Chapter 1 INTRODUCTION Use-of the Term “Corporate Law" Proper Treatment of the Gorporation Code Use oF THE TeRM “Corporate Law” L PD The whole body of laws, principles and doctrines covering private corporations in the Philippines is referred to in this book as “Corporate Law’ in order not to confuse the use of such term with the official name of the old Corporation Law, or Act No. 1459.' The main statutory provisions governing Philippine Corporate Law are currently found in the ‘Corporation Code, or Batas Pambansa Big. 68+ PROPER TREATMENT OF THE CORPORATION CODE’ Philippine Gorporate Law comes from the common law system of the United States of America. Although we have a Corporation Code that provides for statutory rules and principles, Philippine Corporate Law is, and continues to be, the product of ‘commercial developments. Necessarily, the statutory corporate provisions and principles are representations of atime ‘when such principles were the governing, or at best, the general controlling influence; but by no means can be taken to indicate changes in the field that have accurred since their adaptation, and do not limit future developments. Much of the development in Corporate Law can be expected to happen in jurisprudential rules that apply and adopt corporate principles into the hanging concepts and mechanism of the commercial world. ———_—_——_——; “Gnagied on 1 March 1908 by the Philippine Commission, and tack effacs on 4 April 1906" Section 1 of Aci No. 1459 specifically provides that “The short ite ofthis Act shall be “The Corporation Law.” "May, 1980. *Arrore detailed discussion ofthis approach is found In Chapter 20 on Legal Theory of Philippine Comorate Law:a "Oo PORATE LAW PHILIPPINE COR! ting dated nas sugges! should therefore be id real toss and tussle ‘His Comeration Cone te Law, but t te Law development, principles and practices in ae future Corporal om oh wad Ge. and Fe bog pot hr ipaeliite practices. sea ihe: courts of law in in com for u oo tious - controversies put forth tt some of which would be hc mn Peel me ‘thesized ny Jursprudential aw. Once ina whi Oe isting cone SEN pions oan iets sp Togislative enactments are Corpora trines or rules; but often SU ta Gaudena' ee meant Nene toe already existing commercial pf statutory language, i ode has for Jr ancthat vey f iosiong ae ison #8 St or of doing its subject matter the “corporation,” which is a “medium anon business, then the Code may be viewed as the ‘manual ell ion. The Which to properly operate the medium or the tooi, thatis the a The Corporation, however, Is not a static medium, but one that is lynami continues to evolve in response to the needs and ‘demands of | businessmen, entrepreneurs and investors, in Particular, and society in general, in the @ver-changing transactions and fields of the commercial world, It should be Gxpected that after a given period, some portions of the Corporation Code would have become outdated or outmoded, and by its original provisions €S @ manual of instructions, the Code would conomy, ‘ares separati Ng One nal NCy is to '8-examin eo roments or ee HO" from er ins Tharketing conditions oo as theyINTRODUCTION ‘The Securities a thes in the PrOpOr exercise Tee (SEC) has ruled: “Fur ions ry an captor parva gna Somauan, aC wir joc I Durpoes, veh headh toon ec ‘whch wil cual non ui somos oe ens © c . to be rejected tit 2 of the Code. Therefore, ‘a literal interpreta~ er to mention that sarod be unjust or lead te absurd results.’ . . X'S wor 4 ciple that the i fecisions of our courts have frequently enunciated ee shoud be intent of the legislature will gavern. Thus, the Gorpora 6 ee OM poroeniutee oT discordant interpret- nich will ence fri and uplift the development of trade relations and Wier ed that It age friendly commercial intercourse among corporations provided that its primordial end (protection of public interests) is served." in essence, PrikDekNe Corporate Low ahi : aw should be a dynamic system that meets the developmental needs of a country competing in @ globalized setting, —o0o— ——____——_ “SEC Gpinion No. 04-36, quoting from Sariano v. Offshore Shipping and Manning Corp. 177 SCRA 513, 519 (1989), which: interpreted provisions of the Labor Code. PLM LAW LIBRARYF BRIEF HISTORY re LAW PHILIPPIN E srstoicl Background of PEP? corporate LM Anonimas: Cuentas an nv tne Gopevaton Code Historical BACKGROUND OF PuiippIne CORPORATE Law 4. Socledades Anénimas ivalof the American occupying " ; the ee anoss verices under the Spanish colonial adiinstration tre wore similar to the Anglo-Saxon corporalicrs were ve a ra andnimas. The sociedades andénimas were introduced in ppin jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 10 489 of the Spanish Code of Commerce A sociedad anénima was considered a commercial partnership, a sect of a comaration, “where upon the execution of the pUbtic it ent in which its articles of agreement appear, and the contribution of funds tnd personal property, becomes a juridical person — an artifical being, invisible, intangible, and existing only in ‘contemplation of law — with power to hold, buy, and sell property, and to sue and be sued —a corporation — not a general co-partnership nor a limited co-partnership . .. The inseribia ofits artcies of agreement in the commercial register was not fobeeity B ‘make it a juridical person — a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation." forces in the Philippines, "Mead v. McCullough, 21 Phil, 95,106 (1911). 4 YAARELI WAS 19 eeBRIEF HISTORY OF PHILIPPINE CORPORATE LAW wi ronpect meal 8nd American laws. That was particularly true ivi Seeedton. Ve" aPd those in which equity intervenes forthe benefit The i menial adore in late 1888 of the sociedades andnimas as com- ceing. shige by 4 cae business did not quite prosper under Philippine authorities lost no-tma 1 ‘American occupation had began. The American authors ost no tin nroducng i the Plppine legal system nedured maliars, to ohio system, especially in commercial and pro- aaa ad ca gennance commercial acivites between the new colony Harden v. Benguet Consolidated Mining Co., gives a vivid description on the background on the enactm ili Stictont ent of The Corporation Law into Philippine When the Philippine islands passed to the sovereignty of the United States, the attention of ihe Philppine arenes early, drawn to the fact that there is no entity in ‘Spanish law exactly corresponding to the, notiod corporation.in English and ‘American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of Franchise, which were intended to control the: lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. . - . Under the guidance of this and certain other provisions: thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This-rather elaborate. piece. legislation is {Act No, 1459 of the Philippine Commission). The syident purpose _ ‘of the commission was 10 introduce the American corporation. into tka Philippine Telands as the standard commercial ¢ and to posald be obsolete, That state [sa sort of codiction of Amveican corporate law? " 958 Phil. 141 (1933). Ibid, at pp. 145-148.lad anonima existing , fion Law: ae ‘at its option to either 75oftne we was at rm and be organized Lund Fine pase FN Seay of 1 aeenrthy Law. In the event atthe time ang business 2 SULT. of The COTPET ng provisions of said ne and by virtue of he P ‘and re-organlze eval corporate interests to _ SI . i i: that it elected 10 ane entity a HS was authorized to ius its no ora. mambors teen phil the new or to iS the: ‘ansform : snares of stock at par 10 ‘The election t i im the effectivity of The according to their interest vnable time quo was to be made within 2 reas SORE Law, sociedades andnimas of The Corporation ration Li lite Section ie and organize under The Corpo ston | aw, poo s Se coven by the laws ns ao nay od Commerce continu t rf rovisions of peanage of sid Law, patient a oe their organization and method of ‘on sociedades anénimas, “in relation eh fas betwen (ak) transacting business and to the rights. of members: ereo! themselves.” Philippine jurisprudenca recognized the difference between a corporation and a sociedad anénima and did not interchange the two. In Phil. Products Go. v. Primateria Society Anonyme Pour Le Commerce Exterieur, the Supreme Court refused to apply the provisions of the Section o of ihe saleby Law requiring “foreign corporations” to obtain a license to isinéss in the Philippines to an enti Sonar ippi ity that was deemed to be 2. Cuentas en Participacion Early on, Philippine juri of cuent i isprudence i ait oe al ei Boums vari the Concept or set-up Thanner that its existe 7 ental partnershy seabed @ cuentas en inthe same, there being re known to th nstituted in such a hee Who had an interest tho pubic in sone Partners, and Way that thereBRIE! F HISTORY OF PHILIPPINE CORPORATE LAW were other people besides the ‘one who ostensibly mat and conducted the business, govemed under Article 239 of the bia ponebenns _ Those who coi ofeach scekdonta aie with the person under whose name the business shall have only a righ ership of cuentas en participacion was conducted, other persons cian -action against such person and not against the id not have any right in the venture, and the latter, on the other hand, the biarseger intost t of action against third persons who contracted with lager unless such manager formally transfers his right to them.’ 3. The Corporation Law seach, Corporation Law, or Ack No. 1469, wich was in fact the first sefparate statute in Philippine jurisdiction, became effective on 1 Aprit it had various piece-meal amendments during its 74-year history. it apidty became antiquated and not adapted to the changing times. Certain provisions of The Corporation Law showed an ambivalent appreciation of the corporation asa medium of doing business, and associated corporations which monopolistic and explaitative activities. There were special provisions penalizing corporations for employing persons in involuntary servitude,’ failure to report cessation of business," for unlawful investment of corporate funds in another corporation,” and for foreign corporation transacting business in the Philippines without a license." Under The-Corporation-Law, | corporation could be authorized to conduct was-pérmitted to hald or own reares' ‘except such as may be reasonably necessary to enable it to carry out the purposes for was created, In addition, no agricultural corporation could in anywise be interested in any other agricultural corporation; and thatno non-agricultural corporation shall ‘own in excess of 15% of the outstanding capital stock of any agricultural corporation, which holding shall be for purpose of investment only. A mining corporation could not acquire and hold more than 40% of the voting capital stock of another mining corporation, of more than 30% of the voting capital stock of each of not more than three (3) mining corporations, and — bid, at p. 120. "Sec. 15, Act No. 1459. "Sec. 16, Act No. 1459. weGeg. 17-12 of Act No. 1459, in relation te Sec. 6, RA. 337. "ac. 69, Act No. 1459. "Sec. 1345). Act No. 1459. "ibid.Law a PHILIPPINE CORPORATE ip. The Corporation Lay ership. ; ictions equity owns and consolidat wiblee i ther hat oy provisions for valle provise f not even have rect a d criss-crossing US@ Ons oF and the Supreme Cour ends." the statute to allow achievement of such 4. The Corporation Code resent Big. 68, becam, tion Code, or Batas Pambansa Bi came etocivaan Nas een | eerie vefouo corporate octrines previously the ablation nce ee care ogresied in statu bligations of te dis a pee established principles and deetrines, and provided for a chapter n clase corporations. i i trictions on corporations The Code-did-away-with the various. rest i p . especially. those pertaining to agricultural. and mining corporations; ‘and the time Gn real estate ownership. It also did not contain the various Particular Penal clauses found in the old Corporation Law, and Merely Provided for a general Penal clause under Section 144 thereof. The Code was enacted “to establish a new Concept of business ‘corporations so that they are not merely entities estab! lished for private gain but effective partners of the National Government in Spreading the benefits of capitalism for the social and economic development of the Nation." Nevertheless, like its Predecessor, the Corporation Code maintains the concept Of “corporation as a-Creature-of-limited-powers” having copied the exact definition: ‘under Section 2 of The Corporation Law, and in addition "See 3) ATES ee Act 1458, as amendeg “Rove Blnio, gx pry ‘19say A S167 (1967) Explanatory Note io Cabir : Cove enacted by the iver Beret 72,3. whlch became the1 | ' | Crarter 3 NATURE, ATTRIBUTES, AND "CLASSIFICATIONS OF CORPORATIONS Analyzing the Statutory Definition af the Corporation Theanes on the Formation of a Corporation Theory of Concession Theary of Enterprise Entity Tii-Level Existence in the Corporation as a Creature of the Lew Constitutional Provisions Civil Code Provisions Franchises of Corporations Attributes of the Corporation Artificial Being Creature of the Law Right af Succession Creature of Enumerated Powers, Attributes and Properties Advantages of the Corporate Medium ‘Strong Juridical Personality Centralized Managernent Limited Liability to Investors Free Transferability of Units af Investment Advantages over Unregistered Associations Disadvantages of the Corporate Medium Complicated and Costly Formation and Maintenance Lack of Personal Element and Abuse of Corporata Management Limited Liability Hits Innocent Victims Double Taxation Comparing the Corporation with Other Media of Business Endeavors Sole Proprietorships ‘Does a Defective Incorporation Process Result Into Partnership? ‘Lassons fram the Limited Parinership Set-Up Business Trusts Joint Ventures CooperativesCorporate ‘Offense ir a nt oney Laundering ta of 2004 Entitlement to Moral Damages Nabonality of fons Exploitation of Natural Resources Owning and Operating Public Utilities ‘Mass Media Advertising. Wartime TestNATURE ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS "7 (ANALYZING THE Statutory DeFinmon oF THE CORPORATION’ (A CORPORATION IS AN ARTIFICIAL BEING CREATED 8Y OPERATION OF LAIN, HAVING THE RIGHT OF SUCCESSION AND THE POWERS, ATTRIGUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY ‘LAW OR INCIDENT TOTS EXISTENCE * ‘The corporate entity is a medium, one of many available to business men, by which commercial activities can efficiently be undertaken. Although under Section 2 of the Corporation Code, a corporation is a juridical entity with a personality separate and distinct from the Members or stockholders. that compose it, as well as from any other legal entity to which it may be related,” in f@ality a Corporation is but a fiction extended by law to investors, managers and businessmen by which to conduct their affairs in the com- mercial world The present statutory definition of the corporation is a narrow and antiquated view of the corporate vehicle. It looks at only ane aspect — the relationship between the corporation and the State — of the otherwise multifaceted relationships that a corporation represents in the business environment. The statutory definition views the corporation merely 25 a Geature of the law, when actually juridical personality is only one aspect &f corporate existence. The corporate setting embodies contractual relationships of varying degrees and importance; consequently, principles of Contract Law, Agency Law, and even Labor Law, tend to be enmeshed into Corporate Law principles, The resulting interactions between principles of Comorate Law and olher disciplines have continued to create tension and ‘sometimes hybrid legal products that animate the Philippine legal system THEORIES ON THE FORMATION OF A CORPORATION Two basic theories have evolved on the formation of a corporation and its capacity to act in the commercial world. 4. Theory of Concession Tayag v. Benguet Consolidated, Inc. characterized a comporation as an artificial being, created by operation of law, and that “It owes its life to the Tha porton fe aken from the itraducton of the published article entitled *Conronate Conranct Lew Uritying Theme of Theories Relating to Promoter's Contracts. De Facto Comparators Corporations by Estoppel, Articles af Incorporation, By-Laws. and Litre Vires, ets” 37 Armas LS 1 (No. 2. dune 1994) "Sec. 2. Corporaton Code. Reformatied lor easy reference ‘Pmappine Natoral Bank + Andrada Eiectne & Engineering Co..381 SCRA?44 (2002), "26 SCRA 242 (1968).2 PHILIPPI on >in Tayag. the Cour found | ‘tate)its birth being purely dependent O" - oF to refuse 10 Comply with | Trunlawful for the officers of adomeste corporement certiicate Of SLOCKS. in | the-oraar‘al the probate court 10 1888 TEP uetrator, on the assertion | place of those in the possession of Foret iaione of their Dy-Aaws, Which | Sun bleh epiocorent woud veil nn mat the cortficates of stock jowed such replacement whe were lost or destoryed shaft Tayag expressly denied the application of is Se the realy enunciated by Friedmannr which vealed & CompOTe of state recognition the prounas’a social and fegal ently. INd°P Or ation as known and congession.” The Court held in Tayed that stonce unidlit ha to Philippine jurisprudence is 2 creature ‘without any ve ‘ea ia is received the impamatur of the state acting aceOTGNS Ty Tigher inconceivable therefore that it will have Nights any 2 egitmmately refuse priority than that of its creator. More than that, it cann Fer encoding th fo yield obedience to acts of ts state organs. Certainly TA A ue judiciary whenever called upon to do s0.”* The Court wen! As a matter of fact, a corporation once it comes tn being, following American law stil of persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than the other two coordinate branches. it insitutes the appropriate court action te enforce its right. Corretatively, itis not immune from judicial control in those instances, where a duty under the law as ‘ascertained in an appropriate legal proogeding is cast upon. ‘To assert that it can choose which court order to follow and Which to disregard is to confer upon it not autonomy which may be ‘conceded but license which cannot be tolerated. It is to. argue that it may, when so minded, overrule the state, the source of its very existence; itis to contend that what any of its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval * Ang Pue & Co. v, Secretary of Commerce and Industry, would hold that to “organize a corporation . . . that could claim a juridical personality of “Ii, at p. 242. Leow. THeChY, PD: Holds oes 164-168 (1947); also Holdsworth, English Corporation Law, 31 YALE "26 SCRA 242. 253 ‘Ibid. “ibid. 5 SCRA 645, 647 (1962)NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 13 its on usinoee 5 such, is not matter of absolute right but apéiil ay be enjoyed ank pial eta nly under such terms as the State may Torres v. Court of Appeals,” in invalidating the act of the principal stockholder of a family corporation in canceling stock certificates and issuing new ones and not coursing the same through the Corporate Secretary, ‘emphasized the doctrine that since a corporation is a creature of tne State, {thas no choice but to follow the laws: “All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannat have rules and practices other than those established by law." Under the theory of concession, although fiction cannot be created unless there is an enterprise or group of individuals. upon whom it may pe conferred, and in spite of the underlying contract among the perso" wanting, to form the corporation, the grant is only by virtue of 2 primary franchise given by the State; ang itis within the power of the Stale whether to.grant it or to deny such grant, “The theory.ot concession, therefore, looks at a corporation simp a creature of the State and of limited powers and capabilities, within the control of the latter. This isthe theory covered by Section 2 of the Corporation Code as it defines a corporation. The theory of concession is aso the underlying basis forthe ultra vires doctrine, which now finds formal ‘expression under Section 45 of the Corporation Code. Strictly speaking, the theory applies within the juridical entity level, and the issues to be resolved arise batwoen the State and its instrumentalities and the corporation. 2. Theory of Enterprise Entity Under the enterprise theory, the corporate entity takes its being primarily rom the reality of he underlying enterprise, formed or in formation; that the State's approval of the corporate form sets up a prima facie case that the assets, labiliies and operations of the corporation are those of the enterprise. Bul that where the carparate eniily is defective, er othenwise challenged, its existence, axtent and consequences may Be determined by the actual existence and operations of the underlying enterprise, which by —— 178 SCRA 793 (1997) “ibid. at p. 819,CORPORATE LAW Peart . “boing” of itkown, roc these Vary qualities and operations acquires a “ONHi2eg by bw.» ho situations who, : thoory 1s meant to cover t © the cout hove ieee) tract corporate pene ey “se sale thay Not granted: or (b) disregarded corporate pene heii: faced ‘ally hi Sranted it, both for the purpose of giving legal i Yates aise ‘ahi Set Up between an oconomic entity and an autside the onponan of theory had written, “The corporation is emerging a ryt bound ‘8Conomics, rather than as an artificial juridical “ ity KiNded by forms of words in a charter, minute books, and books of account."» The theory draws its vitality from the fact that it is not legal fiction, alone that creates a corporate entity. Any State grant must pregu the existence of cansent or common venture among those who wil the corporation. Although it is within the power of the State to Give such Fant or to deny it, the corporate fiction cannot be created unless there ig 4m enterprise or group upon whom it wauld be confarred. In essence. 4 theory epitomizes the fact that it would be against public policy for the State '0 prohibit the pursuit of a iagal business fontorprise. But once legal fiction ig ‘ranted, and the entity acquires juridical personality, it does not mean that the group, as distinguished fram the juridical entity, becomes a Creature of ‘the State, but actually becomes a creature ofits own volition and. maintains either singly or collectively among its constituents their inherent under the jhts fatine tt, Which may tend to project to their business deslings dors ‘through the i Although the enterprise entity theory has to ‘discarded in Americar great extent been corporate literature, its basic flaw may not other than a general code Personality, the partnership personality aie, The Theory of Ernie. 47 Cok. L Rev. No. BM Apni, 1947), “ioeNATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 1s becomes a reality when two or more persons decide to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves without need of a grant of specific authority by the State.” To a great extent, once a corporate entity comes into being it has certain rights almost independent of the whims of its creator. Even though the corporation is a creature of the State, the underlying relationship is still composed of moral individuals who are not creatures of the State. For example, the State would not destroy the group or the business, without observing the due process clause of the Constitution. In Bache & Co. (Phil), inc. v. Ruiz,*the Court held that a corporation is entitled to immunity against unreasonable searches and seizures. It recognized that “A corporation is, after all, 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. It can only be proceeded against by due process of law, and is protected against unlawful discrimination."* In Philippine Stock Exchange, Inc. v. Court of Appeals the Court recognized that “A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a d legal personality [and that in] organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body.” The Court held that although the SEC, under the Revised Securities Act (now the Securities Regulation Code), Pres. Decree No. 902-A, and other pertinent laws, has been entrusted the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office, nevertheless, the SEC did not have absolute control on the management prerogatives of the Board of ectors of the Philippine Stock Exchange (PSE), since the “PSE is, after ail, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSE's main concerns, as such, is still the generation of profit for its stockholders. . . As to its corporate and management decisions, therefore, the state will generally not interfere with the same."* Tart 1767 of the Civil Code defines partnership a8 follows: “By the contract of part- nership two or mare persons bind themselves to contribute money. property. or industry to a ‘common fund. with the intention of dividing the profits among themselves ~ “37 SCRA 873 (1971), “ibid, at p. 837 #281 SCRA 232 (1997) ibid, al p. 247, cfting Bache & Co. (Phils), Ing. « Ruiz, 37 SCRAB23 (1971), Ibid, at pp. 247-248.aw Prac IPPINE CORPORATE fact that itself on.the hee nica to compose il, there eee pevparate juridie al existence: sociates." The Fad therefore whenever te 5 protection or enforcement ible oF Fo ssenel the legal fiction and I dis The_onterprise ently ee } We re there can be Hd corporate ex can be no association without a5" granted’to a corporation . Hea the necessary for the interests al cai Se of the rights of the members, oa. rise and the persons operate upon both the corporate @rterP! 1 existence of @ group of izational ore recognized The recognition of the organ is now more re individuals extart any State grant or alg mates volving = casa of unincorporated assoc! contests for officers o} dacreee association, such * a the ruling of its policy- ‘civic clubs, the courts generally will not Tei ‘among the associates in ider making body.» if the State would consi wuations, then the more so an unincorporated associations their acts and act ersonality, in a duly incorporated association, which has a juridical P ; - ‘The underlying relationship between and among) eee es a of every corporate setting is recognized and reinforced by the pen en Code itself requires that no corporation can be organized unless HH by “[a]ny number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines. "» ‘Tri-LeveL ExisTENCe IN THE CORPORATE Sertinc In considering developments. in Corporate Law, there are in the ‘corporate setting three (3) "Levels of Comorate Existence," thus: First, the corporation as a Juridical entity or a juridical fiction which ews the relationship betwoen the Slate and the corporation “wom hie Second, the corporate setting a 1 four (4) subovels, namely Provides for contractual Felationships (a) ot ste Corporation and its agents or fepresen- donee the real word, SUCH as its directors Ane Governed suppletorily by the Law onNATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 17 (b) Between the / members; °O'POFAtion and its shareholders. or (c) Between and Venture: ang "9 the Shareholders. in a common (d) stated the Corporation and third parties. or “out- aw, edocs ‘2 @ssentially governed by Contract ; ir it alcers enn ae itcomes to relationship with Third, the cotporation unit, a business enterprise, concem."* becomes in its operation a business economic or what is called in Accounting as a “going Being well-aware of the tri Shadhiae a babe level existence in the corporate setting "Way to both understand and explain the varying and interweaving doctrines prevailing in Corporate Law. se qiamnpie arncuh the Supreme Court would declare that there is a need "to put an end to the fiction that corporations are people."* nevertheless it would make the corporation itself liable for torts committed by its agents, or sooner pierce the veil of corporate fiction and make the individual members of the corporation answerable for corporate liabilities, when even without deing 0, No obstacles. are thrown in the way of obtaining justice.» In practice, the piercing of the veil of corporate fiction is achieved only by looking at the corporation as an aggregation of individuals doing business, and the Court would look at the underlying association of individuals in a corporate setting to resolve the issues raised in controversy: “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."* In the first case where the Philippine Supreme Court applied the piercing doctrine, it had to concede the underlying association of individuals in a corporate setting ‘The proposition that a corporation has an existence separate and distinct from its membership has its limitations. it must be Tym & PERALTA Frawcin Accourive (VOL. One), 1976 ed..pp. 13 and 18 Lavon Brokerage C2. inc. . Meritima Building Co, Inc., BS SCRA 30S (1978) =Phiippme National Bank v Court of Appeals, 83 SCRA 237 (1978). See more exhaustive discussions in Chapter 4 on Comporate Jundical Personality and octane of Prrcing the Veil of Corporate Fiction. ‘Tan Boon Bee & Co. Inc. » Jarencia, 162: SCRA 205 (1868). Amold v. Whilts & Patterson, Lid.. 44 Phil, 634 (1923).Ww prauppine CORPORATE 7 es, tm 1 purpos cesar pate got rotedtnat his separste Ie” ng nO COP on PO ithoutpersonata ampose ie ere ca PO? associates.” w Corporation as A CREATURE OF THE La attributes of 1. Constitutional Provisions of the The power to create corporations 1S OFM naracter, and that F } is legislative in che create a sovereignty." The exercise of the power! of the Constitution, Legislature may, subject to the restrictions OF Te ‘ny g particular corporation by direct act, or make PTT. A com the organization of corparations by natural pet the prescnbed conditions. by general law, Under the Constitution,» Congress cannot, 2100 corporations. provide forthe formation, organization, orreguiation Of PFW” yay The same constitutional provisions allows government-241 Se ra. i the corporations to be created or established by Special nomic viability.” interests of the common good and subject to the test of eco! bed pursusrit Consequently, it has been held that a private corporation created pur cation to a'special law is a.nullity, and such special law is void for being in violati ‘of the Constitution, The constitutional provision taking away from Congress the power to grant specific franchises to private corporations comes from a history of corrupt practices when such power was exercised by Legislatures in ‘common law jurisdictions, where only the rich and powerful could obtain Such franchises, and therefore be able to have monopolies of certain endeavors. “lbad, at p. 644, quoting Trcuson on Coneonancns, 2d od. Vol. |, Sec: 10. “idcCullough v. Maryland, 4 Whaat ‘16, 4 Ed. 579. TFaven, Tea Praprne Law om Stoce Commnarnns (1929 Ed), p 3 "Sec. 16, Art. Xil of the 1987 Consttutian “Congress cannot enact a law creating & private corporation with a special charter caper ae eet BORG chat. ows at Congress can nese Sorporatons with specu cheners corporations are governmentownea Foled Felciano v Commassion on Aut 419 SCRA 363 (2008) Retersted m Votorane $26 (2006 *NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS =—— 19° in Philippine jurisdiction, the Corporation Code is the general law which private corporations are organized pursuant to the mandates of the Constitution.» 2. Civil Code Provisions Under Article 44 of the Civil Code of the Philippines, other than the state and its political subdivisions, and other corporations. institutions and fentites for public interest or purpose, the law recognizes corporations, rtnerships and associations for private interest or purpose to which are nied “a juridical personality, separate and distinct from that of each shareholder, partner or member.” Under Article 45 of the same Code, the juridical persons organized as public corporations are governed by the laws creating of recognizing them, while private corporations are regulated by laws of general application on the subject. 3. Franchises of Corporations JURS. Business Corp, v. Imperial Insurance, inc..» recognized the Giferences between the primary franchise and ‘secondary franchise of a comoration, thus: “For practical purposes, franchises, so far as relating to corporations, are divisible into (a) carporate or general franchises; and (b) special or secondary franchises. The former is the franchise to exist asa ‘on, while the latter are certain rights and privileges conferred upan tpxisting corporations, such as the right fo use the streets of a municipality fp ly pipes or tracks, eract poles or string wires - The primary franchise ‘ofa corporation, that is, the right to exist as such, is vested in the individuals ‘ho compose the corporation and not inthe corporation itself and cannotbe conveyed in the absence: of a legisiative authority so to do. But the special or secondary franchises of 2 ‘corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose ofits properly, except such special or secondary franchises as are charged with a public use."* Ordinarily, a private corporation registered with the Securities and Exchange Commission (SEC) is issued & Certificate. of Incorporation Stach therewith the approved aticles of incorporation end Py as, ——__—_——_——— zawiaa Ua Corporation Cove tat athe conta iatuory component Pe a oleae eesoavon referred 1 under Ae. 45 ofthe Gn Cade whi proves “Private a rpculated by laws Of genera! appicaion on the subject” 11 SCRA 634 (1964) “oid. p. 638. quoting from Gulf Refining Co. Cleveland Trust Go., 108'So., 158.Aw PORATE | » Pea prt COR poration’s charter usqatty corpor’ charter A Which thorety constitutes iti chart of its conferment Upon the ny verte: i OHsttUtOS its primary franchise by virte its corporate HAMA: ANd also Somporation of a juneical parsonakty ander Lorprise Provided in business en! : i lary franchise to engage in the corporation. There are, of és puns ee ‘a ha approved articles of se secondary franchise SOUS. cortan Iidusines which require # ened by law, such as in from Legislature or administrative agencies au the area ot public utilities ATTRIBUTES OF THE CORPORATION following four basic From the statutory definition af a corporation the Attnbules are often ascribed to the corporate entity: 1. Artificial Being Is the fiction of law which creates the “person” of the coi Liste with the same attributes of an individual with full capacity to en ie Contractual relations. It has been well-expressed in our jurisprudence that 8 Corporation is an artificial being created by operation of law, and upon Coming into existence, is invested by law with a personality separate and distinct from those persons comprising it as well as from any other legal entity to which it may be related.» As held in Vazquez v: Borja “It is well known that a corporation is &n artificial being invested by law with a Personality of its own, separate nd distinct from that of its stockholders and from that of its officers who manage and run its affairs. The mere fact that its personality is ‘owing to 4 legal fiction and that it Necessarily has to act thru its agents, does nat make the latter Personally liable on a contract duly entered into, or for @n act lawlully performed by them, for and in its behalf. The legal fiction by which the Personality of a corporation is created is @ practical reality and necessity. Without it, no Corporate entity may exist and NO Corporate Business may be efficiently transacted."NATURE, *E ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 2 constitution and by-laws. tn that ulate that before a co State must give its consen oi elon, the Court held that “It is a basic = lon may acquire jundical personality, the ing ack" aNd the a either in the form of a special law or a general laa the ecauisilon of Procedure and conditions provided under the law A rough ine oid ‘Such juridical personality must be complied with. as pial : utory grant to an association of the powers to purchase, Praca sarin Soe Secor can only be construed the grant of a pies ssociation . . . nevertheless, the failure fo comply with the statutory procedure and conditions does not warrant a finding that such association acquired a idical persor separate jurid when it adopts sets of constitution and oa ‘a muons 2. Creature of the Law The juridical existence of a corporation is dependent on the consent or grant of the State. From a strict legal point of view, and under the theory of concession, @ corporation cannot come into being by mere consent of the parties; there must be a law granting it, and once granted, forms the primary franchise of the corporation. There must first be an underlying contract among the individuals forming the corporation upon which the state grant may be conferred. ‘Therefore, in evaluating and treating the juridical entity, there is a need to be aware of the inter-play between State grant of such personality and contractual relations among the parties upon which the juridical person exists. Which principle has precedence in resolving conflict would depend upon the public interest or issue to be resolved. This issue is discussed in more detail in Chapter 5, on Corporate Contract Law. ‘That every corporation is “created by operation ‘of law," ensures: that it would have a strong juridical personality, for unlike @ partnership which comes into being essentially by the meeting of minds to undertake a common venture and is dissolved by the will ofthe partners or by their death, incapacity, withdrawal or insolvency, every ‘corporation receives a particular commission from the State (j.¢., the ‘SEC certificate of incorporation), and it is only the State that can therefore effect its final dissolution. 3. Right of Succession By specific definition under Section 2 of the Corporation Code granting the.“right of succession", a corporation has the ¢ for continuous > despite the death or replacement of is shareholders or members,aponare Law pHiLiPPINE C* se compose it inct rr attribute that has separate and sist 2 er med ratio tno ramsey yo cm made it most attractive fo business ™ 4 attributes 3" rs 4. Creature of Enumerated Powe! corporation has been once & 1 Under the classic concession eer it is al and can eae granted juridical personality by the SIM sop its crealion. as OPPanEt i rs granted D) ge any power and eeu iees: Potno has the ability 10 ood be that an individual into any business activity and the only lars that is contrary to law, has no right to enter into an act oF ‘Section 2 of th Corporation Code morals and public policy. Inather words, S\" pawers, attributes which provides that a corporation eres incident to its existence,” propertie: thoriz : i oie pate ee be a creature of ie ia Le Sen old and narrow view of the corporation @s & crea! orate development, legal jurisdictions, with a more progressive look at corp have adopted the doctrine of “creature of unlimited powers, ie., that the pay is organized with full powers to undertake any venture and engage in any transaction, provided it is not con! public policy. This notion of “creature of limited powers" under Section 2 is buttressed by Section 45 of the Corporation Code which defines as ultra vires all acts or transactions effected outside of the express, implied or incidental powers of the corporation. The limitations of the powers and attributes of the corporation as a juridical person have been highlighted in Monfort Hermanos Agricult Dev. Corp. v. Montfort ill," thus: arcane Properties trary to laws, morals or ‘corporation has no power e:tcept those express! ; lyconterred Seer Corporation Code and thase that ar implied by or are incidental to its existence. In turn, a corporation exercises said Powers through its board of directors 434 SCRA 27 (2004). Rellerated Tramo Wakes Nei in Pascual and Santos, inc, ng Com. v. Gout oowa, a7 Scena 438 (2008), Une screeNATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS = 23 can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors, ADVANTAGES OF THE CorPoraTe MEDIUM 4, Strong Juridical Personality The corporation has a legal capacity to act and to contract as a distinct person in its own name; and it has continuity of existence. As distinguished from a partnership, it has a strong legal personality having a separate and distinct personality from the members composing it, unaffected by the death, incapacity, withdrawal, or insalvency of any of its stockholders or members. A corporation's credit-worthiness and the certainty of its long- term contractual dealings are strengthened by its character as essentially ‘a creature of the law with a continuity of existence. In addition, a corporation's creation, organization, management and dissolution are standardized as they are governed by a general incorporation law, and therefore, the commercial practice and jurisprudential law governing corporations tend to be more established and reliable when compared to other media of doing business. The re-constitution of the Securities and Exchange Commission (SEC) under Pres. Decree No. 902~ A. as the administrative agency granted both administrative and quasi- judickal powers over controversies and issues governing corporations and corporate matters, had allowed a more efficient system focused on the special field and consistem stream of decisions an Corporate Law coming from a single agency. With the enactment of the Securities Regulation Code,» which has transferred all corporate cases and issues under Section 5 of Pres, Decree No. 902-A to the jurisdiction of the courts of law, the tradition of allowing a specialized tribunal to handle corporate matters and issues has been retained: under the Supreme Court's Administrative Memorandum No. 00-11-03-SC. only specially designated Regional Trial Court branches in each regional district in the country, formally referred to as “Special Commercial Courts,” whose presiding judges are well-versed in corporate and commercial development, are granted exclusive jurisdiction to hear and decide corporate cases arising under Section 5 of P.D. 902-A, involving ‘id, at pp. 31-32, citing Shipside inc. v. Court of Appeals, 352 SCRA 334 (2001), Premium Marble Resources, Inc. v. Court of Appeals, 264 SCRA 11 (1998). “Subsec. 5.2 of Rep, Act No. 8793. “Dated 21 November 2000,DRATE LAW PuiLsPPINE CORP 2% ites, election and ira corporate ate SUSPENSION of corporate teen one and officers, and termination of directors, payments and rehabilitation proceedings 2. Centralized Management Board of Directors, the Wralized 7 eer Section 23 of the corporation's management 's cent under Sect to wie ein ranted all corporate powe ie ‘of the corporation, nor ‘Corporation Code. SSharehoders are not parnerstip setting, where each - a porter ay beth prep even win the knowledge of the other Partners, imbues th The corporate feature of ‘centralized Seay povamance and corporate meen with stable and efficient ae are centralized dealings with third parties, since management prerog xcept in particularly \n its Board of Directors, By imposition of law, and the management Gesignated instances, stockholders are bound by Gecisions and transactions of the Board of Directors of the corporation, whether they like it or not, The doctrine of centralized management is properly covered in Chapter 9 on Directors, Trustees and Officers. 3. Limited Liability to Investors The Supreme Court has defined the limited liability feature of corporate entities as follows — ‘One of the advantages of a organization isthe limitation of an Of the investment. This feature Corporate entity ig of actual stipulation, e SY One of them may de cy all part- ean tan Stuctral and Stag Fe lone shal bind the ‘brctlOrs, Inc. y Court: _NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF corporaTions — ?8 The liability of investors in a corporation is. limited to their shares @5 gstinguished from partnerships where even i the assets of the partnership are already exhausted, creditors can still go after the individual properties of the pariners- In a partnership, an investor can lose everything he owns: even those assets which have never been intended for the partnership senture,” while in a corporation, every stockholder oF member is assured timated liability. of course, through contractual stipulations, there are mary ways 10 around the limited liability feature of a corporation and to make major Shareholders personally lable for more than their actual or promised javesiments in the corporation. For example in case of bank loans, bankers sometimes demand ‘additional security or may require in addition that orate officers make themselves joint and solidarily (surety) llable for the corporate debt. The advantage of the corporate setting is that the default rule of limited liability affords a more efficient means to encouraging investments in the ‘fe, and additional economic cost is spent only when parties attempt to goaround the limited liability feature, Acorporation and its stackholders may therefore choose whether dr not to concede the advantage or protection of imited liability; while in a partnership, there is already an implied contract that if the partnership's assets are insufficient, the partners separate properties would be liable. ‘The doctrine of limited labilty is properly discussed with the doctrine of piercing the veil of corporate fiction in Chapter 4 4. Free Transferability of Units of Investment In a corporate setting, as 2 general rule, the shares of stocks can be transferred without the consent of the other stockholders. This would assure investors of a ready mechanism to dispose of their investments when their personal or financial situation may require it, and therefore places more liquidity in the corporate setting and would better encourage investors to channel their investments through corporate vehicles. "he. 1816 of the Givi Code provides that “All partners are liable pro refa with all thei Prarie a pote pine pve ema, a " “ inst personal ably of partner soma come sna ben of penners for pater 1824, provides that “All partners are liable solidarily with the partnership for every- p for "Ping chargeable to tha partnership when caused by the wrongful act or omission of any Darna stg th cniary core of bunaaa of he pareratin or wit autor rom tne ‘bariners.and for partner's act or misapplication of properties.”ATE LAW o- PHILIPPINE CORPOR! its of investments lity of the uni transferabi market for shares of ype eting resumen a wt dorlope! OGG Taree of aioe Dean Robert Canc opines thal fe oO ria by no Means equal, Cee ith al tal needed distribution of weal ‘of money capil is phone Topaided, so thal large renee may be collected ang to launch and sustain large pe est must solicit investors on arear sae etieenor ® te negotiations ‘with a handful of very rich ama : People. ns 5. Advantages Over Unregistered Associatio ti 0 4 corporation established in sees we siared apnoea . benefits or advant over " indi it nama aorkya apes suserdn bar serene rane eran artificial form; it has the capacity to take and grant pro} rie aaa lee Obligations; it can sue and be sued in its corporate na itwot pitvlanes Person; it has the capacity to receive and enjoy common gra liye 8nd immunities; and its stockholders or members have general ly no Personal liability beyond the value of their shares.» The advantages of the corporation over an unregistered association is subject to the application of the corporation by estoppel doctrine.» Article 1775 of the Civil Code provides that associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have Nd juridical personality, and shall be governed by the provisions relating to ‘co-cwnership, Disaovantaces oF THE Corporate Mepium 1. Complicated and Costly Formation and Maintenance The corporate medium is relatively complicated in formation and management. When compared to other media like the single Proprietorship or the partnership, the Corporation entails relati ‘Speration, and mai i Control and supervyi sna ae cts Ly Lite Brown and Company, 1966 ed s fe .), St oma soca? oma Suingona, J, 232 SCRA 140 (1994) on men mean "umber of persons in uniting together for Opinion, 26 June "See Chapter on Camere Sarses on ten Buse, 1820 (No. 3, Sept 1989).m NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS — 27 For example, ution, pale ar entities, especially banking and insutance snstit or ad ected to More reportorial and record-keeping obligations under the Anti-Money Laundering Act» They are likewise Sub : eater responsibilities to expands we au Govenatica” led stakeholders under regulatory rules 2. Lack of Personal Element and Abu: Management MOEA OtE ST COE Thereis ordinarily lack of personal element in view of the transferability of shares, and the vesting of management powers in the Board of Directors who may be professional managers. This has spawned corporate irresponsibility under the theory that those vested with corporate powers have no personal or proprietary stake in the corporate business enterprise In large corporations, management and control are separated from the powers and prerogatives of ownership with respect 10 the corporate assets and the corporate enterprise, since control is vested in the Board of Directors. The Stockholders’ voting rights have become theoretical particularly in large corporations because of the use of the proxies and Fidespread ownership. In a practical sense therefore, investors have very file voice over the conduct of business of the corporation The situation has actually spawned lately the growth in the area of Corporate Governance when it comes to public companies, banking institutions and insurance companies, which provides greater accountability on the part of the Board of Directors and Management, an expanded scope of stakeholders, and re-focusing of corporate objectives and responsibility beyond maximization of profits to “a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management ‘enhances the value of the corporation as it competes in an increasingly global market place." ——_————— Rep. Act No. 9160, amended by R.A. 9194. a See Code of Comporate Governance (Memorandum Circular NO, 2. series of 2002) is tinding on all isted companies and those fang within ne definition of “public companies" ae on crorporate Governance Principles and Leading Praciioes (C Clraist 31-2005) eee insurance companies and inaurance intermodianes; and BSP Circulars No. 283, institutions re wetreciatan of Priipine Corporate Governance regime, You Wy Ae fo the author's work: Tre Lat AND PRACTICE w Prue ConeonaTe Gavernance (Holy Angel Press, 2009 ed.). “Sec. ra eee cove of Corporate Governance, SEC Memorandum Greuar No. 2. series of 2002:ATE LAW priuiPpané CORPOR Vietims ocent Hits lane has offen been aty,. 2 ene of the aac jual® Protection gt pacity dertal by buses made favo raw see ronsecton cone y sof the crease Steet tereneriasite Ee Boker il cone party 10 at . liability features of the corporat iimited liability feature of COMPO rations use of the limi jurisprudence of the octting The sbuae in io ‘the development in = red in the suc; ing ich is cove Coed ee ae eae chapter. 4. Double Taxation ly been subjected to heavier taxation ote forms of Dasness omrioar = i ation oe = than other income tax and which ir oe) beset coporme hom again subjected to fur buted as income tax inoocay a 8500 of he Tox Reform Act of 1097, there has oan imposed staring n 1996 the tole tax burder throug! jing NS On the means of doing business jh the medium of the corporation: (8) Re-imposition Of final tax on ‘ash and Property dividends: received OY individuals from domestic ‘Comporations;»am NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS = -29 (b) gad of minimum corporate income tax at 2% we goss noone on the fourth taxable year from minimum have ie. Toe ee is greater corporate income tax and “an ths reper (c) Re-imposition of improperly accumulated eamings tax at the rate of 10% of the nprops accumulated taxable income.” eeneee | au CoMPARING THE CORPORATION With OTHER meoia OF Business Endeavors 4, Sole Proprietorships ‘The sole proprietorship, where tt el business enterpriseis notendowed with a separate juridical personality,“ i 1655 saddled with the many requirements and regulations fo which corporations are often subjected to by law, rules and regulations. The owner is in command of his whole business and he stands to lose as much as he puts in and even more tothe extent oF al Fis perscnal holdings. in the event the business veniure goes bafkrupt. Consequently, the ddctrine of limited liability dees.not apply in a ile proprietorship setting that will Init-the claims of busines creditors to the assets of the business enterprise. = This is in contrast to a corporation where control of the corporate enterprise i the Board of Directors, and there is limite y on the part of the shareholders. Consequently, sole proprietorships work welronly for carrying-on-simpie~or small business endeavors, and do not function well in cases of large enterprises which require huge capital investments and specialized management skills, ‘Yet, the sole proprietorship remains the basic structure upon which many of the theories on liability draw their basis. The sole proprietor, who exercises both the prerogatives of control and management and the main beneficiary of the income and fruits of operation that flow from “full ownership of the business enterprise,” remains personally liable for all debts and abilities of the enterprise with all his assets and properties, whether they be intended for business or those for personal consumption or enjoyment. The business creditors of the sole proprietor can ciaim satisfaction fram i "Sec. 27(E), National intemal Revenue Code of 1997. S26. 29, National Internal Revenue Code of 1997. “Excellent Quality Apparel, Inc. ¥. Win Muttiple-Rich Builders, inc;, 578 SCRA 272 (2008),» PHILIPPINE CORPORATE LAW etor, in the same both the business and personal assets of the =e propiye proprietor bac manner the non-business or personal creditors y assets of the oe claim satisfaction from both the business and Fra sole proprietors! i» proprietor. Perhaps this state of things happen enterprise MY also because the income coming from the business ENN? ction of the flowed out from the business into personal enjoyment sole proprietor, and vice versa. hest form oo the hig s, sole proprietorship represents“ 7 a sole in of {Unlimited tiabiliys when it comes to the sole Propr nly to the extent proprietor is-Hable for business debts and liabilities Not on snacation), of his business assets, but for all his assets not oxen management but because he has in his person not only the prerogatives © and income is also the benefits of ownership, and the flow of transactions Not limited within the confines of the business enterprise. 2. Partnerships* , e hip has a Article 1768 of the Civil Code provides that the partners! juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the registrations requirements of the said Code.” ‘ The most important distinction between the corporation and the Partnership is in their their legal capacities. With the right of succession, a ‘corporation has a stronger legal personality, enabling it to continue despite the death, incapacity, withdrawal or insolvency of any of its stockholders or members. In a partnership, the withdrawal, death, incapacity or insolvency of any partner would automatically bring about the dissolution of the Partnership.” Limited liability is a main feature in @ Corporate setti | ing, whereas. partners are liable personally for partnership debts not ‘only to what they have invested in the Partnership but even as to their other properties. Generaily, every partner is an agent of the i n Partnership" and by hi sole 7 he can bind the Partnership,» whereas in a Corporation, only bn Board Directors or its agents can bind the corporation, “ayNATURE. ATTRIBUTES. AND CLASSIFICATIONS OF CORPORATIONS 31 In a partnership setting. although a partner has the power to sell of of his capital interest or proprietary interest, the buyer or transferee goes not assume transfercr’s position as partner, but merely has & Fight jo demand for accounting or distribution of the profits pertaining ‘thereto. The principle of defectus personae prevails in the partnership setting. In @ oo setting, every stockholder has the right to transfer his shares in the corporation, and the buyer or transferee assumes the role of stockholder of said shares when the transfer has been duly registered in the ‘corporate books. “Free transferability of the units of ownership" is a hallmark feature a ine corporate setting. a. Does a Defective Incorporation Process Result into a Partnership? The clear distinctions between the corporation and partnership can best be illustrated by discussing the issue of whether a defective incorporation which does nat result in the grant of a charter to a corporate being, would at least result into a partnership. ‘The legal principle is that when parties come together and all the elements of a particular contract are present, although the parties may have denominated it otherwise, the law will impose such contractual relationship upon them. In other words, the contract or legal relationship is what the law says it is, nat how the parties wish to call it, Therefore, if five or more persons agree to contribute money or property to a common yenture to be pursued in corporate medium, with the intention of dividing the profits among themselves through their agreed distribution of shares of stock, but the business venture is pursued without a corporation being duly incorporated and registered, would there have arisen at least among the parties a contract of partnership? The author believes that the answer would be in the negative, based on two grounds: First, both corporate and partnership relationships are fundamentally contractual relationships created by the co-venturers who consent to come together under said relationships. \f the parties had intended to create an association in the form of a corporation, @ partnership cannot be created in its stead since such is not within their intent, and therefore does not ‘constitute a part of their consent to the contractual relationship. Second, the important differences between the corporation and the partnership cannot lead one to the conclusion that in the absence of the first, the contracting parties would have gone along with the latter. Limited oie "Arts. 1804 and 1813, Civil Code. "Sec. 63, Corporation Code,Ww PHILIPPINE: CORPORATE i f the units of ferabilty Ot ee tors for nd aasy WANE og strong facto aot. ized management af emselves cannot onrerp in 9 compra send ae OY Nip, and one aot Parties intention to be bound n the COMPO Ay the patent geracally presume that if these forsee errors relations rivers. eAd to be covered by a among Would involve unt hy. mural agoreY the defectus personae feature ntractual relationship of The essence of what constitutes blame or what is known in parinership under Arce 1767 i the coming NOH ini venture. The Partnership Law as “delectus personae” al tionship, ée., that each would- essence of partnership is the personal rela! ‘he wants the other co- be partner goss info the venture: precioaly Decade’ NT on the other venturers, and no other person, to be with him in the relationship perhaps hand, an investor who seeks to enter info a cosporate rine wel de does not even care about the personality of the other orm hae Most likely aware that he himself and others have the ability investments to third parties. On the other hand, there seems to be indications of a contrary view to the above. Under Section 21 of the Corporation Code, when parties act and Pretend to be a corporation, when in fact none exist, the law would impute {0 them a juridical personality to validate the contract under the corporation by estoppel doctrine; howe: ‘expressly makes them liab! ver, it would treat the parties as partners since it lé as “general partners.” co-investors Whase invest?™» ncorpo Quoting from, ric is sn a an urt in Pioneer that Fs ‘hal as among themselves he 13 SCRA 668 (1659) “Ibid, at p, 661,NATURE. ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 33 . eee in @ defectively incorporated association id be gs y the supposed charter and the laws of the stale 3 ing thereto and not by th cote veld that aan, '@ rules governing partners,” nevertheless een he inarily persons who attempt, but fi . 9g been held tha arsons who attempt, but fail, to form a | Sgoation Garry ‘on business. under.the corporate name occupy Bafiners inter Sé~ and_their rights as_member: sof the company 10 the property-acquired by the company witl be recognized.”» Notwithstanding the foregoing, the Court took the position that such relationship does Not exist, “for ordinarily persons cannot be Frade to assume the relation of partners, as between themselves, when a ineir purpose /s that no partnership shall exist . .. and it should be implied when necessary to do justice between the parties; thus, one who [7 Jakes no part except f0 subscribe for stock in a proposed corporation which A isnever legally formed does not become a partner with other subscribers who en in business under the name of the pretended corporation, so jsto be liable 8s SUCH in an action for settlement of the alleged partnership and contributions. . . A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter’ Nor will it make [> the investor to a would-be corporation liable for losses sustained from O its ‘operations under a partnership inter se theory."= The key elements in = resolving the issue seem to have been in Pioneer Insurance thase of intent and participation in business activities. The doctrinal pronouncement in Pioneer Insurance can be summa- rized as follows: When parties come together intending to form a corpora- tion, but no corporation is formed due to some legal cause, then: (a) Parties who had intended to participate or actually participated in the business-affairs of the proposed corporation would be considered as partners under a defacto parinership, and would be liable as such in an action for settlement of partnership obligations; Trom Corpus Junss Secunoum which cited Cannon v. Brush Efectric Co., 54 A. 124,96 Md. 446, 94 Am, S.R. 584. Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 618, Ann. Cas. 1913 A. 1065. "fbi citing Smith v. Schoadoc Pond Packing Co,, 84 A, 268m 109 Me. 885 Whipple » Parker, 29 Mich. 360. ibid, at p. 683, quoting from Corrus Jumis Secunous. Vol. 68, p. 464 p.685,uM PHILIPPINE CORPORATE LAW — Whereas, ~ hares (b) Parties who took no part excep! osusciben : toe of stock In the intended corporation. fa econ ie pariners with other subscribers who © gaged 7 business under the name of the pretended Corpor nil and are not. liable-for-action- for settierner alleged partnership contribution. nsistent The doctrinal pronouncements in Pioneer Insurance 2° oro x ‘with the distinctions between an investor in a partnership VANE there is clear intent to participate in the management of oe Qa caster business and for which limited ability is not afforded By law. 3 Fademierk: | | in a corporation, where under the principal of centralized ret i ahh there is no intent to participate in the corporate operations. 4! limited liability is afforded by law . a rk contrast 10 ‘The foregoing findings in Pioneer insurance are in stark the obiter of the Supreme Court in Lim Tong Lim v. Philippine ron oe = Industries, Inc.» where the labilities of the parties were adjudg oH the corporation by estoppel doctrine. “ b. Lessons from the Limited Partnership Set-Up = Chapter IV of Tile IX on “Partnership” of the Civil Code allows the establishment of limited partnerships with the unique feature of providing limited liability for the designated “limited partners"= when the following elements are present: (a) There must be proper registration of the articles of limited co-partnership with the SEC, indicating therein who are designated as limited partners; (b) The designated limited partners must contribute money ‘or property into the venture, and cannot contribute service; “317 SCRA 728 (1998). See more detailed discussions in Chapter 5. Art, 1643 of the Civil Code provides that “The limited bound by the abigatons of ret partners as such shall not be voaganlNATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 5 (@) No limited partner can have his name in the company name." Nor participate in the managemer se eee Nagement of the ifany of the: foregoing rules are viglated, the limited partner becomes. ally liable for partnership debts and obligations beyond his per gents into the partnership. ed of the requirements of the Civil Code to maintain the status of tod habilty," (tis Clear that limited partners must assume and maintain Toe of passive investors (hat is why they cannot choose to contnbute | nor can they participate in management), and the moment thay “Same management prerogatives, they become personally lable The lessons learned from the limited partnership setting is that yrenaver the prerogatives of management of the business enterprise fe divorced from a Person who thereby is made to assume the passive role of being a mere beneficiary of the profits flawing from the business fietse, he 1s thereby accorded “limited liability” status. And that so classified as having limited liability, the moment he exercises the atives of management, he thereby becomes unlimitedly liable for all Mfrs and obligations of the business enterprise 3. Business Trusts” ‘As compared to a corporation, a business trust is created under the terns of a deed of trust which is easier and less expensive to constitute forts not bounded by any legal requirements like the former. It does not have a separate jundical personality, and is mainly governed by contractual ” ésorines and the common law principles on trust. But a trust relationship foes not come about simply by the execution of the deed of trust, for itis. aeontractual relationship that requires the fourth requisite of delivery: trust is created ownership over the property subject thereof (the corpus) is split between the trustee who assumes legal or naked title, and the beneficiary who has beneficial title. Itshould be noted, however, that the basic set-up of a business thrust, which spits naked title from beneficial tile in the corpus, is akin to the ‘Aa. 1848, Chil Code. AHL 1848 ofthe Civil Cade provides that “A invted partner shall not Decors able 2s agmeral parner unless, in addition to the axeresse of his rights and powers as 2 tented Father, ho takes part in the control of the business.” rron b macy astaded discussion on business trust, you may refer to the autnors biog: swordpress.comvisean-ch-on-trusts aiaw oRPORATE irri — . . ea te oe corona then to the p Men DaroctOs PU gficial title tO ne erties are hold by Ue Board of 0 wher oats ne arms, The Boar dof pr 4 oe: a eee er Sectan 2). tn Cen rut HN gga no eomoree corporat enterprise bs vested with Wp iho stockoie crete a ine carpus of Be loge! roaHOTSDP YS iorcg the fiduciary enterprise a3 the 6 oa as the beneficiary group wath certain lagal Powe" obligations of the Board, a Wor warty basic setup in corporate @aterpe & selet Yeotiree® “ tof ajoint venture is yal concep! The Supreme Eom} os bald that ~ teat definition. sik Philippi ne iow fant verre i a form of partnership and oe the teewaect by she Law on Partnerships.» which would than inclvc® Te Separate juridical personality, mutual agency among unlimited liability, nership, The element of a joint vanture, being basically those of the pat Pp, has been affirmed in Kifosbayan, Inc. v. Guingona, Jr. ont venture is-defined ag an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a Sommunity of interest in the performance of the subject matter, a Nght to direct and gover the Policy in connection therewith, and uly. which may be altered by agreement to share both in profit Sed losses, The acts of working together ina joint project = Previous discussions on distinguishing the Partnership from the orporation would apply to joint ventures, y author's biog: “Aubach y, Spencer ther sono2 SCR 30 980, et enter Su- a ae ane rir coment sr mon whee TE ape ete Some features in three directors in,NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 37 5, Cooperatives: ‘a cooperative is an Avlonomaus and duly registered association of e008 with a common bond of interest, who have voluntarily joined to- por aonieve their social, economic and cultural needs and aspirations oat equitable contributions to the capital required, patronizing their mpgs and services and by accepting a fair share of the risks and ben- Fs of the undertaking in accordance with universally accepted coopera e . cooperative, like an ordinary corporation, has a juridical personality and distinct from its. members, and has limited liability feature. Unlike ordinary corporations, cooparatives.are- govemed by principlas- ofdemacratic controlwhere the members in primary cooperatives shall have quarvoiing fights on a one-member-one-vote principle;* where the Board of Directors manages the affairs of the cooperative, but it is the General ly of full membership that exercises all the rights. and performs aill of the obligations of the cooperative: and are under the supervision and sanirot of the Cooperative Development of Authority, and not the SEC. Unlike an ordinary stock corporation which is organized for profit, and anon-stock corporation which can be organized for any eleemosynary purpose and no part of the net income is to be distributed to the officers: ‘and members thereof, the primary objective ‘of every.cooperative is. salt— hap. “The primary objective of every cooperative is to help improve the “quality of life of its members. Towards this end, the cooperative shall aim to. . . Provide goods and services to its members and thus enable them to attain increased income and savings, investments, productivity, and ing power and promote among them. equitable distribution of net surplus through maximum utilization of economies of scale, cost-sharing and risk-sharing: . . . Provide optimum ‘social and economic benefits to its members; . . . Teach them efficient ways of doing things in a cooperative manner. ——<—_—> Tidare dalniled discussions on legal requirements covering cooperatives are founct in Chapter 47 on Non-Stock Carparations, Foundations and Cooperatives. TAR. 3, Phibppine Cooperative Code of 2008 (R.A. No. 6938, as amended by R.A 20). "Aste, 12 and 30, ibid. *At 442), ibid, Arts. 5(3) and 34, iid. Ant 7. ibid. ‘The Tax Code defines & cooparative as an association “conducted by the members ‘eral wih the money collected from among themselves and solely for their own protec. srt ra Ppl Site Asian Company Conan, 72 SSSA USRPORATE LAW PHILIPPINE Ct res 2 Policy of 00s deciat Cade of 2% tives a8 4 Practical tive Cade al The Philippine Cooperative growin of COOPe! power towards the State “lo foster the rons © saad hamessind F ice."= The ian social jus! i sen esp e atta omic participation: (q) training and information: (fy tion, ae autonomy and iniependonoe: on ‘concern for the community, Cooperation among cooperatives; tives are established tg that cooperal in one case, the Court held re that th Provide @ strong social and economic organization mpaten ee 'enant-farmers will enjoy on a lasting basis the benefits ENTITLEMENT OF THE CORPORATION TO ConstrrutionaL GUARANTEES Fights even as against the State, is contrary to the essence Of the theory of concession, 1. Due Process and Equal Protection Clauses A corporation is entitled to due process and the equal Protection of the law and Protection against Unreasonable Searches. and Seizures, In Smith, Belt & Co, v = a domestic Corporation with the Majority of its shareholdings held by British ‘Subjects, Sought to have a feserving Tegistration Of vessels for coast-wide shipping Only to dor i ipinos. or America: i ‘ mestic Corporations Poca oY In citizens as Violation of the due ioe : jauses, Althoug ‘denying the Stand of theNATURE. ATTRIBUTES, AND CLag: SIFICATIONS OF CORPORATIONS 3 The guarantees of the F; Ourteenth Amer ra P dh in on to all persons within the oars ners without regard 2 de differences of race, color, oral logon, are “persons” antec Private ineneratens: Rechce ‘Scope of propery is concerned... Pe Of the guaranties in so far as their 2. Unreasonable Searches and Seizures stonehill v. Diokno, recognized that i ihe constitutional guarantee against unreasonable, cones Z wer, the Court ruled that the officers of a corporation ‘roe whch gocuments, papers and things Were seized have no cause of action 10 gssail the legality of the seizures, regardless of the amount of shares of or of the interest of each of them in said corporation, and whatever ‘fe offices they hold therein may be, because the corporation has a personality separate and distinct from those of said officers, It held that the vegality of a seizure can be contested only by the party whose rights have peen impaired thereby; and the objection to an unlawful search is purely sersonal and cannot be availed of by third parties, such as officers of the corporation who interpose it for their personal interests. In Bache & Co. (Phil,), Inc. v. Ruiz, the Court held that a corporation ig entitled to immunity against unreasonable searches and seizures, thus: “A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity: In organizing itself asa ‘collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected, under the 14° ‘Amendment, against unlawful discrimination." 3. Right Against Setf-incrimination in Bache & Co., however, the Court denied that corporations have a fight to claim protection on the constitutional right against self-incrimination, 8y applying American doctrine, the Court held that the privilege against self-incrimination “is.a personal one, applying only to natural individuals. ‘a “37 SCRA823 (197 1). “Sibi, at p, 837, quoting from Hele v. Henke), 201 U.S. 43, 50 L.Ed. 652 “United States v. White, 322 U.S. 694, 698 (1944).Law PHILIPPINE CORPORATE « the ial powers of ’ ve competed ta submitio Ie ration.” corporation may auaune the seed n gisctosure of erminal 4 Engineering CO. ine. This ruling was affirmed in Bataan Se indiwrual is ol ; it held that ted by reset answer netmnaing questions vies Pee statute, it does not follow that a corparati rd when cha and franchises, may refuse to show ils Lie quoted (rom Wilson V. of such privilege." The decision extensiv¢ States, thus: United ed tate. Itis presume *** The corporation sa creature ofthe slate KE BOO, to be incorporated for the benefit ere pate Be subject to the ‘special privileges and franchises, and Oris charter. Its powers laws of the state and the limitations Of its Cn by its aro limited by law. It can make no contract Serrasereed tof charter. is rights to act as a corporation are only Presents 80 lang as it obeys the laws of its creation. There ead oat ether in the legislature to investigate its contracts and fin artes thas exceeded its powers. It would be a shanye momely ah that state, having chartered s corporation to make use of certain franchises, could nol, in the exercise of sovereignty, inquire these franchises had been employed, and whether they had been abused, and demand tha production of the corporate books and papers for that purpose. The defense amounts to this, that an ‘officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books, To state this proposition is to answer 8. While an individual may lawfully refuse to answer incriminating Questions unless protected by an immunity statute, it does not follow that @ corporation, vesied with special privileges and fenchises may refuse 10 show its hand when charged with an abuse of such privileges. .."+« lt seems that when it comes to the constituti nal right pri atl Honal rights of due process, against unreasonable search and seizures, the Supreme Court would be willing to view the hedd,at 9.219 ead, at pp. 211-212PHILIPPINE CORPORATE LAW jonale for the arty the rations Ghavee, trough Justice Carpio, fd dW" FTE. ands of the public constitutional ban against corporations holding oration can be domain, showing a clear understanding thal as a “tool of indirection,” thus: ine the constitutional ban ed than constitutional limitation on individuals from aeauirTN, allowed area of allenable lands ofthe public OMe imum consttutional ban, individuals who already BCU at yp area of alienable land of the pubic domains GONE TT dual Corporations to acquire more alienable public land Oa could own as may corporations as his means would ae individual could even hide his ownership of @ COMmONEY corporation is a convenient vehicie to circumvent the cons! f the limitation on acquisition by individuals of allenable land public domain. The constitutional intent, under the 1973 and 1987 Cons- titutons, isto transfer ownership of only a limited area of alienable land of the public domain to qualified individual, This constitu onal intent is safeguarded by the provision prohibiting corpora~ bons from acquiring abenable lands of the public domain, since the vehicle to circumvent the constitutional intent is removed. The available alenable public lands are gradually decreasing in the face of an ever-growing population, The most effective way to in- sure faithful adherence to this constitutional intent is to grant or Sei! alenabie land o! the public domain only to individuals. This, it bse iS the practical benefit arising from the constitutional in actual practice, C.assiricaTion oF ConPoRAaTions Non- Stock Corporations and Foundetions hep cnaes Saisie Chapter 16 on SuEness in the Phiinpines of foreign I a domestic corporation @ daconeg omporatons. as distinguishes nd 67d the Concept of Dowrg Bursineag, CP 1? on Facengn Comoritinn ————NATURE. ATTRIBUTES, ang i ““ASSIFICATIONS OF CORPORATIONS 71 1. In Relation to the state 8. Public and Pri vate Corpora: Section 3 of th poratans ind private © Old Corporatio and pri : corporations, and defn mn Law distinguished between public or organized for the ‘government a Public corporations as “those formed hand, the Bame section defined ‘Sf & portion of the State.” On the other some private purpose, benefit oe corronslions as those formed for ~ OF any Public corporation: , 8 with the public good in the thoss.created for political purposes connected corporations theretore, oo, “c”Tinistration of the civil government Public fomed and organized by the eet municipal corporation. or those municipality, city and theo, tae for goverment, such as the barangay. mini-state, possesses atten In essence, a public corporation, being & mi reat E pawer of eminent domain ey Sr an erent pokes Power, Munici i : ie hes cee with respect to its governmental functions, administration hen created by the legislature for the convenient . babi co he government, or some aspect of the government, of nt ah a defined district, remain entiraly subject to the legislative control. They are organized for the purpose of serving the communal welfare of the inhabitants of a town or a city. Municipal corporations are incorporated to continue the existence and the legal status of the town or city without regard to the coming and going people who inhabit it. They are not operated for profit, and the operating expenses are levied against the members through the process of taxation. Amunicipal corporation possesses a two-fold character: (a) public or governmental character, in which it acts as agent ofthe state and exercises, by delegation a part of the sovereignty of the state; (b) a private, corporate or proprietary character, in which it acts asa private or business corporation, and stands for the community in the administration of its local affairs wholly beyond the sphere ‘of public purposes for which its governmental powers: are conferred. In their governmental character, the municipal corporations are ‘of and can exercise the ‘so-called police power of the state, for certain purposes delegation of the legislature. They may levy taxes oder fimitations imposed by the law making body. In their character, municipal corporations are einpautes morigage their property under certain limitations. They can sue al ss on contracts and may be held liable for damages for torts committed by them in the exercise of their corporate functions as distinguished from public and governmental functions.Ww is PHILIPPINE CORPORATE LA ic stock orations and non-si rock divided into shares uch shares dividends or : held are stock Private corporations are divided into mi corporations. Corporations which have @ capi and are authorized to distribute to the holders of s allotments of the surplus profit on the ba! re_non-stock corporations. corporations. All other private corporstions 25 UT iheir purposes: (a) Private corporations may be classified according To) religious the business corporation, or the profit-seeking col hoe organized for corporations, (c) eleemosynary corporations OF charitable, scientific or vocational corporations. biic and Private Corporations ivate corporation What distinguishes @ public corporation from @ private corp’ ling interest. It owned by the government is not ownership of ae ie ouied does not necessarily mean that when the equity: by the State or is wabumorially, then it is a public Dare eS Mery government-owned and -controlled corporations are said to be govern . corporations", bul do not fall within the classification of public corporation, and in fact are to be treated as “private carporations. Sometimes the distinction between public corporation and a private corporation is based on the corporation's creation. Usually a public corporation is created by its charter whereas a private corporation is created under a general incorporation law, which today is the Corporation Code, However, while this is. a general norm, many private corporations are granted special charters by the Legislature, because they constitute government-owned or controlled corporations, but still cannot be considered as public corporations. In National Coal Co. v. Collector of Internal Revenue, National Goal Co. was created by Act 2705 for the purpose of developing the coal industry, with the Government owning almost all of the shareholdings of the company. The company was created with the general powers of @ corporation and such other powers as may be necessary to enable it to prosecute the business of development. The Legislature subsequently Passed a law providing for the leasing and development of coal lands and ‘exempted the same from specific taxes. On that basis, National Coal Co, Sue ee lands belonging to the government, and began 23 Coal. The Collector levied against the company specific tax on extracted from coal land. National Coal Co. claimed exemption from b. Distinctions Between Pul =—_— 2246 Phil. 583 (1924),NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS «78 The Gout held that National Coal Co. is 3 private corporation. The mere fact that the govemment happens to be a majonty stockholder jes not Make @ Corporation 8 public corporation, The Court took into conssderation that the law creating the National Coal Co. expressly made mne company Subject to ail the provisions of the then Corporation Law: AS @ prvate corporation. it had no greater rights. powers. or privileges than any other corporation which might be organized for the same purpose under corporation law. It was not certainly the intention of the legislature to give ita right oF privilege over other legitimate privaie corporation. Even if the majority stockholder is the government or that the charter was a direct grant legislature or it was not incorporated for public welfare, such matters did not make the National Coal Go. a public corporation — itis still 2 private corporation especially the act creating it, made the company subject to the provisions of the Corporation Law. National Coal shows that the mere fact that the government happens to be @ majority stockholder of a corporation with its own charter, does not make it @ public corporation, especially when its charter provides that it is subject to all the provisions of the Corporation Law. It can therefore have no greater rights, powers or privileges than any other corporation which might be organized fer the same purpose under the Corporation Code. In Cervanies v. Auditor General NAFCO was created under (Commonwealth Act 332, with its controlling stock owned by the Government and the power of appointing its directors vested in the President of the Philippines. However, it was expressly made subject to the provisions of the Corporation Law insofar as they were compatible with the provisions of its charter. The Manager of NAFCO questioned the denial by the Auditor General of his claims for quarters allowance granted in a resolution of its board of directors. The Court held that there could be no question that the NAFCO is a private corporation controlled by the government, and subject ta the provisions of law which subjected it to the supervision and control of the Control Committee which had the power to pass upon the program, of activities and yearly budget of expenditures approved by its board of directors. in Philippine Society for the Prevention of Cruelty to Animals v. Commission on Audit the Court held that although the corporation had its own charter (C.A. No. 148), it was still a private corporation and not an agency of the government, since a reading of the charter showed that itis not subject ta control or supervision by any agency of the State and that fact that is employees are registered and covered by the Social Security 91 Phil, 359 (1952). 534 SCRA 112 (2007).a pan rine « omponare LAW si8 which should be i'n Initiative, anid mot th a employees 2 are considered 0° oo types of Private ove, there are aon Code for private (under the Corp code as government. ‘onde. and (b) thase organized under (60 Co certain purposes of the owned and -contraliad corporation 10 BCI Ton), and (c) those government (ag, Clark Davelopment Cor organized with their own government-owned or controlled corporation oe controlled OF -owned charters, Therefore, itis possible for a gies afore it was privatized) corporation to have private holdings (o.g., PI oldings. and a private corporation to have government hi 7 alone, or the complete or Howaver, it is not the public purpose J, or the fact that it has a controlling ownership by the State of its capital, fie corporation from Charter under a special law, that distinguishes 4 publ ‘ed by th f private. corporation. Thus, certain corporations, wholly-owned Oy Ne Goverment, having a public purpose, and organized under {Gir Own charter would stil continue to be private corporations, such as the National Development Corporation, the Philippine National Railways, efc. Take the case of the Bases Conversion and Development Authority (BCDA), in which case Shipside Inc. v. Court of Appeals,” held that even though public benefit and public welfare, particularly, the promotion of the ‘economic and social development of Central Luzon, may be attributable to the operation of the BCDA, yet it Is certain that the functions performed by the BCDA are basically proprietary in nature — the promotion of economic and social development of Central Luzon, particularly, and the country's goal for enhancement, in general, and did not make the BCDA equivalent tee the eioalibles acces is not a mere agency of the Government 8 corporate Performing proprietary functions. Therefore, the that prescription does not run against the State will not apply to BCDA, ‘ being said that when title of the Republic has been divested, it : although artificial bodies of its own creation, are i Senate . are in the same category as ordinary persons.” tama cr tno ay ne 6 6 fact that a juridical entity i impressed with public interest does not, by that circumstance alone, ae Symtom al the latter tho case Hf the ormployen Based upon the cases al corporations (a) those organized eat ra #9352 SCRA 334 (2001), 2534 SCRA 112 (2007).NATURE, AT ‘TRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS = 75 inthe end a ie oe corporation has a juridical entity, but it exists pi ots at tea Nt OF 8 portion of the state, and thereby exercising an wrens < hen 2h taxing power and the power of eminent e mnén @ government undertaking is set up without encowing cn teeta jundical personally, then it is neither a public nar pal hes ts es il Femains an instrumentality of the State. Thus, hi : tional Airport Authority v. Court of A _ eld thal “The MIAA is ve ‘ Pi ekehonencle, ; Rol @ government-owned or controlled corporation because it Is nol constituted of capital divided into shares of stock, and neither is it @ nonstock corporation because it has no members. MUMA is go a government instrumentality vested with corparate powers to perform efficiently its governmental functions." . c¢. Quasi-Public Corporations There is a group of association that seem to be a crass between private corporations and public corporations, and they are classified as. quasi-public corporations. These usually cover school districts, water districts, and the like. Marilao Water Consumers Association, Inc. v. Intermediate Appellate Court," held that water districts organized under Pres. Decree 198, although considered as quasi-public corporations and authorized to exercise the powers, rights and privileges given to private corporations under existing laws, are entirely distinct from corporations organized under the Gorporation Code, and not in the jurisdiction of the SEC. d. Applicability of Civil Service Law Boy Scouts of the Philippines v. NLRC2* held that 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 Commission of Audit, 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 #495 SCRA 891 (2006), Relterated in Manila Intemational Airport Authority v. Court of ‘Appeals, 583 SCRA 234 (2008). bid, ap. 617 #201 SCRA 437 (1991). 196 SCRA 176 (1991).TE LAW « prac PPINE CORPORA comoration since its vvernments pus eat nave proprietary municipal corporation or boca! 9° state, but 2189 OF tas of government does not govern a portion of the inchans OF ad J) Development functions in the same sense thal the ° as bee considered as ‘owned oF -contralied corporations may stl ‘Company or the National Stee! Carper case 3 # CE Lice such, or under the 1987 pepe ‘are surject 10 Government. Therefore, the Law. Leogardo.* PNOC-Energy PNOC-Et Development Com: ¥ iter District V. Civil Service Development: pel NLRC» and Davao ee of government-owned ‘Commission, held that the docinn by special [aw OF formed as and controlled corporations, whether sie ‘aw are governed by the Civil subsidiaries under the general corporation ©" 7, supplanted by the Service Law and not by the Labor Cade, that, The test In determining 1987 Constitution, The present dooininé © 1 oraiion is subject to the whether a government-owned or contralle’ © AT" |} that government Civil Service Law is the manner of its ee vite provsions while corporations created by special charter are SUBICT AT not within the those incorporated under the general corporat the Labor Code: ‘coverage, and therefore are governed by the éor-controliod Under Rep. Act 7456, which required government OWE | Government, the term corporations to declare dividends ta the Nationa! been specifical “goveriment-cwned or -controlled corporations’ has a 2 = Y defined as “corporations organized as a stock or non-stock corporation vested with functions relating to public needs, whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly or, where applicable as in the case of stock corporations, to the extent of at least fifty-one: percent (51%) of its capital stock.” The term also includes financial institutions, owned or controlled by the National Govemment, “but shall exclude acquired asset corporations,” 2. AAs to Place of Incorporation a. Domestic Corporations __A domestic corporation is one incorporated under laws of the Philippines. Under Section 123 of the Corporation Code, “a foreign corporation is one formed, organized or existing under any laws other than those of the ines and whose laws allow Filipino citizens and 28175 SCRA 26 (1989). ™201 SCRA 487 (1991) 201 SCRA 583 (1991)NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS 77 corporations t0 do business in its right to business in the Philippin to transact business in the cou certificate of authority from the ‘own. country or State. It shall have the 185 after it shall have obtained a license intry in accordance with this code and & Appropriate government agency.” b. Foreign Corporations one racridn Corporation may be licensed by the SEC to do business I ne cate of eaten Under the principle of reciprocity, after secunng a cartiicte Of authority fram the Board of Investments under Executive een fe Omnibus Investments Code, and after complying with S for issuance of the lic forms, structural orpanizatone and capkalenton ene 7 Oa” The objectives of the statutory provisions prescribing canditions under which foreign corporations are permitted to do business in a state other than that of their creation: fa) ca them on an equality with domestic corpora- (b) To subject them to inspection so that their condition may be known: and (c) To protect the residents of the state doing business with them by subjecting them to the courts of the state, In case of war, for reasons of national security, in addition to the incorporation test embodied In Section 123 of the Corporation Code, the “control test” is applied to determine the nationality af a corporation. A foreign corporation can have no legal existence beyond the bounds of the state or sovereignty by which it is created. It exists only in contemplation of law and by the force of law, and where that law ceases to operate, the corporation can have no existence. This principle however, does not prevent a corporation from acting in another state or country with the latter's express or implied consent. The siate, in extending to foreign corporations the privilege of doing business, may impose such privilege with whatever conditions and restrictions it deems fit to impose.™ TFiupinas Compania de Seguros v Christer, Huanafeld & Co. Inc., 89 Phil. 84 (1851); Dovis Winship v Phiippine Trust Co., 90 Phil 744 (1962). Haw Pia v, China Banking Corp,, 80 Pri 604 (1948) See alscussons on doing business in Chapter 17 on Non-Stock Cermpovations, Foun. ations and CooperaivesPORATE LAW 1 PruippiNe COR! 8 3. An to Logal Status ‘orporetion full or substantial Eee wees existonce If there permitting organization in ne wt the relreents of an axis ‘eprporatior duly sepciies sn caption ny ape 2 eo ta Ie tnd od. Gemoray, fea! parconollY courts from any source. its due incorporation cannot ate, by the State, is a de jure comport foceeding: be sims oianaes avon in a quo paren or corporation nd the orafore such Procoading is brought BOTs show that it Is @ do jure ‘State has a prima facie case, the corporation M\ corparation. b, Corporation De Facto ; A corporation has da facto existence where there is a bona fide ‘attempt to incorporate, colorable compliance with the statute and user of corporate powers, Under Section 20 of the Corporation Code, the “due incorporation of Any corporation claiming in good faith to be a corporation . .. and its right fo exercise corporate powers, shall not be inquired into collaterally in any Private suit of which such Corporation may be a party.” Such inquiry may be made by the Solicitor General in a quo warranto proceeding. The doctrine grew out of the necessity to promote the Security of business transactions and to. eliminate quibbling over irregularities. |t would be a rare case where third persons dealing wit i by its recognition as a Separate entity despite some minor defects in its incorporation. it would be Unfair to allow a claimant against the alleged ‘Corporation to insist on the individual liability of innocent investors Merely because of some minor flaws in its incorporation, A more thorough K discussion of the de facto coy Provided for in ‘Chapter 5 on Corporate Contract Law, e Corporation by Estoppei Particula a an entity may not be ; I person tion de jure ot de Ff to, from denying ts corporat, Ta YY estoppel or facto, a admissi existence, A group of Mission, be Precluded Persons may assume to So ie, "poration doctrine is CO oo.| \ NATURE. ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS — 78 do business as a corporation without having gone far enough to give @ de facte existence to the entity, nao " Under certain circumstances and for certain purposes, either the group or third persons contracting with the purported corporation may be estopped to deny its corporate status. Under Section 21 of the Corporation Code, “All persons who assume to act as a corporation knawing it to be without authority to do so shail be liable as general partners for all debts. liabilities and damages incurred or arising as a result thereof; Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it ‘a8 SUCH, it shall not be allowed to use as a defense its lack of corporate personality.” In addition, the same section provides that “One who assures an ‘obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.” The corporation by estoppel doctrine is founded on procedural convenience, avoidance of inquiries into irrelevant formalities, and fairness to all parties concemed. The corporation by estoppel doctrine is properly discussed in Chapter 5 on Corporate Contract Law. 4. Corporation by Prescription The Roman Catholic Church is 2 corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which ‘antedated by almost a thousand years any other personality in Europe, and which existed ‘when Grecian eloquence sill flourished in Antioch and when idols were still worshipped in the temple of Mecca."™* 4. As to Existence of Shares of Stocks a. Stock Corporations Corporations which have a capital stock divided into shares and are authorized to distribute to the holders dividends, If no! authorized by the by-laws to distribute the dividends, but itis a stock corporation, can a corporation distribute dividends to its shareholders? The answer seems to be in the affirmative, since one of the expressed powers granted to stock corporations under Section 43 of the Corporation Code is the power to declare dividends. ‘=Bariin v. Ramirez, 7 Pha. 41 (1908).LAW RATE payuierine CORPO 0 a non-stock 1s ides thal Non-Stock Corporations. pO atlas as dividends : range income is diATIDEAE dissolution, Seclion 87 of the Comenre ee Oe nay Obtain fy an i no. ject ; tolls narbara tegs or oricors ie earporefor proper Be used for toits members, wusins ee ne " Provided that any pr nenever NOCeSS Tine corporation wag i I), vd for wl incident to its ee ee cof purposes | the furtherance of the purpo: inent shall be i hen pertinent [ organized. or corporations. covered by specifig This Rowers gereming es gncoot 3S applicable to non-s ‘OpOr provisions of this title, hat non-stock corpo. 88 of the Corporation Code provides 1 Section religious, educational arta social, civi nized for cl scientific, , Civic fest era rrr ea try agriculture and ike chars professional, cultural rect Tike trade, industry, 29 sr ieee ae in So ae OF any cor Ee : ae Bien particular classes of non-steck ilipino* the Club Filipino ne eve , and neither in was auc created for recreational hone w provision eee the articles of incorporation nor in the: bylaws re 8 covenanted that pee to dividends and their distribution, although ie ming debts re m its dissolution, the club’s remaining assels, after p ving « atin donated to a charitable institution. Whatever profits the ae to defray its overhead expenses and to improve its golf cot ie It Would seem therefore that for a Stock corporation to Sxist, two. requisites must be complied with: () acapital Stock divided into shares: ang (b) authority to distribute dividends, front aa itis to be noted that nowhere iis articles or by laws cou e found an aut for the distributi ann eae : thority for the Istribution of its Thus, every time there is an express, authorization in either the i undue a Fy ofa ‘Corporation to declare dividends, it . When there is no xpress prohibition 5 SCRA321 (1967),