MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T.
Divina
BUSINESS
ORGANIZATIONS
MERCANTILE LAW
ATTY. NILO T. DIVINA
CORPORATIONS
1. DEFINITION OF CORPORATION
Section 2, Revised Corporation Code (RCC).
Corporation Defined. – A corporation is an artificial being
created by operation of law, having the right of
succession and the powers, attributes, and properties
expressly authorized by law or incidental to its existence.
4 ATTRIBUTES OF CORPORATIONS
1. It is an artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes, and properties expressly
authorized by law or incidental to its existence.
DOCTRINE OF SEPARATE LEGAL ENTITY
This doctrine emanates from the attribute of a corporation
that it is an artificial being. It means that corporations have
a legal personality distinct and separate from its
stockholders, directors and officers composing it.
What are the legal consequences of the doctrine of
separate legal entity?
a. Properties registered in the name of the
corporation are owned by it as an entity separate
and distinct from its corporators.
Lim v. Court of Appeals, G.R. No. 124715 (January 24,
2000)
The inclusion in the estate of the deceased stockholder of
the properties registered in the name of various corporation
was erroneous even though the corporations were owned
and controlled by the deceased stockholder during his
lifetime.
Philippine National Bank v Merelo B. Aznar, G.R. No.
171805 (May 30, 2011)
Where stockholders granted a loan to the corporation to
finance the acquisition of property which was eventually
mortgaged to a bank to secure a corporate loan, the right
of the stockholders is subordinate to the mortgagee. The
stockholder has the right to be paid the loan but not to the
property of the corporation.
Manuela Azucena Mayor v. Edwin Tiu, G.R. No. 203770,
second division (November 23, 2016)
The probate court hearing the settlement of the estate of
the deceased stockholder cannot order the lessees of the
corporation to remit rentals to the estate’s administrator.
The decedent was not the owner of the rented property but
only of the shares of the corporation that owns the property.
b. As a general rule, directors, officers, or agents of a
corporation cannot be held personally liable for the
obligations incurred by the corporation, unless it
can be shown that such director/officer/agent is
guilty of gross negligence or bad faith or committed
an unlawful act and that the same was clearly and
convincingly proven.
Mactan Rock Industries v. Germo, G.R. No. 228799
(January 10, 2018)
The president should not be held solidarily liable with the
corporation for the unpaid commissions due to a marketing
agent because no commission of an unlawful act, gross
negligence, or bad faith was alleged in the complaint, much
less proven in the course of the trial.
c. The cause of action available to the corporation
cannot be generally enforced by its director, officer,
or stockholder and vice-versa.
MAY A CORPORATION BE LIABLE FOR TORTS?
Philippine National Bank v. Court of Appeals, et.al., G.R.
No. L-27155 (May 18, 1978)
A corporation is civilly liable in the same manner as natural
persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation,
and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master
is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a
natural person, A corporation is liable, therefore, whenever
a tortious act is committed by an officer or agent under
express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors
as the governing body.
Naguiat Ent., Inc. & Clark Field Taxi, Inc. v. NLRC, et.al.,
G.R. No. 116123 (March 13, 1997)
In a close corporation, stockholders who are actively
engaged in the management or operation of the business
and affairs of the corporation shall be personally liable for
corporate torts unless the corporation has obtained
reasonably adequate liability insurance.
MAY A CORPORATION BE CRIMINALLY
PROSECUTED?
Yes, as long as the imposable penalty is not imprisonment.
MAY A CORPORATION CLAIM MORAL DAMAGES?
There are conflicting decisions on this.
The better view, however, is that generally, the award of
moral damages cannot be granted in favor of a corporation
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because being an artificial person and having existence only
in legal contemplation, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock which are the
causes of moral damages under the Civil Code. However,
it may acquire goodwill or reputation of its own and if the
same is besmirched, the corporation may recover moral
damages.
Filipinas Broadcasting Network, Inc. v. AGO Medical and
Educational Center-Bicol Christian College of Medicine
(AMEC-BCCM)
A radio broadcaster uttered libelous remarks against an
educational center (calling it the dumping ground for
intellectual misfits). The Supreme Court held that AMEC’s
claim for moral damages falls under item 7 of Article 2219
of the Civil Code which expressly authorizes the recovery of
moral damages in cases of libel, slander, or any other form
of defamation. Article 2219(7) of the Civil Code 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.
Simex International, Incorporated v. Court of Appeals, G.R.
No. 88013 (March 19, 1990)
Moral damages may also be awarded in case of tortious act
against the corporation. A corporation whose checks were
dishonored by the drawee bank despite the availability of
funds and because of the negligence of the bank
employees can recover moral damages for besmirched
reputation. The standing of the corporation was reduced in
the business community because of the bank’s negligence.
DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION
This applies in 3 areas:
1. Defeat of public convenience cases
2. Fraud cases
3. Alter ego cases
DEFEAT OF PUBLIC CONVENIENCE
Sta. Monica Industrial and Development Corporation v. the
Department of Agrarian Reform Regional Director for
Region III, et. al., G.R. No. 164846 (June 18, 2008)
The sale of agricultural land covered by the agrarian reform
law by the owner to a corporation owned and controlled by
the same owner and his family is null and void. The
corporate vehicle cannot be used to shield the owner from
the agricultural claims of the tenant-beneficiary. The veil of
corporate fiction ought to be pierced when it is used to
subvert a public policy, in this case, the agrarian reform
policy.
FRAUD
A.C. Ransom Labor Union-CCLU v. NLRC et.al., G.R. No.
L-69494 (May 29, 1987)
At the time an unfair labor practice case was pending
against the corporation, its officers and stockholders
organized a run-away corporation, engaged in the same
line of business, producing the same line of products,
occupying the same compound, using the same pieces of
machinery, buildings, laboratory, bodega and sales and
accounts departments used by the first corporation. It was
held that this is another instance where the fiction of
separate and distinct corporate entities should be
disregarded as the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case
could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its
employees.
Times Transportation Company, Inc. v. Santos Sotelo,
et.al., G.R. No. 163786 (February 16, 2005)
The sale of the corporation’s franchise, as well as most of
its bus units, to a company owned by the daughter and
family members of the controlling stockholder of the seller-
corporation, right in the middle of a labor dispute, yielded
the conclusion that the transaction was made to remove
the corporation’s remaining assets from the reach of any
judgment that may be rendered in the unfair labor practice
cases filed against it.
Livesey v. Binswanger Philippines, G.R. No. 177493 (March
19, 2014)
Piercing the veil of corporate fiction is warranted when a
corporation ceased to exist only in name as it re-emerged
in the person of another corporation, for the purpose of
evading its unfulfilled financial obligation under a
compromise agreement. Thus, if the judgment for money
claim could not be enforced against the employer
corporation, an alias writ may be obtained against the other
corporation considering the indubitable link between the
closure of the first corporation and incorporation of the
other.
ALTER EGO TEST
Case law lays down a 3-pronged test to determine the
application of the alter ego theory, which is also known as
the instrumentality theory, namely:
a. 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;
(3 areas – shares, finances, business practices)
b. Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention
of plaintiff’s legal right; and
c. The aforesaid control and breach of duty must
have proximately caused the injury or unjust loss
complained of.
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MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina
Leo R. Rosales, et.al. v New A.N.J.H. Enterprises & N.H.
Oil Mill Corporation, et.al., G.R. No. 203355 (18 August
2015)
In one case, the owner of a business terminated the
employment of his workers on the pretext that there will be
an impending permanent closure of the business as a result
of an intended sale of the assets to an undisclosed
corporation, and that there will be a change in the
management. Subsequent events, however, revealed that
the buyer of the assets was a corporation owned by the
same employer and members of his family. Furthermore,
the business re-opened in less than a month under the
same management. Admittedly, mere ownership by a
single stockholder of all or nearly all of the capital stock of
the corporation does not by itself justify piercing the
corporate veil. Nonetheless, in this case, other
circumstances show that the buyer of the assets of the
proprietor employer is none other than his alter ego.
Luis Juan Virata v. Alejandro Ng Wee, et.al., G.R. Nos.
220926 ad 2215058 (July 5, 2017)
In another case, an investment house devised a scheme
where investors are matched with accredited borrowers. An
investor lent money to a borrower-corporation, as identified
by the investment house. The president of the borrower
corporation was made liable to pay and the legal fiction of
the corporation pierced considering that the president was
the majority owner who exercised complete control over the
corporation; the principal office of the president and the
corporation are the same; the corporation never operated
to perform any business but for the benefit of its president;
and the president allowed the corporation to be used as a
pawn of the investment house in avoiding its legal duty to
pay investors under a failed investment.
JURISPRUDENCE WHERE THE SUPREME COURT
PIERCED THE CORPORATE VEIL WHEN TWO OR
MORE BUSINESSSES ARE OWNED, CONTROLLED,
AND CONDUCTED BY THE SAME PARTIES
Erson Ang Lee Doing Business as “Super Lamination
Services” v. Samahang Manggagawa ng Super Lamination,
G.R. No. 193816 (November 21, 2016)
A settled formulation of the doctrine of piercing the
corporate veil is that 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 these
two entities are distinct and treat them as identical or as one
and the same.
This formulation has been applied by this Court to cases in
which the laborer has been put in a disadvantageous
position as a result of the separate juridical personalities of
the employers involved. Pursuant to veil-piercing, we have
held two corporations jointly and severally liable for an
employee's back wages. We also considered a corporation
and its separately incorporated branches as one and the
same for purposes of finding the corporation guilty of illegal
dismissal. These rulings were made pursuant to the
fundamental doctrine that the corporate fiction should not
be used as a subterfuge to commit injustice and circumvent
labor laws.
Here, a certification election was ordered to be held for all
the rank-and-file employees of Super Lamination, Express
Lamination, and Express Coat. The three companies were
supposedly distinct entities based on the fact that Super
Lamination is a sole proprietorship while Express
Lamination and Express Coat were separately registered
with the SEC. The directive was therefore, in effect, a
piercing of the separate juridical personalities of the
corporations involved. We find the piercing to be proper and
in accordance with the law as will be discussed below.
JURISPRUDENCE WHEN THE CORPORATE VEIL MAY
BE PIERCED IF THE COMPLAINT ALLEGES THAT THE
DIRECTORS AND/OR OFFICERS COMMITTED BAD
FAITH OR GROSS NEGLIGENCE IN CONDUCTING THE
AFFAIRS OF THE CORPORATION
Gerardo Lanuza, Jr. and Antonio O. Olbes v. BF
Corporation, G.R. No. 174938 (October 1, 2014)
The Supreme Court eventually held that corporate
representatives may be compelled to submit to arbitration
proceedings pursuant to a contract entered into by the
corporation they represent if there are allegations of bad
faith or malice in their acts representing the corporation
even though the arbitral only covers the corporation. The
Supreme Court stated that when the directors are
impleaded in a case against a corporation alleging malice
and bad faith on their part in directing the affairs of the
corporation, the complainants are effectively alleging that
the directors and the corporation are not acting as separate
entities; that the acts or omission of the corporation that
violated their rights are also the directors’ acts or omission;
that the contracts executed by the corporation are
contracts executed by the directors. Complainants
effectively pray that the corporate veil be pierced because
the cause of action between the corporation and the
directors is the same. In this case, however, the doctrine
was not applied. The arbitral ruling was that both the
Shangri-La and its directors are not liable.
Should the court first acquire jurisdiction over the
corporation involved before its separate legal
personality may be disregarded?
There appears to be a lack of conclusive yardstick as to
when the court may pierce the veil of corporate fiction of a
corporation that has not been brought to its jurisdiction by
summons, voluntary appearance, or other recognized
modes of acquiring jurisdiction. For academic purposes, it
depends on the similarity with the facts of each case. The
author, though, believes that the corporate veil may be
pierced without having to conduct a full-blown trial as long
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MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

as the corporation, whose veil the court wants to pierce, is sustained the levy, ruling that the corporation is an alter ego
given the opportunity to be heard and based on the hearing, of the lessee and the lessee – the natural person is the alter
albeit summary in nature, evidence exists to warrant the ego of the corporation. The lessee falsely represented
application of the doctrine. This is necessary to prevent himself as president of the corporation in the Deed of Sale
multiplicity of suits and save on expenses. Due process, when he bought the property at a time when the
after all, can be afforded to the corporation even without a corporation had not yet existed. Uncontroverted facts also
full-blown hearing. The Supreme Court has in fact ruled in revealed that the lessee and the corporation are one and
other cases that a party whose corporation is vulnerable to the same person: The lessee is the conceptualizer and
piercing its corporate veil cannot argue violations of due implementor of the corporation and the majority contributor
process. of the corporation. I/AME is basically the corporate entity
used by the lessee as his alter ego for the purpose of
Is the doctrine of piercing the corporate veil applicable shielding his assets from the reach of his creditors.
to a non-stock non-profit corporation and natural
persons?
Yes, the fact that the corporation involved is a non-stock 2. CLASSES OF CORPORATIONS
non-profit corporation does not by itself preclude the court a. AS TO THE EXISTENCE OF SHARES OF
from applying the equitable remedy of piercing the STOCK
corporate veil. The equitable character of the remedy i. Stock corporation
permits a court to look to the substance of the organization ii. Non-stock corporation
and its decision is not controlled by the statutory framework
under which the corporation was formed and operated. b. AS TO ORGANIZERS
While it may appear to be impossible for a person to i. Public
exercise ownership control over a non-stock non-profit ii. Private
corporation, a person can be held personally liable under
the alter ego theory if the evidence shows that the person c. AS TO FUNCTION
controlling the corporation did in fact exercise control even i. Public
though there was no stock ownership. ii. Private

DOCTRINE OF REVERSE PIERCING OF THE d. AS TO GOVERNING LAW

CORPORATE VEIL i. Government-owned and controlled
This doctrine refers to the act of making the corporation corporation (GOCC)
liable for the obligation of its members. ii. Private

In previous cases, the Supreme Court said that the doctrine e. AS TO LEGAL STATUS
of piercing the corporate veil has no application where the i. De Jure
purpose is not to hold the individual stockholders liable for ii. De Facto
the obligation to the corporation but on the contrary, to hold iii. By Estoppel
the corporation liable for the obligations of stockholders. iv. By Prescription
(Francisco Motors v. CA, G.R. No. 100812, Second
Division, June 25, 1999; Umali v. CA, G.R. No. 89561, f. AS TO PLACE OF INCORPORATION
September 13, 1990; Indophil Textile Mill Workers Union v. i. Domestic
Calica, G.R. No. 96490, February 3, 1992). ii. Foreign

In International Academy of Management and Economics g. OTHER CLASSIFICATIONS

(I/AME) Litton and Company, Inc. vs. Litton and Company,
Inc., however the Supreme Court applied the reverse
piercing doctrine and made a non-stock corporation liable
for the debts of its member.
In this case, a lawyer-lessee failed to pay his rentals. The
lessor filed a complaint for unlawful detainer and secured a
favorable judgment. Judgment was not immediately
executed but it was eventually revived. The sheriff levied a
piece of real property in the name of International Academy
of Management and Economics Incorporated (I/AME), a
non-stock corporation, in order to execute the judgment
against the lessee, who is a member of I/AME. The
Supreme Court agreed with the Court of Appeals and
• Closed Corporation
• Special corporations
• One-person Corporations
Bases Conversion and Development Authority (BCDA) v.
Commissioner of Internal Revenue, G.R. No. 205925 (June
20, 2018)
The law creating the BCDA provides that it has an
authorized capital of P100,000,000.00 which may be fully
subscribed by the Republic of the Philippines and shall
either be paid up from the proceeds of the sales of its land
assets.
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MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina
It is created, among others, to own, hold and/or administer
military reservations in the country and implement its
conversion to other productive use.
It is NEITHER a stock nor a non-stock corporation but a
governmental authority vested with corporate powers.
While it has an authorized capital of P100 Billion, it is not
divided into shares of stock. It has no voting shares. There
is likewise no provision which authorizes the distribution of
dividends and allotment of surplus profits to BCDA
stockholders. Hence, it is not a stock corporation. It does
not qualify as a non-stock organization because it is not
organized for any of the purposes mentioned under Section
87 of the RCC.
ELEMENTS OF A GOCC
Carandang v. Desierto, G.R. No. 148076, Third Division
(January 12, 2011)
A GOCC refers to any agency organized as a stock or non-
stock corporation vested with functions relating to public
needs whether governmental or proprietary in nature, and
owned by the government through its instrumentalities
either wholly or where applicable, as in the case of a stock
corporation, to the extent of at least 51% of its capital stock.
When a stockholder ceded to the government shares
representing 72.4% of the voting stock of the corporation
but subsequently clarified that it should be reduced to
32.4%, the corporation shall not be considered a GOCC
until the quantification of shares is resolved with finality.
Consequently, the Ombudsman has no jurisdiction to act
on the complaint for grave misconduct of its officials.
Manila International Airport Authoirty (MIAA) v. City of
Pasay, G.R. No. 163072 (April 2, 2009)
MIAA does not qualify as a government-owned and
controlled corporation because it is not organized as a
stock or non-stock corporation. It is not a stock corporation
because it has no capital stock divided into shares. Neither
is it a non-stock corporation. A non-stock corporation must
have members. Even if we assume that the Government is
considered the sole member of MIAA, this will not make it a
non-stock corporation. Non-stock corporations cannot
distribute any part of its income to its members. Section 11
of the MIAA charter mandates it to remit 20% of its annual
gross operating income to the national treasury. This
prevents MIAA from qualifying as a non-stock corporation.
MIAA is also not organized for any of the purposes allowed
for a non-stock corporation. MIAA, a government
instrumentality and public utility, is organized to operate an
international and domestic airport for public use. As such, it
is not subject to real estate tax.
DE FACTO CORPORATION
One which is organized with colorable compliance with the
requirements under the law.
Requirements:
1. Valid law under which it is incorporated
2. Bona fide attempt to incorporate
3. Use of corporate powers
Missionary Sisters of Our Lady of Fatima v. Alzona, et.al.,
G.R. No. 224307 (August 6, 2018)
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of
a de facto corporation. In fine, it is the act of registration
with the SEC through the issuance of a certificate of
incorporation that marks the beginning of an entity’s
corporate existence.
Are the stockholders of a de facto corporation liable as
general partners? Only to the extent of their subscriptions.
CORPORATION BY ESTOPPEL
International Express Travel & Tour Services, Inc. v. Hon.
Court of Appeals, Henn Kahn, Philippine Football
Federation, G.R. No. 119002 (October 19, 2000)
One person representing a corporation is not a corporation
by estoppel. At any rate, a person acting or purporting to
act on behalf of a corporation that has no valid existence
assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts
performed as such agent.
In another case, it was held that where a national sports
association which is not created by a special law or a
general enabling act, through its president, secured airline
tickets for the foreign trips of its athletes and officials to the
South East Asian Games and later on failed to pay the
obligation, the president shall be personally liable. It is a
settled principle in corporation law that any person acting
or purporting to act on behalf of a corporation that has no
valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts
performed as such agent.
Are all those who subscribed for the stock of a proposed
corporation which was never legally formed liable as
general partners? Only those who assumed themselves as
forming the corporation/those who commit overt acts.
EXC: if passive subscriber gets benefits from the ostensible
corporation.
May a corporation by estoppel be sued? The Supreme
Court said that a corporation by estoppel may be
impleaded as a party defendant considering that it
possesses the attributes of a juridical person, otherwise, it
cannot be held liable for damages and injuries it may inflict
to other persons.
Missionary Sisters of Our Lady of Fatima v. Alzona, et.al.,
G.R. No. 224307 (August 6, 2018)
In another case though, it was held that the doctrine of
corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness. It
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applies when a non-existent corporation enters into
contracts or dealings with third persons. In which case, the
person who has contracted or otherwise dealt with the non-
existent corporation is estopped to deny the latter’s legal
existence in any action leading out of or involving such
contract or dealing. While the doctrine is generally applied
to protect the sanctity of dealings with the public, nothing
prevents its application in the reverse, inf act, the very
wording of the law which sets forth the doctrine of
corporation by estoppel permits such interpretation. Such
that a person who has assumed an obligation in favor of a
non-existent corporation, having transacted with the latter
as if it was duly incorporated, is prevented from denying the
existence of the latter to avoid the enforcement of the
contract. In this case, while the donation was accepted at
the time the done was not yet incorporated, the subsequent
incorporation of the donee-corporation and its affirmation
of the recipient’s authority to accept on its behalf cured
whatever defect that may have attended the acceptance of
the donation, applying the doctrine of corporation by
estoppel under the Corporation Code.
The Supreme Court likewise stated that the donee could
not be considered a de facto corporation because, at the
time of the donation, it was not registered with the SEC.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of
a de facto corporation.
To summarize then, an ostensible corporation when sued
on any transaction entered by it as a corporation or on any
tort committed by it as such shall not be allowed to use its
lack of corporate personality as a defense.
Similarly, anyone who assumes an obligation to an
ostensible corporation as such cannot resist performance
thereof on the ground that there was in fact no corporation
(Sec. 20, RCC)
3. INCORPORATION AND
ORGANIZATION
a. ARTICLES OF INCORPORATION
1. Contents
2. Non-amendable items
Revisions on the RCC
b. An arbitration agreement may be provided in the
articles of incorporation
c. Filing of the articles of incorporation or amendments
thereto may be in the form of an electronic document
in accordance with the rules on electronic filing of the
SEC
d. The articles of incorporation should include an
undertaking to change the corporate name
immediately upon receipt of notice from the SEC that
another corporation, partnership or person has
acquired a prior right to the use of such name, that
the name has been declared not distinguishable from
a name already registered or reserved for the use of
another corporation, or that it is contrary to law,
public morals, good customs, or public policy.
e. It provides that the corporation shall have perpetual
existence or a fixed term as may be indicated in the
articles of incorporation.
f. There is no need to state that at least twenty-five
(25%) percent of the authorized capital stock above
stated has been subscribed and that at least twenty-
five (25%) of the total subscription have been paid as
this double 25% requirement under the OCC has
been deleted.
g. There is a requirement of certification of receipt of the
paid-up portion of subscription by the Corporate
Treasurer.
h. Since the requirement of Treasurer’s affidavit has
already been deleted under the RCC, the format for
the said affidavit is omitted as well.
Revisions on the amendment of articles of incorporation
a. It appears that unless otherwise provided by the
RCC or the corporation’s bylaws, the articles of
incorporation of a non-stock corporation may be
amended by the vote or written assent of both the
trustees, by majority vote, and the members of the
corporation, by at least 2/3s, unlike under the OCC
where the option of written assent is limited to
stockholders or members of the corporation.
b. While the requirements for amendment of the
articles of incorporation are common for both stock
and non-stock corporation, the provision on
requirements for a stock corporation was
separated from those of non-stock corporation. As
a consequence, it may be inferred that the remedy
of appraisal right only applies to a stock
corporation.
What is the remedy available to the stockholder in case of
an amendment to the articles of incorporation?
Appraisal (however not all amendments have the right of
appraisal)
Is appraisal right available for members of a non-stock
corporation? No.
b. ADOPTION OF BY-LAWS
1. Contents of by-laws
2. Binding effects
3. Amendments
Revisions under the RCC on bylaws
1. It removed the option of adopting and submitting
the bylaws of the corporation to the SEC within a
period of one month from the former’s
incorporation but, nevertheless, retained the option
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of the corporation to adopt bylaws after
incorporation.
2. On the contents of the bylaws, it included
provisions on the mode of notice to the
stockholders or members and the modes by which
they may attend meetings; the guidelines for setting
the compensation of directors or trustees and
officers, and the maximum number of other board
representations that an independent director or
trustee may have which shall, in no case, be more
than the number prescribed by the SEC; and other
matters as may be necessary for the promotion of
good governance and anti-graft and corruption
measures.
3. It also allows the inclusion of an arbitration
agreement in the bylaws.
By-laws are not binding on third parties.
By-laws are effective upon approval of the SEC.
Revision under the RCC on amendment of bylaws
It made it clear that the delegation of authority by the
stockholders or members to the board of directors or
trustees to amend the bylaws must be embodied in a
stockholders’ or members’ resolution.
May the bylaws reflect the actual delegation of authority to
the board of directors to amend the bylaws? No. delegation
is supposed to be temporary.
Is it permissible for the bylaws to provide quorum of
stockholders’ meetings which is less than a majority? Yes.
4. REMEDIAL RIGHTS
a. Individual suit
b. Representative suit
c. Derivative Suit
5. BOARD OF DIRECTORS AND
TRUSTEES
a. Repository of corporate powers
b. Tenure, qualifications and disqualifications of
directors
c. Requirement of independent directors
d. Elections
1. Cumulative voting
2. Quorum
Revisions on the RCC
a. The term of a trustee was modified for a period not
exceeding three years from its term of one year in
the OCC.
b. There is no residence requirement for the members
of the Board
c. The RCC requires the election of independent
directors for a corporation vested with public
interest who should constitute at least twenty
percent (20%) of such Board.
d. RCC enumerated the corporations that are vested
with public interest, to wit:
• Corporations covered by Section 17.2 of R.A.
No. 8799, otherwise known as “The Securities
Regulation Code,” namely those whose
securities are registered with the SEC,
corporations listed with an exchange or with
assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred
(200) or more holders of shares, each holding at
least one hundred (100) shares off a class of its
equity shares;
• Banks and quasi-banks, NSSLAs, pawnshops,
corporations engaged in money service
business, preneed, trust and insurance
companies, and other financial intermediaries;
and
• Other corporations engaged in businesses
vested with public interest similar to the above,
as may be determined by the SEC, after taking
into account relevant factors which are
germane to the objective and purpose of
requiring the election of an independent
director, such as the extent of minority
ownership, type of financial products or
securities issued or offered to investors, public
interest involved in the nature of business
operations, and other analogous factors.
e. It defines an independent director as a person who,
apart from shareholdings and fees received from
the corporation, is independent of management
and free from any business or other relationship
which could or could reasonably be perceived to
materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a
director. Independent directors must be elected by
the shareholders present or entitled to vote in
absentia during the election of directors.
Independent directors shall be subject to rules and
regulations governing their qualifications,
disqualifications, voting requirements, duration of
term and term limit, the maximum number of board
memberships, and other requirements that the
SEC will prescribe to strengthen their
independence and align with international best
practices.
DOCTRINE OF CENTRALIZED MANAGEMENT
Corporate power is vested in one body except in those
cases where approval of stockholders are required.
Paul Lee Tan v. Paul Sycip, et.al., G.R. No. 153468 (August
17, 2006)
In other words, stockholders or members periodically elect
the board of directors or trustees, who are charged with the
management of the corporation. The board, in turn,
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periodically elects officers to carry out management
function on a day-to-day basis. As owners though, the
stockholders or members have residual powers over
fundamental and major corporate changes. Acts of
management pertain to the board; and those of ownership,
to the stockholders or members.
BUSINESS JUDGMENT RULE
Questions of policy and management are in the discretion
and decision of the actors and officers of the corporation.
Provident International Resources v. Joaquin Venus, et.al.,
G.R. No. 167041 (June 17, 2008)
The business judgment rule is not absolute.
It cannot be relied upon to support a request for a new
stock and transfer book on the pretext that the original is
lost (when in fact it is not) and declare entries in the
supposed lost stock and transfer book as invalid.
Can the board of directors or trustees create positions or
committees? Yes. However, it cannot create an executive
committee, and a corporate office, because these are
required to be created by the by-laws.
TERM OF THE BOARD OF DIRECTORS
1 year. Holdover period is not part of the term, but of the
tenure. Term is fixed by statute. Tenure is the actual
incumbency which can be shorter or longer than 1 year.
Thus, if a hold-over director resigns, the vacancy is due to
the expiration of term and not resignation. Accordingly, the
vacancy can only be filled by the stockholders in a meeting
called for the purpose and not by the board of directors
even though the remaining directors may still constitute a
quorum.
ELECTION OF DIRECTORS
4. The right of each stockholder or member to nominate
any director or trustee is subject to the exclusive right
reserved for holders of founders’ shares to be voted
as directors.
5. When so authorized in the bylaws or by a majority of
the board of directors, the stockholders or members
may also vote through remote communication or in
absentia: Provided, That the right to vote through such
modes may be exercised in corporations vested with
public interest, notwithstanding the absence of a
provision in the bylaws of such corporations.
6. A stockholder or member who participates through
remote communication or in absentia shall be deemed
present for purposes of quorum.
7. It added a provision that the directors or trustees
elected shall perform their duties as prescribed by law,
rules of good corporate governance, and bylaws of the
corporation.
HOW MANY VOTES ARE STOCKHOLDERS ENTITLED TO
CAST? Such number of votes depending on his
shareholdings multiplied by directors to be elected
(cumulative voting in stock corporation)
HOW MANY VOTES ARE MEMBERS OF NON-STOCK
CORPORATIONS ENTITLED TO CAST? May casts votes
for all candidates, but not more than 1 vote for each.
Do the holders of founders’ shares have the right to be
voted as directors if their shares and votes are not enough
to be assured of a board seat? Yes.
What are the allowable modes of voting for election of
directors or trustees?
1. In person
2. By proxy
3. Remote communication/in absentia
When is #3 allowed?
1. If allowed by the by-laws of the corporation
2. When authorized by the Board
3. In corporations vested with public interest, even
though not provided in the by-laws
REVISIONS ON THE RCC FOR CORPORATE OFFICERS
a. The treasurer is required to be a resident.
b. It requires the appointment of a compliance officer
for those corporations vested with public interest.
c. The provision on the determination of quorum of
directors or trustees for the transaction of
corporate business was moved from Section 24 to
Sec. 52 of the RCC. Likewise, the prohibition on
proxies during board meetings was moved to
Section 52 of the RCC.
d. The prohibition that one cannot act as president
and secretary or as president and treasurer at the
same time is now subject to an exception – if the
same is allowed in the RCC.
May the Board of directors create positions and offices?
Yes, if Board is authorized by the by-laws.
Test: is this position provided for in the by-laws of the
corporation?
Wesleyan University-Philippines v. Guillermo T. Maglaya,
Sr., G.R. No. 212774 (January 23, 2017)
In other words, the creation of the position is under the
corporation’s charter or bylaws, and that the election of the
officer is by the directors or stockholders must concur in
order for an individual to be considered a corporate officer,
as against an ordinary employee or officer. It is only when
the officer claiming to have been illegally dismissed is
classified as such corporate officer that the issue is deemed
an intra-corporate dispute which falls within the jurisdiction
of the trial courts.
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When is the act of the officer of the corporation considered
the act of the corporation and therefore, valid and
enforceable against the corporation?
1. Authorized by the by-laws
2. Authorized by the board of directors
3. If ratified by the corporation (by acquiescence or if
the corporation clothes that the officer is authorized
and holds him out to the public as such)
DOCTRINE OF APPARENT AUTHORITY
A corporation is estopped from denying liability if it permits
its officer or agent to act within its authority and holds him
out to the public as possessing such power to do those
acts.
• Presupposes there is no board resolution
Games and Garment Developers v. Allied Banking
Corporation, G.R. No. 181426 (July 13, 2015)
A bank is liable to the seller who transferred ownership of
his property in favor of its buyer after the seller relied on the
letter of the bank manager that the buyer had an approved
real estate loan with the bank and guaranteed that
subsequent releases from the loan would be made directly
to the seller, but the manager released the loan instead to
the buyer who, however, failed, to pay the seller.
TERP Construction Corp vs. Banco Filipino Savings and
Mortgage Bank, G.R. No. 221771 (September 18, 2019)
Banco Filipino purchased a bond from TERP Construction
(“TERP”) and relied on TERP senior vice president’s (“SVP”)
apparent authority to promise interest payments over and
above the guaranteed 8.5% considering the SVP’s position
in TERP. His apparent authority was further demonstrated
when TERP paid Banco Filipino what the SVP promised
during the Bond’s term.
JURISPRUDENCE WHERE DOCTRINE OF APPARENT
AUTHORITY WAS NOT APPLIED
Philippine Race Horse Trainer’s Association, Inc. v. Piedras
Negras Construction and Development Corporation, G.R.
No. 192658 (December 2, 2015)
While in the absence of a charter or bylaw provision to the
contrary the president is presumed to have authority, the
questioned act should still be within the domain of the
general objectives of the company’s business and within
the scope of his or her usual duties. Here, the corporation
is an association of professional horse trainers in the
Philippine horse racing industry organized as a non-stock
corporation and it is committed to the uplifting of the
economic condition of the working sector of the racing
industry. It is not in its ordinary course of business to enter
into housing projects, especially not in such scale and
magnitude so massive as to amount to P101,150,000.00.
REVISIONS ON THE RCC RELATING TO NON-HOLDING
OF ELECTION AND CESSATION FROM OFFICE
1. The non-holding of elections and the reasons
therefor shall be reported to the SEC within 30 days
from the date of the scheduled election. The report
shall specify a new date for the election, which shall
not be later than 60 days from the scheduled date
2. If no new date has been designated, or if the
rescheduled election is likewise not held, the SEC
may, upon the application of a stockholder,
member, director or trustee, and after verification
of the unjustified non-holding of the election,
summarily order that an election to be held. The
SEC shall have the power to issue such orders as
may be appropriate, including orders directing the
issuance of a notice stating the time and place of
the election, designated presiding officer, and the
record date or dates for the determination of
stockholders or members entitled to vote.
3. Should a director, trustee or officer die, resign or in
any manner cease to hold office, the secretary, or
the director, trustee or officer of the corporation,
shall, within 7 days from knowledge thereof, report
in writing such fact to the SEC.
EMERGENCY QUORUM
Actual attendance shall constitute the required quorum
notwithstanding the attendance required in the by-laws of
the corporation.
REVISIONS ON THE RCC REGARDING
DISQUALIFICATIONS OF DIRECTORS, TRUSTEES, OR
OFFICERS
Within 5 years prior to election or appointment, person was
convicted by final judgment of an offense punishable by
imprisonment of more than 6 years.
May the bylaws provide as a ground for disqualification
being a director or stockholder of a competing corporation
or representing an interest in conflict with or adverse to the
corporation? Yes, conflict of interest is a valid ground for
disqualification.
REVISIONS ON THE RCC REGARDING REMOVAL OF
DIRECTORS OR TRUSTEES
1. The SEC is given authority, motu proprio, or upon
a verified complaint, and after due notice and
hearing, to order the removal of a director or
trustee elected despite the disqualification, or
whose disqualification arose or is discovered
subsequent to an election.
2. The removal of a disqualified director shall be
without prejudice to other sanctions that the SEC
may impose on the board of directors or trustees
who, with knowledge of the disqualification, failed
to remove such director or trustee.
REVISIONS UNDER THE RCC ON DEALING WITH
VACANCIES IN THE BOARD OF DIRECTORS OR
TRUSTEES
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1. There are now fixed periods within which the not establish probable cause absent showing or personal
corporations must hold their elections to fill participation in any irregularity as regards approval of the
vacancies in the director or trustee positions, viz: loan.
o If the vacancy is due to term expiration, the
election shall be held no later than the day Donnina Halley v. Print well, Inc. G.R. No. 157549 (May 30,
of such expiration. 2011)
o If the vacancy arises as a result of removal It should be noted that the stockholders are not included in
by the stockholders or members, the the enumeration of persons who may be held personally
election may be held on the same day of liable. Stockholders are liable only to the extent of their
the meeting authorizing the removal. subscription unless they also act as directors, officers, or
However, this fact must be so stated in the agents of the corporation.
agenda and notice of the said meeting.
o For all other cases, the election must be REVISIONS UNDER THE RCC ON SELF-DEALING
held no later than 45 days from the time PROVISION
the vacancy arose. 1. It expands the coverage of self-dealing provision to
2. The RCC also introduced the concept of spouses and relatives within the 4th civil degree of
emergency board. consanguinity or affinity of the directors, trustees,
officers.
REVISIONS UNDER THE RCC ON COMPENSATION OF 2. In the case of corporations vested with public
DIRECTORS OR TRUSTEES interest, material contracts are approved by at least
1. Section 29 of the RCC clarified that directors or 2/3 of the entire membership of the board, with at
trustees shall not participate in the determination of least a majority of the independent directors voting
their own per diems or compensation. to approve the material contract.
2. It imposed an annual reportorial requirement in
relation to the total compensation of each of the REVISIONS UNDER THE RCC ON CORPORATE POWERS
directors or trustees for corporations vested with 1. Corporations under the RCC may have perpetual
public interest. existence.
2. Corporations are now expressly allowed to enter
Limit: 10% of the net income of the corporation into a partnership, joint venture, or any other
commercial agreement with natural and juridical
What are the instances when personal liability may persons.
attach to directors, trustees, or officers of the 3. It appears that there is no more prohibition for
corporation? domestic corporations to donate in favor of a
political party or candidate.
Heirs of Fe Tan Uy vs. International Exchange Bank, G.R.
No. 166282 (February 13, 2013) Powers of Board of Outstanding
Before a director or officer of a corporation can be held Corporation Directors Capital
personally liable for corporate obligations, the following Stock (or
requisites must concur: members,
1. The complainant must allege in the complaint that for non-
the director or officer assented to patently unlawful stock
acts of the corporation, or that the officer was guilty corporations
of gross negligence or bad faith; and )
2. The complainant must clearly and convincingly Sec. 15 – At least majority At least 2/3s
prove such unlawful acts, negligence, or bad faith. Amendment of of the board of the
Articles of outstanding
The president of the corporation cannot be held personally Incorporation capital stock
liable for gross negligence or bad faith if the complaint Sec. 23 – Election of At least
merely averred that he signed as a surety to secure the Directors majority of
obligation of the corporation, but which surety turned out to the
be spurious. outstanding
capital stock
Note: the grounds are exclusive. Sec. 24 – At least majority
Appointment of of the board
Presidential Commission on Good Government v. Hon. Ma. Corporate Officers
Merceditas Gutierrez, G.R. No. 189800 (July 29, 2018) Removal of At least majority
Relating to a criminal case, the Supreme Court said that Corporate Officers of the board
approval of a loan during the incumbency as a director does
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Sec. 27 – removal of At least 2/3s All or At least 2/3s

Directors/Trustees of the substantially all of the
outstanding of corporate outstanding
capital stock assets – at least capital stock
Sec. 28 – Filling If the ground is If the ground majority of the
Vacancy in the not expiration of is expiration, board
Board the term, removal, Sec. 41 – invest Majority of the
removal, increase in funds in the primary quorum
increase in number of purpose
number of board directors; or if Invest Funds to Majority of the
seats and the the ground is Incidental Purpose quorum
remaining not for which
directors expiration, Corporation is
constitute a removal, created
quorum – increase in Invest the Funds in a At least majority At least 2/3s
majority of the number of Secondary Purpose of the board of the
remaining board seats or another business outstanding
directors/trustee but the capital stock
s remaining Sec. 42 – Majority of the
directors do Declaration of cash quorum
not constitute dividends
a quorum – at Sec. 42 – Majority of the At least 2/3s
least majority Declaration of stock quorum of the
of the dividends outstanding
outstanding capital stock
capital stock Sec. 43 – Enter into Majority of the At least
Sec. 29 – Payment At least Management quorum for both majority of
of Compensation to majority of Contract managed and the
Directors the managing outstanding
outstanding corporation capital stock
capital stock of each
Sec. 34 – Creation Majority of the managed and
of Executive quorum managing
Committee (if corporation
provided by Bylaws) (but at least
Sec. 34 – Creation Majority of the 2/3s of the
of Special quorum outstanding
Committees capital stock
Sec. 36 – At least majority At least 2/3s is required
Extension/Shortenin of the board of the from the
g of the Term outstanding managed
capital stock corporation in
Sec. 37 – Incurring, At least majority At least 2/3s case
creating or of the board of the interlocking
increasing bonded outstanding directors and
indebtedness; mere capital stock stockholders)
using or decreasing Sec. 45 – Adoption Majority of
capital stock of By-laws the
Incurring debt in the Majority of the outstanding
ordinary course of quorum capital stock
business Sec. 46 – At least majority At least
Sec. 39 – Sale or In the ordinary Amendment of of the board majority of
other disposition of course of Bylaws the
assets business – outstanding
majority of the capital stock.
quorum If authority to
amend will be

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MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

delegated by
stockholders
to the board
at least 2/3s
of the
outstanding
capital stock.
Revocation of
the
delegation
made to the
Board – at
least majority
of the
outstanding
capital stock.
Sec. 61 – Fixing the Majority of the Or at least
issued value of no quorum majority of
par value shares (if (pursuant to the
not fixed in the authority outstanding
Articles of conferred by the capital stock
Incorporation) Articles of
Incorporation or
the Bylaws)
Sec. 75 – Merger or At least majority At least 2/3s
consolidation of the board of the
outstanding
capital stock
Sec. 102 - At least majority At least 2/3s
Amendment of of the board of the
articles of outstanding
incorporation of a capital stock
close corporation
Sec. 134 – Voluntary At least majority At least
dissolution where no of the board majority of
creditors are the
affected outstanding
capital stock
Sec. 135 – voluntary At least majority At least 2/3s
dissolution where of the board of the
creditors are outstanding
affected capital stock

How can a director or trustee cast vote in a meeting via

remote communication?
• Email, text messages, or other manner provided in
internal procedures of the corporation.

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