A corporation is an artificial being created by operation of law, having the right of succession (b) Found administratively liable for
for any offense involving fraudulent acts; and - The SEC may order the removal, after due notice and hearing, of a director who
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";
(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.
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 - BUT: The statement that a corporation may recover moral damages if it “has a
equity ownership in a particular natural resource corporation is not in doubt. If good reputation that is debased, resulting in social humiliation” are obiter
the stockholder corporation is 60% or more owned by Filipinos, all the stock dictum.
held by the stockholder corporation is deemed to be held by Filipinos. -
6. CORPORATIONS CAN BE HELD LIABLE FOR TORTS/QUASI-DELICTS
Hence, it is only when there is doubt, based on the Control Test, that the - A corporation is civilly liable for
Grandfather Rule is applied. - 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
RIGHTS OF A CORPORATION natural or artificial person. Philippine National Bank v. Court of Appeals, 83
SCRA 237 (1978).
1. ENTITLED TO INVOKE THE DUE PROCESS AND EQUAL PROTECTION
CLAUSES 7. GENERALLY: NO CRIMINAL SUIT CAN LIE AGAINST A CORPORATION
- The guaranteed of Bill of Rights are universal in their application to all persons - Philippines courts have no common law jurisdiction. Consequently, corporations
within the territorial jurisdiction, without regard to any differences of race, color, cannot be held criminally liable under Philippine jurisdiction since at this time
or nationality. Private corporations, likewise, are 'persons' within the scope of there is no law relating to the practice and procedure in criminal actions
the guaranties in so far as their property is 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
- Iiii bringing a civil action for malicious prosecution for the damages suffered by the
- Kikkiiiijìik 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
- K the Board of Directors, cannot be held liable for the criminal offense committed
- K on behalf of the corporation, unless they personally took part in the same.
-
- K 9. DIRECTORS/TRUSTEES PER SE NOT PERSONALLY LIABLE FOR A
- K CORPORATE CRIMINAL ACT
6u. - 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
2. PROTECTED UNDER THE UNREASONABLE SEARCHES AND SEIZURE management of the corporation liable for the criminal acts done in pursuit of
CLAUSE. corporate operations. Even if the corporate powers of a corporation are reposed
- a corporation is entitled to Immunity against unreasonable searches and in the Board under [Sec. 22 of RCC], it is of common knowledge and practice
seizures since a corporation is, after all, but an association of individuals under that the Board is not directly engaged or charged with the running of the
an assumed name and with a distinct legal entity. In organizing itself as a recurring business affairs of the corporation. The members of the Board
collective body it waives no constitutional immunities appropriate for such body. generally do not concern themselves with the day-to-day affairs of the
corporation, except those corporate officers who are charged with the running
3. NO RIGHT AGAINST SELF- INCRIMINATION of the businet5ss of the corporation and are concomitantly members of the
- Court held that the privilege against self incrimination is a personal one, Board, like the President.
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 10. ACTING OFFICERS OR EMPLOYEES SHALL BE CRIMINALLY LIABLE FOR
acts of the corporation. THE CRIMINAL CORPORATE ACT
- A corporation can act only through its officers and agents, and where the
4. CORPORATIONS CAN ENGAGE IN PRACTICE OF PROFESSION WHEN business itself involves a violation of the law, the correct rule is that all who
AUTHORIZED BY LAW participate in it are liable. Thus, when the manager of a corporation made a
- Cannot engage in the practice of a profession since they lack the moral and false tax return of the total amount of sales made by said corporation in
technical competence required by the PRC. 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).
5. GENERALLY, CORPORATIONS NOT ENTITLED TO MORAL DAMAGES - Although all corporate powers are vested in the Board of Directors, it does not
- A corporation, being an artificial person has no feelings, emotions nor senses; mean that the officers other than directors cannot be made criminally liable for
therefore, it cannot experience physical suffering and mental anguish their criminal acts
- However, a corporation may have a good reputation which, if besmirched, may
be a ground for the award of moral damages 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. nominal) in which the contract was approved was not
- Ultra vires acts, which are per se illegal are generally void. necessary to constitute a quorum for such meeting;
(2) The vote of such director was not necessary for the
While ultra vires acts which are not illegal but are within the scope of the articles of approval of the contract; and
incorporation, are merely voidable and may become binding and enforceable when ratified
by stockholders (3) The contract is fair and reasonable under the
circumstances
SELF DEALING DIRECTORS - The contract is valid if the interests of the interlocking director in the
corporations involved are both substantial (stockholdings exceed 20% of
SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. - A contract of the outstanding capital stock), or are both nominal. This is consistent with the rule
corporation with one (1) or more of its directors, trustees, officers or their spouses and that contracts between two or more corporations having interlocking directors
relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of shall not be invalidated on that ground alone.
such corporation, unless all the following conditions are present ……………….. 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
- Self-dealing directors, trustees, or officers are those who personally contract the victim of fraud or unfairness or unreasonableness.
with the corporation in which they are directors, trustees or officers. - If the contract is fair and reasonable, the absence of either the first or second
- The contract between the corporation and the self-dealing director, trustee or condition makes the contract voidable and capable of ratification.
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