OUTLINE ON PHILIPPINE Atty. CESAR L.

VILLANUEVA
CORPORATE LAW
1

I. HISTORICAL BACKGROUND
1. The Philippine Copo!te L!"#
2
Sot o$ Co%i$i&!tion o$ A'ei&!n Copo!te L!"
When the Philippines came under American sovereignty, attention was drawn to
the fact that there was no entity in Spanish law exactly corresponding to the notion
"corporation" in English and American law the Philippine !ommission enacted the
!orporation "aw #Act $o% 1&'(), to introduce the American corporation into the
Philippines as the standard commercial entity and to hasten the day when the
sociedad annima of the Spanish law would *e o*solete% +he statute is a sort of
codification of American !orporate "aw% xHarden v. Benguet Consolidated Mining
Co.,

', Phil% 1&1 #1(--)%
(. The Copo!tion L!"
+he first corporate statute, the !orporation "aw, or Act $o% 1&'(, *ecame
effective on 1 April 1(./% 0t had various piece1meal amendments during its 2& year
history% 0t rapidly *ecame anti3uated and not adapted to the changing times%
). The Copo!tion Co%e
+he present !orporation !ode, or Batas Pambansa Blg% /,, *ecame effective
on 1 4ay 1(,.% 0t adopted various corporate doctrines enunciated *y the Supreme
!ourt under the old !orporation "aw% 0t clarified the o*ligations of corporate directors
and officers, expressed in statutory language esta*lished principles and doctrines, and
provided for a chapter on close corporations%
*. Pope Te!t'ent o$ Philippine Copo!te L!"
Philippine !orporate "aw comes from the common law system of the 5nited
States% +herefore, although we have a !orporation !ode that provides for statutory
principles, !orporate "aw is essentially, and continues to *e, the product of
commercial developments% 4uch of this development can *e expected to happen in
the world of commerce, and some expressed 6urisprudential rules that try to apply and
adopt corporate principles into the changing concepts and mechanism of the
commercial world%
II. CONCEPTS
See opening paragraphs of 70""A$5E7A, Corporate
Contract Law -, A+E$E8 "%9% 1 #$o% 2, 9une 1((&)%
1. De$inition #Section 2 Articles &&#-), &', &/, and 122', !ivil !ode)%
(. Ti+Le,el E-i.ten&e o$ Copo!tion
#a) Aggregation of Assets and :esources
#*) ;usiness Enterprise or Economic 5nit
#c) 9uridical Entity
). Rel!tion.hip. In,ol,e% in Copo!te Settin/
0!1 23i%i&!l Entity Le,el, which views the State1corporations relationship
041 Cont!&t3!l Rel!tion.hip Le,el, which considers that the corporate setting is at
once a contractual relationship on four #&) levels<
1 ;etween the corporation and its agents or representatives to
act in the real world, such as its directors and its officers,
which is governed also *y the "aw on Agency
1 ;etween the corporation and its shareholders or mem*ers
1
5nless otherwise indicated, all references to sections pertain to +he !orporation !ode of the
Philippines%
2
+he whole *ody of statutory and 6urisprudential rules pertaining to corporations is referred to as
"!orporate "aw" to differentiate it from the old statute =nown as "+he !orporation "aw," or Act $o% 1&'(%
1 ;etween and among the shareholders in a common venture and
1 ;etween the corporation and third1parties or "outsiders", which
is essentially governed *y !ontract "aw%
*. Theoie. on 5o'!tion o$ Copo!tion#
0!1 Theoy o$ Con&e..ion #!a"ag v. Benguet Consolidated #nc., 2/ S!:A 2&2
>1(/,?)
+o organi@e a corporation that could claim a 6uridical personality of its own
and transact *usiness as such, is not a matter of a*solute right *ut a privilege
which may *e en6oyed only under such terms as the State may deem necessary to
impose #x1cf. $ng Pue % Co. v. Sec. of Commerce and #ndustr", ' S!:A /&'
>1(/2?)%
;efore a corporation may ac3uire 6uridical personality, the State must give
its consent either in the form of a special law or a general ena*ling act, and the
procedure and conditions provided under the law for the ac3uisition of such
6uridical personality must *e complied with% +he failure to comply with the statutory
procedure and conditions does not warrant a finding that such association
achieved the ac3uisition of a separate 6uridical personality, even when it adopts
sets of constitution and *y1laws% x#nternational &xpress !ravel % !our Services
#nc. v. Court of $ppeals -&- S!:A /2& #2...)%
Since all corporations, *ig or small, must a*ide *y the provisions of the
!orporation !ode, then even a simple family corporation cannot claim an
exemption nor can it have rules and practices other than those esta*lished *y law%
x!orres v. Court of $ppeals, 22, S!:A 2(- #1((2)%
041 Theoy o$ Entepi.e Entity #;E:"E, !heor" of &nterprise &ntit", &2 !8"% "% :E7%
-&- >1(&2?)
!orporations are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission of in6ustice and
ine3uity, such as the use of separate personality to avoid the execution of the
property of a sister company% x!an Boon Bee % Co. #nc. v. 'arencio, 1/- S!:A
2.' #1(,,)%
A corporation is *ut an association of individuals, allowed to transact under
an assumed corporate name, and with a distinct legal personality% 0n organi@ing
itself as a collective *ody, it waives no constitutional immunities and per3uisites
appropriate to such a *ody% xPhilippine Stoc( &xchange #nc. v. Court of $ppeals
2,1 S!:A 2-2 #1((2)%
6. 5o3 Atti43te. o$ Copo!tion $o' St!t3toy De$inition#
#a) A corporation is an artificial *eing
#*) !reated *y operation of law
#c) With right of succession
#d) 8nly has powers, attri*utes and properties expressly authori@ed *y law or
incident to its existence
7. A%,!nt!/e. !n% Di.!%,!nt!/e. o$ Copo!te 5o'#
0!1 5o3 B!.i& A%,!nt!/eo3. Ch!!&tei.ti&. o$ Copo!te O/!ni8!tion#
#i) Strong "egal Personality
1 Entity attri*uta*le powers
1 !ontinuity of existence
1 Purpose
+he corporation was evolved to ma=e possi*le the aggregation and
assem*ling of huge amounts of capital upon which *ig *usiness depends
and has the advantage of non1dependence on the lives of those who
compose it even as it en6oys certain rights and conducts activities of
natural persons% )e"noso #* v. Court of $ppeals A%:% $o% 11/12&12', 22
$ovem*er 2...%
#ii) !entrali@ed 4anagement%
#iii) "imited "ia*ility to 0nvestors
2
8ne advantage of a corporate *usiness organi@ation is the limitation
of an investorBs lia*ility to the amount of the investment, which flows from
the legal theory that a corporate entity is separate and distinct from its
stoc=holders% xSan 'uan Structural and Steel +abricators #nc. v. Court of
$ppeals, 2(/ S!:A /-1, /&' #1((,)%
#iv) Cree +ransfera*ility of 5nits of 8wnership for 0nvestors
041 Di.!%,!nt!/e.#
#i) A*use of corporate management
#ii) A*use of limited lia*ility feature
#iii) !ost of maintenance
#iv) Dou*le taxation
Dividends received *y individuals from domestic corporations are
su*6ect to final 1.E tax #Sec% 2&#;)#2), $0:! of 1((2) for income earned
on or after 1 9anuary 1((,% 0nter1corporate dividends *etween domestic
corporations, however, are not su*6ect to any income tax #Sec% 22#D)#&),
$0:! of 1((2)%
0n addition, there has *een a re1imposition of the Fimproperly
accumulated earnings tax,G under Section 2( of the $0:! of 1((2 for
corporations at the rate of 1.E annually%
9. Co'p!e% With Othe :e%i! o$ B3.ine.. En%e!,o.
, -istribution of )is( Profit and Control
#a) Sole Proprietorships
#*) ;usiness +rusts #Article 1&&2, !ivil !ode)
#c) Partnerships and 8ther Associations #Arts% 12/, and 122', !ivil !ode)
1 !an a defective attempt o form a corporation result at least in the formation
of a partnershipH Pioneer #nsurance v. Court of $ppeals 12' S!:A //,
#1(,()%
#d) 9oint 7entures
'oint venture is defined as an association of persons or companies 6ointly
underta=ing some commercial enterprise generally all contri*ute assets and share
ris=s% 0t re3uires a community of interest in the performance of the su*6ect matter,
a right to direct and govern the policy in connection therewith, and duty, which
may *e altered *y agreement to share *oth in profit and losses% the acts of wor=ing
together in a 6oint pro6ect% x.ilosba"an #nc. v. /uingona 'r., 2-2 S!:A 11., 1&-
#1((&), citing ;"A!IBS "AW D0!+08$A:J, Sixth ed%, ,-(%
#e) !ooperatives #Art% -, :%A% $o% /(-,)
#f) Sociedades $nnimas
A sociedad annima was considered a commercial partnership, a sort of a
corporation, Fwhere upon the execution of the pu*lic instrument in which its articles
of agreement appear, and the contri*ution of funds and personal property,
*ecomes a 6uridical personKan artificial *eing, invisi*le, intangi*le, and existing
only in contemplation of lawKwith power to hold, *uy, and sell property, and to
sue and *e suedKa corporationKnot a general copartnership nor a limited
copartnership % % % +he inscri*ing of its articles of agreement in the commercial
register was not necessary to ma=e it a 6uridical personKa corporation% Such
inscription only operated to show that it partoo= of the form of a commercial
corporation%G xMead v. McCullough, 21 Phil% (',1./ #1(11)%
+he sociedades annimas were introduced in Philippine 6urisdiction on 1
Decem*er 1,,, with the extension to Philippine territorial application of Articles
1'1 to 1'( of the Spanish !ode of !ommerce% +hose articles contained the
features of limited lia*ility and centrali@ed management granted to a 6uridical
entity% ;ut they were more similar to the English 6oint stoc= companies than the
modern commercial corporations% xBenguet Consolidated Mining Co. v. Pineda, (,
Phil% 211 #1('/)
8ur !orporation "aw recogni@es the difference *etween sociedades
annimas and corporations and will not apply legal provisions pertaining to the
latter to the former xPhil. Product Co. v. Primateria Societe $non"me, 1' S!:A
-.1 #1(/')%
-
#g) Cuentas &n Participacion
A cuentas en participacion as a sort of an accidental partnership constituted
in such a manner that its existence was only =nown to those who had an interest in
the same, there *eing no mutual agreement *etween the partners, and without a
corporate name indicating to the pu*lic in some way that there were other people
*esides the one who ostensi*ly managed and conducted the *usiness, governed
under article 2-( of the !ode of !ommerce%
+hose who contract with the person under whose name the *usiness of such
partnership of cuentas en participacion is conducted, shall have only a right of
action against such person and not against the other persons interested, and the
latter, on the other hand, shall have no right of action against third person who
contracted with the manager unless such manager formally transfers his right to
them% xBourns v. Carman, 2 Phil% 112 #1(./)%
III. NATURE AND ATTRIBUTES O5 A CORPORATION
1. N!t3e o$ Po"e to Ce!te ! Copo!tion #Sec% 1/, Article L00, 1(,2 !onstitution)
(. Copo!tion !. ! Pe.on<
0!1 Entitle% to %3e po&e..
+he due process clause is universal in its application to all persons without
regard to any differences of race, color, or nationality% Private corporations,
li=ewise, are "persons" within the scope of the guaranty insofar as their property is
concerned%" xSmith Bell % Co. v. 0atividad, &. Phil% 1-/, 1&& #1(2.)%
041 E;3!l pote&tion &l!3.e #xSmith Bell % Co. v. 0atividad, &. Phil% 1-/ >1(2.?)%
0&1 Une!.on!4le Se!&he. !n% Sei83e
!orporations are protected *y the constitutional guarantee against
unreasona*le searches and sei@ures, *ut that the officers of a corporation from
which documents, papers and things were sei@ed have no cause of action to assail
the legality of the sei@ures, regardless of the amount of shares of stoc= or of the
interest of each of them in said corporation, and whatever the offices they hold
therein may *e, *ecause the corporation has a personality distinct and separate
from those of said officers% +he legality of a sei@ure can *e contested only *y the
party whose rights have *een impaired there*y and the o*6ection to an unlawful
search is purely personal and cannot *e availed of *y such officers of the
corporation who interpose it for their personal interests% xStonehill v. -io(no, 2.
S!:A -,- #1(/2)%
A corporation is *ut an association of individuals under an assumed name
and with a distinct legal entity% 0n organi@ing itself as a collective *ody it waives no
constitutional immunities appropriate for such *ody% 0ts property cannot *e ta=en
without compensation can only *e proceeded against *y due process of law and
is protected against unlawful discrimination%

xBache % Co. 1Phil.2 #nc. v. )ui3, -2
S!:A ,2-, ,-2 #1(21), 4uoting from xHale v. Hen(el 2.1 5%S% &-, '. "%Ed% /'2%
0%1 B3t ! &opo!tion i. not entitle% to pi,ile/e !/!in.t .el$ in&i'in!tion
F0t is elementary that the right against self1incrimination has no application
to 6uridical persons%G Bataan Ship"ard % &ngineering Co v. PC//, 1'. S!:A 1,1,
2-&12-' #1(,2)%
While an individual may lawfully refuse to answer incriminating 3uestions
unless protected *y an immunity statute, it does not follow that a corporation,
vested with special privileges and franchises may refuse to show its hand when
charged with an a*use of such privilege% xHale v. Hen(el, 2.1 5%S% &- #1(./)
x5ilson v. 6nited States 221 5%S% -/1 #1(11) x6nited States v. 5hite -22 5%S%
/(& #1(&&)%
). Li!4ility $o Tot.
A corporation is civilly lia*le in the same manner as natural persons for torts,
*ecause generally spea=ing, the rules governing the lia*ility of a principal or master for
a tort committed *y an agent or servant are the same whether the principal or master
*e a natural person or a corporation, and whether the servant or agent *e a natural or
artificial person% +hat a principal or master is lia*le for every tort which he expressly
directs or authori@es, is 6ust as true of a corporation as a natural person% P0B v. C$,
,- S!:A 2-2 #1(2,)%
&
8ur 6urisprudence is wanting as to the definite scope of Fcorporate tort%G
Essentially, FtortG consists in the violation of a right given or the omission of a duty
imposed *y law% Simply stated, tort is a *reach of a legal duty% When it was found that
!lar= Cield +axi failed to comply with the o*ligation imposed under Article 2,- of the
"a*or !ode which mandates that the employer to grant separation pay to employees
in case of closure or cessation of operations of esta*lishments or underta=ing not due
to serious *usiness losses or financial reverses conse3uently, its stoc=holder who was
actively engaged in the management or operation of the *usiness should *e held
personally lia*le% xSergio +. 0aguiat v. 0L)C, 2/( S!:A '/& #1((2)%
As a general rule, a *an=ing corporation is lia*le for the wrongful or tortuous acts
and declarations of its officers or agents within the course and scope of their
employment% A *an= will *e held lia*le for the negligence of its officers or agents when
acting within the course and scope of their employment, even as regards that species
of tort of which malice is an essential element% 0n this case, we find a situation where
the P!0;an= appears also to *e the victim of the scheme hatched *y a syndicate in
which its own management employees had participated% Philippine Commercial
#nternational Ban( vs. Court of $ppeals, A%:% $o% 121&1-, 2( 9anuary 2..1%
*. Ci'in!l Li!4ility o$ ! Copo!tion #5est Coast Life #ns. Co. v. Hurd, 22 Phil% &.1
#1(1&) People v. !an Boon .ong, '& Phil% /.2 >1(-.? Sia v. C$, 121 S!:A /''
>1(,-? Articles 1.2 and 1.-, :evised Penal !ode)%
$o criminal suit can lie against an accused who is a corporation% x!imes #nc. v.
)e"es, -( S!:A -.- #1(21)%
When a criminal statute for*ids the corporation itself from doing an act, the
prohi*ition extends to the *oard of directors, and to each director separately and
individually% xPeople v. Concepcion && Phil% 12( #1(22)%
6. Re&o,ey o$ :o!l D!'!/e. !n% Othe D!'!/e.
A corporation, *eing an artificial person, cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shoc= or social
humiliation which are *asis for moral damages under Art% 2212 of the !ivil !ode%
However a corporation ma" have a good reputation which if besmirched ma" be a
ground for the award of moral damages% xMambulao Lumber Co. v. Philippine 0ational
Ban( 22 S!:A -'( #1(/,).
Even when the corporationMs reputation and goodwill have *een pre6udiced,
"there can *e no award for moral damages under Article 2212 and succeeding articles
of Section 1 of !hapter - of +itle L7000 of the !ivil !ode in favor of a corporation%"
xPrime 5hite Cement Corp. vo #ntermediate $ppellate Court, 22. S!:A 1.-, 11-111&
#1((-)%
4oral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, *esmirched reputation, wounded feelings, moral
shoc=, social humiliation, and similar in6ury% A corporation, *eing an artificial person
and having existence only in legal contemplation, has no feelings, no emotions, no
senses therefore, it cannot experience physical suffering and mental anguish% 4ental
suffering can *e experienced only *y one having a nervous system and it flows from
real ills, sorrows, and griefs of lifeKall of which cannot *e suffered *y respondent *an=
as an artificial person% xLBC &xpress #nc. v. Court of $ppeals 2-/ S!:A /.2 #1((&)
x$cme Shoe )ubber % Plastic Corp. v. Court of $ppeals, 2/. S!:A 21& #1((/)
xSolid Homes #nc. v. Court of $ppeals, 22' S!:A 2/2 #1((2)%
0n $sset Privati3ation !rust v. Court of $ppeals -.. S!:A '2( #1((,), the
Supreme !ourt seemed to have gone *ac= to the original doctrine that F>u?nder Article
2212 of the !ivil !ode, moral damages include *esmirched reputation which a
corporation may possi*ly suffer%G
+he award of moral damages cannot *e granted in favor of a corporation
*ecause, *eing an artificial person and having existence only in legal contemplation, it
has no feelings, no emotions, no senses% 0t cannot, therefore, experience physical
suffering and mental anguish, which can *e experienced only *y one having a nervous
system% +he statement in People v% 4anero >21, S!:A ,' #1((-)? and 4am*ulao
"um*er !o% v% P$; >1-. Phil% -// #1(/,)?, that a corporation may recover moral
damages if it Fhas a good reputation that is de*ased, resulting in social humiliationG is
an o*iter dictum% % %G !he possible basis of recover" of a corporation would be under
$rticles 78 9: and 97 of the Civil Code but which re4uires a clear proof of malice or
bad faith. x$BS,CB0 Broadcasting Corp. v. Court of $ppeals, -.1 S!:A ',( #1((()%
While it is true that a criminal case can only *e filed against the officers of a
corporation and not against the corporation itself, it does not follow from this, however,
'
that the corporation cannot *e a real1party1in1interest for the purpose of *ringing a civil
action for malicious prosecution for the damages incurred *y the corporation for the
criminal proceedings *rought against its officer% xCometa v. Court of $ppeals, -.1
S!:A &'( #1((()%
7. N!tion!lity o$ Copo!tion# COUNTRY UNDER WHOSE LAWS INCORPORATED #Sec% 12-)%
E-&eption.# The TEST OF CONTROLLING OWNERSHIP Applie. In#
0!1 E-ploit!tion o$ N!t3!l Re.o3&e. #Sec% 1&. Sec% 2, Article L00, 1(,2
!onstitution )oman Catholic $postolic $dministrator of -avao #nc. v. !he L)C
and the )egister of -eeds of -avao, 1.2 Phil% '(/ >1('2?)%
+he donation of land to an unincorporated religious organi@ation, whose
trustees are foreigners, cannot *e allowed registration for *eing violation of the
constitutional prohi*ition and it would not *e violation of the freedom of religion
clause% +he fact that the religious association Fhas no capital stoc= does not suffice
to escape the constitutional inhi*ition, since it is admitted that its mem*ers are of
foreign nationality% +he purpose of the sixty per centum re3uirement is o*viously
to ensure that corporations or associations allowed to ac3uire agricultural land or
to exploit natural resources shall *e controlled *y Cilipinos and the spirit of the
!onstitution demands that in the a*sence of capital stoc=, the controlling
mem*ership should *e composed of Cilipino citi@ens%G x)egister of -eeds of )i3al
v. 6ng Sui Si !emple, (2 Phil% ', #1('')
041 P34li& Utilitie. #Sec% 11, Article L00, 1(,2 !onstitution People v. ;uasha, (-
Phil% --- >1('-?)%
+he primary franchise of a corporation, that is, the right to exist as such, is
vested in the individuals who compose the corporation and not in the corporation
itself and cannot *e conveyed in the a*sence of a legislative authority so to do%
;ut the special or secondary franchises of a corporation are vested in the
corporation and may ordinarily *e conveyed or mortgaged under a general power
granted to a corporation to dispose of its property, except such special or
secondary franchises as are charged with a pu*lic use% x'.).S. Business Corp. v.
#mperial #nsurance, 11 S!:A /-& #1(/&)%
+he !onstitution, in no uncertain terms, re3uires a franchise for the
operation of a pu*lic utility however, it does not re3uires a franchise *efore one
can own the facilities needed to operate a pu*lic utility so long as it does not
operate them to serve the pu*lic% 0n law there is a clear distinction *etween the
"operation" of a pu*lic utility and the ownership of the facilities and e3uipment
used to serve the pu*lic% !atad v. /arcia 'r., 2&- S!:A &-/ #1((')
FA distinction should *e made *etween shares of stoc=, which are owned *y
stoc=holders, the sale of which re3uires only $+! approval, and the franchise
itself which is owned *y the corporation as the grantee thereof, the sale or transfer
of which re3uires !ongressional sanction% Since stoc=holders own the shares of
stoc=, they may dispose of the same as they see fit% +hey may not, however,
transfer or assign the property of a corporation, li=e its franchise% 0n other words,
even if the original stoc=holders had transferred their shares to another group of
shareholders, the franchise granted to the corporation su*sists as long as the
corporation, as an entity, continues to exist% +he franchise is not there*y
invalidated *y the transfer of the shares% A corporation has a personality separate
and distinct from that of each stoc=holder% 0t has the right of continuity or perpetual
succession !orporation !ode, Sec% 2)%G Philippine Long -istance !elephone Co. v.
0ational !elecommunications Commission, 1(. S!:A 212, 2-2 #1((.)%
0&1 :!.. :e%i! #Sec% 11#1), Art% L70, 1(,2 !onstitution)
So3&e.< P%D% -/, as amended *y PDs 1(1 and 1(2 D89 8pinion $o% 12., s% of
1(,2 Section 2, P%D% '2/ SE! 8pinion dated 2& 4arch 1(,- D89 8pinion
1/-, s% 1(2- SE! 8pinion dated 1' 9uly 1((1, LL7 SE! N5A:+E:"J
;5""E+0$, #$o% &KDecem*er, 1((1), at p% -1%
C!4le In%3.ty
+he $ational +elecommunications !ommission #$+!), which regulates and
supervises the ca*le television industry in the Philippines under Section 2 of
Executive 8rder $o% &-/, s% 1((2, has provided under $+! 4emorandum !ircular
$o% ,1(1(', under item (2.#a) thereof provides that F!a*le +7 operations shall *e
governed *y E%"% $o% 2.', s% 1(,2% 0f !A+7 operators offer pu*lic
telecommunications services, they shall *e treated 6ust li=e a pu*lic
telecommunications entity%G
/
5nder D89 8pinon $o% (', series of 1(((, the Secretary of 9ustice, ta=ing
its cue from $llied Broadcasting #nc. v. +ederal Communications Commission &-'
C% 2d 2., considered !A+7 as Fa form of mass media which must, theefore, *e
owned and managed *y Cilipino citi@ens, or corporations, cooperatives or
associations, wholly1owned and managed *y Cilipino citi@ens pursuant to the
mandate of the !onstitution%G
0%1 A%,eti.in/ B3.ine.. #Sec% 11#2), Art% L70, 1(,2 !onstitution)
0e1 W!+Ti'e Te.t #+ilipinas Compania de Seguros v. Christern Huenefeld % Co.
#nc., ,( Phil% '& >1('1? x-avis 5inship v. Philippine !rust Co., (. Phil% 2&& >1('2?
xHaw Pia v. China Ban(ing Corp%, ,. Phil% /.& >1(&,?)%
0$1 In,e.t'ent Te.t as to "Philippine $ationals" #Sec% -#a),#*), :%A% 2.&2, Coreign
0nvestment Act of 1((2)
0/1 The G!n%$!the R3le #8pinion of D89 $o% 1,, s% 1(,(, dated 1( 9anuary 1(,(
SE! 8pinion, dated / $ovem*er 1(,(, LL07 SE! N5A:+E:"J ;5""E+0$ #$o% 11
4arch 1((.) SE! 8pinion, dated 1& Decem*er 1(,(, LL07 SE! N5A:+E:"J
;5""E+0$ #$o% 2 19une 1((.)
5p to what level do you apply the grandfather ruleH #Palting v. San 'ose
Petroleum #nc., 1, S!:A (2& >1(//?)%
0h1 Spe&i!l Cl!..i$i&!tion. #Sec% 1&.)
IV. SEPARATE 2URIDICAL PERSONALIT< AND DOCTRINE
O5 PIERCING VEIL O5 CORPORATE 5ICTION
See relevant portions of 70""A$5E7A, )estatement of the
-octrine of Piercing !he *eil of Corporate +iction, -2 A+E$E8
"%9% 1( #$o% 2, 9une 1((-)%
A. :!in Do&tine# A CORPORATION HAS A PERSONALIT< SEPARATE AND
DISTINCT 5RO: ITS STOCKHOLDERS OR :E:BERS.
:udimentary is the rule that a corporation is invested *y law with a personality
distinct and separate from its stoc=holders or mem*ersK*y legal fiction and
convenience it is shielded *y a protective mantel and im*ued *y law with a character
alien to the persons comprising it% xLim v. Court of $ppeals -2- S!:A 1.2 #2...)%
1. So3&e.# Sec% 2 Article &&, !ivil !ode
(. I'pot!n&e o$ Pote&tin/ :!in Do&tine#
+he Fseparate 6uridical personalityG includes< right of succession limited
lia*ility centrali@ed management and generally free transfera*ility of shares of
stoc=% +herefore, an undermining of the separate 6uridical personality of the
corporation, such as the application of the piercing doctrine, necessarily dilutes any
or all of those attri*utes%
8ne of the advantages of a corporate form of *usiness organi@ation is the
limitation of an investorBs lia*ility to the amount of the investment% +his feature flows
from the legal theory that a corporate entity is separate and distinct from its
stoc=holders% Oowever, the statutorily granted privilege of a corporate veil may *e
used only for legitimate purposes% 8n e3uita*le considerations, the veil can *e
disregarded when it is utili@ed as a shield to commit fraud, illegality or ine3uity
defeat pu*lic convenience confuse legitimate issues or serve as a mere alter ego
or *usiness conduit of a person or an instrumentality, agency or ad6unct of another
corporation% xSan 'uan Structural and Steel +abricators #nc. v. Court of $ppeals,
2(/ S!:A /-1, /&' #1((,)%
). Appli&!tion.#
0!1 Majority Ownersi! o" or Dea#in$s in Sareo#%in$s< 8wnership of a
ma6ority of capital stoc= and the fact that ma6ority of directors of a corporation
are the directors of another corporation creates no employer1employee
relationship with the latterMs employees% -BP v. 0L)C, 1,/ S!:A ,&1 #1((.)
+rancisco et al. v. Me=ia A% :% $o% 1&1/12, 1& August 2..1%
+he mere fact that a stoc=holder sells his shares of stoc= in the
corporation during the pendency of a collection case against the corporation,
does not ma=e such stoc=holder personally lia*le for the corporate de*t, since
the disposing stoc=holder has no personal o*ligation to the creditor, and it is
2
the inherent right of the stoc=holder to dispose of his shares of stoc= anytime
he so desires% x)emo 'r. v. #ntermediate $ppellate Court, 122 S!:A &.',
&1-1&1& #1(,()%
4ere ownership *y a single stoc=holder or *y another corporation of all
or nearly all of the capital stoc= of a corporation is not of itself sufficient ground
for disregarding the separate corporate personality% xSunio v. 0L)C , 122 S!:A
-(. #1(,&) x$sionics Philippines #nc. v. 0ational Labor )elations Commission
2(. S!:A 1/& #1((,) xLim v. Court of $ppeals -2- S!:A 1.2 #2...) xManila
Hotel Corp. v. 0L)C -&- S!:A 1 #2...) x+rancisco v. Me=ia A% :% $o%
1&1/12, 1& August 2..1%
4ere su*stantial identity of the incorporators of the two corporations
does not necessarily imply fraud, nor warrant the piercing of the veil of
corporate fiction% 0n the a*sence of clear and convincing evidence to show that
the corporate personalities were used to perpetuate fraud, or circumvent the
law, the corporations are to *e rightly treated as distinct and separate from
each other% xLaguio v. 0L)C 2/2 S!:A 21' #1((/)%
041 Dea#in$s &etween te Cor!oration an% Sto'(o#%ers) +he transfer of the
corporate assets to the stoc=holder is not in the nature of a partition *ut is a
conveyance from one party to another% Stoc(holders of +. /uan3on and Sons
#nc. v. )egister of -eeds of Manila, / S!:A -2- #1(/2)%
As a general rule, a corporation may not *e made to answer for acts or
lia*ilities of its stoc=holders or those of the legal entities which it may *e
connected and vice1versa% x$)B Constructions Co. #nc. v. Court of $ppeals
--2 S!:A &22 #2..)
0&1 On Iss*es o" Pri+i#e$es Enjoye%) +he tax privileges en6oyed *y a corporation
do not extend to its stoc=holders% "A corporation has a personality distinct from
that of its stoc=holders, ena*ling the taxing power to reach the latter when they
receive dividends from the corporation% 0t must *e considered as settled in this
6urisdiction that dividends of a domestic corporation which are paid and
delivered in cash to foreign corporations as stoc=holders are su*6ect to the
payment of the income tax, the exemption clause to the charter >of the
domestic corporation? notwithstanding%" xManila /as Corp. v. Collector of
#nternal )evenue, /2 Phil% ,(', ,(, #1(-/)%
0%1 &ein$ a Cor!orate O""i'er) ;eing an officer or stoc=holder of a corporation
does not *y itself ma=e oneMs property also of the corporation, and vice,versa,
for they are separate entities, and that shareholders are in no legal sense the
owners of corporate property which is owned *y the corporation as a distinct
legal person% /ood &arth &mporium #nc. v. C$, 1(& S!:A '&& #1((1)
+he mere fact that one is president of the corporation does not render
the property he owns or possesses the property of the corporation, since that
president, as an individual, and the corporation are separate entities% xCru3 v.
-alisa", 1'2 S!:A &,2 #1(,2)%
0e1 Pro!erites, O-#i$ations an% De-ts) "i=ewise, a corporation has no legal
standing to file a suit for recovery of certain parcels of land owned *y its
mem*ers in their individual capacity, even when the corporation is organi@ed
for the *enefit of the mem*ers% Sulo ng Ba"an v. $raneta #nc%, 22 S!:A -&2
>1(2/?)%
+he corporate de*t or credit is not the de*t or credit of the stoc=holder
nor is the stoc=holderMs de*t or credit that of the corporation% x!raders )o"al
Ban( v. C$, 122 S!:A 2,( #1(,()%
Stoc=holders have no personality to intervene in a collection case
covering the loans of the corporation on the ground that the interest of
shareholders in corporate property is purely inchoate% xSaw v. C$, 1(' S!:A
2&. >1((1?)
+he interests of payees in promissory notes cannot *e off1set against the
o*ligations *etween the corporations to which they are stoc=holders a*sent
any allegation, much less, even a scintilla of su*stantiation, that the parties
interest in the corporation are so considera*le as to merit a declaration of unity
of their civil personalities% x#ndustrial and -evelopment Corp. v. Court of
$ppeals, 222 S!:A --- #1((2)%
0t is a *asic postulate that a corporation has a personality separate and
distinct from its stoc=holders% +herefore, even when the foreclosure on the
,
assets of the corporation was wrongful and done in *ad faith, the stoc=holders
of the corporation have no standing to recover for themselves moral damages%
8therwise, it would amount to the appropriation *y, and the distri*ution to,
such stoc=holders of part of the corporationBs assets *efore the dissolution of
the corporation and the li3uidation of its de*ts and lia*ilities% x$sset
Privati3ation !rust v. Court of $ppeals -.. S!:A '2(, /12 #1((,)%
Where real properties included in the inventory of the estate of a
decedent are in the possession of and are registered in the name of the
corporations, in the a*sence of any cogency to shred the veil of corporate
fiction, the presumption of conclusiveness of said titles in favor of said
corporations should stand undistur*ed% xLim v. Court of $ppeals -2- S!:A
1.2 #2...)%
0$1 Tir%.Parties# +he fact that respondents are not stoc=holders of the disputed
corporations does not ma=e them non1parties to the case, since the 6urisdiction
of a court or tri*unal over the su*6ect matter is determined *y the allegations
in the !omplaint% 0n this case, it is alleged that the aforementioned
corporations are mere alter egos of the directors1petitioners, and that the
former ac3uired the properties sought to *e reconveyed to CAS:! in violation
of directors1petitionersB fiduciary duty to CAS:!% +he notion of corporate entity
will *e pierced or disregarded and the individuals composing it will *e treated
as identical if, as alleged in the present case, the corporate entity is *eing
used as a cloa= or cover for fraud or illegality as a 6ustification for a wrong or
as an alter ego, an ad6unct, or a *usiness conduit for the sole *enefit of the
stoc=holders% /ochan v. >oung A%:% $o% 1-1,,(, 21 4arch 2..1%

B. Pie&in/ the Veil o$ Copo!te 5i&tion#
1. So3&e o$ In&!nt!tion# x6nited States v. Milwau(ee )efrigerator !ransit Co., 1&2
Ced% 2&2 >1(.'?)% xSee also +rancisco v. Me=ia A% :% $o% 1&1/12, 1& August
2..1%
(. N!t3e o$ the Pie&in/ Do&tine #!raders )o"al Ban( v. Court of $ppeals, 2/(
S!:A 1' >1((2?)
Piercing the veil of corporate entity re3uires the court to see through the
protective shroud which exempts its stoc=holders from lia*ilities that ordinarily,
they could *e su*6ect to, or distinguishes one corporation from a seemingly
separate one, were it not for the existing corporate fiction% xLim v. Court of
$ppeals -2- S!:A 1.2 #2...)%
+his !ourt has pierced the veil of corporate fiction in numerous cases where
it was used, among others, to avoid a 6udgment credit, to avoid inclusion of
corporate assets as part of the estate of a decedent, to avoid lia*ility arising from
de*t when made use of as a shield to perpetrate fraud andPor confuse legitimate
issues, or to promote unfair o*6ectives or otherwise to shield them% x)e"noso #*
v. Court of $ppeals A%:% $o% 11/12&12', 22 $ovem*er 2... also x)amoso v.
Court of $ppeals A%:% $o% 112&1/, , Decem*er 2...%
). When Pie&in/ Do&tine Not Appli&!4le#
0!1 Piercing the veil of corporate fiction is remedy of last resort and is not availa*le
when other remedies are still availa*le% 6mali v. C$, 1,( S!:A '2( #1((.)%
041 Piercing is not allowed unless the remedy sought is to ma=e the officer or
another corporation pecuniarily lia*le for corporate de*ts% 6mali v. C$, 1,(
S!:A '2( #1((.)? #ndophil !extile Mill 5or(ers 6nion,P!/5@ v. Calica, 2.'
S!:A /(2 #1((2)%
0&1 Piercing is not availa*le when the personal o*ligations of an individual are
sought to *e enforced against the corporation% x)obledo v. 0L)C 2-, S!:A
'2 #1((&)
F+he rationale *ehind piercing a corporationBs identity in a given case is
to remove the *arrier *etween 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 underta=ing certain proscri*ed activities% Oowever,
in the case at *ar, instead of holding certain individuals or person responsi*le
for an alleged corporate act, the situation has *een reversed% 0t is the
petitioner as a corporation which is *eing ordered to answer for the personal
lia*ility of certain individual directors, officers and incorporators concerned%
Oence, it appears to us that the doctrine has *een turned upside down
(
*ecause of its erroneous invocation%G +rancisco Motors Corp. v Court of
$ppeals, -.( S!:A 22, ,- #1((()%
0%1 +o disregard the separate 6uridical personality of a corporation, the wrongdoing
must *e clearly and convincingly esta*lished% 0t cannot *e presumed% +his is
elementary% +he organi@ation of the corporation at the time when the
relationship *etween the landowner and the developer were still cordial cannot
*e used as a *asis to hold the corporation lia*le later on for the o*ligations of
the landowner to the developer under the mere allegation that the corporation
is *eing used to evade the performance of o*ligation *y one of its ma6or
stoc=holders% xLuxuria Homes #nc. v. Court of $ppeals -.2 S!:A -1'
#1((() x-evelopment Ban( of the Philippines vs. Court of $ppeals A%:% $o%
12/2.., 1/ August 2..1%
0e1 Not A!!#i'a-#e to Teori/in$) Piercing of the veil of corporate fiction is not
allowed when it is resorted to 6ustify under a theory of co1ownership the
continued use and possession *y stoc=holders of corporate properties% Bo"er,
)oxas v. Court of $ppeals, 211 S!:A &2. >1((2?)%
+he piercing doctrine cannot *e availed of in order to dislodge from the
6urisdiction of the SE! a the petition for suspension of payments filed under
Section '#e) of Pres% Decree $o% (.21A, on the ground that the petitioning
individuals should *e treated as the real petitioners to the exclusion of the
petitioning corporate de*tor% F+he doctrine of piercing the veil of corporate
fiction heavily relied upon *y the petitioner is entirely misplaced, as said
doctrine only applies when such corporate fiction is used to defeat pu*lic
convenience, 6ustify wrong, protect fraud or defend crime%G x6nion Ban( of the
Philippines v. Court of $ppeals 2(. S!:A 1(, #1((,)%
!hanging of the petitionersBs su*sidiary lia*ilities *y converting them to
guarantors of *ad de*ts cannot *e done *y piercing the veil of corporate
identity% x)amoso v. Court of $ppeals A%:% $o% 112&1/, , Decem*er 2...%
#f) Piercing doctrine is meant to prevent fraud, and cannot *e employed to
perpetrate fraud or a wrong% /regorio $raneta #nc. v. !uason de Paterno and
*idal, (1 Phil% 2,/ #1('2)%
+he theory of corporate entity was not meant to promote unfair
o*6ectives or otherwise, nor to shield them% x*illanueva v. $dre, 122 S!:A
,2/ #1(,()%
#g) Piercing is a power *elonging to the court and cannot *e assumed
improvidently *y a sheriff% Cru3 v. -alisa", 1'2 S!:A &,2 #1(,2)%
). Con.e;3en&e. !n% Type. o$ Pie&in/ C!.e.< 6mali v. C$, 1,( S!:A '2(
>1((.?)
0!1 +he application of the doctrine to a particular case does not deny the
corporation of legal personality for any and all purposes, *ut only for the
particular transaction or instance for which the doctrine was applied% .oppel
1Phil.2 #nc. v. >atco, 22 Phil% &(/ #1(&/) x!antoco v. .aisahan ng Mga
Manggagawa sa La Campana, 1./ Phil% 1(, #1('()%
041 Cl!..i$i&!tion o$ the Pie&in/ C!.e.#
0i1 When the corporate entity is used to commit fraud or to do a
wrong #"fraud cases")
0ii1 When the corporate entity is merely a farce since the corporation
is merely the alter ego, *usiness conduit or instrumentality of a
person or another entity #"alter ego cases") and
0iii1 When the piercing the corporate fiction is necessary to achieve
6ustice or e3uity #"e3uity cases")%
+he three cases may appear together in one application% See ).+.
Suga" % Co. v. )e"es, 12 S!:A 2.. #1(/&)%
*. 5!3% C!.e.#
0!1 A&t. 4y the Contollin/ Sh!ehol%e< Where a stoc=holder, who has
a*solute control over the *usiness and affairs of the corporation, entered into a
contract with another corporation through fraud and false representations, such
stoc=holder shall *e lia*le 6ointly and severally with his co1defendant
1.
corporation even when the contract sued upon was entered into on *ehalf of
the corporation% 0amarco v. $ssociated +inance Co., 1( S!:A (/2 #1(/2)%
+he tests in determining whether the corporate veil may *e pierced are<
#1) the defendant must have control or complete domination of the other
corporationBs finances, policy and *usiness practices with regard to the
transaction attached #2) control must *e used *y the defendant to commit
fraud or wrong and #-) the aforesaid control or *reach of duty must *e the
proximate cause of the in6ury or loss complained of% Manila Hotel Corporation
v. 0L)C -&- S!:A 1 #2...) xAlso Lim v. Court of $ppeals -2- S!:A 1.2
#2...)%
041 8ne cannot evade civil lia*ility *y incorporating properties or the *usiness%
Palacio v. +el" !ransportation Co., ' S!:A 1.11 #1(/2)%
0&1 +he veil of corporation fiction may *e pierced when used to avoid a contractual
commitment against non1competition% *illa )e" !ransit #nc. v. +errer, 2'
S!:A ,&' #1(/,)%
0%1 +he Supreme !ourt found the following facts to *e legal *asis to pierce< 8ne
company was merely an ad6unct of the other, *y virtue of a contract for
security services, the former provided with security guards to safeguard the
latterBs premises *oth companies have the same owners and *usiness
address the purported sale of the shares of the former stoc=holders to a new
set of stoc=holders who changed the name of the corporation appears to *e
part of a scheme to terminate the services of the security guards, and *ust
their newly1organi@ed union which was then *eginning to *ecome active in
demanding the companyBs compliance with "a*or Standards laws% -e Leon v.
0L)C, A%:% $o% 112//1, -. 4ay 2..1%
0e1 P!ent+S34.i%i!y Rel!tion.= A$$ili!te. #)e"noso #* v. Court of $ppeals
A%:% $o% 11/12&12', 22 $ovem*er 2... Commissioner of #nternal )evenue
v. 0orton and Harrison, 11 S!:A 2.&, >1('&? !omas Lao Construction v.
0L)C, 22, S!:A 21/ >1((2?)%
1 Why is there inordinate showing of alter1ego elementsH
0e1 G3i%in/ Pin&iple. in 5!3% C!.e.<
#i) +here must have *een fraud or an evil motive in the affected
transaction, and the mere proof of control of the corporation *y itself
would not authori@e piercing and
#ii) +he main action should see= for the enforcement of pecuniary claims
pertaining to the corporation against corporate officers or
stoc=holders%
6. Alte+E/o C!.e.#
0!1 Where the stoc= of a corporation is owned *y one person where*y the
corporation functions only for the *enefit of such individual owner, the
corporation and the individual should *e deemed the same% $rnold v. 5illets
and Patterson Ltd., && Phil% /-& #1(2-)%
041 When the corporation is merely an ad6unct, *usiness conduit or alter ego of
another corporation, the fiction of separate and distinct corporation entities
should *e disregarded% x!an Boon Bee % Co. v. 'arencio 1/- S!:A 2.'
#1(,,)%
+he corporation veil cannot *e used to shield an otherwise *latant
violation of the prohi*ition against forum1shopping% Shareholders, whether
suing as the ma6ority in direct actions or as the minority in a derivative suit,
cannot *e allowed to trifle with court processes, particularly where, as in this
case, the corporation itself has not *een remiss in vigorously prosecuting or
defending corporate causes and in using and applying remedies availa*le to it%
x+irst Philippine #nternational Ban( v. Court of $ppeals, 2'2 S!:A 2'( #1((/)%
0&1 Employment of same wor=ers single place of *usiness, etc% La Campana
Coffee +actor" v. .aisahan ng Manggagawa, (- Phil% 1/. #1('-)%
+he doctrine that a corporation is a legal entity or a person in law distinct
from the persons composing it is merely a legal fiction for purposes of
convenience and to su*serve the ends of 6ustice% +his fiction cannot *e
extended to a point *eyond its reason and policy% Where, as in this case, the
corporation fiction was used as a means to perpetrate a social in6ustice or as a
vehicle to evade o*ligations or confuse the legitimate issues, it would *e
11
discarded and the two #2) corporations would *e merged as one, the first *eing
merely considered as the instrumentality, agency conduit or ad6unct of the
other% 0n this case, *ecause of the actions of management of the two
corporations, there was much confusion as to the proper employment of the
claimant% x$3cor Manufacturing #nc. v. 0L)C -.- S!:A 2/ #1((()%
0%1 5se of nominees% xMarvel Building v. -avid, ( Phil% -2/ #1('1)
%
0e1 Avoidance of tax% >utivo Sons Hardware v. Court of !ax $ppeals 1 S!:A 1/.
#1(/1) xLiddell % Co. v. Collector of #nternal )evenue,

2 S!:A /-2 #1(/1)%
0$1 4ixing of *an= deposit accounts% x)amire3 !elephone Corp. v. Ban( of
$merica, 2( S!:A 1(1 #1(/()%
0/1 Where it appears that two *usiness enterprises are owned, conducted, and
controlled *y the same parties, *oth law and e3uity will, when necessary to
protect the rights of third persons, disregard the legal fiction that two
corporations are distinct entities and treat them as identical% xSibagat !imber
Corp. v. /arcia, 21/ S!:A 2. #1((2)%
0h1 +hinly1capitali@ed corporations% McConnel v. Court of $ppeals, 1 S!:A 222
#1(/1)%
0i1 Parent1su*sidiary relationship% .oppel 1Phil.2 #nc. v. >atco, 22 Phil% (2 #1(&/)
xPhilippine *eterans #nvestment -evelopment Corporation v. C$, 1,1 S!:A
//( #1((.)%
0>1 Affiliated companies% x/uatson #nternational !ravel and !ours #nc. v. 0L)C
2-. S!:A ,1' #1((.)%
0?1 S3''!y o$ Po4!ti,e 5!&to.# Philippine 0ational Ban( vs. )itratto /roup
#nc. et al. A%:% $o% 1&2/1/, -1 9uly 2..1 xConcept Builders #nc. v. 0L)C,
2'2 S!:A 1&( #1((/)%
Whether the existence of the corporation should *e pierced depends on
3uestions of facts, appropriately pleaded% 4ere allegation that a corporation is
the alter ego of the individual stoc=holders is insufficient% +he presumption is
that the stoc=holders or officers and the corporation are distinct entities% +he
*urden of proving otherwise is on the party see=ing to have the court pierce
the veil of corporate entity% x)amoso v. Court of $ppeals A%:% $o% 112&1/, ,
Decem*er 2...%
0l1 G3i%in/ Pin&iple. in Alte+E/o C!.e.#
#i) +he doctrine applies in this case even in the a*sence of evil intent it
applies *ecause of the direct violation of a central corporate law
principle of separating ownership from management%
#ii) +he doctrine in such cased is *ased on estoppel< if stoc=holders do
not respect the separate entity, others cannot also *e expected to *e
*ound *y the separate 6uridical entity%
#iii) Piercing in alter ego cases may prevail even when no monetary
claims are sought to *e enforced against the stoc=holders or officers
of the corporation%
7. E;3ity C!.e.#
0!1 When used to confuse legitimate issues% !elephone &ngineering and Service
Co. #nc. *. 5CC, 1.& S!:A -'& #1(,1)%
041 When used to raise technicalities% x&milio Cano &nt. v. C#), 1- S!:A 2(1
#1(/')%
9. Pie&in/ Do&tine !n% D3e Po&e.. Cl!3.e
0!1 +he need to *ring a new case against the officer% McConnel v. Court of
$ppeals, 1 S!:A 22- #1(/1)%
#*) When corporate officers are sued in their official capacity when the corporation
was not made a party, the corporation is not denied due process% &milio Cano
&nterprises v. Court of #ndustrial )elations, 1- S!:A 2(1 #1(/')%
#c) Provided that evidential *asis has *een adduced during trial to apply the
piercing doctrine% 'acinto v. Court of $ppeals, 1(, S!:A 211 #1((1) x$rcilla
v. Court of $ppeals, 21' S!:A 12. #1((2)%
12
V. CLASSI5ICATIONS O5 CORPORATIONS
1. In Rel!tion to the St!te#
#a) Pu*lic corporations #Sec% -, Act $o% 1&'()
8rgani@ed for the government of the portion of the state #e%g%, *arangay,
municipality, city and province)
4a6ority shares *y the Aovernment does not ma=e an entity a pu*lic
corporation% x0ational Coal Co. v. Collector of #nternal )evenue, &/ Phil% ',-
#1(2&)%
#*) ;uasi1pu*lic corporations xMarilao 5ater Consumers $ssociates v. #$C, 2.1
S!:A &-2 #1((1)
Although ;oy Scouts of the Philippines does not receive any monetary or
financial su*sidy from the Aovernment, and that its funds and assets are not
considered government in nature and not su*6ect to audit *y the !8A, the fact that
it received a special charter from the government, that its governing *oard are
appointed *y the Aovernment, and that its purpose are of pu*lic character, for
they pertain to the educational, civic and social development of the youth which
constitute a very su*stantial and important part of the nation, it is not a pu*lic
corporation in the same sense that municipal corporation or local governments are
pu*lic corporation since its does not govern a portion of the state, *ut it also does
not have proprietary functions in the same sense that the functions or activities of
government1owned or controlled corporations such as the $ational Development
!ompany or the $ational Steel !orporation, is may still *e considered as such, or
under the 1(,2 Administrative !ode as an instrumentality of the Aovernment%
+herefore, the employees are su*6ect to the !ivil Service "aw% xBo" Scouts of the
Philippines v. 0L)C, 1(/ S!:A 12/ #1((1)%
0&1 Pi,!te Copo!tion #Sec% -, Act 1&'()
A government1owned or 1controlled corporation when organi@ed under the
!orporation !ode is still a private corporation% ;ut *eing a government1owned or
1controlled corporation ma=es it lia*le for laws and provisions applica*le to the
Aovernment or its entities and su*6ect to the control of the Aovernment%
xCervantes v. $uditor /eneral, (1 Phil% -'( #1('2)%
A private corporation is created *y operation of law under the !orporation
while a government corporation is normally created *y special law referred to often
as a charter% xBliss -ev. Corp. &mplo"ees 6nion v. Calle=a 2-2 S!:A 221
#1((&)%
+he doctrine that employees of government1owned and 1controlled
corporations, whether created *y special law or formed as su*sidiaries under the
general corporation law are governed *y the !ivil Service "aw and not *y the
"a*or !ode, has *een supplanted *y the 1(,2 !onstitution% +he present doctrine
in determining whether a government1owned or 1controlled corporation is su*6ect
to the !ivil Service "aw is the manner of its creation, such that government
corporations created *y special charter are su*6ect to the !ivil Service "aw, while
those incorporated under the general corporation law are governed *y the "a*or
!ode% xP0@C,&nerg" -evelopment Corp. v. 0L)C, 2.1 S!:A &,2 #1((1)
x-avao Cit" 5ater -istrict v. Civil Service Commission, 2.1 S!:A '(- #1((1)%
+he test to determine whether a corporation is government owned or
controlled, or private in nature is simple% 0s it created *y its own charter for the
exercise of a pu*lic function, or *y incorporation under the general corporation
lawH +hose with special charters are government corporations su*6ect to its
provisions, and its employees are under the 6urisdiction of the !ivil Service
!ommission, and are compulsory mem*ers of the Aovernment Service 0nsurance
System% xCamparedondo v. 0L)C, -12 S!:A &2 #1((()%
Section -1 of the !orporation !ode #"ia*ility of Directors and 8fficers) is
applica*le to corporations which have *een organi@ed *y special charters since
Sec% & of the !orporation !ode renders the provisions of thereof applica*le in a
supplementary manner to all corporations, including those with special or
individual charters, such as cooperatives organi@ed under Pres% Decree $o% 2/(,
so long as those provisions are not inconsistent with such charters% xBenguet
&lectric Cooperative #nc. v. 0L)C, 2.( S!:A '' #1((2)%
(. A. to Pl!&e o$ In&opo!tion#
#a) Domestic !orporation
1-
#*) Coreign !orporation #Sec% 12-)
). A. to P3po.e o$ In&opo!tion#
#a) 4unicipal or Pu*lic corporation
#*) :eligious corporation #Secs% 1.( and 11/)
#c) Educational corporations #Secs% 1./, 1.2 and 1., Sec% 2', ;%P% ;lg% 2-2)
#d) !harita*le, Scientific or 7ocational corporations
#e) ;usiness corporation
*. A. to N3'4e o$ :e'4e.#
#a) Aggregate !orporation
041 Copo!tion Sole #Secs% 11. to 11' x)oman Catholic $postolic $dministrator of
-avao #nc. v. L)C and the )egister of -eeds of -avao Cit", 1.2 Phil% '(/ #1('2)%
x-irector of Land v. #$C, 1&/ S!:A '.( #1(,/), which held that a
corporation sole has no nationality, overturned the previous doctrine #x)epublic v.
*illanueva, 11& S!:A ,2' >1(,2? and )epublic v. #glesia 0i Cristo, 122 S!:A /,2
>1(,&?) that a corporation sole is dis3ualified to ac3uire or hold aliena*le lands of
the pu*lic domain, *ecause of the constitutional prohi*ition 3ualifying only
individuals to ac3uire land of the pu*lic domain and the provision under the Pu*lic
"and Act which applied only to Cilipino citi@ens or natural persons% x)epublic v.
#glesia ni Cristo, 122 S!:A /,2 #1(,&) x)epublic v. #$C, 1/, S!:A 1/' #1(,,)%
6. A. to Le/!l St!t3.#
0!1 De 0*re Copo!tion
041 De Fa'to Copo!tion #Sec% 2.)
0&1 Copo!tion 4y E.toppel #Sec% 21)
7. A. to E-i.ten&e o$ Sh!e. #Secs% - and ')
#a) Stoc= !orporation
#*) $on1Stoc= !orporation
VI. CORPORATE CONTRACT LAW
See relevant portion of 70""A$5E7A, Corporate Contract
Law -, A+E$E8 "%9% 1 #$o% 2, 9une 1((&)
1% Pe+In&opo!tion Cont!&t.
0!1 Who Ae Po'ote.@
FPromoterG is a person who, acting alone or with others, ta=es initiative in
founding and organi@ing the *usiness or enterprise of the issuer and receives
consideration therefor% #Sec% -%1., Securities :egulation !ode >:%A% ,2((?)
041 N!t3e o$ Pe+in&opo!tion A/ee'ent. #Secs% /. and /1 Ba"la v. Silang
!raffic Co. #nc., 2- Phil% ''2 >1(&2?)
0&1 Theoie. on Li!4ilitie. $o Po'oteA. Cont!&t. #Caga"an +ishing
-evelopment Co. #nc. v. !eodoro Sandi(o, /' Phil% 22- >1(-2? )i3al Light % #ce
Co. #nc. v. Public Service Commission, 2' S!:A 2,' >1(/,? Caram 'r. v. C$,
1'1 S!:A -22 >1(,2?)%
(. De Fa'to Copo!tion #Sec% 2.)
0!1 Ele'ent. $o E-i.ten&e o$ De 5!&to Copo!tion<
#1) 7alid law under which incorporated
#2) Attempt in good faith to incorporate Fcolora*le
complianceG
#-) Assumption of corporate powers and
1&
#&) 0ssuance of certificate of incorporation% $rnold Hall v.
Piccio, ,/ Phil% /-& #1('.)%
). Copo!tion 4y E.toppel Do&tine #Sec% 21 Salvatierra v. /arlitos, 1.- Phil% 2'2
>1(',?? $lbert v. 6niversit" Publishing Co., 1- S!:A ,& >1(/'? #nternational &xpress
!ravel % !our Services #nc. v. Court of $ppeals -&- S!:A /2& #2...) x$sia
Ban(ing Corporation v. Standard Products, &/ Phil% 1&' >1(2&? xMadrigal Shipping
Co. #nc. v. @gilvie, Supreme !ourt Advanced Decision, '' 8%A% $o% -', p% 2--1)%
An individual should *e held personally lia*le for the unpaid o*ligations of the
unincorporated association in whose *ehalf he entered into such transactions, under
the principle that Fany person acting or purporting to act on *ehalf of a corporation
which has no valid existence assumes such privileges and *ecomes personally lia*le
for contract entered into or for other acts performed as such agent%G #nternational
&xpress !ravel % !our Services #nc. v. Court of $ppeals -&- S!:A /2& #2...)%
0!1 N!t3e o$ Do&tine
!orporation *y estoppel doctrine is founded on principles of e3uity and is
designed to prevent in6ustice and unfairness% 0t applies when persons assume to
form a corporation and exercise corporate functions and enter into *usiness
relations with third persons% Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who
therefore =now that it has not *een registered, there is no corporation *y estoppel%
Lo3ano v. -e Los Santos, 22& S!:A &'2 #1((2)
A party cannot challenge the personality of the plaintiff as a duly organi@ed
corporation after having ac=nowledged same when entering into the contract with
the plaintiff as such corporation for the transportation of its merchandise% #x@hta
-ev. Co. v. Steamship Pompe" &( Phil% 112 >1(2/?) the same principle applied in
xCompania $gricole de 6ltramar v. )e"es, & Phil% 1 >1(11? *ut that case pertained
to a commercial partnership which re3uired registration in the registry under the
terms of the !ode of !ommerce%
041 T"o Le,el.< #i) With "fraud" and #ii) Without "fraud"
When incorporating individuals represent themselves to *e officers of the
corporation never duly registered with SE!, and engages in the name of purported
corporation in illegal recruitment, they are estopped from claiming that they are not
lia*le as corporate officers, since Section 2' of !orporation !ode provides that all
persons who assume to act as a corporation =nowing it to *e without authority to
do so shall *e lia*le as general partners for all the de*ts, lia*ilities and damages
incurred or arising as a result thereof% xPeople v. /arcia, 221 S!:A /21 #1((2)%
An individual cannot avoid his lia*ilities to the pu*lic as an incorporator of a
corporation whose incorporation was not consummated, when he held himself out
as officer of the corporation and received money from applicants who availed of
their services% Such individual is estopped from claiming that they are not lia*le as
corporate officers for illegal recruitment under the corporation *y estoppel doctrine
under Sec% 2' of the !orporation !ode which provides that all persons who
assume to act as a corporation =nowing it to *e without authority to do so shall *e
lia*le as general partners for all the de*ts, lia*ilities and damages incurred or
arising as a result thereof% xPeople v. Pineda, A%:% $o% 112.1., 1, April 1((2
#5npu*lished)%
*. T3.t 53n% Do&tine
See 70""A$5E7A, "!he !rust +und -octrine 6nder
Philippine Corporate Setting," -1 A+E$E8 "%9% #$o% 1, Ce*%
1(,2)%
0!1 Co''e&i!lBCo''on L!" Pe'i.e on E;3ity ,i.+!+,i. De4t.
041 N!t3e o$ Do&tine
5nder the trust fund doctrine, the capital stoc=, property and other assets of
the corporation are regarded as e3uity in trust for the payment of the corporate
creditors% xCommissioner of #nternal )evenue v. Court of $ppeals -.1 S!:A 1'2
#1((()%
+he re3uirement of unrestricted retained earnings to cover the shares is
*ased on the trust fund doctrine which means that the capital stoc=, property and
other assets of a corporation are regarded as e3utiy in trust for the payment of
corporate creditors% +he reason is that creditors of a corporation are preferred over
the stoc=holders in the distri*ution of corporate assets% +here can *e no
1'
distri*ution of assets among the stoc=holders without first paying corporate
creditors% Oence, any disposition of corporate funds to the pre6udice of creditors is
null and void% xBoman &nvironmental -ev. Corp. v. C$, 1/2 S!:A '&. #1(,,)%
+he F+rust CundG doctrine considers the su*scri*ed capital as a trust fund for
the payment of the de*ts of the corporation, to which the creditors may loo= for
satisfaction% 5ntil the li3uidation of the corporation, no part of the su*scri*ed
capital stoc= may *e turned over or released to the stoc=holder #except in the
redemption of the redeema*le shares) without violating this principle% +hus
dividends must never impair the su*scri*ed capital stoc= su*scription
commitments cannot *e condoned or remitted nor can the corporation *uy its own
shares using the su*scri*ed capital as the consideration therefore% 0!C v. Court
of $ppeals -11 S!:A '.,, '1&1'1' #1((()%
0&1 Copo!tion P3&h!.in/ O"n Sh!e. #Secs% ,, &1, &- and 122, last paragraph
Phil. !rust Co. v. )ivera, && Phil% &/( >1(2-? Steinberg v. *elasco, '2 Phil% ('-
>1(2(?)
VII. ARTICLES O5 INCORPORATION
See relevant portions of 70""A$5E7A, Corporate Contract
Law -, A+E$E8 "%9% 1 #$o% 2, 9une 1((&)%
1. N!t3e o$ Ch!te + +he charter is in the nature of a contract *etween the corporation
and the Aovernment% /overnment of P.#. v. Manila )ailroad Co%, '2 Phil% /(( #1(2()%
(. Po&e%3e !n% Do&3'ent!y Re;3ie'ent. #Sec% 1& and 1')
0!1 A. to N3'4e !n% Re.i%en&y o$ In&opo!to. #Sec% 1.)
041 Copo!te N!'e #Secs% 1,, 1&#1) and &2 )ed Line !rans. v. )ural !ransit, /.
Phil% '&( >1(-&?)%
A corporation may change its name *y the amendment of its articles of
incorporation, *ut the same is not effective until approved *y the SE!% xPhilippine
+irst #nsurance Co. v. Hartigan, -& S!:A 2'2 #1(2.)
A change in the corporate name does not ma=e a new corporation, and
whether affected *y special act or under a general law, has no effect on the
identity of the corporation, or on its property, rights, or lia*ilities% x)epublic
Planters Ban( v. C$, 21/ S!:A 2-, #1((2)%
Similarity in corporate names *etween two corporations would cause
confusion to the pu*lic especially when the purposes stated in their charter are
also the same type of *usiness% x6niversal Mills Corp. v. 6niversal !extile Mills
#nc., 2, S!:A /2 >1(22?)%
A corporation has not right to intervene in a suit using a name other than its
registered name if a corporation legally and truly wants to intervene, it should
have used its corporate name as the law re3uires and not another name which it
had not registered% xLaureano #nvestment and -evelopment Corporation v. Court
of $ppeals, 222 S!:A 2'- #1((2)%
+here would *e no denial of due process when a corporation is sued and
6udgment is rendered against it under its unregistered trade name, holding that a
corporation may *e sued under the name *y which it ma=es itself =nown to its
wor=ers% xPison,$rceo $gricultural -evelopment Corp. v. 0L)C 22( S!:A -12
#1((2)
0&1 P3po.e Cl!3.e #Secs% 1&#2) and &2 6" Siuliong v. -irector of Commerce and
#ndustr", &. Phil% '&1 >1(1(?)
0%1 Copo!te Te' #Sec% 11)%
$o extension can *e effected once dissolution stage has *een reached%
x$lhambra Cigar v. S&C, 2& S!:A 2/( #1(/,)%
0e1 Pin&ip!l Pl!&e o$ B3.ine..
Place of residence of the corporation is the place of its principal office%
xClavecilla )adio S"stem v. $ntillon, 1( S!:A -2( #1(/2)
+he residence of its president is not the residence of the corporation
*ecause a corporation has a personality separate and distinct from that of its
officers and stoc=holders% xS" v. !"son &nterprises #nc., 11( S!:A -/2 #1(,2)%
0$1 :ini'3' C!pit!li8!tion #Sec% 12)
1/
1 Why is maximum capitali@ation re3uired to *e indicatedH
0/1 S34.&iption !n% P!i%+3p Re;3ie'ent. #Sec% 1-)
0h1 Step. !n% Do&3'ent. Re;3ie% in SEC
). Go3n%. $o Di.!ppo,!l #Sec% 12)
When the proposed articles presented show that the o*6ect of incorporation is to
organi@e a *arrio of a given municipality into a separate corporation for the purpose of
ta=ing possession and having control of all municipal property within the *arrio so
incorporated and administer it exclusively for the *enefit of the residents, the o*6ect is
unlawful and the articles can *e denied registration% x$suncion v. -e >riarte, 2, Phil%
/2 >1(1&?)%
*. A'en%'ent. to Ati&le. o$ In&opo!tion #Sec% 1/)
6. Co''en&e'ent o$ Copo!te E-i.ten&e #Sec% 1()
VIII. B<+LAWS
See relevant portions of 70""A$5E7A, "Corporate Contract
Law" -, A+E$E8 "%9% 1 #$o% 2, 9une 1((&)%
1. N!t3e !n% 53n&tion. #/o(ongwei v. S&C, ,( S!:A --2 >1(2(? PeAa v. C$, 1(-
S!:A 212 >1((1?)
As the Frules and regulations or private laws enacted *y the corporation to
regulate, govern and control its own actions, affairs and concerns and its stoc=holders
or mem*ers and directors and officers with relation thereto and among themselves in
their relation to it,G *y1laws are indispensa*le to corporations in this 6urisdiction% +hese
may not *e essential to corporate *irth *ut certainly, these are re3uired *y law for an
orderly governance and management of corporations% $onetheless, failure to file them
within the period re3uired *y law *y no means tolls the automatic dissolution of a
corporation% Lo"ola /rand *illas Homeowners 1South2 $ssociation #nc. v. Court of
$ppeals 22/ S!:A /,1 #1((2)%
0!1 Co''on L!" Li'it!tion. on By+L!".
0i1 By+L!". C!nnot Be Cont!y to L!" !n% Ati&le. o$ In&opo!tion
A *y1law provision granting to a stoc=holder a permanent representation
in the ;oard of Directors is contrary to the !orporation !ode re3uiring all
mem*ers of the ;oard to *e elected *y the stoc=holders or mem*ers% Even
when the mem*ers of the association may have formally adopted the
provision, their action would *e of no avail *ecause no provision of the *y1laws
can *e adopted if it is contrary to law% x/race Christian High School v. Court
of $ppeals 2,1 S!:A 1-- #1((2)%
Although the right to amend *y1laws lies solely in the discretion of the
employer, this *eing in the exercise of management prerogative or *usiness
6udgment, such right cannot impair the o*ligation of existing contracts or rights
or undermine the right to security of tenure of a regular employee% 8therwise,
it would ena*le an employer to remove any employee from employment *y the
simple expediency of amending its *y1laws and providing the position shall
cease to exist upon occurrence of a specified event% xSalafranca v. Philamlife
1Pamplona2 *illage Homeowners $ssociation #nc., -.. S!:A &/(, &2(
#1((,)%
0ii1 By+L!". C!nnot Be Une!.on!4le o Be Cont!y to N!t3e o$ By+l!".%
x/overnment of the Philippine #slands v. &l Hogar +ilipino, '. Phil% -((
#1(22)%
Authority granted to a corporation to regulate the transfer of its stoc=
does not empower corporation to restrict the right of a stoc=holder to transfer
his shares, *ut merely authori@es the adoption of regulations as to the
formalities and procedure to *e followed in effecting transfer% x!homson v.
Court of $ppeals 2(, S!:A 2,. #1((,)%
;y1laws are intended merely for the protection of the corporation, and
prescri*e regulation, not restrictions they are always su*6ect to the charter of
the corporation% x)ural Ban( of Salinas #nc. v. C$, 21. S!:A '1. #1((2),
12
4uoting from +hompson on !orporation Sec% &1-2, cited in x+leischer v.
0olasco, &2 Phil% ',-.
0iii1 By+L!". C!nnot Di.&i'in!te
041 Bin%in/ E$$e&t. o$ By+l!". #China Ban(ing Corp. v. Court of $ppeals, 22. S!:A
'.- >1((2?)%
F$either can we concede that such contract would *e invalid 6ust *ecause
the signatory thereon was not the !hairman of the ;oard which allegedly violated
the corporationBs *y1laws% Since *y1laws operate merely as internal rules among
the stoc=holders, they cannot affect or pre6udice third persons who deal with the
corporation, unless they have =nowledge of the same%G PM# Colleges v. 0L)C, 222
S!:A &/2 #1((2)%
(. A%option Po&e%3e #Sec% &/)
Section &/ of the !orporation, which re3uires the filing of *y1laws, does not
expressly provide for the conse3uence of their non1filing within the period provided
therein however, Pres% Decree (.21A allows the SE! to suspend or revo=e, after
proper notice and hearing, the franchise or certificate of registration of corporations
which fail to file their *y1laws% !learly, there can *e no automatic corporate dissolution
simply *ecause the incorporators failed to a*ide *y the re3uired filing of *y1laws, and
there is no outright FdemiseG of corporate existence% Proper notice and hearing are
cardinal components of due process in any democratic institution, agency or society,
which would re3uire that the incorporators must *e given the chance to explain their
neglect or omission and remedy the same% xLo"ola /rand *illas Homeowners 1South2
$ssociation #nc. v. Court of $ppeals 22/ S!:A /,1 #1((2)%
). Content. #Sec% &2)
*. A'en%'ent. #Sec% &,)
Power to amend may *e delegated to the *oard of directors
IC. CORPORATE POWERSD AUTHORIT< AND ACTIVITIES
1. Copo!te Po"e !n% C!p!&ity #Art% &/, !ivil !ode Secs% -/ and &' Land Ban( of
the Philippines v. C@$, 1(. S!:A 1'& >1((.?)
A corporation has no power except those expressly conferred on it *y the
!orporation !ode and those that are implied or incidental to its existence% 0n turn, a
corporation exercises said powers through its *oard of directors andPor its duly authori@ed
officers and agents, since the physical acts of the corporation, li=e the signing of
documents, can *e performed only *y natural persons duly authori@ed for the purpose of
*y corporate *y1laws or *y a specific act of the *oard of directors% x)e"noso #* v. Court
of $ppeals A%:% $o% 11/12&12', 22 $ovem*er 2...%
Precisely *ecause the corporation is such a prevalent and dominating factor in
the *usiness life of the country, the law has to loo= carefully into the exercise of powers
*y these artificial persons it has created% )e"noso #* v. Court of $ppeals A%:% $o%
11/12&12', 22 $ovem*er 2...%
0!1 Cl!..i$i&!tion o$ Copo!te Po"e.# E1!ress2 I3!#ie%2 an% In'i%enta#
+here is *asis to rule that the act of issuing the chec=s on *ehalf of the
corporation was well within the am*it of a valid corporate act, for it was for
securing a loan to finance the activities of the corporation, hence, not an ultra
vires act% $trium Management Corporation vs. Court of $ppeals, A%:% $o% 1.(&(1,
2, Ce*ruary 2..1%
041 Whee Copo!te Po"e i. Lo%/e% #Sec% 2-)
5nless otherwise provided *y the !orporation !ode, corporate powers, such
as the power to enter into contracts, are exercised *y the ;oard of Directors%
Oowever, the ;oard may delegate such powers to either an executive committee
or officials or contracted managers, which delegation, except for the executive
committee, must *e for specific purposes% +he delegated officers ma=es the latter
agents of the corporation, and rules of agency as to the *inding effects of their
acts would apply% Cor such officers to *e deemed fully clothed *y the corporation
1,
to exercise a power of the ;oard, the latter must specially authori@e them to do so%
x$BS,CB0 Broadcasting Corporation v. Court of $ppeals, -.1 S!:A '22 #1((()%
(. U#tra 4ires A&t.
See relevant portions of 70""A$5E7A, Corporate Contract
Law -, A+E$E8 "%9% 1 #$o% 2, 9une 1((&)%
0!1 Con&ept !n% Type. #Sec% &')
An ultra vires act is one committed outside the o*6ect for which a corporation
is created as define *y the law of its organi@ation and therefore *eyond the power
conferred upon it *y law%G +he term Fultra vireG is Fdistinguished from an illegal act
from the former is merely voida*le which may *e enforced *y performance,
ratification, or estoppel, while the latter is void and cannot *e validated% $trium
Management Corporation vs. Court of $ppeals, A%:% $o% 1.(&(1, 2, Ce*ruary
2..1%
041 R!ti$i&!tion o$ U#tra 4ires A&t.# #Pirovano v. -e la )ama Steamship Co. #nc., (/
Phil% --' >1('&? Carlos v. Mindoro Sugar Co., '2 Phil% -&- >1(-2? )epublic v.
$co=e Mining Co., - S!:A -/1 >1(/-? Crisologo 'ose v. C$, 122 S!:A '(&
>1(,(?
0i1 Teory o" Esto!!e# or Rati"i'ation
0n order to ratify the unauthori@ed act of an agent and ma=e it *inding on
the corporation, it must *e shown that the governing *ody or officer authori@ed
to ratify had full and complete =nowledge of all the material facts connected
with the transaction to which it relates% :atification can never *e made on the
part of the corporation *y the same person who wrongfully assume the power
to ma=e the contract, *ut the ratification must *e *y the officer or governing
*ody having authority to ma=e such contract% +he act or conduct for which the
corporation may *e lia*le under the doctrine of estoppel must *e *y those of
the corporation, its governing *ody or authori@ed officers, and not those of the
purported agent who is himself responsi*le for the misrepresentation% x*icente
v. /eralde3, '2 S!:A 21. #1(2-)%
When the counsel representing the corporation in a collection suit
admits on *ehalf of the corporation that the latter admitted culpa*ility for
personal loans o*tained *y its corporate officers, such admission cannot *e
given legal effect to the detriment of the corporation% +he admission made in
the answer *y the counsel for the corporation was Fwithout any ena*ling act or
attendant ratification of corporate act,G as would authori@e or even ratify such
admission% 0n the a*sence of such ratification or authority, such admission
does not *ind the corporation% Also, the letter issued *y the corporate officers
who o*tained the loan Fas indicating the corporate lia*ility of the corporation,G
cannot also serve to ma=e the corporation lia*le% +he documents and
admissions cannot have the effect of a ratification of an unauthori@ed act%
:atification can never *e made on the part of the corporation *y the same
persons who wrongfully assume the power to ma=e the contract, *ut the
ratification must *e *y the officers as governing *ody having authority to ma=e
such contract% x$guen3a v. Metropolitan Ban( and !rust Co. 221 S!:A 1
#1((2)%
0ii1 Do'trine o" A!!arent A*tority #Prime 5hite Cement Corp. v. #ntermediate
$ppellate Court, 22. S!:A 1.-, 11-111& >1((-? +rancisco v. /S#S, 2 S!:A
'22 >1(/-?)
A contract signed *y the PresidentP!hairman without authority from the
;oard of Directors is void% Although the *y1laws grant authority to the
President "to execute and sign for and in *ehalf of the corporation all contracts
and agreements which the corporation may enter into," the same presupposes
a prior act of the corporation exercised through its ;oard of Directors% >ao .a
Sin !rading v. C$, 2.( S!:A 2/- #1((2)%
Although an officer or agent acts without, or in excess of, his actual
authority if he acts within the scope of an apparent authority with which the
corporation has clothed him *y holding him out or permitting him to appear as
having such authority, the corporation is *ound there*y in favor of a person
who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the
*usiness, or a particular *ranch of it, continuously and pu*licly, for a
considera*le time% >ao .a Sin !rading v. C$, 2.( S!:A 2/- #1((2)%
1(
Persons who deal with corporate agents within circumstances showing
that the agents are acting in excess of corporate authority, may not hold the
corporation lia*le% x!raders )o"al Ban( v. Court of $ppeals, 2/( S!:A /.1
#1((2) also Art% 1,,-, !ivil !ode%
+he authority of a corporate officer in dealing with third persons may *e
actual or apparent% % % the principal is lia*le for the o*ligations contracted *y
the agent% +he agentMs apparent representation yields to the principalMs true
representation and the contract is considered as entered into *etween the
principal and the third person% x+irst Philipine #nternational Ban( v. Court of
$ppeals, 2'2 S!:A 2'( #1((/)%
0f a corporation =nowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the pu*lic as
possessing the power to do those acts and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, *e estopped from
denying the agentBs authority% xSoler v. Court of $ppeals A%:% $o% 12-,(2, 21
4ay 2..1%
5nder Article 1,(, of the !ivil !ode, the acts of an agent *eyond the
scope of his authority do no *ind the principal unless the latter ratifies the same
expressly or implied% 0t also *ears emphasi@ing that when the third person =nows
that the agent was acting *eyond his power or authority, the principal can not *e
held lia*le for the acts of the agent% 0f the said third person is aware of such
limits of authority, he is to *lame, and is not entitled to recover damages from
the agent, unless the latter undertoo= to secure the principalBs ratification% 0n the
case of the corporation as the principal, there was no such ratification%
+herefore, when the officer entered into the speculative contracts without
securing the ;oardBs approval, nor did he su*mit the contracts to the ;oard after
their consummation nor were they recorded in the *oo=s of the corporation,
there was, in fact, no occasion at all for ratification% xSafic $lcan % Cie. *.
#mperial *egetable Co. A%:% $o% 12/2'1, 2, 4arch 2..1%
0iii1 Theoy o$ No St!te D!'!/e 0Harden v. Benguet Consolidated Mining Co., ',
Phil% 1&. >1(--?)%
). Spe&i$i& 0E-pe..1 Po"e.
0!1 En3'e!te% Po"e. 0Se&.. )71
&xample of Poor -raftsmanship<
When the article of incorporation expressly provides that the purpose of the
corporation was to Fengage in the transportation of person b" water,G such
corporation cannot engage in the *usiness of land transportation, which is an
entirely different line of *usiness, and, for which reason, may not ac3uire any
certificate of pu*lic convenience to operate a taxica* service% xLuneta Motor Co.
v. $.-. Santos #nc%, ' S!:A ,.( >1(/2?)%
Power to Sue
5nder section -/ of the !orporation !ode, in relation to Section 2-, it is
clear that where a corporation is an in6ured party, its power to sue is lodged with its
*oard of directors or trustees% A minority stoc=holder and mem*er of the ;oard,
who fails to show any proof that he was authori@ed *y the ;oard of Directors, has
no such power or authority to sue on the corporationBs *ehalf% $or can we uphold
this as a derivative suit% Cor a derivative suit to prosper, it is re3uired that the
minority stoc=holder suing for and on *ehalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on *ehalf of the
corporation and all other stoc=holders similarly situated who may wish to 6oin him
in the suit% +here is now showing that petitioner has complied with the foregoing
re3uisites% x!am 5ing !a( v. Ma(asiar A%:% 122&'2, 2( 9anuary 2..1%
041 Po"e to E-ten% o Shoten Copo!te Te' #Secs% -2 and ,1 >1?)
0&1 Po"e to In&e!.e o De&e!.e C!pit!l Sto&? #Sec% -,)
Prior to SE! approval of the increase in the authori@ed capital stoc=, and
despite the ;oard resolution approving the increase in capital stoc=, and the
receipt of payment on the future issues of the shares from the increased capital
stoc=, such funds do not constitute part of the capital stoc= of the corporation until
approval of the increase *y SE!% xCentral !extile Mills #nc. v. 0ational 5ages
and Productivit" Commission, 2/. S!:A-/, #1((/)%
2.
A reduction of capital to 6ustify the mass layoff of employees, especially of
union mem*ers, amounts to nothing *ut a premature and plain distri*ution of
corporate assets to o*viate a 6ust hearing to la*or of the vast profits o*tained *y its
6oint efforts with capital through the years, and would constitute unfair la*or
practice% xMadrigal % Co. v. Bamora, 1'1 S!:A -'' >1(,2?)
0%1 In&3D Ce!te o In&e!.e Bon%e% In%e4te%ne.. #Sec% -,)
0e1 Sell o Di.po.e o$ A..et. #Sec% &.)%
Sale *y the ;oard of the only property of the corporation without compliance
with the provisions of Sec% &. of the !orporation !ode re3uiring the ratification of
mem*ers representing at least two1thirds of the mem*ership, would ma=e the sale
null and void% x#slamic -irectorate of the Philippines v. Court of $ppeals, 222
S!:A &'& #1((2) also xPeAa v. C$, 1(- S!:A 212 #1((1)%
0$1 In,e.t Copo!te 53n%. in Anothe Copo!tion o B3.ine.. o 5o Any Othe
P3po.e #Sec% &2 -e la )ama v. Ma,ao Sugar Central Co%, 22 S!:A 2&2 >1(/(?)%
0/1 De&l!e Di,i%en%. #Sec% &- 0ielson % Co. v. Lepanto Consolidated Mining Co.,
2/ S!:A '&. >1(/,?)%
Stoc= dividend is the amount that the corporation transfers from its surplus
profit account to its capital account% 0t is the same amount that can loosely *e
terms as the Ftrust fundG of the corporation% x0ational !elecommunications
Commission v. Court of $ppeals -11 S!:A '.,, '1&1'1' #1((()%
Although the certificates of stoc= granted the stoc=holder the right to receive
3uarterly dividends of 1E, cumulative and participating, the stoc=holders do not
*ecome entitled to the payment thereof as a matter of right without necessity of a
prior declaration of dividends% % % ;oth Sec% 1/ of the !orporation "aw and Sec% &-
of the present !orporation !ode prohi*it the issuance of any stoc= dividend
without the approval of stoc=holders, representing not less than two1thirds #2P-) of
the outstanding capital stoc= at a regular or special meeting duly called for the
purpose% +hese provisions underscore the fact that payment of dividends to a
stoc=holder is not a matter of right *ut a matter of consensus% Curthermore,
Finterest *earing stoc=sG, on which the corporation agrees a*solutely to pay
interest *efore dividends are paid to the common stoc=holders, is legal only when
construed as re3uiring payment of interest as dividends from net earnings or
surplus only% x)epublic Planters Ban( v. $gana, 2/( S!:A 1 #1((2)%
0i1 Ente into :!n!/e'ent Cont!&t. #Sec% && 0ielson % Co. #nc. v. Lepanto
Consolidated Mining, 2/ S!:A '&. >1(/,? )icafort v. Mo"a, 1(' S!:A 2&2, at
pp% 2//12/2 >1((1?)% Why the difference in rule *etween entity and individualH
0>1 Othe Po"e.
. To Se## Lan% an% Oter Pro!erties
A corporation whose primary purpose is to mar=et, distri*ute, export and
import merchandise, the sale of land is not within the actual or apparent
authority of the corporation acting through its officers, much less when acting
through the treasurer% "i=ewise Article 1,2& and 1,2, of the !ivil !ode re3uires
that when land is sold through an agent, the agentBs authority must *e in writing,
otherwise the sale is void% xSan 'uan Structural and Steel +abricators #nc. v.
Court of $ppeals, 2(/ S!:A /-1, /&' #1((,)%
. To &orrow F*n%s
+he power to *orrow money is one of those cases where even a special
power of attorney is re3uired under Art% 1,2, of the $ew !ivil !ode% +here is
invaria*ly a need of an ena*ling act of the corporation to *e approved *y its
;oard of Directors% +he argument that the o*taining of loan was in accordance
with the ordinary course of *usiness usages and practices of the corporation is
devoid of merit *ecause the prevailing practice in the corporation was to
explicitly authori@e an officer to contract loans in *ehalf of the corporation%
xChina Ban(ing Corp. v. Court of $ppeals, 22. S!:A '.- #1((2)%
. To Pro+i%e Grat*ity Pay "or E3!#oyees
Providing gratuity pay for its employees is one of the express powers of a
corporation under the !orporation !ode, and cannot *e considered to *e ultra
21
vires to avoid any lia*ility arising from the resolution granting such gratuity pay%
xLope3 )ealt" v. +ontecha, 2&2 S!:A 1,-, 1(2 #1((')%
. To Donate
. To Enter Into Partnersi!, 0oint 4ent*re% !uason % Co. v. Bolanos, (' Phil%
1./ #1('&)%
C. DIRECTORSD TRUSTEES AND O55ICERS
1. Po"e. o$ Bo!% o$ Die&to. o T3.tee. #Sec% 2- /amboa v. *ictoriano, (. S!:A
&. >1(2(?)%
0!1 T"o Theoie. on So3&e o$ Po"e o$ Bo!% o$ Die&to. #$ngeles v. Santos, /&
Phil% /(2 >1(-2?)%
041 Bo!% :3.t A&t A. Bo%y #Sec% 2' !he Board of Li4uidators v. Heirs of Maximo
M. .alaw, 2. S!:A (,2 >1(/2? )amire3 v. @rientalist Co. and +ernande3, -,
Phil% /-& >1(1,? $cuAa v. Batac Producers Cooperative Mar(eting $ssociation,
2. S!:A '2/ >1(/2?)%
+he general rule is that a corporation, through its *road of directors, should
act in the manner and within the formalities, if any, prescri*ed *y its charter or *y
the general law% +hus, directors must act as a *ody in a meeting called pursuant to
the law or the corporationMs *y1laws, otherwise, any action ta=en therein may *e
3uestioned *y any o*6ecting director or shareholder% ;e that as it may,
6urisprudence tells us that an action of the *oard of directors during a meeting,
which was illegal for lac= of notice, may *e ratified either expressly, *y the action
of the directors in su*se3uent legal meeting, or impliedly, *y the corporationMs
su*se3eunt course of conduct% xLope3 )ealt" v. +ontecha, 2&2 S!:A 1,-, 1(2
#1((')%
0&1 E$$e&t. o$ ! EBo/3.F Bo!%
+he acts or contracts effected *y a *ogus *oard would *e void pursuant to
Art% 1-1, of the !ivil !ode *ecause of the lac= of FconsentG% #slamic -irectorate of
the Philippines v. Court of $ppeals, 222 S!:A &'& #1((2)%
0%1 E-e&3ti,e Co''ittee #Sec% -')
(. BUSINESS 2UDG:ENT RULE #Montelibano v. Bacolod,Murcia Miling Co. #nc., '
S!:A -/ >1(/2? Philippine Stoc( &xchange #nc. v. Court of $ppeals 2,1 S!:A 2-2
>1((2?)
;oard mem*ers and officers who purport to act for and in *ehalf of the
corporation, =eep within the lawful scope of their authority in so acting and act in
good faith, do not *ecome lia*le, whether civilly or otherwise, for the
conse3uences of their acts% +hose acts, when they are such a nature and are done
under such circumstances, are properly attri*uted to the corporation alone and no
personal lia*ility is incurred *y such officers and ;oard mem*ers% xBenguet
&lectric Cooperative #nc. v. 0L)C, 2.( S!:A '' #1((2)
). G3!li$i&!tion. o$ Die&to. !n% T3.tee. #Secs% 2- and 22 /o(ongwei 'r. v. S&C,
,( S!:A --/ >1(2(?)%
0!1 A director must own at least one share of stoc= #xPeAa v. C$, 1(- S!:A 212
>1((1? x-etective % Protective Bureau #nc. v. Cloribel, 2/ S!:A 2'' >1(/(?)
041 4ere *eneficial ownership in a voting trust arrangement no longer 3ualifies # Lee v.
C$, 2.' S!:A 2'2 >1((2?)%
*. Ele&tion o$ Die&to. !n% T3.tee.
0!1 Directors #Secs% 2& and 2/ Premium Marble )esources v. Court of $ppeals 2/&
S!:A 11 >1((/?)%
041 +rustee #Secs% (2 and 1-,)
0&1 C3'3l!ti,e Votin/ #Sec% 2& Cumulative *oting in Corporate &lections<
#ntroducing Strateg" in the &4uation -' S85+O !A:8"0$A "% :E7% 2(')
6. V!&!n&y in Bo!% #Sec% 2()
22
;y1law provision or the practice giving a stoc=holder a permanent seat in the
;oard of Directors would *e against the provision of Sections 2, and 2( of the
!orporation !ode which re3uires mem*er of the *oard of corporations to *e elected%
0n addition, Section 2- of the !orporation !ode which provides for the powers of the
;oard of Directors or +rustees expressly re3uires them Fto *e elected from among the
holders of stoc=, or where there is no stoc=, from among the mem*ers of the
corporation% x/race Christian High School v. Court of $ppeals 2,1 S!:A 1-- #1((2)%
7. Te' o$ O$$i&eD Hol%+o,e Pin&iple
Directors may lawfully fill vacancies occurring in the *oard, and such officials, as
well as the original directors, hold until 3ualification of their successors% x/overnment
v. &l Hogar +ilipino, '. Phil% -(( #1(22)%
+he remedy is 4uo warranto to 3uestion the legality and proper 3ualification of
persons elected to the *oard% xPonce v. &ncarnacion, (& Phil% ,1 #1('-)%
9. Re'o,!l o$ Die&to. o T3.tee. #Sec% 2, )oxas v. -e la )osa, &( Phil% /.( >1(2/?)%
H. Die&to.A o T3.tee.A :eetin/. #Secs% &(, '-, '& and (2)
0n a *oard meeting, an a*stention is presumed to *e counted as an affirmative
vote insofar as it ma" be construed as an ac4uiescence in the action of those who
voted affirmativel"? *ut such presumption, *eing merely prima facie would not hold in
the face of clear evidence to the contrary% xLope3 v. &ricta, &' S!:A '-( >1(22?)%
I. Co'pen.!tion o$ Die&to. #Sec% -.)
Directors and trustees are not entitled to salary or other compensation when they
perform nothing more than the usual and ordinary duties of their office, founded on the
presumption that directors and trustees render service gratuitously, and that the return
upon their shares ade3uately furnishes the motives for service, without compensation%
5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/, 22- #1((2)%
5nder Section -. of the !orporation !ode, there are two #2) ways *y which
mem*ers of the *oard can *e granted compensation apart from reasona*le per diems<
#a) when there is a provision in the *y1laws fixing their compensation and #*) when the
stoc=holders representing a ma6ority of the outstanding capital stoc= at a regular or
special meeting agree to give them compensation% Crom the language of Section -., it
may also *e deduced that mem*ers of the *oard may also receive compensation,
when they render services to the corporation in a capacity other than as directors or
trustees of the corporation% 5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A
21/ #1((2)%
+he position of *eing !hairman and 7ice1!hairman, li=e that of +reasurer and
Secretary, were considered *y the officers as not mere directorship position, *ut
officership position that would entitle the occupants to compensation% "i=ewise, the
limitation placed under Section -. of the !orporation that directors cannot receive
compensation exceeding 1.E of the net income of the corporation, would not apply to
the compensation given to such positions since it is *eing given in their capacity as
officers of the corporation and not as *oard mem*ers% 5estern #nstitute of
!echnolog" #nc. v. Salas 22, S!:A 21/ #1((2)%
1J. Role o$ Die&to.
0!1 Die&to. !. 5i%3&i!ie..
1 Pre1!orporation !ode% Palting v. San 'ose Petroleum #nc., 1, S!:A (2&
#1(//)%
1 $ature of Duties of Directors and 8fficers% Prime 5hite Cement Corp. v. #$C,
22. S!:A 1.- #1((-)%
041 D3ty o$ O4e%ien&e
A corporation, through its *oard of directors, should act in the manner and
within the formalities, if any, prescri*ed *y its charter or *y the general law%
xLope3 )ealt" #nc. v. +ontecha, 2&2 S!:A 1,- #1((')
0&1 D3ty o$ Dili/en&e #Sec% -1 Steinberg v. *elasco, '2 Phil% ('- >1(2(? Bates v.
-resser, 2'1 5%S% '2&, /& "% Ed% -,,, &. S% !t% 2&2 >1(1(? Smith v. *an /or(am,
&,, A%2d ,',, Supreme !ourt of Delaware, 1(,')%%
0%1 D3ty o$ Loy!lty #Secs% -1 to -& Mead v. McCullough, 21 Phil% (' >1(11?)%
2-
1 Do&tine o$ Copo!te Oppot3nity #/o(ongwei v. S&C, ,( S!:A --/ >1(2(?
See Annotations< Doctrine of !orporate 8pportunity, ,( S!:A &12)%
1 Sel$+%e!lin/. #Secs% -2 and --)
1 U.in/ In.i%e In$o'!tion #/o(ongwei v. S&C, ,( S!:A --/ >1(2(?)%
When a director, who also owns Q of the e3uity of the corporation, who has
also *een designated as the administrator of corporate affairs, and who was
directly negotiating the sale of the corporations large landholdings to the
Aovernment at great prices, purchases the shares of stoc= of a shareholder
without informing the latter of the on1going negotiations, such director is deemed
to have fraudulently ac3uired the shareholdings *y way of deceit practiced *y
means of concealing his =nowledge of the state of the negotiations and their
pro*a*le successful result% xStrong v. )epide, &1 Phil% (&2 >1(.(?
1 Applies to confidential employees #cf. xSing 'uco v. Llorente, &- Phil% ',(
>1(22?)
0e1 D3ty to Ce%ito. !n% O3t.i%e.
>x70""A$5E7A, !he +iduciar" -uties of -irectors and
@fficers )epresenting the Creditor Pursuant to a Loan 5or(out
$rrangement< Parameters 6nder Philippine Corporate Setting,
-' A+E$E8 "%9% #$o% 1, Ce*% 1((1)?
0$1 Copo!te De!lin/. "ith Die&to. !n% O$$i&e. #Sec% -2 /o(ongwei v. S&C, ,(
S!:A --/ >1(2(? Prime 5hite Cement Corp. v. #$C, 22. S!:A 1.- >1((-?)%
0/1 Cont!&t. Bet"een Copo!tion. "ith Intelo&?in/ Die&to. #Sec% --)
11. Who I. !n KO$$i&eK o$ the Copo!tion #Sec% 2' /urrea v. Le3ama, 1.- Phil% ''-
>1(',? Mita Pardo de !avera v. !uberculosis Societ", 112 S!:A 2&- >1(,2? PSB$ v.
LeaAo, 122 S!:A 22, >1(,&? -" v. 0L)C, 1&' S!:A 211 >1(,/? x*isa"an v. 0L)C,
1(/ S!:A &1. >1((1?)%
!orporations act only through their officers and duly authori@ed agents% All acts
within the powers of a corporation may *e performed *y agents of its selection except
so far as limitations or restrictions imposed *y special charter, *uy1laws, or statutory
provisions% xB$ Savings Bani v. Sia --/ S!:A &,& #2...)%
An FofficeG is created *y the charter of the corporation and the officer is elected
*y the directors or stoc=holders% % % $ote that a corporate officerBs removal from his
office is a corporate act% 0f such removal occasions an intra1corporate controversy, its
nature is not altered *y the reason or wisdom, or lac= thereof, with which the ;oard of
Directors might have in ta=ing such action% When petitioner, as Executive 7ice1
President allegedly diverted company funds for his personal use resulting in heavy
financial losses in the company, this matter would amount to fraud% Such fraud would
*e detrimental to the interest not only of the corporation *ut also of its mem*ers% +his
type of fraud encompasses controversies in a relationship within the corporation
covered *y the SE! 6urisdiction >now with the regular courts?% Perforce, the matter
would come within the area of corporate affairs and management, and such a
corporate controversy would call for the ad6udicative expertise of the SE!, not the
"a*or Ar*iter or the $":!%G -e )ossi v. 0L)C, -1& S!:A 2&' #1((()%
When the *y1laws of the condominium corporation specifically includes the
position of FSuperintendentPAdministratorG in is roster of corporate officers, then such
position is clearly a corporate officer position and issues of reinstatement would *e
within the 6urisdiction of the SE! and not the $":!% x@ng(ingco v. 0L)C, 22. S!:A
/1- #1((2)%
When the *y1laws provide that one of the powers of the ;oard of +rustees is F>t?o
appoint a 4edical Director, !omptrollerPAdministrator, !hiefs of Services and such
other officers as it may deem necessary and prescri*e their powers and duties,G then
such specifically designated positions should *e considered Fcorporate officersG
position% +he determination of the rights and the concomitant lia*ility arising from any
ouster from such positions, would *e intra1corporate controversy su*6ect to the
6urisdiction of the SE! #now :+!)% x!abang v. 0L)C 2// S!:A &/2 #1((2)%
An FofficeG is created *y the charter of the corporation and the officer is elected
*y the directors or stoc=holders #2 Cletcher !yc% !orp% !h% 00, Sec% 2//)% 8n the other
hand, an FemployeeG usually occupies no office and generally is employed not *y
action of the directors or stoc=holders *ut *y the managing officer of the corporation
who also determines the compensation to *e paid to such employee% ##bid2 . % % A
corporate officerBs dismissal is always a corporate act, or an intra1corporate
controversy, and the nature is not altered *y the reason or wisdom with which the
2&
;oard of Directors may have in ta=ing such action% x!abang v. 0L)C 2// S!:A &/2
#1((2)%
+he president, vice1president, secretary and treasurer are commonly regarded
as the principal or executive officers of a corporation, and modern corporation statutes
usually designate them as the officers of the corporation% Oowever, other offices are
sometimes created *y the charter or *y1laws of a corporation, or the board of directors
ma" be empowered under the b",laws of a corporation to create additional offices as
ma" be necessar"% x!abang v. 0L)C 2// S!:A &/2 #1((2)%
1(. Po"e. o$ Copo!te O$$i&e.#
0!1 The R3le on Copo!te O$$i&eL. Po"e to Bin% Copo!tion
An officerMs power as an agent of the corporation must *e sought from the
statute, charter, the *y1laws or in a delegation of authority to such officer, from the
acts of the *oard of directors formally expressed or implied from a ha*it or custom
of doing *usiness% x*icente v. /eralde3, '2 S!:A 21. >1(2-? reiterated in
xBo"er,)oxas v. C$, 211 S!:A &2. #1((2)%
041 When Copo!tion Bo3n% 4y A&t o$ It. Pe.i%ent% PeopleCs $ircargo v. Court of
$ppeals, 2(2 S!:A 12. #1((,)
0&1 Copo!te Se&et!y
0n the a*sence of provisions to the contrary, the corporate secretary is the
custodian of corporate recordsKhe =eeps the stoc= and transfer *oo= and ma=es
proper and necessary entries therein% 0t is the duty and o*ligation of the corporate
secretary to register valid transfers of stoc= in the *oo=s of the corporation and in
the event he refuses to comply with such duty, the transferor1stoc=holder may
rightfully *ring suit to compel performance% x!orres 'r. v. Court of $ppeals 22,
S!:A 2(- #1((2)%
When a SecretaryBs !ertificate is regular on its face, it can *e relied upon *y
a third party who does not have to investigate the truths of the facts contained in
such certification otherwise *usiness transactions of corporations would *ecome
tortuously slow and unnecessarily hampered% x&sguerra v. Court of $ppeals 2/2
S!:A -,. #1((2)%
0%1 Copo!te Te!.3e
A corporate treasurerBs function have generally *een descri*ed as Fto
receive and =eeps funds of the corporation, and to dis*urse them in accordance
with the authority given him *y the *oard or the properly authori@ed officers%G
5nless duly authori@ed, a treasurer, whose power are limited, cannot *ind the
corporation in a sale of its assets% Selling is o*viously foreign to a corporate
treasurerBs function% When the corporation categorically denies ever having
authori@ed its treasurer to sell the su*6ect parcel of land, the *uyer had the *urden
of proving that the treasurer was in fact authori@ed to represent and *ind the
allegedly selling corporation in the transaction% And failing to discharge such
*urden, and failing to show any provision of the articles of incorporation, *y1laws
or *oard resolution to prove that the treasurer possessed such power, the sale is
void and not *inding on the alleged selling corporation% xSan 'uan Structural and
Steel +abricators #nc. v. Court of $ppeals, 2(/ S!:A /-1, /&' #1((,)%
0e1 Othe EO$$i&e.F $o Se,i&e o$ S3''on. on Copo!tion
Cor purposes of determining proper service of summons to a corporation in
a 3uasi16udicial proceeding *efore the $":!, a *oo==eeper can *e considered as
an agent of the corporation within the purview of the :ules of !ourt% +he rationale
of all rules with respect to service of process on a corporation is that such service
must *e made to an agent or a representative so integrated with the corporation
sued as to ma=e it a priori supposa*le that he will reali@e his responsi*ilities and
(now what he should do with an" legal papers served on him. !he boo((eeperCs
tas( is one under consideration that his regular recording of the corporationCs
Dbusiness accountsE and Dessential facts about the transactions of a business or
enterpriseE safeguards the corporation from possible fraud being committed
adverse to its own corporate interest% xPabon v. 0L)C 2(/ S!:A 2 #1((,)%
0n spite of provisions of the :ules of !ourt on service of process to *ind
corporate entities, service made to a representative so integrated with the
corporation sued as to ma=e it a priori supposa*le that he will reali@e his
responsi*ilities and =now what he should do with any legal papers served on him,
has *een considered proper service to *ind the corporation% #x*illa )e" !ransit
#nc. v. +ar &ast Motor Corp%, ,1 S!:A 2(, >1.2,?, overturning x-elta Motor Sales
2'
Corp. v. Mangosing, 2. Phil% '(, >1(2/? reiterated in x). !ransport Corp. v. C$
2&a S!:A 22 >1(('?)%
Section 11, :ule 1& of the 1((2 :ules of !ivil Procedure uses the term
Fgeneral managerG and unli=e the old provision in the :ules of !ourt, it does not
include the term FagentG% !onse3uently, the enumeration of persons to whom
summons may *e served is Frestricted, limited and exclusiveG following the rule on
statutory construction expressio unios est exclusion alterius. +herefore, the earlier
cases that uphold service of summons upon a construction pro6ect manager
1
a
corporationBs assistant manager
2
ordinary cler= of a corporation
-
private secretary
of corporate executives
&
retained counsel
'
officials who had charge or control of
the operations of the corporation, li=e the assistant general manager
/
or the
corporationBs !hief Cinance and Administrative 8fficer
2
no longer apply since they
were decided under the old rule that allows service of summons upon an agent
,
of
the corporation% x&.B. *illarosa % Partners Co. Ltd. v. Benito, -12 S!:A /'
#1((()%
0$1 Co,e!/e o$ Copo!te EA/ent.F
;lac=Bs "aw Dictionary defines an FagentG as Fa *usiness representative,
whose function is to *ring a*out, modify, affect, accept performance of, or
terminate contractual o*ligations *etween principal and third persons%G +o this
extent, an FagentG may also *e shown to represent his principal in some one or
more of his relations to others, even though he may not have the power to enter
into contracts% +he rules on service of process ma=e service on FagentG sufficient%
0t does not in any way distinguish whether the FagentG *e general or special, *ut is
complied with even *y a service upon an agent having limited authority to
represent his principal% As such, it does not necessarily connote an officer of the
corporation% Oowever, though this may include employees other than officers of a
corporation, this does not include employees whose duties are not so integrated to
the *usiness that their a*sence or presence will not toll the entire operation of the
*usiness% xPabon v. 0L)C 2(/ S!:A 2 #1((,)%
1). LIABILITIES O5 CORPORATE O55ICERS# #Sec% -1 *a34ue3 v. Bor=a, 2& Phil% '/.
#1(&&) Pala" #nc. v. Clave, 12& S!:A /-, >1.(-? !ramat Mercantile #nc. v. C$, 2-,
S!:A 1& >1((&? Pabalan v. 0L)C 1,& S!:A &(' >1((.? xSulo ng Ba"an #nc. v.
$raneta #nc. #nc., 22 S!:A -&2 >1(2/? xMindanao Motors Lines #nc. v. Court of
#ndustrial )elations, / S!:A 21. #1(/2)
+he general rule is that corporate officers are not personally lia*le for their
official acts unless it is shown that they have exceeded their authority% x$)B
Constructions Co. #nc. v. Court of $ppeals --2 S!:A &22 #2..)
23i.p3%enti!l En3'e!tion o$ O$$i&e Li!4ilitie. + M$M )ealt" v. 0L)C
2&& S!:A 2(2, #1((') reiterated in x0ational +ood $uthorit" v. Court of $ppeals -11
S!:A 2.. #1((() x6ichico v. 0L)C 22- S!:A -' #1((2)%
+he horn*oo= law is that corporate personality is a shield against personal lia*ility
of its officers% +hus, when the trust receipt sued upon was clearly entered into in *ehalf
of the corporation *y its Executive 7ice1President, then such officer and his spouse
cannot *e made personally lia*le the personality of the corporation is separate and
distinct from the persons composing it% x!he Consolidated Ban( and !rust Corp. v. Court
of $ppeals A%:% $o% 11&2,/, 1( April 2..1%
Personal lia*ility of a corporate director, trustee or officer along #although not
necessarily) with the corporation may so validly attach, as a rule, only when<
#a) Oe assents to a patently unlawful act of the corporation
#*) Auilty of *ad faith or gross negligence in directing its affairs
1
.anlaon Construction &nterprises Co. #nc. v. 0L)C 22( S!:A --2 #1((2)%
2
/esulgon v. 0L)C 21( S!:A '/1 #1((-)%
-
/olden Countr" +arms #nc. v. Sanvar -evelopment Corp., 21& S!:A 2(' #1((2) / % / !rading
Corp. v. Court of $ppeals, 1', S!:A &// #1(,,)%
&
Summit !rading and -ev. Corp. v. $vendaAo 1-' S!:A -(2 #1(,') also *lason &nterprises Corp.
v. Court of $ppeals -1. S!:A 2/ #1((()%
'
)epublic v. .er % Co. Ltd. 1, S!:A 2.2 #1(//)%
/
*illa )e" !ransit #nc. v. +ar &ast Motor Corp., ,1 S!:A 2(, #1(2,)%
2
+ar Corporation v. +rancisco 1&/ S!:A 1(2 #1(,/)%
,
+iloil Mar(eting Corp. v. Marine -ev. Corp. of the Philippines, 122 S!:A ,/ #1(,2)%
2/
#c) for conflict on interest resulting in damages to the corporation, its
stoc=holders or other persons
#d) Oe consents to the issuance of watered down stoc=s or who, having
=nowledge thereof, does not forthwith file with the corporate secretary
his written o*6ection thereto
#e) Oe agrees to hold himself personally and solidarily lia*le with the
corporation or
#f) Oe is made, *y a specific provisions of law, to personally answer for his
corporate action% x$trium Management Corporation vs. Court of
$ppeals, A%:% $o% 1.(&(1, 2, Ce*ruary 2..1
+he finding of solidary lia*ility among the corporation and its officers and
directors would patently *e *aseless when the decision contains no allegation, finding
or conclusion regarding particular acts committed *y said officers and mem*ers of the
;oard of Directors that show them to have *een individually guilty of unmista=a*le
malice, *ad faith, or ill1motive in their personal dealings with third parties% When
corporate officers and directors are sued merely as nominal parties in their official
capacities as such, they cannot *e held lia*le personal for the 6udgment rendered
against the corporation% x0ational Power Corp. v. Court of $ppeals, 22- S!:A &1(
#1((2)%
When corporate officers are sued in their official capacity, the suit is e3uivalent
to a suit against the corporation, and 6udgment may *e enforced against corporate
assets% x&milio Cano &nterprises #nc. v. C#), 1- S!:A 2(1 #1(/')%
An attempt *y the corporation to avoid lia*ility *y distancing itself from the acts
of the its President was struc= down with the !ourt holding that a corporation may not
distance itself from the acts of a senior officer< "the dual roles of :omulo C% Sugay
should not *e allowed to confuse the facts%" x).+. Suga" v. )e"es, 12 S!:A 2..
#1(/1)%
Aenerally, officers or directors under the old corporate name *ear no personal
lia*ility for acts done or contracts entered into *y officers of the corporation, if duly
authori@ed% x)epublic Planters Ban( v. C$, 21/ S!:A 2-, #1((2)%
An officer1stoc=holder who is a party signing in *ehalf of the corporation to a
fraudulent contract cannot claim the *enefit of separate 6uridical entity< "+hus, *eing a
party to a simulated contract of management, petitioner 5y cannot *e permitted to
escape lia*ility under the said contract *y using the corporate entity theory% +his is one
instance when the veil of corporate entity has to *e pierced to avoid in6ustice and
ine3uity%" xParadise Sauna Massage Corporation v. 0g, 1,1 S!:A 21( #1((.)%
0!1 S!e'ia# Pro+isions in La-or Laws. , 0n the "a*or !ode since a corporate
employer is an artificial person, it must have an officer who can *e presumed to
*e the emplo"er, *eing the "person acting in the interest of #the) employer" as
provided in the "a*or !ode% $.C. )ansom Labor 6nion,CCL6 v. 0L)C, 1&2
S!:A 2/( #1(,/)%
5nder the "a*or !ode, in the case of corporations, it is the president who
responds personally for violation of the la*or pay laws% x*illanueva v. $dre, 122
S!:A ,2/ #1(,()%
Cor the separate 6uridical personality of a corporation to *e disregarded, the
wrongdoing must *e clearly and convincingly esta*lished% -el )osario v. 0L)C,
1,2 S!:A 222 #1((.)%
A corporate officer cannot *e held personally lia*le for a corporate de*t
simply *ecause he had executed the contract for and in *ehalf of the corporation%
0t held that when a corporate officer acts in *ehalf of a corporation pursuant to his
authority, is "a corporate act for which only the corporation should *e made lia*le
for any o*ligations arising from them%" x5estern $gro #ndustrial Corporation v.
Court of $ppeals, 1,, S!:A 2.( #1((.)%
8nly the responsi*le officer of a corporation who had a hand in illegally
dismissing an employee should *e held personally lia*le for the corporate
o*ligations arising from such act% Maglutac v. 0L)C,1,( S!:A 2/2 #1((.)
reiterated in x/ude3 v. 0L)C, 1,- S!:A /&& #1((.) and xChua v. 0L)C, 1,2
S!:A -'- #1((.)%
+he case of )ansom v. 0L)C is not in point *ecause there the de*tor
corporation actually ceased operations after the decision of the !ourt of 0ndustrial
:elations was promulgated against it, ma=ing it necessary to enforce it against its
former president% When the corporation is still existing and a*le to satisfy the
22
6udgment in favor of the private respondent, the corporate officers cannot *e held
personally lia*le% Lim v. 0L)C, 121 S!:A -2, #1(,()%
+he aforecited cases will not apply to the instant case, however, *ecause the
persons who were there made personally lia*le for the employeesM claims were
stoc=holders1officers of the respondent corporation% 0n the case at *ar, the
petitioner while admittedly the highest ran=ing local representative of the
corporation, is nevertheless not a stoc=holder and much less a mem*er of the
*oard of directors or an officer thereof% x-e /u3man v. 0L)C, 211 S!:A 22-
#1((2)
A mere general manager cannot *e held solidarily lia*le with the corporation
for unpaid la*or claims, especially when he is neither a stoc=holder or a mem*er
of the *oard of the corporation% x-e /u3man v. 0L)C, 211 S!:A 22- #1((2)
A president cannot *e held solidarily lia*le personally with the corporation
a*sent evidence of showing that he acted maliciously or in *ad faith% x&P/
Constructions Co. v. C$, 21. S!:A 2-. #1((2)%
A 6udgment rendered against a person "in his capacity as President" of the
corporation was enforcea*le against the assets of such officer when the decision
itself found that he merely used the corporation as his alter1ego or as his *usiness
conduit% x$rcilla v. Court of $ppeals, 21' S!:A 12. #1((2)%
+he President and Aeneral 4anager of a corporation who entered into and
signed a contract in his official capacity cannot *e made lia*le thereunder in his
individual capacity in the a*sence of stipulation to that effect due to the personality
of the corporation *eing separate and distinct from the persons composing it%
x)ustan Pulp % Paper Mills #nc. v. #$C, 21& S!:A //' #1((2), citing xBan4ue
/enerale Belge v. 5alter Bull and Co., ,& Phil% 1/& #1(&().
)eahs Corporation v. 0L)C 221 S!:A 2&2 #1((2), reviewed the $.C.
)ansom doctrine of imposing solidarily lia*ility on the highest officers of the
corporation for 6udgment on la*or claims rendered against the corporation
pursuant to Art% 2,- of the "a*or !ode, and reviewed its application in su*se3uent
cases of Maglutac Chua /ude3 and Pabalan. 0t reiterated the main doctrine of
separate personality of a corporation which should remain as the guiding rule in
determining corporate lia*ility to its employees, and that at the very least, to 6ustify
solidary lia*ility, Fthere must *e an allegation or showing that the officers of the
corporation deli*erately or maliciously designed to evade the financial o*ligation of
the corporation to its employees,G or a showing that the officers indiscriminately
stopped its *usiness to perpetuate an illegal act, as a vehicle for the evasion of
existing o*ligations, in circumvention of statutes, and to confuse legitimate issues%
!orporate officers are not personally lia*le for money claims of discharged
employees unless they acted with evident malice and *ad faith in terminating their
employment% x$HSFPhilippines v. Court of $ppeals 2'2 S!:A -1( #1((/)%
+he finding of solidary lia*ility among the corporation and its officers and
directors would patently *e *aseless when the decision contains no allegation,
finding or conclusion regarding particular acts committed *y said officers and
mem*ers of the ;oard of Directors that show them to have *een individually guilty
of unmista=a*le malice, *ad faith, or ill1motive in their personal dealings with third
parties% When corporate officers and directors are sued merely as nominal parties
in their official capacities as such, they cannot *e held lia*le personal for the
6udgment rendered against the corporation% x0ational Power Corp. v. Court of
$ppeals, 22- S!:A &1( #1((2)%
0n la*or cases, particularly, corporate directors and officers are solidarily
lia*le with the corporation for the termination of employment of corporate
employees done with malice or in *ad faith% 0n this case, it is undisputed that the
corporate officers have a direct hand in the illegal dismissal of the employees%
+hey were the one, who as high1ran=ing officers and directors of the corporation,
signed the ;oard :esolution retrenching the employees on the feigned ground of
serious *usiness losses that had no *asis apart from an unsigned and unaudited
Profit and "oss Statement which, to repeat, had no evidentiary value whatsoever%
+his is indicating of *ad faith on the part of the corporate officers for which they
can *e held 6ointly and severally lia*le with the !orporation for all the money
claims of the illegally terminated employees% x6ichico v. 0L)C, 22- S!:A -'
#1((2)%
A corporation, *eing a 6uridical entity, may act only through its directors,
officers and employees and o*ligations incurred *y them, acting as corporate
2,
agents, are not theirs *ut the direct accounta*ilities of the corporation they
represent% xBrent Hospital #nc. v. 0L)C 2(2 S!:A -.& #1((,)%
+he manager of a corporation are not personally lia*le for their official acts
unless it is shown that they have exceeded their authority% +here is nothing on
record to show that the manager deli*erately and maliciously evaded the
corporationBs financial o*ligation to the employee hence, there appearing to *e no
evidence on record that the manager acted maliciously or deli*erately in the non1
payment of *enefits to the employee, the manager cannot *e held 6ointly and
severally lia*le with the corporate employers% >!"7 R $othing was shown to
determine whether the corporate employer had no assets with which to pay the
claims of the employee?% x0icario v. 0L)C 2(' S!:A /1( #1((,)%
0n x)estuarante Las Conchas v. Llego, -1& S!:A 2& #1(((), the Supreme
!ourt had apparently returned to the $.C. )ansom principle that F>a?lthough as a
rule, the officers and mem*ers of a corporation are not personally lia*le for acts
done in the performance of their duties, this rule admits of exceptions, one of
which is when the employer corporation is no longer existing and is una*le to
satisfy the 6udgment in favor of the employee, the officers should *e held lia*le for
acting on *ehalf of the corporation%G 0n that case, the restaurant *usiness had to *e
closed down *ecause possession of the premises had *een lost through an
adverse decision in an e6ectment case% +he !ourt held< F0n the present case, the
employees can no longer claim their separation *enefits and 1-
th
month pay from
the corporation *ecause it had already ceased operation% +o re3uire them to do so
would render illusory the separation and 1-t6 month pay awarded to them *y the
$":!% +heir only recourse is to satisfy their claim from the officers of the
corporation who were, in effect, acting in *ehalf of the corporation%G
+he $.C. )ansom doctrine has *een reiterated in xCarmelcraft Corp. v.
0L)C 1,/ S!:A -(- #1((.), x*alderrama v. 0L)C, 2'/ S!:A &// #1((/)%
CI. STOCKHOLDERS AND :E:BERS
1. Sh!ehol%e. Not Ce%ito. o$ Copo!tion #/arcia v. Lim Chu Sing, '( Phil% '/2
>1(-&?)%
(. S34.&iption Cont!&t. #Sec% /. and 22 !rillana v. ;ue3on Colegialla, (- Phil% -,-
>1('-?)%
0!1 Purchase Agreement #Ba"la v. Silang !raffic Co. #nc., 2- Phil% ''2 >1(&2?)%
041 Pre10ncorporation Su*scription #Sec% /1)
0&1 :elease from Su*scription 8*ligation #*elasco v. Poi3at, -2 Phil% ,.2 >1(1,? P0B
v. Bitulo( Sawmill #nc., 2- S!:A 1(/, >1(/,? 0ational &xchange Co. v. -exter,
'1 Phil% /.1 >1(2,?)
0%1 When condition of payment provided for in the *y1laws #-e Silva v. $boiti3 % Co.,
&& Phil% 2'' >1(2-?)%
). Con.i%e!tion #Sec% /2)%
#a) !ash
#*) Property
#c) Service
#d) :etained Earnings
#e) Share
Stoc= dividends are in the nature of shares of stoc=, the consideration for
which is the amount of unrestricted retained earnings converted into e3uity in the
corporationBs *oo=s% xLincoln Philippine Life v. Court of $ppeals A%: $o% 11,.&-,
2- 9uly 1((,%
*. W!tee% Sto&?. #Sec% /')
6. P!y'ent o$ B!l!n&e o$ S34.&iption #Secs% // and /2 Linga"en /ulf &lectric Power
Co. v. Balta3ar, (- Phil% &.& >1('-?)%
7. Delin;3en&y on S34.&iption #Secs% /,, /(, 2. and 21 xPhilippine !rust Co. v.
)ivera, && Phil% &/( >1(2-? xMiranda v. !arlac )ice Mill Co., '2 Phil% /1( >1(-2?)
+he prescriptive period to recover on unpaid su*scription does not commence
from the time of su*scription *ut from the time of demand *y the corporation through it
2(
*oard of directors for the stoc=holder to pay the *alance of his su*scription #x/arcia v.
Suare3, /2 Phil% &&1>1(-(?)%
0!1 Who 4ay Nuestion a Delin3uency Sale #Sec% /, and /()%
9. Ceti$i&!te o$ Sto&? #Sec% /-)
0!1 N!t3e o$ Ceti$i&!te #!an v. S&C, 2./ S!:A 2&. >1((2? -e los Santos v.
)epublic (/ Phil% '22 >1(''? xC.0. Hodges v. Le3ama, 1& S!:A 1.-. >1(/'?)%
A stoc= certificate is merely evidence of a share of stoc= and not the share
itself% xLincoln Philippine Life v. Court of $ppeals, 2(- S!:A (2 #1((,)%
A formal certificate of stoc= could not *e considered issued in contemplation
of law unless signed *y the president or vice1president and countersigned *y the
secretary or assistance secretary% Bitong v. Court of $ppeals 2(2 S!:A '.-
#1((,)%
041 5*asi+ne/oti!4le Ch!!&te o$ the Ceti$i&!te o$ Sto&? #Bachrach Motor Co. v.
Lacson Ledesma, /& Phil% /,1 >1(-2?)%
0n order for a transfer of stoc= certificate to *e effective, the certificate must
*e properly indorsed and that title to such certificate of stoc= is vested in the
transferee *y the delivery of the duly indorsed certificate of stoc=% 0ndorsement of
the certificate of stoc= is a mandatory re3uirement of law for an effective transfer
of a certificate of stoc=% )a3on v. #$C, 2.2 S!:A 2-& #1((2)%
+he rule is that the endorsement of the certificate of stoc= *y the owner or
his attorney1in1fact or any other person legally authori@ed to ma=e the transfer
shall *e sufficient to effect the transfer of shares only if the same is couple with
delivery% +he delivery of the stoc= certificate duly endorsed *y the owner is the
operative act of transfer of shares from the lawful owner to the new transferee%
+hus, for a valid transfer of stoc=s, the re3uirements are as follows< #a) +here must
*e delivery of the stoc= certificate #*) +he certificate must *e endorsed *y the
owner or his attorney1in1fact or other persons legally authori@ed to ma=e the
transfer and #c) to *e valid against third parties, the transfer must *e recorded in
the *oo=s of the corporation% Bitong v. Court of $ppeals 2(2 S!:A '.- #1((,)%
0&1 Ri/ht to I..3!n&e #Sec% /& Balta3ar v. Linga"en /ulf &lect. Power Co. #nc., 1&
S!:A '22 >1(/'?)%
0%1 Lo.t o De.toye% Ceti$i&!te. #Sec% /- and 2-)
While Section 2- of the !orporation !ode appears to *e mandatory, the
same admits exceptions, such that a corporation may voluntarily issue a new
certificate in lieu of the original certificate of stoc= which has *een lost without
complying with the re3uirements under Section 2- of the !orporation !ode,
provided that the corporation is certain as to the real owner of the shares to whom
the new certificate shall *e issued% % % % 0t would *e an internal matter for the
corporation to find measures in ascertaining who are the real owners of stoc= for
purposes of li3uidation% 0t is well1settled that unless proven otherwise, the Fstoc(
and transfer boo(E of the corporation is the *est evidence to esta*lish stoc=
ownership% #SE! 8pinion, dated 2, 9anuary 1(((, addressed to 4s% 4a% !ecilia
Sala@ar1Santos)%
0e1 5o/e% !n% Un!3thoi8e% T!n.$e. #'. Santamaria v. Hong.ong and Shanghai
Ban(ing Corp., ,( Phil% 2,. >1('1? 0eugene Mar(eting #nc. v. Court of $ppeals,
-.- S!:A 2(' >1(((?)%
H. Sto&? !n% T!n.$e Boo? #Secs% /-, 22 and 2& +ua Cun v. Summers, && Phil% 2.&
>1(2-? Monserrat v. Ceran, ', Phil% &/( >1(--? Chua /uan v. Samahang
Magsasa(a #nc%, /2 Phil% &22 >1(-'? 6son v. -iosomito, /1 Phil% '-' >1(-'? &scaAo
v. +ilipinas Mining Corporation, 2& Phil% 21 >1(&&? Bachrach Motors v. Lacson,
Ledesma, /& Phil% /,1 >1(-2? 0ava v. Peers Mar(eting Corp., 2& S!:A /' >1(2/?)%
0n /arcia v. 'omouad -2- S!:A &2& #2...), the Supreme !ourt directly
resolved the issue FWhether a bona fide transfer of the shares of a corporation, not
registered or noted in the *oo=s of the corporation, is valid as against a su*se3uent
lawful attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not%G +he !ourt 3uoted from 6son v. -iosomito which
held that all transfers of shares not entered in the stoc= and transfer *oo= of the
-.
corporation are invalid as to attaching or execution creditors of the assignors, as well
as to the corporation and to su*se3uent purchasers in good faith and to all persons
interested, except the parties to such transfers< FAll transfers not so entered on the
*oo=s of the corporation are a*solutely void *ot *ecause they are without notice or
fraudulent in law or fact, *ut *ecause they are made so void *y statute% +he Supreme
!ourt held that Fthe transfer of the su*6ect certificate made *y Dico to petitioner was
not valid as to the spouses Atinon, the 6udgment creditors, as the same still stood in
the name of Dico, the 6udgment de*tor, at the time of the levy on execution% 0n
addition, as correctly ruled *y the !A, the entry in the minutes of the meeting of the
!lu*Bs *oard of directors noting the resignation of Dico as proprietary mem*er does
not constitute compliance with Section /- of the !orporation !ode% Said provision of
law strictly re3uires the recording of the transfer in the *oo=s of the corporation, and
not elsewhere, to *e valid as against third parties%G
Attachments of shares of stoc= are not included in the term "transfer" as
provided in Section /- of the !orporation !ode% ;oth the :evised :ules of !ourt and
the !orporation !ode do not re3uire annotation in the corporationMs stoc= and transfer
*oo=s for the attachment of shares to *e valid and *inding on the corporation and third
parties% Chemphil &xport % #mport Corporation v Court of $ppeals, 2'1 S!:A 2'2
#1((')%
5ntil registration is accomplished, the transfer, though valid *etween the parties,
cannot *e effective as against the corporation% +hus, the unrecorded transferee cannot
vote nor *e voted for% +he purpose of registration, therefore, is two1fold< to ena*le the
transferee to exercise all the rights of a stoc=holder, including the right to vote and to
*e voted for, and to inform the corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and su*6ect to the lia*ilities of a
stoc=holder% 5ntil challenged in a proper proceeding, a stoc=holder of record has a
right to participate in any meeting his vote can *e properly counted to determine
whether a stoc=holdersB resolution was approved, despite the claim of the alleged
transferee% 8n the other hand, a person who has purchased stoc=, and who desires to
*e recogni@ed as a stoc=holder for the purpose of voting, must secure such a standing
*y having the transfer recorded on the corporate *oo=s% 5ntil the transfer is registered,
the transferee is not a stoc=holder *ut an outsider% Batangas Laguna !a"abas Bus
Compan" #nc. v. Bitanga, A%:% $o% 1-2(-&, 1. August 2..1%
Section /- of the !orporation !ode which provides that Fno share of stoc=
against which the corporation holds any unpaid claim shall *e transfera*le in the *oo=s
of the corporationG cannot *e utili@ed *y the corporation to refuse to recogni@e
ownership over pledged shares purchased at pu*lic auction% +he term Funpaid claimsG
refers to Fany unpaid claims arising from unpaid su*scription, and not to any
inde*tedness which a su*scri*er or stoc=holder may owe the corporation arising from
any other transactions% 8*ligations arising from unpaid monthly dues do not fall within
the coverage of Section /-% China Ban(ing Corp. v. Court of $ppeals, 22. S!:A '.-
#1((2)%
Entries made on the stoc= and transfer *oo= *y any person other than the
corporate secretary, such as those made *y the President and !hairman, cannot *e
given any valid effect% x!orres 'r. v. Court of $ppeals 22, S!:A 2(- #1((2)%
A person cannot claim a right to intervene as a stoc=holder in corporate issue on
the strength of the transfer of shares allegedly executed *y a registered stoc=holder%
+he transfer must *e registered in the *oo=s of the corporation to affect third persons%
+he law on corporation is explicit on this under Sec% /- of the !orporation !ode%
xMagsa"sa",Labrador v. C$, 1,. S!:A 2// #1(,()
Section /- of the !orporation !ode envisions a formal certificate of stoc= which
can *e issued only upon compliance with certain re3uisites% +irst the certificate must
*e signed *y the president or vice1president, countersigned *y the secretary or
assistant secretary, and sealed with the seal of the corporation% A mere typewritten
statement advising a stoc=holder of the extent of his ownership is a corporation without
3ualification andPor authentication cannot *e considered as a formal certificate of
stoc=% Second delivery of the certificate is an essential element of its issuance%
Oence, there is no issuance of a stoc= certificate where it is never detached from the
stoc= *oo=s although *lan=s therein are properly filled up if the person whose name is
inserted therein has no control over the *oo=s of the company% !hird the par value, as
to par value shares, or the full su*scription as to no par value shares, must first *e
fully paid% +ourth the original certificate must *e surrendered where the person
re3uesting the issuance of a certificate is a transferee from a stoc=holder% Bitong v.
Court of $ppeals 2(2 S!:A '.- #1((,)%
I. Sit3. o$ Sh!e. o$ Sto&?. #Sec% '')
-1
+he situs of shares of stoc= would *e the place of domicile of the corporation to
which they pertain to% x5ells +argo Ban( and 6nion v. Collector, 2. Phil% -2' #1(&.)
x!a"ag v. Benguet Consolidated #nc., 2/ S!:A 2&2 #1(/,) cf. xPer(ins v. -i3on, /(
Phil% 1,/ #1(-()%
CII. RIGHTS O5 STOCKHOLDERS AND :E:BERS
1. Wh!t %oe. ESh!eF epe.ent@
While shares of stoc= constitute personal property, they do not represent
property of the corporation >i.e. they are properties of the stoc=holders who own them?%
Share of stoc= only typifies an ali3uot part of the corporationBs property, or the right to
share in its proceeds to that extent when distributed according to law and e4uit" *ut
the holder is not the owner of any part of the capital >properties? of the corporation, nor
is he entitled to the possession of any definite portion of its property or assets% +he
stoc=holder is not a co1owner or tenant in common of the corporate property%
xStoc(holders of +. /uanson and Sons #nc. v. )egister of -eeds of Manila, / S!:A
-2- #1(/2)%
(. Ri/ht to Ceti$i&!te o$ Sto&? $o 53lly P!i% Sh!e. #Sec% /& !an v. S&C, 2./ S!:A
2&. >1((2?)
). Pee'pti,e Ri/ht. #Sec% -( -atu !agoranao Benito v. S&C, 12- S!:A 222 >1(,-?
-ee v. S&C, 1(( S!:A 2-, >1((1?)%
*. Ri/ht to T!n.$e o$ Sh!ehol%in/. #Sec% /-)
Authority of a corporation to regulate the transfer of its stoc= does not empower
the corporation to restrict the right of a stoc=holder to transfer his shares, *ut merely
authori@es the adoption of regulations as to the formalities and procedure to *e
followed in effecting transfer% x!homson v. Court of $ppeals, 2(, S!:A 2,. #1((,)%
0!1 Non+t!n.$e!4ility o$ :e'4e.hip in Non+Sto&? Copo!tion #Secs% (.
and (1)%
041 Re.ti&tion on T!n.$e. #Lambert v. +ox, 2/ Phil% ',, >1(1&?)
+ Ri/ht o$ Re$3.!l #Padgett v. Babcoc( % !empleton #nc., '( Phil% 2-2 >1(--?)%
Section /- of the !orporation !ode contemplates no restriction as to
whom the stoc=s may *e transferred% 0t does not suggest that any discrimination
may *e created *y the corporation in favor of, or against a certain purchaser%
+he owner of shares, as owner of personal property, is at li*erty, under said
section to dispose them in favor of whomever he pleases, without limitation in
this respect, than the general provisions of law% +leishcher v. Botica 0olasco, &2
Phil% ',- #1(2')%
+he only limitation imposed *y Section /- of the !orporation !ode is
when the corporation holds any unpaid claim against the shares intended to *e
transferred% A corporation, either *y its *oard, its *y1laws, or the act of its
officers, cannot create restrictions in stoc= transfers, *ecause ":estrictions in the
traffic of stoc= must have their source in legislative enactment, as the
corporation itself cannot create such impediment% ;y1laws are intended merely
for the protection of the corporation, and prescri*e relation, not restriction they
are always su*6ect to the charter of the corporation% )ural Ban( of Salinas v. C$,
21. S!:A '1. #1((2)%
Restraint o" Tra%e K An agreement *y which a person o*liges himself
not to engage in competitive trade for five years is valid and reasona*le and not
an undue or unreasona*le restraint of trade and is o*ligatory on the parties who
voluntarily enter into such agreement% x@llendorf v. $brahamson -, Phil% ','
#1(1,).
0&1 Re'e%y I$ Re/i.t!tion I. Re$3.e% #Hager v. Br"an, 1( Phil% 1-, >1(11?)
A stipulation on stoc= certificate that assignment thereof would not *e
*inding on the corporation unless such assignment is registered in the *oo=s of the
clu* as re3uired under the *y1laws, which does not provide when the registration
should *e made, would mean that the cause of action and the determination of the
prescription period would *egin only upon demand for registration is made and not
at the time of the assignment of the certificate% x5on v. 5ac( 5ac( /olf %
Countr" Club, 1.& Phil% &// #1(',)%
-2
+he claim for damages of what the shares could have sold had the demand
*een complied with is deemed to *e speculative damage and non1recovera*le
xBatong Buha" /old Mines v. C$, 1&2 S!:A & #1(,2)%
6. Ri/ht. to Di,i%en%. #Sec% &-)
Although the certificates of stoc= granted the stoc=holder the right to receive 1E
3uarterly dividends, cumulative and participating, the stoc=holders do not *ecome
entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividends% % % ;oth Sec% 1/ of the !orporation "aw and Sec% &- of the
present !orporation !ode prohi*it the issuance of any stoc= dividend without the
approval of stoc=holders, representing not less than two1thirds #2P-) of the outstanding
capital stoc= at a regular or special meeting duly called for the purpose% +hese
provisions underscore the fact that payment of dividends to a stoc=holder is not a
matter of right *ut a matter of consensus% Curthermore, Finterest *earing stoc=sG on
which the corporation agrees a*solutely to pay interest *efore dividends are paid to the
common stoc=holders, is legal only when construed as re3uiring payment of interest as
dividends from net earnings or surplus only% x)epublic Planters Ban( v. $gana, 2/(
S!:A 1 #1((2)%
7. Ri/ht. to Atten% :eetin/. !n% Vote #Sec% /, Sec% ,()
5ntil challenged successfully in the proper proceedings, a stoc=holder according
to the *oo=s of the corporation has a right to participate in any meeting, and in the
a*sence of fraud the action of the stoc=holdersB meeting cannot *e collaterally
attac=ed on account of such participation, even if it *e shown later on that the shares
had *een previously sold #*ut not recorded)% xPrice and Sulu -ev. Co. v. Martin, ',
Phil% 2.2 #1(--)
Se3uestration of shares does not entitle the government to exercise acts of
ownership over the shares conse3uently, even se3uestered shares may *e voted
upon *y the registered stoc=holder of record% xCo=uangco 'r. v. )oxas, 1(' S!:A 2(2
#1((1)%
0!1 In.t!n&e. When Sto&?hol%e. Entitle% to Vote#
1 Election of directors and trustees #Sec% 2&)
1 Amendment of articles of incorporation #Sec% 1/)
1 0nvestment in another *usiness or corporation #Secs% -/ and &2)
1 4erger and consolidation #Sec% 22)
1 0ncrease and Decrease of capital stoc= #Sec% -,)
1 Adoption, amendment and repeal of *y1laws #Sec% &,)
1 Declaration of stoc= dividends #Sec% &-)
1 4anagement contracts #Sec% &&)
1 Cixing of consideration of no par value shares #Sec% /2)
041 2oint O"ne.hip #Sec% '/)
0&1 Te!.3y Sh!e No Votin/ Ri/ht. #Sec% '2)
0%1 Ple%/oD :ot/!/o. !n% A%'ini.t!to. #Sec% '')
When shares of stoc=s are pledged *y means of endorsement in *lan= and
delivery of the covering certificates to secure a mortgage loan, the pledgee does
not *ecome the owner of the shares simply *y the failure of the registered
stoc=holder to pay his loan% !onse3uently, without proper foreclosure, the lender
cannot demand that the shares *e registered in his name% A contract of pledge of
shares does not ma=e the pledgee the owners of the shares pledged% xLim !a" v.
Court of $ppeals 2(- S!:A /-& #1((,)%
0e1 Con%3&t o$ Sto&?hol%e.A o :e'4e.A :eetin/.#
Iinds and :e3uirements of 4eetings #Secs% &( and '.)
Place and +ime of 4eeting #Secs% '1 and (-)
Nuorum #Sec% '2)
9. Ri/ht. to In.pe&t !n% Copy Copo!te Re&o%.
0!1 B!.i. o$ Ri/ht #/o(ongwei 'r. v. S&C, ,( S!:A --/ >1(2(?)%
--
:ight to inspect covers controlled su*sidiaries% x/o(ongwei v. S&C, ,(
S!:A --/ #1(2()%
041 Li'it!tion. on Ri/ht
+he only express limitations on the right of inspection under Sec% 2& of the
!orporation !ode are< #a) the right of inspections should *e exercised at
reasona*le hours on *usiness days #*) the person demanding the right to examine
and copy excerpts from the corporate records and minutes has not improperly
used any information secured through any previous examination of records of the
corporation and #c) the demand is made in good faith or for a legitimate purpose%
x$frica v. PC//, 2.' S!:A -( #1((2)%
+he right is exercisa*le through agents and representatives, otherwise it
would often *e useless to the stoc=holder who does not =now corporate intricacies%
x5./. Philpotts v. Philippine Manufacturing Co., &. Phil% &21 #1(1()%
A director has the un3ualified right to inspect the *oo=s and records of the
corporation at all reasona*le times, and cannot *e denied on the ground that the
director or shareholder is on unfriendly terms with the officers of the corporation
whose records are sought to *e inspected% x*eraguth v. #sabela Sugar Co., '2
Phil% 2// #1(-2)
+he right to inspect, although it includes the right to ma=e copies, does not
authori@e *ringing the *oo=s or records outside of the corporate premises%
x*eraguth v. #sabela Sugar Co., '2 Phil% 2// #1(-2)
+he right to inspect does not include the right of access to minutes until such
minutes have *een written up and approved *y the directors% x*eraguth v. #sabela
Sugar Co., '2 Phil% 2// #1(-2)
A *oard resolution limiting the right to inspect to a period of ten days shortly
prior to the annual stoc=holdersB meeting is an unreasona*le restriction and
violates the legal provision granting the exercise of such right Fat reasona*le
hours%G xPardo v. Hercules Lumber Co., &2 Phil% (/& #1(2&)
0&1 Spe&i$ie% Re&o%. #Secs% 2&, 2' and 1&1)
0%1 Re'e%ie. I$ In.pe&tion Denie%# Man%a3*s #/on3ales v. P0B, 122 S!:A, &,(
>1(,-? )epublic v. Sandiganba"an, 1(( S!:A -( >1((1?)%
0e1 Con$i%enti!l N!t3e o$ SEC E-!'in!tion. #Sec% 1&2)
H. App!i.!l Ri/ht #Secs% ,1 to ,/ and 1.')
I. Dei,!ti,e S3it. #San Miguel Corp. v. .ahn, 12/ S!:A &&2 >1(,(?)%
0!1 Who :!y Bin/ S3it ##Pascual v. @ro3co, 1( Phil% ,- >1(11?)%
041 E-h!3.tion o$ Int!+Copo!te Re'e%ie. #&verett v. $sia Ban(ing Corp. &( Phil%
'12 >1(22? $ngeles v. Sanmtos /& Phil% /(2 >1(-2?).
0&1 N!t3e o$ Relie$ #&vangelista v. Santos, ,/ Phil% -,2 >1('.? )epublic Ban( v.
Cuaderno, 1( S!:A /21 >1(/2? )e"es v. !an, - S!:A 1(, >1(/1? Commart
1Phils.2 #nc. v. S&C, 1(, S!:A 2- >1((1?)%
Appointment of receiver can *e an ancillary remedy in a derivative suit
xChase v. C+# of Manila, 1, S!:A /.2 #1(//)%
A derivative suit is an action *rought *y minority shareholders in the name
of the corporation to redress wrongs committed against the corporation, for which
the directors refuse to sue% 0t is a remedy designed *y e3uity and has *een the
principal defense of the minority shareholders against a*uses *y the ma6ority%
x5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/ #1((2)%
Cor a derivative suit to prosper, it is re3uired that the minority shareholder
who is suing for and on *ehalf of the corporation must allege in his complaint
*efore the proper forum that he is suing on a derivative cause of action on *ehalf
of the corporation and all other shareholders similarly situated who wish to 6oin%
x5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/ #1((2)%
0n the a*sence of a special authority from the *oard of directors to institute a
derivative suit for and in *ehalf of the corporation, the president or managing
director is dis3ualified *y law to sue in her own name% +he power to sue and *e
sued in any court *y a corporation even as a stoc=holder is lodged in the *oard of
directors that exercises its corporate powers and not in the president or officer
thereof% xBitong v. Court of $ppeals 2(2 S!:A '.- #1((,)%
-&
Cor a derivative suit to prosper, it is re3uired that the minority stoc=holder
suing for and on *ehalf of the corporation must allege in his complaint that he is
suing on a derivative cause of action on *ehalf of the corporation and all other
stoc=holders similarly situated who may wish to 6oin him in the suit% +here is now
showing that petitioner has complied with the foregoing re3uisites% !am 5ing !a(
v. Ma(asiar A%:% 122&'2, 2( 9anuary 2..1%
+he allegations of in6ury to the spouses1relators can co1exist with those
pertaining to the corporation% +he personal in6ury suffered *y the spouses cannot
dis3ualify them from filing a derivative suit on *ehalf of the corporation% 0t merely
gives rise to an additional cause of action for damages against the erring directors%
+his cause of action is also included in the !omplaint filed *efore the SE!% /ochan
v. >oung A%:% $o% 1-1,,(, 12 4arch 2..1%
1J. Ri/ht to Popotion!te Sh!e o$ Re'!inin/ A..et. Upon Di..ol3tion
#a) Different rules apply to non1stoc= corporations and foundations #Secs% (& and ('
Section -&#O)#2)#c), $0:! of 1((2)%
11. Cont!&t. !n% A/ee'ent A$$e&tin/ Sh!ehol%in/.
0!1 Po-y #Sec% ',)
041 Votin/ T3.t A/ee'ent. #Sec% '( Lee v. C$, 2.' S!:A 2'2 >1((2?)%
+he trustor has a right to terminate the 7+A for *reach thereof% x&verett v.
$sia Ban(ing Corporation, &( Phil% '12 #1(2/)%
7oting trust agreement as part of a loan arrangement% 0#-C v. $4uino, 1/-
S!:A 1'- #1(,,)%
0&1 Poolin/ A/ee'ent. o Sh!ehol%e.L A/ee'ent. #Sec% 1..)
CIII. CAPITAL STRUCTURE# SHARES O5 STOCK
(. Con&ept o$ KC!pit!l Sto&?K #Central !extile Mills v. 0ational 5age and Productivit"
Commission 2/. S!:A -/, >1((/?)%
;y express provision of Section 1- >of the !orporation !ode?, paid1up capital is
that portion of the authori@ed capital stoc= which has *een *oth su*scri*ed and paid%
$ot all funds or assets received *y the corporation can *e considered paid1up capital,
for this term has a technical signification in !orporation "aw% Such must form part of
the authori@ed capital stoc= of the corporation, su*scri*ed and then actually paid up%
xMSC#,0$C6S#P Local Chapter v. 0ational 5ages and Productivit" Commission 2/(
S!:A 12- #1((2)%
+he term FcapitalG and other terms used to descri*e the capital structure of a
corporation are of universal acceptance, and their usages have long *een esta*lished
in 6urisprudence% ;riefly, capital refers to the value of the property or assets of a
corporation% +he capital su*scri*ed is the total amount of the capital that persons
#su*scri*ers or shareholders) have agreed to ta=e and pay for, which need not
necessarily *e, and can *e more than, the par value of the shares% 0n fine, it is the
amount that the corporation receives, inclusive of the premium if any, in consideration
of the original issuance of the shares% x0ational !elecommunications Commission v.
Court of $ppeals -11 S!:A '.,, '1&1'1' #1((()%
(. Cl!..i$i&!tion o$ Sh!e. #Sec% /)
0!1 Co''on Sh!e.
FA common stoc= represents the residual ownership interest in the
corporation% 0t is a *asic class of stoc= ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division
of profits%G xCommissioner of #nternal )evenue v. Court of $ppeals, -.1 S!:A 1'2
#1((()%
041 Pe$ee% Sh!e. #)epublic Planters Ban( v. $gana, 2/( S!:A 1 >1((2?)%
P!ti&ip!tin/ !n% Non+p!ti&ip!tin/
C3'3l!ti,e !n% Non+&3'3l!ti,e
-'
Preferred stoc=s are those which entitle the shareholder to some priority on
dividends and asset distri*ution% xCommissioner of #nternal )evenue v. Court of
$ppeals -.1 S!:A 1'2 #1((()%
FA preferred share of stoc=, on one hand, is one which entitles the holder
thereof to certain preferences over the holders of common stoc=% +he preferences
are designed to induce persons to su*scri*e for shares of a corporation% Preferred
shares ta=e a multiplicity of forms% +he most common forms may *e classified into
two< #1) preferred shares as to assets and #2) preferred shares as to dividends% +he
former is a share which gives the holder thereof preference in the distri*ution of the
assets of the corporation in case of li3uidation the latter is a share the holder of
which entitled to receive dividends on said shares to the extent agreed upon *efore
any dividends at all are paid to the holders of common stoc=% +here is no guaranty,
however, that the share will receive any dividends% % % Similarly, the present
!orporation !ode provides that the *oard of directors of a stoc= corporation may
declare dividends only out of unrestricted retained earnings% +he !ode, in Section
&-, adopting the change made in accounting terminology, su*stituted the phrase
Funrestricted retained earnings,G which may *e a more precise term, in place of
Fsurplus profits arising from its *usinessG in the former law% +hus, the declaration of
dividends is dependent upon the availa*ility of surplus profit or unrestricted retained
earnings, as the case may *e% Preferences granted to preferred stoc=holders,
moreover, do not give them a lien upon the property of the corporation nor ma=e
them creditors of the corporation, the right of the former *eing always su*ordinate
to the latter% Dividends are thus paya*le only when there are profits earned *y the
corporation and as a general rule, even if there are existing profits, the *oard of
directors has the discretion to determine whether or not dividends are to *e
declared% Shareholders, *oth common and preferred, are considered ris= ta=ers
who invest capital in the *usiness and who can loo= only to what is left after
corporate de*ts and lia*ilities are fully paid% )epublic Planters Ban( v. $gana, 2/(
S!:A 1 #1((2)%
041 Re%ee'!4le .h!e. #Sec% ,)
:edeema*le shares are shares usually preferred, which *y their terms are
redeema*le at a fixed date, or at the option of either issuing corporation, or the
stoc=holder, or *oth at a certain redemption price% A redemption *y the corporation
of its stoc= is, in a sense, a repurchase of it for cancellation% +he present !ode
allows redemption of shares even if there are no unrestricted retained earnings on
the *oo=s of the corporation% +his is a new provision which in effect 3ualifies the
general rule that the corporation cannot purchase its own shares except out of
current retained earnings% Oowever, while redeema*le shares may *e redeemed
regardless of the existence of unrestricted retained earnings, this is su*6ect to the
condition that the corporation has, after such redemption, assets in its *oo=s to
cover de*ts and lia*ilities inclusive of capital stoc=% :edemption, therefore, may
not *e made where the corporation is insolvent or if such redemption will cause
insolvency or ina*ility of the corporation to meet its de*ts as they mature% )epublic
Planters Ban( v. $gana, 2/( S!:A 1 #1((2)%
F:edemption is repurchase, a reac3uisition of stoc= *y a corporation which
issued the stoc= in exchange for property, whether or not the ac3uired stoc= is
cancelled, retired or held in the treasury% Essentially, the corporation gets *ac=
some of its stoc=, distri*utes cash or property to the shareholder in payment for
the stoc=, and continues in *usiness as *efore% +he redemption of stoc= dividends
previously issued is used as a veil for the constructive distri*ution of cash
dividends% xCommissioner of #nternal )evenue v. Court of $ppeals -.1 S!:A
1'2 #1((()%
0&1 5o3n%e Sh!e. #Sec% 2)
0%1 Te!.3y Sh!e. #Sec% ( Commissioner v. Manning, // S!:A 1& >1(2'?)%
When a treasury share which has not *een retired *y the corporation may
*e sold again *ut so long as it remains a treasury share, it does not participate in
dividends #since a corporation cannot pay dividends to itself) and cannot vote in
stoc=holdersB meeting% San Miguel Corp. v. Sandiganba"an, -&. S!:A 2,(
#2...)%
0e1 Sto&? W!!nt.
0$1 Sto&? Option.
0/1 Re+Cl!..i$i&!tion o$ Sh!e.
-/
F:eclassification of shares does not always *ring any su*stantial alteration in
the su*scri*erBs proportional interest% ;ut the exchange is differentKthere would
*e a shifting of the *alance of stoc= features li=e priority in dividend declarations
or a*sence of voting rights% Jet neither the reclassification nor exchange per se
yields income for tax purposes% % % 0n this case, the exchange of shares, without
more, produces no reali@ed income to the su*scri*er% +here is only a modification
of the su*scri*erBs rights and privilegesKwhich is not a flow of wealth for tax
purposes% +he issue of taxa*le dividend may arise only once a su*scri*er disposes
of his entire interests and not when there is still maintenance of proprietary
interest%G xCommissioner of #nternal )evenue v. Court of $ppeals -.1 S!:A 1'2
#1((()%
). Hy4i% Se&3itie. #/overnment v. Phil. Sugar &states, -, Phil% 1' >1(1,? 'ohn .ele"
Co. v. Comm. of #nternal )evenue, -2/ 5%S% '21, // S% !t% 2((, (. "% Ed%, 22, >1(&'?)
*. G3!.i+Reo/!ni8!tion
0!1 :eduction of !apital Stoc= #Sec% -, xMadrigal % Co. v. Bamora, 1'1 S!:A -''
>1(,2?)
041 Stoc= Splits
0&1 Stoc= !onsolidations
CIV. ACGUISITIONSD :ERGERS AND CONSOLIDATIONS
A. A&;3i.ition. !n% T!n.$e.
See relevant portion of 70""A$5E7A, )estatement of the
-octrine of Piercing the *eil of Corporate +iction, -2 A+E$E8 "%9%
1( #$o% 2, 9une 1((-)
1. Con&ept o$ KEntepi.eK o KE&ono'i& 3nitK o KGoin/ &on&enK #*illa )e"
!ransit #nc. v. +errer, 2' S!:A ,&' >1(/,?)%
(. Type. o$ A&;3i.ition.MT!n.$e. #&dward '. 0ell Co. v. Pacific, 1' S!:A &1'
>1(/'?)#
0!1 0n a pure KA..et. onlyK T!n.$e, the transferee is not lia*le for the
de*ts and lia*ilities of the transferor, except where the transferee
expressly or impliedly agrees to assume such de*ts
041 0n a EB3.ine.. Entepi.eF T!n.$e, the transferee is lia*le for the
de*ts and lia*ilities of the transferor and
0&1 0n an E;3ity T!n.$e, the transferee is not lia*le for the de*ts and
lia*ilities of the transferor, except where the transferee expressly or
impliedly agrees to assume such de*ts%
). B3.ine.. Entepi.e T!n.$e. #$.-. Santos v. *as4ue3, 22 S!:A 11'/ >1(/,?
Laguna !ransportation Co. #nc. v. SSS, 1.2 Phil% ,-- >1(/.?)%
Although the *usiness enterprise was held under a partnership scheme and
latter the *usiness was transferred to a corporation, the *usiness enterprise is
deemed to have *een in operation for the re3uired two1year period as to come
under the coverage of the SSS "aw% xSan !eodoro -ev. &nt. #nc. v. SSS, ,
S!:A (/ #1(/-)%
Although a corporation may have ceased *usiness operations and an
entirely new company has *een organi@ed to ta=e over the same type of
operations, it does not necessarily follow that no one may now *e held lia*le for
illegal acts committed *y the earlier firm% Pepsi,Cola Bottling Co. v. 0L)C, 21.
S!:A 222 #1((2)%
*. E;3ity T!n.$e. #Philippine *eterans #nvestment -evelopment Corp. v. C$, 1,1
S!:A //( >1((.?)%
+he fact that instead on foreclosing on the mortgaged assets, D;P
converted its loans to e3uity, ma=ing it the controlling stoc=holder of a *an=, and
although the ma6ority of the mem*ers of the *oard of directors of the *an= are
from D;P, the same does not ma=e D;P an employer of the *an= employees, nor
does it ma=e D;P lia*le for the wage claims of the *an=Ms employees% x-BP v.
0L)C, 1,/ S!:A ,&1 #1((.)%
-2
B. :e/e !n% Con.oli%!tion
1. Con&ept.
(. Po&e%3e#
0!1 Plan of 4erger or !onsolidation #Sec% 2/)
041 Stoc=holdersM or 4em*ersM Approval #Sec% 22)
0&1 Articles of 4erger or !onsolidation #Sec% 2,)
0%1 Approval *y SE! #Sec% 2()%
). E$$e&t. o$ :e/e o Con.oli%!tion #Sec% ,.)
0t is settled that in the merger of two existing corporations, one of the
corporations survives and continues the *usiness, while the other is dissolved and all
its rights, properties and lia*ilities are ac3uired *y the surviving corporation% xBabst v.
Court of $ppeals, A%:% $o% ((-(,, 2/ 9anuary 2..1%
8rdinarily, in the merger of two or more existing corporations, one of the
com*ining corporations survives and continues the com*ined *usiness, while the
rest are dissolved and all their rights, properties and lia*ilities are ac3uired *y the
surviving corporation% Although there is dissolution of the a*sor*ed corporations,
there is no winding up of their affairs or li3uidation of their assets, *ecause the
surviving corporation automatically ac3uires all their rights, privileges and powers,
as well as their lia*ilities% x$ssociated Ban( v. Court of $ppeals 2(1 S!:A '11
#1((,)
+he merger, however, does not *ecome effective upon the mere agreement of
the constituent corporations% +he procedure to *e followed is prescri*ed under the
!orporation !ode% Section 2( of said !ode re3uires the approval *y the Securities
and Exchange !ommission #SE!) of the articles of merger which, in turn, must have
*een duly approved *y a ma6ority of the respective stoc=holders of the constituent
corporations% +he same provision further states that the merger shall *e effective
only upon the issuance *y the SE! of a certificate of merger% +he effectivity date of
the merger is crucial for determining when the merged or a*sor*ed corporation
ceases to exist< and when its rights, privileges, properties as well as lia*ilities pass
on to the surviving corporation% x$ssociated Ban( v. Court of $ppeals 2(1 S!:A
'11 #1((,)%
C. E$$e&t. on E'ployee. o$ Copo!tion 0Complex &lectronics &mplo"ees $ssociation
v. 0L)C -1. S!:A &.- >1(((?)%
1. A..et. Only T!n.$e. #Sundowner -ev. Corp. v. -rilon 1,. S!:A 1& >1(,(?)
+here is no law re3uiring that the purchaser of 4D00Bs assets should a*sor*
its employees% As there is no such law, the most that the $":! could do, for
reasons of pu*lic policy and social 6ustice, was to direct >the *uyer? to give
preference to the 3ualified separated employees of 4D00 in the filling up of
vacancies in the facilities% xM-## Supervisors % Confidential &mplo"ees $sso. *.
Pres. $ssistance on Legal $ffairs G8 SC)$ H: 178GG2.
(. B3.ine..+Entepi.e T!n.$e. #>u v. 0L)C 2&' S!:A 1-& >1(('? Sunio v.
0L)C, 122 S!:A -(. >1(,&? Central $3ucarera del -anao v. Court of $ppeals,
1-2 S!:A 2(' >1(,'? xSan +elipe 0eri School of Mandalu"ong #nc. v. 0L)C,
2.1 S!:A &2, #1((1)%
). E;3ity T!n.$e. #Manlimos v. 0L)C, 2&2 S!:A 1&' >1(('? )obledo v. 0L)C,
2-, S!:A '2 >1((&? Pepsi,Cola Bottling Co. v. 0L)C, 21. S!:A 222 #1((2)
x-evelopment Ban( of the Philippines v. 0L)C, 1,/ S!:A ,&1>1((.? Pepsi Cola
-istributors of the Philippines #nc. v. 0L)C, 2&2 S!:A -,/ #1((') xCoral v.
0L)C, 2', S!:A 2.& >1((/? x$von -ale /arments #nc. v. 0L)C, 2&/ S!:A
2-- >1(('? &lectronics &mplo"ees $ssociation v. 0L)C -1. S!:A &.- >1(((?)%
*. :e/e. !n% Con.oli%!tion. #+ilipinas Port Services #nc. v. 0L)C 122 S!:A
2.- >1(,(? +ilipinas Port Services #nc. v. 0L)C 2.. S!:A 22- >1((1? 0ational
6nion Ban( &mplo"ees v. "a@aro, 1'/ S!:A 12- >1(,,?) x+irst /eneral
Mar(eting Corp. v. 0L)C, 22- S!:A --2 #1((-)%
6. Spin+O$$. #San Miguel Corp. &mplo"ees 6nion,P!/5@ v. Confessor, 2/2 S!:A
,1 >1((/?)
-,
CV. REHABILITATION AND INSOLVENC<
See 70""A$5E7A, )evisiting the Philippine DLawsE on
Corporate )ehabilitation, L"000 A+E$E8 "AW 985:$A" $o% 2
#4ay, 1((()%
1. Copo!te B!n?3pt&y L!". in Gene!l
0!1 Aoverning "aws #+he 0nsolvency Act, PD (.21A, and Securities :egulation !ode
>:A ,2((? 0nterim :ules of Procedure for !orporate :eha*ilitation of 2...)
041 +ypes of *an=ruptcy proceedings in the Philippines
0&1 :esolution on 6urisdiction issues on *an=ruptcy proceedings #Ching v. Land Ban( of
the Philippines 2.1 S!:A 1(. >1((1?)%
(. S3.pen.ion o$ P!y'ent.
0!1 0nsolvency "aw #Secs% 2 to 1-)
1 Situation of the corporate de*tor
1 $ature of petition
1 :e3uired vote of creditors
1 !onse3uences of approvalPnon1approval
041 Pres% Decree (.21A #Sec% '>d?), and Section '%1. of Securities :egulation !ode%
0&1 Supreme !ourt 0nterim :ules of Procedure on !orporation :eha*ilitation #2...)%
). Copo!te Reh!4ilit!tion
0!1 N!t3e o$ EReh!4ilit!tionF #)ub" #ndustrial Corp. v. Court of $ppeals 2,& S!:A
&&' #1((,)%
"i3uidation, in !orporation "aw, connotes a winding up or setting with creditors
and de*tors% 0t is the winding up of a corporation so that assets are distri*uted to
those entitled to receive them% 0t is the process of reducing assets to cash,
discharging lia*ilities and dividing surplus or loss% 8n the opposite end of the
spectrum is reha*ilitation which connotes a reopening or reorgani@ation%
:eha*ilitation contemplates a continuance of corporate life and activities in an effort
to restore and reinstate the corporation to its former position of successful operation
and solvency% 0t is crystal clear that the concept of li3uidation is diametrically
opposed or contrary to the concept of reha*ilitation, such that *oth cannot *e
underta=en at the same time% +o allow the li3uidation proceedings to continue would
seriously hinder the reha*ilitation of the su*6ect *an=% Philippine *eterans Ban(
&mplo"ees 6nion I 0.6.B.&., A%:% $o% 1.'-/&, 2, 9une 2..1%
041 B!.i. o$ RTC Po"e to Un%et!?e Copo!te Reh!4ilit!tion #Secs% '>d? and /,
Pres% Decree (.21A, in relation to Sec% '%1., Securities :egulation !ode)
0&1 Appointment of 4anagement !ommittee or a :eha*ilitation :eceiver
0%1 Automatic Stay and its "egal Effects When it *ecomes effective
+he appointment of a management committee or reha*ilitation receiver may
only ta=e place after the filing with the SE! of an appropriate petition for
suspension of payments% +he conclusion is inevita*le that pursuant to Section
/#c), ta=en together with Sections '#d) and #d), a court action is ipso =ure
suspended only upon the appointment of a management committee or a
reha*ilitation receiver% #Barotac Sugar Mills v. Court of $ppeals 22' S!:A &(2
>1((2? reiterated in 6nion Ban( v. Court of $ppeals 2(. S!:A 1(, >1((,?)
+ D3!tion #B.+. Homes #nc. v. Court of $ppeals 1(. S!:A 2/2 >1((.?)
+ E$$e&t on In%i,i%3!l Petitione. 2oinin/ the Petition #6nion Ban( of the
Philippines v. Court of $ppeals, 2(. S!:A 1(, #1((,) xModern Paper Products
#nc. v. Court of $ppeals, 2,/ S!:A 2&( #1((,) x!raders )o"al Ban( v. Court of
$ppeals 122 S!:A 2,, >1(,(? xChung .a Bio v. #ntermediate $ppellate Court
1/- S!:A '-& #1(,,))
+ Cl!i'. Co,ee% 4y the A3to'!ti& St!y #xPC#B v. Court of $ppeals 122 S!:A
&-/ >1(,(? $lemarCs Sibal % Sons #nc. v. &lbinias, 1,/ S!:A (& >1((.?
-(
x)i3al Commercial Ban(ing Corp. v. #$C, 21- S!:A ,-. >1((2? xBan( of P#
v. Court of $ppeals, 22( S!:A 22- >1((&?)%
+ Type. o$ E&l!i'.F Co,ee% #+inasia #nvestments v. Court of $ppeals 2-2
S!:A &&/ >1((&?)
"a*or claims are not exempted from the automatic stay under Pres%
Decree $o% (.21A% +he 6ustification for the automatic stay of all pending
actions for claims is to ena*le the management committee or the reha*ilitation
receiver to effectively exercise itsPhis powers free from any 6udicial or extra1
6udicial interference that migh unduly hinder or prevent the FrescueG of the
de*tor company% +o allow such other actions for la*or claims to continue
would only add to the *urden of the management committee or reha*ilitation
receiver, whose time, effort and resources would *e wasted defending claims
against the corporation instead of *eing directed toward its restructuring and
reha*ilitation% x)ubberworld JPhils.K #nc. v. 0L)C -.' S!:A 221 #1((()
A%:% $o% 12,..-, 2/ 9uly 2...%
0e1 R!tion!le $o S3.pen.i,e E$$e&t o$ Appoint'ent on E-i.tin/ S3it. !n%
C!3.e. o$ A&tion
0$1 Po"e. o$ :!n!/e'ent Co''ittee o the Reh!4ilit!tion Re&ei,e #Sec% /, PD
(.21A)
0/1 SEC Po"e to Li;3i%!te Copo!tion
0h1 B!.i& Di$$een&e. Bet"een S3.pen.ion o$ P!y'ent. Po&ee%in/. 3n%e the
In.ol,en&y L!" !n% Un%e Pe.. De&ee No. IJ(+A
*. In.ol,en&y Po&ee%in/.
A li3uidation proceeding is a proceeding in rem so that all other interested
persons whether =nown to the parties or not may *e *ound *y such proceedings% xChua
v. 0L)C, 1(. S!:A '', #1((.)%
0!1 Aoverning "aw and 9urisdiction
041 Aeneral Effect of !orporate 0nsolvency Proceedings
0&1 VOLUNTAR< INSOLVENC<
0%1 Ciling of Petition #Sec% 1&, +0")
0e1 Effect of 8rder of 0nsolvency #Sec% 1, -e $mu3ategui v. Macleod -- Phil% ,.
>1(1'?)%
Section 1, on the automatic stay is no self1executory applications for
suspension of proceedings must *e made in the various courts where actions in
pending #x6nson v. $beto &2 Phil% &2 >1(2&?)%
0$1 INVOLUNTAR< INSOLVENC< #Sec% 2. to --)
0/1 Nualifications of Petitioning !reditors
A foreign corporation whichs shows that it is a resident of the Philippines has
legal standing to petition for involuntary insolvency of a corporate de*tor xState
#nvestment House #nc. v. Citiban( 0.$. 2.- S!:A ( #1((1)%
0h1 8rder to Show !ause #Sec% 21) Oearing of petition #Sec% 2&)
0i1 Acts of 0nsolvency and 8rder of Ad6udication #Sec% 2.)
0>1 4eeting of !reditors to Elect Assignee #Secs% 2( and -.)
0?1 Effects of 8rder of 0nsolvency and Appointment of :eceiver #Secs% -2, -& and -'
x)adiola,!oshiba Phil. v. #$C, 1(( S!:A -2- >1((1?)
0l1 "i3uidation of assets and payment of de*ts #Sec% --)
0'1 :emedies of Secured !reditors #Sec% 2(, &- and '()
0n1 !omposition #Sec% /-)
0o1 Discharge #Secs% '2, /&, and //)
0p1 Appeal in certain cases #Sec% ,2)
CVI. DISSOLUTION
1. No Ve.te% Ri/ht. to Copo!tion 5i&tion #/on3ales v. Sugar )egulator"
$dministration 12& S!:A -22 >1(,(?)%
(. Vol3nt!y Di..ol3tion #Sec% 112)
0!1 No Ce%ito. A$$e&te% #Sec% 11,)
&.
041 Thee Ae Ce%ito. A$$e&te% #Secs% 11( and 122)%
). In,ol3nt!y Di..ol3tion #Sec% 121 Sec% /#l), P%D% (.21A Sec% 2, :ule // :ules of
!ourt)
0!1 5*o Warranto #)epublic v. Bisa"a Land !ransportation Co., ,1 S!:A ( >1(2,?
)epublic v. Securit" Credit % $cceptance Corp., 1( S!:A ', >1(/2?
x/overnment v. &l Hogar +ilipino, '. Phil% -(( >1(22?)%
041 E-pi!tion o$ Te'
0&1 Shotenin/ o$ Copo!te Te' #Sec% 12.)
0%1 Non+3.e o$ Copo!te Ch!te !n% Contin3o3. Inope!tion o$ ! Copo!tion
#Sec% 22)
"8rgani@e" when used in reference of a corporation involves the election of
officers, providing for the su*scription and payment of the capital stoc=, the
adoption of *y1laws, and such other steps as are necessary to endow the legal
entity with the capacity to transact the legitimate *usiness for which it was created%
+he term "organi@ation" relates merely to the systemati@ation and orderly
arrangement of the internal and managerial affairs and organs of the corporation%
xBenguet Consolidated Mining Co. v. Pineda (, Phil% 211 #1('/)%
+he failure to file the *y1laws does not automatically operate to dissolve a
corporation *ut is now considered only a ground for such dissolution% xChung .a
Bio v. #ntermediate $ppellate Court, 1/- S!:A '-& #1(,,)%
0$1 De'!n% o$ :inoity Sto&?hol%e. $o Di..ol3tion #+inancing Corp. of the Phil.
v. !eodoro, (- Phil% &.& >1('-?)%
*. Le/!l E$$e&t. o$ Di..ol3tion
A corporation cannot extend its life *y amendment of its articles of incorporation
effected during the three1year statutory period for li3uidation when its original term of
existence had already expired, as the same would constitute new *usiness% x$lhambra
Cigar % Cigarette Manufacturing Compan" #nc. v. S&C, 2& S!:A 2/( #1(/,)%
When the period of corporate life expires, the corporation ceases to *e a *ody
corporate for the purpose of continuing the *usiness for which it was organi@ed
xPhilippine 0ational Ban( v. Court of +irst #nstance of )i3al Pasig Br. LL#, 2.( S!:A
2(& #1((2)%
6. :etho%. o$ Li;3i%!tion #Sec% 122 Board of Li4uidators v. .alaw, 2. S!:A (,2
>1(/2? Sumera v. *alencia, /2 Phil% 221 >1(-(? Buenaflor v. Camarines #ndustr",
1., Phil% &22 >1(/.?)%
F"i3uidationG is Fthe settlement of the affairs of a corporation >which? consists
of ad6usting the de*ts and claims, that is, of collecting all that is due the corporation,
the settlement and ad6ustment of claims against it and the payment of its 6ust de*ts%G
xChina Ban(ing Ciorp. *. M. Michelin % Cie, ', Phil% 2/1 #1(--)%
+here can *e no dou*t that under Sections 22 and 2, of the !orporation "aw,
the "egislature intended to let the shareholders have the control of the assets of the
corporation upon dissolution in winding up its affairs% +he normal method of procedure
is for the directors and executive officers to have charge of the winding up operations,
though there is the alternative method of assigning the property of the corporation to
the trustees for the *enefit of its creditors and shareholders% FWhile the appointment of
a receiver rests within the sound 6udicial discretion of the court, such discretion must,
however, always *e exercised with caution and governed *y legal and e3uita*le
principles, the violation of which will amount to its a*use, and in ma=ing such
appointment the court should ta=e into consideration all the facts and weigh the
relative advantages and disadvantages of appointing a receiver to wind up the
corporate *usiness%G xChina Ban(ing Ciorp. *. M. Michelin % Cie, ', Phil% 2/1 #1(--)%
F+he appointment of a receiver *y the court to wind up the affairs of the
corporation upon petition for voluntary dissolution does not empower the court to hear
and pass on the claims of the creditors of the corporation at first hand% % % all claims
must *e presented for allowance to the receiver or trustee or other proper persons
during the winding up proceedings which in this 6urisdiction would *e within the three
years provided *y sections 22 and 2, of the !orporation "aw as the term for the
corporate existence of the corporation, and if a claim is disputed or unli3uidated so
that the receiver cannot safely allow the same, it should *e transferred to the proper
court for trial and allowance, and the amount so allowed then presented to the receiver
or trustee for payment% +he rulings of the receiver on the validity of claims su*mitted
&1
are su*6ect to review *y the court appointing such receiver though no appeal is ta=en
to the latterBs ruling%G xChina Ban(ing Corp. *. M. Michelin % Cie, ', Phil% 2/1 #1(--)%
While Section 22 of the !orporation "aw >now section 122 of the !orporation
!ode? provides for a three year period for the continuation of the corporate existence
of the corporation for purposes of li3uidation, there is nothing in said provision which
*ars an action for the recovery of the de*ts of the corporation against the li3uidator
thereof, after the lapse of the said three1year period% F0t immaterial that the present
action was filed after the expiration of the three years % % % for at the very least, and
assuming that 6udicial enforcement of taxes may not *e initiated after said three years
despite the fact that actual li3uidation has not terminated and the one in charge thereof
is still holding the assets of the corporation, o*viously for the *enefit of all the creditors
thereof, the assessment aforementioned, made within the three years, definitely
esta*lished the Aovernment as a creditor of the corporation for whom the li3uidator is
supposed to hold assets of the corporation%G x)epublic v. Marsman -evelopment
Compan" && S!:A &1, #1(22)%
7. Who Ae Li!4le A$te Di..ol3tion !n% Win%in/+Up@ #0ational $baca Corp. v. Pore, 2
S!:A (,( >1(/1? !an !iong Bio v. Commissioner, 1.. Phil% ,/ >1('/? /elano v.
C$, 1.- S!:A (. >1(,1?)%
Although a corporate officer, such as a general manager is not lia*le for
corporate o*ligations, such as claims for wages, however, when such corporate officer
ceases corporate property to apply to his own claims against the corporation, he shall
*e lia*le to the extent thereof to corporate lia*ilities, since =nowing fully well that
certain creditors had similarly valid claims, he too= advantage of his position as
general manager and applied the corporationMs assets in payment exclusively to his
own claims% x-e /u3man v. 0L)C, 211 S!:A 22- #1((2)%
+he corporation continues to *e a *ody corporate for three #-) years after its
dissolution for purposes of prosecuting and defending suits *y and against it and for
ena*ling it to settle and close its affairs, culminating in the disposition and distri*ution
of its remaining assets% 0t may, during the three1year term, appointing a trustee or a
receiver who may act *eyond that period% +he termination of the life of a 6uridical entity
does not *y itself cause the extinction or diminution of the rights and lia*ilities of such
entity nor those of its owners and creditor% 0f the three1year extended life has expired
without a trustee or receiver having *een expressly designated *y the corporation
within that period, the *oard of directors #or trustee) itself, following the rationale of the
Supreme !ourtMs decision in /elano v. court of $ppeals #1.- S!:A (.) may *e
permitted to so continue as "trustees" *y legal implication to complete the corporate
li3uidation% Still in the a*sence of a *oard of directors or trustees, those having any
pecuniary interest in the assets, including not only the shareholders *ut li=ewise the
creditors of the corporation, acting for and in its *ehalf, might ma=e proper
representations with the Securities and Exchange !ommission, which has primary and
sufficient *road 6urisdiction in matters of this nature, for wor=ing out a final settlement
of the corporate concerns% Clemente v. Court of $ppeals, 2&2 S!:A 212, 22- #1((')%
Since the law specifically allows a trustee to manage the affairs of the
corporation in li3uidation, any supervening fact, such as the dissolution of the
corporation, repeal of the law, or any other fact of similar nature, would not serve as
an effective *ar to the enforcement of such right% x)eburiano v. Court of $ppeals -.1
S!:A -&2 #1((()%
0n /elano case, the counsel of the dissolved corporation was considered a
trustee% 0n the later case of Clemente v. Court of $ppeals >2&2 S!:A 212 #1((')?, we
held that the *oard of directors may *e permitted to complete the corporate li3uidation
*y continuing as FtrusteesG *y legal implication% 5nder Section 1&' of the !orporation
!ode, F$o right of remedy in favor or against any corporation % % % shall *e removed or
impaired either *y the su*se3uent dissolution of said corporation or *y any su*se3uent
amendment or repeal of this !ode or of any part thereof%G +his provision safeguards
the rights of a corporation which is dissolved pending litigation% x)eburiano v. Court of
$ppeals -.1 S!:A -&2 #1((()
9. Rein&opo!tion #Chung .a Bio v. #ntermediate $ppellate Court, 1/- S!:A '-&
>1(,,?)%
CVII. CLOSE CORPORATION
See 70""A$5E7A, !he Philippine Close Corporation, -2
A+E$E8 "%9% #$o% 2, 4arch, 1(,,)%
&2
1. De$inition #Sec% (/ Manuel ). -ula" &nterprises v. Court of $ppeals, 22' S!:A /2,
>1((-? San 'uan Structural and Steel +abricators #nc. v. Court of $ppeals, 2(/ S!:A
/-1, /&' #1((,)%
(. Ati&le. o$ In&opo!tion Re;3ie'ent. #Sec% (2)
#a) Pre1Emptive :ights #Sec% 1.2)
#*) Amendment #Sec% 1.-)
). Re.ti&tion on T!n.$e o$ Sh!e. #Secs% (, and (()
*. A/ee'ent. 4y Sto&?hol%e #Sec% 1..)
6. No Ne&e..ity o$ Bo!% #Sec% 1.1 Sergio +. 0aguiat v. 0L)C 2/( S!:A '/& >1((2?)%
7. De!%lo&?. #Sec% 1.&)
9. With%!"!l !n% Di..ol3tion #Sec% 1.')
Even prior to the passage of the !orporation !ode which recogni@ed close
corporation, the Supreme !ourt had on limited instances recogni@ed the common law
rights of minority stoc=holders to see= dissolution of the corporation% +inancing Corp.
of the Phil. v. !eodoro, (- Phil% &.& #1('-)%
CVIII. NON+STOCK CORPORATIONS AND 5OUNDATIONS
See 70""A$5E7A, -istinguishing +oundations from @ther
0on,Stoc( Corporations% #5npu*lished)
1. Theoy on Non+Sto&? Copo!tion #Secs% 1&#2), &-, ,2, ,, and (&#') Collector of
#nternal )evenue v. Club +ilipino #nc. de Cebu, ' S!:A -21 >1(/2? Collector of
#nternal )evenue v. 6niversit" of *isa"as, 1 S!:A //( >1(/1?)%
A non1stoc= corporation may only *e formed or organi@ed for charita*le,
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or
other similar purposes% 0t may not engage in underta=ings such as the investment
*usiness where profit is the main or underlying purpose% Although the non1stoc=
corporation may o*tain profits as an incident to its operation such profits are not to *e
distri*uted among its mem*ers *ut must *e used for the furtherance of its purposes%
People v. Menil, A%:% 11'.'&1//, 12 Septem*er 1(((%
+he incurring of profit or losses does not determine whether an activity is for
profit or non1profit, and the courts will consider whether dividends have *een declared
or its mem*ers or that is property, effects or profit was ever used for personal or
individual gain, and not for the purpose of carrying out the o*6ectives of the enterprise%
xManila Sanitarium and Hospital v. /abuco, 2 S!:A 1& #1(/-)%
(. Wh!t i. ! 5o3n%!tion@ #Secs% -. and -&#O), $0:! of 1((2 Sec% 2&, :evenue
:egulations $o% 2 ;0:1$EDA :egulations $o% 11,1, as amended)
+he formal re3uirements of :evenue :egulations $o% 2 are not mandatory and
that an entity may, in the a*sence of compliance with such re3uirements, still show
that it falls under the provisions of Section 2/ of the $0:!% xCollector v. *./. Sinco
&ducational Corp., 1.. Phil% 122 #1('/)%
). Di..ol3tion #Secs% (& and (')
CIC. 5OREIGN CORPORATION
See 70""A$5E7A, Philippine -octrine of "-oing Business," +OE
"AWJE:S :E70EW, 1 Part 0 1 7ol% 700, $o% &, #April, 1((-) Part 00 1 7ol% 700, $o%
/ #9une, 1((-)%
1. De$inition #Sec% 12-)%
A foreign corporation owes its existence to the laws of another state, and
generally, has no legal existence within the state in which it is foreign% x$von
#nsurance PLC v. Court of $ppeals 22, S!:A -12 #1((2)%
A fundamental rule of international 6urisdiction is that no state can *y its laws,
and no court which is only a creature of the state, can *y its 6udgments and decrees,
directly *ind or affect property or persons *eyond the limits of that state% x!imes #nc.
v. )e"es, -( S!:A -.- #1(21)%
&-
(. St!t3toy Con&ept o$ KDoin$ &*sinessK #Art% &&, Executive 8rder $o% 22/, 8mni*us
0nvestment !ode Sec% -#d), :%A% $o% 2.&2, Coreign 0nvestment Act of 1((1)%
0!1 Application for "icense #Secs% 12& and 12' also Art% &,, 8mni*us 0nvestment
!ode)
041 0ssuance of "icense #Sec% 12/ Art% &(, 8mni*us 0nvestment !ode)
0&1 Amendment of "icense #Sec% 1-1)
0%1 :ationale for :e3uiring "icense to Do ;usiness
+he purpose of the law in re3uiring that foreign corporations doing *usiness
in the country *e licensed to do so, it to su*6ect the foreign corporations doing
*usiness in the Philippines to the 6urisdiction of the courts, otherwise, a foreign
corporation illegally doing *usiness here *ecause of its refusal or neglect to o*tain
the re3uired license and authority to do *usiness may successfully though unfairly
plead such neglect or illegal act so as to avoid service and there*y impugn the
6urisdiction of the local courts% $von #nsurance PLC v. Court of $ppeals 22, S!:A
-12 #1((2)%
+he same danger does not exist among foreign corporations that are
indu*ita*ly not doing *usiness in the Philippines% 0ndeed, if a foreign corporation
does not do *usiness here, there would *e no reason for it to *e su*6ect to the
StateBs regulation% As we o*served, in so far as the State is concerned, such
foreign corporation has no legal existence% +herefore, to su*6ect such foreign
corporation to the courtsB 6urisdiction would violate the essence of sovereignty%
x$von #nsurance PLC v. Court of $ppeals 22, S!:A -12 #1((2)%
A foreign corporation licensed to do *usiness in the Philippines should *e
su*6ected to no harsher rules that is re3uired of domestic corporation and should
not generally *e su*6ect to attachment on the pretense that such foreign
corporation is not residing in the Philippines% xClaude 0eon Lights v. Phil.
$dvertising Corp., '2 Phil% /.2 #1(-2)%
). 23i.p3%enti!l Con&ept. o$ KDoin/ B3.ine..K#
0!1 KDoin/ 43.ine..K implies a continuity of commercial dealings and arrangements
and the performance of acts or wor=s or the exercise of some of the functions
normally incident to the purpose or o*6ect of its organi@ation% Mentholatum v.
Mangaliman, 22 Phil% '2' #1(&1)%
Where a single act or transaction, however, is not merely incidental or
casual *ut indicates the foreign corporationMs intention to do other *usiness in the
Philippines, said single act or transaction constitutes doing *usiness% x+ar &ast
#ntMl. v. 0an(ai .og"o, / S!:A 22' #1(/2)%
A foreign corporation with a settling agent in the Philippines which issues
twelve marine policies covering different shipments to the Philippines is doing
*usiness in the Philippines% x/eneral Corp. of the Phil. v. 6nion #nsurance Societ"
of Canton Ltd. ,2 Phil% -1- #1('.)%
A foreign corporation which had *een collecting premiums on outstanding
policies was regarded as doing *usiness in the Philippines% xManufacturing Life
#ns. v. Meer, ,( Phil% -'1 #1('1)
Solicitation of *usiness contracts constitutes doing *usiness in the
Philippines% xMarubeni 0ederland B.*. v. !ensuan, 1(. S!:A 1.' #1((.)%
0t is not really the fact that there is only a single act done that is material for
determining whether a corporation is engaged in *usiness in the Philippines, since
other circumstances must *e considered% Where a single act or transaction of a
foreign corporation is not merely incidental or casual *ut is of such character as
distinctly to indicate a purpose on the part of the foreign corporation to do other
*usiness in the state, such act will *e considered as constituting *usiness% xLitton
Mills #nc. v. Court of $ppeals, 2'/ S!:A /(/ #1((/)%
Participating in *idding process shows an intention to engage in *usiness in
the Philippines% xHutchison Philippines Ltd. v. Subic Ba" Metropolitan $uthorit",
--( S!:A &-& #2...)%
041 Unel!te% o I.ol!te% T!n.!&tion. #&astboard 0avigation Ltd. v. 'uan >smael
and Co. #nc., 1.2 Phil% 1 >1('2? $ntam Consolidated v. C$, 1&- S!:A 2,,
>1(,/?).
Te "o##owin$ were a## e#% not to -e en$a$e% in -*siness in te
Pi#i!!ines)
&&
+he collision of two vessels at the 4anila Oar*or #x-ampfschieffs
)hederei 6nion v. La CampaAia !ransatlantica, , Phil% 2// >1(.2?)
"oss of goods *ound for Oong=ong *ut erroneously discharged in 4anila
#x!he Swedish &ast $sia Co. Ltd. v. Manila Port Service, 2' S!:A
/-- >1(/,?)
0nfringement of trade name #x/eneral /arments Corp. v. -irector of
Patens, &1 S!:A '. >1(21? x6niversal )ubber Products #nc. v. Court
of $ppeals, 1-. S!:A 1.& >1(,,?)
:ecovery of damages sustained *y cargo shipped to the Philippines
#xBula(hidas v. 0avarro, 1&2 S!:A 1 >1(,/?)
Sale to the Aovernment of road construction e3uipment and spare parts
with no intent of continuity of transaction #x/on3ales v. )a4ui3a, 1,.
S!:A 2'& >1(,(?) and
:ecovery on a Oong=ong 6udgment against a 4anila resident #xHang
Lung Ba( v. Saulog, 2.1 S!:A 1-2 >1((1?)%
0n the case of foreign movie companies who have registered intellectual
property rights over their movies in the Philippines, it was held that the
appointment of local lawyer to protect such rights for piracy is not deemed to *e
doing *usiness< "We fail to see how exercising oneMs legal and property rights and
ta=ing steps for the vigilant protection of said rights, particularly the appointment of
an attorney1in1fact, can *e deemed *y and of themselves to *e doing *usiness
here%" xColumbia Pictures #nc. v. Court of $ppeals 2/1 S!:A 1&& #1((/)%
0&1 The KCont!&t Te.tK o$ Doin/ B3.ine.. #Pacific *egetable @il Corp. v. Singson,
Advanced Decision Supreme !ourt, April 1('' 7ol%, p% 1..1A $etna Casualt" %
Suret" Co. v. Pacific Star Line, ,. S!:A /-' >1(22? 6niversal Shipping Lines
#nc. v. #$C, 1,, S!:A 12. >1((.?)%
0%1 T!n.!&tion. "ith A/ent. !n% Bo?e. #/ranger $ssociates v. Microwave
S"stems #nc., 1,( S!:A /-1 >1(( ? La Chemise Lacoste S.$. v. +ernande3,
12( S!:A -2- >1(,&? xSchmid % @berl" v. )'L, 1// S!:A &(- >1(,,? x5ang
Laboratories #nc. v. Mendo3a, 1'/ S!:A && >1(2&?
*. Di$$eent R3le. on T!%e'!? !n% T!%en!'e. #5estern &4uipment % Suppl" Co.
v. )e"es, '1 Phil% 11' >1(22? xLeviton #ndustries v. Salvador, 11& S!:A &2. >1(,2?
xConverse )ubber v. 6niversal )ubber, 1&2 S!:A 1'& >1(,2? xConverse )ubber
Corp. v. 'acinto )ubber % Plastic Co., (2 S!:A 1', >1(,.? x6niversal )ubber
Products #nc. v. C$, 1-. S!:A 1.& >1(,&? xPuma Sportschunhfabri(en )udolf
-assler ../. v. #$C, 1', S!:A 2-- >1(,,? xPhilips &xport B.*. v. C$, 2./ S!:A
&'2 >1((2?)%
6. E$$e&t. o$ 5!il3e to O4t!in Li&en.e#
0!1 8n the contract entered into *y such foreign corporation #Home #nsurance
Compan" v. &astern Shipping Lines, 12- S!:A &2& >1(,-?)%
Section /( of the then !orporation "aw was intended to su*6ect the foreign
corporation doing *usiness in the Philippines to the 6urisdiction of our courts and
not to prevent the foreign corporation from performing single acts, *ut to prevent it
from ac3uiring domicile for the purpose of *usiness without ta=ing the necessary
steps to render it amena*le to suit in the local courts% Marshall,5ells Co. v. &lser,
&/ Phil% 2. #1(2&)%
041 Standing of such foreign corporation to sue in Philippine courts #Sec% 1--
Marshall,5ells v. &lser, &/ Phil% 21 >1(2&?)
0&1 !riminal lia*ility under Sect% 1&& of the !orporation !ode% Home #nsurance
Compan" v. &astern Shipping Lines, 12- S!:A &2& #1(,-)%
0%1 Pari De#i'to Do&tine# +he local party to a contract with a foreign corporation that
does *usiness in the Philippines without license cannot maintain suit against the
foreign corporation 6ust as the foreign corporation cannot maintain suit, under the
principle of pari delicto% #!op,5eld Mfg. v. &C&-, 11( S!:A 11, >1(,'?)
&*t Now See Communication Materials and -esign #nc. v. Court of
$ppeals 2/. S!:A /2- #1((/)%
0e1 E.toppel Do&tine# A foreign corporation doing *usiness in the Philippines may
sue in Philippine courts although it is without license to do *usiness here against a
&'
Philippine citi@en who had contracted with and *een *enefitted *y said corporation
and =new it to *e without the necessary license to do *usiness, under the principle
of estoppel% Merrill L"nch +utures #nc. v. C$, 211 S!:A ,2& #1((2) x/eorg
/rot=ahn /MBH % C. v. #snani, 2-' S!:A 21/ #1((&)%
0$1 Pope Do&tine# &ric(s Ltd. v. Court of $ppeals 2/2 S!:A '/2 #1((2)%
B3t .ee l!tely# Subic Ba" Metropolitan $uthorit" v. 6niversal #nternational /roup of
!aiwan -&. S!:A -'( #2...)%
7. S3it. A/!in.t 5oei/n Copo!tion.#
0!1 23i.%i&tion O,e the KPe.onK o$ 5oei/n Copo!tion. #Sec% 1&, :ule 1&,
:ules of !ourt /eneral Corp. of the Phil. v. 6nion #nsurance Societ" of Canton
Ltd., ,2 Phil% -1- >1('.? 'ohnlo !rading Co. v +lores ,, Phil% 2&1 >1('1?
x'ohnlo !rading Co. v. Bulueta, ,, Phil% 2'. >1('1? xPacific Micronisian Line #nc.
v. -el rosario, (/ Phil% 2- >1('&? x+ar &ast #nternational #mport and &xport Corp.
v. 0an(ai .og"o Co. Ltd., / S!:A 22' >1(/2?)%
0t the appearance of a foreign corporation to a suit is precisely to 3uestion
the 6urisdiction of the said tri*unal over the person of the defendant, then this
appearance is not e3uivalent to service of summons, nor does it constitute an
ac3uiescence to the courtBs 6urisdiction% x$von #nsurance PLC v. Court of $ppeals
22, S!:A -12, -22 #1((2)%
Cor the purpose of having summons served on a foreign corporation in
accordance with :ule 1&, Section 1&, it is sufficient that it *e alleged in the
complaint that the foreign corporation is doing *usiness in the Philippines% xHahn
v. Court of $ppeals 2// S!:A '-2 #1((2)%
When it is shown that a foreign corporation is doing *usiness in the
Philippines, summons may *e served on #a) its resident agent designated in
accordance with law #*) if there is no resident agent, the government official
designated *y law to that effect or #c) any of its officers or agent within the
Philippines% +he mere allegation in the complaint that a local company is the agent
of the foreign corporation is not sufficient to allow proper service to such alleged
agent% Although there is no re3uirement to first su*stantiate the allegation of
agency, yet it is necessary that there must *e specific allegations in the complaint
that esta*lishes the connection *etween the principal foreign corporation and its
alleged agent with respect to the transaction in 3uestion% $owhere in the case of
Signetics Corporation v. Court of $ppeals did the !ourt state that if the Fcomplaint
alleges that defendant has an agent in the Philippines, summons can validly *e
served thereto even without prior evidence of the truth of such factual allegation it
is only in the headnote of the reporter which is not part of the decision% x+rench @il
Mills Machiner" Co. #nc. v. Court of $ppeals 2(' S!:A &/2 #1((,)%
041 The O%% Do&tine #+acilities Management Corp. v. -e la @sa, ,( S!:A 1-1
>1(2(? x+B$ $ircraft v. Bosa, 11. S!:A 1 >1(,1? x)o"al Crown #nternational v.
0L)C, 12, S!:A '/( >1(,(? x5ang Laboratories #nc. v. Mendo3a, 1'/ S!:A
&& >1(,2?)%
Contra# +he sine 4ua non re3uirement for service of summons and other legal
processes or any such agent or representative is that the foreign
corporation is doing *usiness in the Philippines% xH"opsung Maritime
Co. Ltd. v. C$, 1/' S!:A 2', 1(,,) Signetics Corp. v. C$, 22' S!:A
2-2 #1((-2.
&*t Now See $von #nsurance PLC v. Court of $ppeals 22, S!:A -12 #1((2)
0&1 Stip3l!tion on Ven3e
When the contract sued upon has a venue clause within the Philippines, it is
deemed a confirmation *y the foreign corporation, even though not doing *usiness
in the Philippines, to *e sued in local courts% xLinger % +isher /MBH v. #$C, 12'
S!:A '22 #1(,-)%
9. Ple!%in/ KDoin/K !n% KNot Doin/K o$ B3.ine..
+he fact that a foreign corporation is not doing *usiness in the Philippines must
*e alleged if a foreign corporation desires to sue in Philippines courts under the
"isolated transactions rule%" $tlantic Mutual #nc. Co. v. Cebu Stevedoring Co., 12
&/
S!:A 1.-2 #1(//) xCommissioner of Customs v. ..M... /ani, 1,2 S!:A '(1
#1((.)%
+his overturned the previous doctrine in xMarshall,5ells #as well as in x#n re
Li4uidation of the Mercantile Ban( of China etc., /' Phil% -,' #1(-,), that the lac= of
authority of foreign corporation to sue in Philippine courts for failure to o*tain the
license is a matter of affirmative defense%
A complaint filed *y a foreign corporation is fatally defective for failing to allege
its duly authori@ed representative or resident agent in Philippine 6urisdiction% x0ew
>or( Marine Managers #nv. c. Court of $ppeals 2&( S!:A &1/ #1((')%
Cor the purpose of having summons served on a foreign corporation in
accordance with :ule 1&, Section 1&, it is sufficient that it *e alleged in the complaint
that the foreign corporation is doing *usiness in the Philippines% xHahn v. Court of
$ppeals 2// S!:A '-2 #1((2)%
H. Re.i%ent A/ent #Sec% 122 and 12,)
0!1 !oncept of "residence" #State #nvestment House v. Citiban(, 2.- S!:A ( >1((1?)%
041 When a corporation has designated a person to receive service of summon
pursuant to the !orporation !ode, the designation is exclusive and service of
summons on any other person is inefficacious% xH.B. Bachr" Compan"
#nternational v. C$, 2-2 S!:A -2( #1((&)%
I. Appli&!4le L!". to 5oei/n Copo!tion. #Sec% 12( /re" v. #nsular Lumber Co., /2
Phil% 1-( >1(-,?)
1J. A'en%'ent o$ Ati&le. o$ In&opo!tion #Sec% 1-.)
11. :e/e !n% Con.oli%!tion #Sec% 1-2 Art% '1, 8mni*us !ode)
1(. Re,o&!tion o$ Li&en.e #Secs% 1-& and 1-' Art% '., 8mni*us 0nvestment !ode)
1*. With%!"!l o$ 5oei/n Copo!tion #Sec% 1-/)
CC. PENALT< PROVISIONS O5 THE CODE
See 70""A$5E7A, !he Penal Provision 6nder Sec. 7HH of
the Corporation Code, +OE "AWJE:S :E70EW, 7ol% L, $o% 2 #2(
Ce*ruary 1((/)%
1. Penalty !lause for 7iolations of the Provisions of the !ode #Sec% 1&&)%
(. !ross1reference #Sec% 22)%
). Specific application #Sec% 2&)%
*. Strict Principles in !riminal "aw the issue of malice%
6. Hi.toi&!l B!&?/o3n% o$ Se&. 1** 0Se&. 1IJ 1B9 o$ the Copo!tion L!"1
Sec% 1(. was not intended to ma=e every casual violation of one of the
!orporation "aw provisions ground for involuntary dissolution of the corporation and
that the court was entitled to exercise discretion in such matters% x/overnment of
the Philippine #slands v. &l Hogar +ilipino,

'. Phil% -(( #1(22)%
+he penalties imposed in Sec% 1(.#A) of the !orporation "aw for the violation
of the prohi*ition in 3uestion are of such nature that they can *e enforced only *y a
criminal prosecution or *y an action of 4uo warranto% But these proceedings can be
maintained onl" b" the $ttorne",/eneral in representation of the /overnment. "
xHarden v. Benguet Consolidated Mining Co. ', Phil% 1&1 #1(--)%
7. Viol!tion o$ Se&tion 1)) 4y 5oei/n Copo!tion.
Section 1-- of the present !orporation !ode, which unli=e its counterpart
Section /( of the !orporation "aw provided specifically for penal sanctions for
foreign corporations engaging in *usiness in the Philippines without o*taining the
re3uisite license, should *e deemed to have a penal sanction *y virtue of Section
1&& of the !orporation !ode% Home #nsurance Compan" v. &astern Shipping Lines,
12- S!:A &2& #1(,-)%
&2
Home may therefore provides the second instance of violation of the !ode
#under Section 1--), when the criminal penalties of Sec% 1&& are applica*le%
CCI. :ISCELLANEOUS
1. SE! power and supervision #Secs% 1., and 1&- PD (.21A)%
(. Special corporations #Sec% &)%
). $ew re3uirements on existing corporations #Sec% 1&,)%
*. Applica*ility of other provision of the old !orporation "aw, #Sec% 1&' and 1&/)%
NoOoN
CORPLAW.DIRMCORPLAW.OTLM)*)SCRAM11+1*+(JJ1
&,