OUTLINE ON PHILIPPINE CORPORATE LAW1
I. HISTORICAL BACKGROUND
Atty. CESAR L. VILLANUEVA
1. The Philippine Corporate Law: Sort of Codification of American Corporate Law When the Philippines came under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. xHarden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adapted to the changing times. 3. The Corporation Code The present Corporation Code, or Batas Pambansa Blg. 68, became effective on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a chapter on close corporations. 4. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen in the world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world.
See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994). 1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code). 2. Tri-Level Existence of Corporation (a) Aggregation of Assets and Resources (b) Business Enterprise or Economic Unit (c) Juridical Entity 3. Relationships Involved in Corporate Setting (a) Juridical Entity Level, which views the State-corporations relationship (b) Contractual Relationship Level, which considers that the corporate setting is at once a contractual relationship on four (4) levels: - Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency; - Between the corporation and its shareholders or members;
Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines. 2 The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.
- Between and among the shareholders in a common venture; and - Between the corporation and third-parties or "outsiders", which is essentially governed by Contract Law. 4. Theories on Formation of Corporation: (a) Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 ) To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (x-cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 ). Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws. xInternational Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997). (b) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 ) Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution of the property of a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988). A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997). 5. Four Attributes of Corporation from Statutory Definition: (a) A corporation is an artificial being (b) Created by operation of law (c) With right of succession (d) Only has powers, attributes and properties expressly authorized by law or incident to its existence 6. Advantages and Disadvantages of Corporate Form: (a) Four Basic Advantageous Characteristics of Corporate Organization: (i) Strong Legal Personality - Entity attributable powers - Continuity of existence - Purpose The corporation was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends; and has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000. (ii) Centralized Management. (iii) Limited Liability to Investors
One advantage of a corporate business organization is the limitation of an investor’s liability to the amount of the investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998). (iv) Free Transferability of Units of Ownership for Investors (b) Disadvantages: (i) Abuse of corporate management (ii) Abuse of limited liability feature (iii) Cost of maintenance (iv) Double taxation Dividends received by individuals from domestic corporations are subject to final 10% tax (Sec. 24(B)(2), NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), NIRC of 1997). In addition, there has been a re-imposition of the ―improperly accumulated earnings tax,‖ under Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually. 7. Compared With Other Media of Business Endeavors - Distribution of Risk, Profit and Control (a) Sole Proprietorships (b) Business Trusts (Article 1442, Civil Code) (c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) - Can a defective attempt o form a corporation result at least in the formation of a partnership? Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989). (d) Joint Ventures Joint venture is defined as an association of persons or companies jointly undertaking 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. the acts of working together in a joint project. xKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), citing BLACK’S LAW DICTIONARY, Sixth ed., 839. (e) Cooperatives (Art. 3, R.A. No. 6938) (f) Sociedades Anónimas A sociedad anónima was considered a commercial partnership, a sort of a corporation, ―where upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical person—an artificial being, invisible, intangible, and existing only in contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a corporation—not 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 person—a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation.‖ xMead v. McCullough, 21 Phil. 95,106 (1911). The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956) Our Corporation Law recognizes the difference between sociedades anónimas and corporations and will not apply legal provisions pertaining to the latter to the former xPhil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).
(g) Cuentas En Participacion A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless such manager formally transfers his right to them. xBourns v. Carman, 7 Phil. 117 (1906).
III. NATURE AND ATTRIBUTES OF A CORPORATION
1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution) 2. Corporation as a Person: (a) Entitled to due process The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are "persons" within the scope of the guaranty insofar as their property is concerned." xSmith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Equal protection clause (xSmith Bell & Co. v. Natividad, 40 Phil. 136 ). (c) Unreasonable Searches and Seizure Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but that the officers of a corporation from which documents, papers and things were seized have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby; and the objection to an unlawful search is purely personal and cannot be availed of by such officers of the corporation who interpose it for their personal interests. xStonehill v. Diokno, 20 SCRA 383 (1967). A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from xHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. (d) But a corporation is not entitled to privilege against self incrimination ―It is elementary that the right against self-incrimination has no application to juridical persons.‖ Bataan Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-235 (1987). While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privilege. xHale v. Henkel, 201 U.S. 43 (1906); xWilson v. United States, 221 U.S. 361 (1911); xUnited States v. White, 322 U.S. 694 (1944). 3. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB v. CA, 83 SCRA 237 (1978).
even as regards that species of tort of which malice is an essential element. xSolid Homes. 301 SCRA 589 (1999). 129 (1922). v. In Asset Privatization Trust v. Rubber & Plastic Corp. 27 Phil. tort is a breach of a legal duty. 44 Phil. v. a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. the Supreme Court seemed to have gone back to the original doctrine that ―[u]nder Article 2217 of the Civil Code. no senses. fright. When a criminal statute forbids the corporation itself from doing an act. its stockholder who was actively engaged in the management or operation of the business should be held personally liable. if besmirched. 260 SCRA 714 (1996). being an artificial person and having existence only in legal contemplation. NLRC. it has no feelings. serious anxiety. 607 . The statement in People v. sorrows. xSergio F. moral shock or social humiliation which are basis for moral damages under Art. v. and griefs of life—all of which cannot be suffered by respondent bank as an artificial person. 54 Phil. resulting in social humiliation‖ is an obiter dictum. 269 SCRA 564 (1997). G. no senses. Tan Boon Kong. People v. Inc. but which requires a clear proof of malice or bad faith. However. Sia v. Moral damages are granted in recompense for physical suffering. no emotions.‖ Essentially. v. It cannot. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. therefore. 236 SCRA 602 (1994). the prohibition extends to the board of directors. When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283 of the Labor Code which mandates that the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or financial reverses. 121413. Articles 102 and 103. Naguiat v. which can be experienced only by one having a nervous system. being an artificial person. Concepcion. that a corporation may recover moral damages if it ―has a good reputation that is debased. Co." xPrime White Cement Corp. consequently. it does not follow from this. Criminal Liability of a Corporation (West Coast Life Ins. ―tort‖ consists in the violation of a right given or the omission of a duty imposed by law. v. PNB [130 Phil. Philippine National Bank. serious anxiety. however. may be a ground for the award of moral damages. . moral shock. and similar injury. Inc. 29 January 2001. 22 SCRA 359 (1968). "there can be no award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation. vo Intermediate Appellate Court. wounded feelings. 121 SCRA 655 . Reyes. Court of Appeals.‖ The award of moral damages cannot be granted in favor of a corporation because. xTimes. Revised Penal Code). A corporation. xABS-CBN Broadcasting Corp. 4. Court of Appeals. Court of Appeals. 5. As a general rule. Inc. a corporation may have a good reputation which. experience physical suffering and mental anguish. 2217 of the Civil Code. While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself. Even when the corporation's reputation and goodwill have been prejudiced. Recovery of Moral Damages and Other Damages A corporation. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co.‖ The possible basis of recovery of a corporation would be under Articles 19. 401 (1914). being an artificial person and having existence only in legal contemplation. has no feelings.
. 275 SCRA 267 (1997). Simply stated. Court of Appeals. social humiliation. 39 SCRA 303 (1971). we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated. wounded feelings. therefore. moral damages include besmirched reputation which a corporation may possibly suffer. CA. xLBC Express. mental anguish. Court of Appeals. fright. 220 SCRA 103. xPeople v. Court of Appeals. no emotions. mental anguish. v. and to each director separately and individually. 300 SCRA 579 (1998). No criminal suit can lie against an accused who is a corporation. Hurd. it cannot experience physical suffering and mental anguish. v.5
Our jurisprudence is wanting as to the definite scope of ―corporate tort. cannot experience physical sufferings. besmirched reputation. 366 (1968)]. . No. xAcme Shoe. xMambulao Lumber Co. 20 and 21 of the Civil Code. Philippine Commercial International Bank vs. In this case.R. 113-114 (1993). Mental suffering can be experienced only by one having a nervous system and it flows from real ills. v.
Business Corp. 11(1). that is. Jr. and the franchise itself which is owned by the corporation as the grantee thereof.. 1991). The LRC and the Register of Deeds of Davao. 140. continues to exist. 596 ). 2). If CATV operators offer public
. 576. DOJ Opinion 163. 1987 Constitution. XVI. 732 (1990). 8-9-95. of 1982. Since stockholders own the shares of stock. DOJ Opinion No. 6. Court of Appeals. the controlling membership should be composed of Filipino citizens. But the special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property. transfer or assign the property of a corporation. 58 (1955) (b) Public Utilities (Sec.D. 31. s. Inc. except such special or secondary franchises as are charged with a public use. v. Imperial Insurance. 4—December. Sec. 1987 Constitution) Sources: P. s. it does not requires a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. 436. cannot be allowed registration for being violation of the constitutional prohibition and it would not be violation of the freedom of religion clause. XXV SEC QUARTERLY BULLETIN. 301 SCRA 459 (1999). The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos. 36. In law there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public.D.‖ Philippine Long Distance Telephone Co. The franchise is not thereby invalidated by the transfer of the shares. Art. whose trustees are foreigners. xJ. A corporation has a personality separate and distinct from that of each stockholder. National Telecommunications Commission. as amended by PDs 191 and 197. No. s. SEC Opinion dated 15 July 1991. as an entity. and the spirit of the Constitution demands that in the absence of capital stock. SEC Opinion dated 24 March 1983. 11 SCRA 634 (1964). however. Quasha. Nationality of Corporation: COUNTRY UNDER WHOSE LAWS INCORPORATED (Sec. P. under item 920(a) thereof provides that ―Cable TV operations shall be governed by E. 123). even if the original stockholders had transferred their shares to another group of shareholders. 1973. 333 ). (c) Mass Media (Sec. The Constitution. they may dispose of the same as they see fit. which regulates and supervises the cable television industry in the Philippines under Section 2 of Executive Order No. Cable Industry The National Telecommunications Commission (NTC). In other words.‖ xRegister of Deeds of Rizal v. 120. like its franchise. Article XII.6
that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. s. is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. Ung Sui Si Temple. the sale or transfer of which requires Congressional sanction. Article XII. v.R. Tatad v. v. People v. the right to exist as such. since it is admitted that its members are of foreign nationality. at p. Section 2. Garcia. xCometa v. which are owned by stockholders. (No. 97 Phil. It has the right of continuity or perpetual succession Corporation Code. 102 Phil. the franchise granted to the corporation subsists as long as the corporation. 1987. The donation of land to an unincorporated religious organization. 2. 205. Roman Catholic Apostolic Administrator of Davao. 243 SCRA 436 (1995) ―A distinction should be made between shares of stock. in no uncertain terms. 1997. the sale of which requires only NTC approval. has provided under NTC Memorandum Circular No. 93 Phil. They may not. 1987 Constitution. Exceptions: The TEST OF CONTROLLING OWNERSHIP Applies In: (a) Exploitation of Natural Resources (Sec. The primary franchise of a corporation. Sec.S. 11.L. The fact that the religious association ―has no capital stock does not suffice to escape the constitutional inhibition. however. 190 SCRA 717. requires a franchise for the operation of a public utility.
Court of Appeals. 296 SCRA 631. (h) Special Classifications (Sec. or corporations. dated 14 December 1989. R. 1. G. xDavis Winship v. R. considered CATV as ―a form of mass media which must. 2d 70. Federal Communications Commission. or serve as a mere alter ego or business conduit of a person or an instrumentality. v. On equitable considerations. XXIV SEC QUARTERLY BULLETIN (No.. 3(a). series of 1999. SEC Opinion. 604 ). Huenefeld & Co. Christern.
. Therefore. 80 Phil. Philippine Trust Co. SEC Opinion.7
telecommunications services. 3. 19 (No. (f) Investment Test as to "Philippine Nationals" (Sec.‖
Under DOJ Opinon No.A. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. such as the application of the piercing doctrine. xLim v. 645 (1998). xSan Juan Structural and Steel Fabricators. illegality or inequity. v. Francisco. NLRC. be owned and managed by Filipino citizens. Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members—by legal fiction and convenience it is shielded by a protective mantel and imbued by law with a character alien to the persons comprising it. Inc. agency or adjunct of another corporation. centralized management. wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING VEIL OF CORPORATE FICTION
See relevant portions of VILLANUEVA. s. 323 SCRA 102 (2000).. A. 2 -June 1990) Up to what level do you apply the grandfather rule? (Palting v. Inc. limited liability. Foreign Investment Act of 1992) (g) The Grandfather Rule (Opinion of DOJ No. 1987 Constitution) (e) War-Time Test (Filipinas Compania de Seguros v. 7042.. June 1993). Importance of Protecting Main Doctrine: The ―separate juridical personality‖ includes: right of succession. 1March 1990). xHaw Pia v. necessarily dilutes any or all of those attributes. 140)
IV. et al. 54 . Sources: Sec. confuse legitimate issues. San Jose Petroleum Inc. Art. and generally free transferability of shares of stock. DBP v. v. Article 44. Inc. 89 Phil. 186 SCRA 841 (1990). Main Doctrine: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS. 90 Phil. Mejia.J. theefore. 95. 37 ATENEO L. XXIV SEC QUARTERLY BULLETIN (No.‖ (d) Advertising Business (Sec. dated 19 January 1989. defeat public convenience. 18. XVI. the Secretary of Justice. Applications: (a) Majority Ownership of or Dealings in Shareholdings: Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees.(b). telecommunications entity. 1989. Court of Appeals. However. No. dated 6 November 1989. 14 August 2001. taking its cue from Allied Broadcasting. 435 F. cooperatives or associations. Restatement of the Doctrine of Piercing The Veil of Corporate Fiction. the veil can be disregarded when it is utilized as a shield to commit fraud. 744 . the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. 2. China Banking Corp. 2. One of the advantages of a corporate form of business organization is the limitation of an investor’s liability to the amount of the investment. an undermining of the separate juridical personality of the corporation. Civil Code 2. 141617. 18 SCRA 924 )... 11(2).
nor warrant the piercing of the veil of corporate fiction. 72 SCRA 347 ). v. 895. Intermediate Appellate Court. Inc. (d) Being a Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one's property also of the corporation. Court of Appeals. xLaguio v. v. Collector of Internal Revenue. Register of Deeds of Manila. Inc. since the disposing stockholder has no personal obligation to the creditor. (e) Properites. No. even a scintilla of substantiation. Inc. 323 SCRA 102 (2000). As a general rule." xManila Gas Corp. the corporations are to be rightly treated as distinct and separate from each other. for they are separate entities. and the corporation are separate entities. Obligations and Debts: Likewise. Dalisay.. xTraders Royal Bank v. Stockholders of F. xFrancisco v. "A corporation has a personality distinct from that of its stockholders. much less. xLim v. Inc. xAsionics Philippines. NLRC . R. v. Guanzon and Sons. even when the corporation is organized for the benefit of the members. 262 SCRA 715 (1996). 898 (1936). (b) Dealings Between the Corporation and Stockholders: The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. G. Araneta. a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities which it may be connected and vice-versa. CA. xRemo. 152 SCRA 487 (1987). xSaw v. CA. and vice-versa. or circumvent the law. It must be considered as settled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign corporations as stockholders are subject to the payment of the income tax. The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. NLRC. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. the exemption clause to the charter [of the domestic corporation] notwithstanding. xManila Hotel Corp. v. Sulo ng Bayan v. 62 Phil. National Labor Relations Commission. Court of Appeals. as an individual. v. Good Earth Emporium. 290 SCRA 164 (1998). 194 SCRA 544 (1991) The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation. Mejia. that the parties interest
. 14 August 2001. xCruz v. 141617. Inc. since that president. 195 SCRA 740 ) The interests of payees in promissory notes cannot be off-set against the obligations between the corporations to which they are stockholders absent any allegation. enabling the taxing power to reach the latter when they receive dividends from the corporation. Jr. v. does not make such stockholder personally liable for the corporate debt. Stockholders have no personality to intervene in a collection case covering the loans of the corporation on the ground that the interest of shareholders in corporate property is purely inchoate. 127 SCRA 390 (1984). xSunio v. a corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud. 6 SCRA 373 (1962). Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud. 332 SCRA 427 (200)
(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation do not extend to its stockholders. v. 172 SCRA 405. CA. NLRC.8
The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation. 343 SCRA 1 (2000).. 177 SCRA 789 (1989). xARB Constructions Co. and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. 413-414 (1989).
No. Umali v. the presumption of conclusiveness of said titles in favor of said corporations should stand undisturbed. xLim v.. G. 300 SCRA 579. It is a basic postulate that a corporation has a personality separate and distinct from its stockholders. or a business conduit for the sole benefit of the stockholders. the corporate entity is being used as a cloak or cover for fraud or illegality. 21 March 2001.
B. Therefore. R. in the case at bar. 142 Fed. G. Court of Appeals. 272 SCRA 333 (1997). 247 ). In this case.R. were it not for the existing corporate fiction. Milwaukee Refrigerator Transit Co. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if. IV v. since the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. Source of Incantation: xUnited States v. Young.R. also xRamoso v. Court of Appeals. Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporations. the stockholders of the corporation have no standing to recover for themselves moral damages. Umali v. to avoid liability arising from debt. No. in the absence of any cogency to shred the veil of corporate fiction. 189 SCRA 529 (1990). or to promote unfair objectives or otherwise to shield them. However. No. 617 (1998). xRobledo v. and that the former acquired the properties sought to be reconveyed to FGSRC in violation of directorspetitioners’ fiduciary duty to FGSRC. an adjunct. it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners. 117416. 238 SCRA 52 (1994) ―The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. Mejia. Court of Appeals. G. it would amount to the appropriation by. 3. G. No. 2. xAsset Privatization Trust v. instead of holding certain individuals or person responsible for
. When Piercing Doctrine Not Applicable: (a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other remedies are still available. Court of Appeals. CA. v. as alleged in the present case. 323 SCRA 102 (2000). This Court has pierced the veil of corporate fiction in numerous cases where it was used. NLRC. as a justification for a wrong. Indophil Textile Mill Workers Union-PTGWO v. Piercing the Veil of Corporate Fiction: 1. (b) Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts. CA. 269 SCRA 15 ) Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily. 8 December 2000. 205 SCRA 697 (1992). 189 SCRA 529 (1990). even when the foreclosure on the assets of the corporation was wrongful and done in bad faith. Calica. and the distribution to. Nature of the Piercing Doctrine (Traders Royal Bank v. 116124-25. or distinguishes one corporation from a seemingly separate one. Otherwise. (c) Piercing is not available when the personal obligations of an individual are sought to be enforced against the corporation. (f) Third-Parties: The fact that respondents are not stockholders of the disputed corporations does not make them non-parties to the case. xIndustrial and Development Corp. 131889. xLim v. 22 November 2000. xReynoso. 14 August 2001. such stockholders of part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities. 141617. when made use of as a shield to perpetrate fraud and/or confuse legitimate issues. Court of Appeals.9
in the corporation are so considerable as to merit a declaration of unity of their civil personalities. to avoid a judgment credit.R. Court of Appeals. to avoid inclusion of corporate assets as part of the estate of a decedent. 323 SCRA 102 (2000). among others. Gochan v. Court of Appeals. or as an alter ego. xSee also Francisco v. they could be subject to.
Decree No. xRamoso v. Sugay & Co. Cruz v.F. Gregorio Araneta. 8 December 2000. 106 Phil. v. the situation has been reversed. xDevelopment Bank of the Philippines vs. This is elementary. The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC a the petition for suspension of payments filed under Section 5(e) of Pres. v. xTantoco v. Consequences and Types of Piercing Cases: Umali v.
(b) Classification of the Piercing Cases: (i) When the corporate entity is used to commit fraud or to do a wrong ("fraud cases"). 3. justify wrong. officers and incorporators concerned. 290 SCRA 198 (1998). Fraud Cases:
. 211 SCRA 470 ). (g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff.R. Reyes. Tuason de Paterno and Vidal. as said doctrine only applies when such corporate fiction is used to defeat public convenience. (d) To disregard the separate juridical personality of a corporation.‖ xUnion Bank of the Philippines v. 91 Phil. 4. on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. xLuxuria Homes. Dalisay. Court of Appeals. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors. 16 August 2001. 83 (1999). Changing of the petitioners’s subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity. 309 SCRA 72. The three cases may appear together in one application. G.) Inc. Court of Appeals.‖ Francisco Motors Corp. Kaisahan ng Mga Manggagawa sa La Campana.. Hence. CA. ―The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced. No. (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted to justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties. 172 SCRA 876 (1989). Court of Appeals. (ii) When the corporate entity is merely a farce since the corporation is merely the alter ego. the wrongdoing must be clearly and convincingly established. v Court of Appeals. xVillanueva v. It cannot be presumed. G. The theory of corporate entity was not meant to promote unfair objectives or otherwise. protect fraud or defend crime. v. BoyerRoxas v. Inc. No. and cannot be employed to perpetrate fraud or a wrong. 12 SCRA 700 (1964). 152 SCRA 482 (1987). 786 (1952). nor to shield them. 902-A. (f) Piercing doctrine is meant to prevent fraud. and (iii) When the piercing the corporate fiction is necessary to achieve justice or equity ("equity cases"). 126200. 496 (1946). 189 SCRA 529 ) (a) The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes. it appears to us that the doctrine has been turned upside down because of its erroneous invocation. 198 (1959). 77 Phil.R. Court of Appeals. Adre. See R. Koppel (Phil. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Yatco. Inc. business conduit or instrumentality of a person or another entity ("alter ego cases"). Court of Appeals. 117416.10
an alleged corporate act. 302 SCRA 315 (1999). but only for the particular transaction or instance for which the doctrine was applied. v.
entered into a contract with another corporation through fraud and false representations. etc. Inc. the corporation and the individual should be deemed the same. 323 SCRA 102 (2000). G. NLRC. Villa Rey Transit.Why is there inordinate showing of alter-ego elements? (e) Guiding Principles in Fraud Cases: (i) There must have been fraud or an evil motive in the affected transaction. Shareholders. De Leon v. 252 SCRA 259 (1996). 160 (1953). v. 163 SCRA 205 (1988). business conduit or alter ego of another corporation. cannot be allowed to trifle with court processes. Court of Appeals. v. Jarencio. xAlso Lim v. 11 SCRA 704. (c) Employment of same workers. both companies have the same owners and business address. . (d) The Supreme Court found the following facts to be legal basis to pierce: One company was merely an adjunct of the other. Alter-Ego Cases: (a) Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner. NLRC. Manila Hotel Corporation v. Namarco v. the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. 5. The tests in determining whether the corporate veil may be pierced are: (1) the defendant must have control or complete domination of the other corporation’s finances. the former provided with security guards to safeguard the latter’s premises. . 25 SCRA 845 (1968).11
(a) Acts by the Controlling Shareholder: Where a stockholder.. Commissioner of Internal Revenue v. Court of Appeals. by virtue of a contract for security services. particularly where. (b) One cannot evade civil liability by incorporating properties or the business. the fiction of separate and distinct corporation entities should be disregarded. 634 (1923). Affiliates (Reynoso.. 30 May 2001. Kaisahan ng Manggagawa. La Campana Coffee Factory v. xTan Boon Bee & Co. and bust their newlyorganized union which was then beginning to become active in demanding the company’s compliance with Labor Standards laws. policy and business practices with regard to the transaction attached. 343 SCRA 1 (2000). 112661. (c) The veil of corporation fiction may be pierced when used to avoid a contractual commitment against non-competition. the purported sale of the shares of the former stockholders to a new set of stockholders who changed the name of the corporation appears to be part of a scheme to terminate the services of the security guards. (2) control must be used by the defendant to commit fraud or wrong. Ltd. 116124-25. Court of Appeals. No. Willets and Patterson.. G. No. Norton and Harrison. 44 Phil.R. NLRC. 22 November 2000. Palacio v. such stockholder shall be liable jointly and severally with his co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Tomas Lao Construction v. 93 Phil. 5 SCRA 1011 (1962). (e) Parent-Subsidiary Relations. Ferrer. Arnold v. 278 SCRA 716 ). The corporation veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. and the mere proof of control of the corporation by itself would not authorize piercing. whether suing as the majority in direct actions or as the minority in a derivative suit. and (ii) The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders. as in this case.R. IV v. single place of business. Associated Finance Co. 19 SCRA 962 (1967). and (3) the aforesaid control or breach of duty must be the proximate cause of the injury or loss complained of. Fely Transportation Co. who has absolute control over the business and affairs of the corporation. (b) When the corporation is merely an adjunct.
. xFirst Philippine International Bank v.
31 July 2001. v. (k) Summary of Probative Factors: Philippine National Bank vs. agency conduit or adjunct of the other. the first being merely considered as the instrumentality. disregard the legal fiction that two corporations are distinct entities and treat them as identical. No. 7. Inc. 9 Phil... 104 SCRA 354 (1981). 97 (1946). xRamoso v. No. xAzcor Manufacturing. 8 December 2000. CIR. Garcia. 303 SCRA 26 (1999). (i) Parent-subsidiary relationship. CA. 117416. appropriately pleaded. 216 SCRA 70 (1992). v. v.R. xMarvel Building v. et al. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity. Yatco. (l) Guiding Principles in Alter-Ego Cases: (i) The doctrine applies in this case even in the absence of evil intent. the corporation fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues. WCC. v. it would be discarded and the two (2) corporations would be merged as one. G. there was much confusion as to the proper employment of the claimant. NLRC. as in this case. Ritratto Group. Whether the existence of the corporation should be pierced depends on questions of facts. 142616. 13 SCRA 291 (1965). In this case. Court of Appeals. because of the actions of management of the two corporations. This fiction cannot be extended to a point beyond its reason and policy. xGuatson International Travel and Tours. The presumption is that the stockholders or officers and the corporation are distinct entities. 1 SCRA 722 (1961).. v. Where. McConnel v. (d) Use of nominees. Court of Tax Appeals 1 SCRA 160 (1961). conducted. v. (b) When used to raise technicalities. 2 SCRA 632 (1961). (iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. xRamirez Telephone Corp. 29 SCRA 191 (1969). Court of Appeals. Equity Cases: (a) When used to confuse legitimate issues. Inc. Inc. Inc. 1 SCRA 723 (1961). both law and equity will. Bank of America. v. (h) Thinly-capitalized corporations. 6. xConcept Builders. (j) Affiliated companies. Inc. (f) Mixing of bank deposit accounts. 181 SCRA 669 (1990). xEmilio Cano Ent. and controlled by the same parties.R. Court of Appeals. when necessary to protect the rights of third persons.). McConnel v. NLRC. (e) Avoidance of tax. 77 Phil.12
The doctrine that a corporation is a legal entity or a person in law distinct from the persons composing it is merely a legal fiction for purposes of convenience and to subserve the ends of justice.
. (g) Where it appears that two business enterprises are owned. David. Inc. Koppel (Phil. xPhilippine Veterans Investment Development Corporation v. 376 (1951). Telephone Engineering and Service Co. it applies because of the direct violation of a central corporate law principle of separating ownership from management. Piercing Doctrine and Due Process Clause (a) The need to bring a new case against the officer. Collector of Internal Revenue. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. 257 SCRA 149 (1996). xLiddell & Co. xSibagat Timber Corp. NLRC. (ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity. G. others cannot also be expected to be bound by the separate juridical entity. v. 230 SCRA 815 (1990). V. Yutivo Sons Hardware v.
201 SCRA 487 (1991). Civil Service Commission. NLRC. Emilio Cano Enterprises v. 312 SCRA 47 (1999). (c) Private Corporation (Sec. such that government corporations created by special charter are subject to the Civil Service Law. 91 Phil. 46 Phil. xBoy Scouts of the Philippines v. Corp. the fact that it received a special charter from the government. or private in nature is simple. (b) Quasi-public corporations xMarilao Water Consumers Associates v. Court of Appeals. xArcilla v. IAC. the employees are subject to the Civil Service Law. 201 SCRA 593 (1991).
. v. Act 1459) A government-owned or -controlled corporation when organized under the Corporation Code is still a private corporation. CLASSIFICATIONS OF CORPORATIONS
1. v. 1459) Organized for the government of the portion of the state (e. xCervantes v.g. 13 SCRA 291 (1965). xBliss Dev. Act No. 583 (1924). 3. The doctrine that employees of government-owned and -controlled corporations. civic and social development of the youth which constitute a very substantial and important part of the nation. In Relation to the State: (a) Public corporations (Sec. and its employees are under the jurisdiction of the Civil Service Commission.. Auditor General. The test to determine whether a corporation is government owned or controlled. the corporation is not denied due process. Calleja. A private corporation is created by operation of law under the Corporation while a government corporation is normally created by special law referred to often as a charter. but it also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations such as the National Development Company or the National Steel Corporation. barangay. whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code. 359 (1952).. 198 SCRA 211 (1991). 3. xNational Coal Co. city and province) Majority shares by the Government does not make an entity a public corporation. or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions. NLRC. and that its purpose are of public character. NLRC. Court of Appeals. or under the 1987 Administrative Code as an instrumentality of the Government. (c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. The present doctrine in determining whether a government-owned or -controlled corporation is subject to the Civil Service Law is the manner of its creation. Court of Industrial Relations. it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state. xPNOC-Energy Development Corp. Therefore. xDavao City Water District v. and are compulsory members of the Government Service Insurance System. xCamparedondo v. But being a government-owned or controlled corporation makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. is may still be considered as such. 196 SCRA 176 (1991). 215 SCRA 120 (1992). 201 SCRA 437 (1991) Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government.13
(b) When corporate officers are sued in their official capacity when the corporation was not made a party. and that its funds and assets are not considered government in nature and not subject to audit by the COA. Collector of Internal Revenue. for they pertain to the educational. municipality. Employees Union v. Jacinto v. 237 SCRA 271 (1994). has been supplanted by the 1987 Constitution. Is it created by its own charter for the exercise of a public function. that its governing board are appointed by the Government.
V. while those incorporated under the general corporation law are governed by the Labor Code.
xRepublic v. Pre-Incorporation Contracts (a) Who Are Promoters? ―Promoter‖ is a person who. v. xBenguet Electric Cooperative. 168 SCRA 165 (1988). 146 SCRA 509 (1986). so long as those provisions are not inconsistent with such charters. 127 SCRA 687 (1984). 8799]) (b) Nature of Pre-incorporation Agreements (Secs. Inc. 3. (Sec.J.. 269. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. Bayla v. Decree No. Inc. NLRC. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 232) (d) Charitable. IAC. 110 to 115. 20) (c) Corporation by Estoppel (Sec. including those with special or individual charters. 38 ATENEO L. Securities Regulation Code [R. As to Purpose of Incorporation: (a) Municipal or Public corporation (b) Religious corporation (Secs. 114 SCRA 875  and Republic v. 60 and 61. 557 )
. 73 Phil. 25. As to Existence of Shares (Secs. because of the constitutional prohibition qualifying only individuals to acquire land of the public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural persons. Silang Traffic Co. As to Place of Incorporation: (a) Domestic Corporation (b) Foreign Corporation (Sec.14
Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. which held that a corporation sole has no nationality. 123) 3. Blg. 107 and 108.P. CORPORATE CONTRACT LAW
See relevant portion of VILLANUEVA. 2. overturned the previous doctrine (xRepublic v.A. 127 SCRA 687 ) that a corporation sole is disqualified to acquire or hold alienable lands of the public domain. 209 SCRA 55 (1992). 5. 2. v. 4 of the Corporation Code renders the provisions of thereof applicable in a supplementary manner to all corporations. 109 and 116) (c) Educational corporations (Secs. 21) 6. such as cooperatives organized under Pres. B. June 1994) 1. Iglesia Ni Cristo.. Inc. 3 and 5) (a) Stock Corporation (b) Non-Stock Corporation
VI. 596 (1957). Scientific or Vocational corporations (e) Business corporation 4. Iglesia ni Cristo.10. LRC and the Register of Deeds of Davao City. xRepublic v. 1 (No. 106. xRoman Catholic Apostolic Administrator of Davao. takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. Sec. 102 Phil. acting alone or with others. Villanueva. xDirector of Land v. IAC. Corporate Contract Law.
Inc. 13 SCRA 84 . 55 O. v. 35. and engages in the name of purported corporation in illegal recruitment. 49 Phil. 274 SCRA 452 (1997) A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. (xOhta Dev. 343 SCRA 674 (2000). Salvatierra v. Feb. when he held himself out as officer of the corporation and received money from applicants who availed of their services. 223 . Caram. 21. 4 Phil. No. 25 SCRA 285 . International Express Travel & Tour Services.‖ (3) Assumption of corporate powers. G. 18 April 1997 (Unpublished). 1  but that case pertained to a commercial partnership which required registration in the registry under the terms of the Code of Commerce." 31 ATENEO L. who therefore know that it has not been registered. p. 1.15
(c) Theories on Liabilities for Promoter's Contracts (Cagayan Fishing Development Co. 343 SCRA 674 (2000). Inc. An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose incorporation was not consummated. Garlitos. An individual should be held personally liable for the unpaid obligations of the unincorporated association in whose behalf he entered into such transactions. xPeople v. Inc. CA. under the principle that ―any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.J. xAsia Banking Corporation v. 117 ). Rizal Light & Ice Co. No. De Facto Corporation (Sec. Ogilvie. Teodoro Sandiko. xMadrigal Shipping Co. 271 SCRA 621 (1997).. v. ―colorable compliance. Reyes.
. liabilities and damages incurred or arising as a result thereof. Court of Appeals. Court of Appeals. (No. 2. 151 SCRA 372 ). the same principle applied in xCompania Agricole de Ultramar v. Jr. 145 . v. Garcia. 757 . Trust Fund Doctrine See VILLANUEVA. liabilities and damages incurred or arising as a result thereof.. "The Trust Fund Doctrine Under Philippine Corporate Setting. 4. University Publishing Co.R. (b) Two Levels: (i) With "fraud" and (ii) Without "fraud" When incorporating individuals represent themselves to be officers of the corporation never duly registered with SEC. 117010.G. Inc. Arnold Hall v. Standard Products.‖ International Express Travel & Tour Services.. since Section 25 of Corporation Code provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts. there is no corporation by estoppel. Steamship Pompey. De Los Santos. 3. Co. Supreme Court Advanced Decision. v. Albert v. 86 Phil. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation. 103 Phil. and (4) Issuance of certificate of incorporation. they are estopped from claiming that they are not liable as corporate officers. Corporation by Estoppel Doctrine (Sec. 1987). v. Lozano v. v. 25 of the Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts.. Pineda. Piccio. 46 Phil. Public Service Commission. v. 65 Phil. (a) Nature of Doctrine Corporation by estoppel doctrine is founded on principles of equity and is designed to prevent injustice and unfairness. Such individual is estopped from claiming that they are not liable as corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 634 (1950). It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Inc. 7331). xPeople v. 20) (a) Elements for Existence of De Facto Corporation: (1) Valid law under which incorporated. (2) Attempt in good faith to incorporate.
Director of Commerce and Industry. xPison-Arceo Agricultural Development Corp. 279 SCRA 312 (1997) (c) Purpose Clause (Secs. 10) (b) Corporate Name (Secs. 541 )
. 301 SCRA 152 (1999). Thus dividends must never impair the subscribed capital stock. Hence. Procedure and Documentary Requirements (Sec. Corporate Contract Law. 699 (1929). Court of Appeals. June 1994). The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. 167 SCRA 540 (1988). Velasco. property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. There can be no distribution of assets among the stockholders without first paying corporate creditors. xLaureano Investment and Development Corporation v. or on its property. 549 ). CA. xBoman Environmental Dev. Court of Appeals. 469 . Manila Railroad Co. The ―Trust Fund‖ doctrine considers the subscribed capital as a trust fund for the payment of the debts of the corporation. 514-515 (1999). Red Line Trans. Government of P.16
(a) Commercial/Common Law Premise on Equity vis-a-vis Debts (b) Nature of Doctrine Under the trust fund doctrine. 41. last paragraph. 311 SCRA 508. 14(2) and 42. 14 and 15) (a) As to Number and Residency of Incorporators (Sec.. NLRC. Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business. v. NTC v. 40 Phil. 52 Phil. Trust Co. v. Uy Siuliong v. Rural Transit. rights. v. (c) Corporation Purchasing Own Shares (Secs. holding that a corporation may be sued under the name by which it makes itself known to its workers. v. Steinberg v. 60 Phil. 953 )
VII. 38 ATENEO L. any disposition of corporate funds to the prejudice of creditors is null and void. The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock. 34 SCRA 252 (1970) A change in the corporate name does not make a new corporation. no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. if a corporation legally and truly wants to intervene. 1. xCommissioner of Internal Revenue v. 1 (No. Phil. xPhilippine First Insurance Co. Universal Textile Mills Inc. 52 Phil. 78 SCRA 62 ). subscription commitments cannot be condoned or remitted. but the same is not effective until approved by the SEC. A corporation has not right to intervene in a suit using a name other than its registered name. v.I. or liabilities. 18. A corporation may change its name by the amendment of its articles of incorporation.The charter is in the nature of a contract between the corporation and the Government. 272 SCRA 253 (1997). ARTICLES OF INCORPORATION
See relevant portions of VILLANUEVA. it should have used its corporate name as the law requires and not another name which it had not registered. 2. CA. nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Nature of Charter . to which the creditors may look for satisfaction. Court of Appeals. 14(1) and 42. xUniversal Mills Corp. Corp. Hartigan. 8. the capital stock. Until the liquidation of the corporation. There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name. has no effect on the identity of the corporation. 216 SCRA 738 (1992). Rivera. xRepublic Planters Bank v.. 2. v. and whether affected by special act or under a general law. 44 Phil. 43 and 122.J. v.
VIII.. xAsuncion v.‖ by-laws are indispensable to corporations in this jurisdiction. Inc. Peña v. such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Although the right to amend by-laws lies solely in the discretion of the employer. 1. 28 Phil. No extension can be effected once dissolution stage has been reached. 12) .17
(d) Corporate Term (Sec. Amendments to Articles of Incorporation (Sec. 19 SCRA 379 (1967) The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. Inc. Commencement of Corporate Existence (Sec.
(a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members.
. failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. the object is unlawful and the articles can be denied registration. 276 SCRA 681 (1997). xGrace Christian High School v. Grounds for Disapproval (Sec. These may not be essential to corporate birth but certainly. CA. 11). 89 SCRA 337 ..Why is maximum capitalization required to be indicated? (g) Subscription and Paid-up Requirements (Sec. (f) Minimum Capitalization (Sec. De Yriarte. xClavecilla Radio System v. Court of Appeals. 479 (1998). it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event. xSalafranca v.J. Philamlife (Pamplona) Village Homeowners Association. 281 SCRA 133 (1997). Inc. 193 SCRA 717 ) As the ―rules and regulations or private laws enacted by the corporation to regulate. Antillon. govern and control its own actions. Nature and Functions (Gokongwei v. (e) Principal Place of Business Place of residence of the corporation is the place of its principal office. xAlhambra Cigar v. their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. xSy v. Nonetheless. Otherwise. 67 ). SEC. 17) When the proposed articles presented show that the object of incorporation is to organize a barrio of a given municipality into a separate corporation for the purpose of taking possession and having control of all municipal property within the barrio so incorporated and administer it exclusively for the benefit of the residents. Tyson Enterprises. these are required by law for an orderly governance and management of corporations. 2. this being in the exercise of management prerogative or business judgment. June 1994). Court of Appeals. 119 SCRA 367 (1982). v. Even when the members of the association may have formally adopted the provision. 13) (h) Steps and Documents Required in SEC 3. BY-LAWS
See relevant portions of VILLANUEVA. 300 SCRA 469. 24 SCRA 269 (1968). 16) 5. Loyola Grand Villas Homeowners (South) Association. 1 (No. affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. SEC. 4. "Corporate Contract Law." 38 ATENEO L.
xThomson v. 48) Power to amend may be delegated to the board of directors
IX. El Hogar Filipino. the law has to look carefully into the exercise of powers by these artificial persons it has created. like the signing of documents. CORPORATE POWERS. Court of Appeals. Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares. can be performed only by natural persons duly authorized for the purpose of by corporate by-laws or by a specific act of the board of directors. 50 Phil. 583. G. ―Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporation’s by-laws. Court of Appeals. 298 SCRA 280 (1998). COA. for it was for securing
. 116124-25. cited in xFleischer v. 190 SCRA 154 ) A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence.‖ PMI Colleges v. 46. Court of Appeals. (a) Classification of Corporate Powers: Express. but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Court of Appeals. v. and there is no outright ―demise‖ of corporate existence. 399 (1927). Nolasco. 47) 4. the franchise or certificate of registration of corporations which fail to file their by-laws. Precisely because the corporation is such a prevalent and dominating factor in the business life of the country. and prescribe regulation. after proper notice and hearing. Secs. Civil Code. IV v. Clearly. Proper notice and hearing are cardinal components of due process in any democratic institution. xGovernment of the Philippine Islands v. AUTHORITY AND ACTIVITIES
1. No. 47 Phil. IV v. No. xLoyola Grand Villas Homeowners (South) Association. Corporate Power and Capacity (Art. G. By-laws are intended merely for the protection of the corporation. Inc. Reynoso. NLRC. 277 SCRA 462 (1997). and Incidental There is basis to rule that the act of issuing the checks on behalf of the corporation was well within the ambit of a valid corporate act. Inc. does not expressly provide for the consequence of their non-filing within the period provided therein. since the physical acts of the corporation. agency or society. Court of Appeals. Implied. however.R. they are always subject to the charter of the corporation.R. 46) Section 46 of the Corporation. 22 November 2000. which would require that the incorporators must be given the chance to explain their neglect or omission and remedy the same. CA. unless they have knowledge of the same. not restrictions.18
(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws. Amendments (Sec. v. 3. 210 SCRA 510 (1992). Adoption Procedure (Sec. 22 November 2000. Land Bank of the Philippines v. 270 SCRA 503 ). a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws. Decree 902-A allows the SEC to suspend or revoke. xReynoso. Pres. which requires the filing of by-laws. 36 and 45. xRural Bank of Salinas. 116124-25. Contents (Sec. In turn. v. 2. (iii) By-Laws Cannot Discriminate (b) Binding Effects of By-laws (China Banking Corp. 276 SCRA 681 (1997). they cannot affect or prejudice third persons who deal with the corporation. quoting from Thompson on Corporation Sec. Since by-laws operate merely as internal rules among the stockholders. 4137.
(b) Ratification of Ultra Vires Acts: (Pirovano v. 3 SCRA 361 . 23) Unless otherwise provided by the Corporation Code. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract. 28 February 2001. Ultra Vires Acts See relevant portions of VILLANUEVA. 2. 96 Phil. it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. 301 SCRA 572 (1999). The act or conduct for which the corporation may be liable under the doctrine of estoppel must be by those of the corporation. Republic v. (a) Concept and Types (Sec.J.. G. 220 SCRA 103. which delegation.‖ cannot also serve to make the corporation liable. (ii) Doctrine of Apparent Authority (Prime White Cement Corp. 335 . De la Rama Steamship Co. The admission made in the answer by the counsel for the corporation was ―without any enabling act or attendant ratification of corporate act. 38 ATENEO L.‖ The term ―ultra vire‖ is ―distinguished from an illegal act from the former is merely voidable which may be enforced by performance. No. must be for specific purposes. 109491. When the counsel representing the corporation in a collection suit admits on behalf of the corporation that the latter admitted culpability for personal loans obtained by its corporate officers. xVicente v. Corporate Contract Law. and rules of agency as to the binding effects of their acts would apply... 45) An ultra vires act is one committed outside the object for which a corporation is created as define by the law of its organization and therefore beyond the power conferred upon it by law. 2. such as the power to enter into contracts. Acoje Mining Co. and not those of the purported agent who is himself responsible for the misrepresentation. Although the by-laws grant authority to the President "to execute and sign for and in behalf of the corporation all contracts and
. 343 . (b) Where Corporate Power is Lodged (Sec. Geraldez. Court of Appeals. Crisologo Jose v. its governing body or authorized officers.R. Francisco v. 109491. Inc. hence. 28 February 2001. Court of Appeals. v. Atrium Management Corporation vs. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract. 57 Phil. Intermediate Appellate Court. the letter issued by the corporate officers who obtained the loan ―as indicating the corporate liability of the corporation.. Metropolitan Bank and Trust Co.‖ as would authorize or even ratify such admission. CA. 7 SCRA 577 ) A contract signed by the President/Chairman without authority from the Board of Directors is void. Mindoro Sugar Co. No. 1 (No. In the absence of such ratification or authority. 271 SCRA 1 (1997). Also. 52 SCRA 210 (1973). not an ultra vires act.19
a loan to finance the activities of the corporation. the latter must specially authorize them to do so. the Board may delegate such powers to either an executive committee or officials or contracted managers. such admission does not bind the corporation. However. corporate powers. or estoppel. 113-114 . such admission cannot be given legal effect to the detriment of the corporation. Atrium Management Corporation vs. xABS-CBN Broadcasting Corporation v. while the latter is void and cannot be validated. The delegated officers makes the latter agents of the corporation. June 1994). ratification. are exercised by the Board of Directors. (i) Theory of Estoppel or Ratification In order to ratify the unauthorized act of an agent and make it binding on the corporation.R. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board. G. Court of Appeals. except for the executive committee.. 177 SCRA 594 . The documents and admissions cannot have the effect of a ratification of an unauthorized act. but the ratification must be by the officers as governing body having authority to make such contract. xAguenza v. GSIS. but the ratification must be by the officer or governing body having authority to make such contract. Carlos v.
36) Example of Poor Draftsmanship: When the article of incorporation expressly provides that the purpose of the corporation was to ―engage in the transportation of person by water. 21 May 2001. No. who fails to show any proof that he was authorized by the Board of Directors. unless the latter undertook to secure the principal’s ratification. xFirst Philipine International Bank v. or in excess of. V. Court of Appeals. Specific (Express) Powers (a) Enumerated Powers (Secs.20
agreements which the corporation may enter into. or any other agent. Yao Ka Sin Trading v. or a particular branch of it. there was no such ratification. If a corporation knowingly permits one of its officers. the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority. as against anyone who has in good faith dealt with it through such agent. there was. for which reason. the corporation will. Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority. his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority. its power to sue is lodged with its board of directors or trustees. Benguet Consolidated Mining Co. A. xLuneta Motor Co. 5 SCRA 809 ). to act within the scope of an apparent authority. A minority stockholder and member of the Board. when the officer entered into the speculative contracts without securing the Board’s approval. 28 March 2001. Power to Sue Under section 36 of the Corporation Code. The agent's apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person. he is to blame. as where an officer is allowed to exercise a particular authority with respect to the business. continuously and publicly. Therefore. 1883. CA. the principal can not be held liable for the acts of the agent. for a considerable time. G. it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. the principal is liable for the obligations contracted by the agent..R. 269 SCRA 601 (1997). There is
. Although an officer or agent acts without. no occasion at all for ratification. Court of Appeals. nor did he submit the contracts to the Board after their consummation nor were they recorded in the books of the corporation. For a derivative suit to prosper. 209 SCRA 763 (1992). 140 ). Imperial Vegetable Co. . It also bears emphasizing that when the third person knows that the agent was acting beyond his power or authority. v. the acts of an agent beyond the scope of his authority do no bind the principal unless the latter ratifies the same expressly or implied. in relation to Section 23. be estopped from denying the agent’s authority. CA.. 252 SCRA 259 (1996). and thus. and. 126751. Civil Code. Santos. may not hold the corporation liable. which is an entirely different line of business. and is not entitled to recover damages from the agent. 209 SCRA 763 (1992).D.R. xSoler v. G. has no such power or authority to sue on the corporation’s behalf. it is clear that where a corporation is an injured party. may not acquire any certificate of public convenience to operate a taxicab service. Court of Appeals. Nor can we uphold this as a derivative suit. 3. 58 Phil. Yao Ka Sin Trading v. The authority of a corporate officer in dealing with third persons may be actual or apparent. xSafic Alcan & Cie.‖ such corporation cannot engage in the business of land transportation. 123892. (iii) Theory of No State Damage (Harden v. If the said third person is aware of such limits of authority. Under Article 1898 of the Civil Code. also Art.. . No. Inc. it holds him out to the public as possessing the power to do those acts. In the case of the corporation as the principal. xTraders Royal Bank v." the same presupposes a prior act of the corporation exercised through its Board of Directors. in fact.
A reduction of capital to justify the mass layoff of employees. 296 SCRA 631. Court of Appeals. 42. G. Both Sec. 195 SCRA 247. cumulative and participating.. De la Rama v. Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. and would constitute unfair labor practice. such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. 40 of the Corporation Code requiring the ratification of members representing at least two-thirds of the membership. 272 SCRA 454 (1997). Why the difference in rule between entity and individual? (j) Other Powers . Inc.To Sell Land and Other Properties A corporation whose primary purpose is to market. 151 SCRA 355 ). v. Sale by the Board of the only property of the corporation without compliance with the provisions of Sec. xSan Juan Structural and Steel Fabricators. xCentral Textile Mills. 44. Nielson & Co.21
now showing that petitioner has complied with the foregoing requisites. distribute. and despite the Board resolution approving the increase in capital stock. the sale of land is not within the actual or apparent authority of the corporation acting through its officers. Inc. Likewise Article 1874 and 1878 of the Civil Code requires that when land is sold through an agent. Court of Appeals. Agana. Lepanto Consolidated Mining Co. Moya. export and import merchandise. (i) Enter into Management Contracts (Sec. 311 SCRA 508. much less when acting through the treasurer. 645 (1998). representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. 266-267 ). xMadrigal & Co. on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders. the agent’s authority must be in writing. 37 and 81 ) (c) Power to Increase or Decrease Capital Stock (Sec. It is the same amount that can loosely be terms as the ―trust fund‖ of the corporation. Furthermore. (f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose (Sec. (g) Declare Dividends (Sec. 38) Prior to SEC approval of the increase in the authorized capital stock. Zamora. v. CA. would make the sale null and void. Court of Appeals. Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%. Makasiar. otherwise the sale is void. 514-515 (1999). xIslamic Directorate of the Philippines v.R. Lepanto Consolidated Mining. 27 SCRA 247 ). 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders. Ricafort v. 26 SCRA 540 . the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Ma-ao Sugar Central Co. and the receipt of payment on the future issues of the shares from the increased capital stock. xTam Wing Tak v. especially of union members. 260 SCRA368 (1996). These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. 26 SCRA 540 ). 193 SCRA 717 (1991). Inc. ―interest bearing stocks‖. xNational Telecommunications Commission v. 269 SCRA 1 (1997). 38) (e) Sell or Dispose of Assets (Sec. 40). (d) Incur. . Nielson & Co. v.. also xPeña v. . National Wages and Productivity Commission. v.To Borrow Funds
.. 122452. . amounts to nothing but a premature and plain distribution of corporate assets to obviate a just hearing to labor of the vast profits obtained by its joint efforts with capital through the years. (b) Power to Extend or Shorten Corporate Term (Secs. Create or Increase Bonded Indebtedness (Sec. 29 January 2001. xRepublic Planters Bank v. 43. at pp. v. is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. 16 of the Corporation Law and Sec.
TRUSTEES AND OFFICERS
1. are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members.To Donate . 193 SCRA 717 . . Santos. Gokongwei. v. through its broad of directors. for the consequences of their acts. 90 SCRA 40 ). . 1318 of the Civil Code because of the lack of ―consent‖.
X. v. Thus.To Enter Into Partnership. Fontecha. v. 272 SCRA 454 (1997). 23 and 27. The Board of Liquidators v. 64 Phil. xLopez Realty v. jurisprudence tells us that an action of the board of directors during a meeting.. DIRECTORS. SEC. 89 SCRA 336 ). 281 SCRA 232 ) Board members and officers who purport to act for and in behalf of the corporation. 697 ). v. v. Bacolod-Murcia Miling Co. and Fernandez. Heirs of Maximo M. Those acts. 25. should act in the manner and within the formalities. 26 SCRA 255 )
. 1878 of the New Civil Code. Fontecha. xDetective & Protective Bureau. (a) A director must own at least one share of stock (xPeña v. Qualifications of Directors and Trustees (Secs. Inc. (a) Two Theories on Source of Power of Board of Directors (Angeles v. Inc. and cannot be considered to be ultra vires to avoid any liability arising from the resolution granting such gratuity pay.To Provide Gratuity Pay for Employees Providing gratuity pay for its employees is one of the express powers of a corporation under the Corporation Code. which was illegal for lack of notice. 247 SCRA 183. keep within the lawful scope of their authority in so acting and act in good faith. 20 SCRA 526 ). 35) 2. 209 SCRA 55 (1992) 3. v.. prescribed by its charter or by the general law. Bolanos. 5 SCRA 36 . if any. NLRC. xLopez Realty v. Acuña v. 634 . (d) Executive Committee (Sec. Inc. directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws.
(c) Effects of a “Bogus” Board The acts or contracts effected by a bogus board would be void pursuant to Art. 95 Phil. 192 (1995). Inc. Court of Appeals. Orientalist Co. 106 (1954). CA. The general rule is that a corporation. Kalaw. Joint Venture. Victoriano. 247 SCRA 183. 23. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. do not become liable. Islamic Directorate of the Philippines v. Jr. Cloribel. 38 Phil.22
The power to borrow money is one of those cases where even a special power of attorney is required under Art. or impliedly. xBenguet Electric Cooperative. by the corporation's subseqeunt course of conduct. any action taken therein may be questioned by any objecting director or shareholder. Be that as it may. Powers of Board of Directors or Trustees (Sec. Tuason & Co. may be ratified either expressly. xChina Banking Corp. Philippine Stock Exchange. 192 (1995). by the action of the directors in subsequent legal meeting. BUSINESS JUDGMENT RULE (Montelibano v. whether civilly or otherwise. when they are such a nature and are done under such circumstances. 270 SCRA 503 (1997). Court of Appeals. Gamboa v. The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. Batac Producers Cooperative Marketing Association. Ramirez v. otherwise. 20 SCRA 987 . (b) Board Must Act As Body (Sec. Court of Appeals.
29) By-law provision or the practice giving a stockholder a permanent seat in the Board of Directors would be against the provision of Sections 28 and 29 of the Corporation Code which requires member of the board of corporations to be elected. 94 Phil. xGovernment v. 609 ). v. or where there is no stock. (b) Trustee (Secs. 30) Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. 28. 49 Phil. REV. Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation. The position of being Chairman and Vice-Chairman. Directors' or Trustees' Meetings (Secs. Salas. 92 and 138) (c) Cumulative Voting (Sec. but officership position that would entitle the occupants to compensation. Term of Office. 264 SCRA 11 ). Role of Directors (a) Directors as Fiduciaries. like that of Treasurer and Secretary. would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members. 10. Vacancy in Board (Sec. Salas. In addition. being merely prima facie would not hold in the face of clear evidence to the contrary. were considered by the officers as not mere directorship position. Ericta. Hold-over Principle Directors may lawfully fill vacancies occurring in the board. 35 SOUTH CAROLINA L. 8. 53. 7. xLopez v. as well as the original directors. 6. Election of Directors and Trustees (a) Directors (Secs. Western Institute of Technology. Likewise.23
(b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v. Salas. Court of Appeals. 9. 54 and 92) In a board meeting. Inc. 81 (1953). the limitation placed under Section 30 of the Corporation that directors cannot receive compensation exceeding 10% of the net income of the corporation. 24 and 26. there are two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (a) when there is a provision in the by-laws fixing their compensation. Section 23 of the Corporation Code which provides for the powers of the Board of Directors or Trustees expressly requires them ―to be elected from among the holders of stock. From the language of Section 30. The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. 399 (1927). 278 SCRA 216 (1997). Roxas v. hold until qualification of their successors. and (b) when the stockholders representing a majority of the outstanding capital stock at a regular or special meeting agree to give them compensation. xGrace Christian High School v. 50 Phil. v. 278 SCRA 216 (1997). and such officials. 278 SCRA 216. CA. 281 SCRA 133 (1997). 45 SCRA 539 ). but such presumption. v. Removal of Directors or Trustees (Sec. De la Rosa. Premium Marble Resources v. without compensation. 49. an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively. Under Section 30 of the Corporation Code. and that the return upon their shares adequately furnishes the motives for service. Western Institute of Technology. when they render services to the corporation in a capacity other than as directors or trustees of the corporation. Inc. El Hogar Filipino. 205 SCRA 752 ). 4. 223 (1997). 24. Encarnacion. Inc. Western Institute of Technology. xPonce v. Compensation of Directors (Sec. it may also be deduced that members of the board may also receive compensation. 295) 5. Court of Appeals. founded on the presumption that directors and trustees render service gratuitously.
. from among the members of the corporation.
purchases the shares of stock of a shareholder without informing the latter of the on-going negotiations. Fontecha.Using Inside Information (Gokongwei v. An ―office‖ is created by the charter of the corporation and the officer is elected by the directors or stockholders. with which the Board of Directors might have in taking such action. Dresser. prescribed by its charter or by the general law. Dy v. 21 Phil. xLopez Realty.
. Velasco. 524. Prime White Cement Corp. buy-laws. All acts within the powers of a corporation may be performed by agents of its selection. as Executive Vice-President allegedly diverted company funds for his personal use resulting in heavy financial losses in the company. 89 SCRA 412). 336 SCRA 484 (2000). v.‖ De Rossi v. who also owns ¾ of the equity of the corporation. 31 to 34. When petitioner. Mead v. Feb. 32. (No. 196 SCRA 410 ). (g) Contracts Between Corporations with Interlocking Directors (Sec. then such position is clearly a corporate officer position and issues of reinstatement would be
. Mita Pardo de Tavera v. 247 . If such removal occasions an intra-corporate controversy. 553 . 95 ). This type of fraud encompasses controversies in a relationship within the corporation covered by the SEC jurisdiction [now with the regular courts]. McCullough. PSBA v. 251 U. Bates v. 1985). v.24
Pre-Corporation Code. Perforce. . 947 . . . . Steinberg v. Gurrea v. 112 SCRA 243 . 25. 31. 18 SCRA 924 (1966). 43 Phil. Inc. xVisayan v.. who has also been designated as the administrator of corporate affairs. Repide.J. except so far as limitations or restrictions imposed by special charter. SEC. When a director. (b) Duty of Obedience A corporation. or statutory provisions. Llorente. not the Labor Arbiter or the NLRC. 1. 488 A.2d 858. 1991)] (f) Corporate Dealings with Directors and Officers (Sec. Such fraud would be detrimental to the interest not only of the corporation but also of its members. xBA Savings Bani v. IAC. Inc. if any. 40 S. 145 SCRA 211 . through its board of directors. Lezama. or lack thereof. Prime White Cement Corp. 89 SCRA 336 . 103 Phil.Applies to confidential employees (cf. should act in the manner and within the formalities. (d) Duty of Loyalty (Secs. When the by-laws of the condominium corporation specifically includes the position of ―Superintendent/Administrator‖ in is roster of corporate officers. Sia.S. and such a corporate controversy would call for the adjudicative expertise of the SEC. 589 ) (e) Duty to Creditors and Outsiders [xVILLANUEVA. xSing Juco v.. and who was directly negotiating the sale of the corporations large landholdings to the Government at great prices. See Annotations: Doctrine of Corporate Opportunity. 64 L. 953 . 314 SCRA 245 (1999). v. 32 and 33) . 220 SCRA 103 ). the matter would come within the area of corporate affairs and management. Gokongwei v. Supreme Court of Delaware. Note that a corporate officer’s removal from his office is a corporate act.Doctrine of Corporate Opportunity (Gokongwei v. 127 SCRA 778 . 41 Phil. Leaño. 89 SCRA 336 . Ct. San Jose Petroleum. xStrong v. such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of the state of the negotiations and their probable successful result.Nature of Duties of Directors and Officers. Van Gorkam. 89 SCRA 336 ). SEC. this matter would amount to fraud.Self-dealings (Secs. Corporations act only through their officers and duly authorized agents. 52 Phil. IAC. 388. . SEC. Tuberculosis Society. Who Is an "Officer" of the Corporation (Sec. 247 SCRA 183 (1995) (c) Duty of Diligence (Sec. 33) 11. Smith v. 35 ATENEO L. The Fiduciary Duties of Directors and Officers Representing the Creditor Pursuant to a Loan Workout Arrangement: Parameters Under Philippine Corporate Setting. its nature is not altered by the reason or wisdom. NLRC. NLRC. Ed. 220 SCRA 103 (1993). Palting v. NLRC.
otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered. 266). and failing to show any provision of the articles of incorporation. Geraldez. reiterated in xBoyerRoxas v. Powers of Corporate Officers: (a) The Rule on Corporate Officer’s Power to Bind Corporation An officer's power as an agent of the corporation must be sought from the statute. and in the event he refuses to comply with such duty. 266 SCRA 462 (1997). or an intra-corporate controversy. other offices are sometimes created by the charter or by-laws of a corporation. from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. v. (Ibid) . 267 SCRA 380 (1997). NLRC. xVicente v. Sec. xTabang v. the by-laws or in a delegation of authority to such officer. the sale is void and not binding on the alleged selling corporation. xEsguerra v. and to disburse them in accordance with the authority given him by the board or the properly authorized officers. secretary and treasurer are commonly regarded as the principal or executive officers of a corporation. whose power are limited. Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties. a treasurer. 12. It is the duty and obligation of the corporate secretary to register valid transfers of stock in the books of the corporation. 266 SCRA 462 (1997). the transferor-stockholder may rightfully bring suit to compel performance. 278 SCRA 793 (1997). The president. Comptroller/Administrator. and modern corporation statutes usually designate them as the officers of the corporation. an ―employee‖ usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. NLRC. When a Secretary’s Certificate is regular on its face. (e) Other “Officers” for Service of Summons on Corporation
.‖ then such specifically designated positions should be considered ―corporate officers‖ position. it can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification. However. Court of Appeals. NLRC. Selling is obviously foreign to a corporate treasurer’s function. Jr. II. Inc. xSan Juan Structural and Steel Fabricators. or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary. xTabang v. . by-laws or board resolution to prove that the treasurer possessed such power. charter. When the corporation categorically denies ever having authorized its treasurer to sell the subject parcel of land. would be intra-corporate controversy subject to the jurisdiction of the SEC (now RTC). 645 (1998). Corp. CA. xOngkingco v. 270 SCRA 613 (1997). vice-president. People’s Aircargo v. the corporate secretary is the custodian of corporate records—he keeps the stock and transfer book and makes proper and necessary entries therein. . (d) Corporate Treasurer A corporate treasurer’s function have generally been described as ―to receive and keeps funds of the corporation.‖ Unless duly authorized. 266 SCRA 462 (1997). 297 SCRA 170 (1998) (c) Corporate Secretary In the absence of provisions to the contrary. Court of Appeals. xTabang v. 52 SCRA 210 . Court of Appeals. NLRC. The determination of the rights and the concomitant liability arising from any ouster from such positions. Ch. and the nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such action. Court of Appeals. 211 SCRA 470 (1992).25
within the jurisdiction of the SEC and not the NLRC. And failing to discharge such burden. xTorres. v. On the other hand. cannot bind the corporation in a sale of its assets. (b) When Corporation Bound by Act of Its President. An ―office‖ is created by the charter of the corporation and the officer is elected by the directors or stockholders (2 Fletcher Cyc. the buyer had the burden of proving that the treasurer was in fact authorized to represent and bind the allegedly selling corporation in the transaction. A corporate officer’s dismissal is always a corporate act. 296 SCRA 631. When the by-laws provide that one of the powers of the Board of Trustees is ―[t]o appoint a Medical Director.
xPabon v.. reiterated in xR. whose function is to bring about. retained counsel. 81 SCRA 298 .. NLRC. (f) Coverage of Corporate “Agents” Black’s Law Dictionary defines an ―agent‖ as ―a business representative. xMindanao Motors Lines. v. Clave. or the 9 corporation’s Chief Finance and Administrative Officer.. also Vlason Enterprises Corp. Inc.. the enumeration of persons to whom summons may be served is ―restricted. no longer apply since they 10 were decided under the old rule that allows service of summons upon an agent of the corporation. Court of Appeals. Araneta. Sanvar Development Corp. 332 SCRA 427 (200)
Kanlaon Construction Enterprises Co. xPabon v... v. 31. v. overturning xDelta Motor Sales Corp.‖ To this extent. NLRC. like the assistant general manager. Corp. Inc. affect. xSulo ng Bayan. 598 . v. Marine Dev. Inc. xARB Constructions Co. (xVilla Rey Transit. 81 SCRA 298 (1978). limited and exclusive‖ following the rule on statutory construction expressio unios est exclusion alterius. Pabalan v. v. G & G Trading Corp. Consequently. Far East Motor Corp. Avendaño. NLRC. 72 SCRA 347 ... However. Inc. Tramat Mercantile. It does not in any way distinguish whether the ―agent‖ be general or special. 146 SCRA 197 (1986). 70 Phil. Court of Appeals. v.
The general rule is that corporate officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him.. v. As such. or terminate contractual obligations between principal and third persons. The bookkeeper’s task is one under consideration that his regular recording of the corporation’s “business accounts” and “essential facts about the transactions of a business or enterprise” safeguards the corporation from possible fraud being committed adverse to its own corporate interest.B. 296 SCRA 7 (1998). Far East Motor Corp. Francisco. ordinary clerk of a corporation. Court of Appeals. 13. Ltd. 124 SCRA 638 . v. modify. Therefore. Inc. Inc.
LIABILITIES OF CORPORATE OFFICERS: (Sec. this does not include employees whose duties are not so integrated to the business that their absence or presence will not toll the entire operation of the business. v. 8 Villa Rey Transit. 177 SCRA 86 (1982).26
For purposes of determining proper service of summons to a corporation in a quasi-judicial proceeding before the NLRC. has been considered proper service to bind the corporation. an ―agent‖ may also be shown to represent his principal in some one or more of his relations to others. it does not necessarily connote an officer of the corporation. 18 SCRA 207 (1966). the earlier 3 cases that uphold service of summons upon a construction project manager. Palay. 560 (1944). Inc. a bookkeeper can be considered as an agent of the corporation within the purview of the Rules of Court. 184 SCRA 495 . Rule 14 of the 1997 Rules of Civil Procedure uses the term ―general manager‖ and unlike the old provision in the Rules of Court. Ker & Co. The rules on service of process make service on ―agent‖ sufficient. Transport Corp. 312 SCRA 65 (1999). 24a SCRA 77 ). NLRC. NLRC. Court of Industrial Relations. accept performance of. v. 219 SCRA 561 (1993). Section 11. 5 Golden Country Farms. it does not include the term ―agent‖. 214 SCRA 295 (1992). though this may include employees other than officers of a corporation. xE. Ltd. Vazquez v. even though he may not have the power to enter into contracts. Villarosa & Partners Co. CA. but is complied with even by a service upon an agent having limited authority to represent his principal.
. 6 SCRA 710 (1962). Mangosing. Inc. v. Benito. Inc. v.
Gesulgon v. CA. Borja. 310 SCRA 26 (1999). 238 SCRA 14 . of the Philippines. private secretary 6 7 of corporate executives. 7 Republic v. Inc. 6 Summit Trading and Dev. In spite of provisions of the Rules of Court on service of process to bind corporate entities. 74 Phil. 9 Far Corporation v. v. v. officials who had charge or control of 8 the operations of the corporation. Corp. a 4 5 corporation’s assistant manager. v. service made to a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. 135 SCRA 397 (1985). Inc. 296 SCRA 7 (1998). 158 SCRA 466 (1988). v. 279 SCRA 337 (1997). 10 Filoil Marketing Corp.
xRepublic Planters Bank v." xR. Personal liability of a corporate director. only when: (a) He assents to a patently unlawful act of the corporation. Inc. When corporate officers are sued in their official capacity. 12 SCRA 700 (1961). Ransom Labor Union-CCLU v. 244 SCRA 797.R. as a rule. G. Court of Appeals." xParadise Sauna Massage Corporation v. NLRC. 216 SCRA 738 (1992). An attempt by the corporation to avoid liability by distancing itself from the acts of the its President was struck down with the Court holding that a corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. NLRC. if duly authorized. Reyes. it is the president who responds personally for violation of the labor pay laws. Sugay v.MAM Realty v. the wrongdoing must be clearly and convincingly established. This is one instance when the veil of corporate entity has to be pierced to avoid injustice and inequity.27
Jurisprudential Enumeration of Officer Liabilities . xVillanueva v. Generally.
. v. in the case of corporations. 142 SCRA 269 (1986). Adre. No. Ng. (d) He consents to the issuance of watered down stocks or who. v. (b) Guilty of bad faith or gross negligence in directing its affairs. officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation. Sugay should not be allowed to confuse the facts. An officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity: "Thus. or ill-motive in their personal dealings with third parties. and judgment may be enforced against corporate assets. the suit is equivalent to a suit against the corporation. The hornbook law is that corporate personality is a shield against personal liability of its officers.C. 13 SCRA 291 (1965). No. Court of Appeals. CIR. When corporate officers and directors are sued merely as nominal parties in their official capacities as such. Del Rosario v. 273 SCRA 35 (1997). being the "person acting in the interest of (the) employer" as provided in the Labor Code. 172 SCRA 876 (1989). bad faith. 311 SCRA 700 (1999). NLRC. 181 SCRA 719 (1990). when the trust receipt sued upon was clearly entered into in behalf of the corporation by its Executive Vice-President. xThe Consolidated Bank and Trust Corp. its stockholders or other persons. CA. finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice. petitioner Uy cannot be permitted to escape liability under the said contract by using the corporate entity theory. Under the Labor Code. . reiterated in xNational Food Authority v.R. Court of Appeals. Thus. then such officer and his spouse cannot be made personally liable. does not forthwith file with the corporate secretary his written objection thereto. it must have an officer who can be presumed to be the employer. the personality of the corporation is separate and distinct from the persons composing it. (a) Special Provisions in Labor Laws. NLRC. xUichico v. xNational Power Corp. 114286. xAtrium Management Corporation vs. to personally answer for his corporate action. they cannot be held liable personal for the judgment rendered against the corporation.In the Labor Code since a corporate employer is an artificial person. (e) He agrees to hold himself personally and solidarily liable with the corporation. 28 February 2001 The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation. (c) for conflict on interest resulting in damages to the corporation. 273 SCRA 419 (1997). v. For the separate juridical personality of a corporation to be disregarded. being a party to a simulated contract of management. 187 SCRA 777 (1990). Court of Appeals. having knowledge thereof. xEmilio Cano Enterprises. G. by a specific provisions of law. (1995). or (f) He is made. 109491. 19 April 2001. trustee or officer along (although not necessarily) with the corporation may so validly attach. A.F.
It held that when a corporate officer acts in behalf of a corporation pursuant to his authority." xWestern Agro Industrial Corporation v. Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable for the corporate obligations arising from such act. Maglutac v. Inc. NLRC. reviewed the A. xDe Guzman v. Court of Appeals. 182 SCRA 353 (1990). the corporate officers cannot be held personally liable. because the persons who were there made personally liable for the employees' claims were stockholders-officers of the respondent corporation. finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice. The President and General Manager of a corporation who entered into and signed a contract in his official capacity cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the persons composing it. ―there must be an allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its employees. v.C. NLRC. however. Gudez and Pabalan. It reiterated the main doctrine of separate personality of a corporation which should remain as the guiding rule in determining corporate liability to its employees. citing xBanque Generale Belge v. is "a corporate act for which only the corporation should be made liable for any obligations arising from them. NLRC. Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice and bad faith in terminating their employment. v. making it necessary to enforce it against its former president. 283 of the Labor Code.‖ or a showing that the officers indiscriminately stopped its business to perpetuate an illegal act. 211 SCRA 723 (1992) A mere general manager cannot be held solidarily liable with the corporation for unpaid labor claims. 257 SCRA 319 (1996).189 SCRA 767 (1990). NLRC. bad faith. NLRC. xAHS/Philippines v. or ill-motive in their personal dealings with third parties. Walter Bull and Co. xEPG Constructions Co. 211 SCRA 723 (1992) A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. reiterated in xGudez v. NLRC. NLRC is not in point because there the debtor corporation actually ceased operations after the decision of the Court of Industrial Relations was promulgated against it. the petitioner while admittedly the highest ranking local representative of the corporation. 164 (1949). is nevertheless not a stockholder and much less a member of the board of directors or an officer thereof. v. and that at the very least. and to confuse legitimate issues. Court of Appeals. 210 SCRA 230 (1992). Chua. CA. and reviewed its application in subsequent cases of Maglutac. they cannot be held liable personal for the judgment rendered against the corporation. The aforecited cases will not apply to the instant case. The case of Ransom v. especially when he is neither a stockholder or a member of the board of the corporation. NLRC. xDe Guzman v. 171 SCRA 328 (1989). 271 SCRA 247 (1997).
. Court of Appeals. xRustan Pulp & Paper Mills.28
A corporate officer cannot be held personally liable for a corporate debt simply because he had executed the contract for and in behalf of the corporation. When corporate officers and directors are sued merely as nominal parties in their official capacities as such. in circumvention of statutes. 215 SCRA 120 (1992). Reahs Corporation v. IAC. 273 SCRA 419 (1997). 214 SCRA 665 (1992). Court of Appeals. 188 SCRA 709 (1990). as a vehicle for the evasion of existing obligations. 84 Phil. The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation. In the case at bar. A judgment rendered against a person "in his capacity as President" of the corporation was enforceable against the assets of such officer when the decision itself found that he merely used the corporation as his alter-ego or as his business conduit. xNational Power Corp. Ransom doctrine of imposing solidarily liability on the highest officers of the corporation for judgment on labor claims rendered against the corporation pursuant to Art. xArcilla v. 183 SCRA 644 (1990) and xChua v.. to justify solidary liability. When the corporation is still existing and able to satisfy the judgment in favor of the private respondent. Lim v.
292 SCRA 304 (1998). NLRC. Inc. 295 SCRA 619 (1998). 44 Phil. They were the one. 273 SCRA 35 (1997). In this case. Inc. 62). there appearing to be no evidence on record that the manager acted maliciously or deliberately in the nonpayment of benefits to the employee. it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. NLRC. corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. NLRC. Quezon Colegialla. Shareholders Not Creditors of Corporation (Garcia v. (a) Purchase Agreement (Bayla v. the restaurant business had to be closed down because possession of the premises had been lost through an adverse decision in an ejectment case. this rule admits of exceptions. STOCKHOLDERS AND MEMBERS
1. In xRestuarante Las Conchas v. xValderrama v. 73 Phil. xUichico v. v. NLRC. 383 ). one of which is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee. Lim Chu Sing. 314 SCRA 24 (1999). Consideration (Sec. to repeat. 557 ). the employees th can no longer claim their separation benefits and 13 month pay from the corporation because it had already ceased operation. acting as corporate agents.‖ The A. 755 ). particularly. This is indicating of bad faith on the part of the corporate officers for which they can be held jointly and severally liable with the Corporation for all the money claims of the illegally terminated employees. 37 Phil. Aboitiz & Co. Llego. National Exchange Co. the officers and members of a corporation are not personally liable for acts done in the performance of their duties. Poizat. officers and employees and obligations incurred by them.29
In labor cases. 60 and 72. 802 . 186 SCRA 393 (1990). may act only through its directors. Bitulok Sawmill. Their only recourse is to satisfy their claim from the officers of the corporation who were. 3. Ransom doctrine has been reiterated in xCarmelcraft Corp.
XI.. Inc. 51 Phil.. Silang Traffic Co. are not theirs but the direct accountabilities of the corporation they represent. 23 SCRA 1968 . 59 Phil. 2. v. acting in behalf of the corporation. 601 ) (d) When condition of payment provided for in the by-laws (De Silva v.. the officers should be held liable for acting on behalf of the corporation. had no evidentiary value whatsoever. Ransom principle that ―[a]lthough as a rule. 562 ). the Supreme Court had apparently returned to the A. 256 SCRA 466 (1996). Trillana v. [CLV – Nothing was shown to determine whether the corporate employer had no assets with which to pay the claims of the employee]. A corporation. xBrent Hospital. Subscription Contracts (Sec. being a juridical entity. 93 Phil. who as high-ranking officers and directors of the corporation. NLRC. The Court held: ―In the present case. signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which. To require them to do so would render illusory the separation and 13tj month pay awarded to them by the NLRC. The manager of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. 61) (c) Release from Subscription Obligation (Velasco v. PNB v. xNicario v. the manager cannot be held jointly and severally liable with the corporate employers. (a) Cash (b) Property (c) Service (d) Retained Earnings (e) Share
.‖ In that case.C.C. hence. (b) Pre-Incorporation Subscription (Sec. v. Dexter. There is nothing on record to show that the manager deliberately and maliciously evaded the corporation’s financial obligation to the employee. in effect..
93 Phil. . Razon v. the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. provided that the corporation is certain as to the real owner of the shares to whom the new certificate shall be issued.
. 70 and 71. 14 SCRA 1030 ). Hodges v. De los Santos v. 68 and 69). Baltazar. 67 Phil. (a) Who May Question a Delinquency Sale (Sec. the same admits exceptions. 57 Phil. 63 and 73) While Section 73 of the Corporation Code appears to be mandatory. xPhilippine Trust Co. Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. 4. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. v. (SEC Opinion. Court of Appeals. the ―stock and transfer book” of the corporation is the best evidence to establish stock ownership. 64 Phil. such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under Section 73 of the Corporation Code. Lacson Ledesma. Lingayen Gulf Electric Power Co. SEC.R No. 64. 292 SCRA 503 (1998). A formal certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. 96 Phil. 207 SCRA 234 (1992). 404 ). Lingayen Gulf Elect. Republic. the requirements are as follows: (a) There must be delivery of the stock certificate. (d) Lost or Destroyed Certificates (Sec. . for a valid transfer of stocks. 69. Power Co. 68..N. 66 and 67. (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer. Payment of Balance of Subscription (Secs. the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation’s books. v. (c) Right to Issuance (Sec. 619 ) The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by the corporation through it board of directors for the stockholder to pay the balance of his subscription (xGarcia v. Court of Appeals. 44 Phil. xMiranda v. the transfer must be recorded in the books of the corporation. Ma. Court of Appeals. addressed to Ms. Thus. 577 . 206 SCRA 740 . Rivera. IAC. Bitong v. 7. The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is couple with delivery. and (c) to be valid against third parties. Watered Stocks (Sec. Lezama. Tarlac Rice Mill Co. v. Delinquency on Subscription (Secs. 23 July 1998. Cecilia Salazar-Santos). Certificate of Stock (Sec. Court of Appeals. G. . 293 SCRA 92 (1998). A stock certificate is merely evidence of a share of stock and not the share itself. 14 SCRA 522 ). 441). 65) 5. 292 SCRA 503 (1998). dated 28 January 1999. It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation.30
Stock dividends are in the nature of shares of stock. Baltazar v.. Inc. xLincoln Philippine Life v. Bitong v. It is well-settled that unless proven otherwise.
(b) Quasi-negotiable Character of the Certificate of Stock (Bachrach Motor Co.. 681 ). Suarez. 118043. 6. 63) (a) Nature of Certificate (Tan v. In order for a transfer of stock certificate to be effective. 469 . xLincoln Philippine Life v. xC.
780 .‖ The Court quoted from Uson v. Lacson-Ledesma. 8. Until the transfer is registered. Section 63 of the Corporation Code which provides that ―no share of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation‖ cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. Jr. Until challenged in a proper proceeding. and not elsewhere. to be valid as against third parties. such as those made by the President and Chairman. cannot be given any valid effect. the transfer. 74 Phil. is valid as against a subsequent lawful attachment of said shares. the Supreme Court directly resolved the issue ―Whether a bona fide transfer of the shares of a corporation. must secure such a standing by having the transfer recorded on the corporate books. 44 Phil. 704 . The law on corporation is explicit on this under Sec. 64 Phil. 58 Phil. On the other hand. 180 SCRA 266 (1989)
. 137934. 71 . Court of Appeals. Inc. The transfer must be registered in the books of the corporation to affect third persons. Thus. v. Neugene Marketing. but because they are made so void by statute. Nava v. Jomouad. Chemphil Export & Import Corporation v Court of Appeals. Court of Appeals. No. including the right to vote and to be voted for. 278 SCRA 793 (1997). Bachrach Motors v. Samahang Magsasaka. 72 and 74. 63 of the Corporation Code. 89 Phil. The Supreme Court held that ―the transfer of the subject certificate made by Dico to petitioner was not valid as to the spouses Atinon. Entries made on the stock and transfer book by any person other than the corporate secretary. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporation's stock and transfer books for the attachment of shares to be valid and binding on the corporation and third parties. Diosomito. G. Ceran. v. Said provision of law strictly requires the recording of the transfer in the books of the corporation. Bitanga. xTorres. 251 SCRA 257 (1995).. and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. regardless of whether the attaching creditor had actual notice of said transfer or not. Monserrat v. a person who has purchased stock. which held that all transfers of shares not entered in the stock and transfer book of the corporation are invalid as to attaching or execution creditors of the assignors. 270 SCRA 503 (1997). 62 Phil. Chua Guan v. the judgment debtor. as well as to the corporation and to subsequent purchasers in good faith and to all persons interested. The term ―unpaid claims‖ refers to ―any unpaid claims arising from unpaid subscription. 63. 469 . In addition. the unrecorded transferee cannot vote nor be voted for. Inc. China Banking Corp.‖ Attachments of shares of stock are not included in the term "transfer" as provided in Section 63 of the Corporation Code. Court of Appeals. A person cannot claim a right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. though valid between the parties. Escaño v.. CA. Obligations arising from unpaid monthly dues do not fall within the coverage of Section 63. the judgment creditors. The purpose of registration. 74 SCRA 65 ). 535 . at the time of the levy on execution.. Santamaria v. the entry in the minutes of the meeting of the Club’s board of directors noting the resignation of Dico as proprietary member does not constitute compliance with Section 63 of the Corporation Code. 323 SCRA 424 (2000). except the parties to such transfers: ―All transfers not so entered on the books of the corporation are absolutely void. bot because they are without notice or fraudulent in law or fact. HongKong and Shanghai Banking Corp. v. his vote can be properly counted to determine whether a stockholders’ resolution was approved. and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. In Garcia v. is two-fold: to enable the transferee to exercise all the rights of a stockholder. despite the claim of the alleged transferee. the transferee is not a stockholder but an outsider. Stock and Transfer Book (Secs. therefore. 303 SCRA 295 ). 61 Phil. 10 August 2001. as correctly ruled by the CA. Peers Marketing Corp. Batangas Laguna Tayabas Bus Company. v. Until registration is accomplished. as the same still stood in the name of Dico. Fua Cun v. Summers. not registered or noted in the books of the corporation. Uson v. 681 .R. Filipinas Mining Corporation.31
(e) Forged and Unauthorized Transfers (J. xMagsaysay-Labrador v. cannot be effective as against the corporation. 472 . a stockholder of record has a right to participate in any meeting. Diosomito. and who desires to be recognized as a stockholder for the purpose of voting. Inc.
583 (1925). 292 SCRA 503 (1998). 59 Phil. Datu Tagoranao Benito v. but the holder is not the owner of any part of the capital [properties] of the corporation. 39. 206 SCRA 740 ) 3. xThomson v. 123 SCRA 722 . xPerkins v. 63) Authority of a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares.. Register of Deeds of Manila. 199 SCRA 238 ). countersigned by the secretary or assistant secretary. Second. Share of stock only typifies an aliquot part of the corporation’s property. Court of Appeals. Fox. Inc. The stockholder is not a co-owner or tenant in common of the corporate property. Section 63 of the Corporation Code contemplates no restriction as to whom the stocks may be transferred. Inc. 69 Phil. as to par value shares. Situs of Shares of Stocks (Sec. Right to Certificate of Stock for Fully Paid Shares (Sec. xWells Fargo Bank and Union v. there is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. they do not represent property of the corporation [i. 232 ). they are properties of the stockholders who own them]. 26 SCRA 242 (1968). the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. is at liberty. Dizon. Right to Transfer of Shareholdings (Sec. Hence. its by-laws. not restriction. the certificate must be signed by the president or vice-president. 9. or the right to share in its proceeds to that extent when distributed according to law and equity. because "Restrictions in the traffic of stock must have their source in legislative enactment. either by its board. 55) The situs of shares of stock would be the place of domicile of the corporation to which they pertain to. 588 ) . Dee v. cf. Collector. Third. The owner of shares. 70 Phil. must first be fully paid. without limitation in this respect.. Botica Nolasco. Court of Appeals.Right of Refusal (Padgett v. 4.e. 186 (1939). It does not suggest that any discrimination may be created by the corporation in favor of.. 2. and sealed with the seal of the corporation. Fourth. 26 Phil. the par value. Tan v. What does “Share” represent? While shares of stock constitute personal property. 64. as the corporation itself cannot create such impediment. 325 (1940). Bitong v. Guanson and Sons. 90 and 91). as owner of personal property. SEC.
XII. 6 SCRA 373 (1962). A corporation. (a) Non-transferability of Membership in Non-Stock Corporation (Secs. and prescribe relation. xTayag v. cannot create restrictions in stock transfers.32
Section 63 of the Corporation Code envisions a formal certificate of stock which can be issued only upon compliance with certain requisites. SEC. By-laws are intended merely for the protection of the corporation. Babcock & Templeton. or the full subscription as to no par value shares. First. or the act of its officers. nor is he entitled to the possession of any definite portion of its property or assets. or against a certain purchaser. Inc. 298 SCRA 280 (1998). delivery of the certificate is an essential element of its issuance. A mere typewritten statement advising a stockholder of the extent of his ownership is a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. Preemptive Rights (Sec. The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred. v. they are
. SEC. (b) Restriction on Transfers (Lambert v. under said section to dispose them in favor of whomever he pleases. xStockholders of F. Benguet Consolidated. than the general provisions of law. 47 Phil. Fleishcher v. RIGHTS OF STOCKHOLDERS AND MEMBERS
1. but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer.
―interest bearing stocks‖ on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders. a stockholder according to the books of the corporation has a right to participate in any meeting. The claim for damages of what the shares could have sold had the demand been complied with is deemed to be speculative damage and non-recoverable xBatong Buhay Gold Mines v. 104 Phil. xOllendorf v. 48) Declaration of stock dividends (Sec. xRepublic Planters Bank v. (c) Remedy If Registration Is Refused (Hager v. 210 SCRA 510 (1992). 36 and 42) Merger and consolidation (Sec. 62)
(b) Joint Ownership (Sec. 6. 57) (d) Pledgor. would mean that the cause of action and the determination of the prescription period would begin only upon demand for registration is made and not at the time of the assignment of the certificate. 19 Phil. representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. which does not provide when the registration should be made. 56) (c) Treasury Share No Voting Rights (Sec. (a) Instances When Stockholders Entitled to Vote: Election of directors and trustees (Sec. v. 43) Although the certificates of stock granted the stockholder the right to receive 1% quarterly dividends. 16) Investment in another business or corporation (Secs. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation. . the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. 707 (1933) Sequestration of shares does not entitle the government to exercise acts of ownership over the shares. Mortgagors and Administrators (Sec. xWon v. 44) Fixing of consideration of no par value shares (Sec. 38) Adoption. . 195 SCRA 797 (1991). 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders. 5. Rural Bank of Salinas v. 72) Increase and Decrease of capital stock (Sec. Roxas. is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. 24) Amendment of articles of incorporation (Sec. v. 89) Until challenged successfully in the proper proceedings. 466 (1958). Co. CA. Martin. even sequestered shares may be voted upon by the registered stockholder of record.33
always subject to the charter of the corporation. 147 SCRA 4 (1987). cumulative and participating. 6. 138 ) A stipulation on stock certificate that assignment thereof would not be binding on the corporation unless such assignment is registered in the books of the club as required under the by-laws. xCojuangco Jr. Sec. even if it be shown later on that the shares had been previously sold (but not recorded). Rights to Attend Meetings and Vote (Sec. 55)
. 43) Management contracts (Sec. CA. Both Sec. Wack Wack Golf & Country Club. xPrice and Sulu Dev. Bryan. Rights to Dividends (Sec. Abrahamson. 38 Phil. Restraint of Trade — An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such agreement. 16 of the Corporation Law and Sec. 269 SCRA 1 (1997). Furthermore. consequently. 58 Phil. amendment and repeal of by-laws (Sec. Agana. 585 (1918).
19 Phil. xAfrica v.‖ xPardo v. Isabela Sugar Co. SEC.34
When shares of stocks are pledged by means of endorsement in blank and delivery of the covering certificates to secure a mortgage loan. Angeles v.. 89 SCRA 336 ). Appraisal Right (Secs. does not authorize bringing the books or records outside of the corporate premises.. 89 SCRA 336 (1979). PNB. 266 (1932) A board resolution limiting the right to inspect to a period of ten days shortly prior to the annual stockholders’ meeting is an unreasonable restriction and violates the legal provision granting the exercise of such right ―at reasonable hours. (e) Conduct of Stockholders' or Members' Meetings: Kinds and Requirements of Meetings (Secs. 198 SCRA 73 ). 19 SCRA 671 . 74 of the Corporation Code are: (a) the right of inspections should be exercised at reasonable hours on business days. 40 Phil.. 471 (1919). and cannot be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. Republic v. 266 (1932) The right to inspect. (a) Who May Bring Suit ((Pascual v. otherwise it would often be useless to the stockholder who does not know corporate intricacies. v. 75 and 141) (d) Remedies If Inspection Denied: Mandamus (Gonzales v. Right to inspect covers controlled subsidiaries. 57 Phil. SEC. v. 51 and 93) Quorum (Sec. 49 and 50) Place and Time of Meeting (Secs. 83 ). 81 to 86 and 105) 9. Jr.
. 49 Phil. 57 Phil. Santos. 199 SCRA 39 ). 64 Phil. 176 SCRA 447 ). xVeraguth v. 489 . 205 SCRA 39 (1992). PCGG. 74. Philpotts v. (b) Limitations on Right The only express limitations on the right of inspection under Sec. Hercules Lumber Co.G. Court of Appeals.. Consequently. (c) Nature of Relief (Evangelista v. Tan. and (c) the demand is made in good faith or for a legitimate purpose. Cuaderno. 3 SCRA 198 . Philippine Manufacturing Co. 122 SCRA. Isabela Sugar Co. xVeraguth v. 266 (1932) The right to inspect does not include the right of access to minutes until such minutes have been written up and approved by the directors. Derivative Suits (San Miguel Corp. 86 Phil. (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records of the corporation. 52) 7. although it includes the right to make copies. 964 (1924) (c) Specified Records (Secs. xVeraguth v. Orozco..) Inc. (b) Exhaustion of Intra-Corporate Remedies (Everett v. 293 SCRA 634 (1998). Asia Banking Corp. the lender cannot demand that the shares be registered in his name. Sanmtos. Kahn. the pledgee does not become the owner of the shares simply by the failure of the registered stockholder to pay his loan. SEC. 512 . xLim Tay v. 387 . 697 ). 142) 8. xW. xGokongwei v. (e) Confidential Nature of SEC Examinations (Sec. v. A director has the unqualified right to inspect the books and records of the corporation at all reasonable times. A contract of pledge of shares does not make the pledgee the owners of the shares pledged. Rights to Inspect and Copy Corporate Records (a) Basis of Right (Gokongwei. The right is exercisable through agents and representatives. Commart (Phils. 57 Phil. Republic Bank v. Reyes v. without proper foreclosure. Isabela Sugar Co.. Sandiganbayan. 47 Phil.
and their usages have long been established in jurisprudence. Section 34(H)(2)(c). Not all funds or assets received by the corporation can be considered paid-up capital. 11. 10. Inc. 278 SCRA 216 (1997). Lee v. Makasiar. CFI of Manila. 94 and 95. 100)
XIII. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. xMSCI-NACUSIP Local Chapter v. 12 March 2001. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation. Inc. This cause of action is also included in the Complaint filed before the SEC. 122452. xWestern Institute of Technology. The trustor has a right to terminate the VTA for breach thereof. 18 SCRA 602 (1966). xWestern Institute of Technology. In the absence of a special authority from the board of directors to institute a derivative suit for and in behalf of the corporation. it is required that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. Tam Wing Tak v. 269 SCRA 173 (1997). 163 SCRA 153 (1988). By express provision of Section 13 [of the Corporation Code]. for this term has a technical signification in Corporation Law.R. CA. It merely gives rise to an additional cause of action for damages against the erring directors. Salas. Contracts and Agreement Affecting Shareholdings (a) Proxy (Sec. For a derivative suit to prosper. it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. paid-up capital is that portion of the authorized capital stock which has been both subscribed and paid. 278 SCRA 216 (1997). CAPITAL STRUCTURE: SHARES OF STOCK
2. There is now showing that petitioner has complied with the foregoing requisites. For a derivative suit to prosper. the president or managing director is disqualified by law to sue in her own name. capital refers to the value of the property or assets of a corporation. Young. Court of Appeals. NIDC v. xBitong v. G. Gochan v. for which the directors refuse to sue. Voting trust agreement as part of a loan arrangement. 292 SCRA 503 (1998). The term ―capital‖ and other terms used to describe the capital structure of a corporation are of universal acceptance. (c) Pooling Agreements or Shareholders’ Agreements (Sec. Asia Banking Corporation. 59. The capital subscribed is the total amount of the capital that persons
. Right to Proportionate Share of Remaining Assets Upon Dissolution (a) Different rules apply to non-stock corporations and foundations (Secs. No. Concept of "Capital Stock" (Central Textile Mills v. 49 Phil. National Wage and Productivity Commission. Such must form part of the authorized capital stock of the corporation. Aquino. The allegations of injury to the spouses-relators can co-exist with those pertaining to the corporation. Salas.R. xEverett v. 512 (1926). NIRC of 1997). Briefly. 260 SCRA 368 ). 58) (b) Voting Trust Agreements (Sec. G. National Wages and Productivity Commission.35
Appointment of receiver can be an ancillary remedy in a derivative suit xChase v. v. 29 January 2001. 205 SCRA 752 ). 131889. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the board of directors that exercises its corporate powers and not in the president or officer thereof. v. subscribed and then actually paid up.
whether or not the acquired stock is
. Dividends are thus payable only when there are profits earned by the corporation and as a general rule. 269 SCRA 1 ). Preferred shares take a multiplicity of forms. The preferences are designed to induce persons to subscribe for shares of a corporation. in consideration of the original issuance of the shares. both common and preferred. in Section 43.‖ xCommissioner of Internal Revenue v. 8) Redeemable shares are shares usually preferred. the right of the former being always subordinate to the latter. Redemption. or both at a certain redemption price. 311 SCRA 508. Agana. . substituted the phrase ―unrestricted retained earnings. 2. it is the amount that the corporation receives. Participating and Non-participating Cumulative and Non-cumulative Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. The Code. or the stockholder. are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. ―Redemption is repurchase. inclusive of the premium if any. Court of Appeals. do not give them a lien upon the property of the corporation nor make them creditors of the corporation. as the case may be. which need not necessarily be. The most common forms may be classified into two: (1) preferred shares as to assets. ―A preferred share of stock. (b) Preferred Shares (Republic Planters Bank v.‖ which may be a more precise term. moreover. that the share will receive any dividends. this is subject to the condition that the corporation has. Republic Planters Bank v. and can be more than. or at the option of either issuing corporation. Agana. However. A redemption by the corporation of its stock is. Court of Appeals. on one hand. 301 SCRA 152 (1999). (b) Redeemable shares (Sec. the board of directors has the discretion to determine whether or not dividends are to be declared. Classification of Shares (Sec. 269 SCRA 1 (1997). however. There is no guaranty. which by their terms are redeemable at a fixed date. Agana. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. a repurchase of it for cancellation. 6) (a) Common Shares ―A common stock represents the residual ownership interest in the corporation. assets in its books to cover debts and liabilities inclusive of capital stock. Similarly. adopting the change made in accounting terminology. after such redemption. Thus. Shareholders. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. the present Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. Republic Planters Bank v. xNational Telecommunications Commission v. while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings. in a sense. may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. 514-515 (1999). even if there are existing profits. is one which entitles the holder thereof to certain preferences over the holders of common stock. therefore. Preferences granted to preferred stockholders. . the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings. in place of ―surplus profits arising from its business‖ in the former law. xCommissioner of Internal Revenue v. the par value of the shares. 301 SCRA 152 (1999). 269 SCRA 1 (1997). In fine. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. the latter is a share the holder of which entitled to receive dividends on said shares to the extent agreed upon before any dividends at all are paid to the holders of common stock. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation. Court of Appeals.36
(subscribers or shareholders) have agreed to take and pay for. and (2) preferred shares as to dividends. a reacquisition of stock by a corporation which issued the stock in exchange for property.
Zamora. Acquisitions and Transfers See relevant portion of VILLANUEVA. and continues in business as before. Ed. without more. But the exchange is different—there would be a shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. it does not participate in dividends (since a corporation cannot pay dividends to itself) and cannot vote in stockholders’ meeting. 25 SCRA 845 ). The issue of taxable dividend may arise only once a subscriber disposes of his entire interests and not when there is still maintenance of proprietary interest. Yet neither the reclassification nor exchange per se yields income for tax purposes. 3. Inc. the corporation gets back some of its stock. MERGERS AND CONSOLIDATIONS
A. Restatement of the Doctrine of Piercing the Veil of Corporate Fiction. v. 66 S. Manning. 521.. Essentially. xMadrigal & Co. 278 ) 4. Laguna Transportation Co. the transferee is not liable for the debts and liabilities of the transferor. (c) Founder Shares (Sec. Business Enterprise Transfers (A. 7) (d) Treasury Shares (Sec. Court of Appeals. Types of Acquisitions\Transfers (Edward J. Hybrid Securities (Government v. In this case. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. 151 SCRA 355 ). Commissioner v. retired or held in the treasury. 19 (No. 3. Ct. distributes cash or property to the shareholder in payment for the stock. of Internal Revenue. but so long as it remains a treasury share. the transferee is not liable for the debts and liabilities of the transferor. the exchange of shares. ACQUISITIONS. v. v. Quasi-Reorganization (a) Reduction of Capital Stock (Sec. the business enterprise is
. 301 SCRA 152 (1999).37
cancelled. Inc. Nell Co. San Miguel Corp. except where the transferee expressly or impliedly agrees to assume such debts. Court of Appeals. 301 SCRA 152 (1999).D. John Keley Co. 38. 22 SCRA 1156 . v. 340 SCRA 289 (2000). produces no realized income to the subscriber. When a treasury share which has not been retired by the corporation may be sold again. 66 SCRA 14 ). (e) Stock Warrants (f) Stock Options (g) Re-Classification of Shares ―Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. 833 ). 15 SCRA 415 ): (a) In a pure "Assets only" Transfer. . Although the business enterprise was held under a partnership scheme and latter the business was transferred to a corporation.S. Ferrer. except where the transferee expressly or impliedly agrees to assume such debts. the transferee is liable for the debts and liabilities of the transferor. 2. v. xCommissioner of Internal Revenue v. Sandiganbayan. Comm. There is only a modification of the subscriber’s rights and privileges—which is not a flow of wealth for tax purposes.. 90 L. Concept of "Enterprise" or "Economic unit" or "Going concern" (Villa Rey Transit.‖ xCommissioner of Internal Revenue v. 326 U. . Sugar Estates.J. Pacific. 9. (b) In a “Business Enterprise” Transfer. 15 . Vasquez. June 1993) 1. v. 299. (b) Stock Splits (c) Stock Consolidations
XIV. 37 ATENEO L. SSS. and (c) In an Equity Transfer. 107 Phil. 2. 38 Phil. Phil. Santos v.
137 SCRA 295 . NLRC. the same does not make DBP an employer of the bank employees. properties and liabilities are acquired by the surviving corporation. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist: and when its rights. xAssociated Bank v. nor does it make DBP liable for the wage claims of the bank's employees. for reasons of public policy and social justice. Inc. 4. 80) It is settled that in the merger of two existing corporations. because the surviving corporation automatically acquires all their rights. xDBP v. making it the controlling stockholder of a bank. Effects on Employees of Corporation (Complex Electronics Employees Association v.. 2. while the other is dissolved and all its rights. one of the combining corporations survives and continues the combined business. in turn. NLRC. 210 SCRA 277 (1992). Ordinarily. as well as their liabilities. 291 SCRA 511 (1998). No. xSan Teodoro Dev. v. NLRC. privileges. B. one of the corporations survives and continues the business. Business-Enterprise Transfers (Yu v. Pepsi-Cola Bottling Co. C. Sunio v. Assets Only Transfers (Sundowner Dev.
. 79). 3. DBP converted its loans to equity. V. Inc.38
deemed to have been in operation for the required two-year period as to come under the coverage of the SSS Law. v. Effects of Merger or Consolidation (Sec. Court of Appeals. NLRC. CA. Equity Transfers (Philippine Veterans Investment Development Corp. was to direct [the buyer] to give preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which. v. there is no winding up of their affairs or liquidation of their assets. G. 291 SCRA 511 (1998) The merger. privileges and powers. The procedure to be followed is prescribed under the Corporation Code. Ent. and although the majority of the members of the board of directors of the bank are from DBP. NLRC. 8 SCRA 96 (1963). Court of Appeals. 127 SCRA 390 . 186 SCRA 841 (1990). The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. 79 SCRA 40 (1977). 310 SCRA 403 ). while the rest are dissolved and all their rights. SSS. does not become effective upon the mere agreement of the constituent corporations. 1. 26 January 2001. NLRC. (d) Approval by SEC (Sec. xSan Felipe Neri School of Mandaluyong. xBabst v. Drilon. Although there is dissolution of the absorbed corporations. Concepts 2. v. it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. Central Azucarera del Danao v. Although a corporation may have ceased business operations and an entirely new company has been organized to take over the same type of operations. 245 SCRA 134 . must have been duly approved by a majority of the respective stockholders of the constituent corporations. Court of Appeals. the most that the NLRC could do. Merger and Consolidation 1. 77). 76). (b) Stockholders' or Members' Approval (Sec. Assistance on Legal Affairs. Court of Appeals. in the merger of two or more existing corporations.R. xMDII Supervisors & Confidential Employees Asso. properties and liabilities are acquired by the surviving corporation. however. 181 SCRA 669 ). v. 201 SCRA 478 (1991). 180 SCRA 14 ) There is no law requiring that the purchaser of MDII’s assets should absorb its employees. 99398. xAssociated Bank v. properties as well as liabilities pass on to the surviving corporation. Procedure: (a) Plan of Merger or Consolidation (Sec. 78). The fact that instead on foreclosing on the mortgaged assets. As there is no such law. (c) Articles of Merger or Consolidation (Sec. Pres. Corp.
Pepsi Cola Distributors of the Philippines. Mergers and Consolidations (Filipinas Port Services. REHABILITATION AND INSOLVENCY
See VILLANUEVA. Court of Appeals. Electronics Employees Association v. 210 SCRA 277 (1992). Lazaro. Inc. Corporate Bankruptcy Laws in General (a) Governing Laws (The Insolvency Act. 28 June 2001. 258 SCRA 704 . discharging liabilities and dividing surplus or loss. On the opposite end of the spectrum is rehabilitation which connotes a reopening or reorganization. Securities Regulation Code) (c) Appointment of Management Committee or a Rehabilitation Receiver (d) Automatic Stay and its Legal Effects.10 of Securities Regulation Code. v. (c) Supreme Court Interim Rules of Procedure on Corporation Rehabilitation (2000). Inc. 238 SCRA 52 . National Union Bank Employees v. and Securities Regulation Code [RA 8799]. PD 902-A.B. It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the concept of rehabilitation. Filipinas Port Services. NLRC. 2. 105364. Interim Rules of Procedure for Corporate Rehabilitation of 2000) (b) Types of bankruptcy proceedings in the Philippines (c) Resolution on jurisdiction issues on bankruptcy proceedings (Ching v. Liquidation. Corporate Rehabilitation (a) Nature of “Rehabilitation” (Ruby Industrial Corp. v. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. 4. 247 SCRA 386 (1995). Philippine Veterans Bank Employees Union – N. 310 SCRA 403 ).. 2 (May. 242 SCRA 145 . v. G.10. No. xCoral v. 200 SCRA 773 .Consequences of approval/non-approval (b) Pres. Revisiting the Philippine “Laws” on Corporate Rehabilitation. Equity Transfers (Manlimos v. (b) Basis of RTC Power to Undertake Corporate Rehabilitation (Secs. 5. and Section 5. When it becomes effective
. Suspension of Payments (a) Insolvency Law (Secs. NLRC. NLRC. 156 SCRA 123 ). 201 SCRA 190 ). Land Bank of the Philippines. v. Decree 902-A (Sec. 177 SCRA 203 . v.39
3.U. 246 SCRA 733 . 1.R. It is the process of reducing assets to cash.Required vote of creditors . in relation to Sec. Employees Union-PTGWO v. Pres. NLRC. xDevelopment Bank of the Philippines v. 2 to 13) . To allow the liquidation proceedings to continue would seriously hinder the rehabilitation of the subject bank.Situation of the corporate debtor . Inc. v. 186 SCRA 841. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. Spin-Offs (San Miguel Corp.Nature of petition . NLRC. Robledo v. NLRC. 5[d] and 6. 3. 5. Inc. 262 SCRA 81 )
XV. xAvon Dale Garments. NLRC.E. NLRC. NLRC. NLRC. in Corporation Law. 284 SCRA 445 (1998). v. XLIII ATENEO LAW JOURNAL No. 223 SCRA 337 (1993). such that both cannot be undertaken at the same time. xFirst General Marketing Corp. connotes a winding up or setting with creditors and debtors. Pepsi-Cola Bottling Co. NLRC. Decree 902-A. 5[d]). Confessor. 1999).
237 SCRA 446 ) Labor claims are not exempted from the automatic stay under Pres. 290 SCRA 198 (1998).A. PD 902-A) (g) SEC Power to Liquidate Corporation (h) Basic Differences Between Suspension of Payments Proceedings under the Insolvency Law and Under Pres. Inc. Insolvency Proceedings A liquidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. Inc. The conclusion is inevitable that pursuant to Section 6(c). v. v.Duration (B. 26 July 2000. xChung Ka Bio v. 290 SCRA 198 ) . xBank of PI v. 21). whose time. NLRC. 80 ).40
The appointment of a management committee or rehabilitation receiver may only take place after the filing with the SEC of an appropriate petition for suspension of payments. 286 SCRA 749 (1998). Section 18 on the automatic stay is no self-executory. Court of Appeals. NLRC. Court of Appeals. 128003. 190 SCRA 558 (1990). effort and resources would be wasted defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. taken together with Sections 5(d) and (d). Macleod. 42 ). 275 SCRA 497 . (a) Governing Law and Jurisdiction (b) General Effect of Corporate Insolvency Proceedings (c) VOLUNTARY INSOLVENCY (d) Filing of Petition (Sec. xRizal Commercial Banking Corp. 186 SCRA 94 . Citibank. 163 SCRA 534 (1988)) . N. Court of Appeals. xModern Paper Products. 14. To allow such other actions for labor claims to continue would only add to the burden of the management committee or rehabilitation receiver.]. Court of Appeals. Court of Appeals. Inc. Inc. Court of Appeals. v. Court of Appeals. v.. v. 203 SCRA 9 (1991). Decree No. 305 SCRA 721 (1999). 20)
. Homes. TIL) (e) Effect of Order of Insolvency (Sec. No. (Barotac Sugar Mills v. G. Hearing of petition (Sec. 902-A 4. De Amuzategui v. (f) INVOLUNTARY INSOLVENCY (Sec. 24) (i) Acts of Insolvency and Order of Adjudication (Sec.F. applications for suspension of proceedings must be made in the various courts where actions in pending (xUnson v. 20 to 33) (g) Qualifications of Petitioning Creditors A foreign corporation whichs shows that it is a resident of the Philippines has legal standing to petition for involuntary insolvency of a corporate debtor xState Investment House. a court action is ipso jure suspended only upon the appointment of a management committee or a rehabilitation receiver. (h) Order to Show Cause (Sec. Alemar’s Sibal & Sons. Intermediate Appellate Court.R.Effect on Individual Petitioners Joining the Petition (Union Bank of the Philippines v. Abeto. 47 Phil. xTraders Royal Bank v. Inc. 902-A.Claims Covered by the Automatic Stay (xPCIB v. reiterated in Union Bank v. 18. xChua v. Decree No.Types of “claims” Covered (Finasia Investments v. IAC. Elbinias. The justification for the automatic stay of all pending actions for claims is to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that migh unduly hinder or prevent the ―rescue‖ of the debtor company. Court of Appeals. xRubberworld [Phils. 172 SCRA 436 . 33 Phil. 213 SCRA 830 . 177 SCRA 788 . 190 SCRA 262 ) . . 6. Court of Appeals. 229 SCRA 223 ). v. (e) Rationale for Suspensive Effect of Appointment on Existing Suits and Causes of Action (f) Powers of Management Committee or the Rehabilitation Receiver (Sec.
5. Sumera v. 117) (a) No Creditors Affected (Sec. DISSOLUTION
1. 52. Intermediate Appellate Court. 121. 93 Phil. (f) Demand of Minority Stockholders for Dissolution (Financing Corp. There can be no doubt that under Sections 77 and 78 of the Corporation Law. Methods of Liquidation (Sec. 174 SCRA 377 ). The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. Board of Liquidators v. The normal method of procedure
. 64. Involuntary Dissolution (Sec. 81 SCRA 9 . providing for the subscription and payment of the capital stock.‖ xChina Banking Ciorp. 6(l). 261 (1933). (b) Expiration of Term (c) Shortening of Corporate Term (Sec. 721 . Sec. Br. v. M. Pineda. 399 ). The term "organization" relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. Valencia. as the same would constitute new business. of the Phil. 32. 98 Phil. Inc. 58 Phil. xBenguet Consolidated Mining Co. IAC. Voluntary Dissolution (Sec.. the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized xPhilippine National Bank v. 472 ). v. XXI. that is. 122. 404 ). P. Court of First Instance of Rizal. 118) (b) There Are Creditors Affected (Secs.41
(j) Meeting of Creditors to Elect Assignee (Secs. 711 (1956). Kalaw. xChung Ka Bio v. 34 and 35. Rules of Court) (a) Quo Warranto (Republic v. When the period of corporate life expires. 120) (d) Non-user of Corporate Charter and Continuous Inoperation of a Corporation (Sec. xGovernment v. 4. 2. and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. Rule 66. 43 and 59) (n) Composition (Sec. SEC. Michelin & Cie.D. the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. ―Liquidation‖ is ―the settlement of the affairs of a corporation [which] consists of adjusting the debts and claims. El Hogar Filipino. Security Credit & Acceptance Corp. Bisaya Land Transportation Co. and 66) (p) Appeal in certain cases (Sec. 24 SCRA 269 (1968). 3. Pasig. 108 Phil. v. xAlhambra Cigar & Cigarette Manufacturing Company. 20 SCRA 987 . v. 33) (m) Remedies of Secured Creditors (Sec. Legal Effects of Dissolution A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired. 22) "Organize" when used in reference of a corporation involves the election of officers. Camarines Industry. Buenaflor v. the adoption of by-laws. Sec. Republic v. 2. 163 SCRA 534 (1988). 209 SCRA 294 (1992). 29 and 30) (k) Effects of Order of Insolvency and Appointment of Receiver (Secs.. 50 Phil. 82)
XVI. V. the settlement and adjustment of claims against it and the payment of its just debts. 119 and 122). 19 SCRA 58 . 63) (o) Discharge (Secs. 902-A. xRadiola-Toshiba Phil. Teodoro. Sugar Regulatory Administration. 67 Phil. No Vested Rights to Corporation Fiction (Gonzales v. 29. 199 SCRA 373 ) (l) Liquidation of assets and payment of debts (Sec. of collecting all that is due the corporation.
261 (1933). Although a corporate officer. following the rationale of the Supreme Court's decision in Gelano v.‖ xRepublic v. such discretion must. or any other fact of similar nature. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter’s ruling. Michelin & Cie. The corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs. such as the dissolution of the corporation. might make proper representations with the Securities and Exchange Commission. 58 Phil. he took advantage of his position as general manager and applied the corporation's assets in payment exclusively to his own claims. those having any pecuniary interest in the assets. It may. and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business. Michelin & Cie. ―While the appointment of a receiver rests within the sound judicial discretion of the court. . v. and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation. after the lapse of the said three-year period. definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation. including not only the shareholders but likewise the creditors of the corporation. . If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period. however. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditor. the board of directors (or trustee) itself. While Section 77 of the Corporation Law [now section 122 of the Corporation Code] provides for a three year period for the continuation of the corporate existence of the corporation for purposes of liquidation. . it should be transferred to the proper court for trial and allowance. V. Clemente v. since knowing fully well that certain creditors had similarly valid claims. court of Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. such as a general manager is not liable for corporate obligations. made within the three years. Tan Tiong Bio v. for working out a final settlement of the corporate concerns. obviously for the benefit of all the creditors thereof. and if a claim is disputed or unliquidated so that the receiver cannot safely allow the same. appointing a trustee or a receiver who may act beyond that period. 242 SCRA 717. V. such as claims for wages. ―The appointment of a receiver by the court to wind up the affairs of the corporation upon petition for voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. would not serve as an
. there is nothing in said provision which bars an action for the recovery of the debts of the corporation against the liquidator thereof.‖ xChina Banking Corp. Court of Appeals. any supervening fact. during the three-year term. culminating in the disposition and distribution of its remaining assets. 44 SCRA 418 (1972). he shall be liable to the extent thereof to corporate liabilities. M. Still in the absence of a board of directors or trustees. 58 Phil. for at the very least. Pore. Commissioner. Marsman Development Company. CA. when such corporate officer ceases corporate property to apply to his own claims against the corporation. 2 SCRA 989 . 723 (1995). 86 . 100 Phil. the assessment aforementioned. 103 SCRA 90 ). however.42
is for the directors and executive officers to have charge of the winding up operations. and the amount so allowed then presented to the receiver or trustee for payment. repeal of the law. acting for and in its behalf. Gelano v. . Who Are Liable After Dissolution and Winding-Up? (National Abaca Corp. ―It immaterial that the present action was filed after the expiration of the three years . 6. always be exercised with caution and governed by legal and equitable principles. xDe Guzman v. Since the law specifically allows a trustee to manage the affairs of the corporation in liquidation. the violation of which will amount to its abuse. M. NLRC. all claims must be presented for allowance to the receiver or trustee or other proper persons during the winding up proceedings which in this jurisdiction would be within the three years provided by sections 77 and 78 of the Corporation Law as the term for the corporate existence of the corporation. though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders.‖ xChina Banking Ciorp. 211 SCRA 723 (1992). which has primary and sufficient broad jurisdiction in matters of this nature. 261 (1933).
the counsel of the dissolved corporation was considered a trustee. Court of Appeals [242 SCRA 717 (1995)]. 30 and 34(H). cultural.R. 87. 12 September 1999. 101. Financing Corp. professional.J. scientific. Court of Appeals. . educational. Club Filipino Inc. NIRC of 1997. xReburiano v. Teodoro. v. Intermediate Appellate Court. Articles of Incorporation Requirements (Sec. 24. G. and not for the purpose of carrying out the objectives of the enterprise. 2. Inc. ―No right of remedy in favor or against any corporation . Theory on Non-Stock Corporation (Secs. 105) Even prior to the passage of the Corporation Code which recognized close corporation. Definition (Sec. People v. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose.
XVIII. A non-stock corporation may only be formed or organized for charitable. March. CLOSE CORPORATION
See VILLANUEVA. xReburiano v. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes. Court of Appeals. (Unpublished) 1. 645 (1998). literary. we held that the board of directors may be permitted to complete the corporate liquidation by continuing as ―trustees‖ by legal implication. University of Visayas. 2. The incurring of profit or losses does not determine whether an activity is for profit or non-profit. 301 SCRA 342 (1999). San Juan Structural and Steel Fabricators. 6. 296 SCRA 631. 1. Court of Appeals. v. . and the courts will consider whether dividends have been declared or its members or that is property. de Cebu. NON-STOCK CORPORATIONS AND FOUNDATIONS
See VILLANUEVA. 225 SCRA 678 . Collector of Internal Revenue v. Under Section 145 of the Corporation Code. as amended)
. xManila Sanitarium and Hospital v. social. 97) (a) Pre-Emptive Rights (Sec. 2.43
effective bar to the enforcement of such right. Deadlocks (Sec. No Necessity of Board (Sec. Agreements by Stockholder (Sec.‖ This provision safeguards the rights of a corporation which is dissolved pending litigation. shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. Withdrawal and Dissolution (Sec. Manuel R. 88 and 94(5). 1-81. The Philippine Close Corporation. religious. 102). Sec. Gabuco. the Supreme Court had on limited instances recognized the common law rights of minority stockholders to seek dissolution of the corporation. effects or profit was ever used for personal or individual gain. 269 SCRA 564 ). 96. 1 SCRA 669 ). Distinguishing Foundations from Other Non-Stock Corporations. 301 SCRA 342 (1999) 7. 32 ATENEO L. BIR-NEDA Regulations No. 103) 3. 115054-66. Court of Appeals. 5 SCRA 321 . (b) Amendment (Sec. In the later case of Clemente v. fraternal. 100) 5.
XVII. 98 and 99) 4. NLRC. What is a Foundation? (Secs. 7 SCRA 14 (1963). Dulay Enterprises v. 404 (1953). Sergio F. 2. Menil. Revenue Regulations No. (No. 163 SCRA 534 ). of the Phil. In Gelano case. Restriction on Transfer of Shares (Secs. 43. 1988). 104) 7. Naguiat v. civic or other similar purposes. Reincorporation (Chung Ka Bio v. Collector of Internal Revenue v. 93 Phil. 14(2).
Art. v. and no court which is only a creature of the state.Vol.G. Philippine Doctrine of "Doing Business. Mangaliman. 3(d). 525 (1941). 49. 226. xFar East Int'l. 2 are not mandatory and that an entity may. also Art. Foreign Investment Act of 1991). No. Omnibus Investment Code. 57 Phil. 1. 48. such foreign corporation has no legal existence. 39 SCRA 303 (1971).Part I . 278 SCRA 312 (1997). Inc. Court of Appeals. Therefore. if a foreign corporation does not do business here. v. 6 (June. can by its judgments and decrees. Jurisprudential Concepts of "Doing Business": (a) "Doing business" implies a continuity of commercial dealings and arrangements and the performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of its organization. and generally. a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. has no legal existence within the state in which it is foreign. No. Where a single act or transaction." THE LAWYERS REVIEW . 4. 126. As we observed. Court of Appeals. xTimes. 278 SCRA 312 (1997). 2. . 6 SCRA 725 (1962). otherwise.A. in so far as the State is concerned.. 278 SCRA 312 (1997). 3. xAvon Insurance PLC v. Executive Order No. it to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts. 607 (1932). Indeed. The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines.. Court of Appeals. xCollector v. 7042.Vol. A fundamental rule of international jurisdiction is that no state can by its laws. A foreign corporation licensed to do business in the Philippines should be subjected to no harsher rules that is required of domestic corporation and should not generally be subject to attachment on the pretense that such foreign corporation is not residing in the Philippines. xAvon Insurance PLC v. Nankai Kogyo. Phil. xClaude Neon Lights v. Dissolution (Secs. (a) Application for License (Secs. No. in the absence of compliance with such requirements. Reyes. there would be no reason for it to be subject to the State’s regulation. 127 (1956). VII. V. R. A foreign corporation with a settling agent in the Philippines which issues twelve marine policies covering different shipments to the Philippines is doing
. 100 Phil. however. Definition (Sec. 131) (d) Rationale for Requiring License to Do Business The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so. still show that it falls under the provisions of Section 26 of the NIRC. to subject such foreign corporation to the courts’ jurisdiction would violate the essence of sovereignty. 44. Omnibus Investment Code) (c) Amendment of License (Sec. A foreign corporation owes its existence to the laws of another state. 3. FOREIGN CORPORATION
See VILLANUEVA. Part II . 124 and 125. 123). Sinco Educational Corp. Sec. directly bind or affect property or persons beyond the limits of that state. 1993). Omnibus Investment Code) (b) Issuance of License (Sec. 1993).44
The formal requirements of Revenue Regulations No. Avon Insurance PLC v. Statutory Concept of "Doing Business" (Art. said single act or transaction constitutes doing business. is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines. 72 Phil. Advertising Corp. 94 and 95)
XIX. (April. Mentholatum v. VII.
v. 766 ). 351 (1951) Solicitation of business contracts constitutes doing business in the Philippines. since other circumstances must be considered. xConverse Rubber v. Tensuan. and Recovery on a Hongkong judgment against a Manila resident (xHang Lung Bak v. Inc. xSchmid & Oberly v. 147 SCRA 154 . Recovery of damages sustained by cargo shipped to the Philippines (xBulakhidas v. 130 SCRA 104 . xMarubeni Nederland B. The following were all held not to be engaged in business in the Philippines: The collision of two vessels at the Manila Harbor (xDampfschieffs Rhederei Union v. 156 SCRA 44 . xWang Laboratories. Director of Patens. CA. xHutchison Philippines Ltd. Ltd. 130 SCRA 104 ). v.. 166 SCRA 493 .. 188 SCRA 170 ). Reyes. Union Insurance Society of Canton. v. xPuma Sportschunhfabriken Rudolf
. v." xColumbia Pictures Inc. Inc. v. A foreign corporation which had been collecting premiums on outstanding policies was regarded as doing business in the Philippines. Inc. 180 SCRA 254 ). Navarro. 143 SCRA 288 ). xUniversal Rubber Products. 339 SCRA 434 (2000). 256 SCRA 696 (1996). Universal Shipping Lines. Juan Ysmael and Co. RJL. (d) Transactions with Agents and Brokers (Granger Associates v. 114 SCRA 420 . 102 Phil. 100-A. v. v. Jacinto Rubber & Plastic Co. can be deemed by and of themselves to be doing business here. 89 Phil. 313 (1950). v. Aetna Casualty & Surety Co.. v. v. Different Rules on Trademark and Tradenames (Western Equipment & Supply Co. v. v. (b) Unrelated or Isolated Transactions (Eastboard Navigation. Salvador. xLitton Mills. xGeneral Corp. CA. 201 SCRA 137 ). 115 . Universal Rubber. Court of Appeals. S. xLeviton Industries v. Inc. Inc. 25 SCRA 633 ).. In the case of foreign movie companies who have registered intellectual property rights over their movies in the Philippines. La Chemise Lacoste. xConverse Rubber Corp.45
business in the Philippines. Manila Port Service. Court of Appeals. Meer. Fernandez. xManufacturing Life Ins. v. Saulog. Sale to the Government of road construction equipment and spare parts with no intent of continuity of transaction (xGonzales v.. (c) The "Contract Test" of Doing Business (Pacific Vegetable Oil Corp. 190 SCRA 105 (1990). IAC. v. 4. 41 SCRA 50 . 189 SCRA 631 [199 ]. 87 Phil. it was held that the appointment of local lawyer to protect such rights for piracy is not deemed to be doing business: "We fail to see how exercising one's legal and property rights and taking steps for the vigilant protection of said rights. Ltd. Microwave Systems. It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines. Singson. 8 Phil. 1 . v. v. Pacific Star Line.. 129 SCRA 373 . Raquiza. particularly the appointment of an attorney-infact. La Campañia Transatlantica. Participating in bidding process shows an intention to engage in business in the Philippines. 142 SCRA 1 ). Loss of goods bound for Hongkong but erroneously discharged in Manila (xThe Swedish East Asia Co. April 1955 Vol. Ltd. 261 SCRA 144 (1996). Mendoza. v. of the Phil. xUniversal Rubber Products. Inc. Infringement of trade name (xGeneral Garments Corp. Court of Appeals. Advanced Decision Supreme Court. Antam Consolidated v.A. Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state. Inc. p. 51 Phil. v.. 80 SCRA 635 . such act will be considered as constituting business. 97 SCRA 158 .V. Subic Bay Metropolitan Authority.
. Elser. 88 Phil. the government official designated by law to that effect. 119 SCRA 118 ) But Now See Communication Materials and Design. Section 69 of the then Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from performing single acts. Section 14. 206 SCRA 457 ). v. 46 Phil.. 23 . v. Inc. 266 SCRA 537 (1997). Inc. CA. Rules of Court. 144 of the Corporation Code.. summons may be served on (a) its resident agent designated in accordance with law. It the appearance of a foreign corporation to a suit is precisely to question the jurisdiction of the said tribunal over the person of the defendant. v. v. Elser. xHahn v. 741 . 313 . v. Universal International Group of Taiwan. ECED. v. 267 SCRA 567 (1997). 750 . Del rosario. or (c) any of its officers or agent within the Philippines. 88 Phil. 6 SCRA 725 ).G.. Suits Against Foreign Corporations: (a) Jurisdiction Over the "Person" of Foreign Corporations (Sec. 260 SCRA 673 (1996). Court of Appeals. of the Phil. under the principle of estoppel. When it is shown that a foreign corporation is doing business in the Philippines. Effects of Failure to Obtain License: (a) On the contract entered into by such foreign corporation (Home Insurance Company v. Isnani. Ltd. xFar East International Import and Export Corp. Eastern Shipping Lines. IAC. MarshallWells v. nor does it constitute an acquiescence to the court’s jurisdiction. xAvon Insurance PLC v. v. (b) if there is no resident agent. 327 (1997). 14. v. General Corp. 70 (1924). 133. 5. (b) Standing of such foreign corporation to sue in Philippine courts (Sec. For the purpose of having summons served on a foreign corporation in accordance with Rule 14. but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. But see lately: Subic Bay Metropolitan Authority v. xPhilips Export B. 46 Phil.V. Zulueta. v Flores.46
Dassler. 158 SCRA 233 . Rule 14. it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. K. Nowhere in the case of
. 96 Phil. xGeorg Grotjahn GMBH & C. CA. under the principle of pari delicto. v. 340 SCRA 359 (2000). Court of Appeals. xJohnlo Trading Co. yet it is necessary that there must be specific allegations in the complaint that establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question. Union Insurance Society of Canton. Eastern Shipping Lines. v. Merrill Lynch Futures.
6. then this appearance is not equivalent to service of summons. Johnlo Trading Co. v. 278 SCRA 312. 211 SCRA 824 (1992). 235 SCRA 216 (1994). Marshall-Wells Co. 87 Phil.. (f) Proper Doctrine: Ericks Ltd. Although there is no requirement to first substantiate the allegation of agency. 123 SCRA 424 (1983). Inc. (Top-Weld Mfg. (e) Estoppel Doctrine: A foreign corporation doing business in the Philippines may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefitted by said corporation and knew it to be without the necessary license to do business. xPacific Micronisian Line. v. Court of Appeals. Home Insurance Company v. Nankai Kogyo Co. Ltd. (d) Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit. The mere allegation in the complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent. 71 ) (c) Criminal liability under Sect. 123 SCRA 424 ). Court of Appeals.
Omnibus Investment Code) 14.47
Signetics Corporation v. 129. it is only in the headnote of the reporter which is not part of the decision. (b) When a corporation has designated a person to receive service of summon pursuant to the Corporation Code. xRoyal Crown International v. even though not doing business in the Philippines. xHahn v. 232 SCRA 329 (1994).. xWang Laboratories. 134 and 135." Atlantic Mutual Inc. But Now See Avon Insurance PLC v. 139 ) 10. v. Ltd. De la Osa. Art. 278 SCRA 312 (1997) (c) Stipulation on Venue When the contract sued upon has a venue clause within the Philippines. PENALTY PROVISIONS OF THE CODE
. Court of Appeals. Signetics Corp. Amendment of Articles of Incorporation (Sec. Gani. 132. Insular Lumber Co. xHyopsung Maritime Co. Art. 156 SCRA 44 ). xFBA Aircraft v.. Inc. Court of Appeals. 130) 11. 110 SCRA 1 . Resident Agent (Sec. v. 295 SCRA 462 (1998).. Court of Appeals. 67 Phil. 127 and 128) (a) Concept of "residence" (State Investment House v. Omnibus Code) 12. 9. 50. Cebu Stevedoring Co. v. Grey v. Section 14. 266 SCRA 537 (1997). 17 SCRA 1037 (1966).M. Revocation of License (Secs. A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident agent in Philippine jurisdiction. 182 SCRA 591 (1990). 7. CA. to be sued in local courts. K. 125 SCRA 522 (1983). it is deemed a confirmation by the foreign corporation. c.. 385 (1938). etc.K. it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. Contra: The sine qua non requirement for service of summons and other legal processes or any such agent or representative is that the foreign corporation is doing business in the Philippines. Inc. 65 Phil. 8. Merger and Consolidation (Sec. xCommissioner of Customs v. 51. xH. Pleading "Doing" and "Not Doing" of Business The fact that a foreign corporation is not doing business in the Philippines must be alleged if a foreign corporation desires to sue in Philippines courts under the "isolated transactions rule. 136)
XX. Citibank.. Applicable Laws to Foreign Corporations (Sec. Co. Mendoza. v. xLinger & Fisher GMBH v. that the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. 178 SCRA 569 .B. Zosa. Court of Appeals. xFrench Oil Mills Machinery Co. Court of Appeals. Zachry Company International v. 203 SCRA 9 ). This overturned the previous doctrine in xMarshall-Wells (as well as in xIn re Liquidation of the Mercantile Bank of China. IAC. xNew York Marine Managers. the designation is exclusive and service of summons on any other person is inefficacious. 249 SCRA 416 (1995). (b) The Odd Doctrine (Facilities Management Corp. 225 SCRA 737 (1993). Inv. CA. CA. v. summons can validly be served thereto even without prior evidence of the truth of such factual allegation. Withdrawal of Foreign Corporation (Sec. v. For the purpose of having summons served on a foreign corporation in accordance with Rule 14. NLRC. 165 SCRA 258 1988). 89 SCRA 131 . did the Court state that if the ―complaint alleges that defendant has an agent in the Philippines.
2. 144). 190 1/7 of the Corporation Law) Sec. X. Strict Principles in Criminal Law. PD 902-A). 148).
CORPLAW. 2. 2 (29 February 1996). Applicability of other provision of the old Corporation Law. Benguet Consolidated Mining Co. Home Insurance Company v. 4)." xHarden v. New requirements on existing corporations (Sec. 108 and 143. Violation of Section 133 by Foreign Corporations Section 133 of the present Corporation Code. 4. 74). THE LAWYERS REVIEW . 58 Phil. Special corporations (Sec.48
See VILLANUEVA. 141 (1933). 123 SCRA 424 (1983). 5. (Sec. Specific application (Sec. should be deemed to have a penal sanction by virtue of Section 144 of the Corporation Code. El Hogar Filipino.OTL\343SCRA\11-14-2001
. 190 was not intended to make every casual violation of one of the Corporation Law provisions ground for involuntary dissolution of the corporation and that the court was entitled to exercise discretion in such matters. xGovernment of the Philippine Islands v. Penalty Clause for Violations of the Provisions of the Code (Sec..DIR\CORPLAW. the issue of malice. 190(A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. 3. when the criminal penalties of Sec. Vol. Home may therefore provides the second instance of violation of the Code (under Section 133). Cross-reference (Sec. 4. But these proceedings can be maintained only by the Attorney-General in representation of the Government. Historical Background of Sec. 145 and 146). The penalties imposed in Sec. The Penal Provision Under Sec. 399 (1927). 144 are applicable. 1. which unlike its counterpart Section 69 of the Corporation Law provided specifically for penal sanctions for foreign corporations engaging in business in the Philippines without obtaining the requisite license. No. Eastern Shipping Lines. MISCELLANEOUS
1. 50 Phil. 144 of the Corporation Code. 6. 144 (Sec. SEC power and supervision (Secs. 27).