have perpetual existence, unless its. stockholders Tepresenting a majonty of its outstanding capital stock choose otherwise. Corporations whose terms have expired may also apply for a revival of ts corporate existence (Se. 11, RCC) 4, The RCC has allowed the use of remote communication such as videoconferencing and teleconferencing during stockholder meetings. Stockdolder may also participate and vote In absentia, 5. Corporate name has tobe distinguishable from a corporate name already reserved ot registered for the use of another corporation, or not yet protected by law, or is not contrary to existing law, rules and regulations. (Seq. 17, Reg) 6. An emergency board may be constituted when a vacancy prevents the remaining directors from constituting a quorum and an emergency action is required to prevent grave, substantia, and irreparable less or damage to the corporation. (Sec. 28, RCC) 7 ‘The RCC allows electronic monitoring systems. filing and 8. Minimum subscription and minimum paid-up capital no longer required except as othervrise provided by special law. 9. Domestic corporations may now donate to political parties and candidates for purposes of partisan political activity. (Sec. 35, RCC) 10. An arbitration agreement may be provided in the articles of incorporation or in the bylaws. (Sec. 181, RCC) PEON A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressiv authorized by law or i 2, RCC) jent to its existence. (Sec Tn 1. Itisan Artificial being 2. Itis created by operation of Law 3, Itenjoys theright of Succession 4. It has the Powers, Attributes, and Properties expressly authorized by law or In existence. Artificial Personality A corporation is a legal or Juridical person with a persorality separate and distict from its individual stockholders or members and from any other legal entity into which it may be connected o related, 2,_Corporation_as_a Creation of Law or By Operation of Law No corporation can exist without the consent or grant of the sovereign, and that the power to create corporations is one of the attributes of sovereignty. Corporations cannot come Into existence by mere agreement of the parties. (De Leon, 2010) GR: A legislative grant or authority is required for the creation of a corporation, either by a special incorporation law or charter or by means of general corporation law. XPN: For corporations by prescription, such authority is not necessary. (DeLeon, 2010) NOTE: A corporation by prescription Is one which hhas exercised powers for an indefinite pe Without interference on the part of the sovereign | University oF Santo Tomas 2021 GOLDEN NOTES 129BUSINESS ORGANIZATIONS power and which by fiction of law, is given the status of a corporation. (DeLeon, 2010) ‘The creation of a corporation is by operation of law NOTE: The Philippine jurisprudence adopted the Concession or fiat theory, which states that a corporation is conceived as an artificial person ‘owing existence through creation by a foreign power. Further, a corporation is without any existence until it has received the imprimatur of the State acting according to law, through the SEC. (Tayag v. Benguet Consolidated, Inc, GR. No. L- 23145, November 29, 1968) : Since February 8, 1935, the legislature has not passed even a single law creating a private corporation. What provision of the constitution precludes the passage of such law? (2008 BAR) A: Article XI, Section 16 of the 1987 Constitution provides that Congress shall nat, except by general law, provide for the formation, organization, oF regulation of private corporations. Government- ‘owned and controlled corporations may be created co established by special charters in the interest of the common good and subject to the test of economic viability. Private corporations owned or controlled by the government can only be created by special law often referred toas “Charters”, QA corporation was created by a special law. Later, the law creating it was declared invalid. ‘May such corporation claim to be a de facto corporation? ‘A: NO. A private corporation may be created only under the Corporation Code. Only public corporations may be created under a special law. Where a private corporation Is created under a special law, there is no attempt at a valid incorporation and it cannot claim a de acto status. QA Special Audit Team from COA audited the accounts of Leyte Metropolitan Water District (LMWD). Subsequently, LMWD and received a request for payment of auditing fees from COA. LMWD GM Feliciano sent a reply informing COA that the water district could not pay the auditing fees, citing as basis for his action Presidential Decree 198 (PD 198) as well as Republic Act No. 6758 (RA 6758), Thereafter, Feliciano asked COA for a refund of all auditing fees LMWD previously paid to COA. The COA Chairman denied LMWD's request. Feliciano maintains that LWDs are not GOCCs with original charters. He argues that LWDs are private corporations, and thus not subject to CoA's jurisdiction. Is a Local Water District, created under PD 198, as amended, a GOCC subject to the audit jurisdiction of COA? A: YES. LWDs are GOCCe subject to the audit Jurisdiction of COA The Constitution and existing lawsmandate COA to audit all government agencies, including GOCCs with original charters.An LWD is a GOCC with an original charter. The Constitution recognizes two classes of corporations. The first refers to _ private corporations created under a general law. The second refers to GOCCs created by special charters. Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional Private corporations may exist only under a general law. The Constitution authorizes Congress to create GOCCs through special charters.Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Obviously, LWDs are not private corporations because they are not created under the Corporation Code. (Engr: Ranuljo C Feliciano v. COA, et al, GR. No. 147402, January 14,2004) Q: In Liban, et al. v. Gordon (July 15, 2009) the Court held that Richard Gordon did not forfeit his seat in the Senate when he accepted the chairmanship of the Philippine National Red Cross Board of Governors, as the office of the PNRC Chairman is neither a government office nor an office in a governmentowned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution. However, the decision declared vold the PNRC Charter as it creates the PNRC as a private corporation and ruled that the PNRC should incorporate under the Corporation Code and register with the SEC if it wants to be a private corporation. Is PNRC a private corporation? A: NO. Although the PNRC was created by a special charter, it cannot be considered as a GOCC in absence of the essential elements of ownership and control by the government. It docs not have government assets and does not receive any appropriation from the Philippine Congress. It is a non-profit, danor-funded, voluntary organization, whose mission is to bring timely, effective and 130 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW compassionate humanitarian assistance for the most vulnerable without consideration of nationality, race, religion, gender, social status or political affiliation. This does not mean however that the charter of PNRC is unconstitutional, PNRC is sui generis. Although it is neither a subdivision, agency or instrumentality of the government nor a GOCC or a subsidiary thereof, so much so that Gordon was correctly allowed to hold his position as Chairman thereof concurrently while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a private corporation within the contemplation of the provision of the Constitution that must be organized under the Corporation Code. The PNRC enjoysa special status aan important ally and auxiliary of the government in the humanitarian field in accordance with its commitments under international law. (Liban, et al. v. Gordon, GR. No. 175352, January 18, 2011, in Divina, 2014) Q: Pursuant to £0 No. 123, the Ministry of National Defense and the Philippine Tourism Authority executed a MOA for the development of Corregidor. The Philippine Tourism Authority Board of Directors adopted a Resolution, approving the creation of a foundation for the development of Corregidor. ‘The Corregidor Foundation, Inc. was, incorporated. The COA issued Audit Observation Memorandum noting that certain personnels of the Philippine Tourism Authority who were concurrently rendering services in Corregidor Foundation, Inc. received honoraria and cash gifts, The Legal and Adjudication Office-Corporate of the COA issued Notice of Disallowance, disallowing in audit the honoraria and cach gift paid to said personnels. ‘The personnels argues that Corregidor Foundation, Inc. is a private corporation created under the Corporation Code and, therefore, cannot be audited by the Commission on Audit Is Corregidor Foundation, Inc. a government owned or controlled " corporation under the audit jurisdiction of the COA? A: YES. The Corregidor Foundation, Inc. is a government-owned or controlled corporation lunder the audit jurisdiction of the Commission on Audit. Corregidor Foundation, Inc. was organized as a non-stock corporation under the Corporation Cade, It was issued a certificate of registration by the SEC on October 28, 1987 and, according to its Articles of Incorporation, Corregidor Foundation, Ine. was organized and to be operated in the public interest. Corregidor Foundation, Inc. was organized primarily to maintain and preserve the war relies in Corregidor and develop the area's potential as an international and local tourist destination, Corregidor Foundation, Inc's purposes as stated its AOI are related to the promotion and development of tourism in the country, a dedared state policy and, therefore, a function public in character. Even a cursory reading of the statutory definitions of "government owned-or controlled corporation” readily reveals that a non-stock corporation may be governmentowned or controlled. Further, there is nothing in the law. Which provides that governmentowned or controlled corporations are always created under inal charter or special law. (Oriondo v. COA, GR No. 211293, June 4 2019, J. Leonen) Q: Dennis A.B. Funa requested the COA for a copy of the latest financial and audit report of the Manila Economic and Cultural Office (MECO). The MECO was organized as a non- Stock, non-profit corporation under the Corporation Code, in view of the desire of the Philippines and Taiwan to maintain an unofficial relationship in Meu of official diplomatic ties severed by the One-China policy. Upon receipt of COA’s reply that it does not audit MECO, Funa filed a petition for ‘mandamus to compel COA to audit MECO as the latter was a GOCC as it performs functions relating to public needs and is controlled by the government through the appointment of its board of directors, Is Funa correct? A: NO. The MECO is not owned or controlled by the government, hence it is not a GOCC or a government instrumentality. GOCCS are "stock or non-stack” corporations "vested with functions clating to public needs" that are "owned by the Government directly or through its instrumentalities.” By definition, three attributes thus make an entity a GOCC: a. First, its organization as stock or non-stock corporation; Seconé, the public character of its function; and c. Third, government ownership over the same. Possession of all three attributes is necessary to deem an entity a GOCC. In this case, there is not ‘much dispute that the MECO possesses the first and second attributes. It is the third attribute, which the MECO lacks. The MECO is not owned or controlled by the government. Organization as a nomstodk | University oF Santo Tomas 2021 GOLDEN NOTES 131BUSINESS ORGANIZATIONS corporation and the mere performance of functions. with a public aspect, however, are not by themselves sufficient to consider the MECO as a GOCC. In order to qualify as a GOCC, a corporation, portantly, be owned by ‘The government owns a stock or non-stock corporation if it has controlling interest in the corporation. In a stock corporation, the controlling interest of the goverment is assured by its ‘ownership of at least fifty-one percent (51%) of the corporate capital stack In a non-stock corporation, like the MECO, jurisprudence teaches that the controlling interest of the government is affirmed when ‘at least majority of the members are government officials holding such membership by appointment or designation” or there is otherwise “substantial participation of the government in the selection” of the corporation's governing board. The fact of the incorporation of the MECO under the Corporation Code is the key. The MECO was correct in postulating that, az a corporation organized under the Corporation Code, it is governed by the appropriate provisions of the said code, its articles of incorporation and its by-laws. In this case, it is the by-laws of the MECO that stipulates that its directors are elected by its ‘members; its officers are elected by its directors; and its members, other than the original Incorporators, are admitted by way of unanimous board resolution It is significant to note that none of the original incorporators of the MECO were shown to be government officals at the time of the corporation's organization. Indeed, none of the members, officers or board of directors of the MECO, from its incorporation up to the present day, were established as government appointees or public officers designated by reason of their office. ‘There Is, In fact, no law or executive order that authorizes such'an appointment or designation. Hence, from a strictly legal perspective, it appears that the presidential "desire letters" pointed out by Fura are, no matter how strong its persuasive elfectmay be, merely recommendatory. Itis a sul generis private entity especially entrusted by the government with the facilitation of unofficial relations with the people in Taiwan without jeopardizing the country’s faithful commitment to the One China policy of the PROC. However, despite its non-governmental character, the MECO handles government funds in the form of the "verification fees" it collects on behalf of the DOLE and the “consular fees" it collects under Section 2(6) of EO No. 15, s. 2001. Hence, under existing laws, the accounts of the MECO pertaining to its collection of such "verification fees" and "consular fees" should be audited by the COA. (Funa x: Menila Economic and Cultural Office and COA, GR. Na 193462, February 4, 2014) Franchise A franchise includes any special privilege or right affected with public interest, conferred by the State on corporations or persons and which docs not belong to the citizens of the country, generally as a ‘matter of common right (De Leon, 2010, citing JRS. Business Corp. v, Imperial Insurance, Inc, G.R. No. L- 19891, July 33, 1964) Kinds of franchise Primary vs. Secondary Franchise PRIMARY Practise SECONDARY FRANCHISE Special authority given to a corporation to engage in a specialized business (0g banks, Insurance companies, right to use the streets of a municipality to lay pipes of tracks, erect poles, or string wires). Certsin rights privileges conferred upon existing corporations. (RS. “Business Corp. v Imperial Insurance, supra) and The franchise or outhority to exist’ as) a corporation | The franchise to exercise powers and privileges gronted to such corporation to the business for which it was created. including those conferred for purposes of public benelit such as the power of eminent domain and other powers and privileges enjoyed by public utilities. (De Leon 2010) GR: Granted by the Corporation Code Granted by a Government Agency. or a Municipal Corporation XPN: In GOCC’s 132 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW with a speci charter, a special law grants the franchise Te may ordinarily te conveyed or mortgaged tinder a general power granted toa corporation to dispose of ts property (12. Camot be transfered | Though board resolution without the [or ene tare without the | stockholders. (Vilarey v. Congress Ferrer, GR No. 1-23893, Cees se a | October 29 1968) Aauino, 201) |e can be subject to levy and sale on execution together with corporate property. (Sundiang Sr. & ‘Aquino, 2011) 2. Right to succession A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, oF incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares of stock. (De Leon, 2010) 4, Powers, attributes and properties of a Corporation ‘The powers that a corporation can exercise are only those which are granted by the law of its creation. All powers which may be implied from those expressly provided by law and those which are incidental or essential to the corporation's existence may also be exercised (Sec. 35, RCC) TEST: Whether the act of the corporation is in direct and immediate furtherance of its business, fairly incidental to the express powers and rearonably necessary to their exercise, ‘The power to institute _ expropriation proceedings is not granted toall corporations Only quasi-public corporations or those affected with public interest are given the power to institute condemnation proceeding: against, owners of private property. To grant the right of eminent domain to purely private entities exercising functions, which are not public in nature, would be using the right to take property for private use. (De Leon, 2010, citing SEC Opinion, October 28, 1968) Rule_on_whether_a_defective incorporation resultintoa partnership The answer depends on whether or not there is a clear intent to participate in the management ofthe. business affairs on the part of the investor. Parties who Intend to participate or has actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto partnership. On the other hand, parties who took no part notwithstanding their subscriptions do not become partners with other subscribers. (Pioneer Insurance vs. CA, GR. No. 84197, July 28, 1999) Engagement into a contract of partnership or a joint venture GR: Corporations have no power to enter into partnership. XPN: The SEC allowed corporations to enter into partnerships with other corporations and duals provided: (ENLIT) The authority to enter into partnership relation is expressly conferred by the Charter orthe Articles of Incorporation (AOI) The mature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or the AOL. (SEC Opinions, Feb. 29, 1980, December 1, 1993, and February 23, 1994) 3. The partnership must be a Limited partnership and the corporation must bea limited partner. 4. If itis a foreign corporation, it must obtain a license to transact business in the country. Q:May a corporation enter into a joint venture? (1996 BAR) A: YES. A corporation may enter into a joint venture with another where the nature is in line with the business authorized by its charter. (Tuason v. Bolaios, GR. L-4935, May 28, 1954) However, in as much as the term “joint venture” hhas no precise legal definition, it may take various forms. It could take the form of a simple poling of resources (not involving incorporation) between two or more corporations for a specific project, purpose or undertaking, or for a limited time. It may involve the creation of a more formal structure, and, hence, the formation of a | University oF Santo Tomas 2021 GOLDEN NOTES 133BUSINESS ORGANIZATIONS corporation, What is prohibited by law ts the | [JuGaITS] meeting of ] commences Creation of partnership between corporations but | | persemalty | minds" of the | from the date of notthe creation ofoint verre tnd term| partners | issuance of the o Certeate of Advantages ux. Disadvantages of Comaration fctetonce | The term of 2 | Incorporation parnership | by the ADVANTAG DISADVANTAGES) may be | Secures and Mare compllated in established. for | Exchange The capacty toad asa | formation and ny period of | Commission egal uni management time stipulated | (SEC). Timation of oF by the partners tramption "from | Highorcostof formation taity ot | and operation Hes_perpetal shareholders entstence, Taek af personal tless its Continuity of Existence | cement articles of Transferability of | Greater government Incorporation shares control and regulation provides Management ‘and otherwise. Centralized oy eon are separne aay pon ‘s from ownership Partnership, Standardized method | Stockholders have little association, or of organization and | voice in the conduct of Number of | May be | corporation, fase anes Incorporate | organized by at | singly or Jolatly ars feast persons | wth others but Joint Account vs, Partnership not more than 1 ENT Has no firm name and GR: May Mw. is conducted in the exercise any | May oxercie name of the ostensible | #352 irmnsme. power only such ree Iithoried ty | powers as may pane aa thepartners. | be ranted. by personality and can sue | HS Juridical tw and ite br be sued only in the [Bersezality and may Powers | xpu: Aas | articles of tame of the ortensible | SUC OF be sued under which are | incorroration, ame 9 itstrm name Contrary ta law, | imped Has no common fund. | Hasa common fund, morals, good | therefrom or customs, public | incidental The ostensltle partner [Al general parines manages its business |have the right of order public | thereto. vida ulation may GR. Power Liquidation thereof can | Laaeieanen my DY do business and only be done ty the [25reement. be manage its omenble partner | ettusted to 2 par aie i voted When inthe Board of Corporation vs. Partnership management is | Directors (BOD) not agreed |Z Board of EN || emg | nn, “Every | Pater OD my omet oy porter teat | oe mere operation of agent ofthe [XPM and agreement of | law and partnership Committee the partes and | govemed bythe fgoverning om |e (See 3, gov orcrnedby the | Corporation Se Ciutcode” | Code 2 WO ne Cammence| From the | Exitonce ofthe Manageme fant of| moment of | corporation UNIVERSITY OF SANTO TOMAS 134 Pacutty oF Civit LawCOMMERCIAL LAW Ge @, Rec) 3. The AOL of a close corporation may provide that the business of the corporation shall be Shareholde | interest in the | transfor his F’sinterest | partnership | shares without without the | prior consent of consent of all |the other the other | stockholders existing unless the right partners, offirst refusal is, ‘embodied in the articles of, incorporation. Nay be dissolved any | Can only be time by the will | dissolved with (of any or all of | the consent of stockholder thepartners. | the State s of the corporation Dissolution | yee, vit | Death or rather than interdiction and | insolvency of by a board insolvency of a | shareholders of directors. partner cannot dissolve Ge. 96, dissolve the | the corporation. RCC) partnership, “The suit against a member of the BOD or BOT who CLASSES OF CORPORATIONS ‘mismanages A partner as | must be ee suck brought in th Per anagl | such can sue a | brought in the toparmer whe | mame of the ement rmismanages. | corporation: this is commonly imown a8 vatve GR Partners are lable personally and | eocidolders subsidiary Extent of | (sometimes | 8, Hable only Tebity to | Stary) for | 1 th ete of turd | barership | subscribed by eens ® raid or not XPN: Limited partner No right of fie a Right — of |" ogy 2 | Has night of Succession | P2tership | srccession dissolves “upon death of a partnes) Transferab | Partner cannot | Stockholder has tty of | ranster nis | te right _to The following are the classes of corporation: 1 represented by shares of stock or not: a. Stock -onewhich has: i. 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 hares held. (See. 3, RCC) b. Nan-Stock ~ is one which does not issue shares and is - created not for profit but for public good and welfare and where no part of its income is distributable as dividends to its members, trustees, oF officers (Sec. 86 RCC) As to the number of persons who compose them: a. One Person Corporation = corporation consisting of a single stockholder: Provided, That only a natural person, trust, or estate may | Usivensiry oF Sanro Tomas 2021 GOLDEN NOTES 135BUSINESS ORGANIZATIONS form a One Person Corporation. (Sec 116 RCC) b. Corporation aggregate - corporation consisting of more than fone member or corporator. The ROC requires that these corporations must be formed jointly with others. (Sec. 10, ) Corporation Sole ~ Religious corporation which consists of one member which is the head of the religious sect or corporator only and his successor, (Sec. 108, RCC) 3. As_to whether they are for religious [purpose or not: a. Ecclestastical Corporation organized for religious purpose. b. Lay Corporation - one organized for 2 purpose other than for religion. 4 As to whether they are for charitable ‘purpose ornot: a Eleemosynary - one established for charitable purposes. b. Givil - one established for business or profit. 5. As to state or country under or by whose laws they have been created: a. Domestie - incorporated and organized under the laws of the Philippines. b. Foreign - formed, otganized, 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. (Sec. 140, RCC) 6. As to their legal right to corporate existence: a. De jure - existing both in fact and in aw. b. De facto law. existing in fact but not in 7. Astowhether they are open to the publicor not a, Close - limited to selected persons or members of the family. (See 95-104, RCC) b. Open - open to any person who may wish to become a stockholder or member thereto, 8. Asto their relation to another corporation: 4. Parent or Holding - rclated to another corporation that it has the power er, directly or indirectly to, elect the majority of the director of such other corporation, b. Subsidiary - so related to another corporation that the majority of its directors can be elected either, directly or indirectly, by such other comporation 9. As to whether they are corporations in a tue sense or onlyin alimited sense: a. True- exists by statutory authority >. Quast exist without formal legislative grant: i. Corporation by prescription - has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law, is given the status of a corporation; li, Corporation by estoppel - in reality is not a corporation, elther de jure or de facto, hecause it is so defectively formed, but is considered a corporation in relation to those only who, by reason of theirs acts or admissions, are prechided from asserting that it is not a corporation. (Sec: 20, RCC) 10. As to whether they are for public (government) or private purpose: (2001, 2004 BAR) Public - formed or organized for the government of a portion of the State (like cities and municipalities) for the purpose of serving the general good and welfare. (Aquino, 2014) b. Private - one formed for some private purpose, benefit or end. It may either bea stock or non-stock. (Aquino, 2014) is impressed terest does not, by that creumstance alone, make the entity a public corporation, 136 VERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW inasmuch as a corporation may be private although its charter contains provisions of a public character, incorporated solely for the public good. ‘This class of corporations may be considered quasi-public corporations, which are private corporations that render public service, supply public wants, or pursue other eleemosynary objectives. While purposely organized for the gain fo benefit of its members, they are required by law to discharge functions for the public benefit. Examples of these corporations are utility, railroad, warehouse, telegraph, telephone, water supply corporations and transportation companies. It ‘must be stressed that a quasi-public corporation Is, a species of private corporations, but the ‘qualifying factor is the type of service the former renders to the public: if it performs a public service, then it becomes a quasi-public corporation. (Philippine Society for the Prevention of Cruelty to Animals v. COA, GR No. 169752, September 25, 2007) Requisites for the formation of a_stack ‘corporation For a stock corporation to exist, two requisites ‘must be complied with, to wit: 1. Acapital stock divided into shares and 2. An authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held. Gee. 3, RCC; CIR v. Club Filipino, Inc. de Cebu, GR.No.L-12719, May 31, 1962) A de facto corporation is one which actually exists for all practical purposes as a corporation but ‘which has no legal right to corporate existence as, against the State. (8 Fletcher, pp. 62-63) Requisites of a de facto corporation (LAP) 1. Organized under a valid Law. 2. Colorable Compliance ~ Bona fide Attempt in good faith to form a corporation according to the requirements of the law. NOTE: Issuance of Certificate of Incorporation by SEC is a minimum requirement for the formation of the corporation in good faith (undiang Sr. & Aquino, 2009) 3. Actual User - Use of corporate Bowers; The corporation must have performed the acts which are peculiar to a corporation like entering into a subscription agreement, adopting by-laws, and electing directors Defects resulting _in_creation of de facto corporation: (IM-CRAPS) Articles of incorporation fails to state all the matters required by the Code to be stated, or state some of them Incorrectl Sec. 12 of the RCC does not require Minimum capital stock, except when specifically provided by special law 3, Name ofthe Corporation is not distinguishable from a name already reserved or registered for the use of another corporation or already protected by law or contrary to law, rules and regulations; 4, Incorporators or a certain number of them are rot Residents of the Philippines; 5. Adnowledgment of the of Incorporation or certificate of incorporation is insulficient or defective in form, or it was acknowledged before the wrong officer, 6. Bercentage of Filipino ownership of the capital stock required for the business is less than that prescribed by law; or 7. Failure to Submit by-laws on time. articles Defects prectuding creation of corporation 1. Absence of articles of incorporation; 2. Fallure to file articles of Incorporation with SEC; 3. Lack of certificate of incorporation from SEC. NOTE: In this case, neither a de jure nor a de facto corporation is created. Q: University Publishing Company (UPC), through its president, entered into a contract, with Albert to publish the commentaries on the Revised Penal Code. UPC published the commentaries but it did not remit the amount due to Albert. This prompted Albert to file a collection suit. The RTC ruled against UPC. When the Sheriff was about to implement the writ of execution against the company, he discovered that UPC is not a registered corporation. Consequently, the president of UPC was substituted in the writ of execution. The president invoked the separate legal personality of the corporations his defense. a. Is UPCade fucto corporation? b. Can the defense that UPC is a corporation by estoppel be invoked by the president? | University oF Santo Tomas 2021 GOLDEN NOTES 437BUSINESS ORGANIZATIONS © Who is liable for the debts of the corporation? a. NO, UPC cannot be a considered a de facto corporation because it was not registered with the SEC. NO. One who has induced another to act upon his willful misrepresentation that 2 corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel ¢. The president who negotiated with Albert is liable. A person acting or purporting to act on 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. (Albert v. University Publishing Co, G.R. No. L-19118, January 30, 1965) Liabilities of officers and directors/trustess ofa de facto corporation ‘The liabilities and penalties attending to officers and directors/ trustees of a de jure corporation shall be the same as those of a de jacto corporation. ‘This includes the liability under the criminal law. Members of a de facto corporation cannot be held liable as partners by third persons, ‘The members of a de facto corporation cannot be held liable as partners by third persons who deal with them in their supposed corporate capacity, merely oa account of a technical defect in the formation of the corporation On the other hand, where an attempt to organize a corporation fails Ly omission of some substantial step or proceeding required by the law, its ‘members or stockholders are liable as partners (De Leon, 2010). ‘The existence of a de facto corporation cannot be collaterally attacked GR: The existence of a de facto corporation shall not be inguired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in & qua warranto proceeding, (See. 19, RCC) XPN: Collateral attack ean he permitted when the lack of right or the wrong doing of the corporation isin issue because it isin violation of public policy or of express or implied statutory requirement, such as denial of its right to enforce contracts entered into without compliance with prohibitions of express or implied statutory or publie policy. Thus, the defendant may question the personality ofa foreign corporation transacting business in the Philippines to maintain a suit on the ground that i {is not duly licensed to do business In our country. (De Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 150, RCC) (De facto Corporation vs. De jure Corporation Para Da ‘One which actually exists for all practical purposes. asa corporation but which has no legal right to corporate existence as against the State. One created in strict or substantial conformity with the mandatory statutory requirements for incorporation There Is a colorable compliance with the requirements of the law creating the corporation. There Is substantial compliance with the requirements of the law creating the corporation Tis right to exist as a corporation cannot be successfully attacked or questioned by any party even indirect, proceeding that purpose by the State, (DeLeon, 2010) Can be attacked directly but not collaterally for Stockholders enjoy exemption from personal lWability for corporate obligations A corporation by estoppel has no real existence in law. Itis neither a de jure nor de facto corporation, but is a "mere fiction existing for the particular case, and vanishing where the element of estoppel isabsent’. (8 Fletcher, p. 19) Rules governing a corporation by estoppel 1. All persons who assume to actas a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, abilities and damages incurred or arising as a result, 2. When any such ostensible corporation is sued on any tansaction entered by it as a corporation or on any tort committed by it as 138 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW such, it shall not be allowed to use as a defense its lack of corporate personality. 3. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there ‘was in fact no corporation (Sec. 20, RCC) NOTE: Where there is no third person involved and the conflict arises only among those assuming the form of a corporation who know that the corporation has not been registered, there is NO corporation by estoppel. (Lozano v Santos, GR. No. 125221, June 19, 1997) Q: On behalf of Ocean Quest Fishing Corporation, Antonio Chua and Peter Yao entered into a contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with Lim Tong Lim, who however was not a Signatory to the agreement. The buyers failed to pay for the fishing nets and the floats; hence, Philippine Fishing Gear filed a collection suit against Chua, Yao and Lim Tong Lim. The suit, was brought against the three in their capacities 8 general partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation. The trial court ruled in favor of Philippine Fishing Gear and that Chua, Yao and Lim are lable as general partners. Lim contends that the doctrine of corporation by estoppel applies only to Yaoand Chua. Lim insists that only those who dealt in the name of the ostensible corporation should be held liable. Since his name does not appear on any of the contracts and since he never directly transacted with the Ocean Quest Fishing Corporation, he cannot be held liable. Is, Lim jointly liable with Chua and Yao? A: YES. Lim should be held liable jointly with Chua and Yao. Unquestionably, Lim benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership. Lim, Chua and Yao decided to form a Corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three ac contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to bbe without valid existence, are held liable as general partners, Technically, ts true that Lim did notdirectlyacton behalf = ofthe. corporation. However, having reaped the benefits ‘of the contract entered inte by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. (Lim Tong Lim v. Philippine Fishing Gear Industries, Inc, G.R. Ne. 136448, November 3, 1999) Q: Francisco Co, Jr. sued Abante Tonite, a daily tabloid of general circulation, and its publisher and staffs - claiming damages because of an allegedly libelous article they published in an issue. Macasaet, et al moved, among others, to drop Abante Tonite as a defendant by virtue of its being neither a natural nor a juridical person that could be impleaded as a party in a civilaction, ‘The RTC denied the staffs'motion, holding that, assuming “Abante Tonite” is not registered with the SEC, itis deemed a corporation by estoppel considering that It possesses attributes of a juridical person, otherwise it cannot be held liable for damages and injuries it may inflict to other persons. The CA affirmed the RTC ruling. Was the CA correct in upholding the inclusion of Abante Tonite as a party defendant despite its lack of juridical personality? A: YES. In rejecting the contention, the CA categorized Abante Tonite as a corporation by estoppel az the result of its having represented luself to the reading public as a corporation despite its not being incorporated. The non-incorporation of Abante Tonite with the SEC was of no consequence, for, otherwise, whoever of the public who would sufier any damage from the publication of articles in the pages of its tabloids would be lett without recourse. The SC cannot disagree with the CA, considering that the editorial box of the daily tabloid disclosed that although Monica Publishing Corporation had published the tabloid on a daily basis, nothing in the box indicated that Monica Publishing Corporation had owned Abante Tonite. (Macasaet, etal v. Co, G.R. No. 156759, June 5, 2013) RP Tay EL (2004 BAR) There Is no existence in law. ‘There is existence in law The dealings among the parties on a corporate basis is not required ‘The dealings among the parties on a corporate basis s required The State reserves the | Quo warrant right to question its | proceeding isnot existence through a quo | applicable | University oF Santo Tomas 2021 GOLDEN NOTES 139BUSINESS ORGANIZATIONS ‘warranto proceeding Stockholders in a de Jocto corporation are liable as a de jure ‘corporation Stockholders are liable as general partners for all debts, liabilities and damages incurred NATIONALITY OF CORPORATIONS There are different tests being applied to determine the nationality of a corporation Primarily, it is the place of incorporation test which should be applied in determining the nationality of a corporation since the Philippines adhere to the doctrine that a corporation is a creature of the state whose laws it has been created, The incorporation test is enshrined under Section 140 of the Revised Corporation Code of the Philippines which states that a foreign corporation is one formed, organized or existing under laws ‘other than those ofthe Philippines. However, while the incorporation test serves as the primary test, other tests such as the control test ‘must be used for purposes of compliance with the provisions of the Constitution and of other laws on. nationality requirements, Even if the corporation is a creature of the state, there is a need to further safeguard and regulate certain areas of investment and activities for the protection and interests of Filipinos. When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino equity ownership requirement in the corporation, then it may apply the "grandfather rule." The Grandfather Rule is a supplement to the Control Test in implementing the wisdom of the “Filipinization" provisions of the Constitution (Warra Nickel Mining and Development Corp, et al ¥. Redmont Consolidated Mines Corp, GR. No 195580, Jonuary 28, 2015) (SEC Opinion No. 16-15 = SEC) Tests_in_determinine the nationality of ‘corporations 1. Place of Incorporation test 2. Controltest 3. Grandfather rule - Nationality is attributed to the percentage of equity In the corporation used in nationalized or partly nationalized area. This test is an exception to the Control Test and was applied by the SEC in several 4. Domiciliary test - Determined by the principal place of business ofthe corporation PLA ROT In using the Place of Incorporation test, the nationality of a corporation is determined by the state of incorporation, regardless of the nationality of the stockholders. CET In determining the nationality of a corporation, the control test uses the nationality of the controlling stockholders or members ofthe corporation. A corporation organized/incorporated abroad at registered as doing business in the Philippines under the Corporation Code. of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos, may be considered a Philippine National under the Foreign Investments Act of 1991. This isthe only exception to the place of incorporation test (SEC Opinion No, 04-14, March 3, 2004; De Leon, 2010). This test was adopted by the said law as a general guideline in determining the nationality of corporations engaged in a nationalized activity. (See Opinion No. 07-20, November 20,2007) Who are considered as Philippine Nationals Under RA 7042 (Foreign Investments Act of 1991), the following are considered Philippine Nationals: 1. Corporations organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens. NOTE: RA 7042 provides that where a corporation and its non-Filipine stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both corporations must be Fi citizens. (DOUBLE 60% RULE) 2. Corporations organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos. Q: What is the nationality of a corporation organized and incorporated under the laws of a 140 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW foreign country, but owned 100% by Filipinos? (1998 BAR) ‘A: Under the control test of corporate nationality, a corporation organized and incorporated under the laws of a foreign country, but owned 100% by Filipinos is classified as a Philippine National, Where the grounds for piercing the veil of corporate entity are present, the corporation will follow the nationality of the controlling members or stockholders, since the corporation wrll then be considered as one and the same. NOTE: The fact that the religious organization has ro capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpese (f the 60% requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipines; and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens. (Register of Deeds vs. Ung Siu Si Temple, G.R. No, 1-676, May 21, 1955) NO ‘To ensure compliance with the constitutional limitation(s) of corporations engaging in nationalized activities, the nationality of a corporation must be determined by ascertaining If 60% of the investing corporation's outstanding capital stock ic owned by “Filipina citizens”, or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be observed. Reason: One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, for this Is the very essence of the Grandfather Rule. (Redmont Consolidated Mines Corp. vs. McArthur Mining Corp, SEC En Banc Case ‘No.09-09-177, March 25, 2010) Rules__governing the application of the Grandfather Rule 1. The grandfather rule should be used in determining the nationality of a corporation engaged in a partly nationalized activity. Thie applies In cases where the stocks of a corporation are owned by another corporation with foreign stockholders exceeding 40% of the capital stock of the corporation. (SEC-OGC Opinion No. 10-34, December 9, 2010) 2. The Grandfather Rule will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource corporation is not in doubt Ifthe stockholder corporation is 60% or more owned by Filipinos, all the stock held by the stockholder corporation is deemed to be held by Filipinos. (DOJ Opinion No. 19,5. 1983) 3, When there is doubt as to the actual extent of Filipino equity in the investee corporation, the SEC is not precluded from using the Grandiather Rule. (SEC-OGC Opinion No. 22-07 dated December 7, 2007) ‘The Grandfather Rule is "the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.” (Villanueva, Cesar Lapuz, Philippine Corporate Law (2001), p 54.) NOTE: To arrive at the actual Filipino ownership and contral in a corporation, both the direct and Indirect shareholdings in the corporation are determined. Q: Redmont, a mining company, sought to invalidate the Mining Production and Sharing Agreement applications of three domestic mining companies, namely: Narra, Tesoro and McArthur, on the ground that at least 60% of the capital stock of Narra, et al. are owned and controlled by MBMI, a 100% Canadian corporation; thus they were disqualified to engage in mining activities though MPSAs, which are reserved only for Filipino Citizens. Narra, et al. claimed that the issue on nationality should not be raised since they are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMDC (which owns majority shares of Narra), 40% of the shares of MMC {which owns majority shares of McArthur) and 40% of the shares of SMMC (which, in turn, owns majority shares of Tesoro), the shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool used in | University oF Santo Tomas 2021 GOLDEN NOTES aanBUSINESS ORGANIZATIONS determining the nationality of a corporation is the “control test” embodied in Sec 3 of RA 7042 or the Foreign Investments Act of 1991. ‘The controversy reached the CA, which used the grandfather rule to hold that MBMI in effect, ‘owned majority of the common stocks of Narra, et al, and thus the latter were foreign ‘corporations. a Was the CA wrong in applying the Grandfather Rule instead of the Control Test? b, Will the Grandfather Rule apply only when less than 60% of the capital stock are Filipino-owned? (2016 BAR) oe NO. Basically, there are two acknowledged tests in determining the nationality of 2 corporation: the control test’ and the grandfather rule The “control test” is still the prevailing made of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec 2, Art XII of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the cease, in the 60-40 Filipino-equity ownership in the ‘corporation, then it may apply the “grandfather rule’. b, NO. The assertion of Narra, et al. that “doubt only exists when the stockholdings are less than 60% fails to convince this Court. It would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockhaldings in 2 corporation. Tho corporations interested in circumventing our laws would clearly strive to hhave “60% Filipino Ownership” at face value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the Constitution. A corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to wito has the "beneficial ownership" and “control” of the corporation. In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary. “Doubt” refers to various indicia that the “beneficial ownership” and ‘control’ of the corporation do notin fact reside in Filipino shareholders but in foreign stakeholders, Even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation xx x. Concluding from the above-stated facts, It is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, ‘namely: MMI, SMMI and PLMDC. Going further and adding to the picture, Noticeably, the ownership of the “layered” corporations boils down to MEMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements wit practically exercising majority control over the corporations mentioned. In effect, whether looking, at the capital structure or the underlying relationships between end among the corporations, petitioners are NOT nationals and must be considered 60% or more of their capital stocks or equity interests are owned by MBMI Hence, the Court is correct in using the Grandfather Rule in determining the nationality of the petitioners. (Narra Nickel Mining and Development Corp, etal. v.Redmont Consolidated Mines Corp, G.R No, 195580, January 28, 2015) NOTE: “Corporate layering’ is admittedly allowed by the FIA; but if itis used to circumvent the Constitution and pertinent laws, then it becomes illegal 100% Filipino Owned (Zero percent (0%) foreign equity) 142 VERSITY OF SANTO TOMAS Pacutty oF Civit Law wvCOMMERCIAL LAW Code: CoFI AMMaN Co. ~ MiSe- USS2.5M_ 1. Cooperatives (Art. 26, Ch Il, RA. 5938) 2. Manufacture of Firecrackers and other pyrotechnic devices (See 5 RA 7183) 3. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and Anti-personnel mine: (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines) 4. Mass media except recording 5. Utilization of MArine resources (Sec. 2, Art. 21, Constitution) 6. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (See. 8, Art II, Constitution) COckpits (Sec 5 PD. 449) Small-scale Mining (Sec. 3, RA. 7076) Private SEcurity agencies (Sec: 4, RA. 5487) 0, Reiall trade enterprises with pald-up capital of less than USS2.5 M (Sec. 5, RA.8762) £80 % Filipino Owned (Up to ewenty percent (2096) foreign equity) Code: Pre 1. Brivate Radio Gommunications network (RA. 3846) 75 % Filipino Owne (Upto twenty percent (25%) foreign equity) Code: LORD F 1. Contracts for the construction and repair of ‘Lcally-funded public works (Sec. 1, CA 541, 101630) except: a) infrastructure/development covered in RA.7716; and b) projects which are foreign funded or assisted and required to undergo international competitive bidding (Sec. 2[a}, RA. 7718) projects 2. Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442) 3 Contracts for the construction of Defense- related structures; Sec 1, CA 541) 4. Under the Biag Law, in the purchase of articles for the Government, preference shall be given to materials and supplies produced, made, or manufactured in the Philippines, and to domestic entities. Domestic entities means any citizen of the Philippines or commerdal company at least 75% of the capital of which is owned hy citizens af the Philippines (Sec. 1, CA 138) 70% Filipino Owned (Up to twenty percent (30%) foreign equity) Code: AdPawn 1. Advertising (See. 11(2), Art XVI, Constitution) 2. Corporations engaged in pawmshop business (See. 8, P.D.114) 60% Filipino Owned (Up to twenty percent (40%) foreign equity) Code: Go LEARN CUPIDCo 1. Contracts for the supply of materials, goods and commodities to. GOCC, agency or municipal corporation (Sec. 1, RA. 5183) 2. Ownership of private Lands (See 7, Art XI, Constitution; Sec. 22, Ch 5, CA 141; Sec. 4, RA. 9182) 3. Ownership/establishment and administrat of Educational institutions (Sec 4, Art XIV, Constitution) 4, Adjustment Companies (Sec. 323, PD. 613) 5. Culture, praduction, milling processing trading excepting retailing, of rice and com and acquiring by barter, purchase or otherwise, Rice and corn and the by-products thereof (Sec. 5, P.D. 194) 6. Exploration, development and utilization of [Natural resources (See. 2, Art. I, Constitution) 7. Ownership of Condominium units where the common areas in the condominium project are co-owned by the owners of the separate unlts or owned by a corporation (Sec. 5, R.A. 4726) Operation and management of public Utilities, (Sec. 11, Are. I, Constitution; Sec. 16,CA 146) 9. Broject Proponent and Facility Operator of a BOT project requiring a public utilities franchise (Sec. 11, Art XIl, Constitution; Sec. 2a, RA 7718) 10. Manufacture, repair, storage and/or distribution of products/ Ingredients requiring PNP clearance (R.A. 7042 az amended by RA. 8179) Operation of Deep sea commercial fishing vessel (Sec.27, RA. 8550) 12. Corporations engaged in Caastwise shipping. (Sec. 806, PD. 1464) a 40% Filipino Owned (Up to twenty percent (60%) foreign equity) Code: FI [SEC] 1. Financing companies regulated by the SEC (Sec. 6, RA. 5980, asamended by RA. 8556) 2. Investment houses regulated by the SEC (Sec 5,P.D. 129, asamended by RA. 8366) | University oF Santo Tomas 2021 GOLDEN NOTES 143.BUSINESS ORGANIZATIONS Q: Bell Philippines, Inc. (BellPhil.) is a public utility company, duly incorporated and registered with the SEC. Its authorized capital stock consists of voting common shares and non-voting preferred shares, with equal par values of P100.00/share. Currently, the issued and outstanding capital stock of BellPhil consists only of common shares shared between Bayani Cruz, a Filipino with 60% of the issued common shares, and Bernard Fleet, a Ganadian, with 40%. To secure additional ‘working fund, RellPhil issued preferred shares to Bernard Fleet equivalent to the currently outstanding common shares. A suit was filed questioning the corporation action on the ground that the foreign equity holdings in the ‘company would now exceed 40% foreign equity limit allowed under the Constitution for public utilities. Rule on the legality of Bernard Fleet's, current holdings. (2013 BAR) ‘A: The holding of Bernard Fleet equivalent to the ‘outstanding common shares is illegal. His holdings of preferred shares could not exceed 40% Since the constitutional requirement of 60% Filipino ‘ownership of the capital of public utlities applies rnot only to voting control but also to beneficial ‘ownership of the corporation, it should alse apply to the preferred shares. Preferred shares are also entitled to vote in certain corporate matters. The state shall develop a self-reliant and independent national economy effectively controlled by Filipinos The effective control here should be mirrored across the board on all kinds of shares. (Gamivoa ¥. Teves, GR. No, 176579, June 28, 2011; 1987 Constitution, Art Il, See. 19) CORPORATE JURIDICAL PERSONALITY ‘The doctrine of corporate juridical personality States that a corporation is a juridical entity with legal personality separate and distinct trom these acting for and in its bekalf and, in general, from the people comprising It. (Francisco v. Mallen Jr. GR. ‘No. 173169, September 22, 2010) @ PRICE RICHARDSON CORPORATION'S employee, Michelle S. Avelino, executed a sworn affidavit at the NBI's Interpol Division, alleging that Price Richardson was “engaged in boller room operations, wherein the company sells non-existent stocks to investors using high pressure sales tactics.” The SEC filed before the DOJ its complaint against, among with its Incorporators and directors, Price Richardson, for violation of Article 315(4)(b) of the Revised Penal Code and Sections 26.3and 28 of the Securities Regulation Code. VELARDE-ALBERT was its Director for Operations and RESNICK was its Associated Person. Can Velarde-Albert and Resnick be indicted for violations of the Securities Regulation Code and the Revised Penal Code? ‘A: NO. Velarde-Albert and Resnick cannot be indicted for viclations of the Securities Regulation Code and the Revised Penal Code. Petitioner failed to allege the specific acts of respandents Velarde- Albert and Resnick that could be interpreted as participation in the alleged violations. There was also no showing, based on the complaints, that they were deemed responsible for Price Richardson's violations. To he held criminally liable for the acts of a corporation, there must be a showing that ite officers, directors, and shareholders actively participated in or had the power to prevent the wrongful act. A corporation's personality is separate and distinct from its officers, directors, and shareholders. To be held criminally liable for the acts of a corporation, there must be a showing that its officers, directors, and shareholders actively participated in or had the power to prevent the wrongful act. (SEC v. Price Richardson Corp, CR No. 197032, July 26, 2017, J. Leonen) Q: The Olongapo City filed a complaint for sum of money and damages against Olongapo City Water District (OCWD). It alleged that OCWD failed to pay its electricity bills to Olongape City and remit its payment under the contract to Pay, pursuant to OCWD's acquisition of Olongapo City’s water system. In the interim, OCWD entered into a Joint Venture Agreement with SBMA, Biwater and DMCL Pursuant to this agreement, Subic Water ~ a new corporate entity ~ was incorporated, with the following equity participation from its shareholders: SEMA 19.99% or 20%; OCWD 9.99% or 10%; Biwater 29.99% or 30%; and DMCI 39.99% or 40%. Subic Water was granted the franchise to operate and to carry on the business of providing water and sewerage services in the Subic Bay Free Port Zone, as well as in Olongapo City. Hence, Subic Water took over OCWD’s water operations in Olongapo City. To finally settle their money claims against each other, Olongapo City and OCWD entered into a compromise agreement. 4a UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW To enforce the compromise agreement, Olongape City filed a motion for the issuance of a writ of execution with the RTC OCWD's former counsel filed a manifestation alleging that OCWD had already been dissolved and that Subic Water is now the former OCWD. Because Of this assertion, Subic Water also filed a ‘manifestation informing the RTC that as borne ‘out by the articles of incorporation and general Information sheet of Subic Water, OCWD Is not Subic Water. The manifestation also indicated that OCWD was only a ten percent (10%) shareholder of Subic Water; and that its 10% share was already in the process of being transferred to Olongapo City pursuant to a Deed of Assignment. Can Subic Water be made liable under the writ, of execution issued by RTC in favor of Olongapo City? A: NO. OCWD and Subic Water are two separate and different entities. Subic Water clearly demonstrated that it was a separate corporate entity from OCWD. OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere shareholder, OCWD's juridical personality cannot be equated nor confused with that of Subic Water. Itis basic in Corporation Law that a corporation is a juridical entity vested with a legal personality separate and distinct from thoze acting for and in ts bebal and, in general, from the people comprising it. Under this corporate reality, Subic Water cannot be held liable for OCWD's corporate obligations in the same manner that OCWD cannot be held liable for the obligations incurred by Subic Water as a separate entity. (Olongapo City v. Subic Water and Sewerage Co, Inc, GR No. 171626, August 6, 2014) Q: Puyat granted a loan to NS International, Inc. (NSD). The Ioan was made pursuant to the ‘Memorandum of Agreement and Promissory Note between Puyat and NSI, represented by Nucclo. Itwas agreed that Puyat would extend a credit line with a limit of P500,000.00 to NSI, to be paid within 30 days from the time of the signing of the document. The loan carried an interest rate of 17% per annum, or at an adjusted rate of 25% per annum if payment is, beyond the stipulated period. NSI and Nuccio received a total amount of P300,000.00 and certain machineries intended for their business. The proposed business, however, failed to materialize. When the petitioners defaulted in the payment of the loan, Puyat filed a collection suit alleging mainly that the NSI and Nuccio still owe him the value of the ‘machineries. The RTC ordered them, jointly and severally, to pay the balance. CA also affirmed the RTC ruling that they are one and the same. Did CA commit a reversible error in affirming the RTC’s decision holding them jointly and severally Hable for the amount claimed? ‘A: YES. Piercing the veil of corporate fiction is not justified. The NSI and Nucci are not one and the same, The records of the case, however, do not show that Nuccio had control or domination over NG's finances. The mere fact that it was Nuccio who, in behalf of the corporation, signed the MOA. is not sufficient to prove that he exercised control over the corporation's finances. Neither the absence of a board resolution authorizing him to contract the loan nor NSI's failure to object thereto supports this conclusion, These may be Indicators that, among others, may point to the proof required to justify the piercing the veil of corporate fiction, but by themselves, they do not rise to the level of proof required to support the desired conclusion. It should be noted in this regard that while Nuccio was the signatory of the loan and the money was delivered to him, the proceeds of the loan were unquestionably intended for NSI's proposed business plan. That the business did not. materialize is not also sufficient proof to justify a plereing, In the absence of proof that the business plan was a fraudulent scheme geared to secure funds from the respondent for the petitioners’ undisclosed goals. NSI's lability should not attach to Nucco. (Saverio v. Puyat, GR. No 186433, November 27,2013) Q Richard owns 90% of the shares of the capital stock of GOM Co, On one occasion, GOM. represented by Richard as President and General Manager executed a contract to sell a subdivision lot in favor of Tomas. For failure of GOM to develop a subdivision, Tomas filed an action for rescission and damages against GOM_ and Richard, Will the action prosper? Explain (1996 BAR) A: The action will prosper against GOM Corporation but it shall not be the same with regard to the action against Richard. Such is the case because Richard has a separate and distinct personality from the corporation. His mere ownership of 90% of the shares ofthe capltal stock of GOM does not make him as one with the corporation. Mere ownership by a single stockholder, or by another corporation, of all or nearly all of the capital stack of a corporation is not | University oF Santo Tomas 2021 GOLDEN NOTES 145.BUSINESS ORGANIZATIONS itself a sufficient ground for disregarding the separate corporate personality. (Secoza v. Heirs of Erwin Suarez Francisco, GR. No. 160039, June 29, 2004) QA Contract of Sale was entered into between petitioner DHLFMC and respondent ASIAMED whereby the the former agreed to purchase machines from the latter for a consideration of ‘31M to be paid no later than (2) days from the date of delivery. Despite receiving the machines, DHLFMC did not pay the whole consideration which led ASIAMED in filing a complaint for sum of money with a writ of preliminary attachment against the latter demanding for the payment of the balance of the contract The CA ruled that petitioner Anthony is now estopped from raising the separate juridical personality of petitioner DHLFMC. Hence, he should be held solidarily Hable. Is petitioner Anthony estopped from invoking the separate juridical personality of the petitioner corporation as a defense from being held solidarily lable? ‘A: YES, Petitioners do not dispute that they specifically denied the allegation regarding petitioner DHLFMC’s corporate circumstances, the truth being that the petitioners never represented that petitioner DHLFMC is a corporate entity duly ‘organized and existing under and by virtue of the laws of the Republic of the Philippines. Petitioners merely insist that petitioner Anthony was not shown to have acted in bad faith, and thus, cannot be held solidarily liable with petitioner DHLFMC. However, petitioners do not point to anything on record to counter their own specific denial that would establish DHLFMC's existence as a corporation with separate Juridical personally. (Dee Hwa Liong Foundation v. ASIAMED, GR. No. 205638, August 23,2017, J. Leonen) ‘Significance_of the doctrine of separate srsonali 1. Liability for acts or contracts ~ As a general rule, the obligation of the corporation is not the liability of the stockholders, officers or directors. (1992, 1996, 2010 BAR) ‘A corporation may not, generally, be made to answer for acts or liabilities ofits stockholders for those of the legal entities to which it may be connected, and vice versa. (Cease ¥s. C4, G.R. No. 133172, October 18, 1979) NOTE: XPN to this is the reverse piercing of the corporate veil 2. Right to bring actions - may bring civil and criminal actions in its own name in the same manner as natural persons. (Art 46, New Civil Code) cannot be Invoked by the stockholders (or directors and officers) even if the latter owns substantial majority of the shares in that corporation and rights of the stockholders, directors and officers cannot be invoked by the corporation. (Stonehill vs. Diokno, GR No. L- 19550,June 19, 1967) 3. Right to acquire and possess property property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and rot that of the stockholders or members. (Art. 44[3], New Civil Code) NOTE: The interest of the stockholders over the properties are merely inchoate. (Saw vs. CA, GR Na. $0580, April 8, 1991; 1996, 2000 Bar) 4, Acquisition of jurisdiction - service of summons may be made only on the president, general manager, corporate secretary, treasurer oF in- house counsel. (Rules of Coure, Rule 14, Sec. 11) individual Changes in membership — corporation unchanged and unaffected in its identity by changes in its individual membership or ownership of its stocks, Q: As a result of perennial business losses, a corporation's net worth has been wiped out. In fact, itis now in negative territory. Nonetheless, the stockholders did not like to give up. Creditor-banks, however, do not share the confidence of the stockholders and refuse to grant more loans. a. What tools are available to stockholders to replenish capital? b, Assuming that the corporation continues to operate even with depleted capital, would the stockholders or the managers be solidarily liable for the obligations incurred by the corporations? (1999 BAR) the 146 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW a. In the case where the creditor-hanks refinsed to grant more loans to the stockholders, the stockholders can publicly sell their shares and assets. They can also demand payment from stockholders of their unpaid subscriptions where there is no due date inscribed in the subscription contract. b. No, the stockholders or managers cannot be held colidarily liable for the obligations Incurred by the corporation. They cannot be held personally liable for as long as their acts are for and in behalf of the corporation, within the scope of their authority and in good faith, Also, a corporation has a personality separate and distinct from its individual stockholders. (Consolidated Bonk and Trust Corp. v. CA, GR ‘No, 114286, April 19, 2001) ‘Stockholders are not the owners of corporate properties and assets ‘The interest ofthe shareholder in the properties of the corporation is incheate only. The interest of the shareholder on a particular property becomes actual, direct and existing only upon the liquidation Of the assets of the corporation and provided that the same property is assigned to the shareholder concerned. Under the trust fund doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in wust for the payment of corporate creditors wiich are preferred over the stockholders in the 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 unless the indispensable id procedures for the protection of corporate creditors are followed. (Yamamoto v. Niskino Leather Industries, Inc, GR. No. 150283, April 16,2008) @: RISCO ceased operation due to business reverses. Due Aznar et. al’s desire to rehabilitate RISCO, they contributed a total amount of P212,720.00 which was used in the purchase of the three (3) parcels of land located in various areas in the Cebu Province. Pursuant to the Minutes of the Special Meeting of the Board of Directors of RISCO, the contributed amounts constitute liens’ and encumbrances on the aforementioned properties as annotated in the tiles of the sald lots. Such annotation was made. Thereafter, various subsequent annotations were made on the same titles in favor of PNB. As a result, a Certificate of Sale was issued in favor of PNB, being the lone and highest bidder of the three () parcels of land and was also issued Transfer Certificate of Title over the said parcels of land. Aanar, et. al filed a complaint seeking the quieting of their supposed title to the subject, properties. They alleged that the subsequent annotations on the titles are subject to the prior annotation of their liens and encumbrances. On the other hand, PNB assert that, as mere stockholders of RISCO, they do not have any legal or equitable right aver the properties of the corporation. Do the defendants herein (Aznar et. a.) have the legal or equitable rights over the subject properties? A: NO, Stockholders cannot claim ownership over corporate properties by virtue of the Minutes of a Stockholder’s Meeting which merely evidence a loan agreement between the stockholders and the corporation. As such, thelr interest over the properties is merely inchoate. (PNB v. Merelo B. Amer, etal, CR No. 171805, May 30,2011) Q: National Galleon Shipping Corporation (Gallego) took out several loans from different sources such as foreign financial institutions, its shareholders and other entities. DBP guaranteed Galleon’s foreign loans. Galleon and its stockholders Sta. Ines, Cuenca Investment, Universal Holdings, Cuenca, and Tinto, obligated themselves to guarantee DEP's potential liabilities. Galleon undertook to Secure a first mortgage on its {new and second- hand vessels. Despite the loans, Galleon's ‘Anancial condition did not improve. President Marcos issued a Letter of Instruction ordering NDC to acquire 100% of the shareholdings of Galleon Shipping Corporation from its present owners. Galloon's stockholders, represented by Cuenca, and NDG, through its then Chairman of the Board of Directors, Ongpin, entered into a Memorandum of Agreement’ where NDC and Galleon undertook to prepare and sign a share purchase agreement covering 100% of Galleon's equity. DBP paid off Galleon's debts to its foreign bank creditor, NDC took over Galleon's operations “even prior to the signing, of a share purchase agreement.” However, despite NDC's takeover, the share purchase ‘agreement was never formally executed. President Marcos issued another letter to DBP. and NDC directing that they take steps, including foreclosure of Galleon vessels and other assets, | University oF Santo Tomas 2021 GOLDEN NOTES a7BUSINESS ORGANIZATIONS Sta, Ines, Cuenca, Tinio, Cuenca Investment and Universal Holdings, major stockholders of gallego, filed a Complaint with Application for Injunction. They claimed that DBP can no Jonger go after them for any deficiency judgment since NDC had been subrogated in their place as borrowers, hence the Deed of Undertaking between Sta. Ines, Cuenca Investment, Universal Holdings, Cuenca, and Tinlo and DBP had been extinguished and novated. Did the Memorandum of Agreement novated the Deed of Undertaking executed between DBP and respondents? A: NO. The CA erred when it ruled that DEP was prixy to the MOA Novation is a mode of extinguishing an obligation by “changing its object, cor principal conditions, substituting the person of the debtor or subrog person in the rights of the creditor." While novation, "which consists in substituting a new debtor In the place of the original one may be made even without the knowledge or against the will ofthe latter, it must be with the consent of the creditor.” ‘The general rule is that, "in the absence of an authority from the board of directors, no person, noteven the officers of the corporation, can validly bind the corporation.” A corporation is a juridical person, separate and distinct from its stockholders and members, having "powers, attributes and properties expressly authorized by law or ineldent tots existence.” Aside from Ongpin being the concurrent head of DBP and NDC at the time the Memorandum of ‘Agreement was executed, there was no proof presented that Ongpin was duly authorized by the DBP to give consent to the substitution by NDCas 2 co-guarantor of Galleon's debts. Ongpin is not DBP, therefore, itis wrong to assume that DBP impliedly gave its consent to the substitution simply by virtue of the personality of its Governor. (DBP v. Sta, Ines Melale Forest Products Corp, GR. No. 193068, February 1, 2017, J. eonen) ‘Stockholders are not real parties in interest to claim damages and recover compensation ‘The personality of a corporation is distinct and separate from the personalities ofits stockholders. Hence, its stockholders are not themselves the real parties in interest. to. claim and recover ‘compensation for the damages arising from the ‘wrongful attachment of corporate assets. Only the corporation is the real party in interest for that purpose. (Stronghald Insurance Company, Ine. v Guenca, GR No. 173297, March 6, 2013) Q:Ronald Sham doing business under the name of SHAMRON Machineries (Shamron) sold to Turtle Mercantile (Turtle) a diesel farm tractor. In payment, Turtle's President and Manager Dick Seldon issued a check for P50,000 in favor of Shamron. A week later, Turtle sold the tractor to Briccio Industries (Briccio) for 60,000. Briccio discovered that the engine of the tractor was reconditioned so he refused to pay Turtle. As a result, Dick Seldon ordered “Stop Payment” of the check issued to Shamron. Shamron sued Turtle and Dick Seldon. Shamron, obtained a favourable judgment holding co- defendants Turtle and Dick Seldon jointly and severally liable. Comment on the decision of the trial court. Discuss fully. (1995 BAR) ‘A: I disagree with the trial court's ruling. Dick Seldon should not be solidarily liable with Turtle because of his position as President and Manager of the corporation. ‘Turtle Corporation has a separate juridical personality from its officers Corporate officers cannot be personally liable for the consequences of their acts, for as long as these are for and in behalf of the corporation, within the scope of their authority and in good (Consolidated Bank and Trust Corp. v. CA, GR No. 114286, April 19, 2001) Entitlement of corporations to Constitutional rights Corporations are entitled ta the following rights under the constitution: 1. Right to Due Process (Sec. 1, Art Ill, Constitution) 2. Right against unreasonable searches and seizures. (Sec 2, ibid) NOTE: Corporations are not entitled to the right against self incrimination, being a mere creature of law. (Bataan Shipyard & Engineering Co. v. PCGG, GR. No, 75885, May 27, 1987) It cannot refuse to produce the books and papers if lawfully required by the appropriate government agency. It is presumed that they are incorporated for the benefit of the public thereby making ite power limited, A corporation may be held liable for torts 148 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW ‘The corporation is liable for every tort it expressly directs or authorizes. (PNB y. CA, CR. No. 127155, May 18, 1978) Reason for liability in cases of torts A corporation is civilly lable 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 servant (oF agent isa natural or artificial person, (Ibid) ‘Corporations incapable of intent Corporations are incapable of intent, hence they cannot commit felonies that are punishable under the Revised Penal Code. They cannot commit crimes that are punishable under special laws because erimes are personal in nature. In addition, the penalty of Imprisonment cannot be imposed. However, the corporation may be dissolved for violations of the Corporation Cede. (Sec. 158, RCC) Liability of a corporation in cases of crimes GR: Since a corporation is a mere creation of legal fiction, it cannot be held liable for crimes committed by its officers; in such case the responsible officers would be criminally liable. (@eople v. Tan Boon Kong, GR No, L-25262, March 15,1930) XPN: If the penaky of the crime is only fine or forfeiture of license or franchise. (Ching v Secretary of Justice, supra) |RECOVERY OF DAMAGES Recovery of moral damages GR: A corporation is not entitled to moral damages because, being an artifical person and having existence only in legal contemplation, it has no feelings, no emotions, no senses.” (ABS-CBN Broadcasting Corp. v. CA, GR No. 128690 January 21, 1999) XPNs: 1. The corporation may recover moral damages under item 7 of Article 2219 of the New Civil Code because said provision expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation. NOTE: Article 2219(7) does not qualify whether the injured party is a natural or Juridical person, Therefore, a corporation, as a juridical person, can validly complain for libel or any other form of defamation and claim for moral damages. (Filipinas Broadcasting Network, Inc. v. AMEC-BCCM, GX No. 141994, January 17.2005) 2, When the corporation has a reputation that is debased, resulting in its humiliation in the business realm. (MERALCO. vy. TEAM. Hlectronics Corp, et al, GR No. 131723, December 13, 2007) NOTE: While the court may allow the grant of moral damages to corporation, it is not automatically granted; there must still be proof of the existence of the factual basis of the damage and its causal relation to the defendant's acts Moral damages is designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer. (Crystal vs. BPI, G.R. No. 172428, November 29, 2008) Q: "Exposé" is a radio documentary program hosted by Rima and Alegre. It is aired every moming over DZRC-AM which is owned by FENI. One morning, Rima and Alegre exposed various alleged complaints from students, teacher and parents against AMEC and its administrators. Claiming that the broadcasts were defamatory, AMEC and Ago, as Dean of AMEC’s College of Medicine, filed 2 complaint for damages against FBNI, Rima and Alegre. As a defense, FBNI claims that AMEC is not entitled to moral damages because it is a corporation. Is, AMECis entitled to moral damages? A: YES, AMEC is entitled to moral damages. A juridical person is generally not entitled to moral damages because, unlike « natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.Nevertheless, AMECs claim for ‘moral damages falls under item 7 of Article 2219 of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical pperson such as a corporation can validly comp for libel or any other form of defamation and claim for moral damages. (Filipinas Broadcasting Network, Inc, v. AMEC-BCCM, supra) | University oF Santo Tomas 2021 GOLDEN NOTES 149BUSINESS ORGANIZATIONS Q: Meralco and T-E.AM. Electronics Corporation (TEC) were parties to two separate contracts for the sale of electric energy. Meralco undertook to supply TEC’s building known as DCIM with electric power. One day, Meralco conducted a surprise inspection of the electric meters installed at the DCIM building. Two meters were found to be allegedly tampered with and did not register the actual power consumption In the building. Meralco informed TEC of the results of the inspection and demanded from the latter the payment of its unregistered consumption. TEC failed to pay thesame. For failure to pay, Meralco disconnected the electricity supply to the DCIM building. TEC demanded from Meralco the reconnection of electrical service, claiming that it had nothing to do with the alleged tampering but the latter refused to heed the demand.The ERB immediately ordered the reconnection of the service but Meralco did not immediately comply. TEC filed a complaint for damages against Meralco before the RTC. The RTC ruled in favor of TEC and it awarded, among others, moral damages. Is TEC entitled to moral damages? A: NO. TEC is not entitled to moral damages. TEC’s claim was premised allegedly on the damage to its goodwill and reputation. 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 ic debased, resulting in its humiliation in the business realm. But in such a case, it is imperative for the claimant to present proof to justify the award. It s essential to prove the existence of the factual basis of the damage and Its causal relation to Meralco's acts. In the present case, the records are bereft of any evidence that the name or reputation of TEC/TPC hhas been debased as a result of Meralco's acts. (MERALCO v. TEAM. Electronics Corpet al, supra) ‘The doctrine of piercing the corporate veil is the doctrine that allows the State to disregard, for certain justifiable reasons, the nction that a corporation has a personality separate and distinct, from the persons composing it. Where it appears that business enterprises are owned, conducted and controlled by the same parties, law and equity will disregard the legal fiction that these corporations are distinct entities and shall treat them ae one. This is in order to protect the rights of third persons. (Viemor Development Corporation v. Elarces, et al, G.k. No. 202215, December 09,2015, Del Castillo, J) In order to justify the piercing ofthe corporate vell, allegation or proof of fraud or other public policy considerations is needed. (Hacienda Luisita Incorporated vs. Presidential Agrarian Reform Counci, R No. 171101, November 22, 2011) NOTE: This is an exception to the Doctrine of Separate Corporate Entity. Effect of piercing the corporate veil 1. The corporation will be treated merely as an association of persons -undertaking a business and the liability will attach directly to the officers and stockholders. 2. Where there are two (2) corporations, they will be merged into one, the one being merely regarded as the instrumentality, conduit or adjunct of the other agency, NOTE: Notwithstanding that the corporate veil has been pierced, the corporation continues for other legitimate objectives, che corporate character Is not necessarily abrogated. (Reynaso IV vs. CA, G.R. Nos. 116124-25, November 22, 2000) It applies upon the (aco) following circumstances 1. If the fiction is used to perpetrate fraud (Braud Test) 2. Ifthe complete control of one corporate entity to another which perpetuated the wrong is the proximate cause of the injury (Control Test) 3, Ifa certain corporation is only an adjunct or an extension of the personality of the corporation (Alter ego or Instrumentality Test) 4, lf the fiction is pierced to make the stockholders liable for the obligation of the corporation (Objective Test) Q: Rosario Lorezo received, upon inquiry, a letter from the Social Security System, informing her that she cannot avail of their retirement henefits since per their record she hhas only paid 16 months. Aggrieved, Lorezo 150 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW then filed her Amended Petition before the SSC, alleging that she was employed as laborer in ‘Cauaywa managed by Jose Marie Villanueva in 1970 but was reported to the SSS only in 1978. She alleged that SSS contributions were deducted from her wages from 1970 to 1995, but not all were remitted to the SSS which, subsequently, caused the rejection of her claim. She also impleaded Talisay Farms, Inc. by virtue of Its Investment Agreement with Mancy and Sons Enterprises. She also prayed that the veil of corporate fiction be pierced since she alleged that Mancy and Sons Enterprises and ‘Manuel and Jose Marie Villanueva are one and the same. Should Mancy and Sons Enterprises’ veil of corporate fiction be pierced? ‘A: NO. The Court has expressed the language of piercing doctrine when applied to alter ego cases, 1a follows: Where the stock of a corporation is ‘owned by one person whereby the corporation functions only for the benelit of such individual ‘owner, the corporation and the individual should bbe deemed one and the same, ‘This Court agrees with the petitioners that there is no need to pierce the corporate veil. Loreze failed to substantiate her claim that Mancy and Sons Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She based her claim on the SSS form wherein Manuel Villanueva appeared as employer. However, this does not prove, in any way, that the corporation is used to defeat public convenience, justify wrong protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, warranting that its separate and distinct personality be set aside, Also, it was not alleged nor proven that Mancy and Sons Enterprises, Inc. functions only for the benefit of Manuel Villanueva, thus, one cannot be an alter ego of the other. (Hacienda Cataywa/Manuel Villanueva, et al. v. Resario Lorezo, GR.No. 179640, March 18, 2015) Q: Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawful suit which could subject him to substantial damages. A year before the court rendered judgment, Pablo sought his lawyer's advice on how to plan his estate to avold taxes. He suggested that he should form a corporation with himself, his wife, and his children (all students and still unemployed) as stockholders and then transfer all his assets and abilities to this corporation. Mr. Pablo followed the recommendation of his Tawyer. 1 year later, the court rendered judgment against Pablo and the plaintiff sought to enforce this judgment. The sheriff, however, could not locate any property in the name of Pablo and therefore returned the writ of execution unsatisfied. What remedy, if any, is available to the plaintiff? (1994 BAR) ‘A: The plaintiff can avail himself of the doctrine of piercing the veil of corporate fiction which can be invoked when a corporation is formed or used in avolding a Just obligation. While It is true that a family corporation may be organized to pursue an estate tax planning of which is nat per se illegal or unlawful (Delpher Trades Corp. v. IAG, G.R. No I: 69259, January 26, 1988). The factual settings, however, indicate the existence ofa lawful suit that, could subject Pablo to a substantial amount of damages. It would thus be difficult for Pable to convincingly assert that the incorporation of the family corporation was intended merely as a case of “estate tax planning". (Tan Boon Bee v. Jarencio, GR. No. 1-41337, june 30, 1988) Q: Romeo Morales was able to obtain a favorable judgment for a sum of money against Kukan, Inc. With the judgment attaining finality, the sheriff levied on execution various personal properties found at what was supposed to be Kukan's office. Kukan International Corporation (KIC) filed a third-party complaint, alleging that it was the owner of the levied properties. Morales prayed that the principle of plercing the vell of corporate fiction be applied in order to satisfy the judgment debt of Kukan. The RTC granted the motion of Morales and declared KIC and Kukan as one and the same corporation. The CA affirmed the RTC. Did the RTC properly apply the doctrine? A: NO. The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with respect to a given ‘wansaction, is basically applied only to determine established liability; iti not available to confer on the court a jurisdiction it hos not acquired over a party not impleaded in a case. Elzewise put, a Corporation not impleaded in a suit cannot be subject to the courts process by piercing the veil of its corporate fiction. In that situation, the court hhas not acquired jurisdiction ever the corporation, and, hence, any proceedings taken against that corporation and its property would infringe on its right to due process. Aguedo Agbayani, o recognized authority on Commercial Law, stated that piercing the veil of corporate entity applies to determination of lability not of jurisdiction hecause the doctrine of piercing the veil of corporate fiction | University oF Santo Tomas 2021 GOLDEN NOTES asiBUSINESS ORGANIZATIONS ‘comes to play only during the trial ofthe case after the court has already acquired jurisdiction over the corporation. Hence, before this doctrine can be applied, based on the evidence presented, it is imperative that the court must first have jurisdiction over the corporation. Two-fold Implication 1. The court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities are disregarded; and 2. The doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court Ly way of service of summons or what passes as such service, (Kukan International Corp v. Reyes, GR. No. 182729, September 29, 2010) Q: Ma. Concepcion Lacsa was riding a Goldline passenger bus owned and operated by Travel & Tours Advisers, Inc. (TTAI) when the bus collided with 2 passenger jeepney, which resulted to her instant death. The Heirs of Concepcion instituted a suit in the RTC for damages due to breach of contract, with the complaint set against “Travel & Tours Advisers, Inc. (Goldline) and the bus driver. The RTC ruled in favor of the Heirs, holding TTAI liable to pay the heirs damages and expenses. A wrlt of execution was served upon TTAI and Cheng, operator of the Goldline bus. Cheng failed to settle the judgment, thus a tourist bus was levied. Gold Line filed a third-party claim, claiming that the levied tourist bus be returned to it because it was its owner and that it had not been made a party to the case, and it was a corporation entirely different from TTAL Is Gold Line's contention correct? A: NO. There is sufficient factual basis to find that Goldline and TTAI were one and the same entity, specifically: (@) documents submitted showing that Cheng, who claimed to be the operator of TTALis also the President/Manager and an incorporator of Gold Line; and (b) Travel and Tours Advisers, Inc. hhad been known in Sorsogon as Goldline. (Gald Line Tours, Inc v. Heirs of Maria Concepcion Lacsa, GR. No. 159108, June 18, 2012) Q: Eric Livesey filed a complaint for illegal dismissal with money claims against CBR Philippines Strategic Property Services, Inc. (CBB) and Paul Dwyer, its president. Livesey and CBB entered into a compromise agreement Unless and until the agreement is fully satisfied, CBB shall not sell, alienate, or otherwise dispose of all or substantially all of its assets or business; suspend its business operations; Substantially change the nature of its business; and declare bankruptcy or insolvency. CBB failed to pay the rest of the amount as the company ceased operations. Livesey moved for the issuance of an alias writ of execution, alleging that CBB and Keith Elliot have organized another corporation, “Binswanger Philippines, Inc” He claimed that there was evidence showing that CBB and Binswanger Philippines, Inc. are one and the same corporation, pointing out that CBB stands for Chesterton Blumenauer Binswanger. Is the doctrine of plercing the veil of corporate fiction applicable? A: YES. Shortly after Elliot forged the compromise agreement with Livesey, CBE ceased operations. There was an indubitable link between CBB's ‘and Binswanger’s incorporation. CBB ceased to exist only in name; it re-emerged — to avoid payment by CBB of the last two installments of its monetary obligation to Livesey, as well as its other financial liabilities. A reasonable mind would arrive at the conclusion that Binswanger Is CBB's alter ego or that CBB and Binswanger are one and the same corporation, There are also indications of badges of fraud in Binswanger’s incorporation. It was a business strategy to evade CBB's financial liabilities, including its outstanding obligation to Livesey. (Livesey v. Binswanger Philippines, Inc. and Keith Elliot, GR. No. 177493, March 19, 2014) closure NOTE: There appears to be a lack of conclusive yardstick as to when the court may pierce the veil of corporate ction of a corporation which has not been brought to its jurisdiction by summons, voluntary appearance, or other recognized modes of acquiring jurisdiction. To be safe, any bar question should be answered based on similarity with the facts ofeach case. (Divina, 2014) Circumstances which de not warrant the piercing of the corporate veil ‘The mere fact that: (FICOS) 1. A corporation owns Fifty (50%) of the capital stock of another corporation, or the majority ownership af the stacks of a corporation is not per sea cause for piercing the veil. 152 UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawCOMMERCIAL LAW 2. Two corporations have Cammon directors or same or single stockholder who has all or nearly all of the capital stock of both corporations is not in itself sufficient ground to disregard separate corporate entities. 3. There is a Substantial identity of the incorporators of the 2 corporations does not necessarily imply fraud and does not warrant piercing the corporate veil. Q: Land Bank of the Philippines (LBP) extended a series of credit accommodations to ECO using the trust funds of PVTA.The proceeds of the credit accommodations were received on behalf of ECO by Emmanuel Ojiate. Upon maturity of the loans, ECO failed to pay the same. ECO then submitted a Plan of Payment to LBP, however, the latter rejected the same. LBP filed a complaint for collection of sum of money against ECO and Ofate. LEP contends that the personalities of Onate and of ECO should be treated as one holding Ofate liable for the loans incurred by ECO from Land Bank Is Ofate jointly and severally liable with ECO for the loans incurred from LBP? A: NO. Ofiate should not be held jointly and severally liable with ECO. A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it az well as from any other legal entity to which it may be related, By this attribute, a stockholder may not, generally, be ‘made to answer for acts oF liabilities of the said corporation, and vice versa. The mere fact that ‘nate owned the majority of the shares of ECO is, not a ground to conclude that Ofte and ECO are fone and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock ‘of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities. Neither is the fact that the name "ECO" represents the frst three letters of Oflate's name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Ofte. A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name for as in this case, the initials of one of ite shareholders. (Land Bank ofthe Phillppines v. CA, et Al, G.R. No. 127181, September 4, 2001) The following are the tests in determining the applicability of the doctrine of piercing the ‘corporate veil (ECAQ) 1. When the corporation is used to defeat public convenience as when the corporate fiction is used as a vehide for the evasion of an existing tion (Equity Cases) 2. In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend. crime (Control Test) 3. In Alter ego cases, where a corporation is merely a farce since it is a mere alter ogo or business condult of a person, or 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. (Sarona vs. NLRC, Royale Security Agency, et al, G.R. No. 185280, january 18, 2012) 4. The Objective test where the end result in piercing the vell of corporate fiction is tomake the stockholders liable for debts and obligations of the Corporation not to make the Corporation lable for the debts and obligations of the stockholders. (Umali v CA, GR Na 89561, September 13 1990) Three-pronged test__to determine the application of the alter ego/ instrumentality theory: Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own (Instrumentality or Control test} Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act incontravention of plaintiff's legal right (Fraud test): and 3, The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of (Harm test) 1Anstrumentality or Control Test This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation's relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and ite affairs are so conducted as to make It a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary | University oF Santo Tomas 2021 GOLDEN NOTES 153BUSINESS ORGANIZATIONS corporation has no autonomy and the parent corporation, though acting through the subsidiary {in form and appearance, "Is operating the business directly for itselt 2.Braud Test ‘This test requires that the parent corporation's conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. AS such, it requires a showing of “an element of injustice or fundamental unfairness.” a.Harm Test ‘This test requires the plaintiff to show that the defendant's control, exerted in a fraudulent, legal cor otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it would have been treated unjustly by the defendant's exercise of control and improper use of the corporate form and, thereby, suffer damages. NOTE: Piercing the corporate veil based on the alter ego theory requires the concurrence of the three elements - (1) control, (2) fraud or fundamental infaimess, and (3) harm or damage. ‘The absence of any of these elements prevents piercing the corporate veil (DEP v. Hydro Resources Contractors Corp, G.R. Nos. 167603, 167561, & 167530, March 13, 2013). Piercing the veil of corporate fiction on the basis of equity Equity cases applying the piercing doctrine are what are termed the "dumping ground’, where no fraud or alter ego circumstances can be culled by the Court to warrant piercing ‘The main feature of equity cases is the need to render Justice in the situation at hand or to brush aside merely technical defenses. Often, equity cases ‘of piercing appear in combination with other types of plercing. (Villanueva, 2010) Specifically, the equity test can be applied when: 1. The corporate _ person would be inconsistent with the business purpose of the legal fic The piercing the corporate fiction is necessary to achieve justice or equity for those who deal in good faith with the corporation; or The use of the separate juridical personality is ised to confuse legitimate issues Indications that a subsidiary corporation Is a mere instrumentality of its parent corporation 1. The parent corporation owns all or most of the capital stock ofthe subsidiary. 2. The parent and subsidiary corporations have common directors or officers. 3. The parent corporation subsidiary. 4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its Incorporation. 3. The subsidiary has grossly inadequate capital. 6. The parent corporation pays the salaries and other expenses or losses of the subsidiary. 7. The subsidiary has substantially no business except with the parent corporation or no astets except those conveyed to or by the parent corporation. 8, In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financlal responsibility is referred to as the parent corporation's own, 9. The parent corporation uses the property of the subsidiary as its own, The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation. The formal legal requirements of the subsidiary are not observed. (PNB v. Ritratto Group, GR. No, 142616, July 31, 2001) finances the 10. uw. Piercing the Corporate Veil may Apply to Natural Persons 1. When the Corporation is the Alter Ego of a Natural Person. The piercing of the corporate veil may apply to corporations as well as natural persons involved with corporations. The "corporate mask may be lifted and the corporate veil may be pierced when a corporation Is just but the alter ego of a person or of another corporation.” 2. Reverse Piercing of the Corporate Veil. From American parlance of what is called 154 VERSITY OF SANTO TOMAS Pacutty oF Civit Law