OUTLINE ON PHILIPPINE Atty. CESAR L.

VILLANUEVA
CORPORATE LAW
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I. HISTORICAL BACKGROUND
1. The Philippine Corporate Law:
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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 annima 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.
II. CONCEPTS
See opening paragraphs of VILLANUEVA, Corporate
Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994).
1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code).
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;

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Unless otherwise indicated, all references to sections pertain to The Corporation Code of the
Philippines.
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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.
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- 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
[1968])
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
[1962]).
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 [1947])
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
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One advantage of a corporate business organization is the limitation
of an investors 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 BLACKS LAW DICTIONARY, Sixth ed., 839.
(e) Cooperatives (Art. 3, R.A. No. 6938)
(f) Sociedades Annimas
A sociedad annima 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 personan artificial being, invisible, intangible, and existing
only in contemplation of lawwith power to hold, buy, and sell property, and to
sue and be sueda corporationnot a general copartnership nor a limited
copartnership . . . The inscribing of its articles of agreement in the commercial
register was not necessary to make it a juridical persona corporation. Such
inscription only operated to show that it partook of the form of a commercial
corporation. xMead v. McCullough, 21 Phil. 95,106 (1911).
The sociedades annimas were introduced in Philippine jurisdiction on 1
December 1888 with the extension to Philippine territorial application of Articles
151 to 159 of the Spanish Code of Commerce. Those articles contained the
features of limited liability and centralized management granted to a juridical
entity. But they were more similar to the English joint stock companies than the
modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98
Phil. 711 (1956)
Our Corporation Law recognizes the difference between sociedades
annimas and corporations and will not apply legal provisions pertaining to the
latter to the former xPhil. Product Co. v. Primateria Societe Anonyme, 15 SCRA
301 (1965).
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(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 [1920]).
(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
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directs or authorizes, is just as true of a corporation as a natural person. PNB v. CA,
83 SCRA 237 (1978).
Our jurisprudence is wanting as to the definite scope of corporate tort.
Essentially, tort consists in the violation of a right given or the omission of a duty
imposed by law. Simply stated, tort is a breach of a legal duty. 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; consequently, its stockholder who was
actively engaged in the management or operation of the business should be held
personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
As a general rule, 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. A bank will be held liable for the negligence of its officers or agents when
acting within the course and scope of their employment, even as regards that species
of tort of which malice is an essential element. In this case, 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. Philippine Commercial
International Bank vs. Court of Appeals, G.R. No. 121413, 29 January 2001.
4. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401
(1914); People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121 SCRA 655
[1983]; Articles 102 and 103, Revised Penal Code).
No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v.
Reyes, 39 SCRA 303 (1971).
When a criminal statute forbids the corporation itself from doing an act, the
prohibition extends to the board of directors, and to each director separately and
individually. xPeople v. Concepcion, 44 Phil. 129 (1922).
5. Recovery of Moral Damages and Other Damages
A corporation, being an artificial person, cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis for moral damages under Art. 2217 of the Civil Code.
However, a corporation may have a good reputation which, if besmirched, may be a
ground for the award of moral damages. xMambulao Lumber Co. v. Philippine National
Bank, 22 SCRA 359 (1968).
Even when the corporation's reputation and goodwill have been prejudiced,
"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."
xPrime White Cement Corp. vo Intermediate Appellate Court, 220 SCRA 103, 113-114
(1993).
Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury. A corporation, being an artificial person
and having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of lifeall of which cannot be suffered by respondent bank
as an artificial person. xLBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994);
xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996);
xSolid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).
In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the
Supreme Court seemed to have gone back to the original doctrine that [u]nder Article
2217 of the Civil Code, moral damages include besmirched reputation which a
corporation may possibly suffer.
The award of moral damages cannot be granted in favor of a corporation
because, being an artificial person and having existence only in legal contemplation, it
has no feelings, no emotions, no senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be experienced only by one having a nervous
system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao
Lumber Co. v. PNB [130 Phil. 366 (1968)], that a corporation may recover moral
damages if it has a good reputation that is debased, resulting in social humiliation is
an obiter dictum. . . The possible basis of recovery of a corporation would be under
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Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or
bad faith. xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).
While it is true that a criminal case can only be filed against the officers of a
corporation and not against the corporation itself, it does not follow from this, however,
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. xCometa v. Court of Appeals, 301
SCRA 459 (1999).
6. Nationality of Corporation: COUNTRY UNDER WHOSE LAWS INCORPORATED (Sec. 123).
Exceptions: The TEST OF CONTROLLING OWNERSHIP Applies In:
(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987
Constitution; Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC
and the Register of Deeds of Davao, 102 Phil. 596 [1957]).
The donation of land to an unincorporated religious organization, whose
trustees are foreigners, cannot be allowed registration for being violation of the
constitutional prohibition and it would not be violation of the freedom of religion
clause. The fact that the religious association has no capital stock does not suffice
to escape the constitutional inhibition, since it is admitted that its members are of
foreign nationality. 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; and the spirit of the
Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens. xRegister of Deeds of Rizal
v. Ung Sui Si Temple, 97 Phil. 58 (1955)
(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution; People v. Quasha, 93
Phil. 333 [1953]).
The primary franchise of a corporation, that is, the right to exist as such, is
vested in the individuals who compose the corporation and not in the corporation
itself and cannot be conveyed in the absence of a legislative authority so to do.
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, except such special or
secondary franchises as are charged with a public use. xJ.R.S. Business Corp. v.
Imperial Insurance, 11 SCRA 634 (1964).
The Constitution, in no uncertain terms, requires a franchise for the
operation of a public utility; however, 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. 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. Tatad v. Garcia, Jr., 243 SCRA 436 (1995)
A distinction should be made between shares of stock, which are owned by
stockholders, the sale of which requires only NTC approval, and the franchise
itself which is owned by the corporation as the grantee thereof, the sale or transfer
of which requires Congressional sanction. Since stockholders own the shares of
stock, they may dispose of the same as they see fit. They may not, however,
transfer or assign the property of a corporation, like its franchise. In other words,
even if the original stockholders had transferred their shares to another group of
shareholders, the franchise granted to the corporation subsists as long as the
corporation, as an entity, continues to exist. The franchise is not thereby
invalidated by the transfer of the shares. A corporation has a personality separate
and distinct from that of each stockholder. It has the right of continuity or perpetual
succession Corporation Code, Sec. 2). Philippine Long Distance Telephone Co. v.
National Telecommunications Commission, 190 SCRA 717, 732 (1990).
(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)
Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of
1982; Section 2, P.D. 576; SEC Opinion dated 24 March 1983; DOJ Opinion
163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY
BULLETIN, (No. 4December, 1991), at p. 31.
Cable Industry
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The National Telecommunications Commission (NTC), which regulates and
supervises the cable television industry in the Philippines under Section 2 of
Executive Order No. 436, s. 1997, has provided under NTC Memorandum Circular
No. 8-9-95, under item 920(a) thereof provides that Cable TV operations shall be
governed by E.L. No. 205, s. 1987. If CATV operators offer public
telecommunications services, they shall be treated just like a public
telecommunications entity.
Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking
its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435
F. 2d 70, considered CATV as a form of mass media which must, theefore, be
owned and managed by Filipino citizens, or corporations, cooperatives or
associations, wholly-owned and managed by Filipino citizens pursuant to the
mandate of the Constitution.
(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co.,
Inc., 89 Phil. 54 [1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952];
xHaw Pia v. China Banking Corp., 80 Phil. 604 [1948]).
(f) Investment Test as to "Philippine Nationals" (Sec. 3(a),(b), R.A. 7042, Foreign
Investment Act of 1992)
(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989;
SEC Opinion, dated 6 November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1-
March 1990); SEC Opinion, dated 14 December 1989, XXIV SEC QUARTERLY
BULLETIN (No. 2 -June 1990)
Up to what level do you apply the grandfather rule? (Palting v. San Jose
Petroleum Inc., 18 SCRA 924 [1966]).
(h) Special Classifications (Sec. 140)
IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE
OF PIERCING VEIL OF CORPORATE FICTION
See relevant portions of VILLANUEVA, Restatement of the
Doctrine of Piercing The Veil of Corporate Fiction, 37 ATENEO
L.J. 19 (No. 2, June 1993).
A. Main Doctrine: A CORPORATION HAS A PERSONALITY SEPARATE AND
DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS.
Rudimentary is the rule that a corporation is invested by law with a personality
distinct and separate from its stockholders or membersby legal fiction and
convenience it is shielded by a protective mantel and imbued by law with a character
alien to the persons comprising it. xLim v. Court of Appeals, 323 SCRA 102 (2000).
1. Sources: Sec. 2; Article 44, Civil Code
2. Importance of Protecting Main Doctrine:
The separate juridical personality includes: right of succession; limited
liability; centralized management; and generally free transferability of shares of
stock. Therefore, an undermining of the separate juridical personality of the
corporation, such as the application of the piercing doctrine, necessarily dilutes any
or all of those attributes.
One of the advantages of a corporate form of business organization is the
limitation of an investors liability to the amount of the investment. This feature flows
from the legal theory that a corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of a corporate veil may be
used only for legitimate purposes. On equitable considerations, the veil can be
disregarded when it is utilized as a shield to commit fraud, illegality or inequity;
defeat public convenience; confuse legitimate issues; or serve as a mere alter ego
or business conduit of a person or an instrumentality, agency or adjunct of another
corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,
296 SCRA 631, 645 (1998).
3. Applications:
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(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. DBP v. NLRC, 186 SCRA 841 (1990);
Francisco, et al. v. Mejia, G. R. No. 141617, 14 August 2001.
The mere fact that a stockholder sells his shares of stock in the
corporation during the pendency of a collection case against the corporation,
does not make such stockholder personally liable for the corporate debt, since
the disposing stockholder has no personal obligation to the creditor, and it is
the inherent right of the stockholder to dispose of his shares of stock anytime
he so desires. xRemo, Jr. v. Intermediate Appellate Court, 172 SCRA 405,
413-414 (1989).
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. xSunio v. NLRC , 127 SCRA
390 (1984); xAsionics Philippines, Inc. v. National Labor Relations Commission,
290 SCRA 164 (1998); xLim v. Court of Appeals, 323 SCRA 102 (2000); xManila
Hotel Corp. v. NLRC, 343 SCRA 1 (2000); xFrancisco v. Mejia, G. R. No.
141617, 14 August 2001.
Mere substantial identity of the incorporators of the two corporations
does not necessarily imply fraud, nor warrant the piercing of the veil of
corporate fiction. In the absence of clear and convincing evidence to show that
the corporate personalities were used to perpetuate fraud, or circumvent the
law, the corporations are to be rightly treated as distinct and separate from
each other. xLaguio v. NLRC, 262 SCRA 715 (1996).
(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. Stockholders of F. Guanzon and Sons,
Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
As a general rule, 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. xARB Constructions Co., Inc. v. Court of Appeals,
332 SCRA 427 (200)

(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation
do not extend to its stockholders. "A corporation has a personality distinct from
that of its stockholders, enabling the taxing power to reach the latter when they
receive dividends from the corporation. 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 exemption clause to the charter [of the
domestic corporation] notwithstanding." xManila Gas Corp. v. Collector of
Internal Revenue, 62 Phil. 895, 898 (1936).
(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, and vice-versa,
for they are separate entities, and that shareholders are in no legal sense the
owners of corporate property which is owned by the corporation as a distinct
legal person. Good Earth Emporium, Inc. v. CA, 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, since that
president, as an individual, and the corporation are separate entities. xCruz v.
Dalisay, 152 SCRA 487 (1987).
(e) Properites, Obligations and Debts: Likewise, 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, even when the corporation is organized
for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347
[1976]).
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. xTraders Royal
Bank v. CA, 177 SCRA 789 (1989).
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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. xSaw v. CA, 195 SCRA
740 [1991])
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, much less, even a scintilla of substantiation, that the parties
interest in the corporation are so considerable as to merit a declaration of unity
of their civil personalities. xIndustrial and Development Corp. v. Court of
Appeals, 272 SCRA 333 (1997).
It is a basic postulate that a corporation has a personality separate and
distinct from its stockholders. Therefore, even when the foreclosure on the
assets of the corporation was wrongful and done in bad faith, the stockholders
of the corporation have no standing to recover for themselves moral damages.
Otherwise, it would amount to the appropriation by, and the distribution to,
such stockholders of part of the corporations assets before the dissolution of
the corporation and the liquidation of its debts and liabilities. xAsset
Privatization Trust v. Court of Appeals, 300 SCRA 579, 617 (1998).
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, in the absence of any cogency to shred the veil of corporate
fiction, the presumption of conclusiveness of said titles in favor of said
corporations should stand undisturbed. xLim v. Court of Appeals, 323 SCRA
102 (2000).
(f) Third-Parties: The fact that respondents are not stockholders of the disputed
corporations does not make them non-parties to the case, since the jurisdiction
of a court or tribunal over the subject matter is determined by the allegations
in the Complaint. In this case, it is alleged that the aforementioned
corporations are mere alter egos of the directors-petitioners, and that the
former acquired the properties sought to be reconveyed to FGSRC in violation
of directors-petitioners fiduciary duty to FGSRC. The notion of corporate entity
will be pierced or disregarded and the individuals composing it will be treated
as identical if, as alleged in the present case, the corporate entity is being
used as a cloak or cover for fraud or illegality; as a justification for a wrong; or
as an alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders. Gochan v. Young, G.R. No. 131889, 21 March 2001.

B. Piercing the Veil of Corporate Fiction:
1. Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co., 142
Fed. 247 [1905]). xSee also Francisco v. Mejia, G. R. No. 141617, 14 August
2001.
2. Nature of the Piercing Doctrine (Traders Royal Bank v. Court of Appeals, 269
SCRA 15 [1997])
Piercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that ordinarily,
they could be subject to, or distinguishes one corporation from a seemingly
separate one, were it not for the existing corporate fiction. xLim v. Court of
Appeals, 323 SCRA 102 (2000).
This Court has pierced the veil of corporate fiction in numerous cases where
it was used, among others, to avoid a judgment credit, to avoid inclusion of
corporate assets as part of the estate of a decedent, to avoid liability arising from
debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate
issues, or to promote unfair objectives or otherwise to shield them. xReynoso, IV
v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; also xRamoso v.
Court of Appeals, G.R. No. 117416, 8 December 2000.
3. 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. Umali v. CA, 189 SCRA 529 (1990).
(b) Piercing is not allowed unless the remedy sought is to make the officer or
another corporation pecuniarily liable for corporate debts. Umali v. CA, 189
SCRA 529 (1990); Indophil Textile Mill Workers Union-PTGWO v. Calica, 205
SCRA 697 (1992).
10
(c) Piercing is not available when the personal obligations of an individual are
sought to be enforced against the corporation. xRobledo v. NLRC, 238 SCRA
52 (1994)
The rationale behind piercing a corporations 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. However,
in the case at bar, instead of holding certain individuals or person responsible
for an alleged corporate act, the situation has been reversed. It is the
petitioner as a corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned upside down
because of its erroneous invocation. Francisco Motors Corp. v Court of
Appeals, 309 SCRA 72, 83 (1999).
(d) To disregard the separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established. It cannot be presumed. This is
elementary. 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. xLuxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315
(1999); xDevelopment Bank of the Philippines vs. Court of Appeals, G.R. No.
126200, 16 August 2001.
(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. Boyer-
Roxas v. Court of Appeals, 211 SCRA 470 [1992]).
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. Decree No. 902-A, on the ground that the petitioning
individuals should be treated as the real petitioners to the exclusion of the
petitioning corporate debtor. The doctrine of piercing the veil of corporate
fiction heavily relied upon by the petitioner is entirely misplaced, as said
doctrine only applies when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime. xUnion Bank of the
Philippines v. Court of Appeals, 290 SCRA 198 (1998).
Changing of the petitionerss subsidiary liabilities by converting them to
guarantors of bad debts cannot be done by piercing the veil of corporate
identity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.
(f) Piercing doctrine is meant to prevent fraud, and cannot be employed to
perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and
Vidal, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair
objectives or otherwise, nor to shield them. xVillanueva v. Adre, 172 SCRA
876 (1989).
(g) Piercing is a power belonging to the court and cannot be assumed
improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).
3. Consequences and Types of Piercing Cases: Umali v. CA, 189 SCRA 529
[1990])
(a) The application of the doctrine to a particular case does not deny the
corporation of legal personality for any and all purposes, but only for the
particular transaction or instance for which the doctrine was applied. Koppel
(Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); xTantoco v. Kaisahan ng Mga
Manggagawa sa La Campana, 106 Phil. 198 (1959).

(b) Classification of the Piercing Cases:
(i) When the corporate entity is used to commit fraud or to do a
wrong ("fraud cases");
11
(ii) When the corporate entity is merely a farce since the corporation
is merely the alter ego, business conduit or instrumentality of a
person or another entity ("alter ego cases"); and
(iii) When the piercing the corporate fiction is necessary to achieve
justice or equity ("equity cases").
The three cases may appear together in one application. See R.F.
Sugay & Co., v. Reyes, 12 SCRA 700 (1964).
4. Fraud Cases:
(a) Acts by the Controlling Shareholder: Where a stockholder, who has
absolute control over the business and affairs of the corporation, entered into a
contract with another corporation through fraud and false representations, 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. Namarco v. Associated Finance Co., 19 SCRA 962 (1967).
The tests in determining whether the corporate veil may be pierced are:
(1) the defendant must have control or complete domination of the other
corporations finances, policy and business practices with regard to the
transaction attached; (2) control must be used by the defendant to commit
fraud or wrong; and (3) the aforesaid control or breach of duty must be the
proximate cause of the injury or loss complained of. Manila Hotel Corporation
v. NLRC, 343 SCRA 1 (2000); xAlso Lim v. Court of Appeals, 323 SCRA 102
(2000).
(b) One cannot evade civil liability by incorporating properties or the business.
Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).
(c) The veil of corporation fiction may be pierced when used to avoid a contractual
commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25
SCRA 845 (1968).
(d) The Supreme Court found the following facts to be legal basis to pierce: One
company was merely an adjunct of the other, by virtue of a contract for
security services, the former provided with security guards to safeguard the
latters premises; both companies have the same owners and business
address; 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, and bust
their newly-organized union which was then beginning to become active in
demanding the companys compliance with Labor Standards laws. De Leon v.
NLRC, G.R. No. 112661, 30 May 2001.
(e) Parent-Subsidiary Relations; Affiliates (Reynoso, IV v. Court of Appeals,
G.R. No. 116124-25, 22 November 2000; Commissioner of Internal Revenue
v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v.
NLRC, 278 SCRA 716 [1997]).
- 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, and the mere proof of control of the corporation by itself
would not authorize piercing; and
(ii) The main action should seek for the enforcement of pecuniary claims
pertaining to the corporation against corporate officers or
stockholders.
5. 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, the
corporation and the individual should be deemed the same. Arnold v. Willets
and Patterson, Ltd., 44 Phil. 634 (1923).
(b) When the corporation is merely an adjunct, business conduit or alter ego of
another corporation, the fiction of separate and distinct corporation entities
should be disregarded. xTan Boon Bee & Co. v. Jarencio, 163 SCRA 205
(1988).
12
The corporation veil cannot be used to shield an otherwise blatant
violation of the prohibition against forum-shopping. Shareholders, whether
suing as the majority in direct actions or as the minority in a derivative suit,
cannot be allowed to trifle with court processes, particularly where, as in this
case, the corporation itself has not been remiss in vigorously prosecuting or
defending corporate causes and in using and applying remedies available to it.
xFirst Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
(c) Employment of same workers; single place of business, etc. La Campana
Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
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. This fiction cannot be
extended to a point beyond its reason and policy. Where, as in this case, 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, it would be
discarded and the two (2) corporations would be merged as one, the first being
merely considered as the instrumentality, agency conduit or adjunct of the
other. In this case, because of the actions of management of the two
corporations, there was much confusion as to the proper employment of the
claimant. xAzcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
(d) Use of nominees. xMarvel Building v. David, 9 Phil. 376 (1951)
.

(e) Avoidance of tax. Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160
(1961); xLiddell & Co. v. Collector of Internal Revenue,

2 SCRA 632 (1961).
(f) Mixing of bank deposit accounts. xRamirez Telephone Corp. v. Bank of
America, 29 SCRA 191 (1969).
(g) Where it appears that two business enterprises are owned, conducted, and
controlled by the same parties, both law and equity will, when necessary to
protect the rights of third persons, disregard the legal fiction that two
corporations are distinct entities and treat them as identical. xSibagat Timber
Corp. v. Garcia, 216 SCRA 70 (1992).
(h) Thinly-capitalized corporations. McConnel v. Court of Appeals, 1 SCRA 722
(1961).
(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);
xPhilippine Veterans Investment Development Corporation v. CA, 181 SCRA
669 (1990).
(j) Affiliated companies. xGuatson International Travel and Tours, Inc. v. NLRC,
230 SCRA 815 (1990).
(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group,
Inc., et al., G.R. No. 142616, 31 July 2001; xConcept Builders, Inc. v. NLRC,
257 SCRA 149 (1996).
Whether the existence of the corporation should be pierced depends on
questions of facts, appropriately pleaded. Mere allegation that a corporation is
the alter ego of the individual stockholders is insufficient. The presumption is
that the stockholders or officers and the corporation are distinct entities. The
burden of proving otherwise is on the party seeking to have the court pierce
the veil of corporate entity. xRamoso v. Court of Appeals, G.R. No. 117416, 8
December 2000.
(l) Guiding Principles in Alter-Ego Cases:
(i) The doctrine applies in this case even in the absence of evil intent; it
applies because of the direct violation of a central corporate law
principle of separating ownership from management.
(ii) The doctrine in such cased is based on estoppel: if stockholders do
not respect the separate entity, others cannot also be expected to be
bound by the separate juridical entity.
(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.
6. Equity Cases:
13
(a) When used to confuse legitimate issues. Telephone Engineering and Service
Co., Inc. V. WCC, 104 SCRA 354 (1981).
(b) When used to raise technicalities. xEmilio Cano Ent. v. CIR, 13 SCRA 291
(1965).
7. Piercing Doctrine and Due Process Clause
(a) The need to bring a new case against the officer. McConnel v. Court of
Appeals, 1 SCRA 723 (1961).
(b) When corporate officers are sued in their official capacity when the corporation
was not made a party, the corporation is not denied due process. Emilio Cano
Enterprises v. Court of Industrial Relations, 13 SCRA 291 (1965).
(c) Provided that evidential basis has been adduced during trial to apply the
piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); xArcilla
v. Court of Appeals, 215 SCRA 120 (1992).
V. CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
(a) Public corporations (Sec. 3, Act No. 1459)
Organized for the government of the portion of the state (e.g., barangay,
municipality, city and province)
Majority shares by the Government does not make an entity a public
corporation. xNational Coal Co., v. Collector of Internal Revenue, 46 Phil. 583
(1924).
(b) Quasi-public corporations xMarilao Water Consumers Associates v. IAC, 201
SCRA 437 (1991)
Although Boy Scouts of the Philippines does not receive any monetary or
financial subsidy from the Government, and that its funds and assets are not
considered government in nature and not subject to audit by the COA, the fact that
it received a special charter from the government, that its governing board are
appointed by the Government, and that its purpose are of public character, for
they pertain to the educational, civic and social development of the youth which
constitute a very substantial and important part of the nation, 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, 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, is may still be considered as such, or
under the 1987 Administrative Code as an instrumentality of the Government.
Therefore, the employees are subject to the Civil Service Law. xBoy Scouts of the
Philippines v. NLRC, 196 SCRA 176 (1991).
(c) Private Corporation (Sec. 3, Act 1459)
A government-owned or -controlled corporation when organized under the
Corporation Code is still a private corporation. 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.
xCervantes v. Auditor General, 91 Phil. 359 (1952).
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. xBliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271
(1994).
The doctrine that employees of government-owned and -controlled
corporations, 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, has been supplanted by the 1987 Constitution. 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, such that government
corporations created by special charter are subject to the Civil Service Law, while
those incorporated under the general corporation law are governed by the Labor
14
Code. xPNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991);
xDavao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
The test to determine whether a corporation is government owned or
controlled, or private in nature is simple. Is it created by its own charter for the
exercise of a public function, or by incorporation under the general corporation
law? Those with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the Government Service Insurance
System. xCamparedondo v. NLRC, 312 SCRA 47 (1999).
Section 31 of the Corporation Code (Liability of Directors and Officers) is
applicable to corporations which have been organized by special charters since
Sec. 4 of the Corporation Code renders the provisions of thereof applicable in a
supplementary manner to all corporations, including those with special or
individual charters, such as cooperatives organized under Pres. Decree No. 269,
so long as those provisions are not inconsistent with such charters. xBenguet
Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
2. As to Place of Incorporation:
(a) Domestic Corporation
(b) Foreign Corporation (Sec. 123)
3. As to Purpose of Incorporation:
(a) Municipal or Public corporation
(b) Religious corporation (Secs. 109 and 116)
(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
(d) Charitable, Scientific or Vocational corporations
(e) Business corporation
4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole (Secs. 110 to 115; xRoman Catholic Apostolic Administrator of
Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 (1957).
xDirector of Land v. IAC, 146 SCRA 509 (1986), which held that a
corporation sole has no nationality, overturned the previous doctrine (xRepublic v.
Villanueva, 114 SCRA 875 [1982] and Republic v. Iglesia Ni Cristo, 127 SCRA 687
[1984]) that a corporation sole is disqualified to acquire or hold alienable lands of
the public domain, 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. xRepublic v.
Iglesia ni Cristo, 127 SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165 (1988).
5. As to Legal Status:
(a) De J ure Corporation
(b) De Facto Corporation (Sec. 20)
(c) Corporation by Estoppel (Sec. 21)
6. As to Existence of Shares (Secs. 3 and 5)
(a) Stock Corporation
(b) Non-Stock Corporation


VI. CORPORATE CONTRACT LAW
See relevant portion of VILLANUEVA, Corporate Contract
Law, 38 ATENEO L.J. 1 (No. 2, June 1994)
15
1. Pre-Incorporation Contracts
(a) Who Are Promoters?
Promoter is a person who, acting alone or with others, takes initiative in
founding and organizing the business or enterprise of the issuer and receives
consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799])
(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang
Traffic Co., Inc., 73 Phil. 557 [1942])
(c) Theories on Liabilities for Promoter's Contracts (Cagayan Fishing Development
Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v.
Public Service Commission, 25 SCRA 285 [1968]; Caram, Jr. v. CA, 151 SCRA
372 [1987]).
2. De Facto Corporation (Sec. 20)
(a) Elements for Existence of De Facto Corporation:
(1) Valid law under which incorporated;
(2) Attempt in good faith to incorporate; colorable
compliance;
(3) Assumption of corporate powers; and
(4) Issuance of certificate of incorporation. Arnold Hall v.
Piccio, 86 Phil. 634 (1950).
3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757
[1958]; Albert v. University Publishing Co., 13 SCRA 84 [1965]; International Express
Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000); xAsia Banking
Corporation v. Standard Products, 46 Phil. 145 [1924]; xMadrigal Shipping Co., Inc. v.
Ogilvie, Supreme Court Advanced Decision, 55 O.G. No. 35, p. 7331).
An individual should be held personally liable for the unpaid obligations of the
unincorporated association in whose behalf he entered into such transactions, 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. International
Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).
(a) Nature of Doctrine
Corporation by estoppel doctrine is founded on principles of equity and is
designed to prevent injustice and unfairness. It applies when persons assume to
form a corporation and exercise corporate functions and enter into business
relations with third persons. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who
therefore know that it has not been registered, there is no corporation by estoppel.
Lozano v. De Los Santos, 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. Co. v. Steamship Pompey, 49 Phil. 117 [1926]); the same principle applied in
xCompania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained
to a commercial partnership which required registration in the registry under the
terms of the Code of Commerce.
(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, and engages in the name of purported
corporation in illegal recruitment, they are estopped from claiming that they are not
liable as corporate officers, 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, liabilities and damages
incurred or arising as a result thereof. xPeople v. Garcia, 271 SCRA 621 (1997).
An individual cannot avoid his liabilities to the public as an incorporator of a
corporation whose incorporation was not consummated, when he held himself out
as officer of the corporation and received money from applicants who availed of
their services. Such individual is estopped from claiming that they are not liable as
corporate officers for illegal recruitment under the corporation by estoppel doctrine
16
under Sec. 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, liabilities and damages incurred or
arising as a result thereof. xPeople v. Pineda, G.R. No. 117010, 18 April 1997
(Unpublished).
4. Trust Fund Doctrine
See VILLANUEVA, "The Trust Fund Doctrine Under
Philippine Corporate Setting," 31 ATENEO L.J. (No. 1, Feb.
1987).
(a) Commercial/Common Law Premise on Equity vis-a-vis Debts
(b) Nature of Doctrine
Under the trust fund doctrine, the capital stock, property and other assets of
the corporation are regarded as equity in trust for the payment of the corporate
creditors. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152
(1999).
The requirement of unrestricted retained earnings to cover the shares is
based on the trust fund doctrine which means that the capital stock, property and
other assets of a corporation are regarded as equtiy in trust for the payment of
corporate creditors. The reason is that creditors of a corporation are preferred over
the stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice of creditors is
null and void. xBoman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).
The Trust Fund doctrine considers the subscribed capital as a trust fund for
the payment of the debts of the corporation, to which the creditors may look for
satisfaction. Until the liquidation of the 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. Thus
dividends must never impair the subscribed capital stock; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the consideration therefore. NTC v. Court
of Appeals, 311 SCRA 508, 514-515 (1999).
(c) Corporation Purchasing Own Shares (Secs. 8, 41, 43 and 122, last paragraph;
Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953
[1929])
VII. ARTICLES OF INCORPORATION
See relevant portions of VILLANUEVA, Corporate Contract
Law, 38 ATENEO L.J. 1 (No. 2, June 1994).
1. Nature of Charter - The charter is in the nature of a contract between the corporation
and the Government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
2. Procedure and Documentary Requirements (Sec. 14 and 15)
(a) As to Number and Residency of Incorporators (Sec. 10)
(b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60
Phil. 549 [1934]).
A corporation may change its name by the amendment of its articles of
incorporation, but the same is not effective until approved by the SEC. xPhilippine
First Insurance Co. v. Hartigan, 34 SCRA 252 (1970)
A change in the corporate name does not make a new corporation, and
whether affected by special act or under a general law, has no effect on the
identity of the corporation, or on its property, rights, or liabilities. xRepublic
Planters Bank v. CA, 216 SCRA 738 (1992).
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. xUniversal Mills Corp. v. Universal Textile Mills
Inc., 78 SCRA 62 [1977]).
17
A corporation has not right to intervene in a suit using a name other than its
registered name; if a corporation legally and truly wants to intervene, it should
have used its corporate name as the law requires and not another name which it
had not registered. xLaureano Investment and Development Corporation v. Court
of Appeals, 272 SCRA 253 (1997).
There would be no denial of due process when a corporation is sued and
judgment is rendered against it under its unregistered trade name, holding that a
corporation may be sued under the name by which it makes itself known to its
workers. xPison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312
(1997)
(c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and
Industry, 40 Phil. 541 [1919])
(d) Corporate Term (Sec. 11).
No extension can be effected once dissolution stage has been reached.
xAlhambra Cigar v. SEC, 24 SCRA 269 (1968).
(e) Principal Place of Business
Place of residence of the corporation is the place of its principal office.
xClavecilla Radio System v. Antillon, 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. xSy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).
(f) Minimum Capitalization (Sec. 12)
- Why is maximum capitalization required to be indicated?
(g) Subscription and Paid-up Requirements (Sec. 13)
(h) Steps and Documents Required in SEC
3. Grounds for Disapproval (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, the object is
unlawful and the articles can be denied registration. xAsuncion v. De Yriarte, 28 Phil.
67 [1914]).
4. Amendments to Articles of Incorporation (Sec. 16)
5. Commencement of Corporate Existence (Sec. 19)
VIII. BY-LAWS
See relevant portions of VILLANUEVA, "Corporate Contract
Law," 38 ATENEO L.J. 1 (No. 2, June 1994).
1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Pea v. CA, 193
SCRA 717 [1991])
As the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders
or members and directors and officers with relation thereto and among themselves in
their relation to it, by-laws are indispensable to corporations in this jurisdiction. These
may not be essential to corporate birth but certainly, these are required by law for an
orderly governance and management of corporations. Nonetheless, failure to file them
within the period required by law by no means tolls the automatic dissolution of a
corporation. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of
Appeals, 276 SCRA 681 (1997).

(a) Common Law Limitations on By-Laws
(i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation
18
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. Even
when the members of the association may have formally adopted the
provision, their action would be of no avail because no provision of the by-laws
can be adopted if it is contrary to law. xGrace Christian High School v. Court of
Appeals, 281 SCRA 133 (1997).
Although the right to amend by-laws lies solely in the discretion of the
employer, this being in the exercise of management prerogative or business
judgment, such right cannot impair the obligation of existing contracts or rights
or undermine the right to security of tenure of a regular employee. Otherwise,
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. Philamlife
(Pamplona) Village Homeowners Association, Inc., 300 SCRA 469, 479
(1998).
(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws.
xGovernment of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399
(1927).
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, but merely authorizes the adoption of regulations as to the
formalities and procedure to be followed in effecting transfer. xThomson v.
Court of Appeals, 298 SCRA 280 (1998).
By-laws are intended merely for the protection of the corporation, and
prescribe regulation, not restrictions; they are always subject to the charter of
the corporation. xRural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992),
quoting from Thompson on Corporation Sec. 4137, cited in xFleischer v.
Nolasco, 47 Phil. 583.
(iii) By-Laws Cannot Discriminate
(b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA
503 [1997]).
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 corporations by-laws. Since by-laws operate merely as internal rules among
the stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same. PMI Colleges v. NLRC, 277
SCRA 462 (1997).
2. Adoption Procedure (Sec. 46)
Section 46 of the Corporation, which requires the filing of by-laws, does not
expressly provide for the consequence of their non-filing within the period provided
therein; however, Pres. Decree 902-A allows the SEC to suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of corporations
which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution
simply because the incorporators failed to abide by the required filing of by-laws, and
there is no outright demise of corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic institution, agency or society,
which would require that the incorporators must be given the chance to explain their
neglect or omission and remedy the same. xLoyola Grand Villas Homeowners (South)
Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).
3. Contents (Sec. 47)
4. Amendments (Sec. 48)
Power to amend may be delegated to the board of directors

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES
19
1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of
the Philippines v. COA, 190 SCRA 154 [1990])
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. In turn, a
corporation exercises said powers through its board of directors and/or its duly authorized
officers and agents, since the physical acts of the corporation, like the signing of
documents, 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. xReynoso, IV v. Court
of Appeals, G.R. No. 116124-25, 22 November 2000.
Precisely because the corporation is such a prevalent and dominating factor in
the business life of the country, the law has to look carefully into the exercise of powers
by these artificial persons it has created. Reynoso, IV v. Court of Appeals, G.R. No.
116124-25, 22 November 2000.
(a) Classification of Corporate Powers: Express; Implied; 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, for it was for
securing a loan to finance the activities of the corporation, hence, not an ultra vires
act. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28
February 2001.
(b) Where Corporate Power is Lodged (Sec. 23)
Unless otherwise provided by the Corporation Code, corporate powers, such
as the power to enter into contracts, are exercised by the Board of Directors.
However, the Board may delegate such powers to either an executive committee
or officials or contracted managers, which delegation, except for the executive
committee, must be for specific purposes. The delegated officers makes the latter
agents of the corporation, and rules of agency as to the binding effects of their
acts would apply. For such officers to be deemed fully clothed by the corporation
to exercise a power of the Board, the latter must specially authorize them to do so.
xABS-CBN Broadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999).
2. Ultra Vires Acts
See relevant portions of VILLANUEVA, Corporate Contract
Law, 38 ATENEO L.J. 1 (No. 2, June 1994).
(a) Concept and Types (Sec. 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. The term ultra vire is distinguished from an illegal act
from the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated. Atrium
Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February
2001.
(b) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96
Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v.
Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. CA, 177 SCRA 594
[1989];
(i) Theory of Estoppel or Ratification
In order to ratify the unauthorized act of an agent and make it binding on
the corporation, 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. Ratification can never be made on the
part of the corporation by the same person who wrongfully assume the power
to make the contract, but the ratification must be by the officer or governing
body having authority to make such contract. The act or conduct for which the
corporation may be liable under the doctrine of estoppel must be by those of
the corporation, its governing body or authorized officers, and not those of the
purported agent who is himself responsible for the misrepresentation. xVicente
v. Geraldez, 52 SCRA 210 (1973).
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, such admission cannot be
given legal effect to the detriment of the corporation. The admission made in
20
the answer by the counsel for the corporation was without any enabling act or
attendant ratification of corporate act, as would authorize or even ratify such
admission. In the absence of such ratification or authority, such admission
does not bind the corporation. Also, the letter issued by the corporate officers
who obtained the loan as indicating the corporate liability of the corporation,
cannot also serve to make the corporation liable. The documents and
admissions cannot have the effect of a ratification of an unauthorized act.
Ratification can never be made on the part of the corporation by the same
persons who wrongfully assume the power to make the contract, but the
ratification must be by the officers as governing body having authority to make
such contract. xAguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1
(1997).
(ii) Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate
Appellate Court, 220 SCRA 103, 113-114 [1993]; Francisco v. GSIS, 7 SCRA
577 [1963])
A contract signed by the President/Chairman without authority from the
Board of Directors is void. Although the by-laws grant authority to the
President "to execute and sign for and in behalf of the corporation all contracts
and agreements which the corporation may enter into," the same presupposes
a prior act of the corporation exercised through its Board of Directors. Yao Ka
Sin Trading v. CA, 209 SCRA 763 (1992).
Although an officer or agent acts without, or in excess of, 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, the corporation is bound thereby in favor of a person
who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously and publicly, for a
considerable time. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992).
Persons who deal with corporate agents within circumstances showing
that the agents are acting in excess of corporate authority, may not hold the
corporation liable. xTraders Royal Bank v. Court of Appeals, 269 SCRA 601
(1997); also Art. 1883, Civil Code.
The authority of a corporate officer in dealing with third persons may be
actual or apparent. . . the principal is liable for the obligations contracted by
the agent. 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. xFirst Philipine International Bank v. Court of
Appeals, 252 SCRA 259 (1996).
If a corporation knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from
denying the agents authority. xSoler v. Court of Appeals, G.R. No. 123892, 21
May 2001.
Under Article 1898 of the Civil Code, 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. It also bears emphasizing that when the third person knows
that the agent was acting beyond his power or authority, the principal can not be
held liable for the acts of the agent. If the said third person is aware of such
limits of authority, he is to blame, and is not entitled to recover damages from
the agent, unless the latter undertook to secure the principals ratification. In the
case of the corporation as the principal, there was no such ratification.
Therefore, when the officer entered into the speculative contracts without
securing the Boards approval, nor did he submit the contracts to the Board after
their consummation nor were they recorded in the books of the corporation,
there was, in fact, no occasion at all for ratification. xSafic Alcan & Cie. V.
Imperial Vegetable Co., G.R. No. 126751, 28 March 2001.
(iii) Theory of No State Damage (Harden v. Benguet Consolidated Mining Co., 58
Phil. 140 [1933]).
3. Specific (Express) Powers
21
(a) Enumerated Powers (Secs. 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, such
corporation cannot engage in the business of land transportation, which is an
entirely different line of business, and, for which reason, may not acquire any
certificate of public convenience to operate a taxicab service. xLuneta Motor Co.
v. A.D. Santos, Inc., 5 SCRA 809 [1962]).
Power to Sue
Under section 36 of the Corporation Code, in relation to Section 23, it is
clear that where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. A minority stockholder and member of the Board,
who fails to show any proof that he was authorized by the Board of Directors, has
no such power or authority to sue on the corporations behalf. Nor can we uphold
this as a derivative suit. 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. There is now showing that petitioner has complied with the foregoing
requisites. xTam Wing Tak v. Makasiar, G.R. 122452, 29 January 2001.
(b) Power to Extend or Shorten Corporate Term (Secs. 37 and 81 [1])
(c) Power to Increase or Decrease Capital Stock (Sec. 38)
Prior to SEC approval of the increase in the authorized capital stock, and
despite the Board resolution approving the increase in capital stock, and the
receipt of payment on the future issues of the shares from the increased capital
stock, such funds do not constitute part of the capital stock of the corporation until
approval of the increase by SEC. xCentral Textile Mills, Inc. v. National Wages
and Productivity Commission, 260 SCRA368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of
union members, 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, and would constitute unfair labor
practice. xMadrigal & Co. v. Zamora, 151 SCRA 355 [1987]);
(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)
(e) Sell or Dispose of Assets (Sec. 40).
Sale by the Board of the only property of the corporation without compliance
with the provisions of Sec. 40 of the Corporation Code requiring the ratification of
members representing at least two-thirds of the membership, would make the sale
null and void. xIslamic Directorate of the Philippines v. Court of Appeals, 272
SCRA 454 (1997); also xPea v. CA, 193 SCRA 717 (1991).
(f) Invest Corporate Funds in Another Corporation or Business or For Any Other
Purpose (Sec. 42; De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]).
(g) Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co.,
26 SCRA 540 [1968]).
Stock dividend is the amount that the corporation transfers from its surplus
profit account to its capital account. It is the same amount that can loosely be
terms as the trust fund of the corporation. xNational Telecommunications
Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).
Although the certificates of stock granted the stockholder the right to receive
quarterly dividends of 1%, cumulative and participating, the stockholders do not
become entitled to the payment thereof as a matter of right without necessity of a
prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43
of the present Corporation Code prohibit the issuance of any stock dividend
without the approval of stockholders, representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the
purpose. These provisions underscore the fact that payment of dividends to a
stockholder is not a matter of right but a matter of consensus. Furthermore,
22
interest bearing stocks, on which the corporation agrees absolutely to pay
interest before dividends are paid to the common stockholders, is legal only when
construed as requiring payment of interest as dividends from net earnings or
surplus only. xRepublic Planters Bank v. Agana, 269 SCRA 1 (1997).
(i) Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto
Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247, at
pp. 266-267 [1991]). Why the difference in rule between entity and individual?
(j) Other Powers
- To Sell Land and Other Properties
A corporation whose primary purpose is to market, distribute, export and
import merchandise, the sale of land is not within the actual or apparent
authority of the corporation acting through its officers, much less when acting
through the treasurer. Likewise Article 1874 and 1878 of the Civil Code requires
that when land is sold through an agent, the agents authority must be in writing,
otherwise the sale is void. xSan Juan Structural and Steel Fabricators, Inc. v.
Court of Appeals, 296 SCRA 631, 645 (1998).
- To Borrow Funds
The power to borrow money is one of those cases where even a special
power of attorney is required under Art. 1878 of the New Civil Code. There is
invariably a need of an enabling act of the corporation to be approved by its
Board of Directors. 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.
xChina Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
- 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, and cannot be considered to be ultra
vires to avoid any liability arising from the resolution granting such gratuity pay.
xLopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).
- To Donate
- To Enter Into Partnership, J oint Venture. Tuason & Co. v. Bolanos, 95 Phil.
106 (1954).
X. DIRECTORS, TRUSTEES AND OFFICERS
1. Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano, 90 SCRA
40 [1979]).
(a) Two Theories on Source of Power of Board of Directors (Angeles v. Santos, 64
Phil. 697 [1937]).
(b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo
M. Kalaw, 20 SCRA 987 [1967]; Ramirez v. Orientalist Co. and Fernandez, 38
Phil. 634 [1918]; Acua v. Batac Producers Cooperative Marketing Association,
20 SCRA 526 [1967]).
The general rule is that a corporation, through its broad of directors, should
act in the manner and within the formalities, if any, prescribed by its charter or by
the general law. Thus, directors must act as a body in a meeting called pursuant to
the law or the corporation's by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder. Be that as it may,
jurisprudence tells us that an action of the board of directors during a meeting,
which was illegal for lack of notice, may be ratified either expressly, by the action
of the directors in subsequent legal meeting, or impliedly, by the corporation's
subseqeunt course of conduct. xLopez Realty v. Fontecha, 247 SCRA 183, 192
(1995).


23
(c) Effects of a Bogus Board
The acts or contracts effected by a bogus board would be void pursuant to
Art. 1318 of the Civil Code because of the lack of consent. Islamic Directorate of
the Philippines v. Court of Appeals, 272 SCRA 454 (1997).
(d) Executive Committee (Sec. 35)
2. BUSINESS JUDGMENT RULE (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5
SCRA 36 [1962]; Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232
[1997])
Board members and officers who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting and act in
good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts. Those acts, when they are such a nature and are done
under such circumstances, are properly attributed to the corporation alone and no
personal liability is incurred by such officers and Board members. xBenguet
Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992)
3. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC,
89 SCRA 336 [1979]).
(a) A director must own at least one share of stock (xPea v. CA, 193 SCRA 717
[1991]; xDetective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 [1969])
(b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v.
CA, 205 SCRA 752 [1992]).
4. Election of Directors and Trustees
(a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264
SCRA 11 [1996]).
(b) Trustee (Secs. 92 and 138)
(c) Cumulative Voting (Sec. 24; Cumulative Voting in Corporate Elections:
Introducing Strategy in the Equation, 35 SOUTH CAROLINA L. REV. 295)
5. Vacancy in Board (Sec. 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.
In addition, 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, or where there is no stock, from among the members of the
corporation. xGrace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
6. Term of Office, Hold-over Principle
Directors may lawfully fill vacancies occurring in the board, and such officials, as
well as the original directors, hold until qualification of their successors. xGovernment
v. El Hogar Filipino, 50 Phil. 399 (1927).
The remedy is quo warranto to question the legality and proper qualification of
persons elected to the board. xPonce v. Encarnacion, 94 Phil. 81 (1953).
7. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]).
8. Directors' or Trustees' Meetings (Secs. 49, 53, 54 and 92)
In a board meeting, 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; but such presumption, being merely prima facie would not hold in
the face of clear evidence to the contrary. xLopez v. Ericta, 45 SCRA 539 [1972]).
9. Compensation of Directors (Sec. 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, founded on the
presumption that directors and trustees render service gratuitously, and that the return
24
upon their shares adequately furnishes the motives for service, without compensation.
Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997).
Under Section 30 of the Corporation Code, 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; and (b) when the
stockholders representing a majority of the outstanding capital stock at a regular or
special meeting agree to give them compensation. From the language of Section 30, it
may also be deduced that members of the board may also receive compensation,
when they render services to the corporation in a capacity other than as directors or
trustees of the corporation. Western Institute of Technology, Inc. v. Salas, 278 SCRA
216 (1997).
The position of being Chairman and Vice-Chairman, like that of Treasurer and
Secretary, were considered by the officers as not mere directorship position, but
officership position that would entitle the occupants to compensation. Likewise, the
limitation placed under Section 30 of the Corporation that directors cannot receive
compensation exceeding 10% of the net income of the corporation, 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. Western Institute of Technology,
Inc. v. Salas, 278 SCRA 216 (1997).
10. Role of Directors
(a) Directors as Fiduciaries.
- Pre-Corporation Code. Palting v. San Jose Petroleum, Inc., 18 SCRA 924
(1966).
- Nature of Duties of Directors and Officers. Prime White Cement Corp. v. IAC,
220 SCRA 103 (1993).
(b) Duty of Obedience
A corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. xLopez
Realty, Inc. v. Fontecha, 247 SCRA 183 (1995)
(c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v.
Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam,
488 A.2d 858, Supreme Court of Delaware, 1985)..
(d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]).
- Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979];
See Annotations: Doctrine of Corporate Opportunity, 89 SCRA 412).
- Self-dealings (Secs. 32 and 33)
- Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]).
When a director, who also owns of the equity of the corporation, who has
also been designated as the administrator of corporate affairs, and who was
directly negotiating the sale of the corporations large landholdings to the
Government at great prices, purchases the shares of stock of a shareholder
without informing the latter of the on-going negotiations, 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. xStrong v. Repide, 41 Phil. 947 [1909];
- Applies to confidential employees (cf. xSing Juco v. Llorente, 43 Phil. 589
[1922])
(e) Duty to Creditors and Outsiders
[xVILLANUEVA, The Fiduciary Duties of Directors and
Officers Representing the Creditor Pursuant to a Loan Workout
Arrangement: Parameters Under Philippine Corporate Setting,
35 ATENEO L.J. (No. 1, Feb. 1991)]
(f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89
SCRA 336 [1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]).
(g) Contracts Between Corporations with Interlocking Directors (Sec. 33)
25
11. Who Is an "Officer" of the Corporation (Sec. 25; Gurrea v. Lezama, 103 Phil. 553
[1958]; Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v.
Leao, 127 SCRA 778 [1984]; Dy v. NLRC, 145 SCRA 211 [1986]; xVisayan v. NLRC,
196 SCRA 410 [1991]).
Corporations act only through their officers and duly authorized agents. All acts
within the powers of a corporation may be performed by agents of its selection; except
so far as limitations or restrictions imposed by special charter, buy-laws, or statutory
provisions. xBA Savings Bani v. Sia, 336 SCRA 484 (2000).
An office is created by the charter of the corporation and the officer is elected
by the directors or stockholders. . . Note that a corporate officers removal from his
office is a corporate act. If such removal occasions an intra-corporate controversy, its
nature is not altered by the reason or wisdom, or lack thereof, with which the Board of
Directors might have in taking such action. When petitioner, as Executive Vice-
President allegedly diverted company funds for his personal use resulting in heavy
financial losses in the company, this matter would amount to fraud. Such fraud would
be detrimental to the interest not only of the corporation but also of its members. This
type of fraud encompasses controversies in a relationship within the corporation
covered by the SEC jurisdiction [now with the regular courts]. Perforce, the matter
would come within the area of corporate affairs and management, and such a
corporate controversy would call for the adjudicative expertise of the SEC, not the
Labor Arbiter or the NLRC. De Rossi v. NLRC, 314 SCRA 245 (1999).
When the by-laws of the condominium corporation specifically includes the
position of Superintendent/Administrator in is roster of corporate officers, then such
position is clearly a corporate officer position and issues of reinstatement would be
within the jurisdiction of the SEC and not the NLRC. xOngkingco v. NLRC, 270 SCRA
613 (1997).
When the by-laws provide that one of the powers of the Board of Trustees is [t]o
appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such
other officers as it may deem necessary and prescribe their powers and duties, then
such specifically designated positions should be considered corporate officers
position. The determination of the rights and the concomitant liability arising from any
ouster from such positions, would be intra-corporate controversy subject to the
jurisdiction of the SEC (now RTC). xTabang v. NLRC, 266 SCRA 462 (1997).
An office is created by the charter of the corporation and the officer is elected
by the directors or stockholders (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other
hand, 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. (Ibid) . . . A
corporate officers dismissal is always a corporate act, or an intra-corporate
controversy, and the nature is not altered by the reason or wisdom with which the
Board of Directors may have in taking such action. xTabang v. NLRC, 266 SCRA 462
(1997).
The president, vice-president, secretary and treasurer are commonly regarded
as the principal or executive officers of a corporation, and modern corporation statutes
usually designate them as the officers of the corporation. However, other offices are
sometimes created by the charter or by-laws of a corporation, 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. NLRC, 266 SCRA 462 (1997).
12. Powers of Corporate Officers:
(a) The Rule on Corporate Officers Power to Bind Corporation
An officer's power as an agent of the corporation must be sought from the
statute, charter, the by-laws or in a delegation of authority to such officer, from the
acts of the board of directors formally expressed or implied from a habit or custom
of doing business. xVicente v. Geraldez, 52 SCRA 210 [1973]; reiterated in
xBoyer-Roxas v. CA, 211 SCRA 470 (1992).
(b) When Corporation Bound by Act of Its President. Peoples Aircargo v. Court of
Appeals, 297 SCRA 170 (1998)
(c) Corporate Secretary
In the absence of provisions to the contrary, the corporate secretary is the
custodian of corporate recordshe keeps the stock and transfer book and makes
proper and necessary entries therein. It is the duty and obligation of the corporate
26
secretary to register valid transfers of stock in the books of the corporation; and in
the event he refuses to comply with such duty, the transferor-stockholder may
rightfully bring suit to compel performance. xTorres, Jr. v. Court of Appeals, 278
SCRA 793 (1997).
When a Secretarys Certificate is regular on its face, it can be relied upon by
a third party who does not have to investigate the truths of the facts contained in
such certification; otherwise business transactions of corporations would become
tortuously slow and unnecessarily hampered. xEsguerra v. Court of Appeals, 267
SCRA 380 (1997).
(d) Corporate Treasurer
A corporate treasurers function have generally been described as to
receive and keeps funds of the corporation, and to disburse them in accordance
with the authority given him by the board or the properly authorized officers.
Unless duly authorized, a treasurer, whose power are limited, cannot bind the
corporation in a sale of its assets. Selling is obviously foreign to a corporate
treasurers function. When the corporation categorically denies ever having
authorized its treasurer to sell the subject parcel of land, 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. And failing to discharge such
burden, and failing to show any provision of the articles of incorporation, by-laws
or board resolution to prove that the treasurer possessed such power, the sale is
void and not binding on the alleged selling corporation. xSan Juan Structural and
Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).
(e) Other Officers for Service of Summons on Corporation
For purposes of determining proper service of summons to a corporation in
a quasi-judicial proceeding before the NLRC, a bookkeeper can be considered as
an agent of the corporation within the purview of the Rules of Court. 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. The bookkeepers
task is one under consideration that his regular recording of the corporations
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. xPabon v. NLRC, 296 SCRA 7 (1998).
In spite of provisions of the Rules of Court on service of process to bind
corporate entities, 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,
has been considered proper service to bind the corporation. (xVilla Rey Transit,
Inc. v. Far East Motor Corp., 81 SCRA 298 [1078], overturning xDelta Motor Sales
Corp. v. Mangosing, 70 Phil. 598 [1976]; reiterated in xR. Transport Corp. v. CA,
24a SCRA 77 [1995]).
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term
general manager and unlike the old provision in the Rules of Court, it does not
include the term agent. Consequently, the enumeration of persons to whom
summons may be served is restricted, limited and exclusive following the rule on
statutory construction expressio unios est exclusion alterius. Therefore, the earlier
cases that uphold service of summons upon a construction project manager;
3
a
corporations assistant manager;
4
ordinary clerk of a corporation;
5
private secretary
of corporate executives;
6
retained counsel;
7
officials who had charge or control of
the operations of the corporation, like the assistant general manager;
8
or the
corporations Chief Finance and Administrative Officer;
9
no longer apply since they
were decided under the old rule that allows service of summons upon an agent
10
of

3
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
4
Gesulgon v. NLRC, 219 SCRA 561 (1993).
5
Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading
Corp. v. Court of Appeals, 158 SCRA 466 (1988).
6
Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v.
Court of Appeals, 310 SCRA 26 (1999).
7
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).
8
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
9
Far Corporation v. Francisco, 146 SCRA 197 (1986).
10
Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982).
27
the corporation. xE.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65
(1999).
(f) Coverage of Corporate Agents
Blacks Law Dictionary defines an agent as a business representative,
whose function is to bring about, modify, affect, accept performance of, or
terminate contractual obligations between principal and third persons. To this
extent, an agent may also be shown to represent his principal in some one or
more of his relations to others, even though he may not have the power to enter
into contracts. The rules on service of process make service on agent sufficient.
It does not in any way distinguish whether the agent be general or special, but is
complied with even by a service upon an agent having limited authority to
represent his principal. As such, it does not necessarily connote an officer of the
corporation. However, though this may include employees other than officers of a
corporation, 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. xPabon v. NLRC, 296 SCRA 7 (1998).
13. LIABILITIES OF CORPORATE OFFICERS: (Sec. 31; Vazquez v. Borja, 74 Phil. 560
(1944); Palay, Inc. v. Clave, 124 SCRA 638 [1093]; Tramat Mercantile, Inc. v. CA, 238
SCRA 14 [1994]; Pabalan v. NLRC, 184 SCRA 495 [1990]; xSulo ng Bayan, Inc. v.
Araneta, Inc. Inc., 72 SCRA 347 [1976]; xMindanao Motors Lines, Inc. v. Court of
Industrial Relations, 6 SCRA 710 (1962);
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. xARB
Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)
Jurisprudential Enumeration of Officer Liabilities - MAM Realty v. NLRC,
244 SCRA 797, (1995); reiterated in xNational Food Authority v. Court of Appeals, 311
SCRA 700 (1999); xUichico v. NLRC, 273 SCRA 35 (1997).
The hornbook law is that corporate personality is a shield against personal liability
of its officers. Thus, when the trust receipt sued upon was clearly entered into in behalf
of the corporation by its Executive Vice-President, then such officer and his spouse
cannot be made personally liable; the personality of the corporation is separate and
distinct from the persons composing it. xThe Consolidated Bank and Trust Corp. v. Court
of Appeals, G.R. No. 114286, 19 April 2001.
Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when:
(a) He assents to a patently unlawful act of the corporation;
(b) Guilty of bad faith or gross negligence in directing its affairs;
(c) for conflict on interest resulting in damages to the corporation, its
stockholders or other persons;
(d) He consents to the issuance of watered down stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
(e) He agrees to hold himself personally and solidarily liable with the
corporation; or
(f) He is made, by a specific provisions of law, to personally answer for his
corporate action. xAtrium Management Corporation vs. Court of
Appeals, G.R. No. 109491, 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, 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, bad faith, or ill-motive in their personal dealings with third parties. When
corporate officers and directors are sued merely as nominal parties in their official
capacities as such, they cannot be held liable personal for the judgment rendered
against the corporation. xNational Power Corp. v. Court of Appeals, 273 SCRA 419
(1997).
28
When corporate officers are sued in their official capacity, the suit is equivalent
to a suit against the corporation, and judgment may be enforced against corporate
assets. xEmilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965).
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. Sugay
should not be allowed to confuse the facts." xR.F. Sugay v. Reyes, 12 SCRA 700
(1961).
Generally, officers or directors under the old corporate name bear no personal
liability for acts done or contracts entered into by officers of the corporation, if duly
authorized. xRepublic Planters Bank v. CA, 216 SCRA 738 (1992).
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, being a
party to a simulated contract of management, petitioner Uy cannot be permitted to
escape liability under the said contract by using the corporate entity theory. This is one
instance when the veil of corporate entity has to be pierced to avoid injustice and
inequity." xParadise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).
(a) Special Provisions in Labor Laws. - In the Labor Code since a corporate
employer is an artificial person, it must have an officer who can be presumed to
be the employer, being the "person acting in the interest of (the) employer" as
provided in the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142
SCRA 269 (1986).
Under the Labor Code, in the case of corporations, it is the president who
responds personally for violation of the labor pay laws. xVillanueva v. Adre, 172
SCRA 876 (1989).
For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC,
187 SCRA 777 (1990).
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.
It held that when a corporate officer acts in behalf of a corporation pursuant to his
authority, is "a corporate act for which only the corporation should be made liable
for any obligations arising from them." xWestern Agro Industrial Corporation v.
Court of Appeals, 188 SCRA 709 (1990).
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. NLRC,189 SCRA 767 (1990);
reiterated in xGudez v. NLRC, 183 SCRA 644 (1990) and xChua v. NLRC, 182
SCRA 353 (1990).
The case of Ransom v. 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, making it necessary to enforce it against its
former president. When the corporation is still existing and able to satisfy the
judgment in favor of the private respondent, the corporate officers cannot be held
personally liable. Lim v. NLRC, 171 SCRA 328 (1989).
The aforecited cases will not apply to the instant case, however, because the
persons who were there made personally liable for the employees' claims were
stockholders-officers of the respondent corporation. In the case at bar, the
petitioner while admittedly the highest ranking local representative of the
corporation, is nevertheless not a stockholder and much less a member of the
board of directors or an officer thereof. xDe Guzman v. NLRC, 211 SCRA 723
(1992)
A mere general manager cannot be held solidarily liable with the corporation
for unpaid labor claims, especially when he is neither a stockholder or a member
of the board of the corporation. xDe Guzman v. NLRC, 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. xEPG
Constructions Co. v. CA, 210 SCRA 230 (1992).
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
29
itself found that he merely used the corporation as his alter-ego or as his business
conduit. xArcilla v. Court of Appeals, 215 SCRA 120 (1992).
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.
xRustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992), citing xBanque
Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949).
Reahs Corporation v. NLRC, 271 SCRA 247 (1997), reviewed the A.C.
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. 283 of the Labor Code, and reviewed its application in subsequent
cases of Maglutac, Chua, 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, and that at the very least, to justify
solidary liability, 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, or a showing that the officers indiscriminately
stopped its business to perpetuate an illegal act, as a vehicle for the evasion of
existing obligations, in circumvention of statutes, and to confuse legitimate issues.
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. xAHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).
The finding of solidary liability among the corporation and its officers and
directors would patently be baseless when the decision contains no allegation,
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, bad faith, or ill-motive in their personal dealings with third
parties. When corporate officers and directors are sued merely as nominal parties
in their official capacities as such, they cannot be held liable personal for the
judgment rendered against the corporation. xNational Power Corp. v. Court of
Appeals, 273 SCRA 419 (1997).
In labor cases, particularly, 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. In this case, it is undisputed that the
corporate officers have a direct hand in the illegal dismissal of the employees.
They were the one, who as high-ranking officers and directors of the corporation,
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 repeat, had no evidentiary value whatsoever.
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. xUichico v. NLRC, 273 SCRA 35
(1997).
A corporation, being a juridical entity, may act only through its directors,
officers and employees and obligations incurred by them, acting as corporate
agents, are not theirs but the direct accountabilities of the corporation they
represent. xBrent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).
The manager of a corporation are not personally liable for their official acts
unless it is shown that they have exceeded their authority. There is nothing on
record to show that the manager deliberately and maliciously evaded the
corporations financial obligation to the employee; hence, there appearing to be no
evidence on record that the manager acted maliciously or deliberately in the non-
payment of benefits to the employee, the manager cannot be held jointly and
severally liable with the corporate employers. [CLV Nothing was shown to
determine whether the corporate employer had no assets with which to pay the
claims of the employee]. xNicario v. NLRC, 295 SCRA 619 (1998).
In xRestuarante Las Conchas v. Llego, 314 SCRA 24 (1999), the Supreme
Court had apparently returned to the A.C. Ransom principle that [a]lthough as a
rule, the officers and members of a corporation are not personally liable for acts
done in the performance of their duties, this rule admits of exceptions, one of
which is when the employer corporation is no longer existing and is unable to
satisfy the judgment in favor of the employee, the officers should be held liable for
acting on behalf of the corporation. In that case, the restaurant business had to be
30
closed down because possession of the premises had been lost through an
adverse decision in an ejectment case. The Court held: In the present case, the
employees can no longer claim their separation benefits and 13
th
month pay from
the corporation because it had already ceased operation. To require them to do so
would render illusory the separation and 13tj month pay awarded to them by the
NLRC. Their only recourse is to satisfy their claim from the officers of the
corporation who were, in effect, acting in behalf of the corporation.
The A.C. Ransom doctrine has been reiterated in xCarmelcraft Corp. v.
NLRC, 186 SCRA 393 (1990), xValderrama v. NLRC, 256 SCRA 466 (1996).
XI. STOCKHOLDERS AND MEMBERS
1. Shareholders Not Creditors of Corporation (Garcia v. Lim Chu Sing, 59 Phil. 562
[1934]).
2. Subscription Contracts (Sec. 60 and 72; Trillana v. Quezon Colegialla, 93 Phil. 383
[1953]).
(a) Purchase Agreement (Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942]).
(b) Pre-Incorporation Subscription (Sec. 61)
(c) Release from Subscription Obligation (Velasco v. Poizat, 37 Phil. 802 [1918]; PNB
v. Bitulok Sawmill, Inc., 23 SCRA 1968 [1968]; National Exchange Co. v. Dexter,
51 Phil. 601 [1928])
(d) When condition of payment provided for in the by-laws (De Silva v. Aboitiz & Co.,
44 Phil. 755 [1923]).
3. Consideration (Sec. 62).
(a) Cash
(b) Property
(c) Service
(d) Retained Earnings
(e) Share
Stock dividends are in the nature of shares of stock, the consideration for
which is the amount of unrestricted retained earnings converted into equity in the
corporations books. xLincoln Philippine Life v. Court of Appeals, G.R No. 118043,
23 July 1998.
4. Watered Stocks (Sec. 65)
5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power
Co. v. Baltazar, 93 Phil. 404 [1953]).
6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; xPhilippine Trust Co. v.
Rivera, 44 Phil. 469 [1923]; xMiranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932])
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.
Suarez, 67 Phil. 441[1939]).
(a) Who May Question a Delinquency Sale (Sec. 68 and 69).
7. Certificate of Stock (Sec. 63)
(a) Nature of Certificate (Tan v. SEC, 206 SCRA 740 [1992]; De los Santos v.
Republic, 96 Phil. 577 [1955]; xC.N. Hodges v. Lezama, 14 SCRA 1030 [1965]).
A stock certificate is merely evidence of a share of stock and not the share
itself. xLincoln Philippine Life v. Court of Appeals, 293 SCRA 92 (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. Bitong v. Court of Appeals, 292 SCRA 503
(1998).

31
(b) Quasi-negotiable Character of the Certificate of Stock (Bachrach Motor Co. v.
Lacson Ledesma, 64 Phil. 681 [1937]).
In order for a transfer of stock certificate to be effective, 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. Indorsement of
the certificate of stock is a mandatory requirement of law for an effective transfer
of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992).
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. 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.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must
be delivery of the stock certificate; (b) The certificate must be endorsed by the
owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) to be valid against third parties, the transfer must be recorded in
the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
(c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14
SCRA 522 [1965]).
(d) Lost or Destroyed Certificates (Sec. 63 and 73)
While Section 73 of the Corporation Code appears to be mandatory, the
same admits exceptions, 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,
provided that the corporation is certain as to the real owner of the shares to whom
the new certificate shall be issued. . . . 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. It is well-settled that unless proven otherwise, the stock
and transfer book of the corporation is the best evidence to establish stock
ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia
Salazar-Santos).
(e) Forged and Unauthorized Transfers (J. Santamaria v. HongKong and Shanghai
Banking Corp., 89 Phil. 780 [1951]; Neugene Marketing, Inc. v. Court of Appeals,
303 SCRA 295 [1999]).
8. Stock and Transfer Book (Secs. 63, 72 and 74; Fua Cun v. Summers, 44 Phil. 704
[1923]; Monserrat v. Ceran, 58 Phil. 469 [1933]; Chua Guan v. Samahang
Magsasaka, Inc., 62 Phil. 472 [1935]; Uson v. Diosomito, 61 Phil. 535 [1935]; Escao
v. Filipinas Mining Corporation, 74 Phil. 71 [1944]; Bachrach Motors v. Lacson-
Ledesma, 64 Phil. 681 [1937]; Nava v. Peers Marketing Corp., 74 SCRA 65 [1976]).
In Garcia v. Jomouad, 323 SCRA 424 (2000), the Supreme Court directly
resolved the issue Whether a bona fide transfer of the shares of a corporation, not
registered or noted in the books of the corporation, is valid as against a subsequent
lawful attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not. The Court quoted from Uson v. Diosomito, 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, as well
as to the corporation and to subsequent purchasers in good faith and to all persons
interested, 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, but because they are made so void by statute. The Supreme
Court held that the transfer of the subject certificate made by Dico to petitioner was
not valid as to the spouses Atinon, the judgment creditors, as the same still stood in
the name of Dico, the judgment debtor, at the time of the levy on execution. In
addition, as correctly ruled by the CA, the entry in the minutes of the meeting of the
Clubs board of directors noting the resignation of Dico as proprietary member does
not constitute compliance with Section 63 of the Corporation Code. Said provision of
law strictly requires the recording of the transfer in the books of the corporation, and
not elsewhere, to be valid as against third parties.
Attachments of shares of stock are not included in the term "transfer" as
provided in Section 63 of the Corporation Code. Both the Revised Rules of Court and
32
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. Chemphil Export & Import Corporation v Court of Appeals, 251 SCRA 257
(1995).
Until registration is accomplished, the transfer, though valid between the parties,
cannot be effective as against the corporation. Thus, the unrecorded transferee cannot
vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the
transferee to exercise all the rights of a stockholder, including the right to vote and to
be voted for, 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. Until challenged in a proper proceeding, a stockholder of record has a
right to participate in any meeting; his vote can be properly counted to determine
whether a stockholders resolution was approved, despite the claim of the alleged
transferee. On the other hand, a person who has purchased stock, and who desires to
be recognized as a stockholder for the purpose of voting, must secure such a standing
by having the transfer recorded on the corporate books. Until the transfer is registered,
the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus
Company, Inc. v. Bitanga, G.R. No. 137934, 10 August 2001.
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. The term unpaid claims
refers to any unpaid claims arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from
any other transactions. Obligations arising from unpaid monthly dues do not fall within
the coverage of Section 63. China Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).
Entries made on the stock and transfer book by any person other than the
corporate secretary, such as those made by the President and Chairman, cannot be
given any valid effect. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
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.
The transfer must be registered in the books of the corporation to affect third persons.
The law on corporation is explicit on this under Sec. 63 of the Corporation Code.
xMagsaysay-Labrador v. CA, 180 SCRA 266 (1989)
Section 63 of the Corporation Code envisions a formal certificate of stock which
can be issued only upon compliance with certain requisites. First, the certificate must
be signed by the president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation. 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. Second, delivery of the certificate is an essential element of its issuance.
Hence, 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. Third, the par value, as
to par value shares, or the full subscription as to no par value shares, must first be
fully paid. Fourth, the original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a stockholder. Bitong v.
Court of Appeals, 292 SCRA 503 (1998).
9. Situs of Shares of Stocks (Sec. 55)
The situs of shares of stock would be the place of domicile of the corporation to
which they pertain to. xWells Fargo Bank and Union v. Collector, 70 Phil. 325 (1940);
xTayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. xPerkins v. Dizon, 69
Phil. 186 (1939).
XII. RIGHTS OF STOCKHOLDERS AND MEMBERS
1. What does Share represent?
While shares of stock constitute personal property, they do not represent
property of the corporation [i.e., they are properties of the stockholders who own them].
Share of stock only typifies an aliquot part of the corporations property, or the right to
share in its proceeds to that extent when distributed according to law and equity, but
the holder is not the owner of any part of the capital [properties] of the corporation, nor
33
is he entitled to the possession of any definite portion of its property or assets. The
stockholder is not a co-owner or tenant in common of the corporate property.
xStockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA
373 (1962).
2. Right to Certificate of Stock for Fully Paid Shares (Sec. 64; Tan v. SEC, 206 SCRA
740 [1992])
3. Preemptive Rights (Sec. 39; Datu Tagoranao Benito v. SEC, 123 SCRA 722 [1983];
Dee v. SEC, 199 SCRA 238 [1991]).
4. Right to Transfer of Shareholdings (Sec. 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, but merely
authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. xThomson v. Court of Appeals, 298 SCRA 280 (1998).
(a) Non-transferability of Membership in Non-Stock Corporation (Secs. 90
and 91).
(b) Restriction on Transfers (Lambert v. Fox, 26 Phil. 588 [1914])
- Right of Refusal (Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 [1933]).
Section 63 of the Corporation Code contemplates no restriction as to
whom the stocks may be transferred. It does not suggest that any discrimination
may be created by the corporation in favor of, or against a certain purchaser.
The owner of shares, as owner of personal property, is at liberty, under said
section to dispose them in favor of whomever he pleases, without limitation in
this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47
Phil. 583 (1925).
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. A corporation, either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers, because "Restrictions in the
traffic of stock must have their source in legislative enactment, as the
corporation itself cannot create such impediment. By-laws are intended merely
for the protection of the corporation, and prescribe relation, not restriction; they
are always subject to the charter of the corporation. Rural Bank of Salinas v. CA,
210 SCRA 510 (1992).
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. xOllendorf v. Abrahamson, 38 Phil. 585
(1918).
(c) Remedy If Registration Is Refused (Hager v. Bryan, 19 Phil. 138 [1911])
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, which does not provide when the registration
should be made, 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. xWon v. Wack Wack Golf &
Country Club, 104 Phil. 466 (1958).
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. CA, 147 SCRA 4 (1987).
5. Rights to Dividends (Sec. 43)
Although the certificates of stock granted the stockholder the right to receive 1%
quarterly dividends, cumulative and participating, the stockholders do not become
entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43 of the
present Corporation Code prohibit the issuance of any stock dividend without the
approval of stockholders, representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. These
provisions underscore the fact that payment of dividends to a stockholder is not a
34
matter of right but a matter of consensus. Furthermore, interest bearing stocks on
which the corporation agrees absolutely to pay interest before dividends are paid to the
common stockholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only. xRepublic Planters Bank v. Agana, 269
SCRA 1 (1997).
6. Rights to Attend Meetings and Vote (Sec. 6, Sec. 89)
Until challenged successfully in the proper proceedings, a stockholder according
to the books of the corporation has a right to participate in any meeting, and in the
absence of fraud the action of the stockholders meeting cannot be collaterally
attacked on account of such participation, even if it be shown later on that the shares
had been previously sold (but not recorded). xPrice and Sulu Dev. Co. v. Martin, 58
Phil. 707 (1933)
Sequestration of shares does not entitle the government to exercise acts of
ownership over the shares; consequently, even sequestered shares may be voted
upon by the registered stockholder of record. xCojuangco Jr. v. Roxas, 195 SCRA 797
(1991).
(a) Instances When Stockholders Entitled to Vote:
- Election of directors and trustees (Sec. 24)
- Amendment of articles of incorporation (Sec. 16)
- Investment in another business or corporation (Secs. 36 and 42)
- Merger and consolidation (Sec. 72)
- Increase and Decrease of capital stock (Sec. 38)
- Adoption, amendment and repeal of by-laws (Sec. 48)
- Declaration of stock dividends (Sec. 43)
- Management contracts (Sec. 44)
- Fixing of consideration of no par value shares (Sec. 62)
(b) Joint Ownership (Sec. 56)
(c) Treasury Share No Voting Rights (Sec. 57)
(d) Pledgor, Mortgagors and Administrators (Sec. 55)
When shares of stocks are pledged by means of endorsement in blank and
delivery of the covering certificates to secure a mortgage loan, the pledgee does
not become the owner of the shares simply by the failure of the registered
stockholder to pay his loan. Consequently, without proper foreclosure, the lender
cannot demand that the shares be registered in his name. A contract of pledge of
shares does not make the pledgee the owners of the shares pledged. xLim Tay v.
Court of Appeals, 293 SCRA 634 (1998).
(e) Conduct of Stockholders' or Members' Meetings:
Kinds and Requirements of Meetings (Secs. 49 and 50)
Place and Time of Meeting (Secs. 51 and 93)
Quorum (Sec. 52)
7. Rights to Inspect and Copy Corporate Records
(a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).
Right to inspect covers controlled subsidiaries. xGokongwei v. SEC, 89
SCRA 336 (1979).
(b) Limitations on Right
The only express limitations on the right of inspection under Sec. 74 of the
Corporation Code are: (a) the right of inspections should be exercised at
reasonable hours on business days; (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; and (c) the demand is made in good faith or for a legitimate purpose.
xAfrica v. PCGG, 205 SCRA 39 (1992).
35
The right is exercisable through agents and representatives, otherwise it
would often be useless to the stockholder who does not know corporate intricacies.
xW.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919).
A director has the unqualified right to inspect the books and records of the
corporation at all reasonable times, 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. xVeraguth v. Isabela Sugar Co., 57
Phil. 266 (1932)
The right to inspect, although it includes the right to make copies, does not
authorize bringing the books or records outside of the corporate premises.
xVeraguth v. Isabela Sugar Co., 57 Phil. 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. xVeraguth v. Isabela
Sugar Co., 57 Phil. 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. xPardo v. Hercules Lumber Co., 47 Phil. 964 (1924)
(c) Specified Records (Secs. 74, 75 and 141)
(d) Remedies If Inspection Denied: Mandamus (Gonzales v. PNB, 122 SCRA, 489
[1983]; Republic v. Sandiganbayan, 199 SCRA 39 [1991]).
(e) Confidential Nature of SEC Examinations (Sec. 142)
8. Appraisal Right (Secs. 81 to 86 and 105)
9. Derivative Suits (San Miguel Corp. v. Kahn, 176 SCRA 447 [1989]).
(a) Who May Bring Suit ((Pascual v. Orozco, 19 Phil. 83 [1911]).
(b) Exhaustion of Intra-Corporate Remedies (Everett v. Asia Banking Corp., 49 Phil.
512 [1927]; Angeles v. Sanmtos, 64 Phil. 697 [1937]).
(c) Nature of Relief (Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v.
Cuaderno, 19 SCRA 671 [1967]; Reyes v. Tan, 3 SCRA 198 [1961]; Commart
(Phils.) Inc. v. SEC, 198 SCRA 73 [1991]).
Appointment of receiver can be an ancillary remedy in a derivative suit
xChase v. CFI of Manila, 18 SCRA 602 (1966).
A derivative suit is an action brought by minority shareholders in the name
of the corporation to redress wrongs committed against the corporation, for which
the directors refuse to sue. It is a remedy designed by equity and has been the
principal defense of the minority shareholders against abuses by the majority.
xWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
For a derivative suit to prosper, 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.
xWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
In the absence of a special authority from the board of directors to institute a
derivative suit for and in behalf of the corporation, the president or managing
director is disqualified by law to sue in her own name. 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. xBitong v. Court of Appeals, 292 SCRA 503 (1998).
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. There is now
showing that petitioner has complied with the foregoing requisites. Tam Wing Tak
v. Makasiar, G.R. 122452, 29 January 2001.
The allegations of injury to the spouses-relators can co-exist with those
pertaining to the corporation. The personal injury suffered by the spouses cannot
36
disqualify them from filing a derivative suit on behalf of the corporation. It merely
gives rise to an additional cause of action for damages against the erring directors.
This cause of action is also included in the Complaint filed before the SEC. Gochan
v. Young, G.R. No. 131889, 12 March 2001.
10. Right to Proportionate Share of Remaining Assets Upon Dissolution
(a) Different rules apply to non-stock corporations and foundations (Secs. 94 and 95;
Section 34(H)(2)(c), NIRC of 1997).
11. Contracts and Agreement Affecting Shareholdings
(a) Proxy (Sec. 58)
(b) Voting Trust Agreements (Sec. 59; Lee v. CA, 205 SCRA 752 [1992]).
The trustor has a right to terminate the VTA for breach thereof. xEverett v.
Asia Banking Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163
SCRA 153 (1988).
(c) Pooling Agreements or Shareholders Agreements (Sec. 100)
XIII. CAPITAL STRUCTURE: SHARES OF STOCK
2. Concept of "Capital Stock" (Central Textile Mills v. National Wage and Productivity
Commission, 260 SCRA 368 [1996]).
By express provision of Section 13 [of the Corporation Code], paid-up capital is
that portion of the authorized capital stock which has been both subscribed and paid.
Not all funds or assets received by the corporation can be considered paid-up capital,
for this term has a technical signification in Corporation Law. Such must form part of
the authorized capital stock of the corporation, subscribed and then actually paid up.
xMSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, 269
SCRA 173 (1997).
The term capital and other terms used to describe the capital structure of a
corporation are of universal acceptance, and their usages have long been established
in jurisprudence. Briefly, capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the capital that persons
(subscribers or shareholders) have agreed to take and pay for, which need not
necessarily be, and can be more than, the par value of the shares. In fine, it is the
amount that the corporation receives, inclusive of the premium if any, in consideration
of the original issuance of the shares. xNational Telecommunications Commission v.
Court of Appeals, 311 SCRA 508, 514-515 (1999).
2. Classification of Shares (Sec. 6)
(a) Common Shares
A common stock represents the residual ownership interest in the
corporation. 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. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152
(1999).
(b) Preferred Shares (Republic Planters Bank v. Agana, 269 SCRA 1 [1997]).
Participating and Non-participating
Cumulative and Non-cumulative
Preferred stocks are those which entitle the shareholder to some priority on
dividends and asset distribution. xCommissioner of Internal Revenue v. Court of
Appeals, 301 SCRA 152 (1999).
A preferred share of stock, on one hand, is one which entitles the holder
thereof to certain preferences over the holders of common stock. The preferences
are designed to induce persons to subscribe for shares of a corporation. Preferred
shares take a multiplicity of forms. The most common forms may be classified into
two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The
37
former is a share which gives the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation; 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. There is no guaranty,
however, that the share will receive any dividends. . . Similarly, the present
Corporation Code provides that the board of directors of a stock corporation may
declare dividends only out of unrestricted retained earnings. The Code, in Section
43, adopting the change made in accounting terminology, substituted the phrase
unrestricted retained earnings, which may be a more precise term, in place of
surplus profits arising from its business in the former law. Thus, the declaration of
dividends is dependent upon the availability of surplus profit or unrestricted retained
earnings, as the case may be. Preferences granted to preferred stockholders,
moreover, do not give them a lien upon the property of the corporation nor make
them creditors of the corporation, the right of the former being always subordinate
to the latter. Dividends are thus payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits, the board of
directors has the discretion to determine whether or not dividends are to be
declared. Shareholders, both common and preferred, 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. Republic Planters Bank v. Agana, 269
SCRA 1 (1997).
(b) Redeemable shares (Sec. 8)
Redeemable shares are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the
stockholder, or both at a certain redemption price. A redemption by the corporation
of its stock is, in a sense, a repurchase of it for cancellation. The present Code
allows redemption of shares even if there are no unrestricted retained earnings on
the books of the corporation. 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. However, while redeemable shares may be redeemed
regardless of the existence of unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock. Redemption, therefore, 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. Republic
Planters Bank v. Agana, 269 SCRA 1 (1997).
Redemption is repurchase, a reacquisition of stock by a corporation which
issued the stock in exchange for property, whether or not the acquired stock is
cancelled, retired or held in the treasury. Essentially, the corporation gets back
some of its stock, distributes cash or property to the shareholder in payment for
the stock, and continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash
dividends. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA
152 (1999).
(c) Founder Shares (Sec. 7)
(d) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]).
When a treasury share which has not been retired by the corporation may
be sold again; but so long as it remains a treasury share, it does not participate in
dividends (since a corporation cannot pay dividends to itself) and cannot vote in
stockholders meeting. San Miguel Corp. v. Sandiganbayan, 340 SCRA 289
(2000).
(e) Stock Warrants
(f) Stock Options
(g) Re-Classification of Shares
Reclassification of shares does not always bring any substantial alteration in
the subscribers proportional interest. But the exchange is differentthere would
be a shifting of the balance of stock features like priority in dividend declarations
or absence of voting rights. Yet neither the reclassification nor exchange per se
yields income for tax purposes. . . In this case, the exchange of shares, without
more, produces no realized income to the subscriber. There is only a modification
of the subscribers rights and privilegeswhich is not a flow of wealth for tax
purposes. The issue of taxable dividend may arise only once a subscriber disposes
38
of his entire interests and not when there is still maintenance of proprietary
interest. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152
(1999).
3. Hybrid Securities (Government v. Phil. Sugar Estates, 38 Phil. 15 [1918]; John Keley
Co. v. Comm. of Internal Revenue, 326 U.S. 521, 66 S. Ct. 299, 90 L. Ed., 278 [1945])
4. Quasi-Reorganization
(a) Reduction of Capital Stock (Sec. 38; xMadrigal & Co. v. Zamora, 151 SCRA 355
[1987]);
(b) Stock Splits
(c) Stock Consolidations
XIV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. Acquisitions and Transfers
See relevant portion of VILLANUEVA, Restatement of the
Doctrine of Piercing the Veil of Corporate Fiction, 37 ATENEO L.J.
19 (No. 2, June 1993)
1. Concept of "Enterprise" or "Economic unit" or "Going concern" (Villa Rey
Transit, Inc. v. Ferrer, 25 SCRA 845 [1968]).
2. Types of Acquisitions\Transfers (Edward J. Nell Co. v. Pacific, 15 SCRA 415
[1965]):
(a) In a pure "Assets only" Transfer, the transferee is not liable for the
debts and liabilities of the transferor, except where the transferee
expressly or impliedly agrees to assume such debts;
(b) In a Business Enterprise Transfer, the transferee is liable for the
debts and liabilities of the transferor; and
(c) In an Equity Transfer, the transferee is not liable for the debts and
liabilities of the transferor, except where the transferee expressly or
impliedly agrees to assume such debts.
3. Business Enterprise Transfers (A.D. Santos v. Vasquez, 22 SCRA 1156 [1968];
Laguna Transportation Co., Inc. v. SSS, 107 Phil. 833 [1960]).
Although the business enterprise was held under a partnership scheme and
latter the business was transferred to a corporation, the business enterprise is
deemed to have been in operation for the required two-year period as to come
under the coverage of the SSS Law. xSan Teodoro Dev. Ent. Inc. v. SSS, 8
SCRA 96 (1963).
Although a corporation may have ceased business operations and an
entirely new company has been organized to take over the same type of
operations, it does not necessarily follow that no one may now be held liable for
illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210
SCRA 277 (1992).
4. Equity Transfers (Philippine Veterans Investment Development Corp. v. CA, 181
SCRA 669 [1990]).
The fact that instead on foreclosing on the mortgaged assets, DBP
converted its loans to equity, making it the controlling stockholder of a bank, and
although the majority of the members of the board of directors of the bank are
from DBP, the same does not make DBP an employer of the bank employees, nor
does it make DBP liable for the wage claims of the bank's employees. xDBP v.
NLRC, 186 SCRA 841 (1990).
B. Merger and Consolidation
1. Concepts
2. Procedure:
(a) Plan of Merger or Consolidation (Sec. 76);
39
(b) Stockholders' or Members' Approval (Sec. 77);
(c) Articles of Merger or Consolidation (Sec. 78);
(d) Approval by SEC (Sec. 79).
3. Effects of Merger or Consolidation (Sec. 80)
It is settled that in the merger of two existing corporations, one of the
corporations survives and continues the business, while the other is dissolved and all
its rights, properties and liabilities are acquired by the surviving corporation. xBabst v.
Court of Appeals, G.R. No. 99398, 26 January 2001.
Ordinarily, in the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined business, while the
rest are dissolved and all their rights, properties and liabilities are acquired by the
surviving corporation. Although there is dissolution of the absorbed corporations,
there is no winding up of their affairs or liquidation of their assets, because the
surviving corporation automatically acquires all their rights, privileges and powers,
as well as their liabilities. xAssociated Bank v. Court of Appeals, 291 SCRA 511
(1998)
The merger, however, does not become effective upon the mere agreement of
the constituent corporations. The procedure to be followed is prescribed under the
Corporation Code. Section 79 of said Code requires the approval by the Securities
and Exchange Commission (SEC) of the articles of merger which, in turn, must have
been duly approved by a majority of the respective stockholders of the constituent
corporations. The same provision further states that the merger shall be effective
only upon the issuance by the SEC of a certificate of merger. The effectivity date of
the merger is crucial for determining when the merged or absorbed corporation
ceases to exist: and when its rights, privileges, properties as well as liabilities pass
on to the surviving corporation. xAssociated Bank v. Court of Appeals, 291 SCRA
511 (1998).
C. Effects on Employees of Corporation (Complex Electronics Employees Association
v. NLRC, 310 SCRA 403 [1999]).
1. Assets Only Transfers (Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 [1989])
There is no law requiring that the purchaser of MDIIs assets should absorb
its employees. As there is no such law, the most that the NLRC could do, for
reasons of public policy and social justice, was to direct [the buyer] to give
preference to the qualified separated employees of MDII in the filling up of
vacancies in the facilities. xMDII Supervisors & Confidential Employees Asso. V.
Pres. Assistance on Legal Affairs, 79 SCRA 40 (1977).
2. Business-Enterprise Transfers (Yu v. NLRC, 245 SCRA 134 [1995]; Sunio v.
NLRC, 127 SCRA 390 [1984]; Central Azucarera del Danao v. Court of Appeals,
137 SCRA 295 [1985]; xSan Felipe Neri School of Mandaluyong, Inc. v. NLRC,
201 SCRA 478 (1991).
3. Equity Transfers (Manlimos v. NLRC, 242 SCRA 145 [1995]; Robledo v. NLRC,
238 SCRA 52 [1994]; Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992);
xDevelopment Bank of the Philippines v. NLRC, 186 SCRA 841[1990]; Pepsi Cola
Distributors of the Philippines, Inc. v. NLRC, 247 SCRA 386 (1995); xCoral v.
NLRC, 258 SCRA 704 [1996]; xAvon Dale Garments, Inc. v. NLRC, 246 SCRA
733 [1995]; Electronics Employees Association v. NLRC, 310 SCRA 403 [1999]).
4. Mergers and Consolidations (Filipinas Port Services, Inc. v. NLRC, 177 SCRA
203 [1989]; Filipinas Port Services, Inc. v. NLRC, 200 SCRA 773 [1991]; National
Union Bank Employees v. Lazaro, 156 SCRA 123 [1988]); xFirst General
Marketing Corp. v. NLRC, 223 SCRA 337 (1993).
5. Spin-Offs (San Miguel Corp. Employees Union-PTGWO v. Confessor, 262 SCRA
81 [1996])
40

XV. REHABILITATION AND INSOLVENCY
See VILLANUEVA, Revisiting the Philippine Laws on
Corporate Rehabilitation, XLIII ATENEO LAW JOURNAL No. 2
(May, 1999).
1. Corporate Bankruptcy Laws in General
(a) Governing Laws (The Insolvency Act, PD 902-A, and Securities Regulation Code
[RA 8799]; 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. Land Bank of
the Philippines, 201 SCRA 190 [1991]).
2. Suspension of Payments
(a) Insolvency Law (Secs. 2 to 13)
- Situation of the corporate debtor
- Nature of petition
- Required vote of creditors
- Consequences of approval/non-approval
(b) Pres. Decree 902-A (Sec. 5[d]), and Section 5.10 of Securities Regulation Code.
(c) Supreme Court Interim Rules of Procedure on Corporation Rehabilitation (2000).
3. Corporate Rehabilitation
(a) Nature of Rehabilitation (Ruby Industrial Corp. v. Court of Appeals, 284 SCRA
445 (1998).
Liquidation, in Corporation Law, connotes a winding up or setting with creditors
and debtors. It is the winding up of a corporation so that assets are distributed to
those entitled to receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss. On the opposite end of the
spectrum is rehabilitation which connotes a reopening or reorganization.
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. It is crystal clear that the concept of liquidation is diametrically
opposed or contrary to the concept of rehabilitation, such that both cannot be
undertaken at the same time. To allow the liquidation proceedings to continue would
seriously hinder the rehabilitation of the subject bank. Philippine Veterans Bank
Employees Union N.U.B.E., G.R. No. 105364, 28 June 2001.
(b) Basis of RTC Power to Undertake Corporate Rehabilitation (Secs. 5[d] and 6,
Pres. Decree 902-A, in relation to Sec. 5.10, Securities Regulation Code)
(c) Appointment of Management Committee or a Rehabilitation Receiver
(d) Automatic Stay and its Legal Effects; When it becomes effective
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. The conclusion is inevitable that pursuant to Section
6(c), taken together with Sections 5(d) and (d), a court action is ipso jure
suspended only upon the appointment of a management committee or a
rehabilitation receiver. (Barotac Sugar Mills v. Court of Appeals, 275 SCRA 497
[1997]; reiterated in Union Bank v. Court of Appeals, 290 SCRA 198 [1998])
- Duration (B.F. Homes, Inc. v. Court of Appeals, 190 SCRA 262 [1990])
41
- Effect on Individual Petitioners Joining the Petition (Union Bank of the
Philippines v. Court of Appeals, 290 SCRA 198 (1998); xModern Paper Products,
Inc. v. Court of Appeals, 286 SCRA 749 (1998); xTraders Royal Bank v. Court of
Appeals, 177 SCRA 788 [1989]; xChung Ka Bio v. Intermediate Appellate Court,
163 SCRA 534 (1988))
- Claims Covered by the Automatic Stay (xPCIB v. Court of Appeals, 172 SCRA
436 [1989]; Alemars Sibal & Sons, Inc. v. Elbinias, 186 SCRA 94 [1990];
xRizal Commercial Banking Corp. v. IAC, 213 SCRA 830 [1992]; xBank of PI v.
Court of Appeals, 229 SCRA 223 [1994]).
- Types of claims Covered (Finasia Investments v. Court of Appeals, 237
SCRA 446 [1994])
Labor claims are not exempted from the automatic stay under Pres.
Decree No. 902-A. 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. To allow such other actions for labor claims to continue
would only add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted defending claims
against the corporation instead of being directed toward its restructuring and
rehabilitation. xRubberworld [Phils.], Inc. v. NLRC, 305 SCRA 721 (1999);
G.R. No. 128003, 26 July 2000.
(e) Rationale for Suspensive Effect of Appointment on Existing Suits and
Causes of Action
(f) Powers of Management Committee or the Rehabilitation Receiver (Sec. 6, PD
902-A)
(g) SEC Power to Liquidate Corporation
(h) Basic Differences Between Suspension of Payments Proceedings under the
Insolvency Law and Under Pres. Decree No. 902-A
4. 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. xChua
v. NLRC, 190 SCRA 558 (1990).
(a) Governing Law and Jurisdiction
(b) General Effect of Corporate Insolvency Proceedings
(c) VOLUNTARY INSOLVENCY
(d) Filing of Petition (Sec. 14, TIL)
(e) Effect of Order of Insolvency (Sec. 18; De Amuzategui v. Macleod, 33 Phil. 80
[1915]).
Section 18 on the automatic stay is no self-executory; applications for
suspension of proceedings must be made in the various courts where actions in
pending (xUnson v. Abeto, 47 Phil. 42 [1924]).
(f) INVOLUNTARY INSOLVENCY (Sec. 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, Inc. v. Citibank, N.A., 203 SCRA 9 (1991).
(h) Order to Show Cause (Sec. 21); Hearing of petition (Sec. 24)
(i) Acts of Insolvency and Order of Adjudication (Sec. 20)
(j) Meeting of Creditors to Elect Assignee (Secs. 29 and 30)
(k) Effects of Order of Insolvency and Appointment of Receiver (Secs. 32, 34 and 35;
xRadiola-Toshiba Phil. v. IAC, 199 SCRA 373 [1991])
(l) Liquidation of assets and payment of debts (Sec. 33)
(m) Remedies of Secured Creditors (Sec. 29, 43 and 59)
(n) Composition (Sec. 63)
(o) Discharge (Secs. 52, 64, and 66)
42
(p) Appeal in certain cases (Sec. 82)
XVI. DISSOLUTION
1. No Vested Rights to Corporation Fiction (Gonzales v. Sugar Regulatory
Administration, 174 SCRA 377 [1989]).
2. Voluntary Dissolution (Sec. 117)
(a) No Creditors Affected (Sec. 118)
(b) There Are Creditors Affected (Secs. 119 and 122).
3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66; Rules of
Court)
(a) Quo Warranto (Republic v. Bisaya Land Transportation Co., 81 SCRA 9 [1978];
Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 [1967];
xGovernment v. El Hogar Filipino, 50 Phil. 399 [1927]).
(b) Expiration of Term
(c) Shortening of Corporate Term (Sec. 120)
(d) Non-user of Corporate Charter and Continuous Inoperation of a Corporation
(Sec. 22)
"Organize" when used in reference of a corporation involves the election of
officers, providing for the subscription and payment of the capital stock, the
adoption of by-laws, 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.
The term "organization" relates merely to the systematization and orderly
arrangement of the internal and managerial affairs and organs of the corporation.
xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
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. xChung Ka
Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988).
(f) Demand of Minority Stockholders for Dissolution (Financing Corp. of the Phil. v.
Teodoro, 93 Phil. 404 [1953]).
4. 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, as the same would constitute new business. xAlhambra
Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968).
When the period of corporate life expires, the corporation ceases to be a body
corporate for the purpose of continuing the business for which it was organized
xPhilippine National Bank v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA
294 (1992).
5. Methods of Liquidation (Sec. 122; Board of Liquidators v. Kalaw, 20 SCRA 987
[1967]; Sumera v. Valencia, 67 Phil. 721 [1939]; Buenaflor v. Camarines Industry,
108 Phil. 472 [1960]).
Liquidation is the settlement of the affairs of a corporation [which] consists
of adjusting the debts and claims, that is, of collecting all that is due the corporation,
the settlement and adjustment of claims against it and the payment of its just debts.
xChina Banking Ciorp. V. M. Michelin & Cie, 58 Phil. 261 (1933).
There can be no doubt that under Sections 77 and 78 of the Corporation Law,
the Legislature intended to let the shareholders have the control of the assets of the
corporation upon dissolution in winding up its affairs. The normal method of procedure
is for the directors and executive officers to have charge of the winding up operations,
though there is the alternative method of assigning the property of the corporation to
the trustees for the benefit of its creditors and shareholders. While the appointment of
a receiver rests within the sound judicial discretion of the court, such discretion must,
however, always be exercised with caution and governed by legal and equitable
principles, the violation of which will amount to its abuse, and in making such
appointment the court should take into consideration all the facts and weigh the
43
relative advantages and disadvantages of appointing a receiver to wind up the
corporate business. xChina Banking Ciorp. V. M. Michelin & Cie, 58 Phil. 261 (1933).
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. . . 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, and if a claim is disputed or unliquidated so
that the receiver cannot safely allow the same, it should be transferred to the proper
court for trial and allowance, and the amount so allowed then presented to the receiver
or trustee for payment. 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 latters ruling. xChina Banking Corp. V. M. Michelin & Cie, 58 Phil. 261 (1933).
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, there is nothing in said provision which
bars an action for the recovery of the debts of the corporation against the liquidator
thereof, after the lapse of the said three-year period. It immaterial that the present
action was filed after the expiration of the three years . . . for at the very least, 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, obviously for the benefit of all the creditors
thereof, the assessment aforementioned, made within the three years, definitely
established the Government as a creditor of the corporation for whom the liquidator is
supposed to hold assets of the corporation. xRepublic v. Marsman Development
Company, 44 SCRA 418 (1972).
6. Who Are Liable After Dissolution and Winding-Up? (National Abaca Corp. v. Pore, 2
SCRA 989 [1961]; Tan Tiong Bio v. Commissioner, 100 Phil. 86 [1956]; Gelano v.
CA, 103 SCRA 90 [1981]).
Although a corporate officer, such as a general manager is not liable for
corporate obligations, such as claims for wages, however, when such corporate officer
ceases corporate property to apply to his own claims against the corporation, he shall
be liable to the extent thereof to corporate liabilities, since knowing fully well that
certain creditors had similarly valid claims, he took advantage of his position as
general manager and applied the corporation's assets in payment exclusively to his
own claims. xDe Guzman v. NLRC, 211 SCRA 723 (1992).
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, culminating in the disposition and distribution
of its remaining assets. It may, during the three-year term, appointing a trustee or a
receiver who may act beyond that period. 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. If the three-year extended life has expired
without a trustee or receiver having been expressly designated by the corporation
within that period, the board of directors (or trustee) itself, following the rationale of the
Supreme Court's decision in Gelano v. court of Appeals (103 SCRA 90) may be
permitted to so continue as "trustees" by legal implication to complete the corporate
liquidation. Still in the absence of a board of directors or trustees, those having any
pecuniary interest in the assets, including not only the shareholders but likewise the
creditors of the corporation, acting for and in its behalf, might make proper
representations with the Securities and Exchange Commission, which has primary and
sufficient broad jurisdiction in matters of this nature, for working out a final settlement
of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717, 723 (1995).
Since the law specifically allows a trustee to manage the affairs of the
corporation in liquidation, any supervening fact, such as the dissolution of the
corporation, repeal of the law, or any other fact of similar nature, would not serve as
an effective bar to the enforcement of such right. xReburiano v. Court of Appeals, 301
SCRA 342 (1999).
In Gelano case, the counsel of the dissolved corporation was considered a
trustee. In the later case of Clemente v. Court of Appeals [242 SCRA 717 (1995)], we
held that the board of directors may be permitted to complete the corporate liquidation
by continuing as trustees by legal implication. Under Section 145 of the Corporation
Code, No right of remedy in favor or against any corporation . . . shall be removed or
44
impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof. This provision safeguards
the rights of a corporation which is dissolved pending litigation. xReburiano v. Court of
Appeals, 301 SCRA 342 (1999)
7. Reincorporation (Chung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534
[1988]).
XVII. CLOSE CORPORATION
See VILLANUEVA, The Philippine Close Corporation, 32
ATENEO L.J. (No. 2, March, 1988).
1. Definition (Sec. 96; Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678
[1993]; San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA
631, 645 (1998).
2. Articles of Incorporation Requirements (Sec. 97)
(a) Pre-Emptive Rights (Sec. 102);
(b) Amendment (Sec. 103)
3. Restriction on Transfer of Shares (Secs. 98 and 99)
4. Agreements by Stockholder (Sec. 100)
5. No Necessity of Board (Sec. 101; Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]).
6. Deadlocks (Sec. 104)
7. Withdrawal and Dissolution (Sec. 105)
Even prior to the passage of the Corporation Code which recognized close
corporation, the Supreme Court had on limited instances recognized the common law
rights of minority stockholders to seek dissolution of the corporation. Financing Corp.
of the Phil. v. Teodoro, 93 Phil. 404 (1953).
XVIII. NON-STOCK CORPORATIONS AND FOUNDATIONS
See VILLANUEVA, Distinguishing Foundations from Other
Non-Stock Corporations. (Unpublished)
1. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94(5); Collector of
Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 [1962]; Collector of
Internal Revenue v. University of Visayas, 1 SCRA 669 [1961]).
A non-stock corporation may only be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or
other similar purposes. It may not engage in undertakings such as the investment
business where profit is the main or underlying purpose. 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.
People v. Menil, G.R. 115054-66, 12 September 1999.
The incurring of profit or losses does not determine whether an activity is for
profit or non-profit, and the courts will consider whether dividends have been declared
or its members or that is property, effects or profit was ever used for personal or
individual gain, and not for the purpose of carrying out the objectives of the enterprise.
xManila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
2. What is a Foundation? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Revenue
Regulations No. 2; BIR-NEDA Regulations No. 1-81, as amended)
The formal requirements of Revenue Regulations No. 2 are not mandatory and
that an entity may, in the absence of compliance with such requirements, still show
that it falls under the provisions of Section 26 of the NIRC. xCollector v. V.G. Sinco
Educational Corp., 100 Phil. 127 (1956).
3. Dissolution (Secs. 94 and 95)
45
XIX. FOREIGN CORPORATION
See VILLANUEVA, Philippine Doctrine of "Doing Business," THE
LAWYERS REVIEW, - Part I - Vol. VII, No. 4, (April, 1993); Part II - Vol. VII, No.
6 (June, 1993).
1. Definition (Sec. 123).
A foreign corporation owes its existence to the laws of another state, and
generally, has no legal existence within the state in which it is foreign. xAvon
Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
A fundamental rule of international jurisdiction is that no state can by its laws,
and no court which is only a creature of the state, can by its judgments and decrees,
directly bind or affect property or persons beyond the limits of that state. xTimes, Inc.
v. Reyes, 39 SCRA 303 (1971).
2. Statutory Concept of "Doing Business" (Art. 44, Executive Order No. 226, Omnibus
Investment Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991).
(a) Application for License (Secs. 124 and 125; also Art. 48, Omnibus Investment
Code)
(b) Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code)
(c) Amendment of License (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, it to subject the foreign corporations doing
business in the Philippines to the jurisdiction of the courts, otherwise, 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. Avon Insurance PLC v. Court of Appeals, 278 SCRA
312 (1997).
The same danger does not exist among foreign corporations that are
indubitably not doing business in the Philippines. Indeed, if a foreign corporation
does not do business here, there would be no reason for it to be subject to the
States regulation. As we observed, in so far as the State is concerned, such
foreign corporation has no legal existence. Therefore, to subject such foreign
corporation to the courts jurisdiction would violate the essence of sovereignty.
xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
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. xClaude Neon Lights v. Phil.
Advertising Corp., 57 Phil. 607 (1932).
3. 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. Mentholatum v.
Mangaliman, 72 Phil. 525 (1941).
Where a single act or transaction, however, is not merely incidental or
casual but indicates the foreign corporation's intention to do other business in the
Philippines, said single act or transaction constitutes doing business. xFar East
Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962).
A foreign corporation with a settling agent in the Philippines which issues
twelve marine policies covering different shipments to the Philippines is doing
business in the Philippines. xGeneral Corp. of the Phil. v. Union Insurance Society
of Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding
policies was regarded as doing business in the Philippines. xManufacturing Life
Ins. v. Meer, 89 Phil. 351 (1951)
Solicitation of business contracts constitutes doing business in the
Philippines. xMarubeni Nederland B.V. v. Tensuan, 190 SCRA 105 (1990).
46
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, since
other circumstances must be considered. 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, such act will be considered as constituting business. xLitton
Mills, Inc. v. Court of Appeals, 256 SCRA 696 (1996).
Participating in bidding process shows an intention to engage in business in
the Philippines. xHutchison Philippines Ltd. v. Subic Bay Metropolitan Authority,
339 SCRA 434 (2000).
(b) Unrelated or Isolated Transactions (Eastboard Navigation, Ltd. v. Juan Ysmael
and Co., Inc., 102 Phil. 1 [1957]; Antam Consolidated v. CA, 143 SCRA 288
[1986]).
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. La Campaia Transatlantica, 8 Phil. 766 [1907]);
Loss of goods bound for Hongkong but erroneously discharged in Manila
(xThe Swedish East Asia Co., Ltd. v. Manila Port Service, 25 SCRA
633 [1968]);
Infringement of trade name (xGeneral Garments Corp. v. Director of
Patens, 41 SCRA 50 [1971]; xUniversal Rubber Products, Inc. v. Court
of Appeals, 130 SCRA 104 [1988]);
Recovery of damages sustained by cargo shipped to the Philippines
(xBulakhidas v. Navarro, 142 SCRA 1 [1986]);
Sale to the Government of road construction equipment and spare parts
with no intent of continuity of transaction (xGonzales v. Raquiza, 180
SCRA 254 [1989]); and
Recovery on a Hongkong judgment against a Manila resident (xHang
Lung Bak v. Saulog, 201 SCRA 137 [1991]).
In the case of foreign movie companies who have registered intellectual
property rights over their movies in the Philippines, 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, particularly the appointment of
an attorney-in-fact, can be deemed by and of themselves to be doing business
here." xColumbia Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996).
(c) The "Contract Test" of Doing Business (Pacific Vegetable Oil Corp. v. Singson,
Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna Casualty &
Surety Co. v. Pacific Star Line, 80 SCRA 635 [1977]; Universal Shipping Lines,
Inc. v. IAC, 188 SCRA 170 [1990]).
(d) Transactions with Agents and Brokers (Granger Associates v. Microwave
Systems, Inc., 189 SCRA 631 [199 ]; La Chemise Lacoste, S.A. v. Fernandez,
129 SCRA 373 [1984]; xSchmid & Oberly v. RJL, 166 SCRA 493 [1988]; xWang
Laboratories, Inc. v. Mendoza, 156 SCRA 44 [1974];
4. Different Rules on Trademark and Tradenames (Western Equipment & Supply Co.
v. Reyes, 51 Phil. 115 [1927]; xLeviton Industries v. Salvador, 114 SCRA 420 [1982];
xConverse Rubber v. Universal Rubber, 147 SCRA 154 [1987]; xConverse Rubber
Corp. v. Jacinto Rubber & Plastic Co., 97 SCRA 158 [1980]; xUniversal Rubber
Products, Inc. v. CA, 130 SCRA 104 [1984]; xPuma Sportschunhfabriken Rudolf
Dassler, K.G. v. IAC, 158 SCRA 233 [1988]; xPhilips Export B.V. v. CA, 206 SCRA
457 [1992]).
5. Effects of Failure to Obtain License:
(a) On the contract entered into by such foreign corporation (Home Insurance
Company v. Eastern Shipping Lines, 123 SCRA 424 [1983]).
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
47
not to prevent the foreign corporation from performing single acts, 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. Marshall-Wells Co., v. Elser,
46 Phil. 70 (1924).
(b) Standing of such foreign corporation to sue in Philippine courts (Sec. 133;
Marshall-Wells v. Elser, 46 Phil. 71 [1924])
(c) Criminal liability under Sect. 144 of the Corporation Code. Home Insurance
Company v. Eastern Shipping Lines, 123 SCRA 424 (1983).
(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, under the
principle of pari delicto. (Top-Weld Mfg. v. ECED, 119 SCRA 118 [1985])
But Now See Communication Materials and Design, Inc. v. Court of
Appeals, 260 SCRA 673 (1996).
(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, under the principle
of estoppel. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992); xGeorg
Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994).
(f) Proper Doctrine: Ericks Ltd. v. Court of Appeals, 267 SCRA 567 (1997).
But see lately: Subic Bay Metropolitan Authority v. Universal International Group of
Taiwan, 340 SCRA 359 (2000).

6. Suits Against Foreign Corporations:
(a) Jurisdiction Over the "Person" of Foreign Corporations (Sec. 14, Rule 14,
Rules of Court; General Corp. of the Phil. v. Union Insurance Society of Canton,
Ltd., 87 Phil. 313 [1950]; Johnlo Trading Co., v Flores, 88 Phil. 741 [1951];
xJohnlo Trading Co. v. Zulueta, 88 Phil. 750 [1951]; xPacific Micronisian Line, Inc.
v. Del rosario, 96 Phil. 23 [1954]; xFar East International Import and Export Corp.
v. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962]).
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, then this
appearance is not equivalent to service of summons, nor does it constitute an
acquiescence to the courts jurisdiction. xAvon Insurance PLC v. Court of Appeals,
278 SCRA 312, 327 (1997).
For the purpose of having summons served on a foreign corporation in
accordance with Rule 14, Section 14, it is sufficient that it be alleged in the
complaint that the foreign corporation is doing business in the Philippines. xHahn
v. Court of Appeals, 266 SCRA 537 (1997).
When it is shown that a foreign corporation is doing business in the
Philippines, summons may be served on (a) its resident agent designated in
accordance with law; (b) if there is no resident agent, the government official
designated by law to that effect; or (c) any of its officers or agent within the
Philippines. 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. Although there is no requirement to first substantiate the allegation of
agency, 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. Nowhere in the case of
Signetics Corporation v. Court of Appeals, did the Court state that if the complaint
alleges that defendant has an agent in the Philippines, summons can validly be
served thereto even without prior evidence of the truth of such factual allegation; it
is only in the headnote of the reporter which is not part of the decision. xFrench Oil
Mills Machinery Co., Inc. v. Court of Appeals, 295 SCRA 462 (1998).
(b) The Odd Doctrine (Facilities Management Corp. v. De la Osa, 89 SCRA 131
[1979]; xFBA Aircraft v. Zosa, 110 SCRA 1 [1981]; xRoyal Crown International v.
48
NLRC, 178 SCRA 569 [1989]; xWang Laboratories, Inc. v. Mendoza, 156 SCRA
44 [1987]).
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. xHyopsung Maritime
Co., Ltd. v. CA, 165 SCRA 258 1988); Signetics Corp. v. CA, 225 SCRA
737 (1993).
But Now See Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997)
(c) Stipulation on Venue
When the contract sued upon has a venue clause within the Philippines, it is
deemed a confirmation by the foreign corporation, even though not doing business
in the Philippines, to be sued in local courts. xLinger & Fisher GMBH v. IAC, 125
SCRA 522 (1983).
7. 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." Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA
1037 (1966); xCommissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
This overturned the previous doctrine in xMarshall-Wells (as well as in xIn re
Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), 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.
A complaint filed by a foreign corporation is fatally defective for failing to allege
its duly authorized representative or resident agent in Philippine jurisdiction. xNew
York Marine Managers, Inv. c. Court of Appeals, 249 SCRA 416 (1995).
For the purpose of having summons served on a foreign corporation in
accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint
that the foreign corporation is doing business in the Philippines. xHahn v. Court of
Appeals, 266 SCRA 537 (1997).
8. Resident Agent (Sec. 127 and 128)
(a) Concept of "residence" (State Investment House v. Citibank, 203 SCRA 9 [1991]).
(b) When a corporation has designated a person to receive service of summon
pursuant to the Corporation Code, the designation is exclusive and service of
summons on any other person is inefficacious. xH.B. Zachry Company
International v. CA, 232 SCRA 329 (1994).
9. Applicable Laws to Foreign Corporations (Sec. 129; Grey v. Insular Lumber Co., 67
Phil. 139 [1938])
10. Amendment of Articles of Incorporation (Sec. 130)
11. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code)
12. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code)
14. Withdrawal of Foreign Corporation (Sec. 136)
XX. PENALTY PROVISIONS OF THE CODE
See VILLANUEVA, The Penal Provision Under Sec. 144 of
the Corporation Code, THE LAWYERS REVIEW, Vol. X, No. 2 (29
February 1996).
1. Penalty Clause for Violations of the Provisions of the Code (Sec. 144).
2. Cross-reference (Sec. 27).
3. Specific application (Sec. 74).
49
4. Strict Principles in Criminal Law; the issue of malice.
5. Historical Background of Sec. 144 (Sec. 190 1/7 of the Corporation Law)
Sec. 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. El Hogar Filipino,

50 Phil. 399 (1927).
The penalties imposed in Sec. 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. But these proceedings can be
maintained only by the Attorney-General in representation of the Government."
xHarden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
6. Violation of Section 133 by Foreign Corporations
Section 133 of the present Corporation Code, 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, should be deemed to have a penal sanction by virtue of Section
144 of the Corporation Code. Home Insurance Company v. Eastern Shipping Lines,
123 SCRA 424 (1983).
Home may therefore provides the second instance of violation of the Code
(under Section 133), when the criminal penalties of Sec. 144 are applicable.
XXI. MISCELLANEOUS
1. SEC power and supervision (Secs. 108 and 143; PD 902-A).
2. Special corporations (Sec. 4).
3. New requirements on existing corporations (Sec. 148).
4. Applicability of other provision of the old Corporation Law, (Sec. 145 and 146).
oOo
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