CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANTypes of Business Organization y Sole Proprietorship y Partnerships y Corporation y Joint Accounts y Joint Venture Sole Proprietorship - the business is carried in the name and style of the owner of the proprietor. There is no distinction between the person of the owner/proprietor and the business. The Business does not have a separate legal personality from the proprietor Example: Juan dela Cruz was given 5M to start a business, he decided to engage in trade and business, sale and manufacture of RTW. He secured permit from DTI and the business name is Juan dela Cruz doing business under the name and style of Johnny Trading Co. If Johnny Trading Co. acquires assets or properties in the course of the business, are these properties owned independently by the business or is it also owned by Juan dela Cruz? It is also owned by Juan dela Cruz because Juan dela Cruz has no separate legal personality from the business that he put up. In Sole Proprietorship, the assets as well as liabilities incurred by the business are not separate from the assets and liabilities of the proprietor. They are one and the same. So if Juan dela Cruz filed a complaint, in the complaint it should be Juan dela Cruz doing business under the trade name and style of Johnny Trading Co. the business must be specified or the trade name or business name. Juan dela Cruz doing business under the trade name and style of Johnny Trading Co. vs DEFENDANT Partnership - 2 or more persons bind themselves to contribute money, property to a common fund with intention to divide the profits between and among themselves. Example: Juan dela Cruz invited his best friend Pedro Reyes concerning his business of trading RTW. So if Pedro Reyes contributes capital also to make it 5M each, then there is partnership because in partnership 2 or more persons bind themselves to contribute money, property to a common fund with intention to divide the profits between and among themselves. The Partnership has a separate personality separate and distinct from the persons composing it. So Juan dela Cruz and Pedro Reyes have their own legal personalities. Let s say that the partnership name is Johnny and Peter Trading Co.1

In partnership, at the very moment the persons bind themselves to contribute money or property, the partnership is created, even if it not registered in the SEC. Corporation A Corporation needs at least 5 corporators or members except in case of a Corporation Sole. A Corporation Sole has only 1 member. What is a Corporation Sole? A corporation Sole is associated with a clergy, Bishop or a presiding head of a sect. Example: Roman Catholic Bishop of Malolos. The RCB of Malolos has its own character as of a natural person. If he want to put up a corporation, he can organized himself as a Corporation Sole although he is only one. So that Corporation may acquire properties independently of the character of the Bishop presiding the sect or organization. A Corporation has a Legal personality separate and distinct from the persons composing the Corporation. Who are the persons composing the Corporation? y Stockholders y Directors y Officers Let s say that a Corporation is 99.9% by 1 person, does that mean that it will be treated as one with the controlling stockholder? Not necessarily, the fact that one person owns and controls the Corporation does not justify treating the Corporation as one with the controlling stockholder. The personality of the controlling stockholder is still different from the legal personality of his Corporation Joint Account A concept found in the code of Commerce. It is not in the Corporation Code. It is just like a partnership in a sense that persons contribute a capital to a business but it has no legal personality separate and distinct from the persons composing the business and the business is carried out by the managing merchant. This concept is no longer be applied in modern days. Joint Venture a form of a particular partnership. A partnership is organized for a specific purpose or end just like a joint venture. Example: Juan dela Cruz has 5M and he was able to develop his business. Let s say that the RTW that manufacture and supplies to department stores are good quality in such that it

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANbeats the competition, Juan dela Cruz can enter into a joint venture agreement with SM or Robinsons that Juan dela Cruz will increase in volume and he will be the only supplier of SM or Robinsons, they may enter into an agreement that all RTW of this quality will have to be source by SM or Robinsons from Juan dela Cruz. Is there a resulting Corporation by the Joint Venture Agreement? None, it only organize a specific purpose or end Is it possible for Juan dela Cruz and SM or Robinsons to create a Corporation that will carry out their venture? Yes, but it is not always the case. It is not really necessary to put out a corporation to reflect the terms of their agreement. They may just enter into a contract and set out the details on how to profit, and how the profit be distributed, limitations etc.. but need not to create a Corporation but if they want to they may also create a Corporation. Distinction between a Corporation from a Partnership? As regards to: y COMPOSITION o Partnership Should have at least 2 partners o Corporation Should have at least 5 except in a Corporation Sole y MANNER OF CREATION o Partnership Created by agreement of the parties o Corporation Created by Operation of law y COMMENCEMENT OF JURIDICAL PERSONALITY o Partnership From the very moment 2 or more persons bind themselves to contribute money or property to a common fund with intention to split the profits among themselves, the Partnership is deemed created because it is consensual in nature even though its articles of copartnership is not registered with SEC. even though the real property contributed in a Partnership is not yet registered in SEC does not detract from the acquisition of legal personality. Why do we register a Partnership in SEC? For administrative purposes and convenience, because a Partnership cannot obtain permit to operate from city government2

and a Tax verification number from the BIR unless it is registered with SEC. So it is not a condition to acquire a legal personality but it is for administrative convenience o Corporation There has to be a law authorizing the formation of the Corporation, which in that case the Corporation Code governing private corporations. Corporations may also be created by a special law like Red Cross, DBP, PCSO, they have a charter on its own. But whether by a special law (a charter on its own) or the general law (Corporation Code), the fact remains that a Corporation cannot be created except by law not just by mere agreement of partiesSection 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.

Let s say Juan dela Cruz invites 4 persons to put up a Corporation and they agreed to put up a Corporation and to contribute 1M each, they signed a pre-corporation agreement. Is that agreement binding? Yes, but among themselves, they cannot back out from their agreement. General Rule: a pre-corporation agreement is irrevocable Is there already a Corporation formed? Not yet, because they have to prepare the Articles of Incorporation and file it with the SEC and the SEC would have to approve the Incorporation of the Corporation.

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANSo it is the approval by the SEC that gives life to the Corporation not the agreement by 5 or more persons AUTHORITY (who is authorized to exercise the powers) o Partnership The Managing Partner designated in the Articles of Co-partnership. If there is no Managing Partner or in the absence of such, any of the partner may bind the Partnership. But if there is a Managing Partner designated, then he alone can manage the partnership for acts of administration. o Corporation The collective body called the Board of Directors (under section 23 of the Corporation Code). Corporate powers are exercise by the Board of Directors neither by the President nor the controlling stockholder.Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

o

y

Corporation For a Corporation, an act maybe lawful and yet it cannot be performed by the Corporation, the powers of Corporation are limited. Only the powers allowed or authorized by the Corporation Code, Articles of Incorporation and powers incidental to its express powers can be exercised by the Corporation.Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

There is nothing unlawful in buying a resort. A partnership can buy resort. But what about a corporation engaged in Corporation engaged in agriculture or trading, can it but a resort? No, because it is not contemplated or it is inconsistent with the powers of the said corporation. The powers of the Corporation itself are the limitation. The articles of incorporation provide the powers and at the same time provides for the limitations of the powers in a sense that anything inconsistent with its powers cannot be performed or exercised by the corporation. y TERM o Partnership the term is Indefinite until there is a ground to dissolve a partnership. In case of death or withdrawal etc.. by a partner. Corporation Term is what is specified in the articles of Incorporation but to exceed 50 years.

o

So if the Corporation wants to buy or sell a property, or wants to obtain a loan, invest or to enter into a corporate transaction, it has to be approved by the Board of Directors (BOD). BOD is at least 5 but not more than 15 members except in merger of banks where it allows at least 21 directors y POWERS o Partnership A partnership can perform any activity or transaction except: those which are contrary to laws, good morals, custom, public order and policy.3

It is not correct to say that the life of a corporation is 50 years because there are many corporations whose term is less than 50 years. Can it be extended? Yes, but there is a limit for the number of extensions. The extension at any given time must exceed 50 years. CONTINUITY o Partnership If a partner dies, withdraws or becomes incapacitated or civil interdicted, the partnership is dissolved o Corporation Change of share ownership does not dissolve a corporation. There is

y

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANcontinuity in a corporation. The death, insanity, incapacity of one or all stockholders will not dissolve the Corporation. Equitable PCI bank was previously owned by the Go family and then the Go family sold the shares to the Sy family, but still Equitable Bank is still there despite the change of ownership LIABILITY o Partnership General Partners are liable beyond their contribution in the Partnership if the assets of the Partnership are not enough to satisfy the debts or liabilities of the Partnership. The personal properties of the partners may be levied to answer for Partnership debts if the assets are not enough. Such liability is not applicable to Limited Partner General Partners are liable beyond their contributions in proportion of their contribution to the Partnership. So if A contributes 60, B contributes 40, then the assets of the Partnership are not enough then the extended liability in proportion of A and B o Corporation The liability of the Stockholder is limited to the extent of his subscription to the Corporation. If A subscribe only to 100k pesos shares, that is the limit of his liability. His personal properties will not be made to answer for a debt and obligation of the Corporation. Certain stockholder subscribes 200k worth of shares, he paid only 50% (the corporation allows partial payment depending on the contract of subscription), Can a corporate creditor enforce payment of unpaid the unpaid subscription? No, as held in Ong vs Tsiu 401 scra, because the subscription agreement is between the corporation and subscriber (stockholder), if there is anyone who can enforce the terms of the4

contract, it is the aggrieved party of the contract except if the assets of the Corporation is not enough. If the Corporation becomes insolvent then a corporate creditor may enforce payment of the unpaid subscription. The corporate creditor can enforce payment to the extent of the subscriber s subscription only if the assets of the corporation are not enough and if the Corporation becomes insolvent. If the corporation is solvent, then the corporate creditor not being a privy in the subscription contract cannot enforce payment of the subscription. ASSIGNABILITY o Partnership A partner cannot assign his interest to a 3rd person without the consent of his partners because partnership is based on trust and confidence. Any person in the partnership enjoys the same trust and confidence at that of the transferring partner vis--vis his partners. The 3rd party must enjoy trust and confidence of the partners Corporation General Rule: a stockholder has the right to dispose of his shares as he pleases, he need not to obtain the consent of his co-stockholders unless there is a right of first refusal specified in the articles of Incorporation GOVERNING LAW o Partnership New Civil Code o Corporation Corporation Code or the Charter creating it in case of a special corporation o

y

y

y

As regards to: COMPOSITION

Partnership Should have at least 2 partners Created by agreement of the parties From the very moment 2 or more

MANNER OF CREATION COMMENCEMENT OF JURIDICAL

Corporation Should have at least 5 except in a Corporation Sole Created by Operation of law There has to be a law authorizing the

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANPERSONALITY persons bind themselves to contribute money or property to a common fund with intention to split the profits among themselves, the Partnership is deemed created because it is consensual in nature even though its articles of co-partnership is not registered with SEC. So it is not a condition to acquire a legal personality but it is for administrative convenience formation of the Corporation, which in that case the Corporation Code governing private corporations. Corporations may also be created by a special law like Red Cross, DBP, PCSO, they have a charter on its own. But whether by a special law (a charter on its own) or the general law (Corporation Code), the fact remains that a Corporation cannot be created except by law not just by mere agreement of parties So it is the approval of the SEC that gives life to the Corporation not the agreement by 5 or more persons The collective body called the Board of Directors (sec. 23, Corporation Code). BOD is at least 5 but not more than 15 members except in merger of banks where it allows at least 21 directors transaction except: those which are contrary to laws, good morals, custom, public order and policy. Corporation Code, Articles of Incorporation and powers incidental to its express powers can be exercised by the Corporation. Term is what is specified in the articles of Incorporation but to exceed 50 years. Extendible - The extension at any given time must exceed 50 years. There is continuity in a corporation. The death, insanity, incapacity of one or all stockholders will not dissolve the Corporation. The liability of the Stockholder is limited to the extent of his subscription to the Corporation. The corporate creditor can enforce payment to the extent of the subscriber s subscription only if the assets of the corporation are not enough and if the Corporation becomes insolvent. If the corporation is solvent, then the corporate creditor not being a privy in the subscription contract cannot enforce payment of the subscription. ASSIGNABILITY5

TERM

Indefinite until there is a ground to dissolve a partnership. In case of death, withdrawal by a partner.

CONTINUITY

LIABILITY

AUTHORITY (who is authorized to exercise the powers)

POWERS

The Managing Partner designated in the Articles of Co-partnership. If there is no Managing Partner or in the absence of such, any of the partner may bind the Partnership. But if there is a Managing Partner designated, then he alone can manage the partnership for acts of administration. A partnership can perform any activity or

If a partner dies, withdraws or becomes incapacitated or civil interdicted, the partnership is dissolved General Partners are liable beyond their contribution in the Partnership if the assets of the Partnership are not enough to satisfy the debts or liabilities of the Partnership. Such liability is not applicable to Limited Partner

Only the powers allowed or authorized by the

A partner cannot

General

Rule:

a

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANassign his interest to a 3rd person without the consent of his partners because partnership is based on trust and confidence. stockholder has the right to dispose of his shares as he pleases, he need not to obtain the consent of his costockholders unless there is a right of first refusal specified in the articles of Incorporation Corporation Code or the Charter creating it in case of a special corporation Disadvantages y [C]onflict of Interest The liability of shares may result in conflict of interest because a stockholder may transfer his shares to anyone and it is possible that the buyer may be a stockholder of a competing Corporation. Example: San Miguel Corporation Let say A is a significant stockholder of San Miguel, he owns certain number of shares for one board seat and he sold such shares to John Gokungwei. John Gokungwei will end up being a stockholder of a San Miguel corporation and because he has enough number of shares, he may be elected in the Board of San Miguel and if he wins, he may acquire trade secrets of San Miguel. He can take such information to the detriment of San Miguel and in the advantage of Gokungwei s Corporation. That is were the disadvantage comes in, unless there is a conflict of interest clause in the by-laws. Gokungwei vs SBC Gokungwei was able to acquire enough certain number of shares of San Miguel for a board seat. He bought his shares from certain stockholders and in the stock exchange, so the acquisition resulted in ownership of certain number of shares enough for a board seat. Before the stockholders meeting, San Miguel Corporation amended its by-laws to disqualify any stockholder of a competing corporation to be elected in the board of San Miguel or any person representing adverse interest adverse to San Miguel. Obviuosly, it is directed to Gokungwei, hence he cannot be elected in the board of directors. Gokungwei oppose the amendments on the ground that it violates his proprietary rights as a stockholder. The SC said that a conflict of interest clause in the by-laws is valid because of confidential information may leaked to a competitor to the detriment of the Corporation. y Limited [C]redit because there is a limit on the liability of a stockholder, it is possible that its credits is likewise limited especially if the stockholders of the Corporation are limited

GOVERNING LAW

New Civil Code

ADVANTAGES AND DISADVANTAGES OF A CORPORATION AS AGAINST OTHER FORMS OF BUSINESS ORGANIZATION Advantages y [S]ue A corporation may sue and be sued, and acquire properties in its own name independently of the persons composing it y [M]anagement Management is centralized in the board of directors y [E]xistence Continued existence despite of the change of stockholders y [L]imited liability a stockholder may decide to limit his liability to the extent of his subscription y [T]ransfersability y [A]bility to raise capital a Corporation can have thousands of stockholders and can raise capital from the public who wants to subscribe the shares of the corporation. Initial Public Offering (IPO) the shares of the Corporation will be listed in the Stocks Exchange and offers to the public such stocks. Going public means to have the shares be listed and made available to the public. Ways of obtaining the money in a corporation y A corporation may borrow from a bank or from a stockholder because it is borrowing, the Corporation should pay interest on the loan. Usually the interest on the loan is 12%-15% y The Corporations can issue shares to the public and if the public is interested they may subscribe to shares of the Corporation and if they subscribe shares to the Corporation they bring capital to the Corporation which is cheaper because the Corporation need not to pay interest on the capital contributions.6

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANExample: ABC corporation, a closed corporation, owned by 20 stockholders. Since there is only 20 stock holders and the contribution of the subscribers has been fixed then this Corporation can only raise credit up to so much because the collective capital of the Corporation is only so much unless it invites another stockholders y [D]ifficult to organize and maintain it is difficult to organize and maintain a corporation. A corporation is required to file every year audited financial statement, if it fails the franchise will be revoked by the SEC. there are many requirements in maintaining a Corporation. The Corporation has to file every year financial statements, general information sheet (means there has to be election). The Corporation has to engage in business because if the corporation doesn t organize in 2 years, it will be revoked. It has to be in operation for 5years continuously or else its franchise will be revoked. [M]inority General Rule: Minority stockholders does not participate in the management of the Corporation, it is controlled by the Majority stockholders. The corporation s affairs are determined by the Majority [L]imited Power the power of the Corporation is limited [D]ouble Taxation the income of the Corporation is already subjected to a tax and if it distributes dividends to its stock holders, the cash dividends if received by natural persons is also subject to tax (dividends tax). If the dividends are received by a corporation, it is not subject to tax but if received by a natural person, it is subject to 10% dividends tax. considers the corporation not just a group of persons but as a person. A legal person and therefore it has a personality that is separate and distinct from the person composing it (stockholders, directors or officers). So this is the DOCTRINE OF LEGAL ENTITY. DOCTRINE OF LEGAL ENTITY The Corporation has a legal/juridical personality separate, distinct, independent from the persons composing it. As an artificial being, it has certain rights enjoyed by a natural person. Can a corporation acquire properties independently from its stockholders? Yes Can it enter into contracts independently from its stockholders? Yes Can it have a cause of action independently from its stockholders? Yes Can it incur liabilities? Yes Are the liabilities of a corporation the same as the corporation? No Can the stockholders of the Corporation enjoy, possess, and occupy the properties of the corporation without the consent of the corporation? No What if a stockholder owns a 99.9% of the Corporation, can he use corporate properties without the consent of the corporation? No Similarly a corporation can be held liable for torts or quasidelict. The same principle of principal-agent relationship also applies to a corporation A corporation can also be entitled to certain Constitutional protections like unreasonable search and seizure STONEHILL VS DIOKNO were the SC held that a Corporation may invoked its own right against unreasonable searches and seizures for properties or documents that belong to the Corporation not from its stockholders7

y

y y

What is a Corporation?Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Attributes of a Corporation: y It is an artificial being y It is created by operation of law y It has power/right of succession y It has powers, attributes and properties expressly authorized by law or incident to its existence ARTIFICIAL BEING it exist in contemplation of law. It derives its existence to the law that created it either by a general law or a special law. It is not a natural person but the law

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANA corporation can also be held liable for a crime if the penalty is fine or forfeiture of license or franchise as held in the case of CHING VS SECRETARY OF JUSTICE AND ONG VS CA. If the penalty is imprisonment, there is no way that a corporation can put behind bars; in that context a corporation cannot be held liable for a crime. Can a corporation be entitled to moral damages? As held in the recent case of Filipinas Broadcasting Network vs Ago Medical and Educational Center. FILIPINAS BROADCASTING NETWORK VS AGO MEDICAL AND EDUCATIONAL CENTER. Facts: In this case, one of the broadcasters of Filipinas Broadcasting network uttered libelous remarks over a radio against Ago Medical and education Center. Ago Medical is a medical center in Cebu. On air, the said broadcaster said that Ago Medical is the dumping ground of intellectual misfits (bagsakan ng mga bobo). Ago Medical sued the broadcaster. Issue: can a corporation (ago medical) be entitled to moral damages? Held: Under the New Civil Code, in case of libel, oral defamation or slander, the aggrieved person be entitled to moral damages. SC through Justice Carpio said that the New Civil Code makes no distinction between natural and juridical person. The law authorizes recovery of damages to any person victim of libel, defamation or slander, whatever kind of person whether natural or juridical. MERALCO VS TEAM ELECTRONICS CORP General Rule: a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments. Exception: when the corporation has a reputation that is debased, resulting to humiliation in the business realm THE POINT IS: there is no more debate on whether or not the corporation is entitled to moral damages IF THERE IS LIBEL, DEFAMATION OR SLANDER. Lucio Tan owns Philippine Airlines. John Gokungwei owns Cebu Pacific. If PAL obtains a loan from consortiums of creditors and PAL failed to pay, can the creditors of PAL sue Lucio Tan? No, the liability of PAL is not a liability of Lucio Tan A creditor will not lend money from a corporation on the fate of the corporation alone, it extend credit to a corporation because such corporation is associated with Lucio Tan, or8

John Gokungwei or at least the family members that own the Corporation. The practice is to require a surety agreement, so the borrower is PAL and a surety agreement signed by the owners. Because of the surety agreement then the controlling stockholders agree to assume personal liability solidarily with the corporation. Without that surety agreement or an agreement where the stockholders assume liability, the only way that they can be made liable for the obligation of the Corporation if there is a ground to pierce the veil of corporate fiction. If there is no fraud, no wrongdoing and there is no basis to pierce the corporate veil, then the liability of the corporation cannot be imposed against the stockholders unless they assume personal liability thru a surety or guaranty CREATED BY OPERATION OF LAW THEORIES REGARDING THE CREATION OF CORPORATIONS y Concession Theory the corporation exist because the law allows it y Economic theory the corporation is a group of person exists for an economic purpose or end In our jurisdiction, we follow the Concession theory. The corporation owns it existence to the State thru a law enacted by Congress A PRIVATE CORPORATION can only be organized in accordance with the Corporation Code. BP 68 is the general law on incorporation. So any person or group of persons that wants to put up a corporation must do so based on the formalities, procedures prescribed by the Corporation code. In case of a GOVERNMENT OWNED AND CONTROLLED CORPORATION (GOCC) THAT MAY HAVE A CHARTER ON ITS OWN, they are not organized under the Corporation Code. Example: PCSO, DBP Are these Corporation exist on their own, do they have life on their own? Yes, they don t own their existence to the General Law (Corporation Code) but they still own their existence thru a law that created them. In case of a Corporation govern by a special law, Congress can enact a special law to create a corporation only if that corporation is owned and controlled the government and for sovereign purpose or end. Congress cannot enact a special law to create a private corporation, to compete with another private corporation. (sec. 4, Corporation code)

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANSection 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.

Example: San Miguel Corporation is very profitable. Then Congress enact a law to create Lucifer Corporation to compete with San Miguel, can the Congress do that? No, because Congress can only enact a special law creating a corporation only if such corporation is owned and controlled by the Government and organized for a governmental purpose or end. So, such law is unconstitutional and it cannot even create a de facto corporation (sec. 20, Corporation Code)Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

Just like power of succession, it is the ability for continued existence despite change in the share ownership Let s say the Corporation has so much money that it sent all stockholders of the closed corporation to abroad for a business meeting. On the way to Hong Kong, the plane crashed resulting to the death of all stockholders. Can the Corporation still exist, when there are no more stockholders? Yes, because ownership of the shares is transmitted to the heirs by operation of law. (WILLS TOH) Extension of Corporate term entails an amendment to the articles of incorporation. Any amendments in the articles of incorporation requires the approval by at least majority of the board and for the stockholders owning at least 2/3 of the outstanding capital stock and for non-stock corporation, at least 2/3 of its members (sec.16, Corporation Code)Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

What are the 2 kinds of franchise? y Primary franchise the authority to act as a corporation. All corporation registered in SEC has primary franchise. y Secondary franchise a special authority given to a corporation to engaged in a specialized business. Example: Banks, Insurance Companies RIGHT OF SUCCESSION A corporation is not immortal but a corporation is capable with continued existence because any change of ownership or in the composition of the stockholders will not result to the dissolution of the Corporation. It will continue to exist for as long as there is an extension of corporate term based on the requirements provided in the Corporation Code. The extension of corporate term can only be applied for before the expiration not after expiration. Can the application for extension of corporate term be done as early as 2 years after the Corporation acquires juridical personality? No, because no extension can be made earlier than five years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission (sec. 11, corporation code)Section 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any 9

POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE the powers of the Corporation are only those authorized by law or incident to its existence. Where do we find these powers? In the Corporation Code, Articles of Incorporation, by-laws as well as all powers incidental to its express powers of Incorporation. It cannot therefore exercise powers outside the Corporation Code, Articles of Incorporation and by-laws, any

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANtransaction or activity has to be consistent with and not contrary to with the express, implied and incidental powers of the Corporation. What are the various powers of the Corporation under the Corporation Code? y Power to amend the Articles of Incorporation (sec. 16 & 17) y Power to sue and be sued (sec.36) y Power to adopt a corporate seal y Power to adopt and amend its by-laws y Power to adopt and amend its Articles of Incorporation y Power to sell shares or acquire shares y Power to deal with properties whether it s sale, lease or purchase so far as to promote its interest or for furtherance of the purpose for which the corporation was organized y Power to make reasonable donations y Power to enter into merger and consolidation y Power to dissolve y Power to extend or shorten corporate term (sec. 37) y Power to increase or decrease capital stock; incur, create or increase bonded indebtedness (sec. 38) y Power to deny pre-emptive right (sec. 39) y Power to Sell or other disposition of assets (sec. 40) y Power to acquire own shares (sec. 41) y Power to invest corporate funds in another corporation or business or for any other purpose (sec. 42) y Power to declare dividends (sec. 43) y Power to enter into management contract (sec. 44) DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION a doctrine that allows the State to disregard for certain justifiable reasons the notion that a corporation has a personality separate and distinct from the person composing it. Elements of the doctrine of piercing the veil of corporate fiction y It is a doctrine a principle of law y that allows the State only the State thru the courts that can pierce the corporate veil (judicial function) y To disregard for certain justifiable reasons the doctrine of piercing the veil of corporate fiction can only be applied if there is a wrongdoing or if someone is aggrieved or there is a right that has been violated. If there is no one been offended, we cannot talk about this doctrine Effects of piercing the veil of corporate fiction10

y y

If it is between the stockholder and the corporation, they will be treated as one If it is between 2 corporations likewise parents and subsidiary, they will be treated as one

Various test adopted by the SC y Control test y Instrumentality test or Alter-ego test y Public convenience test is the objective test What is the objective of the doctrine of piercing the veil of corporate fiction? To make the stockholders liable for the debts and obligations of the corporation not the other way around (Umali vs CA, Indophil textile vs Calica, Francisco motors)

Case Outline: Doctrine of Separate legal personality y PALAY, INC VS CLAVE (124 SCRA 638) y CRUZ VS DALISAY (152 SCRA 482) y REMO VS IAC (172 SCRA 405) y PALABAN VS NLRC (184 SCRA 495) y UMALI VS CA (189 SCRA 529) y INDOPHIL TEXTILE MILLS WORKERS UNION VS CALICA (205 SCRA 697) y BOYERS ROXAS VS CA (211 SCRA 470) y SESBRENO VS CA (222 SCRA 466) y ROBLEDO VS NLRC (238 SCRA 52) y LAGUIO VS NLRC (262 SCRA 709) y MATUGUINA WOOD PRODUCTS VS CA (263 SCRA 490) y REPUBLIC VS SANDIGANBAYAN (266 SCRA 515) y TRADERS ROYAL VS CA (269 SCRA 15)

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANy y y y y y y y y y y y y PCGG VS SANDIGANBAYAN (290 SCRA 639) (365 SCRA 538) UNION BANK OF THE PHILIPPINES VS CA (290 SCRA 198) ASIONICS PHILIPPINES, INC. VS NLRC (290 SCRA 164) FRANCISCO MOTORS CORPORATION VS CA (309 SCRA 72) COMPLEX ELECTRONICS EMPLOYEES ASSOC VS NLRC (310 SCRA 403) LIM VS CA (323 SCRA 102) MARUBENI CORPORATION VS LIRAG (362 SCRA 620) LAND BANK OF THE PHILIPPINES VS CA (364 SCRA 375) PNB VS RITRATTO GROUP INC. (362 SCRA 216) JARDINE VS JRB REALTY INC. (463 SCRA 555) PASRICHA VS DON LUIS DISON REALTY (548 SCRA 273) CHINA BANKING CORPORATION VS DYNE-SEM ELECTRONICS CORPORATION (494 SCRA 493) DELIMA VS GOIS (554 SCRA 731) at the time when the corporation was still inexistence. So, the right to sue and be sued of the corporation is not affected by any subsequent suspension of the corporate franchise or eventual revocation. Even if the corporation has been dissolve, it has 3 years to liquidate or wind up its corporate affairs. What do we mean by liquidation or winding up corporate affairs? All claims filed against the corporation will have to be completed or settled during the liquidation period. Jurisprudence said that for as long as the suit was filed during the lifetime of the Corporation, the suit may survive even beyond the 3-year period. The obligation of the corporation is not the liability of the stockholders, officers or directors y REMO VS IAC (172 SCRA 405) y EPG CONSTRUCTION VS CA (210 SCRA 230) y ASIONICS PHILIPPINES VS NLRC (290 SCRA 164) The obligation of the corporation is not the liability of the stockholders, officers or directors y REMO VS IAC (172 SCRA 405) In this case, the only participation of Remo as a mere director is he voted for the purchase of certain trucks y EPG CONSTRUCTION VS CA (210 SCRA 230) That the controlling stockholder and president are not liable for breach of contract committed by the Corporation for which he is a stockholder or president. This case involves a construction contract between EPG Construction and the UP Law Library. The air condition units installed were defective so UP Law Library has incurred expenses to control damage and to install new air condition units and such costs was passed on the corporation and the president refused to pay. Admittedly, there was poor workmanship on the part of the Corporation. The issue is whether or not the obligation of the corporation extends to the president because the president own and controls the 90% corporation. The SC held that obligation of the corporation do not extend to the president because there is no foul play on the part of the President and the act of resisting the claim of UP is not tantamount to bad faith11

The principle that a corporation has a legal personality separate and distinct from the persons composing it emanates from one of the attributes of a corporation (artificial being) that it exists in contemplation of law. The law regards it as a person and as a person it can exercise certain rights, remedies that are also available to natural persons. Because of this doctrine, the obligation or liabilities of the corporation are not the obligations or liabilities of the stockholders, officers or directors. The properties of the corporation are not properties of the stockholders, officers or directors.

PASRICHA VS DON LUIS DISON REALTY A corporation having a legal personality has the right to sue and be sued. The right to sue and be sued is not affected by any subsequent suspension of the corporate franchise or eventual revocation A case that involves an ejectment for nonpayment of rentals. The action for ejectment was filed at the time when the corporation was still legally capacitated. Subsequently the franchise of the corporation was suspended and eventually revoked. The issue in that case is whether or not the suit may prosper despite the fact that the license or franchise of the corporation is already suspended or revoked The SC held that the suit may prosper despite the fact that the license or franchise of the corporation is already suspended or revoked because it was filed

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANy ASIONICS PHILIPPINES VS NLRC (290 SCRA 164) The president who implemented the retrenchment program cannot be held liable by the affected employees y SILVERIO VS FILIPINO BUSINESS CONSULTANTS (466 SCRA 584) Kalatagan Property in Batangas, Esses and Tri-star Corporation own a property in Kalatagan. Esses and tri-star entered into an agreement with Filipino Business Consultant to mortgage the said property. The loan obligation was not paid, so Filipino Business Consultant foreclosed the mortgage. Esses and tristar failed to redeem the property. Filipino Business Consultant filed a petition for a consolidation of title and also prayed for the issuance of writ of possession. Such petition was granted by reason of default. The title was given to Filipino Business Consultant and they occupied the property. Upon learning the judgment by default, Silverio, a representative of Esses and tri-star filed a motion to set aside because there was defective service of summons. It was found out that the sheriff forged the service of summons. So the possession was restored in favor of Esses and tri-star. In the meantime, according to Filipino business consultant, there was a supervening event that they acquired the controlling shares and interest of Esses and tristar. Since they have the control and interest over the 2 corporations, the case becomes moot and academic, they now have the right to occupy and enjoy possession of the properties. The SC held that such properties are in the name of the corporation and still the corporation has to decide who gets to use, occupy or enjoy the properties. A stockholder is not a tenant, not an owner nor a co-possessor or usufructuary.

The properties of the Corporation are not the properties of the stockholders, officers or directors y LIM VS CA (323 SCRA 102) y BOYER ROXAS VS CA (211 SCRA 470) y SILVERIO VS FILIPINO BUSINESS CONSULTANTS (466 SCRA 584) The properties of the Corporation are not the properties of the stockholders, officers or directors y LIM VS CA (323 SCRA 102) The issue is whether or not the properties of the Corporation or registered in the name of the Corporation should be included in the settlement of the estate proceeding of its deceased controlling stockholder. Pastor s Lim wife wanted include corporate properties as far as the settlement of the estate just because the deceased is the controlling stockholder The SC held that since the titles are in the name of the corporation, ownership is conclusively in favor of the Corporation. The fact that Pastor Lim control the Corporation during his lifetime is not enough reason to disregard the separate legal personality. y BOYER ROXAS VS CA (211 SCRA 470) This case involves a property in laguna owned by Vda de Roxas which is converted to a resort. One of the heirs of Vda de Roxas was appointed president by the Corporation and allowed to occupy the premiere cottage of the resort. When he was no longer the President, that privilege was taken away from him and he refused on the ground that as a former president/stockholder he has a right to use the property. The right of a stockholder to corporate properties is only inchoate in nature. The right is only expectancy. It will ripen into full ownership only in cases were the law or equity allows distribution of corporate properties back to the stockholders. Since the right is only an expectancy, the properties belong to the Corporation. It is the corporation who decides who will use such properties. A stockholder is not a tenant, not an owner nor a co-possessor or usufructuary.

What are the factors NOT ENOUGH to disregard the separate legal personality of the corporation? y Controlling ownership or ownership over the controlling shares O PALAY, INC VS CLAVE (124 SCRA 638) O EPG CONSTRUCTION VS CA (210 SCRA 230) O PNB VS RITRATTO GROUP INC. (362 SCRA 216) O JARDINE VS JRB REALTY INC. (463 SCRA 555) O SPOUSES NISCE VS EQUITABLE PCI BANK (516 SCRA 231) O LAND BANK OF THE PHILIPPINES VS CA (364 SCRA 375) y Common director O SESBRENO VS CA (222 SCRA 466) O TRADERS ROYAL VS CA (269 SCRA 15) y Substantial Identity of the incorporators and similarity of business12

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANO O O LAGUIO VS NLRC (262 SCRA 709) COMPLEX ELECTRONICS EMPLOYEES ASSOC VS NLRC (310 SCRA 403) CHINA BANKING CORPORATION VS DYNESEM ELECTRONICS CORPORATION (494 SCRA 493) Can a corporation corporation? Yes wholly owned another

Can one person owned and control a corporation? Yes In this case PNB, the parent company and PNB international based on Hong Kong, the subsidiary. The obligations of the parent company should be confined with its operations as a parent company. The obligations of the subsidiary will have to arise from its operations as subsidiary. The obligation of the parent is not the obligation of the subsidiary or vice versa unless there is showing that the subsidiary is only an instrumentality of the parent company with no mind of its own, complete control by the parent. PNB international granted credit accommodation to Ritratto Group in the form of Letter of credit cash receipt. The credit accommodations were secured by mortgaged on properties situated in the Philippines. The process of payment was executed by Ritratto in favor PNB as attorney-in-fact of PNB international. The obligation was not paid, prompting the bank to foreclose the mortgage. Ritratto group filed an action for injunction to restrain PNB (parent) from foreclosing the mortgaged properties. The SC held that PNB (parent) has separate and distinct personality from its subsidiary. There was no showing of that the subsidiary is only an instrumentality of the parent company with no mind of its own, complete control by the parent, hence the case will not prosper.

Controlling ownership or ownership over the controlling shares O PALAY, INC VS CLAVE (124 SCRA 638) Palay Corporation sold a property in installment basis to a buyer and the contract to sell provides for an extrajudicial rescission clause that in case of nonpayment of the amortization payment, the seller may extra-judicially rescind the agreement. The buyer failed to pay the amortization payment, so the seller-Corporation rescinded the contract, but the contract was rescinded without notice to the installment buyer, therefore the rescission was invalid. Since the rescission was invalid, under the terms of the contract, the seller has the obligation to return the property or refund the purchase price. Can this obligation be enforced against the controlling stockholder? The SC held that such obligation cannot be enforced against the controlling stockholder, the fact that a person owns and controls the corporation is not enough reason to disregard the separate legal personality of the corporation. The president in this case did not abuse the corporate fiction. O EPG CONSTRUCTION VS CA (210 SCRA 230)

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PNB VS RITRATTO GROUP INC. (362 SCRA 216) In this case, it involves a parent company and a subsidiary. We said that the fact that a person owns and controls the corporation is not enough reason to disregard the separate legal personality of the corporation, and that person may be a natural person or a juridical person. If the controlling person is a juridical person, it is either called the parent company or holding company and the one that is controlled is called a subsidiary or affiliate. How we do distinguished between a subsidiary and affiliate? Under the General banking act which can be applied by analogy. If a corporation owns 50% or more, it is a subsidiary; if less that 50%, it is an affiliate13

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JARDINE VS JRB REALTY INC. (463 SCRA 555) This case involves an estimation of air condition units, the temperature was not enough to meet the expectation of the JRB Realty. It was not in accordance with the agreement. The air conditioning unit was provided by AIRCON Corporation. JRB Realty sued not just the seller-provider AIRCON but also its distributor in the Philippines and the parent company Jardine. As between Jardine as parent and Aircon Corporation, there is no link other than ownership of the shares The SC held that it is not enough reason to disregard the separate legal personality.

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SPOUSES NISCE VS EQUITABLE PCI BANK (516 SCRA 231)

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANSpouses Nisce had a placement in dollar with PCI capital. PCI capital was a wholly owned subsidiary of PCI bank. Spouses Nisce also have a loan obligation with Equitable Bank secured by a mortgaged on their properties. The loan on equitable bank was not paid and the bank foreclosed the mortgage. Spouses Nisce questions the foreclosure on the ground that its placements or investment with PCI capital would have been set off against the obligation with equitable bank because equitable bank was merge with PCI bank. Is there a legal set off in this case? None, because there can be a legal set off only if 2 persons has credit on each other. In a dollar placement, the creditor is Nisce, the debtor is the PCI bank. In the loan with equitable, the lender is equitable, the debtor is Nisce. The creditor and lender are different, therefore there can be no legal set off. The fact that equitable bank was the surviving entity with the merger with PCI bank which eventually resulted in Equitable PCI bank becoming the parent company of the subsidiary PCI capital is not enough reason to disregard the separate legal personality O LAND BANK OF THE PHILIPPINES VS CA (364 SCRA 375) Land bank granted credit accommodation to ECO Corp. The obligation was not paid; can the obligation be enforced against the president whose initials stand by the name of the Corporation? The SC held that the fact that the name of the corporation is based on the initials of the president or controlling stockholder is not enough reason to disregard the separate legal personality. There is no law that prohibits a corporation in adopting a corporate name based on initials of the controlling stockholder. Common director SESBRENO VS CA (222 SCRA 466) Raul Sesbreno made a money market placement with Phil finance. In consideration with the 300k money market placement Sesbreno made with Phil finance, phil finance issued a post dated check as well as a promissory note that delta motors issued to Phil Finance. Phil finance assign/transfer to Sesbreno the promissory note that delta motors issued with Phil Finance. The investment was not returned and not paid because Phil Finance became bankrupt. So Sesbreno left no other choice but to enforce14

payment of the promissory note against delta motors. It turns out that between Delta Motors and Phil finance there was a set off or compensation. Being an only an assignee of the promissory note, Sesbreno was covered by the set off. Sesbreno argued that Delta Motors and Phil Finance are one and the same because they have common director and common holder. The SC held that the fact they have common director, stockholder or controller is not enough reason to disregard the separate legal personality. O TRADERS ROYAL VS CA (269 SCRA 15)

Substantial Identity of the incorporators and similarity of business O LAGUIO VS NLRC (262 SCRA 709) This case involves 2 corporations (April Toy and Welworld) with common incorporator and similar of business. The laborers of April Toy wanted to be considered as laborers of Welworld after April Toy close business. Can they enforce their claims against Welworld just because Welworld has similar incorporators with April Toy and engage in the same line of business? The SC held that they cannot enforce their claims against Welworld. The mere identity of incorporators and engaged in the same line of business is not enough reason to disregard the separate legal personality. It cannot be said that Welworld was organize for defeating the rights of the laborer because it was organized before April Toy. It has bona fide existence. O COMPLEX ELECTRONICS EMPLOYEES ASSOC VS NLRC (310 SCRA 403) Complex Electronics has to close business because it could compete with its competitors in terms of pricing. The legitimate orders of the Corporation were transferred to Ionics. Ionics have the common director, incorporator with Complex. Whether or not the employees of Complex can enforce the same against Ionics The SC held that they cannot enforce their claims. The mere identity of incorporators and engaged in the same line of business is not enough reason to disregard the separate legal personality.

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CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANO CHINA BANKING CORPORATION VS DYNE-SEM ELECTRONICS CORPORATION (494 SCRA 493) Dyne-sem obtains a credit accommodation with China Bank. The obligations were not paid. China Bank sue Dyne-sem but the summons could not be served so China Bank amended the complaint to implead Dynetics because they have common incorporators and they engaged in the same line of business and Dynetics acquired the machineries of dyne-sem. The SC held that such reasons were not enough to disregard the separate legal personality. On the matter of acquiring the properties, as a general rule, the buyer of corporate assets not bound to honor or assume the obligation of the seller except in four cases: merger or consolidation; if the buyer is only an extension or continuation of the corporate personality of the seller; if the sale of assets is made in bad faith; if the buyer assumes the obligation of the seller. O O O O ABS-CBN BROADCASTING VS CA (301 SCRA 342) JARDINE DAVIES VS CA (333 SCRA 684) NATIONAL POWER CORPORATION VS PHILIPP BROTHERS OCEANIC (369 SCRA 629) FILIPINAS BROADCASTING NETWORK VS AGO MEDICAL AND EDUCATIONAL CENTER (448 SCRA 413) Facts: In this case, one of the broadcasters of Filipinas Broadcasting network uttered libelous remarks over a radio against Ago Medical and education Center. Ago Medical is a medical center in Cebu. On air, the said broadcaster said that Ago Medical is the dumping ground of intellectual misfits (bagsakan ng mga bobo). Ago Medical sued the broadcaster. Issue: can a corporation (ago medical) be entitled to moral damages? Held: Under the New Civil Code, in case of libel, oral defamation or slander, the aggrieved person be entitled to moral damages. SC through Justice Carpio said that the New Civil Code makes no distinction between natural and juridical person. The law authorizes recovery of damages to any person victim of libel, defamation or slander, whatever kind of person whether natural or juridical. MERALCO VS TEAM ELECTRONICS CORP (540 SCRA 62) In this case, the SC clarified that tortuous act, the act complained of, should have directly resulted to the destruction or impairment of the reputation or good will of the corporation. Not all acts can be charge against the corporation, it has to be an act that directly destroys, tarnishes the good will or reputation of the corporation.

There are only 6 cases were a director or officer may be held solidarily liable with the corporation y Gross negligence or bad faith in directing the affair of the corporation y Assenting or consenting to a patently unlawful act y Acquiring interest in conflict of his duty as a director or officer y If he agrees to make himself solidarily liable to the corporation as when he signed a surety agreement or a guaranty agreement or when he bind himself to pay personally with the corporation y If by express provision of law, he is made liable for the corporate act or omission like in sec. 13, PD 115 y Issuance of watered stocks (sec. 65, Corporation Code) Watered Stocks stocks issued for an amount below parSection 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

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Case outline: Doctrine of Piercing the Corporate Veil O VILLA REY TRANSIT VS FERRER (25 SCRA 845) O A.C. RANSOM LABOR UNION-CCLU VS NLRC (150 SCRA 498) O INDINO VS NLRC (178 SCRA 168) O SHOEMART INC VS NLRC (225 SCRA 311) O MANUEL R. DULAY ENTERPRISES VS CA (225 SCRA 678) O GUATSON INTERNATIONAL TRAVEL AND TOURS VS NLRC (230 SCRA 815) O FIRST PHILIPPINE INTERNATIONAL BANK VS CA (252 SCRA 259) O TOMAS LAO CONSTRUCTION VS NLRC (278 SCRA 716) O CONCEPT BUILDERS INC. VS NLRC (257 SCRA 149) O REYNOSO VS CA (345 SCRA 335)15

Case Outline: Claims for moral damages O SIMEX INTERNATIONAL, INC. VS CA (333 SCRA 684)

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANO O O O O O O O LIPAT VS PACIFIC BANKING CORP (402 SCRA 339) MAVEST USA VS SAMPAGUITA GARMENT CORPORATION (470 SCRA 440) PAMPLONA PLANTATION COMPANY VS TINGHIL (450 SCRA 421) TIMES TRANSPORTATION CO VS SOTELO (451 SCRA 587) APEX MINING CO VS SOUTHEAST MINDANAO GOLD MINING CORP (492 SCRA 355) RYUICHI YAMAMOTO VS NISHINO LEATHERS INDUSTRIES (551 SCRA 447) GCC VS ALSONS DEVELOPMENT AND INVESTMENT CORPORATION (513 SCRA 225) STA MONICA INDUSTRIAL AND DEVELOPMENT CORP VS THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR (555 SCRA 97) REYNOSO VS CA (345 SCRA 335) LIPAT VS PACIFIC BANKING CORP (402 SCRA 339) O MAVEST USA VS SAMPAGUITA GARMENT CORPORATION (470 SCRA 440) Objective Test O UMALI VS CA (189 SCRA 529) O INDOPHIL TEXTILE MILLS WORKERS UNION VS CALICA (205 SCRA 697) O ROBLEDO VS NLRC (238 SCRA 52) O FRANCISCO MOTORS CORPORATION VS CA (309 SCRA 72) Public Convenience test O O

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DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION a doctrine that allows the State to disregard for certain justifiable reasons the notion that a corporation has a personality separate and distinct from the person composing it. Forget about the doctrine of piercing the veil of corporate fiction if no right that has been violated. The application of the doctrine presupposes that there is a wrongdoing, that there is a right that has been violated. Only the State can pierce the veil of corporate fiction thru the courts. (CRUZ VS DALISAY) Various test adopted by the SC y Fraud test O MATUGUINA WOOD PRODUCTS VS CA (263 SCRA 490) O MARUBENI CORPORATION VS LIRAG (362 SCRA 620) O VILLA REY TRANSIT VS FERRER (25 SCRA 845) O A.C. RANSOM LABOR UNION-CCLU VS NLRC (150 SCRA 498) O FIRST PHILIPPINE INTERNATIONAL BANK VS CA (252 SCRA 259) O TIMES TRANSPORTATION CO VS SOTELO (451 SCRA 587) O STA MONICA INDUSTRIAL AND DEVELOPMENT CORP VS THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR (555 SCRA 97) y Control test O CONCEPT BUILDERS INC. VS NLRC (257 SCRA 149) y Alter Ego or Instrumentality test16

Fraud test the SC warned that fraud is not presumed, it must be convincingly establish. The mere allegation of fraud is not enough to pierce the veil of corporate fiction y MATUGUINA WOOD PRODUCTS VS CA (263 SCRA 490) Matuguina, as a single proprietor, was the owner of a timber concession license that was found to be encroached to the concession area of Daven corp. Subsequently, Matuguina set up a corporation which he owns 70%, he transferred his license to that corporation. Is that corporation which he set up liable for the encroachment of the timber concession area perpetrated by Matuguina as a single proprietor? Can we say that the Corporation he set up, a continuation of the single proprietorship? The SC held that it is not a continuation of the single proprietorship because there is no showing in this case that the Corporation was just a vehicle of Matuguina to commit the infraction. y MARUBENI CORPORATION VS LIRAG (362 SCRA 620) Lirag was a peddler, he was to bag contracts for Marubeni, for every bag that he gets, and he gets a commission from Marubeni. Lirag was able to obtain a contract for Sanritsu not for Marubeni, but Lirag wanted to be paid not by Sanritsu but by Marubeni. Sanritsu and Marubeni are sister company. VILLA REY TRANSIT VS FERRER (25 SCRA 845) Villarama was the owner of a certificate of Public Convenience and the operator of ___ Buses. He sold ___ buses and assigned the certificate of Public convenience to Pantranco on the condition that within 10 years he will not engaged in a business that will compete with Pantranco. Years after, he set

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CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANup Villa Rey Corporation using his wife and brother in-law as dummies acquires assets and a certificate of public convenience. The seller of the buses was a defendant in a court case. The seller loses, there was a judgment against him and the buses that he sold was levied. Villa Rey Transit intervene, Pantranco, argued that Villa Rey transit has no right to intervene because Villa Rey Transit is just corporation use by Villarama to avoid a contractual restriction. Villarama was not a stockholder of the Corporation, except that he was the source of the subscriptions made by the wife and the brother of Villarama. The SC held that Villa Rey transit was organize for the purpose of evading a contractual restriction and therefore the separate legal personality has to be disregarded. So, the restriction against Villarama is also enforceable to Villa Rey transit. y A.C. RANSOM LABOR UNION-CCLU VS NLRC (150 SCRA 498) There is a pendency of a labor case filed by the labor union of AC ransom against the company. The officers of AC ransom set up a Corporation named Rosario. The officers transferred the assets of AC ransom to Rosario Corporation. The SC held that Rosario Corporation was organized only for the purpose of evading the claims that is due to the laborers of AC ransom y FIRST PHILIPPINE INTERNATIONAL BANK VS CA (252 SCRA 259) This case applies the doctrine of piercing the veil of corporate fiction in relation to the rule against forum shopping. Producer s Bank acquired assets through a foreclosure of mortgage. This acquired assets was sold by it department manager. The department manager entered into a contract with Demetria and Janolo. There were offers and counter-offers and the parties could not agree whether there is a contract that is perfected. Demetria and Janolo filed an action with the RTC, the RTC declared the contract of sale perfected. The conservator of the Bank does not want to honor the contract prompting Demetria and Janolo to file a complaint in the RTC and they obtain a favorable judgment. The Bank appealed. During the pendency of the appeal, the controlling stockholder of producer s bank filed a derivative suit in behalf supposedly of the Corporation to declare the same contract as invalid and unenforceable arguing that17

such suit was filed by the stockholders not by the corporation. The SC held that the legal personality of the corporation in the derivative suit will have to be set aside. It is basically a suit filed by the Corporation disguise as a derivative suit initiated by the Stockholders. So there is a complaint in the first case were the corporation was the defendant and piercing the veil of corporate fiction in the second case, it is as if the Corporation was the one who filed it. Identity of parties, identity of reliefs and cause of action, therefore there is forum shopping. The stockholders of the bank cannot say that it is a separate suit because they have a separate legal personality from the bank. y TIMES TRANSPORTATION CO VS SOTELO (451 SCRA 587) STA MONICA INDUSTRIAL AND DEVELOPMENT CORP VS THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR (555 SCRA 97) Trinidad s properties was covered by the CARP law, being covered with CARP, he is supposed to allocate certain hectares of his land in favor of the tenants to make such tenants the owner thereof. Trinidad set up a Corporation which his family owns and controls 98%. Since the owner of the properties is the Corporation, not being a natural person, he wants to place it outside the coverage of CARP. The SC held that the properties were merely transferred to the Corporation to evade the application of the CARP law. Control test Elements of Control test (all elements must concur) o Control, not mere majority or complete stock control, but complete domination, not of finances but of policy and business practice in respect to the transaction attacked such that the corporate entity as to this transaction had at that time no separate mind, will or existence of its own o Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest or unjust act in contravention of plaintiff s legal right o The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

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CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANy CONCEPT BUILDERS INC. VS NLRC (257 SCRA 149) proprietorship and the corporation, both business organizations is controlled by the spouses Lipat. y MAVEST USA VS SAMPAGUITA GARMENT CORPORATION (470 SCRA 440) This case talks about the liability of a head office. A head office has no legal personality of its own unless it is set up as a Corporation. It is possible that a Corporation is abroad and need not to set up a corporation in the Philippines to undertake its operation in the Philippines. It may put up a subsidiary or a representative/ head office. A head office is an extension of the parent company

Alter Ego or Instrumentality test y REYNOSO VS CA (345 SCRA 335) This involves a financing company, Commercial Credit Corp (CCC). It opened up various franchises over metro manila. One of the franchise involve is CCC-QC. Because of the rules on DOSRI, CCC-equity was created. Reynoso was the resident manager of CCC-QC and was charge of embezzlement, he filed a counterclaim arguing that he was dismissed illegally and he won a favorable judgment. Whether or not on the basis of the Counter-claim he can enforce such counter-claim not just to CCC-QC but against the parent company CCC. The SC concluded that CCC-QC is only an adjunct or instrumentality or CCC base on the circumstances that Reynoso was hired not by CCC-QC but by CCC; the funding of CCC-QC came solely from CCC; the policies may it be personnel, finance of CCC-QC was controlled and determined by CCC. y LIPAT VS PACIFIC BANKING CORP (402 SCRA 339) This case involves Spouses Lipat who is engaged in the Business of manufacture and sale of garments. They have also a business in the USA. The one managing the business (single proprietorship) in the Philippines is the daughter of the Spouses. The Mother executed SPA in favor of the daughter, for the daughter to obtain loans and credit accommodations from Pacific Bank secured by a mortgage. The daughter obtains loans and credit accommodations secured by a mortgage on the properties of the spouses Lipat. Eventually, the business in the Philippines (single proprietorship) was converted into a Corporation owned and controlled by the Spouses Lipat. There was a failure to pay the loans prompting the Bank to foreclose. Can the obligation of single proprietorship be transferred or assumed by the Corporation? The Spouses contend that the SPA or the authority given to the daughter to obtain a loan is for the single proprietorship and not to the Corporation, therefore, the bank cannot foreclose the mortgage to cover the obligation of the Corporation. The SC held that the Corporation was only an extension of the personality of the single proprietorship because there is no highly distinction between the assets of the Corporation and single proprietorship, the same funds of the Single18

Objective Test the end result in piercing the veil of corporate fiction is to make the stockholders liable for debts and obligations of the Corporation NOT to make the Corporation liable for the debts and obligations of the stockholders. y UMALI VS CA (189 SCRA 529) The Spouses obtain a loan secured by a mortgage. They could not pay the loan so they approach a developer who offered to convert certain parcel of land into a subdivision. The Spouses consented and the project was undertaken. They also set up a Corporation. They had to purchase a tractor to undertake the project, and the purchase price was secured by the Bond issued by an insurance Company. The bond issued by the insurance company is turn secured by a mortgage on the properties of the spouses. The obligation was not paid prompting the insurance company to foreclose the mortgage and sold to a buyer-corporation with a common debtor and owner. The owner of the property wanted to pierce the veil of corporate fiction and to treat the insurance company (seller) and the Corporation (buyer) as one and the same in order to justify the action to nullify the sale. The SC held that they can nullify the foreclosure proceeding without piercing the veil of corporate fiction if there is fraud y INDOPHIL TEXTILE MILLS WORKERS UNION VS CALICA (205 SCRA 697) Indophil textile mills workers union, a labor union in the Indophil textile wanted to include the employees of ____, a sister company of Indophil textile engaged in the same line of business; with common directors and owners, as part of the collective bargaining unit. The SC held that the end is not to make the stockholders liable for any debt or obligation of the

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANcorporation in piercing the veil of corporate fiction, therefore such doctrine will not apply in this case y y ROBLEDO VS NLRC (238 SCRA 52) FRANCISCO MOTORS CORPORATION VS CA (309 SCRA 72) A certain lawyer lend his legal services to one of incorporators of Francisco Motors in connection with an estate proceeding. Such lawyer was not paid, he purchased a certain vehicle from Francisco motors corporation. He wants the purchase of the motor vehicle to be set off against the fees due in one of the incorporators. The SC held that the doctrine of piercing the veil of corporate fiction does not apply because the end result in such doctrine is to make the stockholders liable for debts and obligations of the Corporation not the other way around When it comes to labor cases, non-payment of separation pays. This involves 2 or more Corporations and the employees are transfer from one to another without receiving in full the separation benefits from the first corporation, then the separate legal personality of the Corporations will be pierced: O INDINO VS NLRC (178 SCRA 168) O GUATSON INTERNATIONAL TRAVEL AND TOURS VS NLRC (230 SCRA 815) Cases that may be included in the Objective test O APEX MINING CO VS SOUTHEAST MINDANAO GOLD MINING CORP (492 SCRA 355) APEX MINING CO VS SOUTHEAST MINDANAO GOLD MINING CORP (492 SCRA 355) Where the terms of a mining claim prohibit the assignment thereof except in favor of an agent and the corporation, as holder of the mining claim, transferred its right to a wholly-owned subsidiary, the separate legal personality of the subsidiary can not be pierced so that the latter shall be considered a mere conduit or agent of the parent company to legitimize the prohibited transfer. The doctrine of the piercing the corporate veil cannot be used as a vehicle to commit prohibited acts because these acts are the ones which the doctrine seeks to prevent. To allow the subsidiary to avail itself of this doctrine and to approve the validity of the assignment is tantamount to sanctioning illegal act which is what the doctrine precisely seeks to forestall. y

Section 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations.

Classification of Corporations y According to [F]unction o Public Corporation o Private Corporation y According to [E]xistence of shares o Stock Corporation o Non-stock Corporation According to [L]egal Status o De Jure Corporation o De Facto Corporation o Corporation by Estoppel o Corporation by Prescription According to [R]elationship of Management and Control o Parent Corporation o Holding Corporation o Subsidiary Corporation o Affiliate Corporation According to Place of [I]ncorporation o Domestic Corporation o Foreign Corporation According to Place of [C]omposition o Corporation Sole o Corporation Aggregate [O]ther Classification o Open Corporation o Close Corporation o Religious Corporation o Educational Corporation

y

y

y

y

19

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANACCORDING TO [F]UNCTION Public y y y yThe provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n) Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations

If the corporation is organize for the government of a portion of a State. They have a charter of their own. They are organized to govern a portion of a State. Governed by the special law creating it

A non-stock corporation is not organized for profit.

Example: y City of Manila y City of Makati Private y If the corporation is organize for a private purpose or end. y Governed by the Corporation Code and its Articles of Incorporation and By-laws of such corporation ACCORDING TO [E]XISTENCE OF SHARES Stock Corporation - Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. 2 features of stock Corporation y It has capital stock divided into shares y Authorized to distribute dividends or surplus profit proportionately to the stockholders Non-stock Corporation Section 3 defines non-stock corporation by exclusion, so anything which does not have a capital stock divided into shares and/or not authorized to distribute dividends to its members is considered a non-stock corporation Supplementing section 3, Section 88 provides that non-stock corporation is not organized for profit. It is organize for charitable, civic, literary and related purposes. It cannot be organized of partisan activity because it is a partisan political activity registered as a political party not as a non-stock corporationSection 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.

Is there something wrong if the non-stock corporation earns profit? UST is a non-stock, non-profit corporation and yet UST belong to the top 500 corporation, is there anything wrong with that? None, for as long as the profits are not distributed to the members. For as long as the profits are used in furtherance of the purpose for which the corporation was organized What is a Capital Stock ? An absolute amount specified in the Articles of Incorporation and available for subscription. It is fixed in the Articles of Incorporation, that amount that is available for subscription by the stockholders What is a Capital? A capital represents the assets of the Corporation. It fluctuates, maybe more or less depending on the results of operation How do we determine the authorized capital stock? Let s say, the authorized capital stock is Php 1B (absolute amount, fixed in the AOI, divided into shares) Determine the Capital Stock by multiplying the number of shares allowed in the AOI by the par value 100 million shares . So Php 1B 100 million shares = Php 10.00 (par value) The 100 million shares represent the maximum number of shares that a corporation may issue without amending the AOI. If the corporation wants to issue more than 100 million shares, it has to amend the AOI. What about if it has no par value share corporation? What number can we see in the AOI? Just the maximum number of shares Under section 6, that even though it has no par value, it has a minimum issued value (which is Php 5.00). A no par value20

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANshare cannot be issued for an amount not lower than Php 5.00. How do we distinguished capital stock from stock ? Shares of stock is an integral unit of the capital stock A stockholder who owns more shares have more say and control in the corporation in terms of voting, dividends and distribution of assets upon dissolution A stockholder s standing in the Corporation depends on the shares subscribed in the Corporation What about Stock certificate? A stock certificate is a document issued by a Corporation acknowledging that the person named or specified therein owns certain number of shares in the Corporation. It is an instrument evidencing the ownership of a shares by the stockholder named in the document or instrument. Can a stockholder exercise the rights pertaining to the shares without a stock certificate? Yes, because shares of stock is different from a stock certificate. Even if there is no evidence (stock certificate) for as long as u are the holder, u can exercise the rights pertaining to the shares subscribed by the corporation. Under section 64, a stock certificate can only be issued if he had fully paid the subscription priceSection 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid

y y y

A valid law under which a corporation was organized or created Attempt in good faith to organize Actual exercise of corporate powers

If the law for which the corporation is organized is declared Unconstitutional, then that is not even a de facto corporation. Let s say Congress enacted a special law to create a private corporation and that private corporation was allowed to exercise corporate powers enters into a transaction and contract, is that corporation at least a de facto corporation? No, because Congress can enact a special law to create only a government owned and controlled corporation. The law passed by Congress to create a private corporation is unconstitutional. Therefore that corporation is not even a de facto corporation. When we say Attempt in good faith to organize we mean that the articles of incorporation has been filed with the SEC and the SEC issued a certificate of registration. Without the certificate of registration, it is not even a de facto corporation. Where lies the defect then? Defect as to form but it has been issued a certificate of incorporation Example: Under section 14, there is a prescribe form for the articles of incorporation. If the AOI is filed by the corporation or group of person concerned does not conform with the form prescribed by law but goes over with the SEC and SEC issues registration, that is a de facto corporation. The treasurer s certificate is false, under the law, the treasurer must certify that this represent the controlled capital stock as may subscribed and paid up upon incorporation. If it is false but the SEC does not have a way of knowing right away and relied on the representation of the treasurer, it is a de facto corporation In case of residency, it is stated in the AOI that majority of the incorporators are Philippine residents, it turns out they are not, the SEC did not check and issued a certificate of registration. Therefore, it is a de facto corporation CASE: ALBERT VS UCP In this case Albert is a known author or authority in criminal law. He had commentaries in the revised penal code. University Publishing company entered into a contract with Albert to publish the commentaries on the revised penal code. UPC published the commentaries but it did not pay the21

The law allows partial payment of subscription ACCORDING TO [L]EGAL STATUS De Jure Corporation a corporation that fully conforms with the requirements for incorporation under the law. A corporation in law and in fact De Facto Corporation a corporation with a colorable imitation or compliance with the requirements prescribed by law. Colorable means substantial compliance with the requirements of the law. It is a corporation in fact but not in law. There is an infirmity in the incorporation such that the State reserves the right to question or assail its corporate existence thru a quo warranto proceeding. Elements/Requisites of a De Facto Corporation

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-ANamount due to Albert prompting him to file a collection suit. But during the pendency of the case, he died. The judgment obtains in favor of the estate against UPC. When they were about to implement the writ of execution, they had discovered that UPC is not registered with the SEC, is it a de facto corporation? No, it is not registered, there is no attempt in good faith to organize Who will be liable in that case? The president who had control over the proceedings. The real party in interest in case of an unincorporated association is the person who has control over the proceedings. Can the judgment be enforced against the president? Or is there a need to file a separate case against the president? There is no need to file a separate case; the judgment can be enforced against the president because this is an unincorporated association and he who had control over the proceedings is the real party in interest. Actual exercise of corporate powers (3rd element) over time a corporation is allowed to enter into contracts and transactions A de facto, for all end and purposes, is a corporation, it has the same powers, privileges, rights, attributes and subject to the same obligations as a de jure corporations. Its directors are authorized and liable as directors of de jure corporation. Its officers have the same rights and obligations as officers of a de jure corporation. Except that the state reserves the right to question its corporate existence until the defect is already rectified. The existence of a de facto corporation cannot be attacked collaterally What do we mean by it cannot be attacked collaterally? The principal purpose of the suit is to assail the corporate existence Example: ABC corporation, a de facto corporation, entered in a contract with X for sale of certain merchandise. ABC delivered the merchandise but X did not pay his obligation to ABC corp. ABC corp filed an action for collection, X filed a motion to dismiss on the ground that ABC corp has no legal capacity to sue on the ground that it is only a de facto corporation. Will the motion to dismiss be granted? No, because it is a collateral proceeding, the object of the suit is collection but not to question the existence of a corporation. If someone wants to question the existence of a corporation, it must be22

thru a quo warranto proceedings, not in a collection case.Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

Corporation by Estoppel under section 21, a corporation exists if a group of person assumes to be or represents themselves to be a corporation when they have no legal authority to do so and as such they are precluded from denying their corporate existence as regards to the 3rd party who relied on the representation.Section 21. Corporation by estoppel. - 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 on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.

Example: let s say 5 persons, A, B, C, D and E acting and represents themselves to be a corporation. They entered into a contract for purchase and delivery of supplies in favor of X. X delivered the supplies but A, B, C, D and E did not pay. X filed a case for collection, can A, B, C, D and E (ABC corp) deny their corporate existence? No, because they misrepresented X th