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. Phi lippine Corporate Law:2 Sort of Codification of American Corporate Law Under Ame rican sovereignty, attention was drawn to the fact that there was no entity in S panish law exactly corresponding to the notion "corporation" in English and Amer ican law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard comme rcial entity and to hasten the day when the sociedad annima of the Spanish law wo uld 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 e ffective on 1 April 1906. It had various piece-meal amendments during its 74-yea r 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 a nd doctrines, and provided for a chapter on close corporations. 4. Proper Treatm ent of Philippine Corporate Law Philippine Corporate Law comes from the common l aw system of the United States. Therefore, although we have a Corporation Code t hat provides for statutory principles, Corporate Law is essentially, and continu es to be, the product of commercial developments. Much of this development can b e expected to happen in the world of commerce, and some expressed jurisprudentia l rules that try to apply and adopt corporate principles into the changing conce pts and mechanism of the commercial world. CESAR L. VILLANUEVA Atty. LAW1 1Unless otherwise indicated, all references to sections pertain to The Corporati on Code of the Philippines. 2The whole body of statutory and jurisprudential rul es 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 AT ENEO 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 powe rs attributes and properties, expressly authorized by law or incident to its exi stence. Art. 44(3) The following are juridical persons Corporations, partnership s and associations for private interest or purpose to which the law grants a jur idical 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 as sociations for private interest or purpose are governed by the provisions of thi s Code concerning partnerships. Art. 46 Juridical persons may acquire and posses s property of all kinds, as well as incur obligations and bring civil or crimina l actions, in conformity with the laws and regulations of their organization. Ar t. 1775 Association and societies, whose articles are kept secret among the memb ers, 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 prov isions relating to co-ownership corporation is an artificial being created by op eration of law. It has a personality separate and distinct from the persons comp osing 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 pe rson created by law or by state; legal fiction created by law its existence is dep endent upon the onsent or grant of the state EXCEPT corporation by estoppel and de facto corporation the definition of a corporation is merely a guide and does not really provide fo r 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 corpor ation involve a statement creature of the law? 3 A. To reiterate the fact that the corporation can only e law. It is of limited existence, outside its powers, -Level Existence of the Corporation (a) AGGREGATION OF ical assets of the corporation; the tangibles ( ex. in g sold) do acts given to it by th it does not exist. 2. Tri ASSETS AND RESOURCES phys a grocery, the goods bein(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes n ot only the tangible assets but also the intangibles like goodwill created by th e business C) 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 importa nt in its own way as there are consequences for each. The distinctions become im portant and come into play when it comes to dealing with corporation law What ar e 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 busin ess, a simple deed of sale would suffice and you will not be liable for continge nt liabilities. It will be different if you buy the business as an economic conc ept. SEC Regulations or Bulk sales Law may be applied. 3. Relationships Involved in a Corporate Setting A) 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 it s officers, which is governed also by the Law on Agency Between the members corp oration 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. mo st 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. no t merely as an artificial being but more as an AGGRUPATION OF PERSONS DOING BUSI NESS or AN UNDERLYING ECONOMIC UNIT. The corp. is emerging as an enterprise boun ded 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. ha s an existence separate and distinct from its -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 as sociation w/o associates. (a) Theory of Concession (aTayag v. Benguet Consolidat ed, 26 SCRA 242 [1968]). corporation creature of the state limited no other priv ilege may be exercised beyond grant To organize a corporation that could claim a juridical personality of its own an d transact business as such, is not a matter of absolute right but a privilege w hich may be enjoyed only under such terms as the State may deem necessary to imp ose. 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, t he 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 acq uisition of such juridical personality must be complied with. Although the statu tory 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 procedu re and conditions does not warrant a finding that such association acquired a se parate juridical personality, even when it adopts sets of constitution and by-la ws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisi ons 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 coverin g 33, 002 shares of stock of appellant Benguet Consolidated, Inc. Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surren der 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 Pr obate division of this court. An appeal was taken not by County Trust, as domici liary admin., but by Benguet on the ground that the certificates of stock are ex isting and in possession of County Trust. They also assert that there was a fail ure to observe certain requirements of its by-laws before new stock certificates could be issued. Judgment affirmed. Benguet bound by ISSUE: Whether or not Benguet properly pursued the appeal? HELD: order. The Cour t held that the appeal cannot prosper. the challenged order represents a response & express a policy arsing out of a sp ecific problem, addressed to the attainent of specific ends by the use of specif ic remedies, w/ full & ample support from legal doctrines of weight and signific ance.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. AndRevise d 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 ancill iary and the domiciliary admin to who ws reality of the group as a between the e ntity 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 h e corp. life of its own tellsassets of themultiply profitably.Phil. corp. like e very 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 l ife to the state its birth being purely dependent on its will. Flether: A corp. i s 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 distin ct and separate from its individual stockholders. There is thus a rejection of G ierkes 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 acco rding to law. It is logically inconceivable therefore that it will have rights a nd privileges of a higher priority than that of its creator. More than that it c annot legitimately refuse to yield obedience to acts of its state organs, certai nly not excluding the judiciary, whenever called upon to do so. Corporate by-law s must yield to judicial order As a matter of fact, a corp. once it comes into b eing 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. Corr elatively, it is not immune from judicial control in those instances, where a du ty under the law as ascertained in an appropriate legal proceeding is cast upon it. c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. R EV. 343 [1947]) juridical personality contractual relation between 5 or more ind ividuals 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 it self as a collective body, it waives no constitutional immunities and perquisite s appropriate to such a body. PSE v. Court of Appeals, 281 SCRA 232 (1997). Corp orations are composed of natural persons and the legal fiction of a separate cor porate 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 Be e & 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 fiction B) CREATED BY OPERATION OF LAW (Creature of the Law) its existence is dependent upon the consent or grant of the state EXCEPT corpora tion by estoppel and de facto corporation RIGHT OF SUCCESSION C) WITH (Strong Juridical Personality) the corporation exist despite the death of its members as a corporation has a rsonality separate and distinct from that of its individual stockholders. The parate personality remains even if there has been a change in the members and ockholders of the corporation. THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT ITS D) HAS EXISTENCE (Creature of Limited Powers) 6. Advantages and Disadvantages of Corporate Form: (a) Four Basic Advantageous C haracteristics of Corporate Organization: (i) STRONG LEGAL PERSONALITY A corporat ion 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 pers on 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 o f 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). STOCK HOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS Facts: In 1960, five stock holders 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 stock holders dissolving the corporation, they have distributed among themselves in pr oportion to their shareholdings, as liquidating dividends, the assets of said co rporation including real properties located in Manila. The certificate of liquid ation 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 opp pe se st TOosition of assets of the corporation need to be presented aside from the followi ng: (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 att ached. Stockholders contend that it was not conveyance but a mere distribution o f 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 wi th 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 distin ct 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 aliq uot part of the corporations property or the right to share in the proceeds to th at extent when distributed according to law and equity. But its holder is not th e owner of any part of the capital norRevised 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-owne r or tenant in common of the corporate property. Thus, the act of liquidation ma de by the stockholders of the corporations assets cannot be considered as a parti tion of the community property but rather a transference or conveyance of the ti tle of its assets to the individual stockholders in proportion to their stockhol dings. Therefore, said transfer cannot be effected without the corresponding dee d of conveyance from the corporation to the stockholders. (ii) CENTRALIZED MANAG EMENT As can be gleaned from Sec. 23 of Corporation Code It is the board of direc tors or trustees which exercises almost all the corporate powers in a corporatio n. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). The exercise o f the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholders approval for ce rtain specific acts. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCR A 557 (2002). (iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS One of the advantages of the corporation is the limitation of an investors liabil ity to the amount of investment, which flows from the legal theory that a corpor ate entity is separate and distinct from its stockholders. San Juan Structural a nd Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998). It is hornb ook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse cannot be made personally liable unde r a trust receipt where he entered into and signed the contract clearly in his o fficial capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCR A 671 (2001). Obligations incurred by the corporation acting through its directo rs, officers and employees, are its sole liabilities. Malayang Samahan ng mga Ma nggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (iv) FREE TRANSFERABILIT Y OF 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 ta xation Advantages and Disadvantages of Corporate Form: Four Basic Characteristic s Organization: of Advantageous Corporate Disadvantages: (i) Strong Legal Personality - entity attributable powers; - continuity of exist ence; (i) Abuse management -of corporate there is severance of control andhaving the right of succession, the death of an individual stockholder does not affect corporate existence not a natural occurrence, exists mainly because the l aw provides for it. This is what distinguishes the separate juridical personalit y 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 personarumownership. 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 in nocent creditors. (ii) Cost of maintenance the formation and incorporation of a corp. entails a lo t 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 li ability 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 w ays to circumvent the law and make the shareholders liable for more than his act ual 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 invest or of his right to manage the property he had invested in the (iv) Double taxation Dividends received by individuals from domestic corporation s 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) -Revised Bagtas company. Under property law, a person exercises full ownership ov er 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% improper ly accumulated earnings tax for holding companies (Sec. 29, 1997 NIRC) 9 (iv) Centralized Management One of the advantages of a corp. is the limitation o f 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 cor poration. Q. Is limited liability a normal run of things? A. No. It is only ther e 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 Proprietors hips Sole Proprietorship Free from many requirements and regulations in its oper ation Corporation Heavily regulated; a lot of requirements imposed for registrat ion and incorporation Control of business is done by the Owner has full control of his businessand fiat. Just because the BoD are to be elected by the stockholders does not me an that the former derives its powers fro BoD Owner stands to lose more than wha t he puts into the venture Investors have limited liabilty (b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) Art. 1 768 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 sha ll be governed by the provisions relating to coownership Corporation Separate le gal 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 article s of partnership, binds the partnership as every partner is an agent of the othe rs (delectus personarum). In a corporation, only the BoD and not the stockholder s can bind the corporation. Q. What are the 2 types of partnerships? A. Regular and Joint venture Q. Can a c orporation 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 cont racted in a partnership, why did the legislature put such limited liability as a n attribute of a corporation? If the feature of limited liability cots money the n why not take it out? Why not eave it up to the investors who can decide if the y want limited liability or not? A. Even though limited liability will cost a lo t of money, borrowing makes a lot more sense. If I havePioneer 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 ot her peoples money to make a profit for yourself. This is why borrowing is an inte gral part of corporate life and it is up to the creditors to make a diligent app raisal of the credit standing of the corp. Q. What is the main distinction betwe en a corporation and a partnership? A. A corp. is an intermingling of corporatio n 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 extingu ished. Q. What is Corporation Law all about? A. It is all about jurisprudence ac tually 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 Sou thern Airlines, a single proprietorship. On May 17, 1965, he bought from Japan D omestic 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 Mach inery and Heavy Equipment (BORMAHECO), the Cervanteses and Constancia Maglana co ntributed 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 L im to expand his airline business. They executed indemnity agreements in favor o f Pioneer, one signed by Maglana and the other jointly signed SAL, BORMAHECO and Cervantes: where they principally agree and bind themselves jointly and several ly to indemnify pioneer. On June 10, 1965 Lim for SAL executed in favor of Pione er 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 Aeronautic s Administration. Lim defaulted on his subsequent installments prompting JDA to request payment from the surety. Pioneer paid about P298,000 Pioneer filed for a n extra-judicial foreclosure of the mortgage but the Cervanteses -and Maglana filed a third party complaint claiming that they are co-owners of th e aircraft. Pioneer later filed a petition for judicial foreclosure and an appli cation for a writ of preliminary attachment against Lim, the Cervanteses, BORMAH ECO 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 P ioneer, holding Lim liable but dismissing the case as to the other defendants. O n appeal, the CA affirmed. ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to rei mbursement of amounts given by Lim? HELD: Lims assertions: The failure of respond ents 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 the mselves 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 mem bers 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 i s that no partnership shall exist and should be implied only when necessary to d o justice between the parties: thus, one who takes no part except to subscribe f or 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 p retended corp., so as to be liable as such in an action for settlement of the al leged partnership and contribution. the records show that Lim received the amoun t of P151,000 representing the participation of BORMAHECO and Maglana it was cle ar that Lim never intended to form a corp with them but they were duped into giv ing their money no de facto corp. was created Q. In cases where there is a defective attempt to form a corp. which is the prev ailing 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, t hey 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 t he Cervanteses or BORMAHECO, who entered into the contracts using the corporate name and actively participated in the activities of the corporation, then they a re 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 par tner, he should have actively participated in the conduct of the business, the S C 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 Pion eer and Lim Tong Lim? 13 A. In the case of Pioneer, the SC stopped when it declared that to be liable, yo u have to possess powers of management. In Lim tong Lim, it continues its pronou ncement, 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 INDUS TRIES Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. ent ered 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 an d so PFGI filed a collection case with a prayed for a writ of preliminary attach ment. The case was filed against Chua, Yao and Lim because it was found that Oce an Quest was a nonexistent corporation as shown by the certification from SEC. C hua admitted liability and Yao waived his right to cross-examine and present evi dence because he failed to appear while Lim filed a counterclaim and a cross-cla im. 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 C ompromise Agreement and alleges that he had no direct participation in the negot iations 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 in itially 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 reve aled 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 partnersh ip existed which was not solely based on the agreement. It was merely an embodim ent of the relationship among parties. 2.) Lim alleges that he was merely a LESS OR by showing the Contract of Lease and registration papers of the boats, includ ing F/B Lourdes where the nets were found As found by the lower courts, the boat s were registered to Lim only as security for the loan that was granted to the p artnership 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 no t incur, if needed he was merely leasing the boats to Chua and Yao. 3.) Lim cont ests his liability by saying that only those who dealt in the name of the ostens ible 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 corporatio n knowing it to be without authority to do so shall be liable as general partner s 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 tra nsaction 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 associa tion has no personality and would be incompetent to act and appropriate for itse lf the power and attributes of a corporation as provided by law. It cannot creat e agents or confer authority on another to act on its behalf. Thus, those who ac t 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 Lourd es 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. Th ough 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 h ad an existing relationshipwith, he is deemed part of said association and is covered by the doctrine of co rporation by estoppel. CLV: Pioneer case actors who knew of corporations non-exis tence 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 pa ssive investors should be held liable provided they benefited from such transact ions. (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 differen ce between a joint venture and a partnership? A. A joint venture is by law a par tnership because it follows the same definition as having two or more persons bi nding themselves together under a common fund with the intention of dividing the profits between themselves. Therefore, every joint venture is a partnership. Th e distinction between the two is that a joint venture is for a limited purpose o nly 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 ve nture 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, Civi l Code) (d) Cooperatives (Art. 3, R.A. No. 6938) A cooperative is a duly registe red association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equit able contributions to the capital required and accepting a fair share of the ris ks and benefits of the undertaking in accordance with universally accepted coope rative principles. Cooperatives are established to provide a strong social and e conomic organization to ensure that the tenant-farmers will enjoy on a lasting b asis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000). Co operative Separate Juridical Personality Governed by principles of democratic co ntrol where the members have equal voting rights on a one-member-one vote princi ple 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 the ir percentage share of the stocks subscribed by them Corporation BoD is the repository of all powers EXCEPT for acts where the Corp. Code require s concurrence orcoop. Revised Bagtas Reviewer by Ve and Ocfe 2A ratification by the SH Under the Super vision of the SEC Stock Corp. for profit; Non-Stock Corp eleemosynary (charitabl e, philantrophic) purpose 15 Under the supervision of the coop. Development Authority Organized for the purpo se of providing goods and services to its members and thus to enable them to att ain increased income and saving, etc. e) Business Trusts (Article 1442, Civil Code) Art. 1442 Q. What is the differenc e 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 pe rsonality which is apart from the trustor or the trustee/beneficiary. The concep t of a separate juridical personality is absent from a business trust. (f) Socie dades 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 perso nan artificial being, invisible, intangible, and existing only in contemplation o f lawwith power to hold, buy, and sell property, and to sue and be sueda corporati onnot 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 i t partook of the form of a commercial corporation. Mead v. McCullough, 21 Phil. 9 5 (1911). The sociedades annimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articl es 151 to 159 of the Spanish Code of Commerce. Those articles contained the feat ures of limited liability and centralized management granted to a juridical enti ty. But they were more similar to the English joint stock companies than the mod ern commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). Our Corporation Law recognizes the difference between sociedades ann imas and corporations and will not apply legal provisions pertaining to the latt er 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 a ccidental partnership constituted in such a manner that its existence was only k nown to those who had an interest in the same, there being no mutual agreement b etween the partners, and without a corporate name indicating to the public in so me way that there were other people besides the one who ostensibly managed and c onducted 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 agai nst 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 contract ed with themanager unless such manager formally transfers his right to them. Bourns v. Carm an, 7 Phil. 117 (1906). III. NATURE AND ATTRIBUTES OF A CORPORATION 1. Nature of Power to Create a Corpo ration (Sec. 16, Article XII, 1987 Constitution) The Congress shall not except b y general law, provide for the formation, organization or regulation of private corporations, Government-owned or controlled corporations may be created or esta blished by special charters in the interest of the common good and subject to th e test of economic viability. P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the formation of a private corporation by speci al legislative act which is neither owned nor controlled by the government, sinc e NDC was merely required to extend a loan to the new corporation, and the new s tocks of the corporation were to be issued to the old investors and stockholders of the insolvent Agrix upon proof of their claims against the abolishedRevised Bagtas Reviewer by Ve and Ocfe 2A corporation. NDC v. Philippine Veteran s Bank, 192 SCRA 257 (1990). 17 Congress cannot enact a law creating a private corporation with a special charte r, and it follows that Congress can create corporations with special charters on ly if such corporations are government-owned or controlled. Feliciano v. Commiss ion on Audit, 419 SCRA 363 (2004). Q: What distinguishes a public corporation fr om a private corporation owned by the government? A: It is not ownership which d istinguishes a public corporation from a private corporation. It is the civil se rvice eligibility of its employees and if the financial records are subject to t he examination of the Commission on Audit. A public corporation is created by it s charter whereas a private corporation is created under the Corporation Code. 2 . CORPORATION AS A PERSON: (a) Entitled to Due Process The due process clause is universal in its applicati on to all persons without regard to any differences of race, color, or nationali ty. Private corporations, likewise, are persons within the scope of the guaranty i nsofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 1 36, 144 (1920). (b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 P hil. 136 [1920]). (c) Unreasonable Searches and Seizure A corporation is protect ed by the constitutional guarantee against unreasonable searches and seizures, b ut 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 i n said corporation, and whatever the offices they hold therein may be, because t he corporation has a personality distinct and separate from those of said office rs. 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 organ izing itself as a collective body it waives no constitutional immunities appropr iate 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 di scrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quotin g from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why is a corporation entitl ed 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 gra nts to an individual. A corporation is entitled to due process and equal protect ion by virtue of the juridical personality given by the State through the primar y 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 j uridical entity, which therefore extends to private corporations within the scop e of the guaranty. Q: Why is the corporation entitled to the protection against unreasonable searches and seizures? A: The corporation being entitled to due pro cess and equal protection is the consequence of the States grant of a primary fra nchise to a corporation. It emanates from the Theory of Concession, whereby the government recognizes not only the separate juridical personality of the corpora tion but also grants unto it all the rights and protections that a natural indiv idual would possess which includes the right to due process and equal protection . However, a corporation is also entitled to protection against unreasonable sea rches and seizures. This right however does not emanate from the grant of the St ate 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 itsel f 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 pr oceeded 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 sear ch and seizure involves physical intrusion into the premises of the corporation, and therefore also intrudes into the personal and business privacy of the stock holders or members who compose it. It can be seen that the right of the individu al against unreasonable searches and seizures is extended to corporations upon w hom they are members. (d) But Not Entitled to Privilege Against Self incriminati on 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 unles s protected by an immunity statute, it does not follow that a corporation, veste d with special privileges and franchises, may refuse to show its hand when charg ed 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 agains t selfincrimination? A: Any individual is entitled to equal protection whether t hey be juridical or natural. The corporation being in the same class should be t reated equally. However, the right to self-incrimation is not extended to corpor ation because: 1. The right is meant to prevent individuals from having to lie u nder 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 corpor ation 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 s ubject to the whims of its Creator. The corporation powers are limited by law. C LV: Beats me! Perhaps such right is attributable to the moral dimension of an in dividual, 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 competen ce required by the PRC. A corporation engaged in the selling of eyeglasses and w hich hires optometrists is not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); Alfafara v. Ac ebedo 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 a n agent or servant are the same whether the principal or master be a natural per son or a corporation, and whether the servant or agent be a natural or artificia l 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. aP NB v. Court of Appeals, 83 SCRA 237 (1978). PNB v COURT OF APPEALS Facts: Rita G ueco 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 u se the said quota for consideration of 2,500. Her sugar cannot be exported witho ut 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 he r 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 wa s secured by her sugar crop, and since her quota was mortgaged to PNB, her arran gement with Mr. Tuazon had to be approved by the bank. Upon presentment of the l ease arrangement, the PNB branch manager revised it by increasing the lease amou ntRevised Bagtas Reviewer by Ve and Ocfe 2A 19 to P2.80 per picul for a total of P 2,800. 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 am ount 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 t he PNB matured. Since she had a surety agreement with the Philippine American Ge neral Insurance Co. Inc. (Philamgen), the latter paid her outstanding debt. Phil amgen 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. Whe n 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 o f money against Rita. Rita implicated PNB as a third party defendant claiming th at 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 fa ilure 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 r ate 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 pic ul. 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 u ltimate authority of approving or disapproving the proposed lease since the quot a was mortgaged to the bank, the latter certainly cannot escape its responsibili ty of observing precaution and vigilance which the circumstances of the case jus tly demanded in approving or disapproving the lease of said sugar quota. Accordi ng to Art. 19 of the Civil Code, [e]very person must in the exercise of his right s 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 consequen ce, 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 comp ensate 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 pers ons 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 w hether 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 ac t 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 a s the governing body.NOTE: CLV tells us that it is clear from the ruling of the Court in this case th at not every tortuous act committed by an officer can be ascribed to the corpora tion as its liability, for it is reasonable to presume that in the granting of a uthority by the corporation to its agent, such a grant did not include a directi on to commit tortuous acts against third parties. Only when the corporation has expressly directed the commission of such tortuous act, would the damages result ing therefrom be ascribable to the corporation. And such a direction by the corp oration, 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 corporati on, through its board, expressly or impliedly ratifies such an act or is estoppe d from impugning such an act. Our jurisprudence is wanting as to the definite sc ope 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 Co de to grant separation pay to employees in case of cessation ofoperations 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 to rt? A: A corporation is liable for tort when: (a) the act is committed by an off icer 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 dir ection by the corporation is manifested, by its board adopting a resolution to s uch effect (b) by having takien advantage of such a tortious act, the corporatio n 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 can not escape enforcement of the award of damage to the tort victim. As a remedy, t he stockholders may institute a derivative suit against the responsible board me mbers and officers for the damages suffered by the corporation as a result of th e 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. Cou rt 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-ins urance corporation, organized under the laws of California, doing business regul arly and legally in the Philippines. An information was filed against the plaint iff corporation as well as John Northcott and Manue Grey charging the said corpo ration and said individuals with the crime of libel. The controversy started whe n Northcott, as general manager for the Philippines of said company and John Gre y who was an agent and employee of the company, conspired to release certain cir culars 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 co mpany, and of those with whom said company have and had business transactions. T he plaintiffs then filed a motion to quash summons sent by the Judge, on the gro und that the court had no jurisdiction over said company, there being no authori ty 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 proce ed 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 crimina lly liable. Held: No. While the courts have inherent powers which usually go wit h courts of general jurisdiction, it was held that under circumstances of their creation, they have only such authority in criminal matters as is expressly conf erred 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 proces ses of criminal law. Although, there are various penal laws in the Philippines w hich 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 f or the purpose of carrying out the penal statutes, when the legislative itself h as neglected to do so. This is true since the courts are creatures of the statut e and have only powers conferred upon them by statute. Philippines courts have n o common law jurisdictionRevised Bagtas Reviewer by Ve and Ocfe 2A or powers. PEOPLE v TAN BOON KONG Fact s: 21 During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply C o. engaged in the purchase and sale of sugar, bayon, copra, and other native pro ducts and as such must pay internal revenue taxes upon is sales. However, he onl y declared 2.3 million in sales but in actuality the sales amounted to 2.5 milli on, 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 dem urrer, the lower court judge sustained said motion on the ground that the offens e 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: Rulin g 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 parti cipate 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 y ear 1924. As such, the filing of false returns constitutes a violation of law. H im 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 M etal Manufacturing Company of the Philippines engaged in the manufacturing of st eel office equipment. When the company was in need of raw materials to be import ed from abroad, Sia applied for a letter of credit to import steel sheets from T okyo, Japan, the application being directed to Continental Bank and was opened i n 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 a ccording 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 q uestion that when the bill of exchange became due, neither the accused nor his c ompany 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 cr ime charged, having acted only for and in behalf of his company. Held: NO. The C ourt disputed the reliance of the lower court and the CA on the general principl e that for a crime committed by a corporation, the responsible officers thereof would personally bear the criminal liability, as enunciated in Tan Boon Kong. Th e latter provides that: [t]he corporation was directly required by law to do an a ct 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 crimin al 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 ac t 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 therefor e a factor determinant of whether a crime or a civil obligation alone is committ ed. The absence of a provision of the laweven in the RPC making Sia criminally liable as the president of his company cre ated a doubt that must be ruled in his favor according to the maxim, that all do ubts must be resolved in favor of the accused. CONTRASTING THE THREE CASES In th e case of West, the court in effect enunciated that for a person to proceed crim inally against a corporation, it was necessary that express provisions of law be enacted, specifically providing that a corporation may be proceeded against cri minally and brought to court. But since a corporation is a legal fiction that ca nnot 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 liabl e. 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 t o use the corporation as a shield or cloak to hide their criminal activities beh ind such. However, the liability of officers were delineated in case of Sia wher e 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 co rporation was directly required by law to do an act in a given manner, and the s ame law makes the person who fails to perform the act in the prescribed manner e xpressly 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 pe rsons are also defined as offenders of criminal acts, as with the case of the An ti-Money Laundering Act. Art. 102 of the RPC: Subsidiary civil liability of innk eepers, tavern-keepers and proprietors of establishments In default of the perso ns criminally liable, innkeepers, tavern-keepers and any other person or corpora tions shall be civilly liable for crimes committed in their establishments, in a ll cases where a violation of municipal ordinances or some general or special po lice regulation shall have been committed by them or their employees. Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or t heft 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 in nkeeper himself, or the person representing him, of the deposit of such goods wi thin the inn; and shall furthermore have followed the directions which such innk eeper 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 vio lence against or intimidation of persons unless committed by the innkeepers emplo yees. Art. 103 of the RPC: Subsidiary civil liability of other persons The subsi diary liability established in the next preceding article shall also apply to em ployers, 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 th e 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 onl y 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 purpo se of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. Co meta 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 outsid e its authority? A: Crime is not within the corporate contemplation while neglig ence is. Negligence could be part of every transaction. It is an integral part o f 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 su fferings, 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 besmirch ed, may be a ground for the award of moral damages. Mambulao Lumber Co. v. Phili ppine 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 le gal contemplation, has no feelings, emotions nor senses; therefore, it cannot ex perience physical suffering and mental anguish. Mental suffering can be experien ced only by one having a nervous system and it flows from real ills, sorrows, an d griefs of lifeall of which cannot be suffered by an artificial person. Prime Wh ite Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appe als, 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 P eople v. Manero and Mambulao Lumber Co. v. PNB, that a corporation may recover m oral damages if it has a good reputation that is debased, resulting in social hum iliation is an obiter dictum. Recovery of a corporation would be under Articles 1 9, 20 and 21 of the Civil Code, but which requires a clear proof of malice or ba d faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). 7. Section 123: De CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123) finition and rights of foreign corporations For the purposes of this Code, a for eign 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 tra nsact 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 countr y under whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationalit y of the majority stockholders, wherein control is vested. Situation #1: 51% Fil ipino 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 corporat ion. Why 60%? Because under the Corporation Code for a group of persons to incor porate 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 o f a person. Situation #2: 60% Filipino 40% Japanese Under the control test, this is considered aFilipino corporation. 3.) Principal place of business applied to determine wheth er a State has jurisdiction over the existence and legal character of a corporat ion, its capacity or powers, internal organizations, capital structure, rights a nd 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 de termine whether a corporation can engage in nationalized activities in the count ry, and the third one is used to determine the jurisdiction of the State to enfo rce for instance taxation laws. Q: What is the importance of determining the nat ionality of the corporation? A: It is necessary so as to determine whether or no t a corporation can enter into various transactions or engage in different indus tries. 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 pri mary test to determine the nationality of the corporation, why then are there ot her tests used? A: There are certain aspects of the Philippine economy that requ ire 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. T he place of incorporation test need not have been expressly provided by the Cons titution since it is an integral part of our law specifically the power of Congr ess 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 o f 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 sec ondary test to determine which corporations are entitled to entry in nationalize d sectors. Q: What is the implication of having a primary test and a secondary t est? A: Simply put, if a corporation does not pass the first test, which the pla ce 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 determi nes now whether the corporation fulfills the equity requirements of the Constitu tion. In doing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Const itution; aRoman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and t he Register of Deeds of Davao, 102 Phil. 596 [1957]). Sec. 140 Stock ownership i n certain corporations Pursuant to the duties specified by Article XIV of the Co nstitution, the National Economic Development Authority shall, from time to time , make a determination of whether the corporate vehicle has been used by any cor poration of by business or industry to frustrate the provisions thereof or of ap plicable laws, and shall submit to the Batasang Pambansa, whenever deemed necess ary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholding s 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 indiv iduals related to each other by consanguinity or affinity or by close business i nterests, or whenever it is necessary to achieve national objectives, prevent il legal monopolies or combinations in restrain or trade, to implement national eco nomic policies declared in laws, rules and regulations designed to promote the g eneral welfare and foster economic development.Revised Bagtas Reviewer by Ve and Ocfe 2A 25 In recommending to the Batasang Pam bansa corporations, business or industries to be declared vested with a public i nterest and in formulating proposals for limitations on stock ownership, the Nat ional Economic and Development Authority shall consider the type and nature of t he 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 rea lization and promotion of business and industry. Sec. 2 Art. XII All lands of th e public domain, waters, minerals, coal, petroleum and other mineral oils, all f orces of potential energy, fisheries, forests or timber, wildlife, flora and fau na and other natural resources are owned by the State. With the exception of agr icultural lands, all other national resources shall under the full control and s upervision of the State. The State may directly undertake such activities or it may enter into coproduction, joint venture, or production-sharing agreements wit h 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 no t exceeding twenty-five years, renewable for not more than twenty-five years, an d under such terms and conditions as may be provided by law. In cases of water r ights 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 wate rs, territorial sea, and exclusive economic zone, and reserve its use and enjoym ent exclusively to Filipino citizens. The Congress may, by law, allow small-scal e 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-own ed corporations involving either technical or financial assistance for large-sca le exploration, development and utilization of minerals, petroleum and other min eral oils according to the general terms and conditions provided by law, based o n 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 sci entific and technical resources. The President shall notify the Congress of ever y contract entered into in accordance with this provision within thirty days fro m 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 Adm inistrator of Davao, a corporation sole organized and existing in accordance with Philippine laws. The incumbent administrator is Msgr. Clovis Thibault, a Canadia n 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 corp oration is 60% Filipino citizens as required under the Constitution. Roman Catho lic stated that it was a corporation sole (meaning only one incorporator) and th at the totality of the Catholic population in Davao would become the owner of th e property. Register of Deeds doubted this and submitted the case for en consult a in the Land Registration Commission. LRC ruled that the requirement of the Con stitution must be followed and since the 60% cannot be complied with, the regist ration should be denied. Hence, this appeal. Issue: WON the Roman Catholic Apost olic Church, being a corporation sole, can lawfully acquire lands in the Philipp ines. Held: YES. Corporation sole a special form of corporation usually associat ed with the clergy designed to facilitate the exercise of the functions of owner ship of the church whichwas registered as property owner. It is created not only to administer the tempo ralities of the church or religious society where the corporator belongs, but al so 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 be nefit 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 manif estly disregarded the corporate fiction i.e. the juridical personality of such c orporation or associations. It went behind the corporate entity and looked at th e natural persons that composed it, and demanded that a clear majority in intere st (60%) should be Filipino. Since under the rules governing corporation sole, t he members of the religious association cannot overrule or override the decision s 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 e loquence still flourished in Antioch and when idiots were still worshipped in th e temple of Mecca. Since it is a corporation by prescription, it has no national ity, and hence, the nationality test does not apply. (But refer to below.) Q: Wh y 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 qu alified to mean that this is the case only insofar as the control test is concer ned. Nationality is irrelevant insofar as this test is concerned. However, it be comes relevant when the place of incorporation comes into play since the case ne ver sought to touch the place of incorporation test. The registration of the don ation of land to an unincorporated religious organization, whose trustees are fo reigners, would violate constitutional prohibition and the refusal would not be in violation of the freedom of religion clause. The fact that the religious asso ciation has no capital stock does not suffice to escape the constitutional inhibi tion, 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 Deed s 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 corp orations or associations organized under the laws of the Philippines at least si xty per centum of whose capital is owned by such citizens, nor shall such franch ise, certificate or authorization be exclusive in character or for a longer peri od 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 equ ity participation in public utilities by the general public. The participation o f 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 a nd 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 utiliti es.Revised Bagtas Reviewer by Ve and Ocfe 2A 27 PEOPLE v QUASHA Facts: William Quasha, a member of the Philippine Bar was charge d with falsification of public and commercial documents in the CFI. He was entru sted with the preparation and registration of the articles of incorporation of P acific Airways Corporation but he caused it to appear that Arsenio Baylon, a Fil ipino had subscribed to and was the owner of 60% of subscribed capital stock. Su ch was not case because the real owners of said portions were really American ci tizens. 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 fa lsification imputed to Quasha consists in not disclosing in the Articles of Inco rporation that Baylon was a mere trustee of the Americans, thus giving the impre ssion that Baylon subscribed to 60% of the capital stock. But contrary to the lo wer 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 authoriza tion 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 qualif ied 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 me n with corporate existence, but to its secondary franchise, or the privilege to operate as public utility after the corporation has already gone into being. Pri mary franchise refers to that franchise which invests a body of men with corpora te existence, while the secondary franchise is the privilege to operate as a pub lic utility after the corporation has already come into being. For the mere form ation 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. I n the absence of such obligation and of the alleged wrongful intent, Quasha cann ot be legally convicted of the crime with which he is charged. A corporation for med 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 Filip inos from the start. Said condition, may at any time be attained through the nec essary transfer of stocks. The moment for determining whether a corporation is e ntitled to operate as public utility is when it applies for a franchise, certifi cate or any other form of authorization for that purpose and that can only be do ne 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 t he government of primary and secondary franchise. As far as doctrinal pronouncem ents are concerned, any and all type of corporations may be incorporated, so lon g as the requirements for incorporation are fulfilled and that its purpose is la wful and not contrary to law or public policy. The violation of equity requireme nts with regard to entry into nationalized sectors as provided by the Constituti on 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. S EC 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 ind ividuals who compose the corporation and not in the corporation itself and canno t 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 convey ed 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 pub lic use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964). The Co nstitution 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 oper ate a public utility so long as it does not operate them to serve the public. Th ere 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 suppo sed to construct the LRT III on a Build-Operate-Transfer (BOT) basis. Subsequent ly, RA 6957 was enacted which provides for two schemes for the financing, constr uction and operation of government projects through private initiative and inves tment: Build-Operate-Transfer (BOT) or Build-Transfer (BT). DOTC issued a Depart ment Orders creating the Pre-qualification Bids and Awards Committee. EDSA LRT C onsortium 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 E DSA 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 revise d and another Supplemental Agreement was also contracted. According to the agreeme nts, the EDSA LRT III (MRT) will use light rail vehicles from abroad (Czech and Slovak Federal Republics) and will hav