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Chapter IV - Corporate Entity

Chapter IV - Corporate Entity

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Published by: Sui on Aug 10, 2008
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Chapter IV – The Corporate Entity
Theory of Corporate Entity: Its effects
A corporation has a juridical personality separate and distinct from theSHs or members who compose it
Issuance of certificate of incorporation marks beginning of thecorporation’s existence as a legal entity
Section 19.
Commencement of corporate existence.
- A private corporationformed or organized under this Code commences to have corporateexistence and juridical personality and is deemed incorporated from the datethe Securities and Exchange Commission issues a certificate of incorporationunder its official seal; and thereupon the incorporators,stockholders/members and their successors shall constitute a body politicand corporate under the name stated in the articles of incorporation for theperiod of time mentioned therein, unless said period is extended or thecorporation is sooner dissolved in accordance with law. (n)
Not affected by personal rights, obligations, and transactions
Stockholders have no claim on corporate property as owners—they onlyhave an inchoate right to it
A corporation has no interest in the individual property of itsstockholders, unless transferred to the corporation
A corporation, as a juridical person, is entitled to immunity againstunreasonable search and seizure
A corporation is civilly liable for torts in the same manner
Stockholders of F Guanzon v Register of Deeds
. 5 stockholders of FGuanzon executed a certificate of liquidation of the assets of thecorporation. By virtue of a resolution dissolving the corporation, they wish todistribute as liquidated dividends among themselves and in proportion totheir shareholdings, the assets of the corporation, which includes real estateproperties in Manila. The Register of Deeds however, upon presentment of the certificate of liquidation by the 5 stockholders, denied registration of theproperties to be distributed on 7 grounds, 3 of which were questioned by thestockholders: (1) no statement of the # of parcels of land to be distributed(2) registration fees iao P430.50 (3) doc stamp tax iao P940.45 (4) court judgment approving the dissolution and directing disposition of the assets. The stockholders claim that the certificate of liquidation merelypartitions/distributes the corporate assets among them because thecorporation has already been dissolved. Hence they need not comply withthe requirements imposed by the Register of Deeds and the LandRegistration Authority. The LRA counters that the distribution of thecorporate assets upon dissolution of the corporation, is ultimately atransfer/conveyance of property to the stockholders: W/N the certificate of liquidation involves a mere distribution of corporate assets or a transfer orconveyance of property.H: It is a transfer/conveyance of property. A corporation is a juridical personseparate and distinct from the stockholders. Properties registered in thename of the corporation are owned by it as a separate entity. The sharesheld by stockholders are their personal property and not the corporation,and it only typifies an aliquot part of the corporation’s property or the rightto share in the proceeds. The holder of such share is not the owner of anypart of the capital of the corporation, nor is he entitled to possession of anydefinite portion of its assets, neither is he a co-owner. Liquidation bystockholders after a corporation’s dissolution is not mere partitioning of community property, but already a conveyance or transfer of title to themfrom the corporation.
 The distribution of the corporate properties to the SHs was deemed notin the nature of a partition among co-owners, but rather a disposition bythe corporation to the SHs as opposite parties to a contract
Properties registered in the name of the corporation are owned by it asan entity separate and distinct from its members;
shares of stock are personal property, and NOT corporate property
share of stock typifies an aliquot part of the corporation’s property, orthe right to share in the proceeds to that extent when distributed
holder of shares is not the owner of any part of the capital of thecorporation, nor is he entitled to the possession of any definite portion of its property or assets
Caram v CA
A certain Barretto and Garcia contracted the services of respondent Arellano for his technical services to undertake a projectstudy for the formation of a corporation, the Filipinas Orient Airways. The study was then presented to Caram, who wanted to invest in thecorporation. The airline was eventually organized on the basis of theproject study with Caram spouses as major stockholders, andBarretto and Garcia as corporate officers. Arellano sued forcompensation due to him for his services in undertaking the study. TC ruled that Caram spouses are liable jointly and severally withBarretto and Garcia for P50K due to Arellano. Caram spouses claimthey were mere investors in the fledgling airline and were notinvolved in its formation nor in the project study, which was merelypresented to them to induce them to invest.I: W/N Caram spouses are solidarily liable with Barretto and Garciafor the compensation to Arellano.
H: No. Filipinas Orient is a bona fide corporation, the principalstockholders of which are the Carams. As such, the corporation,should alone be liable for its corporate acts as duly authorized by itsofficers. It has a separate juridical personality and its principalstockholders should not be liable for the acts thereof. The Caramsdid not contract the services of Arellano; it was only the results of the study made by Arellano that was presented to them to inducethem to invest.
Palay Inc v Clave
Palay Inc. through its President Onstott executedifo Dumpit a contract to sell a parcel of land in Crestview HeightsSubd in Antipolo for P23300, with 9% interest, payable with adownpayment and monthly installments. The contract contains aprovision that should Dumpit default in payment of any monthlyinstallment after the lapse of 90 days from the expiration of the 1month grace period, Palay Inc will automatically rescind the contractwithout need of notice and will forfeit all payments made. Dumpitpaid the downpayment and made several payments, but soondefaulted. 6 years after the last payment, Dumpit wanted to updateall his overdue accounts, but was told by Palay Inc that the contracthad already been rescinded in accordance with the contract and theland had already been sold. Dumpit filed a complaint with the NHAwhich held the contract void for absence of judicial or notarialdemand and instructed Palay Inc and Onstott to return to Dumpit allhe has paid plus 12% interest from filing of complaint. Palayappealed to OP which affirmed the NHA resolution.I: W/N Onstott should be held solidarily liable with Palay IncH: No. GR—a corporation may not be made to answer for acts andliabilities of its stockholders or those of the legal entities to which itmay be connected and vise-versa. Exception—the veil of corporatefiction may be pierced when:1.it is used as a shield to further an end subversive of justice2.it is used for purposes not intended by the law that created it3.it is used to defeat public convenience, or:4.justify a wrong5.protect fraud6.defend crime7.perpetuate frad or confuse legitimate issues8.circumvent the law or perpetuate deception9.use as an alter-ego, adjunct or business conduit for the solebenefit of the stockholdersthe SC did not find any badges of fraud on the part of Palay andOnstott. They had literally and mistakenly relied on paragraph 6 of the contract when it rescinded the same, and which was held to bevoid by the NHA and OP. Onstott was made liable because he wasthen the President and appeared to be the controlling stockholder of Palay Inc. No proof was found that Onstott used the corporation todefraud Dumpit. Unless sufficient proof appears on record that anofficer has used the corporation to defraud a third party, he cannotbe made personally liable just because he appeared to be the majorstockholder. Mere ownership by a single stockholder or by anothercorporation of all or nearly all of the capital stock of a corporation isnot of itself sufficient ground for disregarding the separate corporatepersonality.
 JG Summit Holdings Inc v CA
. The National Investment and DevelopmentCorporation (NIDC), a government corporation, entered into a Joint VentureAgreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan(KAWASAKI) for the construction, operation and management of the SubicNational Shipyard, Inc. (SNS) which subsequently became the PhilippineShipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDCand KAWASAKI will contribute P330 million for the capitalization of PHILSECOin the proportion of 60%-40% respectively. It also contains a proviso wherebyneither party to the JVA shall sell transfer or assign all or any part of itsinterest in SNS to any third party without giving the other under the sameterms the right of first refusal. NIDC transferred all its rights, title andinterest in PHILSECO to the Philippine National Bank (PNB). Such interestswere subsequently transferred to the National Government pursuant toAdministrative Order No. 14. On December 8, 1986, President Corazon C.Aquino issued Proclamation No. 50 establishing the Committee onPrivatization (COP) and the Asset Privatization Trust (APT) to take title to, andpossession of, conserve, manage and dispose of non-performing assets of the National Government. Thereafter, on February 27, 1987, a trustagreement was entered into between the National Government and the APTwherein the latter was named the trustee of the National Government'sshare in PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Government'sshareholdings in PHILSECO increased to 97.41% thereby reducingKAWASAKI's shareholdings to 2.59%.In the interest of the national economy and the government, the COP andthe APT deemed it best to sell the National Government's share in PHILSECOto private entities. After a series of negotiations between the APT andKAWASAKI, they agreed that the latter's right of first refusal under the JVA be"exchanged" for the right to top by five percent (5%) the highest bid for the
said shares. They further agreed that KAWASAKI would be entitled to name acompany in which it was a stockholder, which could exercise the right to top.On September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc.(PHI) 1 would exercise its right to top. The Asset Specific Bidding Rulesprovide among others that the subject of the sale is the NG's 87.67% equityin PHILSECO, that the highest bid shall be subject to the final approval of theAPT Board of Trustees and COP, and that the indicative price is P1.3B.At the public bidding, JG Summit submitted a bid of P2.03B with anacknowledgement of Kawasaki's right to top. JG Summit then informed APTthat it was protesting the offer of PHI to top its bid on the grounds that: (a)the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui,Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the lastfour (4) companies were the losing bidders thereby circumventing the lawand prejudicing the weak winning bidder; (b) only KAWASAKI could exercisethe right to top; (c) giving the same option to top to PHI constitutedunwarranted benefit to a third party; (d) no right of first refusal can beexercised in a public bidding or auction sale; and (e) the JG Summitconsortium was not estopped from questioning the proceedings.H: The SC upheld the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all, the right of first refusal is aproperty right of PHILSECO shareholders, KAWASAKI and NIDC, under theterms of their JVA. This right allows them to purchase the shares of their co-shareholder before they are offered to a third party. The agreement of co-shareholders to mutually grant this right to each other, by itself, does notconstitute a violation of the provisions of the Constitution limiting landownership to Filipinos and Filipino corporations. As PHILYARDS correctly putsit, if PHILSECO still owns land, the right of first refusal can be validlyassigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-DummyLaws, absent proof of any fraudulent intent. The transfer could be madeeither to a nominee or such other party which the holder of the right of firstrefusal feels it can comfortably do business with. Alternatively, PHILSECOmay divest of its landholdings, in which case KAWASAKI, in exercising itsright of first refusal, can exceed 40% of PHILSECO's equity. In fact, it caneven be said that if the foreign shareholdings of a landholding corporationexceeds 40%, it is not the foreign stockholders' ownership of the shareswhich is adversely affected but the capacity of the corporation to own land— that is, the corporation becomes disqualified to own land. This findssupport under the basic corporate law principle that the corporation and itsstockholders are separate juridical entities. In this vein, the right of firstrefusal over shares pertains to the shareholders whereas the capacity toown land pertains to the corporation. Hence, the fact that PHILSECO ownsland cannot deprive stockholders of their right of first refusal. No lawdisqualifies a person from purchasing shares in a landholding corporationeven if the latter will exceed the allowed foreign equity, what the lawdisqualifies is the corporation from owning land. This is the clear import of the Constitution.
Tramat Mercantile Inc v CA
. On 09 April 1984, Melchor de la Cuesta,doing business under the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. (Tramat), one (1) unit HINOMOTO TRACTOR Model MB1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat'spresident and manager, issued a check for P33,500.00 (apparently replacingan earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor,together with an attached lawn mower fabricated by it, to the MetropolitanWaterworks and Sewerage System ("NAWASA") for P67,000.00. David Ongcaused a stop payment of the check when NAWASA refused to pay thetractor and lawn mower after discovering that, aside from some stateddefects of the attached lawn mower, the engine (sold by de la Cuesta) was areconditioned unit. On 28 May 1985, de la Cuesta filed an action for therecovery of P33,500.00, as well as attorney's fees of P10,000.00, and thecosts of suit. Ong, in his answer, averred, among other things, that de laCuesta had no cause of action; that the questioned transaction was betweenplaintiff and Tramat Mercantile, Inc., and not with Ong in his personalcapacity; and that the payment of the check was stopped because thesubject tractor had been priced as a brand new, not as a reconditioned unit. TC ordered Ong to pay the plaintiff the sum of P33,500.00 with legal interestthereon at the rate of 12% per annum from July 7, 1984 until fully paid.H: It was an error to hold David Ong jointly and severally liable with TRAMATto de la Cuesta under the questioned transaction. Ong had there so acted,not in his personal capacity, but as an officer of a corporation, TRAMAT, witha distinct and separate personality. As such, it should only be thecorporation, not the person acting for and on its behalf, that properly couldbe made liable thereon. Personal liability of a corporate director, trustee orofficer along (although not necessarily) with the corporation may so validlyattach, as a rule, only when —1. He assents (a) to a patently unlawful act of the corporation, or (b) for badfaith, or (c) for conflict of interest, resulting in damages to the corporation,its stockholders or other persons;2. He consents to the issuance of watered stocks or who, having knowledgethereof, does not forthwith file with the corporate secretary his writtenobjection thereto;3. He agrees to hold himself personally and solidarily liable with thecorporation; 6 or4. He is made, by a specific provision of law, to personally answer for hiscorporate action.In the case at bench, there is no indication that petitioner David Ong couldbe held personally accountable under any of the abovementioned cases.

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