Divina - Corporation Law

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MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T.

Divina

The decedent was not the owner of the rented property but
BUSINESS only of the shares of the corporation that owns the property.

ORGANIZATIONS b. As a general rule, directors, officers, or agents of a


MERCANTILE LAW corporation cannot be held personally liable for the
ATTY. NILO T. DIVINA
obligations incurred by the corporation, unless it
can be shown that such director/officer/agent is
CORPORATIONS guilty of gross negligence or bad faith or committed
an unlawful act and that the same was clearly and
1. DEFINITION OF CORPORATION convincingly proven.
Section 2, Revised Corporation Code (RCC).
Corporation Defined. – A corporation is an artificial being Mactan Rock Industries v. Germo, G.R. No. 228799
created by operation of law, having the right of (January 10, 2018)
succession and the powers, attributes, and properties The president should not be held solidarily liable with the
expressly authorized by law or incidental to its existence. corporation for the unpaid commissions due to a marketing
agent because no commission of an unlawful act, gross
4 ATTRIBUTES OF CORPORATIONS negligence, or bad faith was alleged in the complaint, much
1. It is an artificial being less proven in the course of the trial.
2. Created by operation of law
3. Right of succession c. The cause of action available to the corporation
4. Powers, attributes, and properties expressly cannot be generally enforced by its director, officer,
authorized by law or incidental to its existence. or stockholder and vice-versa.

DOCTRINE OF SEPARATE LEGAL ENTITY MAY A CORPORATION BE LIABLE FOR TORTS?


This doctrine emanates from the attribute of a corporation Philippine National Bank v. Court of Appeals, et.al., G.R.
that it is an artificial being. It means that corporations have No. L-27155 (May 18, 1978)
a legal personality distinct and separate from its A corporation is civilly liable in the same manner as natural
stockholders, directors and officers composing it. persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort
What are the legal consequences of the doctrine of committed by an agent or servant are the same whether the
separate legal entity? principal or master be a natural person or a corporation,
a. Properties registered in the name of the and whether the servant or agent be a natural or artificial
corporation are owned by it as an entity separate person. All of the authorities agree that a principal or master
and distinct from its corporators. is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a
Lim v. Court of Appeals, G.R. No. 124715 (January 24, natural person, A corporation is liable, therefore, whenever
2000) a tortious act is committed by an officer or agent under
The inclusion in the estate of the deceased stockholder of express direction or authority from the stockholders or
the properties registered in the name of various corporation members acting as a body, or, generally, from the directors
was erroneous even though the corporations were owned as the governing body.
and controlled by the deceased stockholder during his
lifetime. Naguiat Ent., Inc. & Clark Field Taxi, Inc. v. NLRC, et.al.,
G.R. No. 116123 (March 13, 1997)
Philippine National Bank v Merelo B. Aznar, G.R. No. In a close corporation, stockholders who are actively
171805 (May 30, 2011) engaged in the management or operation of the business
Where stockholders granted a loan to the corporation to and affairs of the corporation shall be personally liable for
finance the acquisition of property which was eventually corporate torts unless the corporation has obtained
mortgaged to a bank to secure a corporate loan, the right reasonably adequate liability insurance.
of the stockholders is subordinate to the mortgagee. The
stockholder has the right to be paid the loan but not to the MAY A CORPORATION BE CRIMINALLY
property of the corporation. PROSECUTED?
Yes, as long as the imposable penalty is not imprisonment.
Manuela Azucena Mayor v. Edwin Tiu, G.R. No. 203770,
second division (November 23, 2016) MAY A CORPORATION CLAIM MORAL DAMAGES?
The probate court hearing the settlement of the estate of There are conflicting decisions on this.
the deceased stockholder cannot order the lessees of the
corporation to remit rentals to the estate’s administrator. The better view, however, is that generally, the award of
moral damages cannot be granted in favor of a corporation
UP Law Center – Bar Review Institute 1
MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

because being an artificial person and having existence only At the time an unfair labor practice case was pending
in legal contemplation, it cannot experience physical against the corporation, its officers and stockholders
suffering or such sentiments as wounded feelings, serious organized a run-away corporation, engaged in the same
anxiety, mental anguish or moral shock which are the line of business, producing the same line of products,
causes of moral damages under the Civil Code. However, occupying the same compound, using the same pieces of
it may acquire goodwill or reputation of its own and if the machinery, buildings, laboratory, bodega and sales and
same is besmirched, the corporation may recover moral accounts departments used by the first corporation. It was
damages. held that this is another instance where the fiction of
separate and distinct corporate entities should be
Filipinas Broadcasting Network, Inc. v. AGO Medical and disregarded as the second corporation seeks the protective
Educational Center-Bicol Christian College of Medicine shield of a corporate fiction whose veil in the present case
(AMEC-BCCM) could, and should, be pierced as it was deliberately and
A radio broadcaster uttered libelous remarks against an maliciously designed to evade its financial obligation to its
educational center (calling it the dumping ground for employees.
intellectual misfits). The Supreme Court held that AMEC’s
claim for moral damages falls under item 7 of Article 2219 Times Transportation Company, Inc. v. Santos Sotelo,
of the Civil Code which expressly authorizes the recovery of et.al., G.R. No. 163786 (February 16, 2005)
moral damages in cases of libel, slander, or any other form The sale of the corporation’s franchise, as well as most of
of defamation. Article 2219(7) of the Civil Code does not its bus units, to a company owned by the daughter and
qualify whether the plaintiff is a natural or juridical person. family members of the controlling stockholder of the seller-
Therefore, a juridical person such as a corporation can corporation, right in the middle of a labor dispute, yielded
validly complain for libel or any other form of defamation and the conclusion that the transaction was made to remove
claim for moral damages. the corporation’s remaining assets from the reach of any
judgment that may be rendered in the unfair labor practice
Simex International, Incorporated v. Court of Appeals, G.R. cases filed against it.
No. 88013 (March 19, 1990)
Moral damages may also be awarded in case of tortious act Livesey v. Binswanger Philippines, G.R. No. 177493 (March
against the corporation. A corporation whose checks were 19, 2014)
dishonored by the drawee bank despite the availability of Piercing the veil of corporate fiction is warranted when a
funds and because of the negligence of the bank corporation ceased to exist only in name as it re-emerged
employees can recover moral damages for besmirched in the person of another corporation, for the purpose of
reputation. The standing of the corporation was reduced in evading its unfulfilled financial obligation under a
the business community because of the bank’s negligence. compromise agreement. Thus, if the judgment for money
claim could not be enforced against the employer
DOCTRINE OF PIERCING THE VEIL OF CORPORATE corporation, an alias writ may be obtained against the other
FICTION corporation considering the indubitable link between the
This applies in 3 areas: closure of the first corporation and incorporation of the
1. Defeat of public convenience cases other.
2. Fraud cases
3. Alter ego cases ALTER EGO TEST
Case law lays down a 3-pronged test to determine the
DEFEAT OF PUBLIC CONVENIENCE application of the alter ego theory, which is also known as
Sta. Monica Industrial and Development Corporation v. the the instrumentality theory, namely:
Department of Agrarian Reform Regional Director for a. Control, not mere majority or complete stock
Region III, et. al., G.R. No. 164846 (June 18, 2008) control, but complete domination, not only of
The sale of agricultural land covered by the agrarian reform finances but of policy and business practice in
law by the owner to a corporation owned and controlled by respect to the transaction attacked so that the
the same owner and his family is null and void. The corporate entity as to this transaction had at the
corporate vehicle cannot be used to shield the owner from time no separate mind, will or existence of its own;
the agricultural claims of the tenant-beneficiary. The veil of (3 areas – shares, finances, business practices)
corporate fiction ought to be pierced when it is used to b. Such control must have been used by the
subvert a public policy, in this case, the agrarian reform defendant to commit fraud or wrong, to perpetuate
policy. the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention
FRAUD of plaintiff’s legal right; and
A.C. Ransom Labor Union-CCLU v. NLRC et.al., G.R. No. c. The aforesaid control and breach of duty must
L-69494 (May 29, 1987) have proximately caused the injury or unjust loss
complained of.
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MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

and its separately incorporated branches as one and the


Leo R. Rosales, et.al. v New A.N.J.H. Enterprises & N.H. same for purposes of finding the corporation guilty of illegal
Oil Mill Corporation, et.al., G.R. No. 203355 (18 August dismissal. These rulings were made pursuant to the
2015) fundamental doctrine that the corporate fiction should not
In one case, the owner of a business terminated the be used as a subterfuge to commit injustice and circumvent
employment of his workers on the pretext that there will be labor laws.
an impending permanent closure of the business as a result
of an intended sale of the assets to an undisclosed Here, a certification election was ordered to be held for all
corporation, and that there will be a change in the the rank-and-file employees of Super Lamination, Express
management. Subsequent events, however, revealed that Lamination, and Express Coat. The three companies were
the buyer of the assets was a corporation owned by the supposedly distinct entities based on the fact that Super
same employer and members of his family. Furthermore, Lamination is a sole proprietorship while Express
the business re-opened in less than a month under the Lamination and Express Coat were separately registered
same management. Admittedly, mere ownership by a with the SEC. The directive was therefore, in effect, a
single stockholder of all or nearly all of the capital stock of piercing of the separate juridical personalities of the
the corporation does not by itself justify piercing the corporations involved. We find the piercing to be proper and
corporate veil. Nonetheless, in this case, other in accordance with the law as will be discussed below.
circumstances show that the buyer of the assets of the
proprietor employer is none other than his alter ego. JURISPRUDENCE WHEN THE CORPORATE VEIL MAY
BE PIERCED IF THE COMPLAINT ALLEGES THAT THE
Luis Juan Virata v. Alejandro Ng Wee, et.al., G.R. Nos. DIRECTORS AND/OR OFFICERS COMMITTED BAD
220926 ad 2215058 (July 5, 2017) FAITH OR GROSS NEGLIGENCE IN CONDUCTING THE
In another case, an investment house devised a scheme AFFAIRS OF THE CORPORATION
where investors are matched with accredited borrowers. An
investor lent money to a borrower-corporation, as identified Gerardo Lanuza, Jr. and Antonio O. Olbes v. BF
by the investment house. The president of the borrower Corporation, G.R. No. 174938 (October 1, 2014)
corporation was made liable to pay and the legal fiction of The Supreme Court eventually held that corporate
the corporation pierced considering that the president was representatives may be compelled to submit to arbitration
the majority owner who exercised complete control over the proceedings pursuant to a contract entered into by the
corporation; the principal office of the president and the corporation they represent if there are allegations of bad
corporation are the same; the corporation never operated faith or malice in their acts representing the corporation
to perform any business but for the benefit of its president; even though the arbitral only covers the corporation. The
and the president allowed the corporation to be used as a Supreme Court stated that when the directors are
pawn of the investment house in avoiding its legal duty to impleaded in a case against a corporation alleging malice
pay investors under a failed investment. and bad faith on their part in directing the affairs of the
corporation, the complainants are effectively alleging that
JURISPRUDENCE WHERE THE SUPREME COURT the directors and the corporation are not acting as separate
PIERCED THE CORPORATE VEIL WHEN TWO OR entities; that the acts or omission of the corporation that
MORE BUSINESSSES ARE OWNED, CONTROLLED, violated their rights are also the directors’ acts or omission;
AND CONDUCTED BY THE SAME PARTIES that the contracts executed by the corporation are
contracts executed by the directors. Complainants
Erson Ang Lee Doing Business as “Super Lamination effectively pray that the corporate veil be pierced because
Services” v. Samahang Manggagawa ng Super Lamination, the cause of action between the corporation and the
G.R. No. 193816 (November 21, 2016) directors is the same. In this case, however, the doctrine
A settled formulation of the doctrine of piercing the was not applied. The arbitral ruling was that both the
corporate veil is that when two business enterprises are Shangri-La and its directors are not liable.
owned, conducted, and controlled by the same parties,
both law and equity will, when necessary to protect the Should the court first acquire jurisdiction over the
rights of third parties, disregard the legal fiction that these corporation involved before its separate legal
two entities are distinct and treat them as identical or as one personality may be disregarded?
and the same. There appears to be a lack of conclusive yardstick as to
when the court may pierce the veil of corporate fiction of a
This formulation has been applied by this Court to cases in corporation that has not been brought to its jurisdiction by
which the laborer has been put in a disadvantageous summons, voluntary appearance, or other recognized
position as a result of the separate juridical personalities of modes of acquiring jurisdiction. For academic purposes, it
the employers involved. Pursuant to veil-piercing, we have depends on the similarity with the facts of each case. The
held two corporations jointly and severally liable for an author, though, believes that the corporate veil may be
employee's back wages. We also considered a corporation pierced without having to conduct a full-blown trial as long
UP Law Center – Bar Review Institute 3
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, • Closed Corporation
Inc., however the Supreme Court applied the reverse • Special corporations
piercing doctrine and made a non-stock corporation liable • One-person Corporations
for the debts of its member.
Bases Conversion and Development Authority (BCDA) v.
In this case, a lawyer-lessee failed to pay his rentals. The Commissioner of Internal Revenue, G.R. No. 205925 (June
lessor filed a complaint for unlawful detainer and secured a 20, 2018)
favorable judgment. Judgment was not immediately The law creating the BCDA provides that it has an
executed but it was eventually revived. The sheriff levied a authorized capital of P100,000,000.00 which may be fully
piece of real property in the name of International Academy subscribed by the Republic of the Philippines and shall
of Management and Economics Incorporated (I/AME), a either be paid up from the proceeds of the sales of its land
non-stock corporation, in order to execute the judgment assets.
against the lessee, who is a member of I/AME. The
Supreme Court agreed with the Court of Appeals and
UP Law Center – Bar Review Institute 4
MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

It is created, among others, to own, hold and/or administer 1. Valid law under which it is incorporated
military reservations in the country and implement its 2. Bona fide attempt to incorporate
conversion to other productive use. 3. Use of corporate powers

It is NEITHER a stock nor a non-stock corporation but a Missionary Sisters of Our Lady of Fatima v. Alzona, et.al.,
governmental authority vested with corporate powers. G.R. No. 224307 (August 6, 2018)
The filing of articles of incorporation and the issuance of the
While it has an authorized capital of P100 Billion, it is not certificate of incorporation are essential for the existence of
divided into shares of stock. It has no voting shares. There a de facto corporation. In fine, it is the act of registration
is likewise no provision which authorizes the distribution of with the SEC through the issuance of a certificate of
dividends and allotment of surplus profits to BCDA incorporation that marks the beginning of an entity’s
stockholders. Hence, it is not a stock corporation. It does corporate existence.
not qualify as a non-stock organization because it is not
organized for any of the purposes mentioned under Section Are the stockholders of a de facto corporation liable as
87 of the RCC. general partners? Only to the extent of their subscriptions.

ELEMENTS OF A GOCC CORPORATION BY ESTOPPEL


Carandang v. Desierto, G.R. No. 148076, Third Division International Express Travel & Tour Services, Inc. v. Hon.
(January 12, 2011) Court of Appeals, Henn Kahn, Philippine Football
A GOCC refers to any agency organized as a stock or non- Federation, G.R. No. 119002 (October 19, 2000)
stock corporation vested with functions relating to public One person representing a corporation is not a corporation
needs whether governmental or proprietary in nature, and by estoppel. At any rate, a person acting or purporting to
owned by the government through its instrumentalities act on behalf of a corporation that has no valid existence
either wholly or where applicable, as in the case of a stock assumes such privileges and obligations and becomes
corporation, to the extent of at least 51% of its capital stock. personally liable for contracts entered into or for other acts
When a stockholder ceded to the government shares performed as such agent.
representing 72.4% of the voting stock of the corporation
but subsequently clarified that it should be reduced to In another case, it was held that where a national sports
32.4%, the corporation shall not be considered a GOCC association which is not created by a special law or a
until the quantification of shares is resolved with finality. general enabling act, through its president, secured airline
Consequently, the Ombudsman has no jurisdiction to act tickets for the foreign trips of its athletes and officials to the
on the complaint for grave misconduct of its officials. South East Asian Games and later on failed to pay the
obligation, the president shall be personally liable. It is a
Manila International Airport Authoirty (MIAA) v. City of settled principle in corporation law that any person acting
Pasay, G.R. No. 163072 (April 2, 2009) or purporting to act on behalf of a corporation that has no
MIAA does not qualify as a government-owned and valid existence assumes such privileges and becomes
controlled corporation because it is not organized as a personally liable for contract entered into or for other acts
stock or non-stock corporation. It is not a stock corporation performed as such agent.
because it has no capital stock divided into shares. Neither
is it a non-stock corporation. A non-stock corporation must Are all those who subscribed for the stock of a proposed
have members. Even if we assume that the Government is corporation which was never legally formed liable as
considered the sole member of MIAA, this will not make it a general partners? Only those who assumed themselves as
non-stock corporation. Non-stock corporations cannot forming the corporation/those who commit overt acts.
distribute any part of its income to its members. Section 11 EXC: if passive subscriber gets benefits from the ostensible
of the MIAA charter mandates it to remit 20% of its annual corporation.
gross operating income to the national treasury. This
prevents MIAA from qualifying as a non-stock corporation. May a corporation by estoppel be sued? The Supreme
MIAA is also not organized for any of the purposes allowed Court said that a corporation by estoppel may be
for a non-stock corporation. MIAA, a government impleaded as a party defendant considering that it
instrumentality and public utility, is organized to operate an possesses the attributes of a juridical person, otherwise, it
international and domestic airport for public use. As such, it cannot be held liable for damages and injuries it may inflict
is not subject to real estate tax. to other persons.

DE FACTO CORPORATION Missionary Sisters of Our Lady of Fatima v. Alzona, et.al.,


One which is organized with colorable compliance with the G.R. No. 224307 (August 6, 2018)
requirements under the law. In another case though, it was held that the doctrine of
corporation by estoppel is founded on principles of equity
Requirements: and is designed to prevent injustice and unfairness. It
UP Law Center – Bar Review Institute 5
MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

applies when a non-existent corporation enters into acquired a prior right to the use of such name, that
contracts or dealings with third persons. In which case, the the name has been declared not distinguishable from
person who has contracted or otherwise dealt with the non- a name already registered or reserved for the use of
existent corporation is estopped to deny the latter’s legal another corporation, or that it is contrary to law,
existence in any action leading out of or involving such public morals, good customs, or public policy.
contract or dealing. While the doctrine is generally applied e. It provides that the corporation shall have perpetual
to protect the sanctity of dealings with the public, nothing existence or a fixed term as may be indicated in the
prevents its application in the reverse, inf act, the very articles of incorporation.
wording of the law which sets forth the doctrine of f. There is no need to state that at least twenty-five
corporation by estoppel permits such interpretation. Such (25%) percent of the authorized capital stock above
that a person who has assumed an obligation in favor of a stated has been subscribed and that at least twenty-
non-existent corporation, having transacted with the latter five (25%) of the total subscription have been paid as
as if it was duly incorporated, is prevented from denying the this double 25% requirement under the OCC has
existence of the latter to avoid the enforcement of the been deleted.
contract. In this case, while the donation was accepted at g. There is a requirement of certification of receipt of the
the time the done was not yet incorporated, the subsequent paid-up portion of subscription by the Corporate
incorporation of the donee-corporation and its affirmation Treasurer.
of the recipient’s authority to accept on its behalf cured h. Since the requirement of Treasurer’s affidavit has
whatever defect that may have attended the acceptance of already been deleted under the RCC, the format for
the donation, applying the doctrine of corporation by the said affidavit is omitted as well.
estoppel under the Corporation Code.
Revisions on the amendment of articles of incorporation
The Supreme Court likewise stated that the donee could a. It appears that unless otherwise provided by the
not be considered a de facto corporation because, at the RCC or the corporation’s bylaws, the articles of
time of the donation, it was not registered with the SEC. incorporation of a non-stock corporation may be
The filing of articles of incorporation and the issuance of the amended by the vote or written assent of both the
certificate of incorporation are essential for the existence of trustees, by majority vote, and the members of the
a de facto corporation. corporation, by at least 2/3s, unlike under the OCC
where the option of written assent is limited to
To summarize then, an ostensible corporation when sued stockholders or members of the corporation.
on any transaction entered by it as a corporation or on any b. While the requirements for amendment of the
tort committed by it as such shall not be allowed to use its articles of incorporation are common for both stock
lack of corporate personality as a defense. and non-stock corporation, the provision on
requirements for a stock corporation was
Similarly, anyone who assumes an obligation to an separated from those of non-stock corporation. As
ostensible corporation as such cannot resist performance a consequence, it may be inferred that the remedy
thereof on the ground that there was in fact no corporation of appraisal right only applies to a stock
(Sec. 20, RCC) corporation.

3. INCORPORATION AND What is the remedy available to the stockholder in case of


ORGANIZATION an amendment to the articles of incorporation?
Appraisal (however not all amendments have the right of
appraisal)
a. ARTICLES OF INCORPORATION
1. Contents Is appraisal right available for members of a non-stock
2. Non-amendable items corporation? No.

Revisions on the RCC b. ADOPTION OF BY-LAWS


b. An arbitration agreement may be provided in the 1. Contents of by-laws
articles of incorporation 2. Binding effects
c. Filing of the articles of incorporation or amendments 3. Amendments
thereto may be in the form of an electronic document
in accordance with the rules on electronic filing of the Revisions under the RCC on bylaws
SEC 1. It removed the option of adopting and submitting
d. The articles of incorporation should include an the bylaws of the corporation to the SEC within a
undertaking to change the corporate name period of one month from the former’s
immediately upon receipt of notice from the SEC that incorporation but, nevertheless, retained the option
another corporation, partnership or person has
UP Law Center – Bar Review Institute 6
MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

of the corporation to adopt bylaws after interest who should constitute at least twenty
incorporation. percent (20%) of such Board.
2. On the contents of the bylaws, it included d. RCC enumerated the corporations that are vested
provisions on the mode of notice to the with public interest, to wit:
stockholders or members and the modes by which • Corporations covered by Section 17.2 of R.A.
they may attend meetings; the guidelines for setting No. 8799, otherwise known as “The Securities
the compensation of directors or trustees and Regulation Code,” namely those whose
officers, and the maximum number of other board securities are registered with the SEC,
representations that an independent director or corporations listed with an exchange or with
trustee may have which shall, in no case, be more assets of at least Fifty million pesos
than the number prescribed by the SEC; and other (P50,000,000.00) and having two hundred
matters as may be necessary for the promotion of (200) or more holders of shares, each holding at
good governance and anti-graft and corruption least one hundred (100) shares off a class of its
measures. equity shares;
3. It also allows the inclusion of an arbitration • Banks and quasi-banks, NSSLAs, pawnshops,
agreement in the bylaws. corporations engaged in money service
business, preneed, trust and insurance
By-laws are not binding on third parties. companies, and other financial intermediaries;
By-laws are effective upon approval of the SEC. and
• Other corporations engaged in businesses
Revision under the RCC on amendment of bylaws vested with public interest similar to the above,
It made it clear that the delegation of authority by the as may be determined by the SEC, after taking
stockholders or members to the board of directors or into account relevant factors which are
trustees to amend the bylaws must be embodied in a germane to the objective and purpose of
stockholders’ or members’ resolution. requiring the election of an independent
director, such as the extent of minority
May the bylaws reflect the actual delegation of authority to ownership, type of financial products or
the board of directors to amend the bylaws? No. delegation securities issued or offered to investors, public
is supposed to be temporary. interest involved in the nature of business
operations, and other analogous factors.
Is it permissible for the bylaws to provide quorum of e. It defines an independent director as a person who,
stockholders’ meetings which is less than a majority? Yes. apart from shareholdings and fees received from
the corporation, is independent of management
4. REMEDIAL RIGHTS and free from any business or other relationship
a. Individual suit which could or could reasonably be perceived to
b. Representative suit materially interfere with the exercise of independent
c. Derivative Suit judgment in carrying out the responsibilities as a
director. Independent directors must be elected by
the shareholders present or entitled to vote in
5. BOARD OF DIRECTORS AND absentia during the election of directors.
Independent directors shall be subject to rules and
TRUSTEES regulations governing their qualifications,
a. Repository of corporate powers disqualifications, voting requirements, duration of
b. Tenure, qualifications and disqualifications of term and term limit, the maximum number of board
directors memberships, and other requirements that the
c. Requirement of independent directors SEC will prescribe to strengthen their
d. Elections independence and align with international best
1. Cumulative voting practices.
2. Quorum
DOCTRINE OF CENTRALIZED MANAGEMENT
Revisions on the RCC Corporate power is vested in one body except in those
a. The term of a trustee was modified for a period not cases where approval of stockholders are required.
exceeding three years from its term of one year in
the OCC. Paul Lee Tan v. Paul Sycip, et.al., G.R. No. 153468 (August
b. There is no residence requirement for the members 17, 2006)
of the Board In other words, stockholders or members periodically elect
c. The RCC requires the election of independent the board of directors or trustees, who are charged with the
directors for a corporation vested with public management of the corporation. The board, in turn,
UP Law Center – Bar Review Institute 7
MERCANTILE LAW | BUSINESS ORGANIZATIONS | Atty. Nilo T. Divina

periodically elects officers to carry out management HOW MANY VOTES ARE STOCKHOLDERS ENTITLED TO
function on a day-to-day basis. As owners though, the CAST? Such number of votes depending on his
stockholders or members have residual powers over shareholdings multiplied by directors to be elected
fundamental and major corporate changes. Acts of (cumulative voting in stock corporation)
management pertain to the board; and those of ownership,
to the stockholders or members. HOW MANY VOTES ARE MEMBERS OF NON-STOCK
CORPORATIONS ENTITLED TO CAST? May casts votes
BUSINESS JUDGMENT RULE for all candidates, but not more than 1 vote for each.
Questions of policy and management are in the discretion
and decision of the actors and officers of the corporation. Do the holders of founders’ shares have the right to be
voted as directors if their shares and votes are not enough
Provident International Resources v. Joaquin Venus, et.al., to be assured of a board seat? Yes.
G.R. No. 167041 (June 17, 2008)
The business judgment rule is not absolute. What are the allowable modes of voting for election of
directors or trustees?
It cannot be relied upon to support a request for a new 1. In person
stock and transfer book on the pretext that the original is 2. By proxy
lost (when in fact it is not) and declare entries in the 3. Remote communication/in absentia
supposed lost stock and transfer book as invalid.
When is #3 allowed?
Can the board of directors or trustees create positions or 1. If allowed by the by-laws of the corporation
committees? Yes. However, it cannot create an executive 2. When authorized by the Board
committee, and a corporate office, because these are 3. In corporations vested with public interest, even
required to be created by the by-laws. though not provided in the by-laws

TERM OF THE BOARD OF DIRECTORS REVISIONS ON THE RCC FOR CORPORATE OFFICERS
1 year. Holdover period is not part of the term, but of the a. The treasurer is required to be a resident.
tenure. Term is fixed by statute. Tenure is the actual b. It requires the appointment of a compliance officer
incumbency which can be shorter or longer than 1 year. for those corporations vested with public interest.
c. The provision on the determination of quorum of
Thus, if a hold-over director resigns, the vacancy is due to directors or trustees for the transaction of
the expiration of term and not resignation. Accordingly, the corporate business was moved from Section 24 to
vacancy can only be filled by the stockholders in a meeting Sec. 52 of the RCC. Likewise, the prohibition on
called for the purpose and not by the board of directors proxies during board meetings was moved to
even though the remaining directors may still constitute a Section 52 of the RCC.
quorum. d. The prohibition that one cannot act as president
and secretary or as president and treasurer at the
ELECTION OF DIRECTORS same time is now subject to an exception – if the
4. The right of each stockholder or member to nominate same is allowed in the RCC.
any director or trustee is subject to the exclusive right May the Board of directors create positions and offices?
reserved for holders of founders’ shares to be voted Yes, if Board is authorized by the by-laws.
as directors. Test: is this position provided for in the by-laws of the
5. When so authorized in the bylaws or by a majority of corporation?
the board of directors, the stockholders or members
may also vote through remote communication or in Wesleyan University-Philippines v. Guillermo T. Maglaya,
absentia: Provided, That the right to vote through such Sr., G.R. No. 212774 (January 23, 2017)
modes may be exercised in corporations vested with In other words, the creation of the position is under the
public interest, notwithstanding the absence of a corporation’s charter or bylaws, and that the election of the
provision in the bylaws of such corporations. officer is by the directors or stockholders must concur in
6. A stockholder or member who participates through order for an individual to be considered a corporate officer,
remote communication or in absentia shall be deemed as against an ordinary employee or officer. It is only when
present for purposes of quorum. the officer claiming to have been illegally dismissed is
7. It added a provision that the directors or trustees classified as such corporate officer that the issue is deemed
elected shall perform their duties as prescribed by law, an intra-corporate dispute which falls within the jurisdiction
rules of good corporate governance, and bylaws of the of the trial courts.
corporation.

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

When is the act of the officer of the corporation considered 1. The non-holding of elections and the reasons
the act of the corporation and therefore, valid and therefor shall be reported to the SEC within 30 days
enforceable against the corporation? from the date of the scheduled election. The report
1. Authorized by the by-laws shall specify a new date for the election, which shall
2. Authorized by the board of directors not be later than 60 days from the scheduled date
3. If ratified by the corporation (by acquiescence or if 2. If no new date has been designated, or if the
the corporation clothes that the officer is authorized rescheduled election is likewise not held, the SEC
and holds him out to the public as such) may, upon the application of a stockholder,
member, director or trustee, and after verification
DOCTRINE OF APPARENT AUTHORITY of the unjustified non-holding of the election,
A corporation is estopped from denying liability if it permits summarily order that an election to be held. The
its officer or agent to act within its authority and holds him SEC shall have the power to issue such orders as
out to the public as possessing such power to do those may be appropriate, including orders directing the
acts. issuance of a notice stating the time and place of
• Presupposes there is no board resolution the election, designated presiding officer, and the
record date or dates for the determination of
Games and Garment Developers v. Allied Banking stockholders or members entitled to vote.
Corporation, G.R. No. 181426 (July 13, 2015) 3. Should a director, trustee or officer die, resign or in
A bank is liable to the seller who transferred ownership of any manner cease to hold office, the secretary, or
his property in favor of its buyer after the seller relied on the the director, trustee or officer of the corporation,
letter of the bank manager that the buyer had an approved shall, within 7 days from knowledge thereof, report
real estate loan with the bank and guaranteed that in writing such fact to the SEC.
subsequent releases from the loan would be made directly
to the seller, but the manager released the loan instead to EMERGENCY QUORUM
the buyer who, however, failed, to pay the seller. Actual attendance shall constitute the required quorum
notwithstanding the attendance required in the by-laws of
TERP Construction Corp vs. Banco Filipino Savings and the corporation.
Mortgage Bank, G.R. No. 221771 (September 18, 2019)
Banco Filipino purchased a bond from TERP Construction REVISIONS ON THE RCC REGARDING
(“TERP”) and relied on TERP senior vice president’s (“SVP”) DISQUALIFICATIONS OF DIRECTORS, TRUSTEES, OR
apparent authority to promise interest payments over and OFFICERS
above the guaranteed 8.5% considering the SVP’s position Within 5 years prior to election or appointment, person was
in TERP. His apparent authority was further demonstrated convicted by final judgment of an offense punishable by
when TERP paid Banco Filipino what the SVP promised imprisonment of more than 6 years.
during the Bond’s term.
May the bylaws provide as a ground for disqualification
JURISPRUDENCE WHERE DOCTRINE OF APPARENT being a director or stockholder of a competing corporation
AUTHORITY WAS NOT APPLIED or representing an interest in conflict with or adverse to the
corporation? Yes, conflict of interest is a valid ground for
Philippine Race Horse Trainer’s Association, Inc. v. Piedras disqualification.
Negras Construction and Development Corporation, G.R. REVISIONS ON THE RCC REGARDING REMOVAL OF
No. 192658 (December 2, 2015) DIRECTORS OR TRUSTEES
While in the absence of a charter or bylaw provision to the 1. The SEC is given authority, motu proprio, or upon
contrary the president is presumed to have authority, the a verified complaint, and after due notice and
questioned act should still be within the domain of the hearing, to order the removal of a director or
general objectives of the company’s business and within trustee elected despite the disqualification, or
the scope of his or her usual duties. Here, the corporation whose disqualification arose or is discovered
is an association of professional horse trainers in the subsequent to an election.
Philippine horse racing industry organized as a non-stock 2. The removal of a disqualified director shall be
corporation and it is committed to the uplifting of the without prejudice to other sanctions that the SEC
economic condition of the working sector of the racing may impose on the board of directors or trustees
industry. It is not in its ordinary course of business to enter who, with knowledge of the disqualification, failed
into housing projects, especially not in such scale and to remove such director or trustee.
magnitude so massive as to amount to P101,150,000.00.
REVISIONS UNDER THE RCC ON DEALING WITH
REVISIONS ON THE RCC RELATING TO NON-HOLDING VACANCIES IN THE BOARD OF DIRECTORS OR
OF ELECTION AND CESSATION FROM OFFICE TRUSTEES

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

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

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.

UP Law Center – Bar Review Institute 12

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