Revised Bagtas Reviewer by Ve and Ocfe 2A ATENEO DE MANILA LAW SCHOOL OUTLINE ON PHILIPPINE CORPORATE 2ND SEMESTER, SY 2004-2005 I. HISTORICAL BACKGROUND 1. Philippine Corporate Law:2 Sort of Codification of American Corporate Law Under American sovereignty, attention was drawn to the fact that there 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 the sociedad annima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. 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 Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. 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 expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world. CESAR L. VILLANUEVA Atty. LAW1

1Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines. 2The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.

grant is conferred. A corporation will be formed only when 5 individual persons , as incorporators, agree to form a corporat

II. CONCEPTS See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994) 1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code) Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, having the rights of succession and the powers attributes and properties, expressly authorized by law or incident to its existence. Art. 44(3) The following are juridical persons Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws creating or recognizing them. Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any pone of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership corporation is an artificial being created by operation of law. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. PNB v. Andrada Electric & Engring Co., 381 SCRA 244 (2002). an artificial being - a person created by law or by state; legal fiction created by law its existence is dependent upon the onsent or grant of the state EXCEPT corporation by estoppel and de facto corporation

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the definition of a corporation is merely a guide and does not really provide for the basis of a corporation

Q. Why is it important to know that the corporation is a juridical person? A. To be able to know that the corporation is able to contract with others.

Revised Bagtas Reviewer by Ve and Ocfe 2A Q. Why does the definition of a corporation involve a statement creature of the law?

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A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of limited existence, outside its powers, it does not exist. 2. Tri-Level Existence of the Corporation (a) AGGREGATION OF ASSETS AND RESOURCES physical assets of the corporation; the tangibles ( ex. in a grocery, the goods being sold)

(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not only the tangible assets but also the intangibles like goodwill created by the businessC)

JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the state

Q. Why is the distinction between the three levels important? A. Each is important in its own way as there are consequences for each. The distinctions become important and come into play when it comes to dealing with corporation law What are you selling or buying (and their worth) will depend upon the particular level you choose. EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed of sale would suffice and you will not be liable for contingent liabilities. It will be different if you buy the business as an economic concept. SEC Regulations or Bulk sales Law may be applied. 3. Relationships Involved in a Corporate SettingA)

JURIDICAL ENTITY LEVEL, which views the State-corporation relationship the state cannot destroy a corporation without observing due process of law

(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual 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 members corporation and its shareholders or

B)

Between and among the shareholders in a common venture

EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and third-parties or outsiders, essentially governed by Contract Law and Labor Law. most imporatant level, highest form of law in this level is contract law.

4. Theories on the Formation of Corporation: the SC has looked upon the corp. not merely as an artificial being but more as an AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT. The corp. is emerging as an enterprise bounded by economics rather than an artificial personality bounded by forms of words in a charter, minute books & books of accounts. The proposition that a corp. has an existence separate and distinct from its

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Tayag vs Benguet Consolidated, Inc. (26 SCRA 242)

membership has its limitations. (Separate existence is for a particular purpose.) There can be no corp. existence w/o persons to compose it & there can be no association w/o associates. (a) Theory of Concession (aTayag v. Benguet Consolidated, 26 SCRA 242 [1968]). corporation creature of the state limited no other privilege may be exercised beyond grant

To organize a corporation that could claim a juridical personality of its own and transact business as 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. cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the 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. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association acquired a separate juridical personality, even when it adopts sets of constitution and by-laws. International 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, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).

FACTS: Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliary administrator & left, among others, 2 stock certificates covering 33, 002 shares of stock of appellant Benguet Consolidated, Inc. Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surrender to ancilliary administrator the stock certificates to satisfy the legitimate claims of local creditors. However, County Trust refused. The lower court then presided by Judge Santos ruled that : 1. stock certificates are considered lost for all purposes of admin. & liquidation of the Philippine estate of Perkins 2. said certificates are cancelled 3. directs said corp. To issue new certificates in lieu thereof, the same to be delivered by aid corp. to either Tayag or the Probate division of this court. An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that the certificates of stock are existing and in possession of County Trust. They also assert that there was a failure to observe certain requirements of its by-laws before new stock certificates could be issued. Judgment affirmed. Benguet bound by

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ISSUE: Whether or not Benguet properly pursued the appeal? HELD: order. The Court held that the appeal cannot prosper. -

the challenged order represents a response & express a policy arsing out of a specific problem, addressed to the attainent of specific ends by the use of specific remedies, w/ full & ample support from legal doctrines of weight and significance.

Formally adopts the concession theory; corp w/o imprimatur outside state grant. wn set of by laws etc., the corp would still have to obey the order of the state by Ve and Ocfe 2A 5 virtue of a primary franchise given by the state. AndRevised Bagtaspower of the state to grant it or not. But once granted it is within the Reviewer pplication of EET corp- as A disagreement ensued social & legal ancilliary and the domiciliary admin to who ws reality of the group as a between the entity independent of state recognition & concession. entitled the certificate of stocks The CFI ordered County Trust to produce and deposit the stocks with the court w/c wasnt complied with Thus the order of the CFI.

- Benguet didnt dispute Tayags authority to gain control & possession of all the he corp. life of its own tellsassets of themultiply profitably.Phil. corp. like every Juan and Maria given life by God acts on its it to go and decedent w/n the The Corporation is an artificial being created by operation of law. It owes it life to the state its birth being purely dependent on its will. Flether: A corp. is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders. There is thus a rejection of Gierkes genossenchaft theory. A corp as known to Phil. Jurisprudence is a creature w/o any existence until it has received the imprimatur of the state acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so. Corporate by-laws must yield to judicial order As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.

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c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 [1947]) juridical personality contractual relation between 5 or more individuals recognize existence of an aggregation of individuals (enterprise entity)

A corporation is but an association of individuals, allowed to transact under an assumed corporate 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. PSE v. Court of Appeals, 281 SCRA 232 (1997). 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 to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

5. Four Corporate Attributes Based on Section 2:A)

A

CORPORATION IS AN ARTIFICIAL BEING

(Ability to Contract and Transact)

- a person created by law or by state; a legal fictionB)

CREATED -

BY OPERATION OF LAW

(Creature of the Law)

its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporationRIGHT OF SUCCESSION

C)

WITH -

(Strong Juridical Personality)

the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separate personality remains even if there has been a change in the members and stockholders of the corporation.THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS

D)

HAS

EXISTENCE

(Creature of Limited Powers)

6. Advantages and Disadvantages of Corporate Form: (a) Four Basic Advantageous Characteristics of Corporate Organization: (i) STRONG LEGAL PERSONALITY A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989). The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. aStockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS Facts: In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation of the assets of the corporation which provided that due to the resolution of the stockholders dissolving the corporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation including real properties located in Manila. The certificate of liquidation was denied registration by the Register of Deeds and one of the grounds is that the judgment of the corporation in approving dissolution and directing opposition of assets of the corporation need to be presented aside from the following: (1) the number of parcels which were not certified in the acknowledgement (2) P430.50 registration fees have to be paid (3) P90.45 docustamps need to be attached. Stockholders contend that it was not conveyance but a mere distribution of corporate assets after the corporation ceased to exist upon dissolution. Issue: WON the certificate merely involves a distribution of the corporate assets or should be considered a transfer or conveyance. Held: The Supreme Court agrees with the Register of Deeds and the Land Registration Commission. A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. The corporation has property of its own which consist mainly of real estates. A share of stock only typifies an aliquot part of the corporations property or the right to share in the proceeds to that extent when distributed according to law and equity. But its holder is not the owner of any part of the capital nor

Revised Bagtas Reviewer by Ve and Ocfe 2A 7 is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property. Thus, the act of liquidation made by the stockholders of the corporations assets cannot be considered as a partition of the community property but rather a transference or conveyance of the title of its assets to the individual stockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. (ii) CENTRALIZED MANAGEMENT As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). The exercise of the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholders approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002). (iii) LIMITED LIABILITYTO

INVESTORS

AND

OFFICERS

One of the advantages of the corporation is the limitation of an investors liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998). It is hornbook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (iv) FREE TRANSFERABILITYOF

UNITS

OF

OWNERSHIP

FOR

INVESTORS

Authority granted to corporations to regulate the transfer of its stock does not empower the corporation 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). (b) Disadvantages: (i) Abuse of corporate management (ii) Abuse of limited liability feature (iii) High cost of maintenance (iv) Double taxation Advantages and Disadvantages of Corporate Form: Four Basic Characteristics Organization: of Advantageous Corporate Disadvantages:

(i) Strong Legal Personality - entity attributable powers; - continuity of existence;

(i) Abuse management -

of

corporate

there is severance of control and

having the right of succession, the death of an individual stockholder does not affect corporate existence not a natural occurrence, exists mainly because the law provides for it. This is what distinguishes the separate juridical personality of a corporation from a partnership. The legal personality of a corp is strong because the law provides for the right of succession, surviving even w/o those who incorporated it while in a partnership the separate juridical personality is extinguished upon the death of a partner no delectus personarum

ownership. Control will be vested with the BoD, thus investors have no say over the use of their investment and little voice in the conduct of the business (ii) Abuse of limited liability feature this feature had been abused and may hurt innocent creditors.

(ii) Cost of maintenance the formation and incorporation of a corp. entails a lot of difficulties and costs, particularly the requirements made by the law so as to qualify for incorporation.

(ii) Limited Liability of Investors ( provided for by jurisprudence only) the liability of an investor is limited their investments and investors cannot be held accountable for more than what they invested. CLV: However there are a lot of ways to circumvent the law and make the shareholders liable for more than his actual investment (ex. A creditor requiring the chairmn or president of the company as a joint debtor of the loan) A trade-off to the abdication made by the investor of his right to manage the property he had invested in the

(iv) Double taxation Dividends received by individuals from domestic corporations are subject to final 10% tax for income earned on or after 1 January 1998 (Sec. 24(B) (2), 1997 NIRC) Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), 1997 NIRC)

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Revised Bagtas company. Under property law, a person exercises full ownership over his property but when he invests it in a corporation, the owner abdicated the six jus of ownership (iii) Free Transferability of shares A legal relationship is created which is more stable for there are laws which govern, and the corp. and the stockholders are bound by the law.

Reviewer by Ve and Ocfe 2A In addition, there is reimposition of the 10% improperly accumulated earnings tax for holding companies (Sec. 29, 1997 NIRC)

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(iv) Centralized Management One of the advantages of a corp. is the limitation of an investors liability, this flows from the legal theory that a corp. entity is separate and distinct from its stockholders

Q. Is a corp. in our jurisdiction given the feature of limited liability? A. No. The feature of limited liability is given to the stockholder and not to the corporation. Q. Is limited liability a normal run of things? A. No. It is only there because in this case, it comes with the separate juridical personality. Q. If limited liability as shown in a corporation setting good for the investors, does it mean that delectus personarum is a bad thing? A. No. It is good in one way, since persons are bound by the contracts they enter into. 7. COMPARED WITH OTHER BUSINESS MEDIA 4 Distribution of Risk, Profit and Control 3 a) Sole Proprietorships Sole Proprietorship Free from many requirements and regulations in its operation Corporation Heavily regulated; a lot of requirements imposed for registration and incorporation Control of business is done by the

Owner has full control of his business

and fiat. Just because the BoD are to be elected by the stockholders does not mean that the former derives its powers fro BoD Owner stands to lose more than what he puts into the venture Investors have limited liabilty

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the partners, even in case of failure to comply with requirements of Art. 1772 first paragraph. Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any pone of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to coownership Corporation Separate legal personality Investors limited liability Free transfer of shares Centralized management Partnership Separate legal personality Contractual limited liability ( when a limited partnership is created) Transfer with consent of partner Every partner is agent

Q. How does the contractual management of a corp. compare with the management of a partnership? A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership as every partner is an agent of the others (delectus personarum). In a corporation, only the BoD and not the stockholders can bind the corporation.

Q. What are the 2 types of partnerships? A. Regular and Joint venture Q. Can a corporation be a partner in a regular partnership? A. No. Because a partner must be a natural person. It is against public policy for corporation to be a partner in a regular partnership. Q. If limited liability is something that can be contracted in a partnership, why did the legislature put such limited liability as an attribute of a corporation? If the feature of limited liability cots money then why not take it out? Why not eave it up to the investors who can decide if they want limited liability or not? A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have

Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668) Revised Bagtas Reviewer by Ve and Ocfe 2A 11 P100M, it would be foolish to put all my eggs in one basket (if the basket falls, all eggs break). So, I merely put P10M in one corporation and then borrow the P90M while the rest of my money I pt somewhere else. If the corporation fails, I do not lose all my P100M, I lose only my P10M. But if the corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from the P90M paid up loan. This is the concept of LEVERAGING, using other peoples money to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to make a diligent appraisal of the credit standing of the corp. Q. What is the main distinction between a corporation and a partnership? A. A corp. is an intermingling of corporation law and contract law. On the other hand, a partnership is purely a contractual relationship and so every time a partner dies, the contract is actually extinguished. Q. What is Corporation Law all about? A. It is all about jurisprudence actually built around the 4 attributes of a corporation Q. Can a defective attempt to form a corporation result at least in a partnership? A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

Facts: In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern Airlines, a single proprietorship. On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts and one set f necessary spare parts for the total price of $109,00. Both arrived in Manila On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety bond in behalf of Lim, principal, for the balance price for the aircrafts and spare parts. Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and Constancia Maglana contributed some funds in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to anew corporation proposed by Lim to expand his airline business. They executed indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed SAL, BORMAHECO and Cervantes: where they principally agree and bind themselves jointly and severally to indemnify pioneer. On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel mortgage as security for the suretyship in favor of Pioneer. The deed was duly registered with the Manila RoD and with the Civil Aeronautics Administration. Lim defaulted on his subsequent installments prompting JDA to request payment from the surety. Pioneer paid about P298,000 Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses

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and Maglana filed a third party complaint claiming that they are co-owners of the aircraft. Pioneer later filed a petition for judicial foreclosure and an application for a writ of preliminary attachment against Lim, the Cervanteses, BORMAHECO and Maglana. In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were not privy to the contracts signed by Lim. The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the other defendants. On appeal, the CA affirmed.

ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to reimbursement of amounts given by Lim? HELD: Lims assertions: The failure of respondents to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must share in the losses and/or gains of the venture in proportion to their contribution. PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of PARTNERS INTER SE. Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corp. w/n the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized. However, such a relationship does not exist, for ordinary persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist and should be implied only when necessary to do justice between the parties: thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corp., so as to be liable as such in an action for settlement of the alleged partnership and contribution. the records show that Lim received the amount of P151,000 representing the participation of BORMAHECO and Maglana it was clear that Lim never intended to form a corp with them but they were duped into giving their money no de facto corp. was created

Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a partnership inter se is created or a corporation by estoppel? A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In the case at bar, there was no intent on the other parties to enter into a partnership but a corporation. As to the Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnership inter se, since there was no intention to do so and to be held liable as such. But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporate name and actively participated in the activities of the corporation, then they are to be held liable as partners. Q. Why are we taking up Pioneer? Why were they not liable? A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively participated in the conduct of the business, the SC held in this case that to be able to be held liable the person should possess powers of management.

Revised Bagtas Reviewer by Ve and Ocfe 2A Q. What is the difference between Pioneer and Lim Tong Lim?

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A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have to possess powers of management. In Lim tong Lim, it continues its pronouncement, by saying that if you have beneficial ownership over the business, then you are also liable as a partner. LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a nonexistent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to cross-examine and present evidence because he failed to appear while Lim filed a counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua, Yao and Lim were jointly liable as general partners. Held: 1.) Lim was contesting that the CA ruled that there was a partnership in the Compromise Agreement and alleges that he had no direct participation in the negotiations and was merely leasing F/B Lourdes to Chua and Yao Facts found by the TC and CA showed that there was a partnership formed by the three of them. They initially purchased two boats through a loan from Lims brother and as security, was placed in the name of Lim Tong Lim. The repairs and supplies were shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim for nullity of commercial documents, reformation of contracts and declaration of ownership of fishing boatswhich was settled amicably. In the Compromise Agreement, it was revealed that they intended to pay the loan from Jesus Lim by selling the boats and to divide among them the excess or loss. Therefore it was clear that a partnership existed which was not solely based on the agreement. It was merely an embodiment of the relationship among parties. 2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration papers of the boats, including F/B Lourdes where the nets were found As found by the lower courts, the boats were registered to Lim only as security for the loan that was granted to the partnership by the brother of Lim, which was not an uncommon practice. Aside from the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed he was merely leasing the boats to Chua and Yao. 3.) Lim contests his liability by saying that only those who dealt in the name of the ostensible corporation should be held liable. His name was not in any of the contracts and never dealt with PFGI Sec. 21 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 debts, liabilities and damages incurred or arising as a result thereof; Provided however that when any such ostensible corporation is sued, on any transaction entered by it as a corporation or ant tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even if the ostensible corporate entity is proven to be non-existent, a party may be estopped from denying its corporate existence because an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law. It cannot create agents or confer authority on another to act on its behalf. Thus, those who act or purport to act as its representatives do so without authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the attachment because it has effectively interfered with the use of the vessel. Though technically, he did not directly act on behalf of the corporation, however, by reaping the benefits of the contract entered into by persons he previously had an existing relationship

with, he is deemed part of said association and is covered by the doctrine of corporation by estoppel. CLV: Pioneer case actors who knew of corporations non-existence are liable as general partners while actors who did not know are liable as limited partners, passive investors are not liable; Lim teaches us that even passive investors should be held liable provided they benefited from such transactions. (c) Joint Ventures Joint venture is an association of persons or companies jointly undertaking some commercial 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 and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994). Q. What is the difference between a joint venture and a partnership? A. A joint venture is by law a partnership because it follows the same definition as having two or more persons binding themselves together under a common fund with the intention of dividing the profits between themselves. Therefore, every joint venture is a partnership. The distinction between the two is that a joint venture is for a limited purpose only while a partnership involves an arrangement or an on-going concern. Q. Is it possible for a joint venture not to be a partnership? A. Yes. When the joint venture forms a corporation, it then becomes a joint venture corporation. Q. Does the requirement of registration needed in a partnership also required in a joint venture? A. No. Only in a partnership is registration required (Art. 1772, Civil Code) (d) Cooperatives (Art. 3, R.A. No. 6938) A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000). Cooperative Separate Juridical Personality Governed by principles of democratic control where the members have equal voting rights on a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membership that exercises all the rights and performs all of the obligations of the SH vote their percentage share of the stocks subscribed by them Corporation

BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or

coop.

Revised Bagtas Reviewer by Ve and Ocfe 2A ratification by the SH Under the Supervision of the SEC Stock Corp. for profit; Non-Stock Corp eleemosynary (charitable, philantrophic) purpose

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Under the supervision of the coop. Development Authority Organized for the purpose of providing goods and services to its members and thus to enable them to attain increased income and saving, etc.

e) Business Trusts (Article 1442, Civil Code) Art. 1442 Q. What is the difference between a business trust and a corporation? A. The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor or the trustee/beneficiary. The concept of a separate juridical personality is absent from a business trust. (f) Sociedades Annimas A sociedad annima was considered a commercial partnership 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 not necessary to make it a juridical persona corporation. Such inscription only operated to show that it partook of the form of a commercial corporation. Mead v. McCullough, 21 Phil. 95 (1911). The sociedades annimas were introduced in Philippine jurisdiction on 1 December 1888 with the 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 companies than the modern commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). Our Corporation Law recognizes the difference between sociedades annimas and corporations and will not apply legal provisions pertaining to the latter to the former. Phil. 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 mutual agreement 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 partnership of cuentas 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. Bourns 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) The Congress shall not except by general law, provide for the formation, organization or regulation of private corporations, Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the formation of a private corporation by special legislative act which is neither owned nor controlled by the government, since NDC was merely required to extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old investors and stockholders of the insolvent Agrix upon proof of their claims against the abolished

Revised Bagtas Reviewer by Ve and Ocfe 2A corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990).

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Congress cannot enact a law creating a private corporation with a special charter, and it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004). Q: What distinguishes a public corporation from a private corporation owned by the government? A: It is not ownership which distinguishes a public corporation from a private corporation. It is the civil service eligibility of its employees and if the financial records are subject to the examination of the Commission on Audit. A public corporation is created by its charter whereas a private corporation is created under the Corporation Code. 2. CORPORATIONAS 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 scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]). (c) Unreasonable Searches and Seizure A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers 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 offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. Stonehill 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 immunities appropriate 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. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why is a corporation entitled to the rights of due process and equal protection? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law grants to an individual. A corporation is entitled to due process and equal protection by virtue of the juridical personality given by the State through the primary franchise of the corporation. The constitution did not distinguish whether the term person in Sec. 1 Art. III of the Constitution refers to an individual or a juridical entity, which therefore extends to private corporations within the scope of the guaranty. Q: Why is the corporation entitled to the protection against unreasonable searches and seizures? A: The corporation being entitled to due process and equal protection is the consequence of the States grant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the government recognizes not only the separate juridical personality of the corporation but also grants unto it all the rights and protections that a natural individual would possess which includes the right to due process and equal protection. However, a corporation is also entitled to protection against unreasonable searches and seizures. This right however does not emanate from the grant of the State by way of primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of the Corporation Code, a corporation is still for all intents and purposes an association of individuals under an assumed name and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities for such body. (1) Its properties cannot be taken without just compensation (2) it can only be proceeded against by due process of law (3) it is protected against unlawful discrimination.

In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involves physical intrusion into the premises of the corporation, and therefore also intrudes into the personal and business privacy of the stockholders or members who compose it. It can be seen that the right of the individual against unreasonable searches and seizures is extended to corporations upon whom they are members. (d) But 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 v. PCGG, 150 SCRA 181 (1987). While an individual may lawfully refuse to answer incriminating questions unless protected by an 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. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944). Q: Why is a corporation entitled to equal protection but not the right against selfincrimination? A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being in the same class should be treated equally. However, the right to self-incrimation is not extended to corporation because: 1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest. It is to protect the individual from having to commit perjury just to keep himself from going to jail. However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just a legal fiction. 2. The corporation is subject to the reportorial requirements of the law. The corporation being a mere creature of the State is subject to the whims of its Creator. The corporation powers are limited by law. CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since the corporation is of an amoral personality, such right may not be attributable to it. 3. Practice of Profession Corporations cannot engage in the practice of a profession since they lack the moral and technical competence required by the PRC. A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002). 4. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. 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. aPNB v. Court of Appeals, 83 SCRA 237 (1978). PNB v COURT OF APPEALS Facts: Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the agricultural year 19561957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the said quota for consideration of 2,500. Her sugar cannot be exported without sugar quota allotments. Sometimes, however a planter harvests less sugar than her quota so her excess quota is used by her mother who pays for it. This is her arrangement with Mr. Tuazon. At the time of the agreement, she was indebted to PNB of San Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured by her sugar crop, and since her quota was mortgaged to PNB, her arrangement with Mr. Tuazon had to be approved by the bank. Upon presentment of the lease arrangement, the PNB branch manager revised it by increasing the lease amount

Revised Bagtas Reviewer by Ve and Ocfe 2A 19 to P2.80 per picul for a total of P2,800. Such increase was agreed to by both Rita and Jacobo. However, when it was presented to the Board of Directors for approval, they further increased the amount to P3.00 per picul. Jacobo asked for the reconsideration but he was denied the same. The matter stood as it was until Jacobo informed Rita and PNB that he had lost interest in pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Since she had a surety agreement with the Philippine American General Insurance Co. Inc. (Philamgen), the latter paid her outstanding debt. Philamgen in turn demanded from Rita the amount which they paid the bank. Instead of paying the bank, Rita claimed that she told Philamgen that she did not consider herself indebted to the bank since she had an agreement with Jacobo Tuazon. When such was discontinued, she failed to realized the income with which she could have paid her creditors. Philamgen filed a complaint for the collection of sum of money against Rita. Rita implicated PNB as a third party defendant claiming that her failure to pay was due to the fault or negligence of PNB. Issue: WON PNB is liable for the damage caused to Rita. Held: There is no question that Ritas failure to utilize her sugar quota was due to the disapproval of the lease by the Board of Directors of the petitioner, thus PNB should be held liable. The Board justified the increase to P 3.00 per picul by saying that it was the prevalent rate at that time. However, there was no proof that any other person was willing to lease the sugar quota allotment of Rita for a price higher than P2.80 per picul. Just because there are isolated transactions where the lease price was P3.00 per picul does not mean that there are always ready takers. While PNB had the ultimate authority of approving or disapproving the proposed lease since the quota was mortgaged to the bank, the latter certainly cannot escape its responsibility of observing precaution and vigilance which the circumstances of the case justly demanded in approving or disapproving the lease of said sugar quota. According to Art. 19 of the Civil Code, [e]very person must in the exercise of his rights and the performance of his duties, act with justice, give everyone his due and observe honesty and good faith. This the petitioner failed to do. As a consequence, Art. 21 states, [a]ny person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. On the liability of the corporation, the court ruled that, [a] corporation is civilly liable in the same manner as natural persons for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or artificial person. All of the authorities agree that a principal or master is liable for every tort which he expressly directs or authorizes, and this is just as true of a corporation as of a natural person. A corporation, is liable therefore, whenever a tortuous act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or generally, from the directors as the governing body.

NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume that in the granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous acts against third parties. Only when the corporation has expressly directed the commission of such tortuous act, would the damages resulting therefrom be ascribable to the corporation. And such a direction by the corporation, is manifested either by its board adopting a resolution to such effect, as in this case, or having taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning such an act. Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tort consists in the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of

operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997). Q: When is a corporation liable for tort? A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express direction of authority from the stockholders or members acting as a body or through the Board of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such effect (b) by having takien advantage of such a tortious act, the corporation through its board, has expressly or impliedly ratified such an act or estopped from impugning the same. Q: What is a derivative suit? A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannot escape enforcement of the award of damage to the tort victim. As a remedy, the stockholders may institute a derivative suit against the responsible board members and officers for the damages suffered by the corporation as a result of the tort suit. 5. Corporate Criminal Liability (aWest Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); aPeople v. Tan Boon Kong, 54 Phil. 607 [1930]; aSia v. Court of Appeals, 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).

WEST COAST LIFE INS. CO. v HURD Facts: The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California, doing business regularly and legally in the Philippines. An information was filed against the plaintiff corporation as well as John Northcott and Manue Grey charging the said corporation and said individuals with the crime of libel. The controversy started when Northcott, as general manager for the Philippines of said company and John Grey who was an agent and employee of the company, conspired to release certain circulars containing foul statements against Insular Life Company claiming that the Insular Life was then and there in a dangerous financial condition on the point of going into insolvency, to the detriment of the policy holders of the said company, and of those with whom said company have and had business transactions. The plaintiffs then filed a motion to quash summons sent by the Judge, on the ground that the court had no jurisdiction over said company, there being no authority in court for the issuance of the processes. Moreover, plaintiffs alleged that under the laws of the Philippines, the court has no power or authority to proceed against a corporation, criminally, to bring it into court for the purpose of making it amenable to criminal laws. Issue: WON corporations can be held criminally liable. Held: No. While the courts have inherent powers which usually go with courts of general jurisdiction, it was held that under circumstances of their creation, they have only such authority in criminal matters as is expressly conferred upon them by statute or which is necessary to imply from such authority in order to carry out fully and adequately the express authority conferred. The SC did not feel that Courts have authority to created new procedure and new processes of criminal law. Although, there are various penal laws in the Philippines which the corporation may violate, still the SC does not believe that the courts are authorized to go to the extent of creating special procedure and processes for the purpose of carrying out the penal statutes, when the legislative itself has neglected to do so. This is true since the courts are creatures of the statute and have only powers conferred upon them by statute. Philippines courts have no common law jurisdiction

Revised Bagtas Reviewer by Ve and Ocfe 2A or powers. PEOPLE v TAN BOON KONG Facts:

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During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the purchase and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the sales amounted to 2.5 million, therefore failing to declare for the purpose of taxation about 200,000, not having paid the government 2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court judge sustained said motion on the ground that the offense charged must be regarded as committed by the corporation and not its officials. Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because it is contrary to a great weight of authority. The court pointed out that, a corporation can act only through its officers and agents where the business itself involves a violation law, the correct rule is that all who participate in it are criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of taxation of the total amount of sales for year 1924. As such, the filing of false returns constitutes a violation of law. Him being the author of the illegal act must be held liable. SIA v PEOPLE Facts: The facts reveal that in 1963, the accused Jose Sia was the general manager of Metal Manufacturing Company of the Philippines engaged in the manufacturing of steel office equipment. When the company was in need of raw materials to be imported from abroad, Sia applied for a letter of credit to import steel sheets from Tokyo, Japan, the application being directed to Continental Bank and was opened in the amount of $18,300. According to the Continental Bank, the delivery of the steel sheets was only permitted upon the execution of the trust receipt. While according to Sia, the steel sheets were already delivered and were even converted to equipment before the trust receipt was signed by him. However, there is no question that when the bill of exchange became due, neither the accused nor his company made payments, despite demands of the bank. On appeal, Sia contends that he should not be held liable. Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf of his company. Held: NO. The Court disputed the reliance of the lower court and the CA on the general principle that for a crime committed by a corporation, the responsible officers thereof would personally bear the criminal liability, as enunciated in Tan Boon Kong. The latter provides that: [t]he corporation was directly required by law to do an act in a given manner and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. The performance of an act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporations who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of the law, negated. The Court concluded that the cited case does not fall squarely with the circumstances surrounding Sia since the act alleged to be a crime is not in the performance of an act directly ordained by law to be performed by the corporation. The act is imposed by the agreement of the parties in pursuit of the business. The intention of the parties is therefore a factor determinant of whether a crime or a civil obligation alone is committed. The absence of a provision of the law

even in the RPC making Sia criminally liable as the president of his company created a doubt that must be ruled in his favor according to the maxim, that all doubts must be resolved in favor of the accused. CONTRASTING THE THREE CASES In the case of West, the court in effect enunciated that for a person to proceed criminally against a corporation, it was necessary that express provisions of law be enacted, specifically providing that a corporation may be proceeded against criminally and brought to court. But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the case of Tan Boon Kong provided that since a corporation acts through its officers and agents, any violation of law by any of the actors of the corporation in the conduct of its business involves a violation of law, the correct rule is that all who participate in it are liable. In making actors liable, the court here said attaching criminal liability to the fiction cannot be done since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a being since it lacks its own mind. To apply the doctrine of separate juridical personality would allow criminals to use the corporation as a shield or cloak to hide their criminal activities behind such. However, the liability of officers were delineated in case of Sia where the court held that the responsible officer is personally liable is personally liable for crimes committed by the corporation only in a situation where the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally.

NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the law is currently undergoing changes such that juridical persons are also defined as offenders of criminal acts, as with the case of the Anti-Money Laundering Act. Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of establishments In default of the persons criminally liable, innkeepers, tavern-keepers and any other person or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special police regulation shall have been committed by them or their employees. Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within their houses from guests lodging therein, or for the payment of the value therefore, provided that such guests shall have notified in advance the innkeeper himself, or the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such innkeeper or his representative may have given them with respect to the care of and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the innkeepers employees. Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liability established in the next preceding article shall also apply to employers, teachers, persons and corporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of duties. No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39 SCRA 303 (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. People v. Concepcion, 44 Phil. 129 (1922). While it is true that a criminal case can only be filed against the officers and not against the corporation itself, it does not follow that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).

Revised Bagtas Reviewer by Ve and Ocfe 2A 23 Q: Why can the corporation be held liable for tortuous acts done by its agent but not for criminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligence could be part of every transaction. It is an integral part of corporate transactions. For as long as people comprise the corporation, it is within the contemplation of every corporate act. 6. Recovery of Moral 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 good reputation which, if besmirched, may be a ground for the award of moral damages. Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998). A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by an artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001). The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corporation may recover moral damages if it has a good reputation that is debased, resulting in social humiliation is an obiter dictum. 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. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). 7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123) Section 123: Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.

There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporation that a corporation is of the nationality of the country under whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationality of the majority stockholders, wherein control is vested. Situation #1: 51% Filipino 49% Japanese Under the control test, the nationality cannot be determined because for a group of stockholders to exercise control over a corporation it is required by the Corporation Code that they at least control 60% of the corporation. Why 60%? Because under the Corporation Code for a group of persons to incorporate a corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person. Situation #2: 60% Filipino 40% Japanese Under the control test, this is considered a

Filipino corporation. 3.) Principal place of business applied to determine whether a State has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organizations, capital structure, rights and liabilities of directors. Q: Do all three tests apply in the Philippines? A: Yes. The first test is considered the primary test, the second one is used to determine whether a corporation can engage in nationalized activities in the country, and the third one is used to determine the jurisdiction of the State to enforce for instance taxation laws. Q: What is the importance of determining the nationality of the corporation? A: It is necessary so as to determine whether or not a corporation can enter into various transactions or engage in different industries. And also, the legal fiction supporting a corporation is valid only within Philippine territory. Q: It was said that the place of incorporation is the primary test to determine the nationality of the corporation, why then are there other tests used? A: There are certain aspects of the Philippine economy that require that the controlling test in corporations engaging in said type of business be that of Filipinos. The nationalized economic sectors are primarily focused at making Filipino interests benefit directly from the bounties of this country. The place of incorporation test need not have been expressly provided by the Constitution since it is an integral part of our law specifically the power of Congress to grant primary franchise to corporations. The place of incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the place where it was incorporated, the corporation cannot escape said law. By providing for the control test, the Constitution is providing for a secondary test to determine which corporations are entitled to entry in nationalized sectors. Q: What is the implication of having a primary test and a secondary test? A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically it is deemed to be a foreign corporation. However, having passed the first test, the nationality of the corporation may have been established but this does not mean that the corporation is entitled to enter every single economic sector of the Philippines. The control test determines now whether the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: TESTOF

CONTROLLING OWNERSHIP also applies in:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; aRoman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]). Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation of by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restrain or trade, to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development.

Revised Bagtas Reviewer by Ve and Ocfe 2A 25 In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as the other factors which are germane to the realization and promotion of business and industry. Sec. 2 Art. XII All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna and other natural resources are owned by the State. With the exception of agricultural lands, all other national resources shall under the full control and supervision of the State. The State may directly undertake such activities or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty percentum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant. The State shall protect the nations marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays and lagoons The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development and utilization of minerals, petroleum and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. The President shall notify the Congress of every contract entered into in accordance with this provision within thirty days from its execution. ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC Facts: Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of land located in the same city in favor of the Roman Catholic Administrator of Davao, a corporation sole organized and existing in accordance with Philippine laws. The incumbent administrator is Msgr. Clovis Thibault, a Canadian citizen. When the deed was presented to the Register of Deeds for registration, it required them to submit an affidavit stating that the ownership of the corporation is 60% Filipino citizens as required under the Constitution. Roman Catholic stated that it was a corporation sole (meaning only one incorporator) and that the totality of the Catholic population in Davao would become the owner of the property. Register of Deeds doubted this and submitted the case for en consulta in the Land Registration Commission. LRC ruled that the requirement of the Constitution must be followed and since the 60% cannot be complied with, the registration should be denied. Hence, this appeal. Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can lawfully acquire lands in the Philippines. Held: YES. Corporation sole a special form of corporation usually associated with the clergy designed to facilitate the exercise of the functions of ownership of the church which

was registered as property owner. It is created not only to administer the temporalities of the church or religious society where the corporator belongs, but also to hold and transmit the same to his successor in said officer. The incumbent administrator is not the actual owner of the land but the constituents or those that make up the church, thus it is their nationality that has to be taken into consideration. The corporation sole only holds the property in trust for the benefit of the Roman Catholic faithful.

Dissenting opinion by Justice JBL Reyes In requiring corporations or association to have 60% of their capital owned by Filipino citizens, the constitution manifestly disregarded the corporate fiction i.e. the juridical personality of such corporation or associations. It went behind the corporate entity and looked at the natural persons that composed it, and demanded that a clear majority in interest (60%) should be Filipino. Since under the rules governing corporation sole, the members of the religious association cannot overrule or override the decisions of the sole corporator, then it would be wrong to conclude that the control of the corporation sole would be in the members of the religious association. NOTE: The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which antedated almost a thousand years any other personality in Europe, and which existed when Grecian eloquence still flourished in Antioch and when idiots were still worshipped in the temple of Mecca. Since it is a corporation by prescription, it has no nationality, and hence, the nationality test does not apply. (But refer to below.) Q: Why is this case relevant to us? A: It is relevant because while it tells us that a corporation sole is not subject to the nationality test, it must be further qualified to mean that this is the case only insofar as the control test is concerned. Nationality is irrelevant insofar as this test is concerned. However, it becomes relevant when the place of incorporation comes into play since the case never sought to touch the place of incorporation test. The registration of the donation of land to an unincorporated religious organization, whose trustees are foreigners, would violate constitutional prohibition and the refusal would not be in 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. . . and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955). (b) Public Utilities (Sec. 11, Art. XII, Constitution; aPeople v. Quasha, 93 Phil. 333) Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation of public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.

NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such corporation to operate in industries concerning public utilities.

Revised Bagtas Reviewer by Ve and Ocfe 2A

27

PEOPLE v QUASHA Facts: William Quasha, a member of the Philippine Bar was charged with falsification of public and commercial documents in the CFI. He was entrusted with the preparation and registration of the articles of incorporation of Pacific Airways Corporation but he caused it to appear that Arsenio Baylon, a Filipino had subscribed to and was the owner of 60% of subscribed capital stock. Such was not case because the real owners of said portions were really American citizens. The purpose of such false statement was to circumvent the Constitutional mandate that no corporation shall be authorized to operate as a public utility in the Philippines unless 60% of its capital is owned by Filipinos. Held: The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation that Baylon was a mere trustee of the Americans, thus giving the impression that Baylon subscribed to 60% of the capital stock. But contrary to the lower courts assumption, the Constitution does not prohibit the mere formation of a public utility corporation without the required proportion of Filipino capital. What it does prohibit is the granting of a franchise or other form of authorization for the operation of a public utility to a corporation already in existence but without the requisite proportion of Filipino capital. From the language of the text, the terms franchise, certificate, and other form of authorization are qualified by the phrase for the operation of public utility. As such, these terms cannot and do not refer to the corporations primary franchise, which vests a body of men with corporate existence, but to its secondary franchise, or the privilege to operate as public utility after the corporation has already gone into being. Primary franchise refers to that franchise which invests a body of men with corporate existence, while the secondary franchise is the privilege to operate as a public utility after the corporation has already come into being. For the mere formation of the corporation, such revelation was not essential and the corporation law does not require it. Therefore, Quasha was under no obligation to make it. In the absence of such obligation and of the alleged wrongful intent, Quasha cannot be legally convicted of the crime with which he is charged. A corporation formed with capital that is entirely alien may subsequently change the nationality of its capital through transfer of shares to Filipino citizens. The converse may also happen. Thus for a corporation to be entitled to operate a public utility, it is not necessary that it be organized with 60% of its capital owned by Filipinos from the start. Said condition, may at any time be attained through the necessary transfer of stocks. The moment for determining whether a corporation is entitled to operate as public utility is when it applies for a franchise, certificate or any other form of authorization for that purpose and that can only be done after the corporation has already come into being not while being formed. Q: Why are we studying Quasha? A: This case makes a distinction with the grant by the government of primary and secondary franchise. As far as doctrinal pronouncements are concerned, any and all type of corporations may be incorporated, so long as the requirements for incorporation are fulfilled and that its purpose is lawful and not contrary to law or public policy. The violation of equity requirements with regard to entry into nationalized sectors as provided by the Constitution come only into play when the secondary franchise is granted. In granting the secondary franchise considerations of equity are now made. CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the case. SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos. In fact, Quasha lied in order to have the articles registered.

The primary franchise, 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. The special or secondary franchises 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. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964). The Constitution requires a franchise for the operation of a public utility; however, it does not require 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. There is a clear distinction between operation of a public utility and the ownership of the facilities and equipment used to serve the public. aTatad v.Garcia, Jr., 243 SCRA 436 (1995). TATAD v GARCIA Facts In 1989, DOTC planned to construct a light railway transit along EDSA. Initially, Eli Levin Enterprise Inc. was supposed to construct the LRT III on a Build-Operate-Transfer (BOT) basis. Subsequently, RA 6957 was enacted which provides for two schemes for the financing, construction and operation of government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT). DOTC issued a Department Orders creating the Pre-qualification Bids and Awards Committee. EDSA LRT Consortium composed of 10 foreign and domestic corporations, was one of the five groups who responded to the invitation. And being the sole complying bidder, it was awarded the contract. DOTC and EDSA LRT Corp., Ltd. in substitution of the EDSA LRT Consortium entered into an Agreement to Build, Lease and Transfer an LRT system for EDSA under the terms of the BOT Law. Agreement was subsequently revised and another Supplemental Agreement was also contract