Chapter IV – The Corporate Entity
Theory of Corporate Entity: Its effects A corporation has a juridical personality separate and distinct from the SHs or members who compose it — Issuance of certificate of incorporation marks beginning of the corporation’s existence as a legal entity — Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n) Not affected by personal rights, obligations, and transactions Stockholders have no claim on corporate property as owners—they only have an inchoate right to it — A corporation has no interest in the individual property of its stockholders, unless transferred to the corporation — A corporation, as a juridical person, is entitled to immunity against unreasonable search and seizure — A corporation is civilly liable for torts in the same manner — — Stockholders of F Guanzon v Register of Deeds. 5 stockholders of F Guanzon executed a certificate of liquidation of the assets of the corporation. By virtue of a resolution dissolving the corporation, they wish to distribute as liquidated dividends among themselves and in proportion to their shareholdings, the assets of the corporation, which includes real estate properties in Manila. The Register of Deeds however, upon presentment of the certificate of liquidation by the 5 stockholders, denied registration of the properties to be distributed on 7 grounds, 3 of which were questioned by the stockholders: (1) no statement of the # of parcels of land to be distributed (2) registration fees iao P430.50 (3) doc stamp tax iao P940.45 (4) court judgment approving the dissolution and directing disposition of the assets. The stockholders claim that the certificate of liquidation merely partitions/distributes the corporate assets among them because the corporation has already been dissolved. Hence they need not comply with the requirements imposed by the Register of Deeds and the Land
Registration Authority. The LRA counters that the distribution of the corporate assets upon dissolution of the corporation, is ultimately a transfer/conveyance of property to the stockholders: W/N the certificate of liquidation involves a mere distribution of corporate assets or a transfer or conveyance of property. H: It is a transfer/conveyance of property. A corporation is a juridical person separate and distinct from the stockholders. Properties registered in the name of the corporation are owned by it as a separate entity. The shares held by stockholders are their personal property and not the corporation, and it only typifies an aliquot part of the corporation’s property or the right to share in the proceeds. The holder of such share is not the owner of any part of the capital of the corporation, nor is he entitled to possession of any definite portion of its assets, neither is he a co-owner. Liquidation by stockholders after a corporation’s dissolution is not mere partitioning of community property, but already a conveyance or transfer of title to them from the corporation. — — — — — The distribution of the corporate properties to the SHs was deemed not in the nature of a partition among co-owners, but rather a disposition by the corporation to the SHs as opposite parties to a contract Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members; shares of stock are personal property, and NOT corporate property share of stock typifies an aliquot part of the corporation’s property, or the right to share in the proceeds to that extent when distributed holder of shares is not the owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or assets
Caram v CA. A certain Barretto and Garcia contracted the services of
respondent Arellano for his technical services to undertake a project study for the formation of a corporation, the Filipinas Orient Airways. The study was then presented to Caram, who wanted to invest in the corporation. The airline was eventually organized on the basis of the project study with Caram spouses as major stockholders, and Barretto and Garcia as corporate officers. Arellano sued for compensation due to him for his services in undertaking the study. TC ruled that Caram spouses are liable jointly and severally with Barretto and Garcia for P50K due to Arellano. Caram spouses claim they were mere investors in the fledgling airline and were not involved in its formation nor in the project study, which was merely presented to them to induce them to invest. I: W/N Caram spouses are solidarily liable with Barretto and Garcia for the compensation to Arellano.
H: No. Filipinas Orient is a bona fide corporation, the principal stockholders of which are the Carams. As such, the corporation, should alone be liable for its corporate acts as duly authorized by its officers. It has a separate juridical personality and its principal stockholders should not be liable for the acts thereof. The Carams did not contract the services of Arellano; it was only the results of the study made by Arellano that was presented to them to induce them to invest.
Palay Inc v Clave. Palay Inc. through its President Onstott executed
ifo Dumpit a contract to sell a parcel of land in Crestview Heights Subd in Antipolo for P23300, with 9% interest, payable with a downpayment and monthly installments. The contract contains a provision that should Dumpit default in payment of any monthly installment after the lapse of 90 days from the expiration of the 1 month grace period, Palay Inc will automatically rescind the contract without need of notice and will forfeit all payments made. Dumpit paid the downpayment and made several payments, but soon defaulted. 6 years after the last payment, Dumpit wanted to update all his overdue accounts, but was told by Palay Inc that the contract had already been rescinded in accordance with the contract and the land had already been sold. Dumpit filed a complaint with the NHA which held the contract void for absence of judicial or notarial demand and instructed Palay Inc and Onstott to return to Dumpit all he has paid plus 12% interest from filing of complaint. Palay appealed to OP which affirmed the NHA resolution. I: W/N Onstott should be held solidarily liable with Palay Inc H: No. GR—a corporation may not be made to answer for acts and liabilities of its stockholders or those of the legal entities to which it may be connected and vise-versa. Exception—the veil of corporate fiction may be pierced when: 1. it is used as a shield to further an end subversive of justice 2. it is used for purposes not intended by the law that created it 3. it is used to defeat public convenience, or: 4. justify a wrong 5. protect fraud 6. defend crime 7. perpetuate frad or confuse legitimate issues 8. circumvent the law or perpetuate deception 9. use as an alter-ego, adjunct or business conduit for the sole benefit of the stockholders
the SC did not find any badges of fraud on the part of Palay and Onstott. They had literally and mistakenly relied on paragraph 6 of the contract when it rescinded the same, and which was held to be void by the NHA and OP. Onstott was made liable because he was then the President and appeared to be the controlling stockholder of Palay Inc. No proof was found that Onstott used the corporation to defraud Dumpit. Unless sufficient proof appears on record that an officer has used the corporation to defraud a third party, he cannot be made personally liable just because he appeared to be the major stockholder. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.
JG Summit Holdings Inc v CA. The National Investment and Development Corporation (NIDC), a government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management of the Subic National Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330 million for the capitalization of PHILSECO in the proportion of 60%-40% respectively. It also contains a proviso whereby neither party to the JVA shall sell transfer or assign all or any part of its interest in SNS to any third party without giving the other under the same terms the right of first refusal. NIDC transferred all its rights, title and interest in PHILSECO to the Philippine National Bank (PNB). Such interests were subsequently transferred to the National Government pursuant to Administrative Order No. 14. On December 8, 1986, President Corazon C. Aquino issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and possession of, conserve, manage and dispose of non-performing assets of the National Government. Thereafter, on February 27, 1987, a trust agreement was entered into between the National Government and the APT wherein the latter was named the trustee of the National Government's share in PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Government's shareholdings in PHILSECO increased to 97.41% thereby reducing KAWASAKI's shareholdings to 2.59%. In the interest of the national economy and the government, the COP and the APT deemed it best to sell the National Government's share in PHILSECO to private entities. After a series of negotiations between the APT and KAWASAKI, they agreed that the latter's right of first refusal under the JVA be "exchanged" for the right to top by five percent (5%) the highest bid for the
said shares. They further agreed that KAWASAKI would be entitled to name a company in which it was a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI) 1 would exercise its right to top. The Asset Specific Bidding Rules provide among others that the subject of the sale is the NG's 87.67% equity in PHILSECO, that the highest bid shall be subject to the final approval of the APT Board of Trustees and COP, and that the indicative price is P1.3B. At the public bidding, JG Summit submitted a bid of P2.03B with an acknowledgement of Kawasaki's right to top. JG Summit then informed APT that it was protesting the offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four (4) companies were the losing bidders thereby circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the proceedings. H: The SC upheld the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all, the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right allows them to purchase the shares of their coshareholder before they are offered to a third party. The agreement of coshareholders to mutually grant this right to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively, PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECO's equity. In fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected but the capacity of the corporation to own land — that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. This is the clear import of the Constitution. Tramat Mercantile Inc v CA. On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. (Tramat), one (1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00 (apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67,000.00. David Ong caused a stop payment of the check when NAWASA refused to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the engine (sold by de la Cuesta) was a reconditioned unit. On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer, averred, among other things, that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit. TC ordered Ong to pay the plaintiff the sum of P33,500.00 with legal interest thereon at the rate of 12% per annum from July 7, 1984 until fully paid. H: It was an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when — 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; 6 or 4. He is made, by a specific provision of law, to personally answer for his corporate action. In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases.
Magsaysay-Labrador v CA. On February 9, 1979, Adelaida RodriguezMagsaysay, widow and special Administratrix of the estate of the late Senator Genaro Magsaysay, brought an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel of land with improvements, known as "Pequeña Island"; that after the death of her husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not obtained, the change made by the Register of Deeds of the title holders was effected without the approval of the Commissioner of Land Registration and that the late Senator did not execute the purported Deed of Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation. She further alleged that the assignment in favor of SUBIC was without consideration and consequently null and void. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor. On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that on June 20, 1978, their brother conveyed to them one-half (1/2) of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around 41% of the total outstanding shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of litigation and that they have a legal interest in the success of the suit with respect to SUBIC. On July 26, 1979, the TC denied the motion for intervention, and ruled that petitioners have no legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality separate and distinct from its stockholders. The CA upheld the TC and further stated that whatever claims the petitioners have against the late Senator or against SUBIC for that matter can be ventilated in a separate proceeding, such that with the denial of the motion for intervention, they are not left without any remedy or judicial relief under existing law. H: Attempts by stockholders to intervene in suits against their corporations as in this present case were struck down by the SC. A party may intervene under remedial provisions if the stockholder has a legal interest in the
matter in litigation; but stockholders’ right in corporate property is purely inchoate and will not entitle them to intervene in a litigation involving corporate property. A majority stockholder’s interest in the corporate property, if at all, is indirect, contingent, remote, conjectural, consequential, and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof upon dissolution, after payment of corporate debts and obligations. While a stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner with any legal right or title to any of the property, his interest in the corporation being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct person. Disregarding Corporate Entity/Piercing the Veil of Corporate Entity — the privilege of being treated as an entity distinct and separate from the stockholders is confined to legitimate uses and is subject to equitable limitations to prevent its being exercised for fraudulent, unfair or illegal purposes in piercing cases, it is always important to consider that the aim is not to use the piercing doctrine as “a ram to break down the ramparts of the main doctrine of separate juridical personality, but more properly for the ancillary piercing doctrine to act as a regulating valve by which to preserve the powerful engine that is the main doctrine of separate juridical personality the main effect of disregarding the corporate fiction is that stockholders will be held personally liable for the acts and contracts of the corporation whose existence, at least for the purpose of the particular situation involved, is ignored not to be confused with the de facto doctrine, where it may be presumed that the corporation is de jure or even de facto and therefore not subject to collateral attack when the court disregards the corporate entity in a proper case, it is not denying corporate existence for all purposes, but merely refuses to allow the corporation to use the corporate property Piercing is to prevent fraud or a wrong, and not for any other purpose — where no fraud or injustice would be prevented as to make directors and officers liable personally, doctrine does not apply — Boyer-Roxas: piercing cannot be used or resorted to merely establish a right or interest, and the SC denied piercing when it was employed to justify under a theory of co-ownership the continued use and possession by SHs of corporate properties In all piercing cases, the effect has always been to make the active or intervening SH or officer liable for corporate debts and obligations
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Classification of piercing cases:
To commit FRAUD or justify a wrong, or defend a crime (Villa Rey, Palay, Concept Builders) a. There must be a fraud or evil motive in the affected transaction; mere proof of control of the corporation—by itself—would not justify piercing b. Main action should seek for the enforcement of pecuniary claims c. Corporate entity was used in the perpetration of the fraud or in the justification of wrong or to escape personal liability as an ALTER EGO, business conduit of another person or entity, or mere farce to defeat public convenience (La Campana, Marvel, Liddell, Koppel, Indophil) a. use of corporation as an alter ego is in direct violation of the separate juridical entity doctrine b. by not respecting the separate personality, others who deal with the corporation are not also expected to be bound by the separate personality of the corporation, and may treat the interests of the controlling SH/officer/director and the corporation as the same c. piercing alter ego may prevail even when no pecuniary claims are sought to be enforced d. since only the medium by which the business enterprise is changed, then the veil may be pierced to allow the business creditors to recover from whoever has actual control necessary to achieve EQUITY or justice
H: Yes. The following findings of the SC proved that Castro was the sole and exclusive owner and that the other persons name in the articles of incorporation are mere dummies: (1) Castro endorsed in blank the shares of stock in the name of the other incorporators and maintained it in her possession. Upon examination of the books the CIR discovered that 11 stock certificates endorsed in blank by the subscribers except that of Ms Castro. She admitted however, signing 25 certificates of stock, which indicates that 2 sets of certificates was prepared by the company bookkeeper Llamado, with out only the 11 mentioned were actually issued. (2) The dummy stockholders did not have incomes in such amounts in the certificates during the time of the organization of the corporation or after in order to enable them to pay in full for their subscriptions. It appears that all of the dummies have incomes which are insufficient to pay for the subscribed share of the stock. On the other hand, Maria Castro had been found to have made enormous profits in the business such that the taxes assessed amounted to more than P3 million. (3) The subscriptions were not receipted for and were deposited in the corporation name but kept in Castro’s possession (4) The stockholders or directors never appeared to have met to discuss the business of the corporation (5) Castro had advance large sums of money to the corporation without any accounting and that the books were kept as if they belonged to Castro alone (6) The supposed subscribers did not appear in court to support their claim, nor did they present any documentary evidence such as receipts and testify on the payments made on the subscriptions. Jacinto v CA. F: The case involves an appeal by Roberto Jacinto from
Cases where veil was pierced: Marvel Bldg v David (corporate entity used to evade war profits taxes). On the strength of a report by a special committee in the DoF tasked to study the war profits tax case of Mrs Maria Castro, President of Marvel Building Corporation, who is allegedly the single owner of all the capital stock of the Corporation, the SoF recommended the collection of around P3.6 million as war profits tax due to the government and instructed the CIR to collect the same. The CIR then seized various properties of Marvel, including 3 properties (Wise Bldg, Aguinaldo Bldg, Dewey Mansion). Marvel sued CIR, and TC ruled ifo of Marvel, ordering the release of the seized properties and enjoined the auction of the same. CIR appeals. I: W/N Maria Castro the owner of all shares of stock of Marvel Building Corp and the other stockholders mere dummies.
the ruling of the CA affirming the ruling of the TC in finding him liable to pay the outstanding obligation to Metrobank as evidenced by trust receipts signed by Jacinto in behalf of Inland Industries. The TC said that “[a]s to [the] liability of [the] defendant Roberto A. Jacinto, it would appear that he is in fact, the corporation itself known as Inland Industries, Inc.” Aside from the fact that he is admittedly the President and General Manager of the corporation and a substantial stockholders (sic) thereof, it was defendant Roberto A. Jacinto who dealt entirely with the plaintiff in those transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is not even mentioned that he did so in this official capacity. Roberto Jacinto, tried to escape liability and shift the entire blame under the trust receipts solely and exclusively on Inland Industries,
asserting that he cannot be held solidarily liable with Inland Industries because he just signed said instruments in his official capacity as president of Inland Industries, Inc. and it has a juridical personality distinct and separate from its officers and stockholders. Furthermore, a cursory perusal of the stipulation of facts clearly shows that Roberto Jacinto acted in his capacity as President and General Manager of Inland Industries, Inc. when he signed said trust receipts. The conflicting statements by Jacinto place in extreme doubt his credibility anent his alleged participation in said transactions and the CA was persuaded to agree with the findings of the lower court that the Jacinto was practically the corporation itself. Indeed, a painstaking examination of the records show that there is no clear-cut delimitation between the personality of Roberto Jacinto as an individual and the personality of Inland Industries, Inc. as a corporation. The circumstances aforestated led the CA to conclude that the corporate veil that en-shrouds defendant Inland Industries, Inc. could be validly pierced, and a host of cases decided by our High Court is supportive of this view. When the veil of corporate fiction is made as a shield to perpetuate fraud and or confuse legitimate issues, the same should be pierced. The CA ruled that Roberto Jacinto even admitted that he and his wife own 52% of the stocks of Inland Industries, and it cannot accept as true the assertion of Jacinto that he only acted in his official capacity as President and General Manager of Inland Industries, Inc. when he signed the aforesaid trust receipts. Jacinto’s ploy is just a clever ruse and a convenient ploy to thwart his personal liability therefor by taking refuge under the protective mantle of the separate corporate personality of Inland Industries. His appeal now faults the TC for piercing the veil of corporate fiction despite the absence of any allegation in the complaint questioning the separate identity and existence of Inland Industries, Inc. H: While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the presentation of evidence and the examination of witnesses, unequivocably show that respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that he is the corporation. No serious objection was heard from petitioner.
(It was held that the piercing doctrine may be applied by the courts even when the complaint does not seek its enforcement, so long as evidence is adduced during trial as the basis for its application can be had. In other words, there must be evidentiary basis for application of the piercing doctrine during trial on the merits.) Concept Builders v NLRC. Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said company as laborers, carpenters and riggers. On November, 1981, private respondents were served individual written notices of termination of employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been completed. Public respondent found it to be, the fact, however, that at the time of the termination of private respondent's employment, the project in which they were hired had not yet been finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the functions of private respondents. Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner. H: SC summarized the probative factors considered when the corporate mask may be lifted and the corporate veil may be pierced, when a corporation is but the alter ego of a person or of another corporation: (1) stock ownership by one or common ownership of both corporations (2) identity of directors and officers (3) manner of keeping corporate books and records (4) methods of conducting the business. The Court held that the conditions under which the juridical entity may be disregarded very according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly there are some probative factors of identity that will justify the application of the piercing doctrine. The Court also applied the following tests in determining the applicability of the piercing doctrine:
(1) (2) (3)
control, not mere majority of complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked such control must have been used to commit fraud or wrong, to perpetuate the violation of statutory or other positive legal duty, or dishonest and unjust act in contravention of legal rights the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of
The absence of any of these elements prevents the piercing doctrine. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the thirdparty claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Furthermore, the NLRC stated that: "Both information sheets were filed by the same Virgilio 0. Casiño as the corporate Secretary of both corporations. It would also not be amiss to note that both corporations had the same president, the same board of directors, the same corporate officers, and substantially the same subscribers. From the foregoing, it appears that, among other things, the respondent (herein petitioner-) and the third-party claimant shared the same address an/or premises. Under this circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of respondents." Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner corporation. Claparols v CIR. Allied Workers Assoc, Garlitos and 10 workers filed a complaint for ULP against Claparols Steel and Nail Plant owned by Mr Eduardo Claparols. The Court of Industrial Relations found Mr Claparols guilty of union busting and ordered, among other things, the reinstatement of the complainants to their former or equivalent jobs with back wages and the examination of the company payrolls to compute the backwages due. The CIR Chief examiner submitted a report on the computation of the periods for the backwages: first computation covers the period Feb 1 1957 Oct 31 1964. The second is up to and including 7 Dec 1962, when the company stopped operations,
and the third is only up to 30 June 1957 when the Claparols Steel and Nail Plant ceased to operate. This is based on the record that the Claparols Steel Corp—established on 1 July 1957 and ceased operations in Dec 7 1962—had succeeded the Claparols Steel and Nail Plant which ceased operations on 30 June 1957. Claparols opposed the ruling, contending that the computation of the backwages should only be limited to 3 months pursuant to the court ruling in Sta. Cecilia Sawmills v CIR. The workers claim that the Claparols Steel and Nail Plant and the Claparols Steel Corporation are one and the same corporation controlled by petitioner Claparols. The CIR approves the report of the CIR examiner concerning the computation, and Claparols appeals to the SC. H: It is very clear that the Claparols Corp which succeeded Claparols Steel and Nail is the continuation and successor of the first entity and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor, Claparols Steel and Nail. Both corporations were owned and controlled by Eduardo Claparols and there was no break in the succession and continuity of the same business. This avoidingtheliability scheme is very patent, considering that 90% of the subscribed shares of Claparols Steel was owned by Eduardo Claparols himself, and all assets of the dissolved Claparols Steel and Nail were turned over to Claparols Steel Corp. It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should be pierced as it was deliberately and maliciously designed to evade the financial obligation to its employees. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons, or in the case of two corporations, will merge them into one. Villa Rey Transit v Ferrer. Jose Villarama was an operator of a bus transportation under the business name of Villa Rey Transit, a single proprietorship. Two certificates of public convenience issued to Villarama authorized to operate 32 units in various routes or lines from Pangasinan to Manila, and vice-versa. In 1959, he sold the CPCs to Pantranco for P350K, under the proviso that Villarama shall not apply for any TPU service competing with or identical to Pantranco for 10 years from date of sale. 3 months later Villa Rey Transit Inc was organized and registered with the SEC, having a capital stock worth P500K (5000 shares at par P100), 200K of which was subscribed, of which Natividad (wife of Jose Villarama and Treasurer) has subscribed for P1000. Villa Rey Corp then bought 5 CPCs, 49 buses, and tools from Valentin Fernando for P249K. The two parties then applied to the Public Service Commission for a provisional permit to operate the transport service, which was granted. Before PSC could take final approval on the application, 2 of
the 5 CPCs were levied in an execution issued by the TC ifo the creditor of Fernando, Eusebio Ferrer, who also was the winning bidder in the subsequent public sale. Ferrer then sold the 2 CPCs to Pantranco, and sought the approval of the sale with the PSC, with a prayer for provisional authority to operate the service. The PSC order that during the pendency of the application Pantranco shall be authorized to operate the service under the 2 CPCs. Villa Rey elevated the matter to the SC which ruled in its favor and allowed it operated provisionally instead of Pantranco. Villa Rey then filed an action to annul the sheriff sale of the 2 CPCs and the sale to Pantranco of the same, and to annul the orders of the PSC related to the sale. Ferrer and Pantranco averred that Villa Rey had no valid title to the CPCs because of a suspensive condition—the approval of the PSC—had not yet been fulfilled, and thus they had a superior right to the CPCs. Pantranco filed a 3rd party suit against Jose Villarama, alleging that Villarama and Villa Rey are one and the same, and that both are disqualified from operating the 2 CPCs by virtue of the agreement between Villarama and Pantranco in the original sale of the CPCs. TC rules that Villa Rey Corp is a separate and distinct entity from Jose Villarama, and that the restriction clause is void, which thus makes the sheriff’s sale void as well. H: IT would appear that Villarama supplied the organization expenses and the assets of Villa Rey such as trucks and equipment, and that there was no actual payment by the original subscribers of the amounts of P95K and P100K as first and second installments of the paid-up capital. The finances of the corporation was manipulated and disbursed by Jose as they were his private funds, in such a way that he appeared to be the actual ownertreasurer and not the wife. The initial cash capitalization of P105K was also mostly financed by Jose V, mostly covered by the check iao P85K drawn by Jose. It was also made to appear, as testified by the accountant, that the P95K second installment of the paid-up capital was delivered to Jose in payment of the equipment purchased and that the P100K first installment were loaned as advances to stockholders, when in fact the only money of the corporation was the P105K, which was Jose’s money. Villarama made use of the money of the corporation and deposited it to his private accounts, and the corporation paid for his expenses. He admitted that he mingled corporate with his personal funds. All these are strong evidence that Villarama had been much too involved in the affairs of Villa Rey and show that Villa Rey is his alter ego. Thus the restrictive clause in the contract of sale of CPCs worth P350K is also binding on the Villa Rey Corp as it is on Jose. The fiction of legal entity is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or a crime, the veil with which the law covers and isolates the corporation from its members or stockholders who
compose it will be lifted to allow for its consideration merely as a aggregation of individuals. The Court pierced the veil to enforce a noncompetition clause entered into by its controlling stockholder in his personal capacity. Liddel v CIR (corporate entity was used to evade the payment of higher taxes). Liddell & Co was engaged in importing and retailing cars
and trucks. Frank Liddell owned 98% of the stocks. Later Liddell Motors Inc was organized to do retailing for Liddell & Co. Frank’s wife owned almost all of that corporation’s stocks. Since then, Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the CIR considered the sales by Liddell Motors to the public as the basis for the original sales tax. H: The Court, agreeing with the CIR, held that Frank Liddell owned both corporations as his wife could not have had the money to pay her subscriptions. Such fact alone though not sufficient to warrant piercing, but under the proven facts alone, Liddel Motors was the medium created by Liddel & Co to reduce its tax liability. A taxpayer has the legal right to decrease, by means which the law permits, the amount of what otherwise would be his taxes or altogether avoid them; but a dummy corporation serving no business purposes other than as a blind, will be disregarded. A taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in the proper cases may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transaction as the person accordingly taxable. Mere ownership by a single stockholder or by another corporation of all or nearly all capital stocks of the corporation is not by itself a sufficient ground for disregarding the separate corporate personality. Substantial ownership in the capital stock of a corporation entitling the shareholder a significant vote in the corporate affairs allows them no standing or claims pertaining to corporate affairs. Where a corporation is a dummy and serves no business purpose and is intended only as a blind, the corporate fiction may be ignored.
Substantial ownership in the capital stock of a corporation entitling the SH to a significant vote in corporate affairs allows then no standing or claims pertaining to corporate affairs. Mere ownership by a single SH or by another corporation of all or nearly all capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality La Campana Coffee Factory v Kaisahan. Tan Tong and family owned and controlled 2 corporations: one engaged in the sale of coffee and the other in starch. Both corporations had one office, one management, and one payroll, and the laborers of both corporations were interchangeable. The 60 members of the labor association in the coffee and starch factories demanded higher wages addressed to La Campania Starch and Coffee Factory. La Campania Coffee sought dismissal on the ground that the starch and coffee factory are two distinct juridical persons. I: W/N the Court of Industrial Relations had jurisdiction over the case H: the Court disregarded the fiction of corporate existence and treated the two companies as one. In alter ego cases, no pecuniary claim need be involved to allow the courts to apply the piercing doctrine. Cases where veil was NOT pierced: IndoPhil Textile Mill Workers Union v Calica. Petitioner Indophil
Textile Mill Workers Union-PTGWO is a legitimate labor organization and the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is impleaded in his official capacity as the Voluntary Arbitrator of the National Conciliation and Mediation Board of the Department of Labor and Employment, while private respondent Indophil Textile Mills, Inc. is a corporation engaged in the manufacture, sale and export of yarns of various counts and kinds and of materials of kindred character and has its plants at Barrio Lambakin, Marilao, Bulacan. In April, 1987, Indophil Textile Mill Workers Union-PTGWO and private respondent Indophil Textile Mills, Inc. executed a collective bargaining agreement effective from April 1, 1987 to March 31, 1990. On November 3, 1987, Indophil Acrylic Manufacturing Corporation was formed and registered with the Securities and Exchange Commission. Subsequently, Acrylic applied for registration with the Board of Investments for incentives under the 1987 Omnibus Investments Code. The application was approved on a preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers according to its own criteria and standards. Sometime in July, 1989, the workers of Acrylic unionized and a duly certified collective bargaining agreement was executed. In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of the facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA. In other words, it is the Union's contention that Acrylic is part of the Indophil bargaining unit. Indophil Union's contention was opposed by private respondent which submits that it is a juridical entity separate and distinct from Acrylic. The existing impasse led the petitioner and private respondent to enter into a submission agreement on September 6, 1990. The parties jointly requested the public respondent to act as voluntary arbitrator in the resolution of the pending labor dispute pertaining to the proper interpretation of the CBA provision. The Voluntary Arbitrator rendered its award, ruling that the proper interpretation and application of Sec. 1, (c), Art. I of the 1987 CBA does not extend to the employees of Acrylic as an extension or expansion of Indophil Textile Mills, Inc. I: Whether or not the operations in Indophil Acrylic Corporation are an extension or expansion of private respondent Company H: Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders or the corporation will be considered as the corporation, that is liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. I n the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent Company. While we do not discount the
possibility of the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic. Although it was shown that the two corporations’ businesses are related, that some of the employees of the two corps are interchanged, and that the physical plants, offices, and facilities, are situated in the same compound, were not considered sufficient bases to pierce the veil in order to treat the two corporations as one bargaining unit. The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation.
Secosa et al v Heirs of Erwin Suarez Franscisco. On June 27, 1996, at
around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of Manila. At the same time, petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc. Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled the scene of the collision. Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and Dassad’s president, El Buenasucenso Sy.
H: It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of its stockholders or members. It has a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality. A corporation’s authority to act and its liability for its actions are separate and apart from the individuals who own it. The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. The records of this case are bereft of any evidence tending to show the presence of any grounds enumerated above that will justify the piercing of the veil of corporate fiction such as to hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it. The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad Warehousing and Port Services, Inc., and not in the name of El Buenasenso Sy. Raymundo Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these things, when taken collectively, point toward El Buenasenso Sy’s exclusion from liability for damages arising from the death of Erwin Francisco.
Yu v NLRC. Private respondents-employees Fernando Duran, Eduardo
Paliwan, Roque Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay Distillery, Inc. (TDI). 22 employees
of TDI, including private respondents employees, received a memorandum from TDI terminating their services, for reason of retrenchment, effective 30 days from receipt thereof or not later than the close of business hours on April 28, 1988. On April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary restraining order against their retrenchment. The labor arbiter issued the restraining order the following day. However, due to the 20-day lifetime of the temporary restraining order, and because of the on-going negotiations for the sale of TDI to the First Pacific Metro Corporation, the retrenchment pushed through. The instant petition involves only the 4 individual respondents herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos. On June 1, 1988, or after respondents-employees had ceased as such employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed the business name Tanduay Distillers. The employees filed a motion to implead herein petitioners James Yu and Wilson Young, doing business under the name and style of Tanduay Distillers, as party respondents in said cases. Petitioners filed an opposition thereto, asserting that they are representatives of Tanduay Distillers an entity distinct and separate from DTI, the previous owner, and that there is no employer-employee relationship between Tanduay Distillers and private respondents. Respondentsemployees filed a reply to the opposition stating that petitioner of TDI labor union of Tanduay Distillers' decision to hire everybody with a clean slate on a probation basis. H: The order of execution and the writ of execution ordering petitioners and Tanduay Distillers to reinstate private respondents employees are, therefore, null and void. Neither may be said that petitioners and Tanduay Distillers are one and the same as TDI, as seems to be the impression of respondents when they impleaded petitioners as party respondents in their complaint for unfair labor practice, illegal lay off, and separation benefits. Such a stance is not supported by the facts. The name of the company for whom the petitioners are working is Twin Ace Holdings Corporation. As stated by the Solicitor General, Twin Ace is part of the Allied Bank Group although it conducts the rum business under the name of Tanduay Distillers. The use of a similar sounding or
almost identical name is an obvious device to capitalize on the goodwill which Tanduay Rum has built over the years. Twin Ace or Tanduay Distillers, on one hand, and Tanduay Distillery, Inc. (TDI), on the other, are distinct and separate corporations. There is nothing to suggest that the owners of DTI, have any common relationship as to identify it with Allied Bank Group which runs Tanduay Distillers. We hold that the director of Labor relations acted with grave abuse of discretion in treating the two companies as a single bargaining unit. That ruling is arbitrary and untenable because the two companies are indubitably distinct with separate juridical personalities. The fact that their businesses are related and that the 236 employees of Georgia Pacific International Corporation were originally employees of Lianga Bay Logging Co., Inc. is not a justification for disregarding their separate personalities. Hence, the 236 employees, who are now attached to Georgia Pacific International Corporation, should not be allowed to vote in the certification election at the Lianga Bay Logging Co. ,Inc. They should vote at a separate certification election to determine the collective bargaining representative of the employees of Georgia Pacific International Corporation. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related (Palay, Inc vs. Clave) The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a subsequent interested buyer. At the time when termination notices were sent to its employees, TDI was negotiating with the First Pacific Metro Corporations for the sale of its assets. Only after First Pacific gave up its efforts to acquire the assets did Twin Ace or Tanduay Distillers come into the picture. Respondents-employees have not presented any proof as to communality of ownership and management to support their contention that the two companies are one firm or closely related. The doctrine of piercing the veil of corporate entity applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or where a corporation is the mere
alter ego or business conduit of a person (Indophil Textile Mill Workers Union vs. Calica) To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed. The complaint for unfair labor practice, illegal lay off, and separation benefits was filed against TDI. Only later when the manufacture and sale of Tanduay products was taken over by Twin Ace or Tanduay Distillers were James Yu and Wilson young impleaded. The corporation itself — Twin Ace or Tanduay Distillers — was never made a party to the case. Another factor to consider is that TDI as a corporation or its shares of stock were not purchased by Twin Ace. The buyer limited itself to purchasing most of the assets, equipment, and machinery of TDI. Thus, Twin Ace or Tanduay Distillers did not take over the corporate personality of TDI although they manufacture the same product at the same plant with the same equipment and machinery. Obviously, the trade name "Tanduay" went with the sale because the new firm does business as Tanduay Distillers and its main product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate corporation. In point of fact TDI is now herein a party respondent represented by its own counsel. Significantly, TDI in the petition at hand has taken the side of its former employees and argues against Tanduay Distillers. In its memorandum filed on January 9, 1995, TDI argues that it was not alone its liability which the arbiter recognized "but also of James Yu and Wilson Young, representatives of Twin Ace and/or the Allied Bank Group doing business under the name 'TANDUAY DISTILLERS,' to whom the business and assets of DTI were sold." If DTI and Tanduay Distillers are one and the same group or one is a continuation of the other, the two would not be fighting each other in this case. TDI would not argue strongly "that the petition for certiorari filed by James Yu and Wilson Young be dismissed for lack for merit." It is thus obvious that the second corporation, Twin Ace or Tanduay Distillers, is an entity separate and distinct, from the first corporation, TDI. The circumstances of this case are different from the earlier decisions of
the Court in Labor cases where the veil of corporate fiction was pierced. In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana (KKM), (93 Phil. 160 , La Campana Coffee Factory, Inc. and La Campana Gaugau Packing were substantially owned by the same person. They had one office, one management, and a single payroll for both business. The laborers of the gaugau factory and the coffee factory were also interchangeable, the workers in one factory worked also in the other factory. In Claparols vs. Court of Industrial Relations (65 SCRA 613 , the Claparols Steel and Nail Plant, which was ordered to pay its workers backwages, ceased operations on June 30, 1956 and was succeeded on the very next day, July 1, 1957, by the Clarapols Steel Corporation. Both corporations were substantially owned and controlled by the same person and there was no break or cessation in operations. Moreover, all the assets of the steel and nail plant were transferred to the new corporation. In fine, the fiction of separate and distinct corporate entities cannot, in the instant case, be disregarded and brushed aside, there being not the least indication that the second corporation is a dummy or serves as a client of the first corporate entity. In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two separate and distinct entities, the order for Tanduay Distillers (and petitioners) to reinstate respondents-employees is obviously without legal and factual basis.
— — — Yu: when a transferee purchases only the assets of the transferor, the transferee cannot be held liable for the labor claims and obligation for reinstatement adjudged against the transferor there must be continuity of the identity of the owners in the business; the doctrine of business-enterprise transfer as to make the transferee liable for the business obligations of the transferor is really a species of piercing doctrine and would require a certain degree of continuity of the same business by the same owners using the corporate fiction as a shield
Cease v CA. Forrest Cease and 5 other kanos organized the Tiaong Milling and Plantation Company. The original incorporators were then bought out by Forrest and his children (Ernest, Cecilia, Teresita, Benjamin, and Florence). The charter of the company then lapsed without any
effort to liquidate it; but when Forrest died the company was partitioned extrajudicially among his children. Benjamin and Florence desired an actual division, but Ernest, Cecilia, and Teresita preferred reincorporation. The latter group of siblings then proceeded to incorporate themselves into the FL Cease Plantation Company and registered with the SEC, while Benjamin and Florence commenced proceedings for the settlement of the estate of Forrest and filed a action to declare the Tiaong Corp to be identical with the FL Cease Corp and its properties divided among the children. The Board of Liquidators of Tiaong Milling then assigned and transferred the properties of the corp to FL Cease as trustee. TC ruled that the Tiaong Corp is also part of the estate of Forrest and should be divided share and share alike to all children, cancelled the conveyance ifo FL Cease and removed the latter as trustee and ordered it to deliver to the appointed receiver all its properties. Ernesto et al contend that no evidence has been found to support the conclusion that the properties of Tiaong Milling are also properties of the estate of Forrest Cease. H: In sustaining the theory that the estate of Forrest and Tiaong Milling are merged as one personality and that the company is only the business conduit and alter ego of Forrest, the TC correctly ruled that the company developed into a close family corporation, with the Board and stockholders belonging to one family, the head of which was Forrest who always retained the majority stocks and thus control and management of its affairs. Generally, a corporation is invested by law with a personality separate and distinct from that of the persons composing it as well as from that of any other legal entity to which it may be related. The notion of corporate entity will be pierced or disregarded and the corporation will be treated as an association of persons or where there are two corporations, they will be merged into one, the one being merely regarded as part or instrumentality of the other. The business of the corporation in question is largely the personal venture of Forrest. The children were neither subscribers or purchasers of the stocks they own. Their participation as nominal shareholders emanated solely from Forrest’s gratuitous dole out of his own shares to the benefit of his children. Delpher Trade v CA. Siblings Deflin and Pelagia Pacheco co-owned Lot No 1095 which they leased to Construction Components. The lease contract had a right of first refusal provision ifo the lessee. CCI then assigned its rights to Hydro Pipes, which included the RFR, with the consent of the Pachecos. The Pachecos then executed a deed of exchange of the property with Delpher Trades Corp for 2,500 shares, or a total value of P1,500,000. Delpher is a family corporation organized by the children of the Pachecos in order to perpetuate their control over the property and avoid taxes. The transfer of shares in exchange for the land are equivalent to a 55% majority stake in Delpher, with the remaining 45% also in the hands of the Pacheco family (they call it estate planning). Hydro argues that Delpher is a corporate entity separate from the Pachecos and is not their alter ego or business conduit, and that the transfer was in the nature of a sale which prejudiced their RFR
and supports their claim to exercise the right under the terms granted to Delpher. Delpher claims there was no transfer of ownership in the nature of a sale prejudicing the RFR of Hydro, because the corporation is a mere alter ego or conduit of the Pachecos, hence Delpher and Pachecos should be deemed one and the same. Thus there was no sale and that the Pachecos merely exchanged the land for shares of stock in their own corporation. Hydro sues for reconveyance exercising its RFR under the same terms of the transfer to Delpher. TC rules ifo Hydro, and the CA affirms. I: W/N the DoE made by the Pachecos ifo Delpher was meant to be a contract of sale thus prejudicing Hydro’s RFR over the property. H: No. The DoE between Pachecos and Delpher cannot be considered a contract of sale. There was no transfer of actual ownership. The Pacheco family merely changed their ownership from one form to another, and it remained in the same hands. After incorporation, one becomes a stockholder by subscription or purchasing stock directly from the corporation or from the individual owners thereof. In this case, the Pachecos became owners of the corporation by subscription, which is an agreement to take and pay for original unissued shares of a corporation formed or to be formed. It is significant in this case that the Pachecos took no par value shares in exchange for the properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of shares of the issuing corporation. The capital stock of a corporation issuing only no-par shares is not set forth by a stated amount of money, but is expressed to be divided into a stated number of shares. This indicates that a shareholder of say 100 shares is an aliquot sharer in the assets of the corporation, no matter what the value of the shares are. By ownership of 2500 shares, the Pachecos have control over Delpher, which makes it a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher to take control of the properties and save on inheritance taxes. The records do no point to anything objectionable about this estate planning scheme. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or avoid them cannot be doubted. As they are still the owners, Hydro has no basis for its claim of RFR under the lease contract. Parent-Subsidiary Relationship — — The general principles outlined in the preceding section apply to parentsubsidiary corporations Taken alone, mere fact of ownership by the mother of all or substantially all the stocks of another corporation is not sufficient to justify their being treated as on entity
— — — — —
If used to perform legitimate functions, the subsidiary’s existence may be respected, and liability will be confined to that which arises from their respective businesses The courts however, in the exercise of its equity jurisdiction, will step in to prevent abuses and pierce the veil Liddell: mere fact that one or more corporations are owned and controlled by a single SH is not of itself sufficient ground for piercing, but… … in Koppel: control of shareholdings of the corporation necessarily means by itself control of the operations of the corporation! Although ownership of the controlling capital stock of the corporation by itself would not authorize piercing, however, when existing together with other factors, the courts have given much weight to such control feature to pierce
Garnett v Southern Railway. Garrett is a wheel molder employed by
Lenoir Car Works who claims and sues for Workmen’s Compensation under the Federal Employer’s Liability Act because of injuries contracted from silica dust which permeated the foundry. He contends that since Southern Railway acquired the entire capital stock of Lenoir and so completely dominated it that it was merely an instrumentality or subsidiary of Southern, he is considered an employee of Southern and thus entitled under the Act mentioned for recovery. He cites the ff facts: — All directors and officers of Lenoir are employees of southern — Southern owns all stock of Lenoir except 5 shares — All profits of Lenoir went to Southern — Claims of Lenoir employees for accidents are handled by Southern — Litigation against Lenoir is handled by Southern — General accounting of Lenoir is handled by Southern — Lenoir sold to Southern $30M of its products compared to $4.5M to other buyers Southern, countered with the ff facts in support of its contention that it is not the parent of Lenoir: — Management of Lenoir is vested in its manager, Henry Marius, who is in the payroll of Lenoir and has no other connection with Southern except holding and proxy voting for Southern — Marius establishes the pricing of Lenoir products and all Lenoir sales are the result of his business judgment
— Lenoir does not sell to Southern exclusively, and Southern does not buy from Lenoir exclusively or substantially, and that it buys from Lenoir just as it buys from other sellers — Lenoir’s corporate and accounting offices are in Washington DC in a building owned by Southern; but it is still based in Tennessee — Lenoir is a specialty business and Southern has not in any way been in a position to direct or supervise the operations of Lenoir — Lenoir is a duly qualified employer under the Tennessee Workmen’s Compensation Act and suits and claims similar to Garretts have been covered by that law — Lenoir maintains a separate bank account and has never intermingled its funds with Southern — Lenoir and Southern keep separate books and pay their own taxes — Lenoir’s general accounting and legal is handled by its own departments in Lenoir City H: The Court finds the existence of two distinct companies. There is no evidence that Southern dictated the management of Lenoir. In fact, Marius the manager was in full control of its operations. He established prices, handled all negotiations in CBAs. It paid local taxes, had local legal counsel, maintained Workmen’s Compensation. Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions and pricing remained in the hands of Marius and was not dictated by Southern. Marius operated the business as a going concern. The facts do not reveal the intimacy and inseparability of control which would lead one to believe that Southern and Lenoir are one and the same. It was also not an agent of Southern because it was not a common carrier by railroad to make it liable under the Federal Act. It was not an operator of a terminal, performed no switching or transportation functions at all. It was a manufacturer and Garrett was one of its employees. There are certain circumstances which if present in the proper combination, would render the subsidiary an instrumentality: (1) parent owns all or most of the capital stock (2) parent and subsidiary have common directors or officers
(3) parent finances the subsidiary (4) parent subscribes to all capital stock of the subsidiary or causes its incorporation (5) subsidiary has grossly inadequate capital (6) parent pays salaries and other expenses or losses of subsidiary (7) subsidiary has substantially no business except with the parent or no assets except those conveyed to the parent (8) the subsidiary is described as a department in the books of the parent (9) parent uses the property of the subsidiary (10)directors of the subsidiary do not act independently but take orders from the parent (11)formal legal requirements of the subsidiary are not met Since only two of the 11 indicia occur—the ownership of most of capital stock and subscription by Southern to capital stock of Lenoir —Lenoir is not a subsidiary and is a separate corporation. Thus there is no basis for the claim of Garrett with Southern under the Federal Act
Jardine Davies Inc v JRB Realty Inc. In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the respondent's Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal air conditioning equipment with a net total selling price of P99,586.00. Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH were installed by Aircon. When the units with rotary compressors were installed, they could not deliver the desired cooling temperature. Despite several adjustments and corrective measures, the respondent conceded that Fedders Air Conditioning USA's technology for rotary compressors for big capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter dated March 26, 1981, Aircon stated that it would be replacing the units currently installed with new ones using rotary compressors, at the earliest possible time. Regrettably, however, it could not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads, that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc. The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded that: at the time it contracted with Aircon on March 13, 1980 and on the date the revised agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase "A subsidiary of Jardine Davies, Inc." was printed on Aircon's letterhead of its March 13, 1980 contract with plaintiff as well as the Aircon's letterhead of Jardine's Director and Senior Vice-President A.G. Morrison and Aircon's President in his March 26, 1981 letter to plaintiff confirming the revised agreement. Aircon's newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 also show that defendant Jardine publicly represented Aircon to be its subsidiary. Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardine's December 31, 1986 and 1985 Financial Statements that "The company acts as general manager of its subsidiaries". Jardine's Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning 94.35% of Aircon. Also, Aircon's reportorial General Information Sheet as of April 1980 and April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon and that out of seven members of the Board of Directors of Aircon, four (4) are also of Jardine. Jardine's witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" and that Jardine nominated, elected, and appointed the controlling majority of the Board of Directors and the highest officers of Aircon. H: It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used
as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. The rationale behind piercing a corporation's identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon's corporate legal existence can just be disregarded. The Court categorically held in another case that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon's majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner. In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy the respondent despite several adjustments and corrective measures. Koppel v Yatco (the subsidiary was so controlled by the parent that its separate identity was hardly discernible, and became a mere alter ego of the parent and was used to evade taxes). Koppel Industrial and Car
however quoted a higher price for the buyer than that quoted by Koppel Industrial. Koppel Phils then cabled to ship the merchandise to Manila. Koppel Phils received a %age of the profits realized or its share of the losses on the transactions. Koppel also returned a sum allotted as payment of commercial broker’s tax of 4%. Koppel Industrial demanded from Koppel Phils the sum of P64,122.51 as merchant’s sales tax of 1 ½% of the share of Koppel Phils in the profits.
H: The Court said that the virtual control of the shareholdings of a
corporation would lead to certain legal conclusions. It could not overlook the fact that in the practical working of corporate organizations of the class to which the two entities belonged, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the board of directors but more often than not, also the action of that board. It held that applying this to the case, it cannot be conceived how the Koppel Phils could effectively go against the policies, decisions, and desires of the American corporation… Neither can it be conceived how the Phil corporation could avoid following the directions of the American corporation in every other transaction where they had both to intervene, in view of the fact that the American corporation held 99.5% of the capital stock of the Phil corporation… In so far as the sales are concerned, Koppel Phils and Koppel Industrial are for all intents and purposes one and the same, and the former is a mere branch, subsidiary, or agency of the latter. The ff are facts which led to the Court to conclude the above: — share in the profits of Koppel Phils was left to the sole, unbridled control of Koppel Industrial — shares of stock of Koppel Phils are all owned by Koppel Industrial (overwhelming majority) — Koppel Phils acted as agent and representative of Koppel Industrial — Koppel Phils alone bore the incidental expenses for transactions, such as cable expenses — Koppel Phils was fully empowered to instruct banks it deals with, if purchasers were not able to pay the bank drafts to the bank as payment for the purchases
Company is a corporation organized and existing under the laws of the State of Pennsylvania. They are not licensed to do business in the RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of stock of the said company (the remaining 5 were owned by the 5 officers of Koppel Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a prospective client. Koppel Phils
— Koppel Phils makes good any deficiencies by deliveries from its own stock
The application of the piercing doctrine is not a contravention of the principle that the corporate personality of a corporation cannot be collaterally attacked. When the piercing doctrine is applied against a corporation in a particular case, the court does not deny legal personality… for any and all purposes. The application of the piercing doctrine is therefore within the ambit of the principle of res judicata that binds only the parties to the case and only to the matters actually resolved therein.
GR: separate personality Exception: cases where veil may be pierced There was a violation of rights or injury in all these cases where veil was pierced Elements of ownership, control, mgt in the corporate entity Inevitable that these will exist All elements have to be satisfied so the corporate veil can be pierced What determines pierceability? Motive/intention Liability arising Injury or damage or loss Estate planning: No impediment to use corporate as vehicle for estate planning Corporation can be put up by a single person Nothing prevents an individual from funding a corporation To meet requirements of code, assign nominal shares to persons If it is money, can be used to acquire assets; still corporate-owned Even a 99.9% owner cannot distribute the property, only the shares Cease: ideal, but there was a dispute Marvel had no compulsory heirs Delpher ruling on transfer is obiter Just defer: use corporate as a vehicle to distribute what appears to be the estate But: you still have to distribute the shares (dispose or donate) Mechanism to ensure that once you die, corporation is dissolved