80608869 reviewer in corporation law

8/2/2019 80608869 Reviewer in Corporation Law

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Reviewer in Corporation Law

I. HISTORICAL BACKGROUND

1. The Philippine Corporate Law

When the Philippines came under American sovereignty, attention was drawn to the fact thatthere was no entity in Spanish law exactly corresponding to the notion corporation in English

and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to

introduce the American corporation into the Philippines as the standard commercial entity and to

hasten the day when thesociedad annima of the Spanish law would be obsolete. The statute is asort of codification of American Corporate Law. Harden v. Benguet Consolidated Mining

Co., 58 Phil. 141 (1933).

2. The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April1906. It had various piece-meal amendments during its 74 year history. It rapidly became

antiquated and not adapted to the changing times.

3. The Corporation Code

The present Corporation Code, orBatas Pambansa Blg. 68, became effective on 1 May 1980. It

adopted various corporate doctrines enunciated by the Supreme Court under the old CorporationLaw. It clarified the obligations of corporate directors and officers, expressed in statutory

language established principles and doctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States. Therefore,although we have a Corporation Code that provides for statutory principles, Corporate Law is

essentially, and continues to be, the product of commercial developments. Much of this

development can be expected to happen in the world of commerce, and some expressedjurisprudential rules that try to apply and adopt corporate principles into the changing concepts

and mechanism of the commercial world.

II. CONCEPTS

See opening paragraphs ofVillanueva, Corporate Contract Law,38 Ateneo L.J. 1 (No. 2, June1994).

1. Definition: Corporation is an artificial being created by operation of law, having the right

of succession and the powers, attributes and properties expressly authorized by law or incident to

its existence. [Sec. 2. BP 68] ( See also Section 2; Articles 44(3), 45, 46, and 1775, Civil Code. )

2. Tri-Level Existence of Corporation

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(a) Aggregation of Assets and Resources

(b) Business Enterprise or Economic Unit

(c) Juridical Entity

3. Relationships Involved in Corporate Setting

(a) Juridical Entity Level, which views the State-corporations relationship

(b) Contractual Relationship Level, which considers that the corporate setting is at once acontractual relationship on four (4) levels:

- Between the corporation and its agents or representatives to act in the real world, such as its

directors and its officers, which is governed also by the Law on Agency;

- Between the corporation and its shareholders or members;

- Between and among the shareholders in a common venture; and

- Between the corporation and third-parties or outsiders, which is essentially governed by

Contract Law.

4. Theories on Formation of Corporation:

(a)Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968])

To organize a corporation that could claim a juridical personality of its own and transact businessas such, is not a matter of absolute right but a privilege which may be enjoyed only under such

terms as the State may deem necessary to impose (x-cf.Ang Pue & Co. v. Sec. of Commerce and

Industry, 5 SCRA 645 [1962]).

Before a corporation may acquire juridical personality, the State must give its consent either inthe form of a special law or a general enabling act, and the procedure and conditions provided

under the law for the acquisition of such juridical personality must be complied with. The failure

to comply with the statutory procedure and conditions does not warrant a finding that suchassociation achieved the acquisition of a separate juridical personality, even when it adopts sets

of constitution and by-laws. xInternational Express Travel & Tour Services, Inc. v. Court of

Appeals, 343 SCRA 674 (2000).

Since all corporations, big or small, must abide by the provisions of the Corporation Code, theneven a simple family corporation cannot claim an exemption nor can it have rules and practices

other than those established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997).

(b) Theory of Enterprise Entity (Berle, Theory of Enterprise Entity, 47 Col. L. Rev. 343

[1947])

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Corporations are composed of natural persons and the legal fiction of a separate corporate

personality is not a shield for the commission of injustice and inequity, such as the use of

separate personality to avoid the execution of the property of a sister company. xTan Boon Bee& Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

A corporation is but an association of individuals, allowed to transact under an assumedcorporate name, and with a distinct legal personality. In organizing itself as a collective body, it

waives no constitutional immunities and perquisites appropriate to such a body. xPhilippine

Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997).

5. Four Attributes of Corporation from Statutory Definition:

(a) A corporation is an artificial being

(b) Created by operation of law

(c) With right of succession

(d) Only has powers, attributes and properties expressly authorized by law or incident to itsexistence

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) Strong Legal Personality

- Entity attributable powers

- Continuity of existence

- Purpose

The corporation was evolved to make possible the aggregation and assembling of huge amounts

of capital upon which big business depends; and has the advantage of non-dependence on the

lives of those who compose it even as it enjoys certain rights and conducts activities of naturalpersons. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

(ii) Centralized Management.

(iii) Limited Liability to Investors

One advantage of a corporate business organization is the limitation of an investors liability to

the amount of the investment, which flows from the legal theory that a corporate entity isseparate and distinct from its stockholders. xSan Juan Structural and Steel Fabricators, Inc. v.

Court of Appeals, 296 SCRA 631, 645 (1998).

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(iv) Free Transferability of Units of Ownership for Investors

(b) Disadvantages:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) Cost of maintenance

(iv) Double taxation

Dividends received by individuals from domestic corporations are subject to final 10% tax (Sec.

24(B)(2), NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporate dividends

between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4),NIRC of 1997).

In addition, there has been a re-imposition of the improperly accumulated earnings tax, under

Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually.

7. Compared With Other Media of Business Endeavors

- Distribution of Risk, Profit and Control

(a) Sole Proprietorships

(b) Business Trusts (Article 1442, Civil Code)

(c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)

- Can a defective attempt o form a corporation result at least in the formation of a

partnership?Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).

(d) Joint Ventures

Joint venture is defined as an association of persons or companies jointly undertaking somecommercial enterprise; generally all contribute assets and share risks. It requires a community of

interest in the performance of the subject matter, a right to direct and govern the policy in

connection therewith, and duty, which may be altered by agreement to share both in profit andlosses. the acts of working together in a joint project. xKilosbayan, Inc. v. Guingona, Jr., 232

SCRA 110, 143 (1994), citing Blacks Law Dictionary, Sixth ed., 839.

(e) Cooperatives (Art. 3, R.A. No. 6938)

(f) Sociedades Annimas

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Asociedad annimawas considered a commercial partnership, a sort of a corporation, where

upon the execution of the public instrument in which its articles of agreement appear, and the

contribution of funds and personal property, becomes a juridical personan artificial being,invisible, intangible, and existing only in contemplation of lawwith power to hold, buy, and

sell property, and to sue and be sueda corporationnot a general copartnership nor a limited

copartnership . . . The inscribing of its articles of agreement in the commercial register was notnecessary to make it a juridical persona corporation. Such inscription only operated to show

that it partook of theform of a commercial corporation. xMead v. McCullough, 21 Phil. 95,106

(1911).

Thesociedades annimas were introduced in Philippine jurisdiction on 1 December 1888 withthe extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of

Commerce. Those articles contained the features of limited liability and centralized management

granted to a juridical entity. But they were more similar to the English joint stock companiesthan the modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98

Phil. 711 (1956)

Our Corporation Law recognizes the difference betweensociedades annimas and corporations

and will not apply legal provisions pertaining to the latter to the formerxPhil. Product Co. v.Primateria Societe Anonyme, 15 SCRA 301 (1965).

(g) Cuentas En Participacion

A cuentas en participacion as a sort of an accidental partnership constituted in such a manner

that its existence was only known to those who had an interest in the same, there being no mutualagreement between the partners, and without a corporate name indicating to the public in some

way that there were other people besides the one who ostensibly managed and conducted the

business, governed under article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnershipofcuentas en participacion is conducted, shall have only a right of action against such person

and not against the other persons interested, and the latter, on the other hand, shall have no right

of action against third person who contracted with the manager unless such manager formally

transfers his right to them.xBourns v. Carman,7 Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)

2. Corporation as a Person:

(a) Entitled to due process

The due process clause is universal in its application to all persons without regard to any

differences of race, color, or nationality. Private corporations, likewise, are persons within the

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scope of the guaranty insofar as their property is concerned. xSmith Bell & Co. v. Natividad, 40

Phil. 136, 144 (1920).

(b) Equal protection clause(xSmith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).

(c) Unreasonable Searches and Seizure

Corporations are protected by the constitutional guarantee against unreasonable searches and

seizures, but that the officers of a corporation from which documents, papers and things were

seized have no cause of action to assail the legality of the seizures, regardless of the amount of

shares of stock or of the interest of each of them in said corporation, and whatever the officesthey hold therein may be, because the corporation has a personality distinct and separate from

those of said officers. The legality of a seizure can be contested only by the party whose rights

have been impaired thereby; and the objection to an unlawful search is purely personal andcannot be availed of by such officers of the corporation who interpose it for their personal

interests. xStonehill v. Diokno, 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct

legal entity. In organizing itself as a collective body it waives no constitutional immunitiesappropriate for such body. Its property cannot be taken without compensation; can only be

proceeded against by due process of law; and is protected against unlawful

discrimination. x Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quotingfromxHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.

(d) But a corporation is not entitled to privilege against self incrimination

It is elementary that the right against self-incrimination has no application to juridical

persons.Bataan Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-235 (1987).

While an individual may lawfully refuse to answer incriminating questions unless protected byan immunity statute, it does not follow that a corporation, vested with special privileges and

franchises may refuse to show its hand when charged with an abuse of such privilege. xHale v.

Henkel, 201 U.S. 43 (1906); xWilson v. United States, 221 U.S. 361 (1911); xUnited States v.White, 322 U.S. 694 (1944).

3. Liability for Torts

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 anagent or servant are the same whether the principal or master be a natural person or acorporation, and whether the servant or agent be a natural or artificial person. That a principal or

master is liable for every tort which he expressly directs or authorizes, is just as true of a

corporation as a natural person.PNB v. CA, 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tortconsists in the violation of a right given or the omission of a duty imposed by law. Simply stated,

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tort is a breach of a legal duty. When it was found that Clark Field Taxi failed to comply with

the obligation imposed under Article 283 of the Labor Code which mandates that the employer

to grant separation pay to employees in case of closure or cessation of operations ofestablishments or undertaking not due to serious business losses or financial reverses;

consequently, its stockholder who was actively engaged in the management or operation of the

business should be held personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

As a general rule, a banking corporation is liable for the wrongful or tortuous acts anddeclarations of its officers or agents within the course and scope of their employment. A bank

will be held liable for the negligence of its officers or agents when acting within the course and

scope of their employment, even as regards that species of tort of which malice is an essentialelement. In this case, we find a situation where the PCIBank appears also to be the victim of the

scheme hatched by a syndicate in which its own management employees had

participated.Philippine Commercial International Bank vs. Court of Appeals, G.R. No. 121413,29 January 2001.

4. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401(1914);People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121 SCRA 655 [1983];

Articles 102 and 103, Revised Penal Code).

No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA303 (1971).

When a criminal statute forbids the corporation itself from doing an act, the prohibition extends

to the board of directors, and to each director separately and individually. xPeople v.Concepcion, 44 Phil. 129 (1922).

5. Recovery of Moral Damages and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish,

fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for

moral damages under Art. 2217 of the Civil Code. However, a corporation may have a goodreputation which, if besmirched, may be a ground for the award of moral damages .xMambulao

Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968).

Even when the corporations reputation and goodwill have been prejudiced, there can be no

award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 ofTitle XVIII of the Civil Code in favor of a corporation. xPrime White Cement Corp. vo

Intermediate Appellate Court, 220 SCRA 103, 113-114 (1993).

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious

anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similarinjury. A corporation, being an artificial person and having existence only in legal

contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical

suffering and mental anguish. Mental suffering can be experienced only by one having a nervoussystem and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by

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respondent bank as an artificial person. xLBC Express, Inc. v. Court of Appeals, 236 SCRA 602

(1994); xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals , 260 SCRA 714 (1996); xSolid

Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).

InAsset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court

seemed to have gone back to the original doctrine that [u]nder Article 2217 of the Civil Code,moral damages include besmirched reputation which a corporation may possibly suffer.

The award of moral damages cannot be granted in favor of a corporation because, being anartificial person and having existence only in legal contemplation, it has no feelings, no

emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish,

which can be experienced only by one having a nervous system. The statement in People v.Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130 Phil. 366 (1968)], that a

corporation may recover moral damages if it has a good reputation that is debased, resulting in

social humiliation is an obiter dictum. . . The possible basis of recovery of a corporation

would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of

malice or bad faith. xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

While it is true that a criminal case can only be filed against the officers of a corporation and not

against the corporation itself, it does not follow from this, however, that the corporation cannot

be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution forthe damages incurred by the corporation for the criminal proceedings brought against its officer.

xCometa v. Court of Appeals, 301 SCRA 459 (1999).

6. Nationality of Corporation:Country Under Whose Laws Incorporated(Sec. 123).

Exceptions: The Test of Controlling Ownership Applies In:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution;Roman

Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao,

102 Phil. 596 [1957]).

The donation of land to an unincorporated religious organization, whose trustees are foreigners,cannot be allowed registration for being violation of the constitutional prohibition and it would

not be violation of the freedom of religion clause. The fact that the religious association has no

capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its

members are of foreign nationality. The purpose of the sixty per centum requirement isobviously to ensure that corporations or associations allowed to acquire agricultural land or to

exploit natural resources shall be controlled by Filipinos; and the spirit of the Constitutiondemands that in the absence of capital stock, the controlling membership should be composed ofFilipino citizens. xRegister of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955)

(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution;People v. Quasha, 93 Phil. 333

[1953]).

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The primary franchise of a corporation, that is, the right to exist as such, is vested in the

individuals who compose the corporation and not in the corporation itself and cannot be

conveyed in the absence of a legislative authority so to do. But the special or secondaryfranchises of a corporation are vested in the corporation and may ordinarily be conveyed or

mortgaged under a general power granted to a corporation to dispose of its property, except such

special or secondary franchises as are charged with a public use. x J.R.S. Business Corp. v.Imperial Insurance, 11 SCRA 634 (1964).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility;

however, it does not requires a franchise before one can own the facilities needed to operate a

public utility so long as it does not operate them to serve the public. In law there is a cleardistinction between the operation of a public utility and the ownership of the facilities and

equipment used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995)

A distinction should be made between shares of stock, which are owned by stockholders, the

sale of which requires only NTC approval, and the franchise itself which is owned by the

corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction.Since stockholders own the shares of stock, they may dispose of the same as they see fit. They

may not, however, transfer or assign the property of a corporation, like its franchise. In otherwords, even if the original stockholders had transferred their shares to another group of

shareholders, the franchise granted to the corporation subsists as long as the corporation, as an

entity, continues to exist. The franchise is not thereby invalidated by the transfer of the shares. Acorporation has a personality separate and distinct from that of each stockholder. It has the right

of continuity or perpetual succession Corporation Code, Sec. 2).Philippine Long Distance

Telephone Co. v. National Telecommunications Commission, 190 SCRA 717, 732 (1990).

(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)

Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of 1982;Section 2,P.D. 576; SEC Opinion dated 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion dated 15

July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4December, 1991), at p. 31.

Cable Industry

The National Telecommunications Commission (NTC), which regulates and supervises the cabletelevision industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has

provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that

Cable TV operations shall be governed by E.L. No. 205, s. 1987. If CATV operators offer

public telecommunications services, they shall be treated just like a public telecommunicationsentity.

Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking its cue from Allied

Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70, considered CATV asa form of mass media which must, theefore, be owned and managed by Filipino citizens, or

corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens

pursuant to the mandate of the Constitution.

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(d)Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89

Phil. 54 [1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; xHaw Pia v. ChinaBanking Corp., 80 Phil. 604 [1948]).

(f)Investment Test as to Philippine Nationals (Sec. 3(a),(b), R.A. 7042, Foreign Investment

Act of 1992)

(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC

Opinion, dated 6 November 1989, XXIV SEC Quarterly Bulletin (No. 1- March 1990); SECOpinion, dated 14 December 1989, XXIV SEC Quarterly Bulletin (No. 2 -June 1990)

Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18

SCRA 924 [1966]).

(h) Special Classifications (Sec. 140)

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING VEIL OFCORPORATE FICTION

A. Main Doctrine: A Corporation Has A Personality Separate and Distinct from its

Stockholders or Members.

Rudimentary is the rule that a corporation is invested by law with a personality distinct and

separate from its stockholders or membersby legal fiction and convenience it is shielded by aprotective mantel and imbued by law with a character alien to the persons comprising it. xLim v.

Court of Appeals, 323 SCRA 102 (2000).

1. Sources: Sec. 2; Article 44, Civil Code

2. Importance of Protecting Main Doctrine:

The separate juridical personality includes: right of succession; limited liability; centralized

management; and generally free transferability of shares of stock. Therefore, an undermining of

the separate juridical personality of the corporation, such as the application of the piercing

doctrine, necessarily dilutes any or all of those attributes.

One of the advantages of a corporate form of business organization is the limitation of an

investors liability to the amount of the investment. This feature flows from the legal theory that

a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable

considerations, the veil can be disregarded when it is utilized as a shield to commit fraud,

illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere

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alter ego or business conduit of a person or an instrumentality, agency or adjunct of another

corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals , 296 SCRA

631, 645 (1998).

3. Applications:

(a)Majority Ownership of or Dealings in Shareholdings: Ownership of a majority of capital

stock and the fact that majority of directors of a corporation are the directors of another

corporation creates no employer-employee relationship with the latters employees. DBP v.NLRC, 186 SCRA 841 (1990);Francisco, et al. v. Mejia, G. R. No. 141617, 14 August 2001.

The mere fact that a stockholder sells his shares of stock in the corporation during the pendency

of a collection case against the corporation, does not make such stockholder personally liable for

the corporate debt, since the disposing stockholder has no personal obligation to the creditor, andit is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires.

xRemo, Jr. v. Intermediate Appellate Court, 172 SCRA 405, 413-414 (1989).

Mere ownership by a single stockholder or by another corporation of all or nearly all of the

capital stock of a corporation is not of itself sufficient ground for disregarding the separatecorporate personality.xSunio v. NLRC , 127 SCRA 390 (1984); xAsionics Philippines, Inc. v.

National Labor Relations Commission, 290 SCRA 164 (1998); xLim v. Court of Appeals, 323

SCRA 102 (2000); xManila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); xFrancisco v. Mejia, G.R. No. 141617, 14 August 2001.

Mere substantial identity of the incorporators of the two corporations does not necessarily imply

fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and

convincing evidence to show that the corporate personalities were used to perpetuate fraud, or

circumvent the law, the corporations are to be rightly treated as distinct and separate from eachother. xLaguio v. NLRC, 262 SCRA 715 (1996).

(b)Dealings Between the Corporation and Stockholders:The transfer of the corporate assets to

the stockholder is not in the nature of a partition but is a conveyance from one party toanother. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373

(1962).

As a general rule, a corporation may not be made to answer for acts or liabilities of its

stockholders or those of the legal entities which it may be connected and vice-versa. xARBConstructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)

(c) On Issues of Privileges Enjoyed:The tax privileges enjoyed by a corporation do not extend

to its stockholders. A corporation has a personality distinct from that of its stockholders,

enabling the taxing power to reach the latter when they receive dividends from the corporation. Itmust be considered as settled in this jurisdiction that dividends of a domestic corporation which

are paid and delivered in cash to foreign corporations as stockholders are subject to the payment

of the income tax, the exemption clause to the charter [of the domestic corporation]notwithstanding. xManila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 898 (1936).

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(d)Being a Corporate Officer: Being an officer or stockholder of a corporation does not by

itself make ones property also of the corporation, and vice-versa, for they are separate entities,

and that shareholders are in no legal sense the owners of corporate property which is owned bythe corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544

(1991)

The mere fact that one is president of the corporation does not render the property he owns or

possesses the property of the corporation, since that president, as an individual, and thecorporation are separate entities. xCruz v. Dalisay, 152 SCRA 487 (1987).

(e)Properites, Obligations and Debts:Likewise, a corporation has no legal standing to file a suit

for recovery of certain parcels of land owned by its members in their individual capacity, evenwhen the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta,

Inc., 72 SCRA 347 [1976]).

The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholders

debt or credit that of the corporation. xTraders Royal Bank v. CA, 177 SCRA 789 (1989).

Stockholders have no personality to intervene in a collection case covering the loans of thecorporation on the ground that the interest of shareholders in corporate property is purely

inchoate. xSaw v. CA, 195 SCRA 740 [1991])

The interests of payees in promissory notes cannot be off-set against the obligations between the

corporations to which they are stockholders absent any allegation, much less, even a scintilla ofsubstantiation, that the parties interest in the corporation are so considerable as to merit a

declaration of unity of their civil personalities. xIndustrial and Development Corp. v. Court of

Appeals, 272 SCRA 333 (1997).

It is a basic postulate that a corporation has a personality separate and distinct from itsstockholders. Therefore, even when the foreclosure on the assets of the corporation was wrongful

and done in bad faith, the stockholders of the corporation have no standing to recover for

themselves moral damages. Otherwise, it would amount to the appropriation by, and thedistribution to, such stockholders of part of the corporations assets before the dissolution of the

corporation and the liquidation of its debts and liabilities. xAsset Privatization Trust v. Court of

Appeals, 300 SCRA 579, 617 (1998).

Where real properties included in the inventory of the estate of a decedent are in the possessionof and are registered in the name of the corporations, in the absence of any cogency to shred the

veil of corporate fiction, the presumption of conclusiveness of said titles in favor of saidcorporations should stand undisturbed. xLim v. Court of Appeals, 323 SCRA 102 (2000).

(f) Third-Parties: The fact that respondents are not stockholders of the disputed corporationsdoes not make them non-parties to the case, since the jurisdiction of a court or tribunal over the

subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the

aforementioned corporations are mere alter egos of the directors-petitioners, and that the formeracquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners

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fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the

individuals composing it will be treated as identical if, as alleged in the present case, the

corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for awrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the

stockholders. Gochan v. Young, G.R. No. 131889, 21 March 2001.

B. Piercing the Veil of Corporate Fiction:

1. Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247[1905]). xSee alsoFrancisco v. Mejia, G. R. No. 141617, 14 August 2001.

2. Nature of the Piercing Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15

[1997])

Piercing the veil of corporate entity requires the court to see through the protective shroud which

exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes

one corporation from a seemingly separate one, were it not for the existing corporate fiction.xLim v. Court of Appeals, 323 SCRA 102 (2000).

This Court has pierced the veil of corporate fiction in numerous cases where it was used, amongothers, to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a

decedent, to avoid liability arising from debt; when made use of as a shield to perpetrate fraud

and/or confuse legitimate issues, or to promote unfair objectives or otherwise to shield

them. x Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; alsoxRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

3. When Piercing Doctrine Not Applicable:

(a) Piercing the veil of corporate fiction is remedy of last resort and is not available when

other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).

(b) Piercing is not allowed unless the remedy sought is to make the officer or another corporationpecuniarily liable for corporate debts. Umali v. CA, 189 SCRA 529 (1990);Indophil Textile Mill

Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).

(c) Piercing is not available when the personal obligations of an individual are sought to be

enforced against the corporation. xRobledo v. NLRC, 238 SCRA 52 (1994)

The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal

schemes of those who use the corporate personality as a shield for undertaking certain proscribedactivities. However, in the case at bar, instead of holding certain individuals or person

responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a

corporation which is being ordered to answer for the personal liability of certain individual

directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been

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turned upside down because of its erroneous invocation.Francisco Motors Corp. v Court of

Appeals, 309 SCRA 72, 83 (1999).

(d) To disregard the separate juridical personality of a corporation, the wrongdoing must beclearly and convincingly established. It cannot be presumed. This is elementary. The

organization of the corporation at the time when the relationship between the landowner and thedeveloper were still cordial cannot be used as a basis to hold the corporation liable later on for

the obligations of the landowner to the developer under the mere allegation that the corporationis being used to evade the performance of obligation by one of its major stockholders. xLuxuria

Homes, Inc. v. Court of Appeals,302 SCRA 315 (1999); xDevelopment Bank of the Philippines

vs. Court of Appeals,G.R. No. 126200, 16 August 2001.

(e)Not Applicable to Theorizing:Piercing of the veil of corporate fiction is not allowed when it

is resorted to justify under a theory of co-ownership the continued use and possession by

stockholders of corporate properties.Boyer-Roxas v. Court of Appeals, 211 SCRA 470 [1992]).

The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC athe petition for suspension of payments filed under Section 5(e) of Pres. Decree No. 902-A, on

the ground that the petitioning individuals should be treated as the real petitioners to the

exclusion of the petitioning corporate debtor. The doctrine of piercing the veil of corporate

fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applieswhen such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or

defend crime. xUnion Bank of the Philippines v. Court of Appeals, 290 SCRA 198 (1998).

Changing of the petitionerss subsidiary liabilities by converting them to guarantors of bad debtscannot be done by piercing the veil of corporate identity. xRamoso v. Court of Appeals, G.R. No.

117416, 8 December 2000.

(f) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a

wrong.Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).

The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor toshield them.xVillanueva v. Adre, 172 SCRA 876 (1989).

(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a

sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).

3. Consequences and Types of Piercing Cases: Umali v. CA, 189 SCRA 529 [1990])

(a) The application of the doctrine to a particular case does not deny the corporation of legalpersonality for any and all purposes, but only for the particular transaction or instance for which

the doctrine was applied.Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946);xTantoco v. Kaisahan

ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959).

(b) Classification of the Piercing Cases:

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(i) When the corporate entity is used to commit fraud or to do a wrong (fraud cases);

(ii) When the corporate entity is merely a farce since the corporation is merely the alter ego,

business conduit or instrumentality of a person or another entity (alter ego cases); and

(iii) When the piercing the corporate fiction is necessary to achieve justice or equity (equitycases).

The three cases may appear together in one application.R.F. Sugay & Co., v. Reyes, 12 SCRA

700 (1964).

4. Fraud Cases:

(a) Acts by the Controlling Shareholder: Where a stockholder, who has absolute control overthe business and affairs of the corporation, entered into a contract with another corporation

through fraud and false representations, such stockholder shall be liable jointly and severally

with his co-defendant corporation even when the contract sued upon was entered into on behalfof the corporation.Namarco v. Associated Finance Co., 19 SCRA 962 (1967).

The tests in determining whether the corporate veil may be pierced are: (1) the defendant must

have control or complete domination of the other corporations finances, policy and business

practices with regard to the transaction attached; (2) control must be used by the defendant tocommit fraud or wrong; and (3) the aforesaid control or breach of duty must be the proximate

cause of the injury or loss complained of.Manila Hotel Corporation v. NLRC, 343 SCRA 1

(2000); xAlsoLim v. Court of Appeals, 323 SCRA 102 (2000).

(b) One cannot evade civil liability by incorporating properties or the business.Palacio v. Fely

Transportation Co., 5 SCRA 1011 (1962).

(c) The veil of corporation fiction may be pierced when used to avoid a contractual commitment

against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).

(d) The Supreme Court found the following facts to be legal basis to pierce: One company wasmerely an adjunct of the other, by virtue of a contract for security services, the former provided

with security guards to safeguard the latters premises; both companies have the same owners

and business address; the purported sale of the shares of the former stockholders to a new set of

stockholders who changed the name of the corporation appears to be part of a scheme toterminate the services of the security guards, and bust their newly-organized union which was

then beginning to become active in demanding the companys compliance with Labor Standardslaws. De Leon v. NLRC, G.R. No. 112661, 30 May 2001.

(e) Parent-Subsidiary Relations; Affiliates ( Reynoso, IV v. Court of Appeals, G.R. No.

116124-25, 22 November 2000; Commissioner of Internal Revenue v. Norton and Harrison, 11

SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]).

- Why is there inordinate showing of alter-ego elements?

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Guiding Principles in Fraud Cases:

(i) There must have been fraud or an evil motive in the affected transaction, and the mere proof

of control of the corporation by itself would not authorize piercing; and

(ii) The main action should seek for the enforcement of pecuniary claims pertaining to thecorporation against corporate officers or stockholders.

5. Alter-Ego Cases:

(a) Where the stock of a corporation is owned by one person whereby the corporation functions

only for the benefit of such individual owner, the corporation and the individual should bedeemed the same.Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).

(b) When the corporation is merely an adjunct, business conduit or alter ego of another

corporation, the fiction of separate and distinct corporation entities should be disregarded. xTan

Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).

The corporation veil cannot be used to shield an otherwise blatant violation of the prohibitionagainst forum-shopping. Shareholders, whether suing as the majority in direct actions or as the

minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where,

as in this case, the corporation itself has not been remiss in vigorously prosecuting or defendingcorporate causes and in using and applying remedies available to it. x First Philippine

International Bank v. Court of Appeals, 252 SCRA 259 (1996).

(c) Employment of same workers; single place of business, etc.La Campana Coffee Factory v.

Kaisahan ng Manggagawa, 93 Phil. 160 (1953).

The doctrine that a corporation is a legal entity or a person in law distinct from the persons

composing it is merely a legal fiction for purposes of convenience and to subserve the ends of

justice. This fiction cannot be extended to a point beyond its reason and policy. Where, as in this

case, the corporation fiction was used as a means to perpetrate a social injustice or as a vehicle toevade obligations or confuse the legitimate issues, it would be discarded and the two (2)

corporations would be merged as one, the first being merely considered as the instrumentality,

agency conduit or adjunct of the other. In this case, because of the actions of management of thetwo corporations, there was much confusion as to the proper employment of the claimant.

xAzcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).

(d) Use of nominees. xMarvel Building v. David, 9 Phil. 376 (1951).

(e) Avoidance of tax. Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961);xLiddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).

(f) Mixing of bank deposit accounts.xRamirez Telephone Corp. v. Bank of America, 29 SCRA

191 (1969).

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(g) Where it appears that 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 persons,

disregard the legal fiction that two corporations are distinct entities and treat them as identical.xSibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).

(h) Thinly-capitalized corporations.McConnel v. Court of Appeals, 1 SCRA 722 (1961).

(i) Parent-subsidiary relationship.Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);xPhilippine

Veterans Investment Development Corporation v. CA, 181 SCRA 669 (1990).

(j) Affiliated companies. xGuatson International Travel and Tours, Inc. v. NLRC, 230 SCRA815 (1990).

(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group, Inc., et al.,

G.R. No. 142616, 31 July 2001; xConcept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).

Whether the existence of the corporation should be pierced depends on questions of facts,appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual

stockholders is insufficient. The presumption is that the stockholders or officers and the

corporation are distinct entities. The burden of proving otherwise is on the party seeking to havethe court pierce the veil of corporate entity. xRamoso v. Court of Appeals, G.R. No. 117416, 8

December 2000.

(l) Guiding Principles in Alter-Ego Cases:

(i) The doctrine applies in this case even in the absence of evil intent; it applies because of the

direct violation of a central corporate law principle of separating ownership from management.

(ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the separate

entity, others cannot also be expected to be bound by the separate juridical entity.

(iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to be

enforced against the stockholders or officers of the corporation.

6. Equity Cases:

(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V.

WCC, 104 SCRA 354 (1981).

(b) When used to raise technicalities. xEmilio Cano Ent. v. CIR, 13 SCRA 291 (1965).

7. Piercing Doctrine and Due Process Clause

(a) The need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723(1961).

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(b) When corporate officers are sued in their official capacity when the corporation was not

made a party, the corporation is not denied due process.Emilio Cano Enterprises v. Court of

Industrial Relations, 13 SCRA 291 (1965).

(c) Provided that evidential basis has been adduced during trial to apply the piercing

doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991);xArcilla v. Court of Appeals, 215SCRA 120 (1992).

V. CLASSIFICATIONS OF CORPORATIONS

1. In Relation to the State:

(a) Public corporations (Sec. 3, Act No. 1459)

Organized for the government of the portion of the state (e.g., barangay, municipality, city

and province)

Majority shares by the Government does not make an entity a public

corporation.xNational Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).

(b) Quasi-public corporationsxMarilao Water Consumers Associates v. IAC, 201 SCRA 437(1991)

Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from

the Government, and that its funds and assets are not considered government in nature and not

subject to audit by the COA, the fact that it received a special charter from the government, thatits governing board are appointed by the Government, and that its purpose are of public

character, for they pertain to the educational, civic and social development of the youth which

constitute a very substantial and important part of the nation, it is not a public corporation in thesame sense that municipal corporation or local governments are public corporation since its does

not govern a portion of the state, but it also does not have proprietary functions in the same sense

that the functions or activities of government-owned or controlled corporations such as theNational Development Company or the National Steel Corporation, is may still be considered as

such, or under the 1987 Administrative Code as an instrumentality of the Government.

Therefore, the employees are subject to the Civil Service Law. xBoy Scouts of the Philippines v.NLRC, 196 SCRA 176 (1991).

(c) Private Corporation (Sec. 3, Act 1459)

A government-owned or -controlled corporation when organized under the Corporation Code is

still a private corporation. But being a government-owned or -controlled corporation makes it

liable for laws and provisions applicable to the Government or its entities and subject to thecontrol of the Government. xCervantes v. Auditor General, 91 Phil. 359 (1952).

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A private corporation is created by operation of law under the Corporation while a government

corporation is normally created by special law referred to often as a charter.xBliss Dev. Corp.

Employees Union v. Calleja, 237 SCRA 271 (1994).

The doctrine that employees of government-owned and -controlled corporations, whether created

by special law or formed as subsidiaries under the general corporation law are governed by theCivil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The

present doctrine in determining whether a government-owned or -controlled corporation issubject to the Civil Service Law is the manner of its creation, such that government corporations

created by special charter are subject to the Civil Service Law, while those incorporated under

the general corporation law are governed by the Labor Code. x PNOC-Energy DevelopmentCorp. v. NLRC, 201 SCRA 487 (1991); xDavao City Water District v. Civil Service Commission,

201 SCRA 593 (1991).

The test to determine whether a corporation is government owned or controlled, or private in

nature is simple. Is it created by its own charter for the exercise of a public function, or by

incorporation under the general corporation law? Those with special charters are governmentcorporations subject to its provisions, and its employees are under the jurisdiction of the Civil

Service Commission, and are compulsory members of the Government Service InsuranceSystem. xCamparedondo v. NLRC, 312 SCRA 47 (1999).

Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to

corporations which have been organized by special charters since Sec. 4 of the Corporation Code

renders the provisions of thereof applicable in a supplementary manner to all corporations,including those with special or individual charters, such as cooperatives organized under Pres.

Decree No. 269, so long as those provisions are not inconsistent with such charters. xBenguet

Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).

2. As to Place of Incorporation:

(a) Domestic Corporation

(b) Foreign Corporation (Sec. 123)

3. As to Purpose of Incorporation:

(a) Municipal or Public corporation

(b) Religious corporation (Secs. 109 and 116)

(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

(d) Charitable, Scientific or Vocational corporations

(e) Business corporation

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4. As to Number of Members:

(a) Aggregate Corporation

(b) Corporation Sole (Secs. 110 to 115; xRoman Catholic Apostolic Administrator of Davao,

Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 (1957).

xDirector of Land v. IAC, 146 SCRA 509 (1986), which held that a corporation sole has no

nationality, overturned the previous doctrine (xRepublic v. Villanueva, 114 SCRA 875 [1982]

andRepublic v. Iglesia Ni Cristo, 127 SCRA 687 [1984]) that a corporation sole is disqualified

to acquire or hold alienable lands of the public domain, because of the constitutional prohibitionqualifying only individuals to acquire land of the public domain and the provision under the

Public Land Act which applied only to Filipino citizens or natural persons. xRepublic v. Iglesia

ni Cristo, 127 SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165 (1988).

5. As to Legal Status:

(a)De Jure Corporation

(b)De Facto Corporation (Sec. 20)

(c) Corporation by Estoppel (Sec. 21)

6. As to Existence of Shares (Secs. 3 and 5)

(a) Stock Corporation

(b) Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

1. Pre-Incorporation Contracts

(a) Who Are Promoters?

Promoteris a person who, acting alone or with others, takes initiative in founding and organizing

the business or enterprise of the issuer and receives consideration therefor.(Sec. 3.10, Securities

Regulation Code [R.A. 8799])

(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61;Bayla v. Silang Traffic Co.,

Inc., 73 Phil. 557 [1942])

(c) Theories on Liabilities for Promoters Contracts(Cagayan Fishing Development Co., Inc.

v. Teodoro Sandiko, 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public ServiceCommission, 25 SCRA 285 [1968]; Caram, Jr. v. CA, 151 SCRA 372 [1987]).

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2. De Facto Corporation (Sec. 20)

(a) Elements for Existence of De Facto Corporation:

(1) Valid law under which incorporated;

(2) Attempt in good faith to incorporate; colorable compliance;

(3) Assumption of corporate powers; and

(4) Issuance of certificate of incorporation.Arnold Hall v. Piccio, 86 Phil. 634 (1950).

3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757

[1958];Albert v. University Publishing Co., 13 SCRA 84 [1965];International Express Travel &

Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000); xAsia Banking Corporation v.Standard Products, 46 Phil. 145 [1924];xMadrigal Shipping Co., Inc. v. Ogilvie, Supreme Court

Advanced Decision, 55 O.G. No. 35, p. 7331).

An individual should be held personally liable for the unpaid obligations of the unincorporated

association in whose behalf he entered into such transactions, under the principle that anyperson acting or purporting to act on behalf of a corporation which has no valid existence

assumes such privileges and becomes personally liable for contract entered into or for other acts

performed as such agent.International Express Travel & Tour Services, Inc. v. Court ofAppeals, 343 SCRA 674 (2000).

(a) Nature of Doctrine

Corporation by estoppel doctrine is founded on principles of equity and is designed to preventinjustice and unfairness. It applies when persons assume to form a corporation and exercise

corporate functions and enter into business relations with third persons. Where there is no thirdperson involved and the conflict arises only among those assuming the form of a corporation,

who therefore know that it has not been registered, there is no corporation by estoppel.Lozano v.

De Los Santos, 274 SCRA 452 (1997)

A party cannot challenge the personality of the plaintiff as a duly organized corporation afterhaving acknowledged same when entering into the contract with the plaintiff as such corporation

for the transportation of its merchandise. (Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117

[1926]); the same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911]

but that case pertained to a commercial partnership which required registration in the registryunder the terms of the Code of Commerce.

(b) Two Levels: (i) With fraud and (ii) Without fraud

When incorporating individuals represent themselves to be officers of the corporation never dulyregistered with SEC, and engages in the name of purported corporation in illegal recruitment,

they are estopped from claiming that they are not liable as corporate officers, since Section 25 of

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Corporation Code provides that all persons who assume to act as a corporation knowing it to be

without authority to do so shall be liable as general partners for all the debts, liabilities and

damages incurred or arising as a result thereof.People v. Garcia, 271 SCRA 621 (1997).

An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose

incorporation was not consummated, when he held himself out as officer of the corporation andreceived money from applicants who availed of their services. Such individual is estopped from

claiming that they are not liable as corporate officers for illegal recruitment under the corporationby estoppel doctrine under Sec. 25 of the Corporation Code which provides that all persons who

assume to act as a corporation knowing it to be without authority to do so shall be liable as

general partners for all the debts, liabilities and damages incurred or arising as a result thereof.People v. Pineda, G.R. No. 117010, 18 April 1997.

4. Trust Fund Doctrine

(a) Commercial/Common Law Premise on Equity vis-a-vis Debts

(b) Nature of Doctrine

Under the trust fund doctrine, the capital stock, property and other assets of the corporation areregarded as equity in trust for the payment of the corporate creditors. Commissioner of Internal

Revenue v. Court of Appeals, 301 SCRA 152 (1999).

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund

doctrine which means that the capital stock, property and other assets of a corporation areregarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a

corporation are preferred over the stockholders in the distribution of corporate assets. There can

be no distribution of assets among the stockholders without first paying corporate creditors.Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Boman

Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).

The Trust Fund doctrine considers the subscribed capital as a trust fund for the payment of the

debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation ofthe corporation, no part of the subscribed capital stock may be turned over or released to the

stockholder (except in the redemption of the redeemable shares) without violating this principle.

Thus dividends must never impair the subscribed capital stock; subscription commitments cannot

be condoned or remitted; nor can the corporation buy its own shares using the subscribed capitalas the consideration therefore.NTC v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

(c) Corporation Purchasing Own Shares (Secs. 8, 41, 43 and 122, last paragraph;Phil. Trust

Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929])

VII. ARTICLES OF INCORPORATION

1. Nature of Charter The charter is in the nature of a contract between the corporation and theGovernment. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).

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2. Procedure and Documentary Requirements (Sec. 14 and 15)

(a) As to Number and Residency of Incorporators (Sec. 10)

(b) Corporate Name (Secs. 18, 14(1) and 42;Red Line Trans. v. Rural Transit, 60 Phil. 549

[1934]).

A corporation may change its name by the amendment of its articles of incorporation, but the

same is not effective until approved by the SEC.Philippine First Insurance Co. v. Hartigan, 34

SCRA 252 (1970)

A change in the corporate name does not make a new corporation, and whether affected byspecial act or under a general law, has no effect on the identity of the corporation, or on its

property, rights, or liabilities.Republic Planters Bank v. CA, 216 SCRA 738 (1992).

Similarity in corporate names between two corporations would cause confusion to the public

especially when the purposes stated in their charter are also the same type of business. UniversalMills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 [1977]).

A corporation has not right to intervene in a suit using a name other than its registered name; if a

corporation legally and truly wants to intervene, it should have used its corporate name as the

law requires and not another name which it had not registered. Laureano Investment andDevelopment Corporation v. Court of Appeals, 272 SCRA 253 (1997).

There would be no denial of due process when a corporation is sued and judgment is rendered

against it under its unregistered trade name, holding that a corporation may be sued under the

name by which it makes itself known to its workers. Pison-Arceo Agricultural Development

Corp. v. NLRC, 279 SCRA 312 (1997)

(c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry , 40

Phil. 541 [1919])

(d) Corporate Term (Sec. 11).

No extension can be effected once dissolution stage has been reached.Alhambra Cigar v. SEC,24 SCRA 269 (1968).

(e) Principal Place of Business

Place of residence of the corporation is the place of its principal office. Clavecilla Radio System

v. Antillon, 19 SCRA 379 (1967)

The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. Sy v. Tyson

Enterprises, Inc., 119 SCRA 367 (1982).

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(f) Minimum Capitalization (Sec. 12)

- Why is maximum capitalization required to be indicated?

(g) Subscription and Paid-up Requirements (Sec. 13)

(h) Steps and Documents Required in SEC

3. Grounds for Disapproval (Sec. 17)

When the proposed articles presented show that the object of incorporation is to organize a barrioof a given municipality into a separate corporation for the purpose of taking possession and

having control of all municipal property within the barrio so incorporated and administer it

exclusively for the benefit of the residents, the object is unlawful and the articles can be deniedregistration.Asuncion v. De Yriarte, 28 Phil. 67 [1914]).

4. Amendments to Articles of Incorporation (Sec. 16)

5. Commencement of Corporate Existence (Sec. 19)

VIII. BY-LAWS

1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Pea v. CA, 193 SCRA717 [1991])

As the rules and regulations or private laws enacted by the corporation to regulate, govern and

control its own actions, affairs and concerns and its stockholders or members and directors and

officers with relation thereto and among themselves in their relation to it, by-laws areindispensable to corporations in this jurisdiction. These may not be essential to corporate birth

but certainly, these are required by law for an orderly governance and management of

corporations. Nonetheless, failure to file them within the period required by law by no meanstolls the automatic dissolution of a corporation. Loyola Grand Villas Homeowners (South)

Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

(a) Common Law Limitations on By-Laws

(i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation

A by-law provision granting to a stockholder a permanent representation in the Board ofDirectors is contrary to the Corporation Code requiring all members of the Board to be elected

by the stockholders or members. Even when the members of the association may have formally

adopted the provision, their action would be of no avail because no provision of the by-laws can

be adopted if it is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA133 (1997).

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Although the right to amend by-laws lies solely in the discretion of the employer, this being in

the exercise of management prerogative or business judgment, such right cannot impair the

obligation of existing contracts or rights or undermine the right to security of tenure of a regularemployee. Otherwise, it would enable an employer to remove any employee from employment

by the simple expediency of amending its by-laws and providing the position shall cease to exist

upon occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village HomeownersAssociation, Inc., 300 SCRA 469, 479 (1998).

(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws . Government

of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).

Authority granted to a corporation to regulate the transfer of its stock does not empowercorporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the

adoption of regulations as to the formalities and procedure to be followed in effecting

transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).

By-laws are intended merely for the protection of the corporation, and prescribe regulation, notrestrictions; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc.

v. CA, 210 SCRA 510 (1992), quoting from Thompson on Corporation Sec. 4137, cited in

xFleischer v. Nolasco, 47 Phil. 583.

(iii) By-Laws Cannot Discriminate

(b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA 503[1997]).

Neither can we concede that such contract would be invalid just because the signatory thereon

was not the Chairman of the Board which allegedly violated the corporations by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudicethird persons who deal with the corporation, unless they have knowledge of the same. PMI

Colleges v. NLRC, 277 SCRA 462 (1997).

2. Adoption Procedure (Sec. 46)

Section 46 of the Corporation, which requires the filing of by-laws, does not expressly providefor the consequence of their non-filing within the period provided therein; however, Pres. Decree

902-A allows the SEC to suspend or revoke, after proper notice and hearing, the franchise or

certificate of registration of corporations which fail to file their by-laws. Clearly, there can be

no automatic corporate dissolution simply because the incorporators failed to abide by therequired filing of by-laws, and there is no outright demise of corporate existence. Proper notice

and hearing are cardinal components of due process in any democratic institution, agency or

society, which would require that the incorporators must be given the chance to explain theirneglect or omission and remedy the same. Loyola Grand Villas Homeowners (South)

Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

3. Contents (Sec. 47)

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4. Amendments (Sec. 48)

Power to amend may be delegated to the board of directors

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45;Land Bank of thePhilippines v. COA, 190 SCRA 154 [1990])

A corporation has no power except those expressly conferred on it by the Corporation Code and

those that are implied or incidental to its existence. In turn, a corporation exercises said powers

through its board of directors and/or its duly authorized officers and agents, since the physicalacts of the corporation, like the signing of documents, can be performed only by natural persons

duly authorized for the purpose of by corporate by-laws or by a specific act of the board of

directors.Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

Precisely because the corporation is such a prevalent and dominating factor in the business life ofthe country, the law has to look carefully into the exercise of powers by these artificial persons it

has created.

(a) Classification of Corporate Powers: Express; Implied; and Incidental

There is basis to rule that the act of issuing the checks on behalf of the corporation was well

within the ambit of a valid corporate act, for it was for securing a loan to finance the activities ofthe corporation, hence, not an ultra vires act.Atrium Management Corporation vs. Court of

Appeals, G.R. No. 109491, 28 February 2001.

(b) Where Corporate Power is Lodged (Sec. 23)

Unless otherwise provided by the Corporation Code, corporate powers, such as the power toenter into contracts, are exercised by the Board of Directors. However, the Board may delegate

such powers to either an executive committee or officials or contracted managers, which

delegation, except for the executive committee, must be for specific purposes. The delegatedofficers makes the latter agents of the corporation, and rules of agency as to the binding effects

of their acts would apply. For such officers to be deemed fully clothed by the corporation to

exercise a power of the Board, the latter must specially authorize them to do so. ABS-CBNBroadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999).

2.Ultra Vires Acts

(a) Concept and Types (Sec. 45)

An ultra vires act is one committed outside the object for which a corporation is created as

define by the law of its organization and therefore beyond the power conferred upon it by law.The term ultra vire is distinguished from an illegal act from the former is merely voidable

which may be enforced by performance, ratification, or estoppel, while the latter is void and

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cannot be validated.Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491,

28 February 2001.

(b) Ratification ofUltra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335[1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3

SCRA 361 [1963]; Crisologo Jose v. CA, 177 SCRA 594 [1989];

(i) Theory of Estoppel or Ratification

In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must

be shown that the governing body or officer authorized to ratify had full and completeknowledge of all the material facts connected with the transaction to which it relates. Ratification

can never be made on the part of the corporation by the same person who wrongfully assume the

power to make the contract, but the ratification must be by the officer or governing body havingauthority to make such contract. The act or conduct for which the corporation may be liable

under the doctrine of estoppel must be by those of the corporation, its governing body or

authorized officers, and not those of the purported agent who is himself responsible for themisrepresentation. Vicente v. Geraldez, 52 SCRA 210 (1973).

When the counsel representing the corporation in a collection suit admits on behalf of the

corporation that the latter admitted culpability for personal loans obtained by its corporate

officers, such admission cannot be given legal effect to the detriment of the corporation. Theadmission made in the answer by the counsel for the corporation was without any enabling act

or attendant ratification of corporate act, as would authorize or even ratify such admission. In

the absence of such ratification or authority, such admission does not bind the corporation. Also,the letter issued by the corporate officers who obtained the loan as indicating the corporate

liability of the corporation, cannot also serve to make the corporation liable. The documents and

admissions cannot have the effect of a ratification of an unauthorized act. Ratification can neverbe made on the part of the corporation by the same persons who wrongfully assume the power tomake the contract, but the ratification must be by the officers as governing body having authority

to make such contract.Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

(ii)Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate AppellateCourt, 220 SCRA 103, 113-114 [1993];Francisco v. GSIS, 7 SCRA 577 [1963])

A contract signed by the President/Chairman without authority from the Board of Directors is

void. Although the by-laws grant authority to the President to execute and sign for and in behalf

of the corporation all contracts and agreements which the corporation may enter into, the same

presupposes aprior actof the corporation exercised through its Board of Directors. Yao Ka SinTrading v. CA, 209 SCRA 763 (1992).

Although an officer or agent acts without, or in excess of, his actual authority if he acts within

the scope of an apparent authority with which the corporation has clothed him by holding himout or permitting him to appear as having such authority, the corporation is bound thereby in

favor of a person who deals with him in good faith in reliance on such apparent authority, as

where an officer is allowed to exercise a particular authority with respect to the business, or a

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particular branch of it, continuously and publicly, for a considerable time. Yao Ka Sin Trading v.

CA, 209 SCRA 763 (1992).

Persons who deal with corporate agents within circumstances showing that the agents are actingin excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v.

Court of Appeals, 269 SCRA 601 (1997); also Art. 1883, Civil Code.

The authority of a corporate officer in dealing with third persons may be actual or apparent. . .

the principal is liable for the obligations contracted by the agent. The agents apparentrepresentation yields to the principals true representation and the contract is considered as

entered into between the principal and the third person. First Philipine International Bank v.

Court of Appeals, 252 SCRA 259 (1996).

If a corporation knowingly permits one of its officers, or any other agent, to act within the scopeof an apparent authority, it holds him out to the public as possessing the power to do those acts;

and thus, the corporation will, as against anyone who has in good faith dealt with it through such

agent, be estopped from denying the agents authority. Soler v. Court of Appeals, G.R. No.123892, 21 May 2001.

Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do

no bind the principal unless the latter ratifies the same expressly or implied. It also bears

emphasizing that when the third person knows that the agent was acting beyond his power orauthority, the principal can not be held liable for the acts of the agent. If the said third person is

aware of such limits of authority, he is to blame, and is not entitled to recover damages from the

agent, unless the latter undertook to secure the principals ratification. In the case of thecorporation as the principal, there was no such ratification. Therefore, when the officer entered

into the speculative contracts without securing the Boards approval, nor did he submit the

contracts to the Board after their consummation nor were they recorded in the books of thecorporation, there was, in fact, no occasion at all for ratification. Safic Alcan & Cie. V. ImperialVegetable Co., G.R. No. 126751, 28 March 2001.

(iii) Theory of No State Damage (Harden v. Benguet Consolidated Mining Co., 58 Phil. 140

[1933]).

3. Specific (Express) Powers

(a) Enumerated Powers (Secs. 36)

Example of Poor Draftsmanship:

When the article of incorporation expressly provides that the purpose of the corporation was to

engage in the transportation of person by water, such corporation cannot engage in the

business ofland transportation, which is an entirely different line of business, and, for whichreason, may not acquire any certificate of public convenience to operate a taxicab service.

Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 [1962]).

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Power to Sue

Under section 36 of the Corporation Code, in relation to Section 23, it is clear that where a

corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Aminority stockholder and member of the Board, who fails to show any proof that he was

authorized by the Board of Directors, has no such power or authority to sue on the corporationsbehalf. Nor can we uphold this as a derivative suit. For a derivative suit to prosper, it is required

that the minority stockholder suing for and on behalf of the corporation must allege in hiscomplaint that he is suing on a derivative cause of action on behalf of the corporation and all

other stockholders similarly situated who may wish to join him in the suit. There is now showing

that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, G.R.122452, 29 January 2001.

(b) Power to Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

(c) Power to Increase or Decrease Capital Stock(Sec. 38)

Prior to SEC approval of the increase in the authorized capital stock, and despite the Board

resolution approving the increase in capital stock, and the receipt of payment on the future issuesof the shares from the increased capital stock, such funds do not constitute part of the capital

stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v.

National Wages and Productivity Commission, 260 SCRA368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union members,amounts to nothing but a premature and plain distribution of corporate assets to obviate a just

hearing to labor of the vast profits obtained by its joint efforts with capital through the years, and

would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 [1987]);

(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

(e) Sell or Dispose of Assets (Sec. 40).

Sale by the Board of the only property of the corporation without compliance with the provisions

of Sec. 40 of the Corporation Code requiring the ratification of members representing at least

two-thirds of the membership, would make the sale null and void. Islamic Directorate of thePhilippines v. Court of Appeals, 272 SCRA 454 (1997);Pea v. CA, 193 SCRA 717 (1991).

(f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose

(Sec. 42;De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]).

(g) Declare Dividends (Sec. 43;Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA540 [1968]).

Stock dividend is the amount that the corporation transfers from its surplus profit account to its

capital account. It is the same amount that can loosely be terms as the trust fund of the

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corporation. National Telecommunications Commission v. Court of Appeals, 311 SCRA 508,

514-515 (1999).

Although the certificates of stock granted the stockholder the right to receive quarterly dividendsof 1%, cumulative and participating, the stockholders do not become entitled to the payment

thereof as a matter of right without necessity of a prior declaration of dividends. . . Both Sec. 16of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any

stock dividend without the approval of stockholders, representing not less than two-thirds (2/3)of the outstanding capital stock at a regular or special meeting duly called for the purpose. These

provisions underscore the fact that payment of dividends to a stockholder is not a matter of right

but a matter of consensus. Furthermore, interest bearing stocks, on which the corporationagrees absolutely to pay interest before dividends are paid to the common stockholders, is legal

only when construed as requiring payment of interest as dividends from net earnings or surplus

only.Republic Planters Bank v. Agana, 269 SCRA 1 (1997).

(i) Enter into Management Contracts (Sec. 44;Nielson & Co., Inc. v. Lepanto Consolidated

Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247, at pp. 266-267 [1991]). Whythe difference in rule between entity and individual?

(j) Other Powers

- To Sell Land and Other Properties

A corporation whose primary purpose is to market, distribute, export and import merchandise,the sale of land is not within the actual or apparent authority of the corporation acting through its

officers, much less when acting through the treasurer. Likewise Article 1874 and 1878 of the

Civil Code requires that when land is sold through an agent, the agents authority must be in

writing, otherwise the sale is void. San Juan Structural and Steel Fabricators, Inc. v. Court ofAppeals, 296 SCRA 631, 645 (1998).

- To Borrow Funds

The power to borrow money is one of those cases where even a special power of attorney isrequired under Art. 1878 of the New Civil Code. There is invariably a need of an enabling act of

the corporation to be approved by its Board of Directors. The argument that the obtaining of loan

was in accordance with the ordinary course of business usages and practices of the corporation is

devoid of merit because the prevailing practice in the corporation was to explicitly authorize anofficer to contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals,

270 SCRA 503 (1997).

- To Provide Gratuity Pay for Employees

Providing gratuity pay for its employees is one of the express powers of a corporation under theCorporation Code, and cannot be considered to be ultra vires to avoid any liability arising from

the resolution granting such gratuity pay.Lopez Realty v. Fontecha, 247SCRA 183, 192 (1995).

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- To Donate

- To Enter Into Partnership, Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954).

X. DIRECTORS, TRUSTEES AND OFFICERS

1. Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40[1979]).

(a) Two Theories on Source of Power of Board of Directors (Angeles v. Santos, 64 Phil. 697

[1937]).

(b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo M. Kalaw,

20 SCRA 987 [1967];Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634 [1918];Acua v.Batac Producers Cooperative Marketing Association, 20 SCRA 526 [1967]).

The general rule is that a corporation, through its broad of directors, should act in the manner andwithin the formalities, if any, prescribed by its charter or by the general law. Thus, directors must

act as a body in a meeting called pursuant to the law or the corporations by-laws, otherwise, anyaction taken therein may be questioned by any objecting director or shareholder. Be that as it

may, jurisprudence tells us that an action of the board of directors during a meeting, which was

illegal for lack of notice, may be ratified either expressly, by the action of the directors insubsequent legal meeting, or impliedly, by the corporations subseqeunt course of conduct.

Lopez Realty v. Fontecha, 247SCRA 183, 192 (1995).

(c) Effects of a Bogus Board

The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of the CivilCode because of the lack of consent. Islamic Directorate of the Philippines v. Court of

Appeals, 272 SCRA 454 (1997).

(d) Executive Committee (Sec. 35)

2. Business Judgment Rule (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36

[1962];Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 [1997])

Board members and officers who purport to act for and in behalf of the corporation, keep within

the lawful scope of their authority in so acting and act in good faith, do not become liable,

whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such anature and are done under such circumstances, are properly attributed to the corporation aloneand no personal liability is incurred by such officers and Board members. Benguet

Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992)

3. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89SCRA 336 [1979]).

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(a) A director must own at least one share of stock (Pea v. CA, 193 SCRA 717 [1991];

xDetective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 [1969])

(b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v. CA, 205SCRA 752 [1992]).

4. Election of Directors and Trustees

(a) Directors (Secs. 24 and 26;Premium Marble Resources v. Court of Appeals, 264 SCRA