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 incidental to its existence.

QUALIFICATIONS & DISQUALIFICATIONS OF DIRECTORS

QUALIFICATIONS:
a. Director: Must own at least one (1) share of stock.
Trustee: Must be a member of the corporation.

A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the
corporation shall cease to be such [Sec. 22].

To be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as
appearing on the books of the corporation.
b. Must be a natural person, of legal age, possess full legal capacity
c. Must not be convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6
years [Sec. 26]
d. Other qualifications as may be prescribed in the by-laws of the corporation [Sec. 46].
While additional qualifications may be prescribed, this cannot conflict with the requirements as set by the RCC.
Note: The RCC removed the requirement that majority of the directors or trustees must be residents of the
Philippines.

- RESIDENCY: PH residency requirement deleted. As such, it is possible that a majority or even all directors
or trustees may be non-residents.
- CITIZENSHIP: The RCC does not require Filipino citizenship for the directors or trustees of a corporation.
However, if the corporation is engaged in nationalized activities, citizenship becomes a qualification. Foreigners
cannot be appointed to the board of corporations engaged in wholly nationalized activities.
For partly nationalized activities, foreigners can be elected to the board of directors in proportion to their foreign
equity, as allowed by law
DISQUALIFICATIONS:
A Person shall be DISQUALIFIED from being a DTO if within 5 years prior to the election or appointment the
persons was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating "The Securities Regulation Code";
(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b) above.

- The bylaws can provide other qualifications and disqualifications in addition to those provided in RCC.
- The BOD does not have the power , by the exercise of its business judgement expressed through a
resolution, to provide for additional qualifications and disqualifications to those who are to be nominated
and elected into the board.
- While foreigners are disqualified from being elected/ appointed as corporate officers in wholly or partially
nationalized business activities, they are allowed representation in the BOD or governing body of said
entities in proportion to their shareholding
 ELECTION OF BOD

- Term of Office Directors shall be elected for a term of one (1) year from among the holders of stocks
registered in the corporation’s books, while trustees shall be elected for a term not exceeding three (3)
years from among the members of the corporation.
- Except when the exclusive right is reserved for holders of founders' shares, each stockholder or member
shall have the right to nominate any director or trustee who posseses all of the qualifications and none of
the disqualifications and none of the disqualifications set forth in this Code.
- majority of majority of the outstanding capital stock.
- Cumulative voting for Stock Corporation: right to concentrate his votes and give one candidate as many
votes as the number of directors to be elected multiplied by the number of his shares shall equal.
- The number of Trustees shall be fixed in the AOI or Bylaws which may or may not be more than 15.
- Unless otherwise provided in the AOI or Bylaws, members of Non-stock corporations may cast as many
votes as there are trustees to be elected but may not cast more than 1 vote for 1 candidate.

REMOVAL OF DIRECTORS

- A SH or Members’ prerogatives
- 2/3 OF THE OUTSTANDING CAPITAL STOCK OR VOTE OF 2/3 OF THE MEMBERS ENTITLED TO
VOTE
- Shall take place either at a regular meeting or at special meeting called for the purpose.
- Meeting may be called by the Secretary on the order of the President or on the written demand of the
MAJORITY OF THE OUTSTANDING CAPITAL STOCK OR MAJORITY OF MEMBERS.
- Removal may be with or without cause.
- However, removal without cause cannot deprive minority SH or members of the right of representation.
- If with cause, may be removed by 2/3 votes.
- If without cause, may be removed by 2/3 votes but director elected by the minority thru a cumulative voting
may not be removed without cause even if there is 2/3 votes.

- The SEC may order the removal, after due notice and hearing, of a director who has been elected despite
his disqualification, or whose disqualification arose or is discovered subsequent to an election
- Imposes an obligation on the BOD to remove a disqualified member, and failure to do so subjects the
members of the Board for Administrative sanction by SEC.
- SEC has no statutory power to remove Officers. The power to remove disqualified Directors or Trustees
does not cover that of removing disqualified Officers.

- Board has no power to discipline or remove its own members.

- The power to remove with or without cause is vested with the SH or Members.
- Such power cannot be exercised by the BOD outside the situation of a disqualified director or trustee,
whether pursuant to a board resolution or when such power is granted to the board by provisions in the
AOI and/or Bylaws (NULL & VOID)
- Does not have the power to discipline one of its members, even for cause.

VACANCY IN THE BOD

1. VACANIES NOT DUE TO TERM EXPIRATION OR REMOVAL

o The Board if still constituting a QUORUM – may fill up such vacancies from qualified SH.
By VOTE OF AT LEAST A MAJORITY VOTE OF THE REMAINING BOD/ BOT.
o If Board no longer has quorum – vacancy must be filled-up by the SH or members in a regular or
special meeting.
If to be filled-up by SH -- The election must be held not later than 45 days from when the
vacancy arose.

2. VACANCY DUE TO TERM EXPIRATION – election shall be held not later than the day of such
expiration at a meeting called for the purpose.
 3. VACANCY DUE TO REMOVAL BY SH OR MEMBERS – the election may be held on the same day of
the meeting and this fact must be so stated in the agenda and notice of said meeting.

4. VACANCY DUE TO INCREASE IN THE BOARD MEMBERSHIP

– shall be filled up only by an election at a regular or at a special meeting of SH or members duly
called for the purpose; OR
– in the same meeting authorizing the increase if so stated in the notice of the meeting.

- Shall be filled-up only for the unexpired term.

- The term “may be filled-up” shows that the filling of vacancies in the Board by the remaining BOD/BOT
constituting a quorum is merely PERMISSIVE, NOT MANDATORY. The vacancies may be filled-up by the
SH or Members in a Regular or Special meeting called for the purpose.

The Emergency Board

- When the vacancies in the board prevent the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial and irreparable loss or damage to the
corporation, the vacancies may be temporarily filled-up from the among the officers of the corporation by
unanimous vote of the remaining BOD/BOT.

CORPORATE OFFICERS

- Tasked with the primary responsibility to handle the day-to-day affairs of the company.
- Direct agents of the Board, they are bound by the same fiduciary duties imposed upon the members of the
board.
- BOD has the power to appoint and terminate officers in the exercise of its business judgment, as contrasted
from non-officers who are protected by the security of tenure policy under the labor law.
- Coterminous with that of the Board; serve at the pleasure of the Board.

(a) a president, who must be a director;

(b) a treasurer, who must be a resident;
(c) a secretary, who must be a citizen and resident of the Philippines; and
(d) such other officers as may be provided in the bylaws.

- The same person may hold two (2) or more positions concurrently, except that no one shall act as president
and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code.
- To prevent abuse of power and discretion and to provide a system of check & balance between and among
such sensitive positions.
- STOCK CORPORATION: appointment is solely within the power of BOD.
- NON-STOCK CORPORATION: unless otherwise provided for in the AOI or Bylaws, the officers may be
elected directly by the members.

APPRAISAL RIGHT

- The right of a stockholder to dissent and demand payment of the fair value of the shares in the certain
instances provided in the RCC.

Instances of Exercise of Appraisal Right Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the AOI has the effect of changing or restricting the rights of any stockholder
or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially
all of the corporate property and assets as provided in the Code;
3. In case of merger or consolidation; and
4. In case of investment of corporate funds for any purpose other than the primary purpose of the
corporation.
RIGHT TO INSPECT

- The stockholder’s right of inspection of the corporation’s book and records is based upon his ownership of
shares in the corporation and the necessity for self-protection. (Puno v. Puno Enterprises, Inc., G.R. No,
177066, 11 Sept. 2009)
- The stockholder's right of inspection of the corporation's books and records is based upon their ownership
of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property. (Republic v. Sandiganbayan, G.R. No. 88809, 10 July 1991)
- The mere fact that the shareholding of a stockholder is merely .001 per cent of the issued shares of stock
- does not justify the denial of the request of inspection of the corporate records. (Terelay v. Yulo, G.R. No.
160924, 05 Aug. 2015)
- The shareholder who is denied of his or her right to inspect the corporate books can avail himself or herself
of the following remedies:
 Action for mandamus or damages;
 Civil and criminal liability.

PRE-EMPTIVE RIGHT

- It is the right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to
their respective shareholdings, unless such right is denied by the AOI or an amendment thereto, and
subject to certain exceptions. (Sec. 38, RCC)
- There is preemptive right, unless such right is denied by the AOI or an amendment thereto.
- To enable the shareholder to retain his proportionate control in the corporation (nondilution) and to retain
his equity in the surplus.

RIGHT OF FIRST REFUSAL

- A right 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.

NATIONALITY OF A CORPORATION

The place of incorporation test is applied if the corporation is not engaged in activities reserve, in whole or in part,
for Filipinos. Under such test, the nationality of the corporation is determined by the state of incorporation.

However, with respect to a corporation engaged in nationalized areas of activities, provided for under the
Constitution and other laws, the primary mode of determining the nationality is the control test.

When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the
60-40 Filipino equity ownership requirement in the corporation, then it may apply the "grandfather rule." With that,
the use of the Grandfather Rule as a “supplement” to the Control Test is not proscribed by the Constitution or the
Philippine Mining Act of 1995.

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.

1. PLACE OF INCORPORATION
- A corporation is a national of the country under the laws of which it has been organized and registered.
- Is the primary test of nationality of corporations in the PH, in the following cases, in addition to the place of
incorporation test, the control test also applies.

a. Exploitation of Natural Resources – the constitutional provision limiting the exploitation of natural
resources to corporations of which at least 60% of the capital stock is owned by Filipino citizens
b. Alienable lands of the Public domain
c. Ownership of Private land
d. Public Utilities
 - only domestic corporations with at least 60% of the capital stock owned by FIiipinos may own and
operate public utilities in the Philippines.
- The participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Phllippines.
e. Mass media
- it requires not only 100% Filipino ownership of the capital stock, but also 100%-Fllipino management
of the corporation.
f. Advertising industry
- Only Filipino citizens or corporations or associations at least 70% of the capital of which is owned by
such citizens shall be allowed to engage in the advertising industry.

It also provides that the participation of foreign investors in the governing body of the entities in such
industry shall be limited to their proportionate share in the capital thereof, and all the executive and
managing officers of such entities must be citizens of the Philippines.
g. War-time test
- the Court held that in times of war, the nationality of a private corporation is determined by the
citizenship of its controlling SH.
- It refused the sole application of the place of incorporation test during war-time to determine the
nationality of an enemy corporation.

2. CONTROL TEST
- The nationality of a corporation is determined by the nationality of the majority of the SH on whom equity
control is vested, on the theory that they would be able to elect the majority of the BOD.

It is a mode of determining the nationality of a corporation engaged in nationalized areas of activities, provided
for under the Constitution and other applicable laws, where corporate shareholders with foreign shareholdings
are present, by ascertaining the nationality of the controlling stockholder of the corporation. If the capital of the
investing Corporation is at least 60% owned by Filipinos, then the entire shareholdings of the investing
Corporation shall be recorded as Filipino-owned thus making both the investing and investee - corporations
Philippine national. (Divina, 2021)

In determining the nationality of a corporation, the control test uses the nationality of the controlling
stockholders or members of the corporation.

A corporation organized/incorporated abroad and registered as doing business in the Philippines under the
Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos, may be considered a Philippine National under the Foreign Investments Act of 1991. This is the only
exception to the place of incorporation test. (SEC Opinion No. 04-14, 3 Mar. 2004; De Leon, 2010).

Who are Considered as Philippine Nationals Under R.A. No. 7042 (Foreign Investments Act of 1991), other
than a citizen of the Philippines, the following are also considered Philippine Nationals:

1. Corporations organized under Philippine laws of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by Filipino citizens.
2. Corporations organized abroad and registered as doing business in the Philippines under the
Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals

NOTE: R.A. No. 7042 provides that where a corporation and its non-Filipino stockholders own stocks in a SEC-
registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of each of both corporations
and at least 60% of the members of the Board of Directors of each of both corporations must be citizens, in order
that the corporation shall be considered a Philippine national. (DOUBLE 60% RULE)

NOTE: The fact that the religious organization has no capital stock does not suffice to escape the constitutional
inhibition, since it is admitted that its members are of foreign nationality. The purpose of the 60% requirement is
obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural
resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of capital
stock, the controlling membership should be composed of Filipino citizens. (Register of Deeds v. Ung Siu Si Temple,
G.R. No. L-6776, 21 May 1955)

Control Test is applied in the following:

1. Exploitation of natural resources - Only Filipino citizens or corporations whose capital stock is at least 60%
owned by Filipinos can qualify to exploit natural resources [Sec. 2, Art. XII, Const.]
2. Public Utilities - No franchise, certificate or any other form of authorization for the operation of a public utility
shall be granted, except to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least 60% of whose capital is owned by such citizens [Sec. 11, Art. XII, Const.].
3. Mass Media [Note: Control test DOES NOT apply to Mass Media. Grandfather Rule applies]
4. Advertising industry (70%) – “Only Filipino citizens or corporations or associations at least seventy per
centum of the capital of which is owned by such citizens shall be allowed to engage in the advertising
industry” [Sec. 11, Art. XVI, Const.]
5. Any industry or activity where foreign ownership is prohibited or restricted under the Foreign Investment
Negative List

GRANDFATHER RULE

The Grandfather Rule is a method of determining the nationality of a corporation, which is owned in part by another
corporation, by breaking down the equity structure of the shareholder corporation. Thus, to arrive at the actual
Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are
determined.

The target company may be termed to be the “gransdson”, the holding company would be considered the “father”
and the person or entity holding shares in the holding company would be considered the “grandfather.”

APPLICATION:
The Grandfather Rule applies: (i) in enterprises where the Filipino ownership requirement is 100% (mass
media) or (ii) in other instances, when the 60-40 Filipino foreign equity ownership is in doubt.

"Doubt" refers to various indicia that the "beneficial ownership" and "control" of the corporation do not in
fact reside in Filipino shareholders, but in foreign stakeholders.

NON-APPLICATION:
The Grandfather Rule will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular
natural resource corporation is not in doubt. If the stockholder corporation is 60% or more owned by
Filipinos, all the stock held by the stockholder corporation is deemed to be held by Filipinos.

Hence, it is only when there is doubt, based on the Control Test, that the Grandfather Rule is applied.

RIGHTS OF A CORPORATION

1. ENTITLED TO INVOKE THE DUE PROCESS AND EQUAL PROTECTION CLAUSES

- The guaranteed of Bill of Rights are universal in their application to all persons within the territorial
jurisdiction, without regard to any differences of race, color, or nationality. Private corporations, likewise, are
'persons' within the scope of the guaranties in so far as their property is concerned.

2. PROTECTED UNDER THE UNREASONABLE SEARCHES AND SEIZURE CLAUSE.

- a corporation is entitled to Immunity against unreasonable searches and seizures since a corporation is,
after all, but an association of individuals under an assumed name and with a distinct legal entity. In
organizing itself as a collective body it waives no constitutional immunities appropriate for such body.

3. NO RIGHT AGAINST SELF- INCRIMINATION

- Court held that the privilege against self incrimination is a personal one, applying only to natural individuals,
a corporation may be compelled to submit to the visitorial powers of the State even if this result In
disclosure or criminal acts of the corporation.

4. CORPORATIONS CAN ENGAGE IN PRACTICE OF PROFESSION WHEN AUTHORIZED BY LAW

 - Cannot engage in the practice of a profession since they lack the moral and technical competence required
by the PRC.

5. GENERALLY, CORPORATIONS NOT ENTITLED TO MORAL DAMAGES

- A corporation, being an artificial person has no feelings, emotions nor senses; therefore, it cannot
experience physical suffering and mental anguish
- However, a corporation may have a good reputation which, if besmirched, may be a ground for the award
of moral damages
- BUT: The statement that a corporation may recover moral damages if it “has a good reputation that is
debased, resulting in social humiliation” are obiter dictum.

6. CORPORATIONS CAN BE HELD LIABLE FOR TORTS/QUASI-DELICTS

- A corporation is civilly liable for torts in the same manner as natural persons, because the rules governing
the liability of a principal for a tort committed by an agent are the same whether the principal be a natural
person or a corporation, and whether the agent be a natural or artificial person. Philippine National Bank v.
Court of Appeals, 83 SCRA 237 (1978).

7. GENERALLY: NO CRIMINAL SUIT CAN LIE AGAINST A CORPORATION

- Philippines courts have no common law jurisdiction. Consequently, corporations cannot be held criminally
liable under Philippine jurisdiction since at this time there is no law relating to the practice and procedure in
criminal actions whereby a corporation may be brought to court to be proceeded against criminally.
- However, a corporation can be a real-party-in-interest for the purpose of bringing a civil action for malicious
prosecution for the damages suffered by the corporation for the criminal proceedings brought against its
officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999)

8. SHAREHOLDERS PER SE CANNOT BE HELD LIABLE FOR A CORPORATE CRIMINAL ACT

- Shareholders, being “owners” of the corporation or being basically investors in the corporation, and with
the management of its business generally vested in the Board of Directors, cannot be held liable for the
criminal offense committed on behalf of the corporation, unless they personally took part in the same.

9. DIRECTORS/TRUSTEES PER SE NOT PERSONALLY LIABLE FOR A CORPORATE CRIMINAL ACT

- The Board being be generally a policy-making body, directors as such cannot be held liable under a
criminal statute making those in charge of the management of the corporation liable for the criminal acts
done in pursuit of corporate operations. Even if the corporate powers of a corporation are reposed in the
Board under [Sec. 22 of RCC], it is of common knowledge and practice that the Board is not directly
engaged or charged with the running of the recurring business affairs of the corporation. The members of
the Board generally do not concern themselves with the day-to-day affairs of the corporation, except those
corporate officers who are charged with the running of the business of the corporation and are
concomitantly members of the Board, like the President.

10. ACTING OFFICERS OR EMPLOYEES SHALL BE CRIMINALLY LIABLE FOR THE CRIMINAL
CORPORATE ACT
- A corporation can act only through its officers and agents, and where the business itself involves a violation
of the law, the correct rule is that all who participate in it are liable. Thus, when the manager of a
corporation made a false tax return of the total amount of sales made by said corporation in violation of law,
it is such manager, as the author of the illegal act, who must necessarily answer for the criminal penalties
for its consequences. People v. Tan Boon Kong, 54 Phil. 607 (1930).
- Although all corporate powers are vested in the Board of Directors, it does not mean that the officers other
than directors cannot be made criminally liable for their criminal acts

11. Right of Succession

- a corporation has the capacity for continuous existence despite the death or replacement of its
shareholders or members, for it has a personality separate and distinct from those who compose it.

PIERCING THE VEIL OF CORPORATE FICTION

Under the doctrine of separate legal entity, a corporation is considered to have a legal personality distinct and
separate from its directors, individual stockholders or members ( Bustos v. Millians Shoe, Inc., G.R. No. 185024,
April 24, 2017). The assets and liabilities of the corporation are not owned by the stockholders even if they own the
capital stock of the corporation and vice-versa. Hence, in cases of satisfaction of debt, a creditor of the corporation
cannot claim the assets of its stockholders, and a creditor of a stockholder cannot claim the assets of the
corporation.

This is just, however, a general rule. As a matter of exception, the doctrine of Piercing the Corporate Veil allows a
stockholder or member of a corporation to be held liable for the obligations of the corporation. This doctrine allows
the State to disregard for certain justifiable reasons the notion or fiction that the the corporation has a legal
personality separate and distinct from the corporators composing it. The said doctrine is applicable when the
separate personality of the corporation is used as a means to perpetuate fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

- The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated
as identical, if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification
for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the shareholders.
- When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons.
- An equitable remedy; remedy of last resort.
- Piercing must be based on clear evidence.
- When two business enterprises are owned, conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entitled and treat them as identical or one and the same.
- Piercing the veil of corporate fiction is applied only to determine established liability; it is not available to
confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in the
case.
- Piercing of the corporate veil is premised on the fact that the corporation concerned must have been
properly served with summons or properly subjected to the jurisdiction of the court a quo. Corollary thereto,
it cannot be subjected to a writ of execution meant for another in violation of its right to due process.
There exists, however, an exception to this rule: if it is shown "by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully employed to evade a legitimate and
binding commitment and perpetuate a fraud or like wrongdoings.
- Absent any allegation or proof of fraud or other public policy considerations, the existence of interlocking
directors, officers and stockholders is not enough justification to pierce the veil of corporate fiction as in the
instant case

REVERSE PIERCING
- Note that the doctrine of Piercing the Corporate Veil has an end objective to hold liable the stockholder or a
member of the corporation. Hence, this doctrine can not be applied to resolve the question I earlier posed.
Nevertheless, the question may still be answered in the affirmative, which means that the creditor can still
seize the assets of a corporation to satisfy the personal obligation of a stockholder applying the doctrine of
Reverse Corporate Piercing which was introduced by the Supreme Court in the fairly recent case
of International Academy of Management and Economics v. Litton and Co., Inc. promulgated on December
13, 2017. Reverse-piercing flows in the opposite direction of traditional corporate veil-piercing and makes
the corporation liable for the debt of the shareholders.

CLASSIFICATION OF PIERCING CASES:

 FRAUD PIERCING:
- When corporate entity is used to commit a crime, to undertake fraud or do a wrong, or that the corporate
veil is used as a means to evade the consequences of one’s criminal or fraudulent acts;

 ALTER-EGO PIERCING:
- When the corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or
instrumentality of a person or another entity;

Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own (Instrumentality or Control test);
 DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING):
- When the application of the separate corporate personality would be inconsistent with the business
purpose of the legal fiction or would merely confuse legitimate issues, or when piercing the corporate fiction
is necessary to achieve justice or equity for those who deal in good faith with the corporation
- The corporation is used as vehicle for the evasion of existing obligation.

EFFECT OF PIERCING THE CORPORATE VEIL

1. The corporation will be treated merely as an association of persons, undertaking a business and the liability
will attach directly to the officers and stockholders.
2. Where there are two (2) corporations, they will be merged into one, the one being merely regarded as the
instrumentality, agency, conduit, or adjunct of the other.

Two-fold Implication:

1. The court must first acquire jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and
2. The doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of
action duly commenced involving parties duly brought under the authority of the court by way of service of
summons or what passes as such service. (Kukan International Corp v. Reyes, G.R. No. 182729, 29 Sept.
2010)

NOTE: The Supreme Court, however, ruled differently in Gold Line Tours v. Lacsa (G.R. No. 159108, 18 June
2012). It held that if the RTC had sufficient factual basis to conclude that the two corporations are one and the same
entity as when they have the same president and controlling shareholder and it is generally known in the place
where they do business that they are one, the thirdparty claim filed by the other corporation was properly set aside
and the levy on its property held valid even though the latter was not made a party to the case. The judgment may
be enforced against the other corporation to prevent multiplicity of suits and save the parties unnecessary expenses
and delays. (Divina, 2021).

DE FACTO CORPORATION vs CORPORATION BY ESTOPPEL

DE FACTO CORPORATION
- Is one that is organized with colorable compliance with the requirements of incorporation under the law and
allowed to exist and exercise the powers of a corporation until its corporate existence is assailed by the
State in a quo warranto proceeding.
- The liabilities and penalties attending to officers and directors/ trustees of a de jure corporation shall be the
same as those of a de facto corporation. This includes the liability under the criminal law.

CORPORATION BY ESTOPPEL
- Where a group of persons misrepresent themselves as a corporation, they are subsequently estopped from
claiming lack of corporate life to avoid liability.
- Also, a third party who had dealt with an unincorporated association as a corporation is precluded from
denying its corporate existence on a suit brought by the alleged corporation on the contract.
- They are liable as general partners for all debts, liabilities, and damages incurred or arising as a result
thereof.

CORPORATE TERM

- A Corporation shall have perpetual existence unless its Articles of Incorporation provides otherwise.
- Perpetual existence as a default rule in order promote the ease of ease of doing business through the
corporate medium and avoid unnecessary expenses to effect reincorporation due to corporate negligence
or inattention.
- Corporations organized under the Old corporation code and which continue to exist, shall have perpetual
existence, unless the corporation, upon a vote of its SH representing a MAJORITY OF ITS OUTSTANDING
CAPITAL STOCK notifies the SEC that it elects to retain its specific corporate term.

Note: Change in corporate term is without prejudice to the appraisal right of dissenting SH

OPTION TO RETAIN:
 - Option to retain does not involve amendment to the AOI nor falls within the terms of extension of corporate
term.
- Option to retain available to Non-stock corporation
- Must be approved by MAJORITY OF THE BOD/ BOT and MAJORITY OF SH including non-voting shares.
- Notice to SEC must be submitted within a period of 2 years from FEBRUARY 23, 2019.

EXTENSION OF CORPORATE TERM

- For specific term, it may be extended in any single instance by an amendment in the AOI
- No extension can be made earlier than 3 years prior to the original or subsequent expiry date.

REVIVAL OF EXPIRED CORPORATIONS

- A corporation whose term has expired may apply with the SEC for revival of its corporate term
- Perpetual existence, unless for specific term.
- Votes requires: MAJORITY OF THE BOD/ BOT and MAJORITY OF THE OUTSTANDING CAPITAL
STOCK/ MEMBERS.

BUSINESS JUDGEMENT RULE

- 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 for the judgment of the board of
directors. 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.
- Similarly, under the same business judgment rule, stockholders cannot interfere with the board in
conducting the business affairs of the corporation. They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere disagreement.

CONSEQUENCES:
 Resolutions and transactions entered into by the Board within the powers of the corporation cannot be
reversed by the courts not even on the behest of the stockholders;
 Directors and officers acting within such business judgment cannot be held personally liable for such
acts;

DOCTRINE OF CENTRALIZED MANAGEMENT

- The doctrine means that corporate powers are vested in a body, called board of directors for a stock
corporation and board of trustees for a nonstock corporation. Except in those instances where stockholders’
or members’ approval is required for certain acts under the RCC or the corporation’s bylaws, it is the board
which exercises corporate powers. The stockholders or members, regardless of number, will have to
delegate the power to manage the corporation to the board.

ULTRA VIRES DOCTRINE

- No corporation shall possess or exercise any corporate powers except those conferred by this Code or by
its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so
conferred.

Types of Ultra Vires Acts

1. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation.

- unauthorized acts that are merely beyond the powers of the corporation under its articles of
incorporation are not void ab initio.
- The contracts entered into in the exercise of ultra vires as are not within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by the
stockholders.

2. Acts entered into on behalf of the corporation by persons who have no corporate authority or exceeded the
scope of their authority.
 - Deemed void on the ground that they offend against the principles of Centralized Management which
provides that all corporate powers, assets and businesses are vested in the BOD.

3. Acts or contracts which are per se illegal as being contrary to law.

- Ultra vires acts, which are per se illegal are generally void.

While ultra vires acts which are not illegal but are within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by stockholders

SELF DEALING DIRECTORS

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. - A contract of the corporation with one (1)
or more of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of such corporation, unless all the following conditions are present
………………..

- Self-dealing directors, trustees, or officers are those who personally contract with the corporation in which
they are directors, trustees or officers.
- The contract between the corporation and the self-dealing director, trustee or officer is voidable at the
option of the corporation.
- The contract is still voidable although the stockholders and directors are aware that the contract is self
dealing so long as substantive and procedural fairness as required by Section 31 are absent.
- However, such contracts shall be valid and binding on the corporation, the corporation shall have no option
to seek the annulment of the contract when all the conditions in section 31 are present.
- Even if not all the requirements are met, the contract with the self-dealing director, trustee or officer may still
be ratified by a vote of stockholders representing at least 2/3 OF THE OUTSTANDING CAPITAL STOCK
OR BY THE VOTE OF LEAST 2/3 OF THE MEMBERS in a meeting called for the purpose.

In order that ratification may be considered valid and effective, it is however necessary that the following
conditions are present:

(1) There must be full disclosure of the adverse interest of the directors/trustees involved that is made at
the stockholders'/members' meeting; and
(2) The contract must be fair and reasonable.

INTERLOCKING DIRECTORS

Section 32. Contaracts Between Corporations with Interlocking Directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances a contract between two (2) or more corporations having
interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking
director in one (1) corporation is substantial and the interest in the other corporation or corporations is merely nominal,
the contract shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations
are concerned.

Stockholding exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors.

- However, the By-Laws may contain provisions that disallow interlocking directorship in certain cases.

- If the interest of the interlocking director in one of the corporations is nominal and substantial in the other, a
contract between the two corporations shall be voidable at the instance of the corporation where the interlocking
director has nominal interest, unless the following conditions are present, in which case the contract will be
considered valid:

(1) The presence of the interlocking director in the Board meeting (of the corporation where his
interest is merely nominal) in which the contract was approved was not necessary to constitute a
quorum for such meeting;

(2) The vote of such director was not necessary for the approval of the contract; and
 (3) The contract is fair and reasonable under the circumstances

- The contract is valid if the interests of the interlocking director in the corporations involved are both substantial
(stockholdings exceed 20% of outstanding capital stock), or are both nominal. This is consistent with the rule
that contracts between two or more corporations having interlocking directors shall not be invalidated on that
ground alone.

The exception under Section 32 is when the contract is fraudulent or not fair and reasonable; the contract is
voidable at the option of the corporation that is the victim of fraud or unfairness or unreasonableness.

- If the contract is fair and reasonable, the absence of either the first or second condition makes the contract
voidable and capable of ratification.