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THE CORPORATION CODE OF THE PHILIPPINES

(BATAS PAMBANSA BILANG 68)

Q: What is a corporation?

ANS: A corporation is an artificial being, created by operation of law, having

the right of succession, and the powers, attributes, and properties expressly
authorized by law or incident to its existence (CORPORATION CODE, Sec 2).

Q: What are the attributes of a corporation?

ANS: The attributes of the corporation are:

1. It is an Artificial being with separate and juridical personality;
2. It is a creature of the Law;
3. It enjoys the right of Succession; and
4. It has the powers, attributes, and properties Expressly authorized by
law or incident to its existence (CORPORATION CODE, Sec. 2).

Q: How are corporations created?

ANS: Corporations are created through:

1. General Law - private corporations are generally created under the

provisions of the Corporation Code. This is done by filing the appropriate
Articles of Incorporation with the Securities and Exchange Commission;

*the life of the corporations starts from the issuance of the Certificate of
Incorporation.

2. Special Law public corporations are created through special laws called
charters. Private corporations cannot be created by special laws.

Exceptions: Government owned or controlled corporations which are actually

private corporations.

Q: May a corporation be incorporated by mere consent?

ANS: No. Corporations cannot come into existence by mere agreement of the
parties as in the case of partnerships. They require special authority or grant
from the State. This power is exercised by the State through the legislature,
either by a special incorporation law or charter which directly creates the
corporation or by means of a general corporation law under which individuals
desiring to be and act as a corporation may incorporate.
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Q: Differentiate primary from secondary franchise.

ANS: All corporations possess a primary franchise. Some corporations, in

addition to the primary franchise, possess secondary franchises. The
difference between the two is:

1. Primary, corporate or general franchises refer to the right of a corporation

to exist as a corporation, vested in the individuals who compose the
corporation, not to the corporation itself (JRS Business Corp. v. Imperial
Insurance, Inc., G.R. No. L-19891, July 31, 1964).

2. Special or secondary franchises refer to certain rights and privileges

conferred upon existing corporations, such as the right to use the streets of a
municipality to lay pipes of tracks, erect poles, or string wires, or the right to
engage in public transport or common carriage (ld.).

Q: What is the Right of succession.

ANS: Right of succession is the capacity of a corporation to have continuity of

existence despite the changes of the persons who compose it. Thus, the
personality continues despite the change of stockholders. members, board
members or officers.

Q: May a corporation be party to a partnership?

ANS: No. A corporation can only act through its duly authorized officers and
agents, and should not bound by the acts of anyone else, while in a
partnership, each member binds the firm when acting within the scope of the
partnership business. In entering into a partnership, the identity of the
corporation is lost or merged with that of another and the direction of its
affairs is placed in other hands than those provided by the law of its creation
(J.M. Tuason & Co. Inc, v. Bolanos, G.R No. L-4935, May 28, 1954, citing
Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043).

Exception: A corporation may enter into a joint venture with another, when
the nature of that venture is in line with the business authorized by their
charters. Thus, a corporation may be represented by another person, natural
or juridical, in a suit in court, where there is nothing in the record to indicate
that this venture in which the former is represented by the latter as its
managing partner is not in line with the corporate business of either of them.

Note: Under the Revised Corporation Code, any person, partnership,

association, or corporation, singly or jointly with others but not more than 15
in number, may organize a corporation for any lawful purpose or purposes
(RCC, Sec. 10).

Q. What are the rules for determining the nationality of a corporation?

ANS: The tests for determining the corporate nationality of a corporation are:
1.Place of Incorporation test; and,
2.Control test
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Q: What is the "Place of incorporation" test?

ANS: Under the place of incorporation test, a corporation is a national of the

country under whose laws it has been organized and registered, regardless of
the nationality of the majority of its stockholders. In the Philippine
jurisdiction, this is the principal test of nationality of a corporate entity
embodied in Sec. 123 of the Corporation Code.

Q: What is the control test?

ANS: Under the control test, the nationality of the corporation may be
determined by the nationality of the majority of the stockholders on whom
equity control is vested based on the theory that they would be able to elect
the majority of the Board of Directors.

Under the control test, a corporation organized under Philippine law shall be
regarded as a Philippine national if at least 60% of its voting shares is owned
and held by Filipino citizens. Otherwise, it is still foreign (R.A. No. 7042,
otherwise known as the Foreign Investments Act of 1991, Sec. 3(a)).

Q: Are the two tests for determining nationality used interchangeably?

ANS: No. The place of incorporation test is the primary and general test to be
used in determining the nationality of a corporation (CORPORATION CODE,
Sec. 123). The control test is an exceptional test used only: (1) in times of war,
or (2) in determining compliance with constitutional and statutory foreign
equity restrictions (Narra Nickel Mining & Development Corp. v Redmont
Consolidated Mines Corp., G.R. No. 195580 April 21, 2014).

The control test cannot override the place of incorporation test. If a

corporation is organized and incorporated abroad, it is considered a foreign
corporation regardless of proportionate equity ownership between Filipinos
and foreigners except when it is wholly owned by Filipinos (R.A. No. 7042,
Sec. 3(a)).

Q: When is the control test applied?

ANS: This test is applied for corporations organizes for the purpose of
exploiting natural resources, owning and operating public utilities, mass
media, advertising, and other corporations subject to foreign equity
restrictions under Sec. 11 of Article XIl and Sec. 11 of Article XVI of the
Constitution (Roy III v. Herbosa, G.R. No 207246, November 22, 2016).

This test is also applied in times of war (War-Time Test) (Filipinas Compania
De Seguros v. Christern, G.R. No. L-2294, May 25, 1951).

Q: What is the purpose of the 60% requirement?

ANS: The purpose is to ensure that corporations and associations allowed to

operate a public utility or industries imbued with public interests are
effectively controlled by Filipino citizens. It is imperative that beneficial
ownership must ultimately be in the hands of Filipinos. Any attempt to defeat
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the same shall be subject to sanctions imposed under applicable law, rules,
and regulations (Narra Nickel Mining & Development Corp. v. Redmont
Consolidated Mines Corp., Supra).

Q: What is the basis of computation of the 60-40 percentage requirement?

ANS: The term "Philippine national" shall mean x x x a corporation organized

under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines (Republic Act No. 7042, Sec. 3(a)).

In effect, the FIA clarifies, reiterates, and confirms the interpretation that the
term "capital" in Section 11, Article XII of the 1987 Constitution refers to
shares with voting rights, as well as those subject to full beneficial ownership
of Filipinos (Heirs of Gamboa v. Teves, G.R. No. 176579, Resolution of October
9, 2012).

The Supreme Court held, in no uncertain terms, that what the Constitution
requires is that full and legal beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, must
rest in the hands of Filipino nationals (Roy III v. Herbosa, G.R. No. 207246,
Resolution of April 18, 2017).

The Control Test, as applied to domestic corporations, when required, is a

two-tiered test, requiring the simultaneous compliance with the (1) Voting
Control Test and (2) Beneficial Ownership Test (Roy III v. Herbosa, Decision,
supra).

For a corporation to be considered a Philippine national, the following must

concur:
1. Filipino citizens own at least 60% of stocks with voting rights (regardless of
the nomenclature of shares); and
2. Filipino citizens have full and beneficial ownership of at least 60% of the
Outstanding capital stock, whether the stock is entitled to vote or not (ld.).

Thus, for purposes of determining compliance with constitutional or statutory

ownership requirements, the required percentage of Filipino ownership shall
be applied to both-

1. the total number of outstanding shares of stock entitled to vote in the

election
of directors; and
2. the total number of outstanding shares of stock, whether or not entitled to
vote. (Id.).

The pronouncement in the Heirs of Gamboa v. Teves (Resolution, supra) that

the constitutional requirement on Filipino ownership should "apply uniformly
and across the board to all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation" is obiter dictum (Roy III v.
Herbosa, Resolution, supra).

Q: What is the grandfather rule?

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ANS: The 'grandfather rule' is used to determining the nationality of a

corporation (the parent) which owns stocks in another corporation (the
target/subject). Shares belonging to (parent) corporations or partnerships at
least 60% of the capital of which are owned by Filipino citizens (the
grandfathers) shall be considered as of Philippine nationality.

But if the percentage of Filipino ownership in the (parent) corporation or

partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality (Narra Nickel
Mining & Development Corp. v. Redmont Consolidated Mines Corp, supra)

In other words the grandfather rule determines the nationality of a parent

corporation and applies it to the shares owned by such parent corporation in
the target or subject corporation (id)

For example, ABC Corp. (parent) owns 100 shares in XYZ Corp
(target/subject). The foreign equity ownership of parent ABC Corp will be
determined how many of its shares in target XYZ Corp. will be considered
Filipino. If at least 60% of parent ABCC Corp. is owned by Filipinos, then all its
100 shares in target XYZ Corp. are deemed to be "Filipino".

If not, then only the proportionate number of the 100 shares as related to
Filipino ownership in ABC Corp. is Filipino For example, if only 40% of parent
ABC Corp is owned by Filipinos, then only 40 shares in target XYZ Corporation
shall be considered Filipino, while the other 60% shall be treated as foreign-
owned shares (ld.).

Q: When should the grandfather rule be applied?

ANS: The Grandfather Rule applies only when the 60-40 Filipino-foreign
equity
ownership is in doubt as a result of various indicia that "beneficial ownership"
and "voting control" of a subject corporation does not in fact reside in Filipino
shareholders but in foreign stakeholders through the medium or practice of
corporate layering (Narra Nickel Mining& Development Corp. v. Redmont
Consolidated Mines Corp., supra).

Note: Corporate layering is a means of structuring companies where by a

parent corporation holds shares in other corporations. Unless used to
circumvent the law, corporate layering is a valid and legal practice in the
business community. It is the use of corporations as stockholders of other
corporations in different stages of organization.

Q: What is the Double 60% rule?

ANS: The Double 60% rules states that where a (parent) corporation and its
non-Filipino stockholders own stocks in a SEC-registered enterprise
(target/subject), at least 60% of the outstanding capital stock and entitled to
vote of both corporations and at least 60% of the members of the board of
directors of both corporations must be Filipino citizens before the (target)
corporation will be considered a "Philippine national" (R.A. No. 7042, Sec.
3(a)).
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Q: Discuss the doctrine of separate juridical personality.

ANS: Under the doctrine of separate juridical personality, a corporation has a

legal personality separate and distinct from its individual stockholders or
members and from any other legal entity by which it may be incorporated. By
virtue of the doctrine, stockholders of a corporation enjoy limited liability
such that the corporate debt is not the debt of the stockholder (Bustos v.
Millians Shoe, Inc., G.R. No. 185024, April 24, 2017).

Q: What is the Limited Liability Rule (LLR)?

ANS: Under the LLR, a stockholder is personally liable for the financial
obligations of the corporation only to the extent of his subscription, paid or
unpaid. While stockholders are generally not liable to satisfy corporate debts
with their own property, the stockholders may be held liable if they have not
fully paid the subscription price, to the extent of the amount unpaid (Halley v.
Printwell, Inc, G.R. No. 157549, May 30, 2011).

Q: What are the consequences of the corporation's separate personality?

ANS: A corporation's separate juridical personality has the following effects:

1. Liability for acts or contracts. - Obligations incurred by a corporation, acting
through its authorized agents and its sole liabilities. Similarly, a corporation
may not generally be made to answer for acts or liabilities of its stockholder
or members or those of the legal entities to which it may be connected (Cease
v. CA, G.R. No. L-33172, October 18, 1979).

2. Right to bring Actions. - It may bring civil and criminal actions in its own
name in the same manner as natural persons (Civil Code, Art. 46)

3. Separate Properties. - The properties of the corporation are not the

properties of its shareholders, members or officers. In the same manner,
properties of the shareholders, members or officers are not the properties of
the corporation.

4. Acquisition by court of Jurisdiction. - Service of summons may be made on

the president, general manager, corporate secretary, treasurer, or in-house
counsel.

5. Changes in individual membership. - Corporation remains unchanged and

unaffected in its identity by changes in its individual membership.

Q: Can a corporation be held liable for tort?

ANS: Yes. A corporation can be held liable for tort, if the tortious act is
committed by an officer or agent under the express direction or authority
from the stockholders or members acting as a body or from the directors as
the governing body (Philippine National Bank y. CA G.R. No, L-27155, May 18,
1978).
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Note: For close corporations and corporations by estoppel, the corporate

officer or officers who caused the tortuous act to be committed in the name of
the corporation shall also personally liable to the victims as joint tortfeasors.

Q: Can a corporation be held liable for crime?

ANS: No. A corporation cannot be held liable for a crime since it cannot have
the
essential element of malice. Moreover, the difficulty, if not the impossibility, of
imposing the penal sanction of imprisonment on a corporation, would
undermine the criminal law system of the country.

Exception: The corporation itself is held criminally liable by express provision

of law (e.g. Trust Receipts Law, Anti-Dummy Law and Anti-Money Laundering
Act). Where the business itself involves a violation of law, the correct rule is
that all who participate in it are liable (People v. Tan Book Kong, G.R. No. L-
35262, March 15, 1930).

Q: When may corporations be subject to the penalty of fine?

ANS: Under Sec. 158 of the Revised Corporation Code. “If, after due notice and
hearing, the Commission finds that any provision of this Code, rules or
regulations, or any of the Commission’s orders has been violated, the
Commission may impose any or all of the following sanctions, taking into
consideration the extent of participation, nature, effects, frequency and
seriousness of the violation:

(a) Imposition of a fine ranging from Five thousand pesos (P5,000.00) to Two
million pesos (P2,000,000.00), and not more than One thousand pesos
(P1,000.00) for each day of continuing violation but in no case to exceed Two
million pesos (P2,000,000.00);

(b) Issuance of a permanent cease and desist order;

(c) Suspension or revocation of the certificate of incorporation; and

(d) Dissolution of the corporation and forfeiture of its assets under the
conditions in Title XIV of this Code.”

Q: Who shall be held liable for the criminal acts done on behalf of a
corporation?

ANS: The officers of the corporation may be held liable. It is settled that an
officer of a corporation can be held criminally liable for acts or omissions done
in behalf of the corporation only when the law directly requires the
corporation to do an act in a given manner and makes the person who fails to
perform such act in the prescribed manner criminally liable. Although the
performance of an act is an obligation directly imposed on a corporation, the
responsible officer who performed the act must be the one to assume criminal
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liability; otherwise this liability as created by the law would be illusory and
would deter the effect of the law (Sia v. People, G.R. No. L-30896, April 28,
1983).

Corporate officers or employees, who commit crime through a corporation,

are
themselves individually guilty of a crime (Ching v. Secretary of Justice, G.R. No.
164317, February 6, 2006).

Q: Can a corporation recover moral damages in a suit?

ANS: As a general rule, a juridical person is not entitled to moral damages

because, unlike a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental anguish or
moral shock. However, Article 2219 of the Civil Code (which provides for
cases when moral damages may be awarded) does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and
claim for moral damages for damage to its goodwill (Filipinas Broadcasting
Network, Inc. v. Ago Medical& Educational Center-Bicol Christian College of
Medicine, G.R. No. 141994, January 17, 2005)

Note: The Supreme Court implied that the award of moral damages of
corporations is not a hard and fast rule, that although corporations may
recover such damages, there must still be proof of the existence of the factual
basis of the damage and its causal relation to the defendant's acts (Crystal v.
BP, G.R, No. 172428, November 28, 2008).

Q: Discuss the doctrine of piercing the corporate veil.

ANS: Under the doctrine of the piercing of the corporate veil, the court looks
at the corporation as a mere collection of individuals or an aggregation of
persons undertaking business as a group, disregarding the separate juridical
personality of the corporation unifying the group. Another formulation of this
doctrine is that when two business enterprises are owned, conducted, and
controlled by the same parties, both law and equity will, when necessary,
protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or as one and the
(Kukan Intemational Corp. v. Hon. Amor Reyes, G.R. No. 182279, September
29,
2010)

NOTE: For the separate juridical personality of a corporation to be

disregarded, the wrongdoing must be clearly and convincingly established. It
cannot be presumed. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not in
itself sufficient ground for disregarding the separate corporate personality
(Uy v. Vilanueva, G.R. No. 157851, June 29, 2007).

Q: When does the doctrine of piercing the corporate veil apply?

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ANS: The doctrine applies:

1. When the corporate fiction is used to Defeat public convenience or evade an
existing obligation;
2. When the corporate fiction is used to Justify wrong;
3. When the corporate fiction is used to Protect fraud;
4. When the corporate fiction is used to Defend a crime; or
5. In Alter ego cases, where the corporation is so organized and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit, or
adjunct of another person or corporation (Sarona V. National Labor Relations
Commission, G.R. No. 185280, Jan 18, 2012).

Q: What are the different classifications of "piercing the corporate veil" cases?

ANS: The different classifications of piercing the corporate veil cases are:
1. Fraud cases- the veil of separate corporate personality may be lifted when
such personality is used to justify wrong, protect fraud or defend crime: or
used as a shield to confuse the legitimate issues (China Banking Corporation v.
Dyne-Sem Electronics, GR No. 149237, June 11, 2006);

2. Alter ego cases (or Conduit Cases) the corporate entity is a mere farce since
the corporation is merely the alter ego, business Conduit, or instrumentality of
a person or another entity (Concept Builders, Inc. V. National Labor Relations
Commission, G.R. No 108734, May 29, 1996);

3. Defeat of public convenience cases- when the corporate fiction is used as a

vehicle for evasion of existing obligations (lbid.);

4. Equity cases - when piercing the corporate fiction is necessary to achieve

justice or equity. Equity is the catch-all where no fraud or alter ego
circumstances can be culled to warrant piercing (Yao v People, G.R. No.
168306, June 19, 2007)

Q: What are the elements to be considered in fraud piercing cases?

ANS: The following are the elements:

1. There must have been Fraud or evil motive in the affected transaction. Mere
proof of control of the corporation by itself would not authorize piercing.

Note: There is always an element of malice or evil motive in fraud cases.

2. The main action should seek for the enforcement of pecuniary claims
pertaining to the corporation against corporate officers or stockholders, and

3. The corporate entity has been Used in the perpetration of the fraud or in
justification of wrong, or to escape personal liability.

Q: What are the tests to determine the application of the Alter Ego Theory?

ANS: The three-pronged tests are:

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1. Instrumentality or Control test - CONTROL, not mere majority or complete

stock control, but complete dominion, not only of finances but of policy and
business 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.
2. Fraud test such control must have been used by the defendant to commit
fraud or wrong in contravention of plaintiff s legal rights; and
3. Harm/Causal Connection test - The aforesaid control and breach of duty
must proximately cause the injury or unjust loss complained of (Concept
Builders Inc. v. NLRC, 257 SCRA 149 [1996]).

Q: What are the indicia that a subsidiary company is merely an alter ego of its
parent corporation?

ANS: A combination of 2 or more of the following circumstances, taken

together, may be indicia that a subsidiary corporation is but a mere
instrumentality or alter ego of its parent corporation:
1) The parent corporation owns all or most of the capital stock of the
subsidiary.
2) The parent and subsidiary corporations have common directors or
officers.
3) The parent corporation finances the subsidiary.
4) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation.
5) 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 assets 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 financial responsibility is referred
to as the parent corporation's own.
9) The parent corporation uses the property of the subsidiary as its own.
10) 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.
11) The formal legal requirements of the subsidiary are not observed
(Philippine National Bank v. Ritratto Group Inc., G.R. No. 142616, July
31, 2001).

Note: However, the general rule is still to the effect that if used for legitimate
functions, a subsidiary's separate existence shall be respected, and the liability
of the parent corporation as well as the subsidiary will be confined to those
arising in their respective business (MR Holdings, Ltd. v. Bajar, G.R. No.
153478, October 10, 2012).

Q: What are the probative factors considered in alter ego cases?

ANS: The probative factors considered are:

1. Stock Ownership by one or common ownership of both corporations
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2. ldentity of directors and officers;

3. Methods of Conducting the business, and
4. Manner of keeping corporate Books and records (Concept Builders, Inc. v.
NLRC, G.R. No. 108734, May 29, 1996).

Q: What the jurisdictional requisites before the corporate veil may be pierced?

ANS: As a matter of due process, the corporate veil may only be pierced when:
1. The court has properly acquired jurisdiction over the corporation involved;
and
2. It was shown after a full-blown trial that the grounds to do so exists in fact
and law (Kukan International Corporation v. Reyes, G.R. No. 182729,
September 29, 2010).

Q: How is the veil of corporate existence pierced?

ANS: The court may pierce the veil -

1. By disregarding the separate personality of the subject corporation; and
2. By holding the corporate officer liable for the corporate obligation
(Francisco v. Mejia, G.R. No. 141617, August 14, 2011); or
3. By regarding the Corporation as an association of persons or in case of two
corporations, treat them as one) and hold them liable as such (Development v.
CA, G.R. No. 126200, August 16, 2001).

Q: What are the classifications of corporations under the Corporation Code?

ANS: Corporations are classified as:

1. Stock Corporation; and
2. Non-stock Corporation (RCC Sec. 3).

Q: What is a stock corporation?

ANS: A stock corporation is one which has capital stock divided into shares
and is authorized to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held.

Note: Even if the by-laws do not authorize the distribution of dividends, a

stock
corporation may still distribute dividends to its shareholders as such power is
expressly granted under Sec. 3 of the Revised Corporation Code.

Q: What is a non-stock corporation?

ANS: A non-stock corporation is one where no part of its income is

distributable as dividends to its members, trustees or officers (RCC Sec. 86)

Note: Any profit which a non-stock corporation may obtain as incident to its
operation shall, whenever necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation was organized (RCC Sec.
86).

Q: What are the essential requisites of a non-stock corporation?

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ANS: A non-stock corporation has the following essential requisites

1. It does not have a capital stock divided into shares (RCC Sec. 86.)
2. No part of its income is distributable as dividends to its members (lbid.);
and
3. Non-stock corporations must be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and
like chambers, or any combination thereof (RCC Sec. 87).

Q: May a stock corporation be converted to a non-stock corporation?

ANS: Yes. A stock corporation can always be converted to a non-stock

corporation. The conversion can be done simply by amending of the Articles
of Incorporation (AOI). The effect is that, after conversion, the stockholders
who became the members of the non- stock corporation will no longer have
any pecuniary interest in the corporate assets. Neither are they entitled to any
share in the profit that may be obtained out of the operations or activities of
the non-stock corporation (SEC Opinion dated July 19, 1999).

Q: May a non-stock corporation be converted to a stock corporation?

ANS: No. Non-stock corporations may not be converted to stock corporations.

Conversion, whether by amendment or other methods, would be inconsistent
with the nature of the non-stock corporation because the same will have the
effect of distributing the assets of the non-stock corporation to its members so
that the latter can become its shareholders. This scheme would effectively
defraud persons who may have contributed donations, gift, or grants to the
corporation for the pursuit of its corporate purposes. The stockholders, if they
really want to do business through a stock corporation, must instead dissolve
the non-stock corporation in accordance with the provisions of the Code and
incorporate a new stock corporation. There would be no "conversion to speak
of because the non-stock corporation does not continue to exist (SEC Opinion
dated February 24, 1989).

Q: What is a de facto corporation?

ANS: A de facto corporation is a corporation organized with a colorable

compliance with the requirements of a valid law, and its existence cannot be
inquired into except by the Solicitor General in a quo warranto proceeding
(RCC, Sec. 19).

It differs from a de jure corporation in that the latter is created in strict or

substantial conformity with the mandatory statutory requirements for
incorporation.

Q: Are all acts of a de facto corporation invalid?

ANS: No, as a matter of public policy, the acts of a de facto corporation are
deemed valid until its existence and due incorporation are inquired into by
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the Solicitor General in a quo warranto proceeding. Its existence cannot be

inquired into collaterally for the purpose of nullifying its acts (Sec. 19).

Q: What are the requisites in order for a corporation to be considered de

facto?
ANS: The requisites are:
1. There is a Valid law under which a corporation with powers assumed might
be incorporated;
2. There is a bona fide Attempt to organize a corporation under such law
3. Actual use or Exercise in good faith of corporate powers conferred upon it
by law (Seventh Day Adventist Conference Church of Southern Philippines,
Inc. vs. Northeastern Mindanao Mission of Seventh Day Adventist, Inc., G.R. No.
150416, July 21, 2006).

Note: If, after the incorporation, the incorporators discovered that they have
not complied substantially with the law and still continued transacting
business as a corporation, without doing anything to correct the defect, the
privilege of de facto existence can longer be invoked.

Q: Do the stockholders or members of a de facto corporation enjoy the

privilege
of limited liability?

ANS: Yes. Stockholders of a de facto corporation enjoy exemption from

personal liability for corporate obligations as do stockholders of de jure
corporations.

Q: Give examples of defects which do not preclude the creation of a de facto

corporation.

ANS: The following are examples of defects which do not preclude the
creation of a de facto corporation:
1. The articles of incorporation fail to state all the matters required by the
Code to be stated, or state some of them incorrectly;
2. The name of the corporation closely resembles that of a pre-existing
corporation that it will tend to deceive the public;
3. The incorporators or a certain number of them are not residents of the
Philippines;
4. The acknowledgment of the AOl or certificate of incorporation is insufficient
or defective in form or it was acknowledged before the wrong officer;
5. The percentage of Filipino ownership of the capital stock required for the
business is less than that prescribed by law;
6. The minimum paid-up capital stock has not been paid to and received by
the
corporate treasurer contrary to his affidavit; and
7.The failure to submit its by-laws on time (Sawadjaan v. CA, G.R. No. 141735,
June 8, 2005).

Note: The filing of AOl and the issuance of certificate of incorporation is

essential for the existence of a de facto corporation (Hall v. Piccio, G.R. No. L-
2598, June 29, 1950).
14

Q: Discuss the Doctrine of Corporation by Estoppel.

ANS: The doctrine of corporation by estoppel (also known as ostensible

corporation) applies only in two instances.

1. Against the unincorporated association.

a. An unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation
(Lim Tong Lim v. Phil. Fishing Gear industries, G.R. 136448. November 3,
1999).
b. The association, or its members, cannot allege lack of personality to
be sued to evade its responsibility for a contract it entered into and by Virtue
of which it received advantages and benefits (ld.)

2. Against a third person who transacted with the unincorporated association

such as a corporation knowing it to be such.
a. A third party who, knowing an association to be unincorporated
nonetheless treated it as a corporation and received benefits from it may be
barred from denying its corporate existence in a suit brought against the
alleged corporation (Id.)
b. In such case, all those who benefited from the transaction made by
the ostensible corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage of (id).
c. The doctrine applies to a third party only when he tries to escape a
liability on a contract from which he has benefitted on the irrelevant ground
of defective incorporation (International Express Travel & Tour Services, Inc.
v. Court of Appeals, G.R. No. 119002, October 19, 2000).

Q: Who will be liable in a corporation by estoppel?

ANS: All persons who assume to act as a corporation knowing it to be without

authority to do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof. Provided however, that
when any such ostensible corporation is sued on any transaction entered by it
as a corporation or on any tort committed by it as such, it shall not be allowed
to use as a defense its lack of corporate personality (Lim Tong Lim v.
Philippine Fishing Gear Industries, Inc., supra.; also Sec. 20 of the RCC.)

Q: Who exercises the corporate powers of the corporation?

ANS: The corporate powers are exercised by the board of directors or trustees
(RCC, Sec. 22), unless otherwise provided. Close corporations and corporation
sole (RCC, Secs. 95 and 108).

Note: Under the Revised Corporation Code, a single stockholder shall be the
sole director and president of the One Person Corporation (REVISED
CORPORATION CODE, Sec. 121, effective February 23, 2019).

Q: Discuss the Doctrine of Centralized Management.

15

ANS: Under the Doctrine of Centralized Management, all businesses of the

corporation shall be conducted and all its properties shall be controlled and
held by the Board or Directors or Trustees. A corporation can act only through
its directors and officers. (Tan v. Sycip, G.R. No. 153468, August 17, 2006).

Q: What is the rationale of the Doctrine of Centralized Management?

ANS: The concentration in the board of the powers of control of corporate
business and of appointment of corporate officers and managers is necessary
for efficiency in any large organization. Stockholders are too numerous,
scattered, and unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the
conduct of corporate business (Filipinas Port v. Go, G.R. No. 161886, March 16,
2007).

Q: Can an individual director exercise corporate powers solely?

ANS: The answer must be qualified. As a rule, a director cannot arrogate unto
himself the exercise of corporate powers. However, just as a natural person
may authorize another to do certain acts in his behalf, so may the board
validly delegate some of its functions to individual officers or agents. Absent
such valid delegation, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of, or connected
with the performance of authorized duties of such director, is held not binding
on the corporation (AF Realty & Devt v. Dieselman Freight Services, G.R.
No.111448, January 16, 2002).

Exception: For the purpose of administering and managing, as trustee, the

affairs, property, and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of such religious denomination,
sect or church (RCC, Sec. 108).

Note: A second exception is now provided under the Revised Corporation

Code in the form of One Person Corporations (RCC, Sec. 121)

Q: Are there instances when corporate powers can be exercised by persons

other than the Board of Directors?

ANS: Yes. The following are the instances:

1. In case of an executive committee duly authorized in the by-laws (RCC, Sec.
34);
2.In case of a contracted manager which may be an individual, a partnership,
or
another corporation; or
3.In case of close corporations, the stockholders may directly manage the
business of the corporation instead, if the articles of incorporation so provide.

Q: Discuss the Business Judgment Rule.

ANS: Under the Business Judgment Rule, courts cannot undertake to control
the
16

discretion of the board of directors about administrative matters as to which

they have the legitimate power of action, and contracts intra vires entered
into by the board of directors are binding upon the corporation and courts
will not interfere unless such contracts are so unconscionable and oppressive
as to amount to a wanton destruction of the rights of the minority (Gamboa v.
Victoriano, G.R. No. 40620, May 5, 1979).

Q: What is the rationale behind the Business Judgment Rule?

ANS: Courts and other tribunals won't override the business judgment of the
board mainly because courts are not in the business of business, and the
laissez faire rule or the free enterprise system prevailing in our social and
economic set-up dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are ill-equipped to
make business decisions. More importantly, the social contract in the
corporate family to decide the course of the corporate business has been
vested in the board and not with courts (Ong Yong v. Tiu, G.R. Nos. 144476 &
144629, April 8, 2003).

Q: What are the requirements for Business Judgment Rule to shield the
directors from liabilities?

ANS: The business judgment rule shields the directors only if the following
requirements are present.
1. The presence of a business decision including decisions on policy,
management and administration;
2. The decision must be intra vires and must comply with the procedural and
substantive requirements of law;
3. Good faith;
4. Due care in making the decision; and
5. The director must not have personal interest or not self-dealing.

Q: Are the directors liable for a corporate act done pursuant to a valid
corporate
objective but later on became unfavorable to the corporation?
ANS: No. Questions of policy or management are left solely to the honest
decision of officers and directors of a corporation and the courts are without
authority to substitute their judgment to the judgment of the board. The board
is the business manager of the corporation and so long as it acts in good faith
its orders are not reviewable by the Courts or the SEC. The directors are also
not liable to the stockholders in performing such acts (Montelibeno v.
Bacolod-Murcia Miling, G.R. No 15092, May 18, 1962).

Q: What are the fiduciary duties of directors or trustees?

ANS: A director or trustee has threefold duties:

1. Duty of Obedience embodied in RCC, Section 23, which states that the
directors or trustees and officers to be elected shall perform the duties
enjoined on them by law, the by-laws of the corporation, and the resolutions
of the stockholders in meetings both regular and special;
17

2. Duty of Loyalty embodied in Section 30 (conflict of interest), Section 31

(self- dealing directors), Section 32 (interlocking directors) and Section 33
(usurpation of corporate business opportunity) essentially state that the
director owes loyalty and allegiance to the corporation, a loyalty that is
undivided; and,

3. Duty of Diligence embodied in Section 30, directors or trustees who are

guilty of gross negligence or bad faith in directing the affairs of the
corporation shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other
persons.

Q: Are directors and officers solidarily liable with the corporation?

ANS: As a general rule, obligations incurred by the corporation, acting through

its directors, officers and employees, are its sole liabilities. There are times,
however, when solidary liability may be incurred when exceptional
circumstances warrant such as in the following cases:
1. When a director, trustee or officer is made, by specific provision of Law,
personally liable for a corporate action (Tupaz IV v. CA, G.R. No. 145578,
November 18, 2005);
2. When a director, trustee or officer has contractually Agreed or stipulated to
hold himself personally and solidarily liable with the corporation;
3. When a director or officer has consented to the issuance of Watered stocks
or who, having knowledge thereof, did not forthwith file with the corporate
secretary his written objection thereto; or
4. When directors and trustees or, in appropriate cases, the officers of a
Corporation-
a. Are guilty of conflict of Interest to the prejudice of the corporation, its
stockholders or members, and other persons.
b. Act in Bad faith or with gross negligence in directing the corporate
affairs
c. Vote for or assent to Patently unlawful acts of the corporation

Q: When is there disloyalty by a director or trustee?

ANS: There is disloyalty when a director or trustee attempts to acquire or

acquires, in violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him in confidence as to
which equity imposes a liability upon him to deal in his own behalf.

Q: What is the penalty of a director or trustee who commits acts of disloyalty?

ANS: Directors or trustees who acquire any pecuniary or personal interest in

conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom.

Moreover, he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation. This
rule is sometimes referred to as a "claw back penalty.

Q: Are officers liable for the criminal acts done on behalf of the corporation?
18

ANS: Yes. The officers of the corporation may be held liable. It is settled that
an officer of a corporation can be held criminally liable for acts or omissions
done in behalf of the corporation only where the law directly requires the
corporation to do such an act in a given manner and the same law makes the
person who fails to perform the act in the prescribed manner criminally liable
(Sia v. People, supra.).

Q: May a corporate officer who signed a check on behalf of the corporation be

held personally liable for bouncing checks under BP 22?

ANS: Generally, the stockholders and officers are not personally liable for the
obligations of the corporation except only when the veil of corporate fiction is
being used as a cloak or cover for fraud or illegality, or to work injustice.
Absent any agreement, stockholders and officers shall not be held liable for
the corporation's obligations in their personal capacity (Bautista v. Auto Plus
Traders, Incorporated, G.R. No. 166405 August 6, 2008).
However, Section 1 of BP 22 expressly provides that if the corporation is the
drawer of the check, the person who actually signed the check on behalf of the
corporation shall be personally liable. BP 22 itself fused the criminal liability
with the corresponding civil liability of the corporation itself by allowing the
complainant to recover such civil liability, not from the corporation, but from
the person who signed the check on its behalf (Navarra v. People, G.R. No.
203750, June 6, 2016).

Q: What are the kinds of corporate powers?

ANS: They are the following:

1. Express - those expressly authorized by the Corporation Code, applicable
special laws, administrative regulations, and the articles of incorporation;
2. Implied- those essential and necessary to carry out its purpose/s as stated
in
the articles of incorporation; and
3. Incidental - those that are deemed conferred on the corporation because
they
are incidental to its existence.

Q: What are the general powers of a corporation?

ANS: The following are the general powers of a corporation

1. To purchase, receive, take or grant, hold, convey. Sell, lease, pledge,
mortgage and deal with real and personal property, securities and bonds;
2. For stock corporations: Issue and sell stocks to subscribers and treasury
stocks; for non-stock corporations, admit members,
3. To enter into merger or consolidation;
4. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees,
5. To sue and be sued;
6. To make reasonable donations for public welfare, hospital, charitable,
cultural scientific, civic or similar purposes, provided that no donation is given
to any (i) political party, (ii) candidate and (iii) partisan political activity;
7. To exercise other powers essential or necessary to carry out its purposes:
19

8.Of succession by its corporate name

9. To adopt and use of corporate seal;
10. To amend its Articles of Incorporation and
11.To adopt its By-laws

Note: Under Section 36 of the Revised Corporation Code, the power to have
perpetual existence and to enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement is added to the list of
general powers of a corporation.

Q: What are the specific powers of a corporation?

ANS: The following are the specific powers of a corporation

1.Power to extend or shorten corporate term (RCC, Sec. 36):
2.Power to increase or decrease capital stock and incur, create or increase
bonded indebtedness (RCC, Sec 37);
3.Power to deny preemptive right (RCC, Sec. 38);
4.Power to sell or dispose of assets (RCC Sec. 39);
5.Power to acquire own shares (RCC, Sec. 40);
6.Power to invest corporate funds in another corporation or business or for
any
other purpose (RCC, Sec. 41);
7.Power to declare dividends (RCC, Sec. 42); and
8.Power to enter into management contract (RCC, Sec. 43).

Q: How is the corporate term extended or shortened?

ANS: Corporate term may be changed upon compliance with the following:
(NARS)
1. Written Notice of the proposed action and the time and place of meeting
served to each stockholder or member either by mail or personal service;
2. Approval by a majority vote of the board of directors/trustees:
3. Ratification by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations; and
4. A copy of the amended articles of incorporation Submitted to the SEC for
Approval.

Q: What are the ways to increase or decrease authorized capital stock?

ANS: These are:

1. By increasing/decreasing the number of shares and retaining the par value;
2 By increasing/decreasing the par value of existing shares without increasing
decreasing the number of shares; or
3.By increasing/decreasing the number of shares and increasing/decreasing
the par value.

Q: What are the requirements for the increase or decrease of authorized

capital
stock?

ANS: The requirements for the increase or decrease of authorized capital

stock are as follows:
20

1. Prior written Notice of the proposed increase or decrease of the capital

stock
indicating the time and place of meeting addressed to each stockholder which
must be made either by mail or personal service;
2. Approval by the majority vote of the Board of directors;
3. Ratification by the Stockholders holding or representing at least 2/3 of the
outstanding capital stock at a meeting duly called for that purpose
4. Submission to the SEC for approval;
5. A Certificate in duplicate signed by a majority of the directors of the
corporation, countersigned by the chairman and the secretary of the
stockholders meeting:
6. In case of decrease in capital stock, the same must not Prejudice the right of
the creditors;
7. Filing of the certificate with the SEC; and,
8. In case of increase in capital stock, 25% of such increased capital must be
Subscribed and that at least 25% of the amount subscribed must be paid
either
in cash or property.

Note: The required 25% subscription shall be based on the additional amount
by which capital stock is increased and not on the total capital stock as
increased.
(RCC, Sec. 37).

Q: What is bonded indebtedness?

ANS: Bonded indebtedness is a secured indebtedness or those secured by real

or personal property that are covered by bond certificates.
Q: What are the requirements in order to increase, decrease, or incur bonded
indebtedness?

ANS: The requirements are the same as for the exercise of the power to
increase or decrease a corporation's authorized capital stock.

Q: What are the requirements in order for a corporation to sell or dispose its
corporate assets?

ANS: The requirements are as follows:

1. Prior written Notice of the proposed action indicating the time and place of
meeting addressed to each stockholder or member which must be made
either by mail or personal service;
2. Approval by the majority vote of the board of directors;
3. Ratification by the stockholders holding or representing at least 2/3 of the
outstanding capital stock at a meeting duly called for that purpose; and
4.The sale of the assets shall not be Contrary to the provisions of existing laws
on illegal combinations and monopolies and Bulk Sales Law.

Note: The vote of the majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by
Section 40 in case of non- stock corporations where there are no members
with voting rights.
21

Note further: The Bulk Sales Law regulates any sale, transfer, mortgage, or
assignment of a stock of goods, wares, merchandise, provisions, or materials
otherwise than in the ordinary course of trade and the regular prosecution of
the business, or sale transfer, mortgage or assignment of all, or substantially
all, of the business or trade theretofore conducted by the vendor, mortgagor,
transferor, or assignor, or of all, or substantially all, of the fixtures and
equipment used in and about the business of the vendor, mortgagor,
transferor, or assignor, shall be deemed to be a sale and transfer in bulk (Act
No. 3952, otherwise known as The Bulk Sales Law, Sec. 2).

Q: Is the SEC's approval required before there can be a sale or disposition of

all
or substantially all of the corporate assets?

ANS: The SEC's approval is NOT required because such power really affects
the
business enterprise level of corporate set-up, an area left by the State to the
judgment of management, and does not in any way affect or alter the Juridical
entity granted by the State.

Q: When is a sale or disposition considered to cover substantially all the

corporate assets ?

ANS: It is considered as such when the corporation would be rendered

incapable of:
1. Continuing the business, or
2. Accomplishing the purpose for which it was incorporated.

Note: A sale or other disposition shalt be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which
it was incorporated. Assets must be computed based on its net asset value, as
shown in its latest financial statements. The value of the assets must be
computed based on its net asset value, as shown in its latest financial
statements.

Q: What are the instances when the sale or disposition of corporate assets do
not require the ratification by the stockholders or members?

ANS: Ratification is not required

1. If it is necessary in the usual and regular course of business
2. If the proceeds of the sale or other disposition of such property and assets
be
appropriated for the conduct of the remaining business; or
3. If the transaction does not cover all or substantially all of the assets

Q. Discuss the Nell Doctrine and its exceptions.

ANS: The Nell Doctrine states the general rule that the transfer of all the assets
of a corporation to another shall not render the latter liable to the liabilities of
the transferor.

Exceptions:
22

1.Where the sale of all corporate assets is entered into Fraudulently to escape
liability for transferor's debts (CIVIL CODE, Art. 1388);
2.Where the transferee corporation expressly or impliedly agrees to assume
the transferor's debts (CIVIL CODE, Art. 2947):
3.Merger and consolidation of corporations. If the transfer of assets of one (1)
corporation to another amounts to a merger or consolidation, then the
transferee corporation must take over the liabilities of the transferor (RCC,
Sec. 79); and
4.When the transaction involves a Business Enterprise Transfer such that the
transferee corporation assumes the debts and liabilities of the transferor
corporation because it is merely a continuation of the latter's business (Y-I
Leisure Philippines, Inc. v. Yu, G.R. NO 207161, September 8, 2015).

Q: Can a shareholder intervene in a suit involving corporate assets?

ANS: No. While a share of stock represents a proportionate or aliquot interest

in the property of the corporation, it does not vest the owner thereof with any
legal right or title to any of the property, his interest in the corporate property
being equitable or beneficial in nature. The interest of a stockholder over
corporate assets being indirect, contingent, remote, conjectural, consequential
and collateral and at the very least, is purely inchoate, or in sheer expectancy
of a right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after payment
of the corporate debts and obligations (Magsaysay-Labrador vs CA, G.R. No.
58168 December 19, 1989).

Q: What are the instances when the corporation can acquire its own shares?

ANS: It can acquire its own shares:

1. To Eliminate fractional shares out of stock dividends (RCC, Sec. 41)
2. To Collect or compromise indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale and to purchase delinquent shares
sold during said sale; (RCC, Sec. 41)
3.To Pay dissenting or withdrawing stockholders; (RCC, Sec. 41)
4. To acquire Redeemable shares regardless of existence of retained earnings
(RCC, Sec. 8):
5.In Close corporations, when there is a deadlock in the management of the
business (RCC, Sec. 103).

Q: What are the conditions before the corporation can acquire its own shares?

ANS: A corporation can acquire its own shares provided that:

1. The capital is not impaired
2. A legitimate and proper corporate purpose or objective is advanced;
3. The corporate affairs warrant it;
4. The transaction is designed and carried out in good faith;
5. There is intended and there results no undue advantage to a favored
stockholder at the expense of the remainder.
6. The creditors are not prejudiced; and
7. The corporation acts in good faith and without prejudice to the rights of
creditors and stockholders (SEC Opinion No. 10-24 dated August 12, 2010).
23

Q: For what purposes may a corporation want invest its funds in another
corporation?
ANS: Corporate funds may be invested in another corporation to further its
own purpose or for purposes other than the primary purposes stated in its
Articles of Incorporation.
The other purposes for which the funds may be invested must be among those
enumerated as secondary purposes and must further comply with the
requirements of Section 41 of the RCC.

Note: Investment of funds includes not only investment of money but also
investment of property of the corporation. Lease of the property is included
in the term investment of funds.

Q: What are the requirements to invest corporate funds in another

corporation
under the Corporation Code?

ANS: The following are the requirements (NAR):

1. Prior written Notice of the proposed investment and the time and place of
the meeting shall be made, addressed to each stockholder or member by mail
or by personal service
2. Approval by the majority of the board of directors or trustees; and
3. Ratification by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporation at
meeting duly called for the purpose (RCC, Sec. 41)

Q: Can a corporation engage in a business not enumerated in its purpose

clause?

ANS: No. A corporation is not allowed to engage in a business distinct from

those enumerated in the articles of incorporation without amending the
purpose clause of said article. However, if the investment by the corporation
Is reasonably necessary accomplish its primary purpose as stated in AOI,
there Is no need for stockholder approval (RCC, Sec. 41).

Q: Do passive investments in another corporation require the ratification of

the stockholders?

ANS: No. Section 41 does not cover passive investment in shares. The same
may
justified in the exercise of the general power to purchase securities in other
corporations. Thus, a corporation with idle funds may invest in shares for the
purpose of generating income (RCC, Sec. 35(g).

Q: What are dividends?

ANS: Dividends are corporate profits allocated, lawfully declared and ordered
by the directors to be paid to the stockholders on demand Or at a fixed time
(SEC Memorandum Circular 11-09, Sec. 2)

Q: What are the requirements before the corporation can declare dividends?
24

ANS: The requirements are as follows:

1. Unrestricted retained earnings
2. Resolution of the board; and
3. If stock dividends are declared, there must be a resolution of the board with
concurrence of 2/3 of outstanding Capital (RCC, Sec. 42).

Q: Define unrestricted retained earnings.

ANS: It is the amount of accumulated profits and gains realized out of normal
operations:
1. Not appropriated by the Board for corporate expansion
2. Not covered by a restriction under a loan agreement and
3. Not required to be retained under special circumstances

Q: What corporate acts require the existence of unrestricted retained

earnings?

ANS: The following are the corporate acts which requires the existence of
unrestricted retained earnings:
1. Power to Acquire own shares (RCC, Sec. 40);
2. Power to Declare dividends (RCC, Sec 42); and
3. Payment of stocks to dissenting stockholder in exercise of his Appraisal
right (RCC, Sec. 81).

Q: What is a management contract?

ANS: It is a contract whereby a corporation undertakes to manage or operate

all or substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise.
(RCC Sec. 43).

Q: Can a corporation enter into a management contract with a natural person?

ANS: No. A corporation cannot enter into a management contract with a

natural person. Such contract is an employment contract and not a
management contract contemplated under the Revised Corporation Code.

Q: What is the allowed period for a management contract?

ANS: A management contract must not be longer than five (5) years for any
one (1) term except those contract which relate to the exploration,
development, exploitation or utilization of natural resources that may be
entered into for such periods as may be provided by pertinent laws or
regulations (RCC, Sec. 43).

Q: What are the requirements in order that a management contract be valid?

ANS: The requirements are as follows:

1. Approval by a majority of the quorum of the board of directors;
2. Ratification by the majority of the members or owners of the Outstanding
capital stock entitled to vote of the managing corporation, and
3. Ratification by-
25

a. The majority of the members or owners of the outstanding capital

stock entitled to vote of the managed corporation; or
b. 2/3 of the membership or 2/3 of the owners of the outstanding
capital stock entitled to vote of the managed corporation
c. Where a stockholder/s representing the same interest of both the
managing and the managed corporations own or control more than 1/3
of the total outstanding capital stock entitled to vote of the managing
corporation; or
d. Where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members of the
board of directors of the managed corporation. (RCC, Sec. 43).

Q: Can the management contract delegate the entire control over all officers
and
business of a corporation to another?

ANS: No. A management contract cannot delegate the entire supervision and
control over the officers and business of a corporation to another as this will
contravene Section 24 of the RCC.

Q: What are the modes of exercising corporate powers?

ANS: The exercise of corporate powers depends on the following instances:

1. If the charter of a corporation prescribes no particular mode for the
exercise of its powers, they may be exercised in any mode, provided it is not
contrary to
Law;
2. If the charter requires its powers to be exercised in any particular way by
officers or agents, such powers cannot be properly exercised in any other way,
for the powers of a corporation are measured by its charter; and
3. If a corporation is organized under a special law, the rules governing
corporations organized under the general law have no application where the
special statutes provide methods for the regulation and control of said
corporation.

Q: How do shareholders or members exercise the powers of the corporation7

ANS: As a general rule, stockholders or members do not have the authority to

exercise general corporate powers as such is expressly granted to the Board of
Directors/Trustees or its officers (RCC, Sec. 24). However, in some cases, the
consent and ratification by the stockholders or members, by majority or super
majority, is required to validate certain specific corporate acts.

Note: Members of non-stock corporations may be validly deprived of the right

to vote under its Articles of Incorporation or By-laws (RCC, Sec. 88).

Note Further: For close corporations, the articles of incorporation may

provide that business of the corporation shall be managed by the stockholders
of the corporation rather than by a board of directors.(RCC, Sec. 96).

Q: What is the remedy of the dissenting stockholders?

26

ANS: With respect to acts affecting the rights of stockholders, in proper cases,
such as the sale of all or substantially all corporate assets or investment of
corporate fund another corporation, the dissenting stockholders can exercise
their appraisal right. (RCC, Sec. 80).

Q: Is the approval of stockholders required before the Board of Directors issue

the unissued portion of the original authorized capital stock?

ANS: No. The power to issue shares of stocks in a corporation is lodged in the
board of directors and no stockholders' meeting is required to consider it
because additional issuance of shares of stocks does not need approval of the
stockholders (Dee v. SEC G.R. No. L-60502, July 16, 1991).

Q: How does the board exercise its grant of corporate power?

ANS: The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed by its
charter or by the general law. Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by-laws, otherwise, any action
taken therein may be questioned by any objecting director or shareholder
(Lopez Realty, Inc. v. Fontecha, G.R. No. 76801, August 11, 1995).

Q: What is the consequence when the Board of Directors (or Trustees) does
not
act according to the corporate charter?

ANS: A director or shareholder may object to the act of the Board. The Board
of
Directors must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be
questioned/by any objecting director or shareholder (Lopez Realty v.
Fontecha, G.R. No. 76801, August 11, 1995).

Q: Are the actions of the board of directors, during a meeting which failed to
abide by the requirements of its charter or the law, subject to ratification?

ANS: Yes. An action of the board of directors during a meeting, which was
illegal due to lack of notice, may be ratified either expressly, by the action of
the directors in subsequent legal meeting, or impliedly, by the corporation's
subsequent course of conduct (ld.).

Q: Can the corporation delegate its corporate powers to its officers?

ANS: Yes. A corporation, like a natural person, may authorize another to do

certain acts for and in its behalf, through its board of directors, and may
legally delegate some of its functions and powers to its officers, committees or
agents appointed by it (Luzviminda Visayan v. NLRC, G.R. No. 69999, April 30,
1991).

Q: What is the source of the authority of officers of the corporation?

27

ANS: Whatever authority the officers or agents of a corporation may have is

derive from the board of directors or other governing body, unless conferred
by the charter of the corporation. A corporate officer's power as an agent of
the corporation therefore be sought from the statute, the charter, the by-laws,
or in a delegation authority to such officer, from the acts of the board of
directors, formally expressed implied from a habit or custom of doing
business (Vicente v. Geraldez, G.R. NO 32473, July 31, 1973).

Q: Discuss the Doctrine of Apparent Authority.

ANS: It is a doctrine which states that an officer, company without formal

authorization from the board of directors, may bind the given that the
following are established:
1. Proof of the course of business;
2. Usage and practices of the company; and
3. Knowledge that the board of directors has, or must be presumed to have, of
acts and doings of its subordinates in and about the affairs of the corporation
(The Board of Liquidators v. Heirs of Maximo Kalaw, G.R. No. L-18805, August
14, 1967).

Q: Discuss the Ultra Vires Doctrine.

ANS: The Ultra Vires Doctrine states that no corporation "shall possess or
exercise corporate powers other than those conferred by this Code or by its
articles of incorporation and except as are necessary or incidental to the
exercise of the powers so conferred" (RCC, Sec. 44).

Q: What is an Ultra Vires Act?

ANS: An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore
beyond the powers conferred upon it by law (Republic of the Philippines v.
Acoje Mining Company, Inc., G.R. No. L-18062, February 28, 1963).

Q: Distinguish Ultra Vires Acts from illegal Acts.

ANS: Illegal acts of a corporation contemplate the doing of an act which is

contrary to law, morals, or public order, or contravenes some rules of public
policy or public duty, and are, like similar transactions between individuals,
void They cannot serve as basis of a court action, nor require validity by
performance, ratification, or estoppel.

On the other hand, ultra vires acts or those which are not illegal and void ab
initio but are outside the scope of the authority granted, or can be granted by
the articles of incorporation. Such acts are generally voidable and may become
binding and enforceable when ratified by stockholders (Pirovana v. De la
Rama Steamship Co., G.R. No. L-5377, December 29, 1954)

Q: What are the types of ultra vires acts?

ANS: They are as follows:

28

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

Q: Who may commit ultra vires acts?

ANS: It may be committed by:

1. The Corporation (RCC, Sec. 44);
2. The Board of Directors (RCC, Sec. 22); and
3. The Corporate Officers (RCC, Sec. 24).

Q: Who may invoke ultra vires?

ANS: As a general rule, the effects of ultra vires acts often depend on who is
invoking it.

However, the following are deemed to have the right to invoke said doctrine:
1. State -as the grant of the charter is on the implied condition that the
corporation shall act within the powers conferred upon it, ultra vires acts,
whether wrong or not, are deemed a breach of this condition.
2. Stockholders- even thought all others consent to the ultra vires act, a
stockholder may still invoke said doctrine to protect himself from the
consequences of the subject act.
3. Stranger- it is a general rule that a plea of ultra vires cannot be interposed
by a stranger not a party of the contract, if he is not injured by such act or
contract. However, if he suffers any injury as a consequence of said act, he
may invoke the same.
4. Creditors- it is a general rule that a plea of ultra vires cannot be interposed
by a stranger not a party to the contract, at least if he is not injured by such act
or contract.

Q: What are the effects of an ultra vires act in executed and executory
contracts?

ANS: The effects depend on the executory stage of the contract:

1. Executed contract- courts will not set aside or interfere with such
contracts;
2. Executory contracts - no reinforcement even at the suit of either
party(unenforceable)
3. Partly executed and party executory - principle prohibiting unjust
enrichment at the expense of another shall apply; and
4. Executory contracts apparently authorized but ultra vires - the principle of
estoppel shall apply.

Q: Is it possible that a power of a corporation included in the Article of

Incorporation be considered as an ultra vires act?

ANS Yes, ultra vires refers to an act outside or beyond corporate power,
including those that may ostensibly be within such powers but are, by general
29

or special laws, either prohibited or declared illegal. Thus, though the Articles
if Incorporation grants the corporation a certain power, such cannot be
exercise if it is prohibited or declared illegal by law.

Q: Discuss the Trust Fund Doctrine.

ANS: The capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors which
means that there can be no distribution of assets among the stockholders
without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void.

It is established doctrine that subscriptions to the capital of a corporation

constitute funds to which creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize assets for the payment of its
debts.

The Trust Fund Doctrine is not limited to reaching the stockholder’s unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate
debts.

Q: Discuss the applicability of the Trust Fund Doctrine.

ANS: it applies in the following instances:

1. Where the corporation has distributed its capital among the stockholders
without providing for the payment of the creditors.
2. When there is payment of dividend without unrestricted retained earnings;
3. Where it has released the subscribers to the capital stock from their
subscriptions;
4. Where it has transferred the corporate property in fraud of its creditors;
and
5. Where the corporation is insolvent (Steinberg v. Velasco, G.R. No. L-30460,
March 12, 1929).

Q: What are the exceptions to the Trust Fund Doctrine?

ANS: The Code allows distribution of corporate capital in the following

instances:
1. Amendment of Articles of Incorporation to Reduce authorized capital stock;
2. Purchase of Redeemable shares by the corporation regardless of existence
of unrestricted retained earnings.
3. Dissolution and eventual liquidation of the corporation; or
4. In close corporation, when there should be a Deadlock and the SEC orders
the payment of the appraised value of the stockholder's share (RCC, Sec. 103).

Q: What is the doctrine of equality of shares?

ANS: Under the doctrine of equality of shares, where the articles of

incorporation do not provide for any distinction of the shares of stock, all
30

shares issued by the corporation are presumed to be equal and shall enjoy the
same rights and privileges as well as liabilities (RCC, Sec 6)

Q: Can the board of directors provide preference or additional rights to some

shares?

ANS: No, the board of directors has no authority to classify shares of stock
where the articles of incorporation are silent on the matter. Hence, a
corporation cannot, without express authority in the articles of incorporation,
and without amendment thereof, issue preferred shares with superior rights
and privileges than other shares.

Q: What are the Proprietary Rights of a Shareholder?

ANS: The following are proprietary rights of a shareholder:

1. To receive dividends when declared (RCC, Sec. 42):
2. To inspect corporate books (RCC, Sec. 73);
3. To pre-emption upon issuance of shares (RCC, Sec. 38);
4. To exercise the right of first refusal when available;
5. To transfer of stocks in the corporate book (RCC, Sec. 62);
6. To the issuance of certificate of stock/other evidence of stock ownership
(RCC, Sec. 62); and
7. To participate in distribution of corporate assets upon dissolution.

Note: Included in proprietary rights is the privilege of immunity from

personal liability for corporate debts, subject to judicial limitations against
abuse of this privilege.

Note Further: Members of a non-stock corporation do not have any

proprietary interest in the corporation except as to the extent of corporate
assets which will remain after liquidation pursuant to Sec. 93 of the RCC.

Q: When is there a right to receive dividends?

ANS: As soon as cash dividends are declared by the board of director
stockholders have the right to receive dividends on their pro rata shares
(PLDT v. NTC, G.R. No. 152685, December 4, 2007).

The above rule does not apply to stock dividends however as the declaration
of dividends may be rescinded at any time before the actual issuance of the
stock dividend. Be that as it may, when stock dividends have already been
distributed, the amount declared ceases to belong to the corporation but is
distributed among the shareholders (ld.)

Q:What are property dividends?

ANS: These are dividends in the form of other assets, such as tangible
products of the company or shares of stocks in a company affiliate or
subsidiary.

Q: Can the shareholders' dividends be declared out of the capital of the

corporation?
31

ANS: No. Dividends cannot be declared out of the capital. The Trust Fund
Doctrine would be violated if dividends are declared out of capital except only
in two instances:
1. Liquidating dividends, and
2. Dividends from investments in Wasting Assets Corporations (National
Telecommunications Commission v. Court of Appeals, G.R. No. 127937, July
28, 1999).

Q: Can the stockholders compel the board of directors to declare dividends?

ANS: No. Stockholders cannot do so because the declaration of dividends is

discretionary upon the board. Dividends are payable only when there are
profits earned by the corporation and as a general rule, even if there are
existing profits, the Board of Directors has the discretion to determine
whether or not dividends will be declared (Republic Planters Bank v. Agana,
G.R. No. 51765, March 3, 1997).

This is subject to the rule on non-retention of retained earnings in excess of

100% of paid-in-capital. (RCC, Sec. 42).

Q: Is payment of dividends to a stockholder a matter of right after it is

declared?

ANS: Yes. When a cash dividend is duly declared, the amount due a
stockholder
belongs to him and it cannot, without his consent, be reverted to the surplus
account of the corporation (SEC Opinion, January 29, 1971).

However, this does not apply to stock dividends as the declaration of such
may be rescinded at any time before the actual issuance of the stock.

Q: When does the right to dividends accrue? Does it require the approval of
the
SEC?

ANS: The right of the stockholder to be paid dividends accrues as soon as the
declaration is made. Neither the same board nor their successors can revoke
the declaration of legally declared dividend without the stockholders' consent.
The right to dividend accrues even if there is no SEC approval (SEC Opinions
dated October 10, 2002 and November 12, 1986).

Q: In the absence of a rule to the contrary, how shall dividends be distributed?

ANS: As a rule, dividends given to stockholders of the same class must always
be pro rata, equal and without discrimination regardless of the time when the
shares were acquired (RCC, Sec. 6)

Q: What are the rights of the stockholders with respect to corporate books and
records?

ANS: The rights of the stockholders with respect to books and records are:
(Sec 73-74, RCC)
32

1. Right to Inspect;
2. Right to demand a list of stockholders
3. Right to demand a detailed auditing of business expenditures
4. Right to examine books of the corporation's subsidiary; and
5. Right to financial Statements

Q: What are the books required to be kept under the Corporation Code?

ANS: These are:

1. Book of all business transactions;
2. Book of minutes of all meetings of stockholders or members,
3.Book of minutes of all meetings of directors or trustees; and
4.Stock and transfer book, in case of stock corporations (RCC, Sec. 73).

Q: What are the corporate records required to be kept by the corporation?

ANS: These are:

1. Books of account;
2. List of stockholders or members, and
3. Financial Records (RCC, Sec. 73)

Q: What is the stockholders' (or members') right to inspect?

ANS: A stockholder can inspect the books of the corporation. This is part of the
right of shareholders to information. It is a right that is personal to each
stockholder (Cua, Jr. v. Ocampo Tan, G.R. No. 181455-56 December 4, 2009).

Q: What are the bases of the right to inspect?

ANS: The bases of the right to inspect are the following:

1.The right of stockholders to inspect the books of the corporation rests on the
fact of beneficial ownership of the corporate property and assets through
ownership of shares;
2. The stockholders are entitled to inspect the books and records of a
corporation in order for them to Investigate the conduct of the management,
determine the financial condition of the corporation, and generally take an
account of the stewardship of the officers and directors;
3. The evident purpose of the law in granting stockholders the right is to
protect
small and minority stockholders from the power of the majority and from
mismanagement by its officers as well as to ascertain, establish and maintain
their rights and intelligently perform their corporate duties; and
4.The SEC's power of supervision and control over all corporations
(Gokongwei, Jr. v. Securities and Exchange Commission, G.R. No. L-45911,
April 11, 1979)

Q: Who has the right to inspect the corporate books?

ANS: Either of the following has the right to inspect the corporate books:
1. Any director, trustee, stockholder, or member;
2. Voting trust certificate holder
33

3. Stockholder of a sequestered company; and

4. Beneficial owner of shares (RCC, Sec. 73).

Q: What are the requirements before the corporate records could be

inspected?

ANS: The conditions a person should comply with in order to be allowed to

inspect the corporate books and records are:
1. Good faith and legitimate purpose;
2. The inspection sought to be made is during reasonable hours on business
days;
3. Absence of misuse of prior inspection right; and,
4. Where copies of the records sought are required, a written demand and
payment of reasonable fees for costs (RCC, Sec. 73).

Q: What information about the corporation is excluded in the right to inspect?

ANS: The right to inspect corporate books does not extend to trade secrets.
Trade secrets are those which the corporation may undoubtedly keep secret
notwithstanding the right of inspection given to stockholders (Air Philippine
Corporation v. Pennswell, G.R. No. 172835, December 13, 2007).

It also does not extend to inspection of bank accounts. The Secrecy of Bank
Deposits Law makes all banks deposits of whatever nature absolutely
confidential in nature and the same may not be inquired into by any person
except under specified circumstances (RA. No. 1405, otherwise known as An
Act prohibiting Disclosure of or Inquiry into Deposits with any Banking
Institution and Providing. Penalty Therefor, Sec. 2).

Q: Can the stockholders of the parent company inspect the books of the
subsidiary corporations?

ANS: Yes. The right of stockholders of the parent company to inspect

corporate books extends, in consonance with equity, good faith, and fair
dealing, to a subsidiary wholly owned by the corporation.

Note: However, the stockholders of the subsidiary cannot inspect the books of
the parent company as the subsidiary does not have an entire interest in the
affairs and assets of the parent corporation (Gokongwei v. SEC supra).

Q: What are the remedies of a stockholder who was denied of the right to
inspect corporate books?

ANS: If the inspection is denied, the following remedies may be availed of:
1. Mandamus;
2. Damages; and,
3. Criminal suit

Q: What are the elements that must be present for the imposition of criminal
liability for violation of the stockholders' right to inspect?
34

ANS: For criminal liability to be imposed, the following elements must be

present
1. A director, trustee, stockholder, or member has made a prior demand in
writing for a copy of the excerpts from the corporation's records or minutes.
2. Any officer or agent of the concerned corporation shall refuse to allow the
said director, trustee, stockholder, or member of the corporation to examine
and copy said excerpts; and
3. If such refusal is made pursuant to a resolution or order of the board
directors or trustees, the liability under this section for such action shall
imposed upon the directors or trustees who voted such refusal (RCC, Sec. 73).

Note: Where the officer or agent of the corporation sets up lawful defenses
against the demand for inspection, as authorized under Section 73, the
contrary must be shown or proved. Such authorized defenses are in the
nature of justifying circumstances that would exonerate those who raise and
are able to prove the same (Ang-Abaya, et al. v. Ang, GR No. 178511, December
4, 2008).

Q: What is a pre-emptive right?

ANS: Pre-emptive right is the preferential right of shareholders to subscribe to

all issues or disposition of shares of any class in proportion to their present
shareholdings.

Q: What is the purpose of the pre-emptive right?

ANS: To enable the shareholder to retain his proportionate control in the

corporation and to retain his equity in the surplus. It is aimed to maintain the
existing ratio of the shareholder's interest and his voting power in the
corporation (SEC Opinion dated May 16, 1991).

Q: What is the extent of a stockholder's pre-emptive right?

ANS: The pre-emptive right covers all issues and disposition (RCC, Sec. 38).
The general rule is that pre-emptive right is recognized only with respect to
new issues of shares, and not with respect to additional issues of originally
authorized shares. This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have offered all of those
which it is authorized to issue (Pedro Lopez Dee v. Securities Regulations
Commission, G.R No. L-60502, July 16, 1991).

Q: When can a stockholder exercise its pre-emptive right?

ANS: Whenever the capital stock of a corporation is increased and new shares
of stock are issued, the newly issued shares must be offered first to the
stockholders who are such at the time the increase was made in proportion to
their existing shareholdings and on equal terms with other holders of the
original stocks before subscriptions are received from the general public
(Benito v SEC, G.R No. L-56655, July 25, 1983).

Q: What are the exceptions to the exercise of the stockholders' pre-emptive

right?
35

ANS: The following are the exceptions to the exercise of the pre-emptive right:
1. When such right is denied by the Articles of incorporation or an amendment
thereto;
2. When Issued in compliance with Laws requiring stock offerings or
minimum
stock ownership by the public;
3. When Issued in good faith with the approval of the stockholders
representing
2/3 of the outstanding capital stock, in exchange for property needed for
Corporate purposes;
4. When Issued in good faith with the approval of the stockholders
representing 2/3 of the outstanding capital stock, in payment of previously
contracted Debt (RCC, Sec. 38).

Q: Can a stockholder waive his pre-emptive right?

ANS: Yes. A stockholder who neither desires nor intends to buy any of the
stocks being offered may waive such right. In which event, the shares may be
offered to any interested persons acceptable to the corporation (SEC Opinion
dated January 25, 1990). Waiver is a personal right, hence, the stockholder
should give such waiver individually or he can authorize somebody to execute
the same for and in his behalf by way of a special power of attorney (SEC
Opinion dated December 6, 1994).

Q: May an existing shareholder demand the right of first refusal in transaction

involving the transfer of stocks to third persons?

ANS: For open corporations, the right of first refusal must first be granted in
the Articles of Incorporation or the By-laws.

In close corporations however, restrictions on the right to transfer shares

must appear in the articles of incorporation, in the by laws, as well as in the
certificate of stock; otherwise, the same shall not be binding on any purchaser
in good faith. Said restrictions shall not be more onerous than granting the
existing stockholders or the corporation the option to purchase the shares of
the transferring stockholder with such reasonable terms, conditions or period
stated. If, upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring
stockholder may sell their shares to any third person. (RCC, Sec. 97).

Q: Differentiate pre-emptive right from right of first refusal.

ANS: The differences between pre-emptive right and right of first refusal are
as follows:

Pre-emptive Right Right of First Refusal

Common law right. Arises by virtue of:
1. Contractual stipulations; or
2. Specified statutory provisions.

May be exercised by stockholders May only be exercised if provided for

36

even when no provision is granted by law or by the articles of by

by law. incorporation. It is a creature of
Contract Law.
Pertains only to that portion of the Pertains to shares already issued.
authorized capital stock that has not
been offered for subscription.
A right claimed against the A right exercisable against another
corporation or unissued shares of its stockholder of the corporation on his
capital stock. shares of stock.

Q: Define Intra-corporate disputes.

ANS: Intra-corporate disputes are those which arise between a stockholder

and the corporation or among the stockholders involving internal affairs of
the corporation.

Q: What may be the subject matter of an intra-corporate controversy?

ANS: Under the Interim Rules of Procedure for Intra-corporate Controversies,
the following are covered by intracorporate controversies:
1. Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to Fraud or
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation,
partnership, or association;
2. Controversies arising out of intra-corporate, partnership, or association,
Relations, between and among stockholders, members, or associates, and
between, any or all of them and the corporation, partnership, or association of
which they are stockholders, members, or associates, respectively;
3. Inspection of corporate books;
4. Controversies in the Election or appointment of directors, trustees, officers,
or managers of corporations, partnerships, or associations; and,
5.Derivative suits (Interim Rules of Procedure for Intra-corporate
Controversies, Sec. 1(a).

Q: What are the differences of Individual, Representative, and Derivative suits

ANS: The distinction between the 3 types of suits are as follows:

Individual Representative Derivative

Plaintiff in the Action

Stockholder Stockholder in Corporation but

in his own name representation of others commenced by
similarly situated stockholders after due
proceedings had been
37

taken.
Defendant in the Action

The corporation, its directors or officers, and/or A person against whom

other stockholders. the corporation has a
cause of action

Who has cause of action

The stockholder in his The stockholder in his The corporation in its

personal capacity Personal representative own name
capacity

Q: What is the basis behind the right of a shareholder to file a derivative

action?

ANS: The stockholder's right to institute a derivative suit is not based on any
express provision of The Corporation Code but is impliedly recognized when
the law makes corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary duties
(Bitong V. Court of Appeals, G.R. No. 123553, July 13, 1998).

Q: What are the requisites of a derivative suit?

ANS: The requisites are the following:
1. Existing Cause of action in favor of the corporation;
2. Stockholder/member must first make a Demand upon the corporation or
the management to sue unless such a demand would be futile;
3. Stockholder/member must be such at the time of the objectionable acts or
transactions unless the transactions are continuously injurious (Pascual v.
Orozco, G.R. No. 5174, March 17, 1911)
4.Action must be brought in the Name of the corporation which must be
alleged (Filipinas Port v. Go, supra);
5. The suit is not a nuisance or Harassment suit; and
6. No appraisal right is available (Interim Rules of Procedure Governing Intra
Corporate Controversies, Rule 8, Sec. 1).

Q: May a person having only legal title over a shareholding, such as a trustee,
institute a derivative suit?

ANS: No. The mere trustee of shares registered in his name cannot file a
derivative suit for he is not a stockholder in his own right (Bitong v. CA, G.R.
No. 123553, July 19 1998).

Q: Is there a number of shares required to institute a derivative suit?

ANS: No. There is no requirement regarding the number of shares that is

being held by the stockholders who will file a case. Two minority shareholders
38

who on a share can file the derivative action (Ching v. Subic Bay Golf and
Country Club, Inc., G.R. No. 121171, December 29, 1998).

Q: Is the stockholder a real party-in-interest in a derivative suit?

ANS: No. The stockholder is only a nominal party in a derivative suit. The real
party in interest is the corporation (Filipinas Port v. Go, supra). The
corporation is an indispensable party who must be impleaded in the
derivative action (Asset Privatization Trust v. Court of Appeals, G.R. No.
121171, December 29, 1998).

Q: An action was filed by a minority stockholder involving a corporate matter.

Is the action considered as a derivative suit?

ANS: No. Not every suit filed in behalf of the corporation is a derivative suit. It
is required that the minority stockholder must allege in his complaint that he
is suing on a derivative cause of action on behalf of the corporation and all
other stockholders similarly situated who may wish to join him in the suit
(Chua v. CA, G.R. No. 150793, November 19, 2004).

Q: Is a Derivative Suit similar to Liquidation proceedings?

ANS: No. A derivative suit is distinct and independent from liquidation

proceedings. They are neither part of each other nor the necessary
consequence of the other (Yu v. Yukayguan, G.R. No. 177549 June 18, 2009).

Q: What is a one person corporation?

ANS: A One Person Corporation is a corporation with a single stockholder:

Provided, That only a natural person, trust, or an estate may form a One
Person Corporation.

Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed

companies, and non-chartered government-owned and -controlled
corporations may not incorporate as One Person Corporations: Provided,
further, That a natural person who is licensed to exercise a profession may not
organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.

Q: What is a foreign corporation?

ANS: A foreign corporation is one formed, organized or existing under laws

other than those of the Philippines’ and whose laws allow Filipino citizens and
corporations to do business in its own country or State. It shall have the right
to transact business in the Philippines after obtaining a license for that
purpose in accordance with this Code and a certificate of authority from the
appropriate government agency. (RCC, Sec. 140)

Q: When may a foreign corporation start to do business in the Philippines?

39

ANS: It shall have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in accordance with
this Code and a certificate of authority from the appropriate government
agency (RCC, Sec 143).

Q: What does it mean for a Foreign corporation to be "doing business" in the

Philippines?

ANS: Under the Foreign Investments Act, any act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization (R.A. No. 7042,
otherwise known as the Foreign Investments Act, Sec. 3(d)).

Q: What is the test of "Doing or Transacting Business in the Philippines?"

ANS: Jurisprudence has adopted the twin characterization test involving the
substance and continuity test. A foreign corporation shall be considered as
doing business in the Philippines when:
1. Substance test - Whether the foreign corporation is maintaining or
continuing in the Philippines the body or substance of the business for which
it was organized or whether it has substantially retired from it and turned it
over another; and
2. Continuity test Whether there is continuity of commercial dealings and
arrangements, contemplating to some extent the performance of acts or
works
or the exercise of some functions normally incident to and in progressive
prosecution of, the purpose and object of its organization (Mentholatum v.
Mangaliman, G.R. No. L-47701, June 27, 1941).
40