02 Case Digests - Corporation Law PDF

CORPORATION LAW DIGESTS ALS2014B ATTY.
DY

CONCEPTS
01 - Tayag v. Benguet Consolidated, Inc. (1968) (Concession Theory)
Doctrines:
A corporation is an artificial being created by operation of law.
Facts:
Idonah Slade Perkins owned 2 stock certificates covering 33,002 shares of stock of Benguet Consolidated Inc.
Perkins died in 1960 in New York City. The stock certificates were then held by County Trust Company [CTC] of New
York, who was the domiciliary administrator of her estate.
Thereafter, Renato D. Tayag was appointed ancillary administrator of Perkins properties in the Philippines. A
dispute arose between the domiciliary administrator in new York and the ancillary administrator in the Philippines as to
which of them was entitled to the possession of the stock certificates.
The CFI of Manila then ordered CTC to produce and deposit the certificates with the ancillary administrator. The
domiciliary administrator refused to do so. As a result, the ancillary administrator petitioned the court to issue an order
declaring the certificates to be lost. The order was issued and Benguet was ordered to issue new certificates to be
delivered to the ancillary administrator.
Benguet Consolidated now questions such ruling, admitting that as far as it was concerned, it is immaterial as to
who is entitled to the possession of the stock certificates, but opposing the declaration that such certificates were lost, as
they were in fact known to be in the possession of the domiciliary administrator in New York. In its view, under the
circumstances, the stock certificates cannot be declared or considered as lost.
Issues:
1. W/N the CFI erred in declaring the certificates lost?
Held/Ratio:
1. NO. Since there was a refusal by the domiciliary administrator in New York to deliver the shares of stocks of
Benguet to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in
considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Any other view
would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of the
domiciliary administrator. To sustain Benguets contentions would mean that a judicial decree could be treated as
a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard. What cannot be
disputed is the indispensable role that legal fictions play in the law.
Moreover, the view adopted by Benguet Consolidated is fraught with implications at war with the basic postulates
of corporate theory. A corporation is an artificial being created by operation of law. According to Fletcher, A
corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of
fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders. Dean
Pounds terse summary that a corporation is a juristic person, resulting from an association of human beings
granted legal personality by the State, puts the matter neatly. A corporation as known to Philippine jurisprudence
is a creature without any existence until it has received the imprimatur of the State acting according to law. It is
logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator.
More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, specifically the
judiciary. It is not immune from judicial control. To assert that it can choose which court order to follow and
which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be
tolerated.

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CORPORATION LAW DIGESTS ALS2014B ATTY. DY

02 - Stockholders of Guanzon v. Register of Deeds (1962) (transfer or distribution)
Doctrines:
A corporation is a juridical person distinct from the members composing it. Properties registered in the name of
the corporation are owned by it as an entity separate and distinct from its members.
Facts:
The five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the
corporation reciting, among other things, that by virtue of a resolution of the stockholders, they are dissolving the
corporation; they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the
assets of said corporation, including real properties located in Manila. The certificate of liquidation, when presented to the
Register of Deeds of Manila, was denied registration on seven grounds, of which the following were disputed by the
stockholders:
1. The number of parcels was not certified to in the acknowledgment;
2. P430.50 registration fees need be paid;
3. P940.45 documentary stamps need to be attached to the document;
4. The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation
needs to be presented.
Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled the last
disputed ground and sustained the first three. The stockholders appealed, contending that the certificate of liquidation is
not a conveyance or transfer but merely a distribution of the assets of the corporation which has ceased to exist for having
been dissolved.
Note: If it is merely a distribution, the certificate need not contain a statement of the number of parcel of land
involved in the distribution in the acknowledgment appearing therein. Not being a conveyance the certificate need not
contain a statement of the number of parcel of land involved in the distribution in the acknowledgment appearing therein.
Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the
Register of Deeds.
Issues:
1. W/N the certificate merely involves a distribution of the corporations assets or such should be considered a
transfer or conveyance.
Held/Ratio:
1. IT IS A TRANSFER OR CONVEYANCE. A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. While shares of stock constitute personal property, they do not represent property of
the corporation. The corporation has property of its own which consists chiefly of real estate. A share of stock
only typifies an aliquot part of the corporations property, or the right to share in its proceeds to that extent when
distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation.
Nor is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-
owner or tenant in common of the corporate property.
Since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their
title from the corporation to the stockholders in proportion to their shareholdings and this is in effect the
purpose which they seek to obtain from the Register of Deeds of Manila that transfer cannot be effected
without the corresponding deed of conveyance from the corporation to the stockholders

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03 - Pioneer Insurance & Surety Co. v. CA (1989) (Southern Airlines, No Corporation)
Doctrines:
1. Can a defective attempt to form a corporation result at least in a Partnership?
a. General Rule: Yes. It is ordinarily held that persons who attempt, but fail, to form a corporation and who
carry on business under the corporate name occupy the position of partners inter se.
b. Exception: (Pioneer) One who takes no part except to subscribe for stock in a proposed corporation which
is never legally formed does not become a partner with other subscribers who engage in business under
the name of the pretended corporation.
2. COCHINGYAN: Pioneer is an exception because the supposed partners were passive. They had no
participation in the venture except to contribute stocks. They did not represent themselves to the public to be
partners.
Facts:
[This is a consolidated case; one is an appeal by Pioneer from the decision of the CA dismissing their complaint against
Lim, Bormaheco, the Cervanteses and Maglana. The second is an appeal by Jacob Lim from the CAs decision ordering
him to reimburse the contributions of Bormaheco, the Cervanteses and Maglana. The relevant issue is found in the second
case.]
Jacob Lim owned Southern Air Lines (SAL), a single proprietorship. In 1965, Lim went to Tokyo, Japan to
purchase from Japan Domestic Airlines (JDA) two (2) aircrafts and a set of necessary spare parts worth $109,000, payable
in installments. Pioneer insurance engaged itself as surety on behalf of Lim and executed a surety bond in favor of JDA.
Respondents Bormaheco Inc., Modesto and Francisco Cervantes and Constancio Maglana contributed to the purchase
of the aircrafts and spare parts. The funds were supposed to be contributions to a new corporation proposed by Lim
to expand his airline business. Lim, Bormaheco, the Cervanteses and Maglana also executed an indemnity agreement
whereby they engaged to be solidarily liable to Pioneer in case the latter is forced to pay JDA. Moreover, Lim executed a
deed of chattel mortgage on the aircrafts as security for Pioneers suretyship.
Not long after, Lim defaulted on paying his installments. Pioneer was forced to pay JDA the remaining balance of
the purchase price. Pioneer instituted a case against Lim, Bormaheco, the Cervanteses and Maglana for extrajudicial
foreclosure with an application for a writ of preliminary attachment over the aircrafts. Maglana, Cervanteses and
Bormaheco, by way of a counterclaim, alleged that they were not privy to the chattel mortgage contract and sought
damages as well as recovery of their contributions from Lim. The trial court upheld Pioneers claim against Lim but
dismissed the claim against Maglana, the Cervanteses and Bormaheco and ordered Lim to reimburse them the value they
contributed to the purchase of the aircrafts.
The CA dismissed Pioneers claim altogether but upheld the right of Bormaheco, Maglana and the Cervanteses to
be reimbursed their contribution. Thus this appeal was made. Lim contends that for failure to incorporate, at the very
least, what existed between him, Bormaheco Inc., the Cervanteses and Maglana was a partnership wherein all of
them shall be liable for the losses of the venture.
Issue:
1. W/N a partnership existed between Lim, Bormaheco Inc., Maglana, and the Cervanteses.
Held/Ratio:
1. NO. As a general rule, persons who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se. However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist and it should be implied only when necessary to do justice between
the parties. One who takes no part except to subscribe for stock in a proposed corporation, which is never
legally formed, does not become a partner.

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A partnership relation between certain stockholders and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of
debts illegally contracted by the latter.
In the case at bar, the SC held that Lim had no intent to form a corporation with Bormaheco, Maglana and the
Cervanteses. What Bormaheco, Maglana and the Cervanteses made were mere contributions to a proposed
corporation. They did not intend to become partners. They were merely stockholders. The chattel mortgage
entered into was an action of Lim in his personal capacity and not as a representative of the supposed
partnership. They cannot be held liable for the losses.
Side Notes:
Pioneers case (1st case) was dismissed because the Court found out that Pioneer had their suretyship reinsured
with another company who already paid them for their loss.
Ano ba yung reinsurance bakit parating lumalabas? Reinsurance = The insurance company, pina-insure yung
risks na pinasok nila sa isa pang insurance company.

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04 - Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. (1999) (by estoppel)
Doctrines:
Under the law on estoppel, including that under Sec 21 of the Corporation Code, not only those who actually
participated in the contract or transactions can be held as general partners, but also those who may not have
directly transacted on its behalf, but reaped the benefits from the contract.1
Facts:
This is Petition for Review on Certiorari filed by petitioner-LIM assailing the CAs decision, affirming the trial
courts ruling finding the petitioner jointly liable (along with Antonio Chua and Peter Yao) for unpaid purchase price of
fishing nets and nets owing to Philippine Fishing Gear Industries, Inc. (PFGI).
Chua and Yao, on behalf of Ocean Quest Fishing Corp., entered into a contract for the purchase of fishing nets
from respondent-PFGI. They claimed that they were engaged in a business with petitioner-LIM who was not a signatory
of the agreement. However, the buyers failed to pay for their purchases; hence, PFGI filed a collection suit against Chua,
Yao and Lim with a prayer for a writ of preliminary attachment.
Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay. Yao, on
the other hand, filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to
present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim filed an Answer
with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.
The trial court ruled that a partnership existed among the Lim, Chua and Yao and held them jointly liable to pay
PFGI based on the testimonies of witnesses presented and the Compromise Agreement executed by the three.
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss. The evidence establishes that all the
defendants undertook a partnership for a specific undertaking (commercial fishing). The ultimate undertaking of the
defendants was to divide the profits among themselves, which is what a partnership essentially is. Petitioner-LIM claims
that he should not be held liable for the purchase price since he was not part of the negotiations with respondent-PFGI.
Furthermore, he claims that the trial court and the CA, should not base the existence of a partnership on the sole basis of
the Compromise Agreement.
Issues:
1. W/N by their acts, Lim, Chua, and Yao could be deemed to have entered into a partnership.
2. W/N under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao and not to Lim.
Held/Ratio:
1. YES. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim are partners. In
their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss. That the parties agreed that any loss or
profit from the sale and operation of the boats would be divided equally among them also shows that they had
indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats in furtherance of their business. It would have been inconceivable for Lim to involve himself so

1. Sec 21. Corporation by estoppel.- All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no
corporation.

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much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could
not have proceeded.
2. NO. Under the doctrine of corporation by estoppel, all those who benefited from the transaction made by
the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they
impliedly assented to or took advantage of. Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat that has earlier been proven to be an asset of the partnership.
Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the
three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.

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NATURE AND ATTRIBUTES OF A CORPORATION

05 - PNB v. CA, Tapnio and Phil-Am (1978) (torts; from 2.8 to 3.0)
Doctrines:
A corporation is civilly liable in the same manner as natural persons for torts. That a principal is liable for every
tort which he expressly directs or authorizes, is just as true of a corporation as a natural person.
Facts:
Phil-Am General Insurance executed its bond with a certain Rita Tapnio as principal, in favor of itself, to
guarantee the payment of Tapnios account with said bank. In turn, to guarantee the payment of whatever amount the
bonding company would pay to the PNB, both Tapnio and her husband executed an indemnity agreement, under the terms
and conditions of which there was stipulations of 12% interests and 15% attorneys fees.
Needless to say, Tapnio defaulted on her obligations. Even after having sent several reminders of her debt both
from the bank and Phil-Am, she did not pay. Frustrated, PNB demanded payment from Phil-Am, Phil-Am paid, and Phil-
Am then went after Tapnio, sending both oral and written demands.
Tapnio claims, however, that she did not consider herself to be indebted to the bank at all because she had an
agreement with one Tuazon whereby she had leased to the latter her unused export sugar quota consisting of 1000 piculs
at the rate of P2.80 per picul, or for a total of P2800, which was already in excess of her obligation. Apparently, she
mortgaged this lease agreement to the bank. However, PNB has placed obstacles to the consummation of the lease, most
important of which is insisting on a P3.0 per picul rate, which would have earned only an additional P200 for PNB. The
delay caused by said obstacles forced Tuazon to ditch Tapnio. Thus, Tapnio filed her third-party complaint (based on tort)
against PNB to recover from the latter any and all sums of money which may be adjudged against her and in favor of Phil-
Am plus moral damages, attorneys fees and costs.
There is no question that Tapnios failure to utilize her sugar quota was due to the disapproval of the lease by the
PNB.
Issues:
1. W/N PNB is liable for the damage caused to Tapnio.
2. COROLLARY: W/N a corporation can be liable for torts.
Held/Ratio:
1. YES. While PNB had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to it, the law makes it imperative that every person must in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. In other
words, PNB should have exercised reasonable case. In this case, PNB failed to do so. Certainly, it knew that the
agricultural year was about to expire, that by its disapproval of the lease Tapnio would be unable to utilize the
sugar quota in question. In failing to observe the reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, PNB is consequently liable for the damages caused on Tapnio.
2. YES. A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking,
the rules governing the liability of a principal for a tort committed by an agent are the same whether the principal
be a natural person or a corporation, and whether the agent be a natural or artificial person. A principal is liable
for every tort which he expressly directs or authorizes, and this is just as true of a corporation as of a natural
person. A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under
express direction or authority from the stockholders or members acting as a body, or, generally, from the directors
as the governing body.

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06 - Professional Services v. CA (2010) (ForMed case, 2 gauzes)
Doctrines:
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons and
medical practitioners in the conduct of its business of facilitating medical and surgical treatment. Within that
reality, three legal relationships crisscross: (1) between the hospital and the doctor practicing within its premises;
(2) between the hospital and the patient being treated or examined within its premises; and (3) between the patient
and the doctor. Regardless of its relationship with the doctor, the hospital may be held directly liable to the patient
for its own negligence or failure to follow established standard of conduct to which it should conform as a
corporation
Facts:
In 1984 Natividad Agana was suffering from cancer of the sigmoid. She had a surgery (hysterectomy) in
Medical City, performed by Drs. Ampil (the Aganas neighbor) and Fuentes. But the surgery appeared flawed. The
attending nurses entered these remarks:
Sponge count lacking 2 announced to surgeon search done but to no avail.
After a couple of days Natividad complained of pain in her anal region. She consulted both her doctors but they
said it was the natural consequence of the surgery. Dr. Ampil later recommended that she see an oncologist.
Consequently, she went to the states for consultation, and there she was told she was fee of cancer. When she came back
to the Phil. still suffering from pains, her daughter found a piece of gauze protruding from her vagina. Dr. Ampil then
proceeded to the Aganas and removed from Natividad a gauze measuring 1.5 in.
Afterwards, Natividads pains intensified, despite the assurance of Dr. Ampil that the pain would soon go away.
Then, Natividad went to Polymedic General Hospital, where it was detected a presence of a (foul smelling) gauze
measuring 1.5 inches in width. The gauze had badly infected her vaginal vault. A recto-vaginal fistula had formed in her
reproductive organ which forced stool to excrete through the vagina. Therefore Natividad underwent another surgery.
Natividad and her husband filed with the RTC, a complaint for damages against PSI (owner of Medical City), Dr.
Ampil and Dr. Fuentes. During the pendency of the case Natividad died and was substituted by her children.
The RTC held PSI solidarily liable with Dr. Ampil and Fuentes. On appeal, the CA absolved Dr. Fuentes but held
Ampil liable with PSI, subject to the right of PSI to claim from Ampil.
Professional Services, Inc. (PSI) filed a second motion for reconsideration urging referral thereof to the Court en
banc and seeking modification of the decision dated January 2007 and resolution dated February 2008 which affirmed its
vicarious and direct liability for damages to respondents Enrique Agana and the heirs of Natividad Agana (Aganas).
Manila Medical Services, Inc. (MMSI), Asian Hospital, Inc. (AHI), and Private Hospital Association of the
Philippines (PHAP)5 all sought to intervene in these cases invoking the common ground that, unless modified, the assailed
decision and resolution will jeopardize the financial viability of private hospitals and jack up the cost of health care.
Issues:
1. W/N PSI is liable to the Aganas under the principle of ostensible agency.
2. W/N PSI was liable to Natividad under the doctrine of corporate negligence.
Held/Ratio:
1. YES. This Court holds that PSI is liable to the Aganas, not under the principle of respondeat superior for lack of
evidence of an employment relationship with Dr. Ampil but under the principle of ostensible agency for the
negligence of Dr. Ampil and, pro hac vice, under the principle of corporate negligence for its failure to perform
its duties as a hospital.
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons and
medical practitioners in the conduct of its business of facilitating medical and surgical treatment. Within that

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reality, three legal relationships crisscross: (1) between the hospital and the doctor practicing within its premises;
(2) between the hospital and the patient being treated or examined within its premises and (3) between the patient
and the doctor. The exact nature of each relationship determines the basis and extent of the liability of the hospital
for the negligence of the doctor.
The reasons the patient had for choosing Dr. Ampil was not only because he was a specialist in that body part as a
surgeon but also because he was known to be a staff member of Medical City. Clearly, the decision made was
clearly influenced by this impression of Dr. Ampil not as an independent but as integrally related to Medical City.
Also, it is of record that PSI required a consent for hospital care to be signed preparatory to the surgery of
Natividad. The form reads:
Permission is hereby given to the medical, nursing and laboratory staff of the Medical City
General Hospital to perform such diagnostic procedures and to administer such medications and
treatments as may be deemed necessary or advisable by the physicians of this hospital for and
during the confinement ... .
By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a physician of its hospital,
rather than one independently practicing in it; that the medications and treatments he prescribed were necessary
and desirable; and that the hospital staff was prepared to carry them out.
So, the two factors that determine apparent authority are present: (1) The hospitals implied manifestation to the
patient which led the latter to conclude that the doctor was the hospitals agent; and (2) the patients reliance upon
the conduct of the hospital and the doctor, consistent with ordinary care and prudence.
2. YES. First, it already constitutes a judicial admission that PSI had the power to review or cause the review of that
may have irregularly transpired within its walls.
Second, it is already a judicial admission because of the nature of its business as well as its prominence in the
hospital industry; it assumed a duty to tread on the captain of the ship role of doctor rendering services within
its premises.
Third, by such admission, PSI defined the standards of its corporate conduct under the circumstances of this case,
specifically: (a) that it had a corporate duty to Natividad even after her operation to ensure her safety as a patient;
(b) that its corporate duty was not limited to having its nursing staff note or record the two missing gauzes and (c)
that its corporate duty extended to determining Dr. Ampils role in it, bringing the matter to his attention, and
correcting his negligence.

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07 - West Coast Life Insurance v. Hurd (1914) (libel)
Doctrines:
Corporations, as such, cannot commit a crime in which malicious intent or purpose is required. Criminal actions,
in these cases, are limited to the officials of such corporation.
Facts:
West Coast Life Insurance is a foreign life-insurance corporation duly organized in California and doing business
regularly and legally in the Philippines. In December 1912, an information was filed against the corporation along with
the general manager and the treasurer charging them of the crime of libel. The information alleged that West Coast
Life and the two others feloniously confederated to print and distribute circulars to policy holders of Insular Life
Insurance Company, stating that the rumor about it is true regarding it being in a bad shape and its capital having been
severely depleted. The CFI Judge, acting on this, issued a summons (order to appear before the court) directed to the
corporation and the other accused.
The corporation countered, saying that Court of First Instance has no power or authority to proceed against a
corporation, as such, criminally, to bring it into court for the purpose of making it amenable to the criminal laws.
Issues:
1. W/N a corporation can also be criminally charged.
Held/Ratio:
1. NO. First, the provisions of the General Orders (aka the 1900s Rules of Court), especially those which relate to
the defendants name, arraignment and counsel, and to demurrers and pleas, indicate clearly that the legislature
had no intention or expectation that corporations would be included among those who would fall within the
provisions thereof.
Second, the only process that a court can issue under the procedural laws is an order of arrest. As a necessary
consequence, the process issued in this case, a summons, is without express authorization of statute.
Third and most importantly, corporations cannot have malicious intent, an essential element in felonies. Under the
Spanish criminal law and procedure, a corporation could not have been proceeded against criminally; it could not
have committed a crime in which a willful purpose or a malicious intent was required. Criminal actions are
restricted or limited to the officials of such corporations and must never be directed against the corporation itself.
Note:
There are cases in which corporations have been proceeded against criminally by indictment and have been
punished by the courts. However, in these cases, a statute, by express words or by necessary intendment, included
corporations within the persons who could offend against the criminal laws; and the legislature, at the same time
established a procedure applicable to corporations. In this case, the general criminal laws apply, and nowhere in
the laws is it mentioned that corporations can commit libel.

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08 - People v. Tan Boon Kong (1930) (Manager Kong)
Doctrines:
The corporation can act only through its officers and agents where the business itself involves a violation law, the
correct rule is that all who participate in it are criminally liable.
Facts:
[one page case, you can choose to read the case if you want J]
During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the purchase
and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue taxes upon is sales.
However, he only declared P2.3 million in sales but in actuality the sales amounted to P2.5 million, therefore failing to
declare for the purpose of taxation about P200,000, not having paid the government P2,000 in taxes. Upon filing by the
defendant of a demurrer, the lower court judge sustained said motion on the ground that the offense charged must be
regarded as committed by the corporation and not its officials.
Issues:
1. W/N the defendant (Kong) as manager may be held criminally liable
Held/Ratio:
1. YES. Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because it is
contrary to a great weight of authority. The court pointed out that, a corporation can act only through its officers
and agents where the business itself involves a violation law, the correct rule is that all who participate in it are
criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of taxation of the
total amount of sales for year 1924. As such, the filing of false returns constitutes a violation of law. Him being
the author of the illegal act must be held liable.

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09 - Sia v. People (1983) (Estafa and trust receipts)
Doctrine:
A corporate officer can be held personally liable for a crime committed in behalf of a corporation only if the
corporation was directly required by law to do the act in a given manner and the same law makes the person who
failed to act in such manner liable
Facts:
Jose Sia was the the President and General Manager of the Metal Manufacturing Co. engaging in the production
of steel office equipment. In 1963, in the need for raw materials to be imported for the company, he transacted under a
trust receipt agreement with Continental Bank for purchase of steel sheets from Japan where such materials shall be
consigned to the same bank. The bank alleged that Sia failed to fulfill his obligation of returning the sheets or accounting
for the proceeds, if sold, which Sia willfully and unlawfully misappropriated to his own personal benefit, to the damage of
Continental Bank. The Bank sues for Sia for Estafa.
Issue:
1. W/N Sia, having only acted for and in behalf of the company as President, may be liable for estafa.
Held/Ratio:
1. NO. The Solicitor General pushes for the applicability of the Tan Boon Kong Doctrine, but the SC disagreed for
the following reasons:
a. A corporate officer can be held personally liable for a crime committed in behalf of a corporation only if
the corporation was directly required by law to do the act in a given manner and the same law makes the
person who failed to act in such manner liable. In all criminal prosecutions, the existence of criminal
liability for which the accused is made answerable must be clear and certain.
The act was committed prior to PD 115 (Trust Receipts Transactions Regulation) which penalizes
responsible officers. Only the RPC was in force at that time, where we can see trust under estafa is not
the same as the trust in the commercial sense of trust receipts. Therefore, upholding the principle that all
cases of doubts must be resolved in favor of the accused, Sia must not be made liable.
b. The trust receipt agreement gives rise only to civil liability. The parties to such agreements consciously
entered into a purely commercial transaction where no criminal prosecution which could give rise to
imprisonment for non-payment of a debt.a debt that should be exclusively paid by the Metal Company
since Sia never intended to be equally liable as a corporation.
Teehankees Concurring Opinon:
The acts committed by Sia were all corporate acts. There is no evidence that the corporate acts were unauthorized, or that
he had personally committed fraud or deceit, or that he personally benefited.

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10 - Ching v. Secretary of Justice (2006) (13 trust receipts signed by VP of corporation)
Doctrines:
If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the
nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined.
Facts:
Ching was the Senior VP of Philippine Blooming Mills Inc (PBMI). In Sept-Oct 1980, PBMI through Ching,
applied with RCBC for the issuance of commercial letters of credit to finance its importation of assorted goods.
RCBC approved the application, and irrevocable letters of credit were issued in favor of Ching. Afterwards, the goods
were purchased and delivered in trust to PBMI.
Ching signed 13 trust receipts as surety, acknowledging delivery of the goods. Under these receipts, Ching
agreed to hold the goods in trust for RCBC, with authority to sell but not by way of conditional sale, pledge or otherwise.
In case the goods were sold, hell turn over the proceeds as soon as he receives it and apply against the relative
acceptances and payment of other debts to RCBC. In case the goods remain unsold within the given period, they will be
returned to RCBC without need for demand. All goods whether manufactured products or its proceeds whether in money,
receivables or accounts will are RCBCs property.
Trust receipts matured but Ching failed to return the goods nor return their value amounting to
P6,940,280.66 despite demands. This prompted RCBC to file a criminal complaint for estafa in the Office of the City
Prosecutor of Manila. The Prosecutor found probable cause for estafa in relation to the Trust Receipts Law. 13
informations were filed against Ching at the RTC of Manila. He then appealed to the DOJ but was dismissed. Moved for
reconsideration and the DOJ eventually reversed its previous decision. City Prosecutor was ordered to withdraw the 13
informations. RCBC filed an MR which was denied.
In Feb 1995, the bank re-filed the criminal complaint for estafa with the City Prosecutor of Manila again.
Dec 1995, Prosecutor found no probable cause as petitioners liability was only civil, not criminal, having signed the
trust receipts as surety.
RCBC appealed the resolution to the DOJ via petition for review. July 1999, DOJ reversed the resolution of the
City Prosecutor. It said that execution of said receipts is enough to indict Ching as the official responsible for
violating the Trust Receipts Law.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of
the DOJ but it was dismissed. Thus, this petition.
Issues:
1. W/N the CA erred in ruling that no grave abuse of discretion amounting to lack or excess of jurisdiction was
committed by Secretary of Justice in deciding the resolutions
2. W/N Ching should be held criminally liable
Held/Ratio:
1. NO, the CA is correct.
Petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in issuing the
assailed resolutions. Indeed, Secretary acted in accord with law and the evidence.

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2. YES
There is no dispute that Ching executed the 13 trust receipts and this proves that he is the official responsible for
the offense. Since a corporation CANNOT be proceeded against criminally because it CANNOT commit
crime in which personal violence or malicious intent is required, criminal action is limited to the corporate
agents guilty of an act amounting to a crime and never against the corporation itself.
Chings being Senior VP of the PBMI does not exculpate him from any liability.2 He cannot, thus, hide behind
the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a corporation where he is the actual, present and efficient actor

11 - Consolidated Bank v. CA, Continental Cement, and Sps. Lim (2001) (Trust Receipts, Not Personally
Liable)
Doctrine:
1. The personality of the corporation is separate and distinct from the persons composing it. (Obiter Dictum)
Facts:
Continental Cement entered into a letter of credit agreement with Consolidated Bank. The letter of credit
agreement was used to purchase bunker fuel from Petrophil. The fuel was delivered to Continental Cement after payment.
Two months thereafter, in relation to the agreement between Consolidated and Continental, a trust receipt was signed
Gregorio Lim, Executive Vice President of Continental.
Consolidated filed a case against Continental, also impleading Lim as respondent. Consolidated alleges that the
goods subject of the trust receipt were not delivered to them. Continental claimed that the agreement was not a trust
receipt agreement but a simple loan. Lim also interposed the defense of separate juridical entity.
Issues:
1. W/N the agreement was a trust receipt agreement.
2. W/N Lim can be made personally liable.
Held/Ratio:
1. NO. The trust receipts were signed two months after the delivery of the fuel by Petrophil to Consolidated. The
Court held that the trust receipt was in truth a contract of adhesion made by the bank to further secure its loan
agreement with Continental. The transaction is a simple loan. The goods need not be delivered to them.
2. NO. The transactions sued upon were clearly entered into by respondent Lim in his capacity as Executive
Vice President of respondent Corporation. We stress the hornbook law that corporate personality is a shield
against personal liability of its officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be
made personally liable since respondent Lim entered into and signed the contract clearly in his official capacity as
Executive Vice President. The personality of the corporation is separate and distinct from the persons
composing it.

2. The crime defined in P.D. No. 115 is malum prohibitum but is classified estafa with abuse of confidence. It may be committed by a corporation
or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article 315.
It specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of
such corporation and/or board of directors, officers, or other officials or employees responsible for the offense

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12 - Gamboa v. Finance Secretary Teves (2011) (PLDT voting shares as capital)
Doctrines:
The 1987 Constitution provides for the Filipinization of public utilities by requiring that any from of
authorization for the operation of public utilities should be granted only to citizens of the Philippines or to
corporation or associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens. The evident purpose of the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national interest. This specific provision explicitly
reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to conserve and develop our patrimony and to ensure a a self-reliant and independent national
economy effectively controlled by Filipinos. We rule that the term capital in Sec. 11, Art. XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not the total outstanding capital stock comprising both common
and non-voting preferred shares. (p. 6 of CLV syllabus)
In the absence of provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often excluded from
any control, that is, deprived of the right to vote in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the corporation for income in the same manner as
bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right
to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the
articles of incorporation restricting the right of common shareholders to vote is invalid. (p. 47 of CLV syllabus)
Facts:
Prime Holdings, Inc. (PHI) owned 46% of the outstanding capital stock of Philippine Telecommunications
Investment Corporation (PTIC). PTIC owned 26% of the outstanding common shares of PLDT. The PTIC shares held by
PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former
President Ferdinand Marcos.
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54% of
the remaining outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of
the Philippine Government announced that it would sell the sequestered 46% percent of the outstanding capital stock of
PTIC, through a public bidding to be conducted on 4 December 2006. First Pacific exercised its right of first refusal as
authorized by the articles of incorporation of PTIC, and bought the 46% (through an affiliate company).
Upon consummation of the sale, First Pacifics equity in PLDT will go up, and the two largest foreign investors in
PLDT First Pacific and Japans NTT DoCoMo - will collectively own over 40% of PLDTs common equity. The 1987
Constitution provides under Section 11, Article XII that No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens
In essence, the facts show that (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%.
If the preferred shares is calculated as part of capital, then the sale would not have violated the constitution
limitation. If capital is construed as only voting shares, then the sale is unconstitutional.
Issues:
1. W/N the term capital in Section 11, Article XII of the Constitution refers to the total outstanding capital stock
(combined total of common and non-voting preferred shares) of PLDT, a public utility.

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Held/Ratio:
1. NO.
Indisputably, construing the term capital in Section 11, Article XII of the Constitution to include both voting
and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners,
amounting to a clear abdication of the States constitutional duty to limit control of public utilities to Filipino
citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of
investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. This interpretation is supported by the deliberations on the
provision by the Constitutional Commission.
[There were other issues that were passed upon by the court, but are not relevant to corporation law. These include
jurisdiction, locus standi, and the presumption of the provisions of the Constitution to be self-executory.]

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13 - Strategic Alliance Dev. Corp v. Radstock Securities Ltd. (2009) (NLEX/SLEX franchise, void compromise
agreement)
Doctrines:
The Constitution prohibits foreign corporations from owning lands in the Philippines. Therefore, it is also
prohibited from owning the rights to ownership of lands in the Philippines.
Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not qualified to
own land in the Philippines, and therefore also disquialified to own the rights to ownership of lands in the
Philippinesit is basic that an assignor or seller cannot assign or sell something he does not own at the time of
ownership, or the rights to ownership, are to be transferred to the assignee or buyer. The assignment by PNCC of
the real properties to a nominee to be designated by Radstock is a circumvention of the constitutional prohibition
against a private corporation owning lands in the Philippines.
Facts:
The Construction Development Corporation of the Philippines (CDCP) had a 30-year franchise to construct,
operate and maintain toll facilities in the North and South Luzon Tollways. Basay Mining Corporation, an affiliate of
CDCP, obtained loans from Marubeni Corporation of Japan amounting to P10 billion. A CDCP official issued
letters of guarantee for the loans, committing the CDCP to pay solidarily. Thereafter, CDCP changed its corporate
name to PNCC to reflect the governments shareholding in the corporation. The government owned 90.3% of the equity
of PNCC. (Isa lang ang PNCC at CDCP, wag ka ma-confuse. CDCP siya nung time na nangutang kay Marubeni tapos
privately owned pa siya nun. Pagkatapos, naging PNCC tapos government owned na.)
The money owing to Marubeni remained unpaid. For so long, this loan, which was secured by CDCP later
renamed PNCC, was not recognized by PNCC in its accounting. But in October 2000, after 20 years, PNCC suddenly
recognized this financial obligation to Marubeni amounting to P10 Billion. Barely 3 months after PNCC recognized their
liability, Marubeni assigned its entire credit to Radstock Corporation for less than P100 million. (Sobrang wtf kasi
20 years hindi inaamin ni PNCC/CDCP na may utang siya kay Marubeni tapos out of nowhere, biglang inacknowledge ni
PNCC na may utang nga siya na 10 billion after all. Tapos 3 months pagkatapos nun, biglang inassign ni Marubeni yung
collectable 10 billion utang na yun kay Radstock for only 100 million.)
Radstock immediately sought to collect this 10 billion loan from PNCC. They filed an action for collection
and damages against PNCC in the RTC of Mandaluyong. Eventually, Radstock and PNCC entered into the
compromise agreement which is the crux of the controversy. The compromise agreement contained the following
stipulations:
That the obligation of PNCC to Radstock would be reduced to P6 billion
MOST IMPORTANT THING HERE: That PNCC shall assign to a third party assignee, to be designated
by Radstock, all its rights and interests in specified real properties provided the assignee shall be duly
qualified to own real properties in the Philippines. There are 19 pieces of real estate properties specified
constituting 13 hectares of valuable property with an appraised value of P6 billion. (So ganito, ang gusto nila
mangyari, iaassign ni PNCC yung real property kay yet unnamed third person. Pero si third person ay pipiliin ni
Radstock dahil si Radstock ay foreign corporation at hindi pwede sa kanya i-assign yung real property dahil sa
constitutional prohibition.)
Less importantly, PNCC shall also assign to Radstock 20% of the outstanding capital stock of PNCC, and 6%
share in the gross toll revenue of the Manila North Tollways Corporation from 2008-2035
Issues:
1. W/N the compromise agreement is valid

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Held/Ratio:
1. NO, the compromise agreement is not valid.
There are many grounds for the invalidity of the compromise agreement but the main focus for our topic would be
the unconstitutionality of the stipulation in the compromise agreement assigning real properties to a third party to
be designated by Radstock.
We will first discuss why Radstock, a foreign corporation cannot own real property in the Philippines. Section 7,
in relation with Section 3, Article XII of the 1987 Constitution prohibits it.
Section. 3. Private corporations or associations may not hold such lands of the public domain
except by lease, for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and not to exceed one hundred thousand hectares in area. Citizens of the
Philippines may lease not more than five hundred hectares, or acquire not more than twelve
hectares thereof by purchase, homestead, or grant.
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain.
While it is admitted that Radstock as a foreign corporation cannot own real property by itself, it is contended that
Radstock can own the rights to ownership of real property. Those who argue for the validity of the compromise
agreement say that Radstock can be allowed to designate the party to whom the real property is assigned instead
of to itself. This argument cannot be countenanced because it will be a circumvention of the constitutional
prohibition.
Radstock cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself.
It is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or
the rights to the ownership, are to be transferred to the assignee or buyer. (Sales concept, ingat ka.) The third party
assignee under the Compromise Agreement who will be designated by Radstock can only acquire rights
duplicating those which its assignor (Radstock) is entitled by law to exercise. Thus, the third party assignee can
acquire ownership of the land only if its assignor, Radstock, owns the land. Clearly, the assignment by PNCC of
the real properties to a nominee to be designated by Radstock is a circumvention of the Constitutional
prohibition against a private foreign corporation owning lands in the Philippines. Such circumvention
renders the Compromise Agreement void.
***Just in case sir asks, the other grounds for invalidity of the compromise agreement are:
Remember the less important assignments of 6% of revenues from toll payments, and 20% stock capital to
Radstock in the compromise agreement? This is also not allowed because the franchise of PNCC has already
expired and all its assets turned over to the government. Therefore, the revenues and stock capital belong to the
government. There can be no disbursement of public funds without appropriation by congress. The compromise
agreement is not an appropriation by congress.
Public bidding is required to dispose of governmental property. Mere assignments are prohibited.
PNCC must follow preference of credit. PNCC has other creditors, among them the national government which
should be paid first, and other creditors who have final and executory judgements against PNCC. The loan from
Marubeni is unsecured and should be one of the last to be paid. So the compromise agreement effectively
satisfying the unsecured loan to Marubeni before the preferred creditors is invalid. (Hello, Sectrans? Please love
me.)

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14 - The Roman Catholic Apostolic Administrator of Davao, Inc. v the LRC (1957)
Facts:
Mateo Rodis executed a deed of sale over a parcel of land in favor of The Roman Catholic Apostolic
Administration of Davao Inc a corporation sole. Msgr. Clovis Thibault, a Canadian citizen, was then the actual
incumbent of the church. When the deed was presented for registration to the register of deeds and then elevated to the
Land Registration Commission, the commissioner denied the registration. The commissioner contends that it failed to
comply with the constitutional requirement that at least 60% of the capital of the corporation must be owned by Filipino
citizens.
Issue:
1. W/N the Roman Catholic Apostolic Administration in the Philippines may acquire or be assigned and hold private
agricultural lands.
Held/Ratio:
1. Yes.
A corporation sole, unlike the ordinary corporations, is composed of only 1 person, a unit which is not subject to
expansion for the purpose of determining any percentage whatsoever. It is a special form of corporation usually
associated with the clergy; it was designed to facilitate the exercise of the functions of ownership carried on by
the clerics for and on behalf of the church. It consists of one person only, and his successors (who will always be
one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities
and advantages, particularly that of perpetuity, which in their natural persons they could not have had.
A corporation sole is only the administrator and not the owner of the temporalities located in the territory
comprised by it. The corporation sole merely holds the properties in trust for the benefit of the faithful,
residing within its territorial jurisdiction. The nationality of its constituents, and not that of its incumbent, should
therefore be taken into consideration.
A corporation sole has no nationality as to disqualify it from owning agricultural lands in the Philippines. The
court believes that the framers of the constitution had not in mind the corporation sole, nor intended it to apply to
the provisions of section 1 and 5 of article XIII (1935 Constitution) when they passed and approved the same,
otherwise it would lead to an absurd interpretation.
Differentiate with Rod v Ung Sui Si Temple:
The SC held in Sui Si Temple that even when the religious organization has no capital stock, it would still not
suffice to escape the constitutional inhibition since its members are of foreign nationality. The spirit of the
constitution demands that in the absence of capital stock, the controlling membership should be composed of
Filipino citizens.
The difference between Sui Si Temple and the present case is that the former was not a corporation sole but a
corporation aggregate. The present case involves a registered corporation sole, evidently of no nationality and
registered mainly to administer the temporalities and manage the properties belonging to the faithful of said
church residing in Davao. In the issue of citizenship requirement, the members of the Roman Catholic Apostolic
faith within the territory of Davao are predominantly Filipino Citizens (more than 80%). As to its clergy and
religious composition, counsel for the petitioner presented the Catholic Directory of the Philippines for 1954
which revealed that as of that year, Filipino Clergy and women novices comprises already 60.5% of the group. It
was therefore clear that the constitutional requirement was fully met and satisfied.

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15 - People v. Quasha (1953)
Doctrines:
The Constitution does not prohibit the mere formation of public utility corporation without the required formation
of Filipino capital. What it does prohibit is the granting of a franchise or other form of authorization for the
operation of a public utility to a corporation already in existence but without the requisite proportion of Filipino
capital.
Primary franchise refers to the franchise which invests a body of men with corporate existence while
secondary franchise is the privilege to operate as a public utility after the corporation has already come into
being.
Facts:
William Quasha, a member of the Philippine Bar was charged in the CFI of Manila with falsification of a public
and commercial document. Having been entrusted with the preparation and registration of the articles of incorporation
of Pacific Airways Corporation, a domestic corporation engaged in business as a common carrier, he caused it to appear
that one Arsenio Baylon, a Filipino has subscribed to and was the owner of 605% of the subscribed capital stock.
However, in truth, the real owner of said portion were American citizens whose name did not appear in the articles of
incorporation. The purpose of such was to circumvent the constitutional mandate that no corporation shall be authorized
to operate as a public utility in the Philippines unless 60% of its capital stock is owned by Filipinos.
CFI found him guilty. He appeals.
Issue:
1. W/N Quasha is guilty of falsification of public and commercial document.
Held/Ratio:
1. It is admitted that the money paid on Baylons subscription did not belong to him but to the American subscribers
to the corporate stock. Baylon explained that in the process of the organization of the corporation, he was made a
trustee for the American incorporators who had a difficulty in deciding what their respective share holdings would
be.
The falsification imputed in the accused consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee (or dummy) of his American co-incorporators, thus giving the impression that he was
the owner of the shares subscribed to by him which amounted to 605% of the subscribed capital stock. Contrary
to the lower courts assumption, the Constitution does not prohibit the mere formation of public utility
corporation without the required formation of Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation of a public utility to a corporation already in
existence but without the requisite proportion of Filipino capital.
For the mere formation of the corporation, Quasha was under no obligation to disclose the fact that he was merely
a trustee of his American co-incorporators. The Corporation Code likewise does not require such revelation. In
the absence of such obligation and of the alleged wrongful intent, Quasha cannot be legally convicted of the
crime with which he is charged.
Moreover, from the context of the law, the provision qualifies the terms, franchise, certificate, or any other
form of authorization with the phrase for the operation of a public utility. Therefore, it is clear that the
franchise meant is not the primary franchise that invests a body of men with corporate existence but rather
it pertains to the secondary franchise or the privilege to operate as a public utility after the corporation
has already come into being.
For a corporation to be entitled to operate a public utility, it is not necessary that it be organized with 60% of its
capital owned by Filipinos from the start. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer of shares to Filipino citizen. The converse may
also happen. The moment for determining whether the corporation is entitled to operate as a public utility is when

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it applies for franchise, certificate, or any other form of authorization for that purpose. At that time, the
corporation must show that it has complied with the necessary capital requirements of Filipino capital.
16 - Tatad v. Garcia Jr. (1995) (EDSA LRT)

Doctrines:
The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise
before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the
public. There is a clear distinction between operation of a public utility and the ownership of the facilities and
equipment used to serve the public.
Facts:
In 1989, the DOTC planned to construct the EDSA LRT. By 1990, the BOT law was passed and provided for two
schemes for the financing, construction, and operation of government projects through private initiative and investment:
Build-Operate-Transfer (BOT) or Build-Transfer (BT). Pursuant to the BOT law, DOTC issued Department Orders for the
prequalification of interested corporations. Five groups responded to the invitation, but based on the prequalification
criteria, only EDSA LRT Consortium met the requirements. EDSA LRT Consortium was composed of ten foreign and
domestic corporations. Because it was the only qualified bidder, the President ordered the DOTC to proceed with
negotiations. EDSA LRT Consortium presented its bids; the DOTC found them to be in compliance with bid
requirements; then they entered into an Agreement to Build, Lease, and Transfer a Light Rail Transit System for EDSA
under the terms of the BOT law.
When the DOTC Secretary asked for approval of the contract, the Executive Secretary informed him that the
President could not grant the requested approval based on a number of reasons, the main contention being that there was
no public bidding, in contravention of the BOT law. There was a subsequent revision of the contract, Ramos replaced
Cory (and other officers involved), and the contract was approved by Ramos. According to the agreements, EDSA LRT
Corp. Ltd. (substituted EDSA LRT Consortium) would build and finish the LRT system in 3 years. Upon completion,
EDSA LRT Corp. Ltd. would deliver the use and possession of the LRT system to the DOTC, which shall operate it.
DOTC would pay EDSA LRT Corp. Ltd. rentals on a monthly basis, which would come from the earnings of the LRT.
After 25 years of complete payment of rentals, ownership of the project shall be transferred to the DOTC for $1.
Subsequently, in 1994, RA 7718, which amended the BOT law, was enacted and expressly recognized the Build-Lease-
Transfer scheme and allowed direct negotiation of BLT contracts.
Tatad, Osmena, and Biazon, as senators and taxpayers, challenge the validity of the agreements on constitutional
grounds, stating that since EDSA LRT Corp. Ltd. was a foreign corporation (duly incorporated and existing under the
laws of Hongkong), it could not own the LRT, being a public utility. They also contend that there was no public bidding,
that the agreements contravened the BOT law (in many ways), and that the contracts are disadvantageous to the
government.
Issues:
1. W/N the BLT agreements with EDSA LRT Corp. Ltd. are constitutional
2. W/N the BLT agreements are allowed under the BOT law
3. W/N the lack of public bidding invalidates the agreements
Held/Ratio:
1. YES, the agreements are constitutional.
What EDSA LRT Corp. Ltd. owns are the rail tracks, coaches, rail stations, terminals, and the power plant, not a
public utility. While a franchise is needed to operate these facilities to serve the public, they do not by themselves
constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public.

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The Constitution requires a franchise for the operation of a public utility. However, it does not require a franchise
before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the
public.
The Constitution (art. XII, 11) provides that, [n]o franchise ... for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations ... organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens ... . There is a clear distinction between the
operation of a public utility and the ownership of the facilities and equipment needed to serve the public. The
exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used
to serve the public as a public utility unless the operator has a franchise. The right to operate a public utility may
exist independently and separately from the ownership of the facilities thereof.
In the instant case, DOTC shall operate the LRT while EDSA LRT Corp. Ltd. shall own the facilities and provide
technical support. EDSA LRT Corp. Ltd. will not run the light rail vehicles and will not collect fees from the
riding pubic. It will have no dealings with the public and the public will have no right to demand any services
from it. Therefore, EDSA LRT Corp. Ltd. will not operate a public utility, thereby not violating any constitutional
provision.
2. YES, they are allowed. Under the BOT scheme, the contractor undertakes the construction and financing of the
facility, then operates the same for a fixed period or rate of return, then upon expiration of the term, transfers the
ownership and operation to the government. On the other hand, in a BT scheme, the contractor undertakes the
construction and financing of the facility, then immediately after completion transfers the ownership and
operation to the government.
Under the BOT scheme, the citizenship requirement must be complied with; however, no such requirement is
imposed in the BT scheme, as the public utility is not operated. In the instant case, the BLT scheme is but a
variation of the BT scheme under the BOT law. The agreements are, in effect, lease-purchase agreements.
3. NO, the agreements are still valid even without public bidding.
EDSA LRT Corp. Ltd. was the only corporation that passed the prequalification requirements. Under PD 1594
(Prescribing Policies, Guidelines, Rules, and Regulations for Government Infrastructure Contracts), negotiated
award of government projects are allowed in exceptional cases where time is of the essence, or where there is a
lack of qualified bidders or contractors ... . In fact, direct negotiation of contracts is specifically provided for in
RA 7718 (which amended the BOT law) in cases where there is only one complying bidder, rendering the
contention moot and academic.

ALS2014B 22 of 199
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17 - Unchuan v. Lozada (2009) (investment test as to Phil. Nationals, at least 60% of the capital stock)
Doctrines:
Under Sec. 3 of the FIA 91, a corporation organized under the laws of the Philippines of which at least 60% of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Phil., is considered a
Philippine national.
Facts:
Anita and Peregrina, sisters who are based in the USA, are co-owners of 2 lots in Cebu. They sold the lots to
their nephew (Antonio) under a Deed of Sale. Armed with a special power of Attorney from Anita, Peregrina went to
the house of their brother (Dr. Lozada AN AMERICAN CITIZEN) who agreed to advance the purchase price of 10
million for Antonio. The Deed of sale was notarized and authenticated and forwarded everything in the Philippines.
Upon receipt of said documents, Antonio recorded the sale with the Register of Deeds. The corresponding TCTs were
then issued to Antonio.
Pending registration of the deed, Marissa Unchuan (petitioner) caused the annotation of an adverse claim because
she claimed that Anita donated an undivided share in the lots to her under an unregistered Deed of Donation. Anita and
Antonio filed for quieting of title while Unchuan wanted the Deed of Sale to be declared void.
At the trial, Dr. Lozada testified that he agreed to advance payment for Antonio in preparation for their plan to
form a corporation. The lots are to be eventually infused in the capitalization of DAMASA Corp., where he and
Antonio are to have 40% and 60% stake, respectively.
Issues:
1. CORP RELATED: W/N Antonio and Dr. Lozada violated the public policy prohibiting aliens from owning lands
in the Philippines?
Held/Ratio:
1. NO
We find nothing to show that the sale between the sisters and and their nephew Antonio violated the public policy
prohibiting aliens from owning lands in the Philippines. Even as Dr. Lozada advanced the money for the payment
of Antonios share, at no point were the lots registered in Dr. Lozadas name.
Nor was it contemplated that the lots be under his control for they are actually to be included as capital of
Damasa Corporation. According to their agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the
shares in the corporation, respectively. Under RA 7042, a corporation organized under the laws of the
Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines, is considered a Philippine National. As such, the corporation may acquire
disposable lands in the Philippines.

ALS2014B 23 of 199
sof

18 - Palting v. San Jose Petroleum (1966) [Parity Agreeement]
Doctrines:
Our Constitution provides that, the exploitation of natural resources shall be limited to citizens of the Philippines
or to corporations or associations at least 60% of the capital of which is owned by such citizens. However,
this right was earlier extended to US citizens by virtue of the Parity Agreement. Said US citizens can either
directly or indirectly own or control the business enterprise.
Facts:
This is a petition for review of the order of the Securities and Exchange Commission (SEC) denying the
opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of
the capital stock of the respondent- appellee San Jose Petroleum, Inc. (SJ PETROLEUM), a corporation organized and
existing in the Republic of Panama.
The respondent Corporation filed with the SEC a sworn registration statement for the registration and licensing
for sale in the Philippines, Voting Trust Certificate representing 2 million shares of its capital stock of a par value of
$0.35/share at P1/share. It was alleged that the proceeds thereof will be used to finance the operations of San Jose Oil Co.
which has 14 petroleum exploration concessions in various provinces. It was expressly conditioned that instead of stock
certificates, registered or bearer-voting trust certificates from voting trustees (Americans) will be given. San Jose
Petroleum amended the application from P2M to P5M at reduced offering at P0.70/share.
Palting and the other prospective investors is the shares, filed with the SEC an opposition to said registration on
the following grounds: (1) the tie-up between SJ Petroleum, a Panamanian corporation and SJ Oil, a domestic corporation
violates the Constitution, the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to transact business in
the Philippines (3) the sale of shares is fraudulent (4) the issuer is based on unsound business principles (sic).
In Answer to the above claims, SJ Petroleum stated that it was a business enterprise enjoying parity rights,
with respect to mineral resources in the Philippines, which may be exercised pursuant to the Laurel-Langley
Agreement, through a medium, the SJ Oil. It contends that giving SJ Oil financial assistance did constitute transaction of
business in the Philippines, which would have required it to register.
The SEC then issued the currently assailed order. Hence this appeal to the SC.
Issues:
1. W/N Palting, as a prospective investor in respondents securities, has personality to file the present petition for
review of the order of the SEC.
2. W/N the tie-up between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL
COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel- Langley
Agreement, the Petroleum Act of 1949, and the Corporation Law;
Held/Ratio:
1. YES, any person (who may not be aggrieved or interested within the legal acceptation of the word) is
allowed or permitted to file an opposition to the registration of securities for sale in the Philippines.
Contrary to respondents claim that as a mere investor, Palting was neither an aggrieved nor an interested
party, citing a Utah State Supreme Court ruling, the SC ruled that said decision was not controlling on the issue in
this case.
2. YES, because SJ Petroleum is not accorded with Parity Rights, which would have allowed the Company to
interest in mining.
SJ Oil is a domestic corporation 90% of which is owned by SJ Petroleum, a Panamanian Corp. the majority
interest of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in turn owned by
Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under the laws of Venezuela.

ALS2014B 24 of 199
sof

Our Constitution provides that, the exploitation of natural resources shall be limited to citizens of the Philippines
or to corporations or associations at least 60% of the capital of which is owned by such citizens. However,
this right was earlier extended to US citizens by virtue of the Parity Agreement. Said US citizens can either
directly or indirectly own or control the business enterprise.
Based on the foregoing, it is clear that, San Jose Petroleum is not entitled to Parity Rights, based on the following
grounds:
1. It is not owned or controlled directly by US citizens because it is owned and controlled by Panamanian
corporation;
2. Neither can it be said that it is indirectly owned and controlled by US citizens because the controlling
corporation is in turn owned by two Venezuelan corporations;
3. Although the two Venezuelan corporations claim to be owned by stockholders residing in the US, there is
no showing that said stockholders were US citizens;
4. Even granting that these stockholders are US citizens, it is still necessary to establish that their
different states allow Filipino corporations and citizens to engage in the exploitation of natural
resources. However, there is no such proof to this;
5. The word indirectly should not be unduly stretched in application.
The motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange
Commissioner, allowing the registration of Respondents securities and licensing their sale in the Philippines are
hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in
consonance with this decision.

ALS2014B 25 of 199
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SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE

FICTION
19 - DBP v. NLRC (1990) (foreclosing creditor, preference of credits)
Doctrine:
Being the majority stockholder and constituting the majority of membership in the board of directors does not
indicate the existence of an employee-employer relationship between the former and the employees of the
corporation.
Facts:
Philippine Smelters Corporation obtained a loan from the Development Bank of the Philippines to finance its
manufacturing and smelting business. As security, PSC executed a mortgage over its real properties in favor of DBP.
Also, by virtue of their loan agreement, DBP became the majority stockholder of PSC and subsequently took over the
management of PSC.
When PSC failed to pay its obligations, DBP foreclosed and acquired the properties of PSC. Prior to the judicial
sales, a Petition for Involuntary Insolvency had been filed with the RTC. Around the same time, the private respondents in
this case filed a complaint with the Department of Labor against PSC for nonpayment of salaries, 13th month pay,
incentive leave pay and separation pay. They subsequently amended the complaint to include DBP as a respondent. The
labor arbiter ruled in favor of the employees and directed that DBP as foreclosing creditor is hereby ordered to pay all the
unpaid wages and benefits of the workers which remained unpaid due to PSCs foreclosure. The DBP appealed but the
NLRC upheld the decision of the labor arbiter hence, this petition.
Issue:
1. W/N the NLRC had jurisdiction over the DBP
2. W/N DBP, as foreclosing creditor, could be held liable for the labor claims of the PSC employees
Held:
1. NOT INITIALLY, but was cured by DBPs participation in the proceeding. In their comment, the private
respondents tried to prove the existence of an employee-employer relationship based on the fact that DBP is the
majority stockholder of PSC and that the majority of the members of the board of directors of PSC are from DBP.
The Court opines that such facts arent enough to constitute an employee-employer relationship as to put the DBP
under the jurisdiction of the NLRC. The defect in jurisdiction was nonetheless cured by active participation. The
nonexistence of the employee-employer relationship is shown in the decision where DBP was ordered to pay, not
as an employer, but as the foreclosing creditor.
2. NO. The right to preference given to workers under the Labor Code cannot exist in any effective way prior to the
time of its presentation in distribution proceedings. (The Court also made a distinction between a preference of
credit and a lien; the former not constituting a lien on the property of the insolvent debtor in favor of the workers,
the latter creating a charge on particular property.) [a huge chunk of the case discussed credit transactions]
[Sarmiento, J. dissents pointing out that due to an amendatory law, workers now enjoy absolute preference I payment of
labor claims]

ALS2014B 26 of 199
sof

20 - Remo, Jr. v. IAC (1989) (stockholder sold all his shares)
Doctrines:
The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection
case against the corporation, does not make such stockholder personally liable for the corporate debt, since the
disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to
dispose of his shares of stock anytime he so desires.
The corporate fiction or the notion of legal entity may be disregarded when it is used to defeat public
convenience, justify wrong, protect fraud, or defend crime in which instances the law will regard the
corporation as an association of persons, or in case of two corporations, will merge them into one.
The corporate fiction may also be disregarded when it is the mere alter ego or business conduit of a person.
Facts:
Akron Customs Brokerage Corporation purchased thirteen trucks from private respondent (E.B. MARCHA
TRANSPORT COMPANY, INC.) for P525,000. The agreement being that Akron is to make a down payment in the
amount of P50,000 and that the balance shall be paid within 60 days from the date of the execution of the agreement. The
parties also agreed that until said balance is fully paid, the down payment of P50,000 shall accrue as rentals of the 13
trucks.
The obligation was further secured by a promissory note executed by Coprada, the President and Chairman of
Akron, in favor of the said company. The note states that the balance is to be paid from the proceeds of a loan obtained
from the DBP within 60 days. After the lapse of 90 days, private respondent tried to collect from Coprada but the latter
promised to pay only upon the release of the DBP loan. Private respondent sent Coprada a letter of demand, to which he
replied that he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made.
Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. Akron also
failed to pay the rentals as agreed upon in their previous agreement.
Private respondent then filed a compliant for the recovery of P525,000 or the return of the 13 trucks with damages
against Akron and its officers and directors (one of which is the petitioner) with the CFI. Only petitioner answered the
complaint denying any participation in the transaction and alleging that Akron has a distinct corporate personality.
In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended its
articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of
Akron to private respondent.
The CFI ruled in favor of the plaintiff and against the defendants.
A motion for new trial filed by petitioner was denied so he appealed to the IAC wherein in due course a decision
was rendered setting aside the said decision as far as petitioner is concerned. However, upon the respondents motion for
reconsideration, the IAC set aside its previous decision and affirmed the decision of the trial court.
Issues:
1. W/N petitioner should be liable to private respondent.
Held/Ratio:
1. NO. There is no basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation
to private respondent. It was Coprada who negotiated with said respondent for the purchase of 13 cargo trucks and
signed a promissory note to guarantee the payment of the unpaid balance of the purchase price out of the proceeds
of a loan he supposedly sought from the DBP. Petitioner did not sign the said promissory note so he cannot be
personally bound thereby.

ALS2014B 27 of 199
sof

Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was a
forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same and
not petitioner.
As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron Transport
International, Inc., petitioner alleges that the change of corporate name was in order to include trucking and
container yard operations in its customs brokerage of which private respondent was duly informed in a letter.
Indeed, the new corporation confirmed and assumed the obligation of the old corporation. There is no indication
of an attempt on the part of Akron to evade payment of its obligation to private respondent.
The fact that petitioner sold his shares in Akron to Coprada during the pendency of the case does not make
petitioner liable to the debt of Akron. Since petitioner has no personal obligation to private respondent, it is his
inherent right as a stockholder to dispose of his shares of stock anytime he so desires.

ALS2014B 28 of 199
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21 - US v. Milwaukee Refrigerator Transit Co. (1905) (dummy corporation)
Doctrines:
General Rule: A corporation will be looked upon as a legal entity, until sufficient reason to the contrary appears.
o Exception: when the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, defend crime, the law will regard the corporation as an association of persons; and, where one
corporation was organized and is owned by the officers and stockholders of another, making their
interests identical, they may be treated as identical when the interests of justice require it.
Facts:
The Elkins Act was enacted to prohibit railroads from giving and receiving of unlawful rebates. After the
enactment of the said Act, officers of a brewing company, who were also its controlling stockholders, organized a transit
company named Milwaukee Refrigerator Transit, et al and became its officers and the owners of all of its stock.
On behalf of the brewing company, the officers contracted with the transit company to make all the shipments for
the brewing company. The transit company contracted for shipments with interstate carriers, where they would only pay it
from 1/10 to 1/8 of the published rate, for the transportation, supposedly as a commission for obtaining the business, but
was known really a rebate for the benefit of the brewing company.
Thus, the US filed a suit against the brewing company to enjoin them from receiving rebates from carriers.
Issues:
1. W/N the piercing of the veil is in order (whether a corporation organized and owned by the officers and
stockholders of another is in fact an independent corporation or was organized merely as a dummy to enable the
other through it to solicit and obtain illegal rebates from carriers)
Held/Ratio:
1. Yes, the piercing is in order. As a general rule, a corporation will be looked upon as a legal entity, until sufficient
reason to the contrary appears. An exception to this is when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, defend crime, the law will regard the corporation as an association of
persons; and, where one corporation was organized and is owned by the officers and stockholders of another,
making their interests identical, they may be treated as identical when the interests of justice require it.
The bill shows the creation, by the controlling interests of the brewing company, of a dummy corporation, and
with dummy directors, with intent to evade the law making the transit company as a mere alter ego of the brewing
corporation, both being substantially identical in interest and control, and the brewing company the ultimate
beneficiary.
Applying the rule here laid down to the circumstances shown to surround the brewing company and transit
company, it clearly appears that the shipper practically controls the transit company, and this shows a sufficient
identity of interest among the shareholders of both in these repayments to make them rebates, if paid and received
with unlawful intent.
It is the argument of Milwaukee that the procurement of the shipments through the contract is the mere soliciting
of them for the carriers, for which they are lawfully authorized to pay a part of the rate, in order to get the
business; and the transit company, owing a large number of refrigerator cars, and wishing to keep them employed,
simply gives the freight to those competing shippers who will make the best terms, the business being of great
volume, and the sums paid for the freights large. But this theory of innocence is exploded by the fact that the
transit company is a mere separate name for the brewing company, being in fact the same collection of persons
and interests.

ALS2014B 29 of 199
sof

22 - Francisco Motors Corporation v. CA (1999)
Doctrine:
In the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the
situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation.
Facts:
Francisco Motors Corporation (FMC) filed a complaint against Spouses Gregorio and Librada Manuel to recover
P3,412.06 representing the balance of the jeep body purchased, an additional sum of P20,454.80 representing the unpaid
balance on the cost of repair of the vehicle; and P6,000 for cost of suit and attorneys fees. In their answer, Spouses
Manuel interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of P50,000 which
was not paid by the incorporators, directors and officers of the FMC. Manuel alleges that he represented members
of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, after the termination
of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner.
FMC questions the propriety of its being made party to the case because it was not the real party in interest but
the individual members of the Francisco family concerned with the intestate case.
The RTC ruled in favor of Manuel and on appeal, the CA applied the doctrine of piercing the veil of
corporate fiction and held that the separate personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for illegality, or to work an injustice, or where necessary to
achieve equity or when necessary for the protection of creditors. Equity and justice demands FMCs veil of corporate
identity be pierced and Gregorio Manuel be compensated for legal services rendered to the heirs, who are directors of the
plaintiff-appellant corporation.
Issue:
1. W/N the doctrine of piercing the veil of corporate fiction was properly applied.
Held/Ratio:
1. No. - Given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant
application here. The rationale behind piercing a corporations identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who
use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been
reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears that the doctrine has
been turned upside down because of its erroneous invocation. Note that according to private respondent
Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them in
the intestate proceedings over Benita Trinidads estate. These estate proceedings did not involve any business
of FMC. His move to recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to
offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious
misapprehension that FMCs corporate assets could be used to answer for the liabilities of its individual directors,
officers, and incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and
even other stockholders; hence, clearly inequitous to petitioner. Furthermore, considering the nature of the legal
services involved, whatever obligation said incorporators, directors and officers of the corporation had
incurred, it was incurred in their personal capacity. In conclusion, FMC cannot be held responsible for the
personal obligations of its incorporators, but the decision is without prejudice to the filing of the proper suit
against concerned members of the Francisco family in their personal capacity.

ALS2014B 30 of 199
sof

23 - Traders Royal Bank v. CA (1997) (Central Bank Certificates of Indebtedness)
Doctrine:
Piercing the veil of corporate entity is merely an equitable remedy and may be awarded only in cases when
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit of a person.
To do this [to pierce the veil of corporate entity], the court must be sure that the corporate fiction was misused, to
such extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his/her personal rights.
Facts: (weve taken this case up in nego J)
This case involves the transfer of Central Bank Certificates of Indebtedness (CBCIs) under the name of
Filriters. These CBCIs formed part of Filriters capital reserves which are, by law, required to be maintained at a certain
level. These were transferred by the Filriters Senior Vice President for Treasury Alfredo Banaria to PhilFinance (a
company which also owns 90% of Filriters).
PhilFinace then entered into a repurchase agreement with the petitioner Traders Royal Bank wherein
PhilFinace sold the CBCIs to TRB then pay installments to buy back the same. PhilFinance defaulted in its payments and
hence, forfeited the CBCIs in favor of TRB. TRB sought to transfer the CBCIs (still under the name of Filriters) under its
name but was refused by the Central Bank. Such refusal was based on the CB Circular requiring that the payee (in this
case Filriters) be the one to effect such transfer. TRB sought recourse from the CA to compel the Central Bank to transfer
the CBCIs to it but was denied because Filriters interposed the defense of invalidity ofthe initial transfer to Philfinance.
The initial transfer was done by Banaria without any board resolution knowledge or consent of the Board of Directors,
and without authority from the Insurance Commissioner.
Issues:
1. [Nego related] W/N
a. the CBCIs were negotiable instruments;
b. and TRB was a holder in due course
2. [Corp related] W/N the veil of corporate entity must be pierce on the basis of the allegation that Filriters was 90%
owned by PhilFinace and that although they are separate entities on paper, they have used their corporate fiction
to defraud TRB
Held/Ratio:
1. No on both counts; [just in case, since he also teaches commercial law review]
a. Payable to Filriters; not an order or bearer instrument
b. The fact that it was transferred by one who wasnt the registered owner should have alerted TRB to
inquire on transferors title
2. No. Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical
personality separate from its stockholder and from other corporations may be disregarded. In the absence of these
grounds, the general rule must be upheld. The fact that PhilFinance owns majority shares in Filriters is not by
itself a ground to disregard the independent corporate status of Filriters. Because the transfer of the CBCIs from
Filriters to PhilFinance was fictitious, PhilFinance had no title to convey to TRB. Consequently, the title of
Filriters over the CBCIs must be upheld over the interest claimed by TRB.

ALS2014B 31 of 199
sof

24 - PNB v. Rittrato Group (2001)
Doctrine:
The doctrine of Piercing the Corporate Veil is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or
when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
Facts:
Philippine National Bank, Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are
all domestic corporations organized and existing under Philippine law.
Rittrato Group procured a letter of credit worth US$300,000 from PNB International Finance Ltd. (PNB-IFL) a
subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the
Ritratto Group secured by real estate mortgages over 4 parcels of land in Makati City. This credit was later eventually
increased to US$1,425,000 in February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made
repayments of the loan by remitting those amounts to their loan account with PNB-IFL in Hong Kong.
However, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the real estate
mortgages, PNB-IFL, through PNB, notified the respondents of the foreclosure of all the real estate mortgages and that the
properties were to be sold at a public auction.
Respondents maintain that the entire credit facility is void as it contains stipulations in violation of the principle of
mutuality of contracts. In addition, respondents justified the act of the court a quo in applying the doctrine of Piercing the
Veil of Corporate Identity by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL.
Respondents argue that even assuming that PNB and PNB-IFL are two separate entities, PNB is still the party-in-interest
in the application for preliminary injunction because it is tasked to commit acts of foreclosing respondents properties.
Issue:
1. W/N PNB is an alter-ego of PNB-IFL.
Held/Ratio:
1. NO. The contract questioned is one entered into between respondent and PNB-IFL. PNB is a mere attorney-in-
fact for the PNB-IFL with full power and authority to foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, PNB is an agent with limited authority and specific duties under a
special power of attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into
by respondents and PNB-IFL.
The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. The
mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify
their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in
their respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of
separate entity privilege and pierce the veil of corporate entity.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A
suit against an agent cannot without compelling reasons be considered a suit against the principal.

ALS2014B 32 of 199
sof

Note:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite
variations of fact that can arise but there are certain common circumstances which are important and which, if present in
the proper combination, are controlling.
These are as follows:
1. The parent corporation owns all or most of the capital stock of the subsidiary.
2. The parent and subsidiary corporations have common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary.
7. The subsidiary has substantially no business except with the parent corporation or no assets except those
conveyed to or by the parent corporation.
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its business or financial responsibility is referred to as the
parent corporations own.
9. The parent corporation uses the property of the subsidiary as its own.
10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take
their orders from the parent corporation.
11. The formal legal requirements of the subsidiary are not observed.

ALS2014B 33 of 199
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25 - Umali v. Court of Appeals (1990) (Piercing the veil of corporate fiction)
Doctrines:
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction,
since petitioners do not intend to hold the officers and/or members of respondent corporations personally
liable thereof.
Facts:
This is a petition for review for the decision made by the CA reversing the decision of the trial courts, who
originally held the foreclosure of the petitioners property null and void.
The original complaint for annulment of title filed in the court a quo by herein petitioners included as party
defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines
(ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera).
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are the
owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Bank
of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated.
This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4)
parcels of land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by the Castillo
family and to carry out the project, a Memorandum of Agreement was executed. Rivera obliged himself to pay the
Castillos P70,000 after the execution of the contract and P400,000 after the property had been converted into a
subdivision.
Rivera armed with the agreement approached Cervantes, president of Bormaheco and bought a Caterpillar Tractor
with P50,000 down payment and the balance of P180,000 payable in installments. Slobec through Rivera executed in
favor of Bormaheco a chattel mortgage over the said equipment as security for the unpaid balance. As further security,
Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as
surety and Slobec as principal. The aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with
Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec and Mauricia Meer Vda. de
Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo
Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In giving the bond, ICP
required that the Castillos mortgage to them the properties in question.
There was a violation of the terms and conditions of the Counter-Guaranty Agreement, hence the properties of the
Castillos were foreclosed by ICP As the highest bidder with a bid of P285,212, a Certificate of Sale was issued by the
Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the
Register of Deeds of Lucena City in favor of ICP
Subsequently, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts)
the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in
dispute so that said parcels of land. Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated
August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject
property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply with his demands.
The heirs of the late Felipe Castillo filed an action for annulment of title before the CFI of Quezon contending that
all the aforementioned transactions are void for being entered into in fraud and without the consent and approval of the
CFI of Quezon before whom the administration proceedings was proceeding.
The CFI ruled in favor of the Heirs but on appeal to the CA, the latter reversed the decision of the trial court and
rendered the judgment subject of this petition.

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Issues:
1. W/N the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development
Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales Agreement, Chattel
Mortgage and the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage are all fraudulent and
simulated, and should be declared null and void.
2. CORP RELATED: W/N the doctrine of piercing the veil of corporate entity should be applied against the
respondent-Corporations.
3. W/N there was a valid foreclosure of the mortgaged properties by ICP
4. W/N PM Parts is a buyer in good faith and therefore acquired valid title over the subject properties.
Held/Ratio:
1. NO, the evidence of record, overall does not convince us the validity of petitioners contention that the
contracts entered into by the parties are either absolutely simulated or downright fraudulent.
The SC stated that this was a question of fact. Respondent CA made several findings to the effect that the
questioned documents are valid and binding upon the parties, that there was no fraud employed by private
respondents in the execution thereof, and that, contrary to petitioners allegation, the evidence on record reveals
that petitioners had every intention to be bound by their undertakings in the various transactions had with private
respondents
The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really
desired or intended to either produce legal effects or in any way alter the juridical situation of the parties.
The subsequent act of Rivera in receiving and making use of the tractor subject matter of the Sales
Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco,
concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,
conduce to the conclusion that petitioners had every intention to be bound by these contracts.
To set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and
convincing. We are not persuaded that such quantum of proof exists in the case at bar.
2. NO, while we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither
are we inclined to apply the doctrine invoked by petitioners in granting the relief sought.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders
may be disregarded. In such cases, the corporation will be considered as a mere association of persons.
The doctrine applies in the following instances, when corporation fiction is used:
1. Defeat public convenience;
2. Justify wrong, protect fraud, or defend crime;
3. As a shield to confuse the legitimate issues;
4. Where a corporation is the mere alter ego or business conduit of a person;
5. Where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction,
since petitioners do not intend to hold the officers and/or members of respondent corporations personally
liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which
relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private

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respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole
intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for
disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as
a shield to defraud creditors and third persons of their rights.
3. NO, the foreclosure of ICP is invalid.
The above argument was premised on the fact that there was (1) no written notice was furnished by Bormaheco to
ICP anent the failure of Slobec in paying its obligation with the former, plus the fact that no receipt was presented
to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the foreclosure of the mortgage,
the liability of ICP under the surety bond had already expired.
In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (12) months from its
effectivity date, whereas Slobecs installment payment was to end on July 23, 1972. Therefore, while ICP
guaranteed the payment by Slobec of the balance of P180,000, such guaranty was valid only for and within twelve
(12) months from the date of effectivity of the surety bond, or until January 22, 1972. The default of Slobec
during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety contract
had already been terminated.
Furthermore, the failure of Bormaheco to notify ICP in writing about Slobecs supposed default released ICP
from liability under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage
executed by petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim
exemption from the required written notice since its case does not fall under any of the exceptions hereinbefore
enumerated.
Lastly, it has been held that where the guarantor holds property of the principal as collateral surety for his
personal indemnity, to which he may resort only after payment by himself, until he has paid something as such
guarantor neither he nor the creditor can resort to such collaterals. There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP. Considering that the fact of payment by ICP has
never been established, it follows, pursuant to the doctrine above adverted to, that ICP cannot foreclose on the
subject properties,
4. NO, PM Parts in not a buyer in good faith.
Although the doctrine of piercing the veil of corporate fiction is not applicable in this case, its
inapplicability has no bearing on the good faith or bad faith of private respondent PM Parts.
It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President
of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several
transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the
Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were
admitted without qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the
defense of good faith may not be resorted to by private respondent PM Parts which is charged with knowledge of
the true relations existing between Bormaheco, ICP and herein petitioners.

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26 - Indophil Textile Mill Workers Union-PTGWO v. Calica (1992)
Doctrines:
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders
may be disregarded.
The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud,
or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere
alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
Facts:
In April 1987, Indophil Textile and the petitioner executed a Collective Bargaining Agreement (CBA) valid from
April 1, 1987 to March 31, 1990. On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed. On
July 1989, Indophil Acrylic Manufacturing Corporations employees also unionized and executed a CBA with the said
corporation. In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union
claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of the
facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA, to wit:
This Agreement shall apply to the Companys plant facilities and installations and to any extension
and expansion thereat.
In other words, it is the petitioners contention that Acrylic is part of the Indophil bargaining unit. However, the
petitioners contention was opposed by private respondent which submits that it is a juridical entity separate and distinct
from Acrylic.
Issues:
1. W/N the operations in Indophil Acrylic Corporation are an extension or expansion of private respondent
Company.
Held/Ratio:
1. NO.
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the
corporation is a devise to evade the application of the CBA between petitioner Union and private respondent
Company. However, the Indophil Acrylic Manufacturing Corporation is not an alter ego or an adjunct or business
conduit of private respondent because it has a separate legitimate business purpose. More so, the fact that the
businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are
the same persons manning and providing for auxilliary services to the units of Acrylic, and that the physical
plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are
not sufficient to justify the piercing of the corporate veil of Acrylic.
Hence, the Acrylic not being an extension or expansion of private respondent, Indophil Textile, the rank-
and-file employees of Acrylic should not be recognized as the bargaining representative of private
respondent.

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27 - Siain Enterprises Enterprises, Inc. v. Cupertino Realty Corp. (2009)
Doctrine:
Where clear evidence presented support the fact that a corporations affiliates have received large amounts which
became the consideration for the company execution of a real estate mortgage over its properties, then the
piercing doctrine shall be applied to support the fact that the real estate mortgage was valid and supported by
proper consideration.
Facts:
In 1995, Siain Enterprises Enterprises, Inc. (Siain Enterprises) obtained a loan of P37M from Cupertino Realty
Corporation (Cupertino) covered by a promissory note signed by both Siain Enterprisess and Cupertinos respective
presidents, Cua Le Leng and Wilfredo Lua. To secure the loan, Siain Enterprises executed a real estate mortgage over two
parcels of land, other equipment and machineries. The promissory note was subsequently amended to contain a 17%
annual interest on the P37M loan. A few months after, Cua Le Leng executed another promissory note in favor of
Cupertino for P160M and signed it as maker on behalf of Siain Enterprises and as co-maker, liable to Cupertino in her
personal capacity. The real estate mortgage was also amended to reflect the increased amount of the loan from
P37M to P197M
A year after, Siain Enterprises through counsel, wrote Cupertino and demanded from the latter the release
of the P160M loan. Siain Enterprises contends that despite repeated verbal demands, Cupertino failed to release P160M.
On the other hand, Cupertino, also through counsel, denied that it had yet to release the P160M loan and
maintained that Siain Enterprises had long obtained the proceeds of such loan and that Siain Enterprises was only
trying to abscond from a just and valid obligation. Cupertino then instituted extrajudicial foreclosure proceedings
over the properties subject of the amended real estate mortgage. This prompted Siain Enterprises to file a complaint with a
prayer for a restraining order to enjoin from proceeding with the public auction. Siain Enterprises further contends that
because it never received the P160M loan, the amended real estate mortgage is null and void because there was no
consideration therefore.
The lower courts ruled in favor of Cupertino and upheld the validity of the amended real estate mortgage.
The lower court disregarded Siain Enterprisess bare denial and negative evidence and gave credence to Cupertinos
evidence that the P160M loan was received by Siain Enterprises and its affiliate companies. In this regard, the court
applied the doctrine of piercing the veil of corporate fiction to preclude Siain Enterprises from disavowing the
receipt of the loan and paying its obligation under the amended real estate mortgage. Siain Enterprises contends that
the court erroneously applied the doctrine of piercing the veil or corporate fiction.
Issue:
1. W/N the doctrine of piercing the veil of corporate fiction was properly applied.
Held/Ratio:
2. Yes.
First and foremost, Siain Enterprises being the plaintiff, had the burden of proof and the duty to present a
preponderance of evidence to establish its claim. Instead, its evidence consisted of only a barefaced denial of
receipt of the P160M loan and a vaguely drawn theory. On the other hand, Cupertino presented overwhelming
evidence that Siain Enterprises Inc., and its affiliate corporations (Yuyek and Siain Transport) had received the
proceeds of the loan which was the consideration of the amended real estate mortgage. Moreover, it was
established in the lower courts that Siain Enterprises and Yuyek had a common set of incorporators,
stockholders and board of directors, the same bookkeeper and accountant, the same office address and the
same majority stockholder which is Cua Le Leng. Cua Le Leng had the unlimited liability to use Siain
Transports funds to pay the obligations incurred by Siain Enterprises. Thus, it is clear that Siain Enterprises,
Siain Transport and Yuyek are characterized by oneness of operations vested in Cua Le Leng alone.
Consequently, these corporations were proven to be mere alter-egos of Cua Le Leng. Where clear evidence
presented support the fact that a corporations affiliates have received large amounts which became the

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consideration for the company execution of a real estate mortgage over its properties, then the piercing doctrine
shall be applied to support the fact that the real estate mortgage was valid and supported by proper consideration.
28 - Rebecca Boyer-Roxas and Guillermo Roxas v. CA and Heirs of Eugenia Roxas Inc. (1992) (Hidden
Springs Resort + No Piercing)
Doctrine:
Piercing the veil of corporate fiction is not allowed when it is resorted under a theory of co-ownership to justify
continued use and possession by stockholders of corporate properties.
Facts:
Two separate ejectment cases were filed against Guillermo Roxas and Rebecca Boyer-Roxas, respectively by
the Heirs of Eugenia V. Roxas, Incorporated.
As against Rebecca, the corporation alleged that Rebecca is in possession of two houses found in Hidden Valley
Springs Resort, a resort owned by the corporation. One of the houses was still under construction. The houses were said
to be built at the expense of the corporation and that Rebeccas continued possession of them was merely tolerated by
the corporation.
As against Guillermo, respondent Corporation alleges that he occupies a house (and lot) within the resort and that
his occupation of said house (and lot) was merely tolerated by the corporation. Moreover, the corporation alleges that
this house was built at the expense of the corporation and was intended to be a recreation hall.
In their answers, Guillermo and Rebecca alleged that they were also heirs of Eugenia Roxas and as such they
have a share in the resort, and that they have the right to stay in the property. According to them, the veil of
corporate fiction must be pierced insofar as it does not allow them to possess the properties owned by the corporation
even though they are co-owners of the corporation and its properties along with other stockholders.
The RTC set a hearing and both Boyer-Roxas and Roxas received copies of the order of hearing. Their counsel,
Atty. Manicad also received a copy. The hearing was suspended and another hearing was set. During the hearing only the
counsel for the corporation appeared. Atty. Manicad nor his clients did not. Another hearing was scheduled for the
purpose of presenting evidence, a notice of hearing was sent to and received by all parties, but again, neither Atty.
Manicad Rebecca/Guillermo appeared. In the same hearing, the Corporation formally offered their evidence. In its Order
dated September 29, 1986, the court warned that in the event the petitioners and their counsel failed to appear on the next
scheduled hearing, the court shall consider the cases submitted for decision based on the evidence on record. On the next
scheduled hearing, neither Manicad, nor Rebecca/Guillermo appeared. The court rendered a decision based on the
evidence submitted by the Corporation. The court ordered that Guillermo and Rebecca vacate the premises and
that the unfinished building be demolished. No motion for reconsideration was submitted to the RTC within the
reglementary period.
Atty. Manicad submitted a Motion for Reconsideration 2 months later, praying for the reopening of the case and
acceptance of evidence. He said that he was to file a motion within the reglementary period but there was a mix-up with
the secretary and the messenger. He also said that the motion contained the reasons for his failure to attend the last hearing
schedule that his car broke down on the way to the Calamba court and that he had no choice but to be absent. The
court denied the motion on.
Issues:
1. W/N Rebecca and Guillermo were denied due process
2. W/N the corporate veil must be pierced
3. W/N Rebecca is a builder in good faith

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Held/Ratio:
1. NO. As a general rule, clients are bound by the acts of their lawyers. Of course the rule admits of certain
exceptions as when persons are deprived of their property without due process imputable to the gross negligence
of their counsel. In the case at bar, Rebecca and Guillermo were not deprived of their property without due
process because they were given the proper notices and they were well aware that their counsel was not appearing
in court. Despite the knowledge of their counsels incapacity, they still retained his services.
2. NO. The fact that the corporation was incorporated with the estate left by Eugenia Roxas as capital, and that
Rebecca/Guillermo, as heirs of Roxas, were stockholders of the company, do not justify the piercing of the
corporate veil. Properties registered in the name of the corporation are owned by it as an entity separate
and distinct from its members. While shares of stock constitute personal property, they do not represent
property of the corporation. A stockholder is not entitled to possess any definite property of the corporation.
Moreover, even if the former manager of the Corporation granted permission to Rebecca/Guillermo to possess the
property, the Corporation is not forever bound by this permission. In the absence of any contract between the
Corporation and Rebecca/Guillermo regarding the length of their possession, the Board may at any time revoke
the permission through a board resolution, as what they did in the case at bar.
The veil of corporate fiction may only be pierced when the Corporation is used as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary to achieve equity or when necessary for the protection of the
creditors.
3. YES. As regards the unfinished building, Rebecaa is considered a builder in good faith and therefore, the CAs
decision that it be demolished is modified. The unfinished building must be governed by the Civil Code
provisions on Property and builders in good faith.
FAMILY TREE: Rebecca is the mother of Guillermo. Rebeccas husband was the former manager of the corporation
(Kaya sila nabibigyan ng permission dati).

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29 - Gochan v. Young (2001)
Doctrines:
A court or tribunals jurisdiction over the subject matter is determined by the allegations in the complaint. The
fact that certain persons are not registered as stockholders in the books of the corporation will not bar them from
filing a derivative suit, if it is evident from the allegations in the complaint that they are bona fide stockholders.
In view of RA 8799, intra-corporate controversies are now within the jurisdiction of courts of general jurisdiction,
no longer of the Securities and Exchange Commission.
[from outline] The notion of corporate entity will be pierced and the individuals composing it will be treated as
identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
Facts:
Felix Gochan and Sons Realty Corporation (FGSRC) was registered under the SEC on June, 1951 with Felix
Gochan, Sr. as one of the incorporators. Felix had a daughter, Alice, who is the mother of the respondents. [There are two
groups of respondents in this case, the Uys and the Youngs. The Youngs are the heirs of Alice.] Alice inherited from her
father 50 shares of stock of FGSRC. Alice also died, leaving the 50 shares to her husband, John Young Sr.
John Young Sr. wanted to have the stock certificates in the names of his children (the respondents Young), so he
requested FGSRC to cancel the stock certificates under his name and issue new certificates under the names of his
children. FGSRC refused, saying the other stockholders had a right of first refusal under the Articles of Incorporation.
Later on, John Young Sr. died, leaving the FGSRC shares to his children. Four years later, the Uys [bigla nalang
sila sumingit, supposedly stockholders din sila ng FGSRC], together with the Youngs, filed a complaint with the SEC,
alleging that the directors were using the corporation for fraudulent purposes. FGSRC apparently sold some of its real
properties to 2 other corporations, with these corporations having the same directors as FGSRC. FGSRC also supposedly
bought the shares of the Uys fraudulently and sold them to these other corporations. The directors of FGSRC are the
petitioners in this present case. [The Youngs just wanted the shares of stock transferred to them, pero sumama na din sila
sa complaint against the directors kasi ayaw pumayag ng directors.]
The FGSRC directors moved to dismiss the case with the SEC, saying among others that the Youngs were not
parties-in-interest as the certificates of stock still held the name of their father, John Young Sr. And since the estate
proceedings were still ongoing, their interest was inchoate and they cannot be treated as stockholders yet. The SEC, in
dismissing the complaint, held that the Youngs had no capacity to sue, as they were not yet stockholders and could thus
not bring a derivative suit for FGSRC as they could not have suffered damage. It was up to the administrator of the estate,
if he so chooses, to bring the action.
The Court of Appeals upheld the SEC ruling, but only insofar as the heirs of Alice Gochan were concerned. The
CA held that the Youngs had no capacity to sue, as they were not stockholders yet, but the Uys were real parties-in-
interest, and had capacity to sue. It also held that the intestate Estate of John Young Sr. was an indispensable party.
In this petition, the directors of FGSRC also want the case dismissed as regards the Uys, saying they also dont
have capacity to sue. Since the shares of stock of the Uys were already sold at the time of the complaint, they were
supposedly no longer stockholders and thus could not bring a suit.
Issues:
1. W/N the Uys had capacity to sue
2. W/N the derivative suit could be brought
3. W/N the Youngs had capacity to sue
4. W/N the annotation of the notice of lis pendens on the properties sold by FGSRC to the other corporations was
proper

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Held/Ratio:
1. YES, they had capacity to sue. As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint. In the present case, the Uys contend that the sale of their shares of
stock was void ab initio. Thus, being in the complaint, it is deemed admitted. Therefore, since the sale was void
ab initio, the Uys remain as stockholders of the corporation even if under the corporate records they were no
longer stockholders.
There was also an issue regarding prescription, but the court ruled that since the action was based on a contract
which was void ab initio, prescription cannot be invoked. The action or defense for the declaration of nullity of a
contract does not prescribe.
2. YES, the derivative suit was proper. The directors of FGSRC were contending that it was only the Uys who were
injured, not the corporation, and thus, a derivative suit in behalf of the corporation could not prosper. However,
the complaint alleges all the components of a derivative suit. The personal injury of the Uys cannot disqualify
them from filing a derivative suit in behalf of the corporation; it just gives rise to an additional cause of action for
damages against the directors, which they included. As the complaint already avers that the corporation suffered
damage as a result of the action of the directors, the derivative suit could prosper.
3. YES, the Youngs were proper parties to the case. In citing Rule 3, 3 [CivPro!] and Rule 87, 2 of the Rules of
Court, the SC held that while an administrator is permitted to bring suits on behalf of the deceased, the
Rules do not prohibit the heirs from representing the deceased. More so in this case as there was still no
administrator appointed; the Youngs could not be expected to wait for the appointment of an administrator; then
wait further to see if the administrator appointed would care enough to file a suit to protect the rights and interests
of the deceased; and in the meantime do nothing while the rights and the properties of the decedent are violated or
dissipated. Since the Rules do not specifically prohibit them from representing the deceased, and since no
administrator had as yet been appointed at the time of the institution of the complaint in the SEC, there is nothing
wrong in allowing the heirs of John Young Sr. to represent the estate in the case.
4. YES, the annotations were proper. The complainants need not be stockholders of the two other corporations in
order to make them parties to the case. On the complaint, it was stated that the directors were using those 2 other
corporations as alter-egos, and the Uys and Youngs wanted the lands sold to these two corporations reconveyed in
the name of FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical if, as alleged here, the corporate entity is being used as a cloak or
cover for fraud or illegality; as a justification for a wrong; or as an alter-ego, an adjunct, or a business
conduit for the sole benefit of the stockholders.
The case is remanded to the RTC, as the SEC no longer had jurisdiction pursuant to RA 8799.
[I added a few facts to make the story make sense na wala sa decision mismo. Yung case kasi is just regarding a motion to
dismiss, and its not the actual case itself. A few of the facts of the main case were just hinted at.]

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30 - General Credit Corp. v. Alsons Devt and Investment Corp. (2007)
Doctrines:
Authorities agreed on at least 3 basic areas where piercing the veil is allowed, with which the law isolates the
corporation from any other legal entity to which it may be related:
a) defeat of public convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation
b) fraud cases or where the corporate entity is used to justify a wrong, protect fraud, or defend a crime
c) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of the other
corporation.
Facts:
General Credit Corp (GCC), then known as Commercial Credit Corp (CCC), established CCC franchise
companies in different urban centers in the country. To further its business, GCC was able to secure license from the
Central Bank (CB) and the SEC to engage also in quasi-banking activities. On the other hand, respondent CCC Equity
Corporation (EQUITY) was organized by GCC for the purpose of taking over the operations and management of
the various franchise companies. At a time material hereto, Alsons Devt & Investment Corp (ALSONS) and the Alcantara
Family each owned, just like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.
ALSONS and the Alcantara family, for a consideration of P2M, sole their shareholdings in the CCC franchise
companies to EQUITY. EQUITY issued ALSONS et al., a bearer promissory note for P2M with a 1-year maturity
date.
4 years later, the Alcantaras assigned their rights and interests over the bearer note to ALSONS. But even before
the execution of the assignment deal, letter of demand for interest payment were already sent to EQUITY. EQUITY
pleaded inability to pay (it had no more assets or property to settle the obligation nor was GCC extending them financial
support).
ALSONS filed a complaint for a sum of money against EQUITY and GCC. GCC was impleaded as a party-
defendant for any judgment against GCC, since EQUITY was organized as a tool and mere conduit of GCC.
(In a cross-claim against GCC), EQUITY claims it acted merely as an intermediary / bridge for loan
transactions and other dealings of GCC to its franchises and the public; that it is solely dependent on GCC for its funding;
hence, GCC is solely and directly liable to ALSONS (because GCC failed to provide EQUITY the necessary funds to
meet its obligations to ALSONS). In the answer to cross-claim, GCC says it is a distinct and separate entity from
EQUITY.
RTC ruled that EQUITY was an instrumentality or adjunct of GCC and considering the implications of the
relationship, held in favor of ALSON. CA affirmed.
Issues:
1. W/N the doctrine of Piercing the Veil of Corporate Fiction should be applied in the case at bar
Held/Ratio:
1. YES.
The notion of separate personality may be disregarded under the doctrine piercing the veil of corporate
fiction as in fact the court will look at the corporation as a mere collection of individuals undertaking business as
a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation
of this doctrine is that when 2 business enterprises are owned, conducted and controlled by the same parties, both

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law and equity will disregard the legal fiction that 2 corporations are distinct entities and treat them as one and the
same, when necessary to protect third parties rights.
Authorities agreed on at least 3 basic areas where piercing the veil is allowed, with which the law isolates the
corporation from any other legal entity to which it may be related:
a. defeat of public convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation
b. fraud cases or where the corporate entity is used to justify a wrong, protect fraud, or defend a crime
c. alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of the other corporation.
There are at least 20 documented circumstances and transactions which, taken together, strongly support the
conclusion that EQUITY was an adjunct / instrumentality / business conduit of GCC i.e. commonality of
directors, officers and stockholders, sharing of office between GCC and EQUITY, financing and management
arrangements allowing GCC to handle the funds of EQUITY, virtual control of GCC over finances, business
policies and practices of EQUITY, and the establishment of EQUITY by GCC to circumvent CB rules.
This relation provides a justifying ground to pierce GCCs existence as to ALSONs claim. The relationship of
GCC and EQUITY have been that of parent-subsidiary corporations, the doctrine is applicable in the case at
bar. It is right to disregard the separate existence of the parent and subsidiary, the latter being so controlled by
the parent that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego
of the former. Said relationships were shown to have been used to perform certain functions not characterized
with legitimacy.

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31 - Concept Builders Inc., v. NLRC (2007) (EPIRA Law, Universal Charge)
Doctrine:
Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for damages, the
corporation may not be heard to say that it has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.
When the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud
or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation
Facts:
Concept Builders is a domestic corporation engaged in the construction business. Private respondents are
employed by the company as laborers, carpenters and riggers.
In November of 1981, private respondents were served individual notices of termination by the company. It stated
that their contract had already expired and the project for which they were hired was completed. The NLRC discovered
that the project for which they were hired was not yet even finished. In addition to this, Concept had to hire subcontractors
whose works are the same as private respondents.
Dec 1984, Labor Arbiter rendered judgment ordering Concept to reinstate private respondents and pay them back
wages. Nov 1985, NLRC dismissed the MR filed by Concept. A writ of execution was issued by the Labor Arbiter
ordering sheriff to execute the decision. It was partially satisfied through the garnishment of money from MWSS, a debtor
of Concept, and turned over to NLRC.
On Feb 1989, an Alias Writ of Execution was issued by Labor Arbiter directing sheriff to collect from Concept
the balance of the judgment award and reinstate the private respondents but the sheriff issues a report saying he tried to
serve it but was unable to because Concept no longer occupied the premises. A second alias writ was issued but still to no
avail because it was now occupied by Hydro Phils Inc (HPPI).
On Nov 1989, private respondent filed a Motion for Issuance of a Brek-Open Order alleging that Hydro Phils and
Concept were owned by the same stockholders. HPPI filed an opposition to the motion contending that HPPI is distinct
and separate from Concept Builders and that HPPI is a manufacturing firm while Concept was engaged in construction.
March 1990, Labor Arbiter denied private respondents motion for break-open order. They appealed to the NLRC
wherein NLRC issued the break-open order and directed the auction sale of properties levied upon.
Concept Builders moved for reconsideration but was denied by NLRC. Hence, this petition.
Issues:
1. W/N the NLRC commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor
Arbiter
2. W/N the doctrine of piercing the corporate veil is applicable to this case
Held/Ratio:
1. NO. In view of the failure of the sheriff to effect a levy upon the property subject of the execution, private
respondents had no other recourse but to apply for a break-open order. This is in consonance with Section 3, Rule
VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open
order.

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Also, records show that the requirements of due notice and hearing were complied with. Concept and HPPI were
given the opportunity to submit evidence in support of their claim
2. YES. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in
this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents.
But, this wasnt so.
The corporate veil may be pierced when it is the alter ego of a person of another corporation. There is no hard and
fast rule to this because of a dependence on the facts and circumstances of every case.
But there are some probative factors of identity that will justify the application of the doctrine.
Summary probative factors: (1) stock membership by one or common ownership of both (2) identity of
directors and officers (management) (3) manner of keeping corporate books and records (management) (4)
methods of conducting business (management).
While petitioners claimed it ceased operations in 1986, it filed an Information Sheet with the SEC in 1987 stating
that its office address is their old address. Both information sheets were filed by Virgilio Casino, the same
corporate secretary. They had the same President, Board of Directors and substantially the same subscribers.
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of
back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of
Concept Builders and its emergence was skillfully orchestrated to avoid the latters financial liability.

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32 - Lipat v. Pacific Banking Corporation (2003) (BEC and BET; alter ego)
Doctrine:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its principal.
Facts:
Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading (BET), a single proprietorship engaged in
garment manufacturing in Quezon City. The Lipats also owned the Mystical Fashions in the United States, which sells
goods imported from the Philippines through BET. Estelita designated her daughter, Teresita, to manage BET in the
Philippines while she was managing Mystical Fashions in the United States.
In order to facilitate the convenient operation of BET, Estelita executed a special power of attorney appointing
Teresita as her attorney-in-fact to obtain loans, as well as execute mortgage contracts, from Pacific Bank. Thereafter, by
virtue of such SPA, Teresita was able to obtain a sizeable loan.
Three months after the loan, BET was incorporated into a family corporation named Belas Export Corporation
(BEC), engaged in the same business and utilized the same properties. Its incorporators and directors included the Lipat
spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and
other close relatives and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-
president and general manager. Pursuant to this, the loan was restructured in the name of BEC, and the new corporation
obtained subsequent loans (evidenced by several promissory notes) and a letter of credit agreement, all secured by the real
estate mortgage on the Lipats property.
Eventually, BEC defaulted on payments, which prompted the bank to foreclose on the real mortgage. A certain
Trinidad came out to be the highest bidder. Unfazed, the spouses moved to annul the real estate mortgage and
extrajudicial foreclosure, alleging that the promissory notes and the letter of credit were ultra vires acts of Teresita as they
were executed without the requisite board resolution of the Board of Directors of BEC, and even assuming that such were
binding on BEC, the same were the corporations sole obligation, it having a personality distinct and separate from spouses
Lipat.
The trial court ruled that there was convincing and conclusive evidence proving that BEC was a family
corporation of the Lipats. As such, it was a mere extension of petitioners personality and business and a mere alter ego or
business conduit of the Lipats established for their own benefit. The appellate court affirmed this ruling. The spouses, still
unfazed, countered on certiorari, alleging that there was no clear showing of fraud on their part.
Issue:
1. W/N the doctrine of piercing the veil of corporate fiction applies in this case.
Held/Ratio:
1. YES. In finding the Lipats mortgaged property liable for the obligations of BEC, both courts below relied upon
the alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the
corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may
be disregarded.
Note:
If sir asks why the court came to the conclusion that the two businesses are one and the same and that one was
merely an alter ego of the other, say this!
Evidence suggests and alter ego case in the sense that: (1) the spouses are the owners and majority shareholders of
BET and BEC; (2) both firms were managed by their daughter, Teresita; (3) both firms were engaged in the garment

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business, supplying products to Mystical Fashion, a US firm established by Estelita; (4) both firms held office in the same
building owned by the Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable;
(7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of
directors of BEC was composed of the Burgos and Lipat family members; (9) Estelita had full control over the activities
of and decided business matters of the corporation; and that (10) Estelita Lipat had benefited from the loans secured from
Pacific Bank to finance her business abroad and from the export bills secured by BEC for the account of Mystical
Fashion. It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership,
business purpose, and management. Apparently, BET and BEC are one and the same and the latter is a conduit of and
merely succeeded the former. The spouses desperately attempt to isolate themselves from and hide behind the corporate
personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the
veil of corporate entity seeks to prevent and remedy. In he Courts view, BEC is a mere continuation and successor of
BET, and petitioners cannot evade their obligations in the mortgage contract secured under the name of BEC on the
pretext that it was signed for the benefit and under the name of BET.

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33 - Emilio Cano Enterprise, Inc. v. Court of Industrial Relations, et al (1965) (close/family corp.)
Doctrines:
While a corporation is a legal entity existing separate and apart from the persons composing it, that concept
cannot be extended to a point beyond its reason and policy; and when invoked in support of an end subversive of
this policy, it should be disregarded by the courts.
Facts:
A complaint for unfair labor practice was filed By Honorata Cruz against Emilio, Ariston and Rodolfo Cano as
president and proprietor, field supervisor and manager, respectively, of Emilio Cano Enterprises, Inc.
After trial, Emilio and Rodolfo were found guilty of the ULP charge, but absolved Ariston for insufficiency
evidence. Emilio and Rodolfo were ordered, jointly and severally, to reinstate Honorata to her former position with
payment of back wages from the time of her dismissal up to her reinstatement, together with all of the rights and
privileges thereunto appertaining.
The case was appealed, but the judge affirmed the trial court decision. An order of execution was issued to
reinstate Honorata and to deposit with the court the amount P7,222.58 within 10 days from receipt of the order, failing
which the court will order either a levy on respondents properties or the filing of an action for contempt of court. (The
order of execution was directed against the properties of Emilio Cano Enterprises, Inc.)
Issues:
1. W/N the judgment against Emilio and Rodolfo in their capacity as officials of the corporation can be made
effective against the property of the latter which was not a party to the case.
Held/Ratio:
1. Yes. While it is an undisputed rule that a corporation has a personality separate and distinct from its members or
stockholders because of a fiction of the law, here we should not lose sight of the fact that the Emilio Cano
Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family.
Thus, the following are its incorporators: Emilio Cano, his wife Juliana, his sons Rodolfo and Carlos, and his
daughter-in-law Ana D. Cano. Here is an instance where the corporation and its members can be considered as
one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give
meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end
subversive of justice. And so it has been held that while a corporation is a legal entity existing separate and apart
from the persons composing it, that concept cannot be extended to a point beyond its reason and policy, and when
invoked in support of an end subversive of this policy it should be disregarded by the courts.

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34 - Palacio v. Fely Transportation Co. (1962)
Doctrine:
One cannot evade civil liability by incorporating properties or the business.
Facts:
Isabelo Calingasan owns a jeep which Alfredo Carillo was hired to drive. One day, as Carillo was driving in
Quezon City, he ran over a child, Mario Palacio, in a negligent, reckless, and imprudent manner. Carillo was then
convicted. Subsequently, Calingasan sold the jeep to Fely Transportation Company. Now, Marios parents are charging
Fely Transportation Co. subsidiary liable for damages. Apparently, the accident/mishap done to their son caused them
great financial distress and anguish especially it was the day before Christmas when Mario was ran over. In addition to
this, and as their main contention, they claim that Calingasan sold the jeep to Fely Corporation in order to evade liability.
Issue:
1. W/N Fely Transportation Co. and Calingasan are subsidiary liable.
Held/Ratio:
1. YES. Fely Transportation Co. and Calingasan must be subsidiary liable. The court is convinced that Calingasans
main purpose of forming the corporation was to evade his subsidiary liability resulting from the conviction of his
driver, Carillo.
This fact was evident since the incorporators were the immediate family members of Calingasan and that the
defendant failed to prove that it has other property than the said jeep it then strengthens the conviction that the
formation of the corporation was indeed for the evasion of subsidiary liability.
The court said that the corporation should not be heard to say that it has a separate juridical personality distinct
from its members when to allow to do so would be to sanction the use of the fiction of corporate entity as a shield
to subversive acts.

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35 - Villa Rey Transit, Inc. v. Eusebio Ferrer and PANTRANCO (1968)
PANTRANCO v. Jose M. Villarama
Doctrine:
The ends and purposes of the Corporation law seeks to separate personal responsibilities from corporate
undertakings. It is the very essence of incorporation that the acts and conducts of the corporation be carried out in
its own corporate name because it has its own personality.
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of
individuals.
Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be
enjoined from competing with the covenantee.
Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or business, and
which purports to bind the seller not to engage in the same business in competition with the purchaser, is lawful
and enforceable. While such covenants are designed to prevent competition on the part of the seller, it is
ordinarily neither their purpose nor effect to stifle competition generally in the locality, nor to prevent it at all in a
way or to an extent injurious to the public.
Facts:
Villarama original owner of the TPU (first set); entered into a contract with PANTRANCO.
PANTRANCO bought the TPUs from Villarama
Fernando original owner of the 5 TPUs (second set), from whom Villarama bought along with 49 buses, tools
and equipment.
Ferrer winner of a civil case against FERNANDO; sheriff levied on two of the five TPUs (second set) in his
favor
The case is a tri-party appeal from the decision of the CFI of Manila. In 1959, Villarama entered into a Contract
of Sale with PANTRANCO for two certificates of public convenience (first set) which authorizes the owner to operate 32
units of buses along the Pangasinan to Manila route. Among others, the contract contains a stipulation that prohibits
the seller (Villarama) from applying for new TPUs for 10 years identical or competing with the buyers.
Three months later on March 1959, a corporation called Villa Rey Transit Inc. was organized with a capital stock
of P500,000. The incorporators are Natividad Villarama (respondent Villaramas wife) and other relatives. On April 1959
after registering with the SEC, Villa Rey bought five TPUs (second set) from Fernando along with 49 buses, tools and
other equipment. After the execution of the contract, Villa Rey then prayed for the Public Service Commission (PSC) to
grant it provisional authority to operate. Before the PSC could take action on the application, two of the five TPUs were
levied in favor of respondent Ferrer in cases against Fernando. Ferrer then sold these two TPUs to PANTRANCO.
Subsequently, the PSC ordered that PANTRANCO would have the authority to operate on the two TPUs acquired
from Ferrer.
Villa Rey now questioned this order and initiated an action in the CFI of Manila to annul these two TPUs.
PANTRANCO on the other hand initiated a third-party complaint alleging that Villarama/Villa Rey Inc. was disqualified
from operating on the two TPUs by virtue of their original contract of Sale.

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Issues:
1. W/N the stipulation on the original contract between PANTRANCO and Villarama binds Villa Rey Inc. as
well.
2. W/N such stipulation is valid
Held/Ratio:
1. YES.
Evidence discloses that for someone claiming he is only a part-time manager, the evidence on record shows
Villarama practically controlled the corporation because he used the corporation funds to pay for his own
obligations, and that he also bought money into the corporations coffers. The finances of the Corporation which,
under all concepts in the law, are supposed to be under the control and administration of the treasurer keeping
them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the private
funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-treasurer of the
business without regard to the rights of the stockholders. The evidence further shows that the initial cash
capitalization of the corporation of P105,000 was mostly financed by Villarama. Further, the evidence shows that
when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal
checks Ford trucks for the Corporation. Villarama had co-mingled his personal funds and transactions with those
made in the name of the Corporation.
The Court thus concluded:
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection
of a monopoly or generally the perpetration of knavery or crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of
evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and
that the restrictive clause in the contract entered into by the latter and Pantranco is also
enforceable and binding against the said Corporation.
2. YES.
The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years
since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of
such period. If the prohibition is to be applied only to the acquisition of new certificates of public convenience
thru an application with the Public Service Commission, this would, in effect, allow the seller just the same to
compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous
operator, thus defeating the intention of the parties.
Although the stipulation is in the nature of an agreement suppressing competition, it is, however, merely ancillary
or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited:
first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer;
second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only
along the lines covered by the certificates sold.

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36 - McConnel v. CA (1961) (Case for thinly-capitalized corporations)
Doctrines:
If a corporation is a mere instrumentality of the individual stockholder; the latter must individually answer for
the corporate obligations
Facts:
Park Rite Co. (PRC), a Phil. corporation, was originally organized on April 1947, with a capital stock of 1,500
shares/P1 a share. PRC leased from Rafael Samanillo a vacant lot which was used for parking motor vehicles for
consideration.
It turned out that in operating its parking business, the corporation occupied and used not only the Samanillo
lot it had leased but also an adjacent lot belonging to Padilla (respondent) without the owners knowledge and consent.
Padilla wanted payment for the use and occupation of the lot.
Park Rite (then controlled by Parades and Tolentino) disclaimed liability, blaming the original incorporators
(McConnel, Rodriguez, and Cochrane). Padilla filed a complaint for forcible entry in the MTC (uy civpro).
Judgment was rendered on Nov. 13, 1947 against Park Rite to pay P7,500 plus interest. Restitution not having
been made until 31 January 1948, the entire judgment amounted to P11,732.50. Upon execution, the corporation was
found without any assets other than P550 deposited in Court. After their application to the judgment credit, there
remained a balance of P11,182.50 outstanding and unsatisfied.
The judgment creditors then filed suit in the CFI Manila against the corporation and its past and present
stockholders, to recover from them, jointly and severally, the unsatisfied balance of the judgment, plus legal interest and
costs.
CFI denied recovery. CA reversed finding that the corporation was a mere alter ego or business conduit of the
principal stockholders that controlled it for their own benefit, and adjudged them responsible
Issues:
1. W/N there was justification for disregarding the corporate entity of Park Rite Co., Inc. and holding its controlling
stockholders personally responsible for a judgment against the corp.
Held/Ratio:
1. YES
The evidence clearly shows that these persons completely dominated and controlled the corporation and that the
functions of the corporation were solely for their benefits.
When it was originally organized on or about April 15, 1947, the original incorporators were McConnel,
Cochrane, Rodriguez, Dario and Ordrecio with a capital stock of P1,500 divided into 1,500 shares at P1 a
share. McConnel and Cochrane each owned 500 shares, Rodriguez 408 shares, and Dario and Odrecio 1
share each. It is obvious that the shares of the last two named persons were merely qualifying shares. (So
McConnel and Cochrane 500 shares each, Rodriguez 498 shares and Dario and Odrecio 1 share each
TOTAL 1500 shares )
Then or about August 22, 1947 the defendants Paredes and Tolentino purchased 1,496 shares of the said
corporation and the remaining four shares were acquired by Claudio, Paredes, Tarictican, and Marquez at
one share each. It is obvious that the last four shares bought by these four persons were merely qualifying
shares and that to all intents and purposes the spouses Cirilo Paredes and Ursula Tolentino composed the so-
called Park Rite Co., Inc.
The facts show that the corporation is a mere instrumentality of the individual stockholders; hence the latter
must individually answer for the corporate obligations. While the mere ownership of all or nearly all of the capital
stock of a corporation is a mere business conduit of the stockholder, that conclusion is amply justified where it is

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shown, as in the case before us, that the operations of the corporation were so merged with those of the
stockholders as to be practically indistinguishable from them.
That the corporation was a mere extension of their personality is shown by the fact that the office of Cirilo
Paredes and that of Park Rite Co., Inc. were located in the same building, in the same floor and in the same
room at 507 Wilson Building. This is further shown by the fact that the funds of the corporation were kept
by Cirilo Paredes in his own name.
To hold the latter liable for the corporations obligations is not to ignore the corporations separate entity, but
merely to apply the established principle that such entity cannot be invoked or used for purposes that could
not have been intended by the law that created that separate personality.

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37 - Gabionza v. CA (2008)
Doctrine:
There is no legal obligation on the part of the petitioners to undertake an investigation of ASBHI before agreeing
to provide loans. It is unfair to expect a person to procure every public record concerning an applicant for credit to
satisfy himself of the latters financial standing.
Facts:
Betty Go Gabionza and Isabelita Tan invested money with ASB Holdings, Inc. (ASBHI). According to ASBHIs
articles of incorporation, its primary purpose is to invest in any real and personal properties of every kind or otherwise
acquire the stocks and bonds of any other corporation, and other securities or evidence of indebtedness of any other
corporation and to hold or own, use, sell, deal in, dispose of, and turn to account any such stocks. (Parang money market
placement)
After each deposit, ASBHI would issue two (2) postdated checks to its lenders/investors, one representing the
principal amount and the other covering the interest thereon. The checks were drawn against DBS Bank and would mature
in 30 to 45 days. On the maturity of the checks, the individual lenders can renew the loans, either collecting only the
interest earnings or rolling over the same with the principal amounts.
At first, petitioners were issued receipts reflecting the name ASB Realty Development which they were told
was the same entity as ASB or was connected therewith, but beginning in March 1998, the receipts were issued in the
name of ASBHI. Petitioners claimed that the employees told them that the ASBHI was exactly the same institution that
they had previously dealt with
In the first quarter of 2000, DBS Bank started to refuse to pay for the checks purportedly by virtue of stop
payment orders from ASBHI. In May of 2000, ASBHI filed a petition for rehabilitation and receivership with the
Securities and Exchange Commission (SEC), and it was able to obtain an order enjoining it from paying its outstanding
liabilities. This series of events led to the filing of the complaints by petitioners charging Luke Roxas (president of
ASBHI) and Evelyn Nolasco (Senior VP and Treasurer) with estafa under Article 315(2)(a) and (2)(d) of theRPC, estafa
under PD 1689, violation of the Revised Securities Act and violation of the General Banking Act.
A special task force, the Task Force on Financial Fraud (Task Force), was created by the DOJ to investigate. The
Task Force concluded that the subject transactions were loans which gave rise only to civil liability; that petitioners were
satisfied with the arrangement from 1996 to 2000; that petitioners never directly dealt with Nolasco and Roxas; and that a
check was not a security as contemplated by the Revised Securities Act.
Petitioners assailed the Task Force findings and filed a joint petition for review with the Secretary of Justice. Then
DOJ Secretary Hernando Perez issued a resolution which partially reversed the Task Force and instead, directed the filing
of five (5) Informations for estafa under Article 315(2)(a) of the RPC. Respondents filed a petition for certiorari with the
CA. The CA reversed the DOJ resolution and ordered the dismissal of the criminal cases, hence this petition filed by
Gabionza and Tan.
Issue:
1. W/N the findings embodied in the DOJ Resolution align with the foregoing elements of estafa3 by means of deceit

3. ART. 315. Swindling (estafa). Any person who shall defraud another by any of the means mentioned herein below shall be punished by:
...
2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneous with the commission of the fraud:
a. By using a fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business or imaginary
transactions, or by means of other similar deceits;
The elements of estafa by means of deceit are as follows: (1) that there must be a false pretense, fraudulent act or fraudulent means; (2) that such
false pretense, fraudulent act or fraudulent means must be made or executed prior to or simultaneously with the commission of the fraud; (3)
that the offended party must have relied on the false pretense, fraudulent act or fraudulent means, that is, he was induced to part with his money

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Held/Ratio:
1. YES. The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means perpetrated
upon the petitioners. It narrated that petitioners were made to believe that ASBHI had the financial capacity
to repay the loans it enticed petitioners to extend, despite the fact that it had an authorized capital stock of
only P500,000 and paid up capital of only P125,000.
The material misrepresentations have been made by the agents or employees of ASBHI to petitioners, to the effect
that the corporation was structurally sound and financially able to undertake the series of loan transactions that it
induced petitioners to enter into. (They claimed that ASBHI had controlling interests with ASB Realty Corp., ASB
Development Corp. and ASB Land, Inc,; that ASB could legitimately solicit funds from the public for
investment/borrowing purposes; that ASB, by itself, or through the corporations aforestated, owned real and
personal properties which would support and justify its borrowing program; that ASB was connected with and
firmly backed by DBS Bank in which Roxas held a substantial stake; and ASB would, upon maturity of the checks
it issued to its lenders, pay the same and that it had the necessary resources to do so.)
Even if ASBHIs lack of financial and structural integrity is verifiable from the articles of incorporation or other
publicly available SEC records, it does not follow that the crime of estafa through deceit would be beyond
commission when precisely there are bending representations that the company would be able to meet its
obligations. Moreover, respondents argument assumes that there is legal obligation on the part of petitioners to
undertake an investigation of ASBHI before agreeing to provide the loans. There is no such obligation. It is unfair
to expect a person to procure every available public record concerning an applicant for credit to satisfy himself of
the latters financial standing. At least, that is not the way an average person takes care of his concerns.
To the benefit of private respondents, the Court of Appeals ruled, citing Sesbreno v. Court of Appeals, that the
subject transactions are akin to money market placements which partake the nature of a loan, the non-payment of
which does not give rise to criminal liability for estafa. That rationale is wholly irrelevant to the complaint at bar,
which centers not on the inability of ASBHI to repay petitioners but on the fraud and misrepresentation
committed by ASBHI to induce petitioners to part with their money.
To be clear, it is possible to hold the borrower in a money market placement liable for estafa if the creditor was
induced to extend a loan upon the false or fraudulent misrepresentations of the borrower. Such estafa is one by
means of deceit.
The DOJ Resolution clearly supports a prima facie finding that the crime of estafa under Article 315 (2)(a) has
been committed against petitioners.

or property because of the false pretense, fraudulent act or fraudulent means; and (4) that as a result thereof, the offended party suffered
damage.
Other facts: Gabionza lost P12,160,583.32 whereas Tan lost 16,411,238.57

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38 - Yutivo Sons Hardware Company v. CTA and CIR (1961) (assessment; mere alter ego)
Doctrines:
Corporate Juridical Personality cannot be employed for the purpose of avoidance or minimization of taxes.
It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporation petitions to which it may be connected. However, when
the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons, or in the case of two corporations, merge them into
one.
When the corporation is the mere alter ego or business conduit of a person, it may be disregarded.
Facts:
Yutivo Sons Hardware Co. is a company engaged in the importation and sale of hardware supplies and
equipment. The former bought a number of cars from General Motors Overseas Corporation. As importer, GM paid sales
tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being
collected only once on original sales, Yutivo paid no further sales tax on its sales to the public.
On 1946, Southern Motors was organized to engage in the business of selling cars, trucks, and spare parts. Its
original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each, 25% of which
(2,500) was subscribed to the 5 sons of 3 of the founders of Yutivo. [Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng
Poh, and Washington Sycip] (The first three are brothers, being sons of Yu Tiong Yee. The latter two are respectively
sons of Yu Tiong Sin and Albino Sycip.)
**Short corp shiz: only at least 25% of the authorized capital stock needs to be subscribed at the time of incorporation, out
of which only at least 25% of the subscribed stocks need to be paid upon subscription. Minimum number of people to
form a corporation: FIVE**
After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars
and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the
Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and
trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of
selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as
importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is
collected only once on original sales, SM paid no sales tax on its sales to the public.
After some time, the CIR made an assessment on Yutivo and demanded from the latter P1,804,769.85 as
deficiency sales tax, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale
made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the
subsidiary of the latter.
The said assessment was disputed by Yutivo, and after a reinvestigation was made, the respondent Collector
countermanded his demand for sales tax deficiency on the ground that there was no sufficient evidence that could be
gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or
subsidiary of Yutivo.
Another investigation ensued, this time the respondent determined that the aforementioned tax assessment was
lawfully due the government, the last demand being P2,215,809.27. The increase in amount was due to the additional
assessment made for the year of 1950.
Yutivo contested the second assessment before the CTA, alleging that there is no valid ground to disregard
corporate personality and to hold that SM is an adjunct of petitioner. The CTA finding sustained the Collectors theory
that there was no legitimate or bona fide purpose in the organization of SM the apparent objective being to evade the

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payment of taxes and that it was owned (or a majority of the stocks thereof) and controlled by Yutivo, and is a mere
alter ego of the latter.
Yutivo brought the case to the SC through a petition for review.
Issues:
1. W/N Southern Motors was organized for the purpose of evading the payment of taxes.
2. W/N Southern Motors is a mere adjunct of Yutivo.
Held/Ratio:
1. NO. SM was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to
June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo,
which, in turn resold them to SM. During that period, it is not disputed that GM as importer, was the one solely
liable for sales taxes. Neither Yutivo nor SM was subject to the sales taxes on their sales of cars and trucks. The
sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its
practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax
evasion device runs counter to the fact that there was no tax to evade.
The intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and
convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation.
This is because fraud is never lightly to be presumed.
2. YES. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 (25% of
P250,000 **see short corp shiz above**) was paid by the aforenamed subscribers, but actually the said sum was
advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were
paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM.
Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment
of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to
subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the
former initiated the subscription.
Another aspect relative to Yutivos control over SM operations relates to its cash transactions. All cash assets of
SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all
receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo
in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred
to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the
payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs
generally, a corresponding charge is made against the account of SM in Yutivos books. The payments for and
charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter
would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are
made on Yutivo stationery and made under authority of Yutivos corporate officers, without any copy thereof
being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the
account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information
received from Yutivo.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit
to the latter not only in the form of starting capital but also in the form of credits extended for the cars and
vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus, the increases in the capital stock were made in advances or Guarantee
payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At
all times, Yutivo, through officers and directors common to it and SM, exercised full control over the cash funds,
policies, expenditures and obligations of the latter.

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Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court CTA correctly disregarded the
technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.
In the end, SC merely modified the ruling of the CTA and reduced the charges held therein, due to the fact that
the CTA erroneously included in the computation amounts which were already paid by Yutivo.
39 - Francisco v. Mejia (2001) (intentional delinquency in payment of real taxes)

Doctrines:
US v. Milwaukee Refrigerator and Umali v. CA were cited.
With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with
the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in behalf of the
corporation, within the scope of his authority and in good faith. In such cases, the officers acts are properly
attributed to the corporation. However, if it is proven that the officer has used the corporate fiction to defraud a
third party, or that he has acted negligently, maliciously or in bad faith, then the corporate veil shall be lifted and
he shall be held personally liable for the particular corporate obligation involved.
Facts:
Andrea Gutierrez was the owner of a parcel of land in Caloocan. This property was subdivided into five lots, four
of which are the subject of this controversy. The four lots were sold to Cardale Financing and Realty Corporation for a
consideration of P800,000. Cardale made an initial payment of P171,000, the balance payable within a period of 5 years
with an interest of 9% per annum. To secure the balance of the purchase price, Cardale mortgaged 3 of the 4 parcels of
land sold to it by Gutierrez to Gutierrez herself (hence, the deed executed was sale with mortgage).
Cardale failed to pay. Gutierrez filed a suit for rescission. Cardale was represented by its VP and Treasurer, herein
petitioner Adalia Francisco. During the pendency of the suit, Gutierrez died and was substituted by herein respondent Rita
Mejia as the administrator of Gutierrezs estate. The case dragged on for 14 years.
Meanwhile, real property taxes for the mortgaged properties were not paid. As a result, the government levied
upon them. They became subject of an auction sale. The highest bidder was Merryland Development Corporation, whose
President was also Adalia Francisco. Eventually, titles were consolidated to Merryland.
Mejia filed a complaint for damages against Francisco, Merryland, and the Register Deeds of Caloocan City. The
trial court ruled in favor of Francisco. It was said that no sufficient proof of fraud on the part of Francisco was adduced.
The Court of Appeals reversed the decision of the trial court.
Issues:
1. W/N it is proper to pierce the corporate veil and hold Francisco liable
Held/Ratio:
1. YES, it was evident that Francisco was in bad faith, not informing Gutierrezs estate of the tax delinquencies.
Apparently, Francisco made use of her involvement in Cardale and Merryland to secure an advantage for the
latter. Cardale as the mortgagor had the duty of paying the taxes for the properties. Evidence showed that
Francisco as Cardales Treasurer, intended to conceal the delinquency in the payment of taxes so that the
properties may be levied upon and be the subject of an auction where Merryland could bid, which was exactly
what happened.

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40 - NAMARCO v. Associated Finance (1967) (sugar deal)
Facts:
National Marketing Corporation (NAMARCO) entered into an agreement with Associated Finance, a domestic
corporation represented by its president, Francisco Sycip, for the exchange of raw and refined sugar. Respondent would
deliver to the Petitioner 22,516 bags (each weighing 100 pounds) of Victorias and/or National refined sugar in
exchange for 7,732.71 bags of Busilak and 17,285.08 piculs of Pasumil raw sugar belonging to NAMARCO, both
agreeing to pay liquidated damages equivalent to 20% of the contractual value of the sugar should either party fail to
comply. Associated failed to deliver to NAMARCO the Victoria and National sugar agreed upon and instead offered
to pay its price. NAMARCO refused and filed a suit for damages. The trial court held Associated liable but not Sycip.
Issue:
1. W/N Sycip may be held liable, jointly and severally with his co-defendant, Associated Finance.
Held/Ratio:
1. There are facts w/c are sufficient to hold Sycip liable solidarily w/ Associated. He asserted that he entered into the
contract personally, he had full knowledge of the fact that Associated was in no position to comply. At the same
time, he was majority stockholder of Associated; w/ 60,000 of its 105,000 total shares in his name, and another
20,000 in the name of his wife. He had full control over Associated. The foregoing facts, fully established by
evidence, can lead to no other conclusion than that Sycip was guilty of fraud through false representations. Thus,
he cannot seek refuge behind the separate personality of the corporation w/c was his mere alter ego.

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41 - G. C. Arnold v. Willits and Patterson Ltd. (1923) (Exhibit A v. Exhibit B)
Doctrines:
Where the stock of a corporation is owned by one person whereby the corporation functions only for the
benefit of such individual owner, the corporation and the individual should be deemed to be the same.
Facts:
Willits & Patterson was a partnership organized in San Francisco, California. In 1916, they engaged the services
of Arnold to be their agent in the Philippines. Under their contract, marked Exhibit A, Arnold will get half of the net
profits of any transaction entered into in the name of the partnership, half of the net profits of the coconut oil mill, a
minimum $200/month salary, and a 1% brokerage fee on all purchases and sales of merchandise. Arnold was to be Willits
& Pattersons agent for five years, and he was tasked to operate a certain oil mill. Sometime later, Patterson retired, and
Willits then created a new corporation under the same name. Under this corporation, Willits owned practically all the
shares except those nominal shares needed to qualify directors. Willits also created another corporation in the
Philippines with the same name. Again, he owned practically all the shares. Legally, the San Francisco corporation
owned all the assets and liabilities of the Manila corporation. Sometime in 1919, Willits and Arnold entered into
another contract, marked Exhibit B, which clarified Arnolds mode of compensation.
Under Exhibit B, Arnold would get a 1% commission on all sales made by the corporation in Manila, half of the
profits on all business transactions, and no participation on earnings of any stock, and if the business operated on a loss,
he would receive $400/month. No complaint or argument was raised against these terms, and the accountant of Willits &
Patterson in Manila used Exhibit B in computing what was due to Arnold. By 1921, it showed that defendant corporation
owed Arnold P106,277.50 under Exhibit B. However, before this, the corporation underwent financial trouble and all its
assets were forwarded to a creditors committee. The committee refuses to honor Exhibit B because according to it,
the corporation never allowed or acceded to such a contract or understanding, and that Willits signed it without
authority.
Issues:
1. W/N Exhibit B is binding upon the corporation and the creditors committee despite the lack of approval from the
Board
Held/Ratio:
1. YES. The approval of the Board is not needed since it is evident that Willis owns and controls the corporation.
When the stock of a corporation owned by one individual and the corporation functions for his benefit, the
corporation and individual should be deemed the same. Willits actions were done not just to benefit him as a
shareholder but to control the whole corporation and to affect the transaction of its business, in the same
manner as if it had been clothed with all the formalities of a corporate act.
Also, Exhibit B came into effect in 1919 and since then, was used by the corporation in determining Arnolds
salary and dues. There was no objection ever raised against it except two years later, in 1921, by the creditors
committee. Its a well-settled doctrine that acts of officers, though unauthorized, may be ratified by the
corporation where the latter acquiesces to the act. Here, the creditors committee cannot object to Exhibit B
because the corporation has in effect ratified its validity by applying it for two years.

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42 - La Campana Coffee Factory v. Kaisahan ng Manggagawa (1953) (jurisdiction of Court of Industrial
Relations, GauGau and Coffee Corporation)
Doctrines:
The issue in this case is about the jurisdiction of the Court of Industrial Relations to hear the case filed against the
corporation. This shows a distinction between Alter Ego Cases and Fraud Cases, which in the latter involves a
pecuniary claim.
The law treats two corporations as one, in a case filed against them, when they have only one management, set of
shareholders, office, and payroll.
Facts:
Tan Tong and his family own two corporations, namely: La Campana Gaugau Packing(The Gaugau Corporation)
and La Campana Coffee Factory, Inc.(The Coffee Corporation). Both are located in the same office in Espana.
In 1951, the laborers of the two corporations of Tan Tong formed a labor union named as Kaisahan ng
Manggagawa sa La Compana(The Kaisahan). The 66 members of which are under one payroll of the two corporations.
The Kaisahan then sought to be registered in the Department of Labor to have its separate entity in July 1951.
Tan Tong and the Kaisahan went into a Coporate Bargaining Agreement in which the laborers demanded higher
wages. The two entities failed to reach an agreement and by the issuance of a permit by the Department of Labor to the
Kaisahan to have legal standing, the dispute was then given to the Court of Industrial Relations.
In September 1951, during the pendency of the case, the Secretary of Labor revoked the Kaisahans permit to
be a separate entity due to a finding that the labor union was engaged in subversive actions.
Tan Tong now pushes for the dismissal of the case in the Court of Industrial Relations for lack of jurisdiction.
The claim that the number of workers in the La Campana Coffee Factory is only 14 and the Court of Industrial
Relations requires that to have jurisdiction over a dispute, an organization must have at least 31 members.
Tan Tong claims that the two corporations are distinct from each other and its La Campana Coffee Factory has
less than 31 laborers and the Court of Industrial Relations does not have jurisdiction over the same. He also claims that
the union has lost its legal standing to sue because the Secretary of Labor has revoked the permit.
Issues:
1. W/N the Court of Industrial Relations has jurisdiction over the dispute
2. W/N the Kaisahan have legal standing to sue
Held/Ratio:
1. Yes
It has been proven by an investigation done, that the corporations owned by Tan Tong are merely one and the
same. This is for the fact that they are based in only one office, its goods (gaugau and coffee) are stored in one
place and in one warehouse, delivery trucks indicate deliveries of both gaugau and coffee. It is also stated that the
employees receive their salaries from only one payroll and from one Natividad Garcia, Tan Tongs secretary. In
this case, the court treats the two companies as one. Therefore, the count of employees should be taken as a
whole, which is 66, very well above the minimum number required for the Court of Industrial Relations to
acquire jurisdiction.
2. Yes
The law vests the Court of Industrial Relations jurisdiction of disputes of organizations with at least 31 members.
It is also stated that once the Court of Industrial Relations acquires jurisdiction, it is retained throughout
until the dispute is resolved. The revocation of the permit of the Kaisahan by the Secretary of Justice did not
remove the jurisdiction of the court over the case.

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43 - Shoemart v. NLRC (1993) (sister company of SM)
Doctrines:
Employment of same workers, single place of business, etc., may indicate alter ego situation (from syllabus)
Facts:
Moris Industries was engaged in manufacture of leather goods. In 1985, 56 out of 74 workers decided to form the
Moris Industries Union. When the Union contacted Moris in order to fix a collective bargaining agreement, Moris
suddenly shut down and ceased operations two days later. Because of this, the Union filed a case with the NLRC against
Moris for unfair labor practice, recovery of wage differentials and other monetary benefits. Shoemart, and its president,
Henry Sy, was also impleaded because according to the Union, Shoemart and Moris had only one juridical personality.
SM countered that it had a separate juridical personality from Morris and that it had no employer-employee relationship
with members of the Union.
The Union presented one Cresencio Edic as a witness. Edic testified that he was first hired by the persons who
owned SM to make samples to be displayed on the store windows. When he was promoted as over-all supervisor, the
factory was transferred, the production division was separately incorporated and underwent many name changes.
However, the owners remained the same. Due to martial law, the case was repeatedly delayed, until it finally landed
with Labor Arbiter Linsangan, who was the 4th arbiter to handle the case. Linsangan decided that Moris and SM were
equally liable to the Union based on the ff. grounds:
a. Edics testimony
b. all five incorporators of Moris were major stockholders of SM (except for Elizabeth Sy)
c. SM is the exclusive buyer of all of Moriss products
d. SM and Moris are housed in one building
e. Moris uses the payrolls of SM (SM says that they didnt know this was happening, but the Court found
this allegation incredible)
SM appeals this decision.
Issues:
1. W/N the NLRC correctly applied the piercing doctrine by holding SM liable together with Moris
Held/Ratio:
1. YES. The facts show that Moris was the mere alter ego of SM. There are several factors that show that Moris is a
mere conduit of SM, and that it is SM who really owns and controls Moris. Thus, in order to protect the rights of
the workers, the NLRC properly applied the piercing of the corporate veil doctrine. And since Moris doesnt exist
anymore to rehire the workers, who also cant work for SM because of a difference in expertise of labor, then the
SC deemed it proper to hold SM solidarily liable with Moris for separation pay.

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44 - Padilla v. Court of Appeals (2001) (same person, different corporation, must implead)
Doctrine:
No person shall be affected by any proceedings to which he is a stranger, and strangers to a case are not bound by
the judgment rendered by the court.
The veil of corporate fiction may only be disregarded in cases where the corporate vehicle is being used to defeat
public convenience, justify wrong, protect fraud, or defend crime. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be
presumed.
Facts:
Susana Realty Inc. (SRI) sold to Light Rail Transit Authority (LRTA) several parcels of land along Taft Avenue.
On the deed of absolute sale, SRI had a right of first refusal in case LRTA decided to develop the land. LRTA contracted
with Phoenix-Omega Development and Management Corporation (Phoenix-Omega) to develop the land, but this was
opposed by SRI due to the right of first refusal clause.
SRI later agreed to lease to Phoenix-Omega part of its property for commercial development. The condition set by
SRI was that any developments to be made were subject to its prior approval. Phoenix-Omega then assigned its rights
over the development of the land to PKA Development and Management Corporation (PKA). Padilla, herein petitioner, is
the President and General Manager of PKA as well as the Chairman of the Board of Directors of Phoenix-Omega.
So now, PKA was in charge of developing the properties. However, it continuously failed to do so, and its
building permit was even revoked for violation of the National Building Code (BP 344) due to defects in the construction.
SRI withheld its approval of PKAs development plans until the defects were cured, but they never were. PKA then filed
for rescission of the contract, alleging that SRI maliciously withheld approval of the plans, which in turn led to PKA being
unable to comply with its obligations. However, the judgment went in favor of SRI. The contract was rescinded, and PKA
was ordered to indemnify SRI for damages.
The properties were returned to SRI, but PKA failed to pay the monetary awards. Thus, SRI filed a motion for
the issuance of an alias writ against Padilla and Phoenix-Omega, saying that they were one and the same entity with
PKA. The RTC granted this motion, and said that if PKAs properties were insufficient, SRI can go against the
properties of Padilla and Phoenix-Omega for the enforcement of the previous judgment. The RTC ruled, and the CA
later agreed, that there was evidence to show the PKA and Phoenix-Omega were one and the same, or that PKA is
a mere conduit of Phoenix-Omega. It pointed out that Padilla was both the President and General Manager of PKA
and at the same time the Chairman of the Board and controlling stockholder of Phoenix-Omega. PKA and Phoenix-
Omega also shared officers, laborers, and offices.
Naturally, Padilla and Phoenix-Omega opposed this ruling, saying they were denied due process and were not
given their day in court. The CA, however, ruled that since Padilla was already involved in the proceedings as PKAs
President and General Manager, and since he was the Chairman of the Board and controlling stockholder of
Phoenix-Omega, then they were already allowed to take part in the proceedings. Thus, there was no violation of due
process.
Padilla and Phoenix-Omega now go to the SC.
Issue:
1. W/N the RTC acquired jurisdiction over Padilla and Phoenix-Omega
2. W/N Padillas participation in the proceedings as PKAs President and General Manager could be construed as
the opportunity to be heard in court of Padilla and Phoenix-Omega

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Held/Ratio:
1. NO, the RTC did not acquire jurisdiction, therefore the alias writ of execution was void.
A court acquires jurisdiction over a person through either a valid service of summons or the persons voluntary
appearance in court. A court must necessarily have jurisdiction over a party for the latter to be bound by a court
decision. Generally accepted is the principle that no man shall be affected by any proceeding to which he is a
stranger, and strangers to a case are not bound by judgment rendered by the court. In the present case, the RTC
never acquired jurisdiction over the petitioners through any of the aforementioned modes. Neither of the
petitioners were even impleaded as parties to the case.
Since the RTC had no jurisdiction over Padilla and Phoenix-Omega, they could not be bound by the decision.
Execution can only be issued against a party and not against one who was not accorded his day in court. To levy
upon their properties to satisfy a judgment in a case in which they were not even parties is not only inappropriate;
it most certainly is deprivation of property without due process of law.
2. NO, Padilla and Phoenix-Omega were not given their day in court. It is clear that Padilla participated in the
proceedings as General Manager of PKA and not in any other capacity. The fact that he was the Chairman of
the Board of Phoenix-Omega cannot equate to participation by Phoenix-Omega in the same proceedings.
Phoenix-Omega was never a party to the case and so could not have participated therein.
Neither was the trial courts use of the doctrine of piercing the veil of corporate fiction proper. The general rule is
that a corporation is clothed with a personality separate and distinct from the persons composing it. It may not be
held liable for the obligations of the persons composing it, and neither can its stockholders be held liable for its
obligations. This veil of corporate fiction may only be disregarded in cases where the corporate vehicle is being
used to defeat public convenience, justify wrong, protect fraud, or defend crime. PKA and Phoenix-Omega are
admittedly sister companies, and may be sharing personnel and resources, but there was no allegation, much less
positive proof, that their separate corporate personalities were being used to defeat public convenience,
justify wrong, protect fraud, or defend crime.
For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. In this case, there was no reason to justify piercing the corporate
veil.

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CORPORATE CONTRACT LAW

45 - Bayla v. Silang Traffic Co., Inc (1942) contract of sale not subscription
Doctrine:
Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its
terms and the intention of the parties
Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed
shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other
subscribers consent to the revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be stipulated in the contract of subscription:
Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission.
A subscription is the mutual agreement of the subscribers to take and pay for stock of a corporation, while a
purchase and sale is merely an independent agreement to buy shares of stock at a stipulated price.
Bayla was decided under the old Corporation Law. It laid down the distinctions between a subscription contract
and a purchase agreement over unissued shares of stocks (see p526 of Corp book). However, Section 60 of the
Corporation Code removed such distinctions and now provides that all agreements pertaining to the purchase of
unissued shares of stock of a corporation would be considered as subscription agreements and governed by the
principles of Corporate Law.
Facts:
Sofronio Bayla and other petitioners instituted this action in the CFI of Cavite against Silang Traffic Corporation
in order to recover a sum of money they paid to the corporation on account of shares of stock they each agreed to take and
pay for under the condition that if the subscriber fails to pay any of the installments when due, or if they are levied upon
by the creditors of the said subscriber, the shares were to revert to the seller and the payments already made will also be
forfeited to the seller, and that the latter may take possession without court proceedings.
The following people agreed to purchase the following number of shares and up to April 30, 1937 had paid the
following amounts:
Sofronio Bayla 8 shares P360
Venancio Toledo 8 shares P375
Josefa Naval 15 shares P675
Paz Toledo 15shares P675
The Board of Directors of the Corporation issued a resolution on August 1, 1937 rescinding the agreement, hence,
Bayla and the other petitioners instituted this action. The corporation alleged that the resolution is not application to Bayla
and the others because their subscribed shares of stock had already automatically reverted to the coporation and the
installments made by them were already forfeited and that the Aug. 1, 1937 resolution was cancelled by a subsequent
resolution.
Issues:
1. W/N the contract is a contract of subscription
2. W/N the failure of Bayla and the others to pay any installment can automatically give rise to forfeiture of the
amounts and the reversion of the shares to the corporation
3. W/N the Aug. 1, 1937 resolution was valid

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Held/Ratio:
1. NO. The contract is one of sale not subscription.
The said agreement is entitled Agreement for Installment Sale of Shares in the Silang Traffic Co, and while the
purchaser is designated as the subscriber and the corporation seller, the agreement was entered into in 1935
long after the incorporation and organization of the corporation which took place in 1927. The purchase was to be
payable in quarterly installments for five years. The lower court failed to see the distinction between a
subscription and a purchase. A subscription, properly speaking, is the mutual agreement of the subscribers to
take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual
and the corporation to buy shares of stock from it at stipulated price.
2. NO.
The contract actually provided for an interest of 6% p.a. on deferred payments which would not have been present
if the intention of the parties was the automatic forfeiture and cancellation of the contract. Also, the contract did
not expressly provide that demand shall not be necessary in order that default may arise.
3. Yes.
Since the contract is one of purchase, there is no legal impediment to its rescission by agreement of the parties. In
the first resolution, the rescission was made for the good of the corporation and in order to terminate the then
pending civil case involving the validity of the sale of the shares in question among others. Bayla and the others
agreed to the rescission as shown by their demand for the refund of the amounts they had paid as provided in said
resolution. But the subsequent revocation of the rescission in the first resolution is invalid as it was not agreed to
by the parties.

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46 - Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko (1937) (Manuel Tabora and his 4 parcels of land)
Doctrines:
A promoter could not have acted as agent for a corporation that had no legal existence.
A corporation, until organized, has no being, franchise or faculties.
Facts:
Manuel Tabora (Tabora) owns 4 parcels of land which are covered by three mortgages (2 - PNB; 1 - Severina
Buzon). On May 31, 1930, Tabora sold the 4 parcels of land to Cagayan Fisheries Dev. Co., Inc. (Cagayan) which was in
the process of incorporation then. Note: later on in the decision it was stated that Cagayan was actually composed of
Tabora, his wife, and others and that Tabora owned most of the capital stock subscribed. The consideration was P1 and
there was a stipulation that the certificate of title to the lands would not be transferred to Cagayan until the latter has fully
paid Taboras indebtedness to PNB. Five months later, Cagayan was incorporated, but the mortgage loan was not paid.
A year later, the parcels of land were sold in the name of the corporation to Sandiko with the condition that the
latter would shoulder the mortgage debts. Sandiko issued a promissory note in favor of Cagayan, secured by the 4 parcels
of land. When Sandiko failed to comply with his obligation, Cagayan filed an action praying that judgment be rendered
against Sandiko for P25,300 (the book called it a recovery suit). The CFI ruled in favor of Sandiko.
Issues:
1. W/N Sandiko is liable to Cagayan.
Held/Ratio:
1. NO. The transfer to Cagayan was null (word used in the case) because at the time it was effected, Cagayan was
non-existent. If Cagayan could not and did not acquire the 4 parcels of land, it follows that it had no right to sell
them to Sandiko.
The sale was made 5 months before Cagayan was incorporated. It was not even a de facto corporation at that time.
Not being in legal existence then, Cagayan did not have juridical capacity to enter into the contract. A
corporation, until organized, has no being, franchise or faculties. Nor do those engaged in bringing it into
being have any power to bind it by contract, unless so authorized by the charter.
It is to be noted that the contract here was entered into not between Manuel Tabora and a non-existent corporation
but between Manuel Tabora as owner of the 4 parcels of lands on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporation on the other hand. These promoters could not have acted as
agent for a projected corporation since that which had no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties.
However, this does not mean that acts of promoters can never be ratified by the corporation when it is
subsequently organized. There are exceptions. However, given the facts and circumstances of this case, the court
refused to apply the doctrine of ratification.
*Additional facts which according to the book pointed to a lack of a bona fide ratification of the deed of sale in favor of
Cagayan: The court also noted that out of the P48,700 amount of capital stock subscribed, P45,000 was subscribed by
Tabora and P500 by his wife. Both Tabora and his wife were directors and the latter was treasurer as well. The lands
remain inscribed in Taboras name. Sandiko always regarded Tabora as the owner of the lands. He dealt with the latter
directly. The President of Cagayan only intervened to sign the contract in behalf of Cagayan. Even PNB always treated
Tabora as the owner of the lands.
(The case was discussed in Dean CLVs book. p. 148 -149)

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47 - Rizal Light and Ice Co. v. Public Service Commission (1968) (electricity franchise, corporate organized
enterprise)
Doctrine:
Contracts made by the promoters of a corporation on its behalf may be adopted, accepted, or ratified by the
corporation when organized.
Facts:
Involved in this case are two electric companies in the old times, RIZAL LIGHT AND ICE and MORONG
ELECTRIC COMPANY.
RIZAL LIGHT AND ICE has been distributing electricity in the Morong, Rizal Area since 1949 when it was
awarded a Certificate of Public Convenience by the now defunct Public Service Commission and a franchise to operate by
the Municipality of Morong. Through the years however, the Commission gradually observed that RIZAL LIGHT could
no longer render efficient, adequate, and satisfactory electric service, and in July 1962, the electric plant of RIZAL
LIGHT burned down. Morong was left in the dark.
And so, another enterprising company, MORONG ELECTRIC Company came into the picture.
May 6, 1962 MORONG ELECTRIC was granted a franchise to operate an electric service by the Municipality
of Morong
September 10, 1962 Morong Electric filed before the Public Service Commission an application for a Certificate of
Public Convenience
October 17, 1962 Only here did the Securities and Exchange Commission issue Morong Electrics Certificate of
Incorporation
March 13, 1963 The Public Service Commission granted a Certificate of Public Convenience in favor of Morong
Electric.
Rizal Light contended that Morong Electric did not have a corporate personality at the time it was granted a
franchise by the Municipality and when it applied for the Cert. of Public Convenience from the Public Service
Commission. Its incorporation came belatedly and so, it cannot be considered even at least, a de facto corporation. Rizal
Light also noted that franchises are contracts, and in contracts, at least two competent parties are required, and parties are
competent when they are not yet in being.
Issue:
1. W/N Morong Electric could validly be granted a franchise and apply for a Certificate of Public Convenience
even when it did not yet have a separate corporate legal personality at those times
Held/Ratio:
1. Yes. Morong Electric might not yet have a corporate personality at those times but ultimately, it was granted
its certificate of incorporation by the SEC and it accepted its franchise according to the terms and conditions.
In effect, the doctrine of ratification was applied in favor of Morong Electric.
The Court cited three American authors, McQuiuin, Fletcher (of Fletchers Law Encyclopedia), and
Thomson, who unanimously believed that the fact that a company is not completely incorporated at the time
the grant is made to it does not affect the validity of the grant. But such grant cannot take effect until the
corporation is organized.
American courts generally hold that contracts made by the promoters of a corporation on its behalf may be
adopted, accepted, or ratified by the corporation when organized.
Thus, to ratify an otherwise defective contract, more than the existence of a juridical personality through
incorporation, the existence of an organized corporate enterprise or a complete corporate organization is
required.

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The decision here is NOT incompatible with the Cagayan Electric case because there, the Court held that a
corporation should have a full and complete organization and existence as an entity before it can enter into
any kind of contract or transact any business. Cagayan Electric did not hold that under absolutely no
circumstance can the acts of a promoter of a corporation be ratified or accepted if and when the corporation is
subsequently organized.
48 - Fermin Caram, Jr. and Rose O. Caram v. CA and Alberto Arellano (1987)
Facts:
The Carams are challenging the validity of the dispositive portion of the CAs decision which states:
1. Defendants are hereby ordered to jointly and severally pay the plaintiff (Arellano) the amount
of P50,000 for the preparation of the project study and his technical services that led to the
organization of the defendant corporation, plus P10,000 attorneys fees;
The Carams are claiming that said order has no basis because no such contract with Arellano existed. They were
contending that they were mere subsequent investors in the corporation that was later created and, as such, they should
not be held solidarily liable with Filipinas Orient Airways and with Barretto and Garcia, their co-defendants in the lower
court, who were the ones who requested the said services from Arellano.
(Short story: The Carams were amongst the principal stockholders of the Filipinas Orient Airways. But the actual brains
responsible for the conceptualizing and all that shiz of the said airlines were Barretto and Garcia.)
Issues:
1. W/N the Carams are also and personally liable for such expenses and, if so, to what extent.
Held/Ratio:
1. NO. After a perusal of the decision of the CA, the SC found that the Carams were not really involved in the
initial steps that finally led to the incorporation of the Filipinas Orient Airways. It was Barretto and Garcia who
handled the preparation of the project study. The said study being then subsequently presented to the Carams to
induce the latter in investing to the proposed airlines. The Carams were merely among the financiers who
were persuaded by the strength of the project study to invest in the proposed airline.
Furthermore, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have
a separate juridical personality, to be able to justify making the Carams, as principal stockholders thereof,
responsible for its obligations.
To summarize, the Carams did not contract the services mentioned. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in the proposed airline. The most that
can be said is that they benefitted from such services. Therefore, the SC held that the Carams were not liable at
all, jointly or solidarily.

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49 - Arnold Hall v. Piccio (1950) (de facto corporation, immunity)
Doctrines:
Personality of a corporation begins to exist only from the moment a certificate of incorporation is issued.
Immunity from collateral attack is granted to corporations claming in good faith to be a corporation.
Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders.
Facts:
Arnold and Bradley Hall (petitioners) and Fred and Emma Brown, Chapman, and Abella (respondents) signed and
acknowledged the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc. Attached to the article
was an affidavit of the treasure stating that 23,428 shares of stock had been subscribed and fully paid with certain
properties transferred to the corporation.
The said articles of incorporation were later filed in the office of the SEC for the issuance of the corresponding
certificate of incorporation. Pending action by the SEC, the respondents filed before the CFI of Leyte a case against the
Halls. They alleged that the Far Eastern Lumber and Commercial Co. was an unregistered partnership and that they
wished to dissolve it because of bitter dissension among members, mismanagement, and fraud. Piccio, the judge of the
CFI of Leyte, ordered the dissolution of the company and at the request of the respondents, appointed them to be the
receiver of the properties. The Halls filed a counter-bond for the discharge of the receiver. Judge Piccio refused to accept
the offer and to discharge the receiver. Hence, the Halls filed a case, claiming that the court had no jurisdiction to decree
the dissolution of the company, because it being a de facto corporation, dissolution may only be ordered in a quo warranto
proceeding and that the respondents, having signed the articles of incorporation, are estopped from denying that it is a
corporation.
Issues:
1. W/N the court had jurisdiction to decree the dissolution
Held/Ratio:
1. YES.
Personality of a corporation begins to exist only from the moment such certificate is issued. Immunity from
collateral attack is granted to corporations claiming in good faith to be a corporation under the
Corporation Law. The parties very well know that the SEC has not issued the certificate of corporation. Thus,
they couldnt claim in good faith to be a corporation. In this case, there is no de facto corporation immune from
collateral attack.
Besides, this corporation is not a party to this case. The case is a litigation between stockholders, for the purpose
of obtaining dissolution. Even the existence of a de jure corporation may be terminated in a private suit for
its dissolution between stockholders, without the intervention of the state.
Regarding estoppel, no one was led to believe anything to his prejudice and damage. Hence, the principle of
estoppel does not apply.

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50 - Salvatierra v. Garlitos (1958) (corporation by estoppel; Phil. Fibers)
Doctrine:
Corporation by Estoppel: Where a person acts on behalf of a corporation which he knew was not existing at the
time of the transaction with a third person, such person is estopped from claiming that he has no personal liability
for any debts which the non-existent corporation may incur.
In other words: Actually, wala naman talagang corporation. Pero since may third person na na-prejudice dahil
naniwala siyang existing yung corporation, edi may corporation. Kaya nga corporation by estoppel eh. Parang
partnership by estoppel lang.
Facts:
In 1954, Manuela Salvatierra entered into a contract of lease with Philippine Fibers Producers Corp.
(represented by its President Refuerzo) over a parcel of land in Leyte owned by the former. Among the provisions of the
contract were the lessors entitlement to 30% of the net income accruing from the harvest of without being responsible for
the cost of production thereof; and the lessees obligation to declare at the earliest possible time the income derived
therefrom and to deliver the corresponding share due the lessor. Barely a year after the lease, Salvatierra filed for
damages, accounting and rescission; she averred that the corporation violated the aforementioned provisions in the
contract.
Subsequently, the trial court declared the corporation in default (after sufficient notice and still no answers),
received Salvatierras evidence and rendered judgment against Phil. Fibers. The corporation did not appeal, so the court
moved to subject parcels of land owned by Refuerzo to attachment. This was because the corporation had no property in
its name. Refuerzo filed a motion claiming that the decision rendered was null and void with respect to him, there being
no allegation in the complaint pointing to his personal liability. His defense was that for while it was stated in the
complaint that he was a signatory to the lease contract, he did so in his capacity as president of the corporation. On
the other hand, Salvatierra maintains that her failure to specify Refuerzos personal liability was due to the fact that all the
time she was under the impression that Phil. Fibers, represented by Refuerzo, was a duly registered corporation as
appearing in the contract, but a subsequent inquiry from the SEC yielded otherwise. Judge Garlitos sided with Refuerzo
and ordered the attachment lifted. Salvatierra now moves to render Judge Garlitos decision as null and void.
Issue:
1. W/N Refuerzo, in his personal capacity, can be held liable for corporate debts.
Held/Ratio:
1. YES. A registered corporation has a juridical personality separate and distinct from its component members or
stockholders and officers and conversely, a stockholder or member cannot be held personally liable for any
financial obligation of the corporation in excess of his unpaid subscription. But this rule is understood to refer
merely to registered corporations and cannot be made applicable to the liability of members of an
unincorporated association. Since an organization, which before the law is non-existent, has no personality and
would be incompetent to act as a corporation, it cannot confer authority to another to act in its behalf; thus, those
who act or purport to act as its representatives or agents do so without authority and at their own risk.
A person who acts as an agent without authority or without a principal is himself regarded as the principal;
a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such
obligations and comes personally liable for contracts entered into or for other acts performed as such. Considering
that Refuerzo, as president of the unregistered corporation Phil. Fibers, was the agent of a non-existent principal,
his liability cannot be limited or restricted to that imposed upon corporate shareholders. In acting on behalf of a
corporation which he knew to be unregistered, he assumed the risk of reaping the consequential arising out of
such transaction.

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51 - Albert v. University Publishing (1965)
Doctrine:
In a suit against a corporation with no valid existence, the person who had and exercised the rights to control the
proceedings, to make defense, to adduce and to cross-examine witnesses, and to appeal from a decision, is the real
defendant, and the enforcement of a judgment against the corporation upon him is substantial observance of due
process of law.
Facts:
15 years previously, Mariano Albert sued University Publishing Co., Inc. (UP Co.) which alleged that it was a
corporation duly organized and existing under the laws of the Philippines. UP Co. through Jose Aruego, its President,
entered into a contract with Albert for the exclusive right to publish his revised Commentaries on the Revised Penal Code
and for his share in previous sales of the books first edition. The former would pay in 8 quarterly installments of P3,750
starting July 15, 1948 and the contract stated that failure to pay one installment would render the rest due. UP Co. had
failed to pay the second installment.
During the previous proceedings, UP Co. admitted to Alberts allegation of its corporate existence as well as
admitted the execution and terms of the contract dated July 19, 1948. However, it alleged that it was Albert who breached
their contract by failing to deliver his manuscript. The CFI of Manila ruled against UP Co.
Thereafter, Albert petitioned for a writ of execution against Aruego, as the real defendant, because it was recently
discovered that there is no such entity as University Publishing Co., Inc. The SEC records show that UP Co. was never
registered either as a corporation or partnership. UP Co. countered through counsel (Aruegos own law firm), that Aruego
is not a party to the case.
Issue:
1. W/N the judgment may be executed against Jose M. Aruego, supposed President of University Publishing Co.,
Inc., as the real defendant.
Held/Ratio:
1. YES. On account of the non-registration UP Co. cannot be considered a corporation, not even a corporation de
facto. It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently. Although
corporation-by-estoppel doctrine has not been invoked, even assuming that it was, it does not apply in this case.
Aruego represented a non-existent entity by signing the contract as President of UP Co. stating that this was a
corporation duly organized and existing under the laws of the Philippines, and obviously misled Albert into
believing the same. Jose M. Aruego was, in reality, the one who answered and litigated, through his own law firm
as counsel. He was in fact the actual defendant.
It is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party to
the contract sued upon, reaping the benefits resulting from it. Responsibility under the judgment falls on him since
partial payments of the consideration were made by him, he violated its terms, which precipitated the previous
suit in question.
The case is remanded to the lower court to hold supplementary proceedings for the purpose of carrying the
judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.

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52 - International Express Travel and Tours Services, Inc. v CA, Henri Kahn, Phil. Football Federation
(2000) (corporation by estoppel; FOOTBALL)
Doctrine:
One who deals with an unincorporated association which is not duly incorporated is not estopped to deny its
corporate existence when his purpose is not to avoid liability, but precisely to enforce the contract against the
action for the purported corporation.
Facts:
In 1989, International Express Travel and Tours (International Express) entered into an agreement with the Philippine
Football Federation (Federation) through the Federations president, Henri Kahn, where they would be the Federations
travel agent. International Express secured the airline tickets for the trips of the athletes and officials to the 1989 South
East Asian Games in Kuala Lumpur as well as various trips to China and Brisbane where the total costs of the tickets
amounted to P449,654.83. The Federation made partial payments around P200,000. Henri Kahn also issued a personal
check in the amount of P50,000. After this, there remained a P200,000 balance but no further payments were made despite
repeated demands. As such, International Express sued Henri Kahn in his personal capacity and as President of the
Federation alleging that Kahn personally guaranteed the obligation. Kahn on the other hand denied that he personally
guaranteed the payment and that International Express has no cause of action against him.
The Trial Court ruled in favor of International Express and declared Kahn personally liable because neither International
Express nor Kahn adduced any evidence to prove the corporate existence of the Federation. The Trial Court held that a
voluntary unincorporated association like the Federation has no power to enter into a contract and that its officers or
agents shall be liable themselves. The Court of Appeals reversed the decision by recognizing the juridical existence of the
Federation. International Express now maintains that the CA erred in holding such.
Issue:
1. W/N The Federation is an existing juridical entity that should be liable for payment.
Held/Ratio:
1. NO. The Court held that the CA was wrong. The Federation has no separate juridical identity because in order to
exist as a juridical entity, the State must first give its consent through a special law or a general enabling act. The
CA cited two laws, RA 3135 (about the Phil. Amateur Athletic Federation) and PD 604 (about the Dept. of Youth
and Sports Development), to assert the existence of the Federation. However, these laws merely recognized the
existence of national sports associations and provided the manner by which they may acquire juridical
personality. They are general laws that do not provide for the existence of the Federation. (National sports
associations (NSAs) are individual governing bodies for different sports; so for example, the Phil Football
Federation is the one setting up the Azkals vs Galaxy game on Dec 3).
In other words, it is not enough that the Federation has its own by-laws and constitution; it must show proof that it
is an NSA recognized and accredited by the Phil Amateur Athletic Federation or Dept of Youth and Sports
Development because only accredited NSAs are entitled to have a separate corporate personality.
Kahn failed to prove this and as president, he is presumed to have known about the existence or nonexistence
of the Federation. As such he should be held liable for the unpaid obligations of the unincorporated Philippine
Football Federation.
Although it transacted with Kahn, International Express is not estopped to claim from Kahn because one who
deals with an association which is not duly incorporated is not estopped to deny its corporate existence when his
purpose is not to avoid liability, but precisely to enforce the contract against the purported corporation.
In other words, the corporation by estoppel doctrine applies to a third party who tries to escape liability on a
contract from which he has benefited on the irrelevant ground of defective incorporation. International Express is
not escaping liability but actually, enforcing the Federations liability.

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53 - Asset Privatization Trust (APT) v. The Honorable Court of Appeals (1998)
Doctrine:
Stockholders have no standing to recover for themselves moral damages, otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of part of the corporations assets before its
dissolution.
Facts:
[Note: APT is the successor of DBP and PNB, super tagal pa kasi niya lumabas so baka mainip kayo. Haha. J]
Marinduque Mining Industrial Corporation (MMIC) was granted the exclusive right to develop, explore
and exploit the Surigao Mineral Reservation. The Government obtained the help of the DBP and other government
financing institutions to guarantee foreign loans by the MMIC. To secure the guarantees extended by DBP and PNB,
MMIC executed in favor of them a Mortgage Trust Agreement over all of MMICs assets, providing for a right to
extrajudicial foreclosure in case MMIC fails to pay their obligation.
MMICs obligation blew up to a total of P22 Billion. In an attempt to save the company, its Board of Directors
adopted a Financial Rehabilitation Plan aimed at reducing MMICs debts by converting them to equity. Neither PNB
nor DBP adopted the plan. Meanwhile, MMICs obligations to PNB/DBP became due but no payment was obtained.
PNB/DBP decided to extra-judicially foreclose on the assets of MMIC. The PNB turned out to be the lone bidder. The
assets were subsequently transferred by PNB to the Asset Privatization Trust.
Jesus Cabarrus, the President of MMIC, and other stockholders filed a derivative suit in the RTC of Makati
against APT contending that the foreclosure was illegal because a rehabilitation plan to rehabilitate MMIC was being
prepared so that they may be able to pay their obligations. The suit was dismissed by the RTC because the parties
decided to enter into a Compromise Agreement whereby they agreed to enter instead into arbitration.
The arbitration committee decided that the foreclosure was illegal. They upheld the validity of the
rehabilitation plan. According to the committee, since no valid foreclosure was made, MMIC is still obliged to pay APT
their obligation, however MMICs liability shall be reduced because under the plan, DBP shall have 87% equity over the
total capital of MMIC (Kumbaga, sabi ng plan, para umonti utang natin kay DBP, bigyan natin siya ng 87% equity. Sabi
ngayon ng committee, dahil may 87% equity ka na, liable ka na rin sa sarili mo kahit papano, so mag-o-offset.)
The arbitration committee also directed the APT to pay moral damages to MMIC and to Cabarrus and the
other stockholders. The RTC affirmed the Committees decision. APT appealed to the CA but the latter dismissed the
appeal.
Issues:
1. W/N the FRP is valid and consequently
2. W/N the extra-judicial foreclosure was Illegal
3. W/N the award of Moral Damages to MMIC was valid
4. W/N the award of Moral Damages to the stockholders was valid
Held/Ratio:
1. NO, the FRP is not valid. The Financial Rehabilitation Plan cannot be said to be valid because it was not
adopted by DBP or PNB. As mentioned, the FRP planned to convert MMICs obligations into equity. The
conversion directly affects DBP or PNB, thus their ratification of the plan is essential. The FRP is a contract and
its validity depends on whether or not both the contracting parties agreed to its terms. In this case, no
agreement was expressed by DBP or PNB who both felt that the plans objectives would never materialize.
Moreover, the fact that most of MMICs Board of Directors are the same with DBP/PNB does not make the
latter estopped from assailing the FRP since the individual board of directors are separate from the
personality of the company. They, singly, are different from DBP/PNB.

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2. NO. The foreclosure was legal. The existence of the Financial Rehabilitation Plan did not divest DBP or PNB
their right to extra-judicially foreclose under the mortgage agreement. MMIC knew that the plan has to be
approved by PNB/DBP. The fact that these institutions opted to foreclose meant that they reject the plan.
3. NO. As a general rule, corporations are not entitled to moral damages. An exception would be if the wrongful act
was so grave that it besmirched the corporations good reputation. MMIC in this case had no more reputation to
protect since it was already suffering from serious financial crisis. Its credit standing cannot be said to be of good
reputation. Moreover, MMIC was not a party to the suit. Only Cabarrus and the stockholders filed a
derivative suit in their capacity as individual stockholders. In a derivative suit, it is a settled doctrine that
the Corporation is an indispensable party. The cause of action remains that of the corporations. Because
MMIC is not a party to the suit, it cannot be awarded damages.
4. NO. The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong was committed in the
foreclosure, it was done against the corporation. Cabarrus cannot directly claim those damages for himself
that would result in the appropriation by, and the distribution to, him part of the corporations assets
before the dissolution of the corporation and the liquidation of its debts and liabilities.
[Sinasabi kasi ni Cabarrus na karamihan sa nakuhang assets ay sa ibang company na majority stockholder din
siya, so dapat bigyan siya ng moral damages dahil na-stress daw siya.]
Note: Sobrang mahirap at mahaba talaga yung kaso guys, I did my best K Kung di niyo gets, I can always explain,
sabihan niyo lang ako love, Pat
Note Ulit: Si Atty. Jose Sison (host ng Ipaglaban Mo) ay isa sa arbiters, fun fact lang ulit, baka manghuli siya ulit.

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54 - National Telecommunications Commission v. Court of Appeals (1999)
Doctrine:
Trust fund doctrine considers subscribed capital as a trust fund for the payment of the debts of the
corporation to which the creditors may look for satisfaction. No part of the subscribed capital may be returned or
released to the stockholder until the liquidation of the corporation. With this, dividends must never impair the
subscribed capital, the corporation cannot buy its own shares using the subscribed capital as the consideration.
Vocabulary:
o Capital value of the property or assets of a corporation
o Capital subscribed total amount of the capital that persons have agreed to take and pay for (can be
more than the par value of the shares, so pwedeng may patong)
amount the corporation receives (including the premium) in consideration of the original issuance
of the shares
o Subscribed capital stock amount of capital stock subscribed whether fully paid or not
o Outstanding capital stock total shares of stock that is already issued to subscribers or stockholders (no
longer held by the corporation)
o Par value amount of money contributed by the shareholder to the capital stock (money value for share
of stock as written in the articles of incorporation)
inclusive of stock dividends and premium
o Market value the price a willing seller would sell and a willing buyer would buy and is affected by law
of supply and demand
excluding stock dividends and premium
o Stock dividends amount that the corporation transfers from its surplus profit (so pag may sobra)
account to its capital account (this is also considered trust fund of the corporation)
Facts:
[The case has many technical terms, please refer to the VOCABULARY when the terms get confusing.]
The case resulted from the assessment notices served by the National Telecommunications Commission (NTC) to
the PLDT. This is for payment of certain fees imposed upon PLDT for the expenses in supervision, regulation and
authorization done by the NTC on public services (in pursuant to Sec 40 of Public Service Act.) There are several fees
(regulation fees, permit fees) imposed, but for the purpose of this case we only focus on the regulation fees.
For the assessment of the regulation fees, NTC based it on the outstanding capital stock, thus arriving at the
amount of around P7.4 million for the fees. With this, PLDT filed a protest in the said commission claiming that the
regulation fee should be based on the par value instead. NTC denied the protest which prompted PLDT to appeal in the
CA.
The CA ordered NTC to ecomputed and base the regulation fees on the par value of the capital stock
subscribed or paid excluding stock dividends, premium or capital in excess of par. NTC then now argued that the fee
should be based on the market value of PLDTs capital stock including stock dividends and premium.
Issue:
1. W/N the computation of supervision and regulation fees under section 40 (e) of the public service act should be
based on the par value of the subscribed capital stock.

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Held/Ratio:
1. NO
The Court held that the regulation fee should be based on the capital stock subscribed or paid (nothing less
nothing more.) According to the trust fund doctrine, (which considers capital subscribed as trust for the payment
of debts of corporation) the dividends must never impair the subscribed capital. With this, SC disallowed the
computation of fees based on the par value of capital stock subscribed (excluding premiums and stock
dividends) and it also rejected the idea of basing it on the market value.
(The decision was based on the case of PLDT v PSC. Here, the SC rejected the assessment which based the regulation
fees imposed in Sec 40 (e) on the value of the property and equipment. According to the Court, the proper basis for
the computation of regulation fees is the capital stock subscribed or paid and not alternatively the property and
equipment.)

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55 - Ong Yong v. Tiu (2003) (presubscription agreement)
Doctrines:
The rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the
capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation
Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed
When properties were assigned pursuant to a pre-incorporation subscription agreement, but the corporation fails
to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission and
does not amount to corporate distribution of assets prior to dissolution.
Even when the subscription agreement is denominated as a Pre-Subscription Agreement, it will nevertheless be
governed under Section 60 of the Corporation Code as a subscription agreement since is covered an agreement to
subscribe to the agreed increase in the authorized capital stock of the corporation.
Facts:
The Tiu family members are the owners of First Landlink Asia Development Corporation (FLADC). One of the
corporations projects is the construction of Masagana Citimall in Pasay City. However, due to financial difficulties (they
were indebted to PNB for P190 million), the Tius feared that the construction would not be finished. So to prevent the
foreclosure of the mortgage on the two lots where the mall was being built, they invited the Ongs to invest in FLADC.
The two parties entered into a Presubscription Agreement:
The total shares of capital stock would be 2,000,000. The division of the shareholdings would be on a 50-50
basis (1,000,000 shares for each party)
the Ongs were to subscribe to 1,000,000 shares at a par value of P100 each
the Tius were to subscribe to an additional 549,800 shares at P100 each in addition to their already existing
subscription of 450,200 shares
Tius were entitled to nominate the VP and the Treasurer + 5 directors
Ongs were entitled to nominate the President, Secretary + 6 directors; they also have the right to manage and
operate the mall
To fill the deficiency of 549,800 shares of stock, the Tius commited to contribute to FLADC a building
(equivalent to 200,000 shares) and two lots (equivalent to 300,000 and 49,800 shares of stock). The Ongs
contributed P100 Million (equivalent to 1 Million shares of stock). They also paid P70 Million to FLADC and another
P20 Million to the Tius (a total of P190 Million) to pay off the loan from PNB.
Two years after, the Tius filed a case in SEC for the rescission of the Agreement due to the following reasons: a)
the Ongs refused to issue to them the shares of stock corresponding to their property contributions; b) they were prevented
from assuming the positions of VP and Treasurer. In their defense, the Ongs contended that they could not issue the new
shares to the Tius because the latter did not pay the capital gains tax and the documentary stamp tax of the lots. And
because of this, the SEC would not approve the valuation of the property contribution of the Tius. (It turned out that one
of the lots was in FLADCs name all along, so issuance of new shares of stock was not needed because the lot was
already a part of the corporations assets).
The SEC decided in favor of the Tius. The case eventually reached the CA, and it ordered the liquidation of
FLADC to enforce the rescission of the contract (restitution of their initial contributions, then whatever remaining assets
would go to the Tius, including the mall which is already valued at P 1 Billion). The CA also concluded that both the
Ongs and the Tius were in pari delicto so technically they are not entitled to the remedy of rescission. But the rescission
was granted only to prevent squabbles and numerous litigations between the parties. The SC upheld the decision of the
CA. The Ongs then filed a Motion for Reconsideration, asserting that the decision would amount to unjust enrichment on
the part of the Tius.

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Issues:
1. W/N the Tius could legally rescind the presubscription agreement (whether they have the personality to sue)
2. W/N rescission is the proper remedy
3. W/N the liquidation of FLADC violated the Trust Fund Doctrine
Held/Ratio:
1. NO. The Agreement was in fact a subscription contract because it involves unissued shares of the corporation. A
subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter
of the transaction is property owned by the corporation its shares of stock. Thus, the contract was actually
between FLADC and the Ongs, and not between the Tius and the Ongs (separate juridical personality). Therefore,
the Tius had no personality to file a case for rescission.
2. NO. The Tius allege that the Ongs prevented them from assuming the positions of Treasurer and VP. However,
rescission is not the remedy for personal grievances. The Corporation Code, SEC rules and even the Rules of
Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this.
The breach committed by the Ongs was not substantial to warrant the rescission of the contract. It would be unfair
on the part of the Ongs who actually helped the Tius. Hence, the Tius cannot demand the rescission of the
agreement for they have other remedies under the law, and besides they do not have the capacity to bring the suit.
3. YES. Even assuming that the Tius had the legal standing to sue, the case would still not prosper because the
rescission would be in violation of the Trust Fund Doctrine.
This doctrine enunciates that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in
the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation.
In this case, the rescission would certainly be a violation of the doctrine and also of the Corporation Code because
the rescission would result in the unauthorized distribution of the assets of the corporation. Rescission based on a
breach in the terms of a subscription agreement is not one of the instances when distribution of a corporations
assets and property is allowed. It would not only be unlawful but it would also be prejudicial to the corporate
creditors who enjoy absolute priority of payment over any individual stockholder.
[ADDITIONAL: if ever itanong ni Sir, this was mentioned kasi in the book]
The Tius also argued that the rescission would not result into liquidation because their case is actually a petition to
decrease the capital stock. As provided in Sec. 122 of the Corporation Code, distribution of any of its assets or property
is permitted only after lawful dissolution and payment of all debts and liabilities. An exception is by decrease of capital
stock. So the Tius claim that they do not violate the liquidation procedures under the law. They were asking the court to
compel FLADC to file a petition with SEC to approve the decrease in capital stock. The SC ruled that it has no right
to intrude into the internal affairs of the corporation so it cannot compel FLADC to file the petition. It was not
actually a decrease of capital stock because it failed to comply with certain requirements (no board decision, etc.).

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BY-LAWS
56 - Gokongwei v. SEC (1979)
[Note: If you dont have time just read issue number 2 for it is the most relevant one. The rest are just in case Sir is in a
questioning mood.]
Doctrines:
Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to
the management of its affairs. And in the Philippine Law, under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws the qualifications, duties and compensation of directors, officers and employees ...
.
Facts:
Petitioner: John Gokongwei, was a stock holder of San Miguel Corp. (Gokongwei)
Private Respondents: The majority of the members of the Board of Directors of San Miguel, last named Soriano, Zobel,
Roxas etc. (The Board)
Respondent: Securities and Exchange Commission (SEC)
This case arose from two other cases, SEC Case No. 1375 and SEC Case No. 1423.
This SEC case involves two main issues. The facts relevant to the first issue (this is the most important issue) are
as follows;
In 1976, the Board amended the bylaws of San Miguel Corp. (SMC), the amendment prohibits a Stock holder
being nominated or elected as a Board of Directors if he is engaged, or if he is an officer, manager or controlling person
of, or the owner of any business which competes with or is antagonistic to that of the Corporation; and to determine
whether the business he is in competition a 3/4 of the Board is required, furthermore in determining whether or not a
person is a controlling person, beneficial owner, or the nominee of another, the Board may take into account such factors
as business and family relationship.
It is to be noted that, Gokongwei is the president and a substantial stockholder of Robina Corp. (Robina) and
Consolidated Foods Corp. (CFC), a competitor of SMC, in various areas, such as Instant Coffee, Ice Cream, Poultry and
Hog Feeds and many more.
Gokongwei petitioned that the amendments to the bylaws be declared null and void. One of his reason was that,
the amendment was done without authority since the Board based their authority on a resolution adopted on 1961.
According to Gokongwei in order to amend the bylaws 2/3 vote of the capitalization at the time of the amendment is
necessary. And since the total par value of the SMC was greater during 1976 (when bylaws where amended), the
amendment was done without authority. (not really important issue). He also alleged that the amendment was
unreasonable and arbitrary.
The Second issue arose when, Gokongwei filed a motion to inspect the documents of San Miguel International
Inc.(SMI) a subsidiary of, and wholly controlled by, SMC. Gokongwei motion was denied by SEC. SEC Case No. 1423
(Not important)
When SMC invested in SMI, according to Gokongwei, this was against the primary purpose clause of SMC,
which is a violation of the Corporation Law.
Issues:
1. W/N amended by-laws are valid is purely a legal question which public interest requires to be resolved
2. W/N the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board
of Directors of SMC are valid and reasonable

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3. W/N SEC gravely abused its discretion in denying petitioners request for an examination of the records of San
Miguel International Inc., a fully owned subsidiary of San Miguel Corporation
4. W/N respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to
ratify the investment of corporate funds in a foreign corporation
Held/Ratio:
1. YES, It is settled that the doctrine of primary jurisdiction has no application where only a question of law is
involved. In the case at bar, there are facts which cannot be denied, : that the amended by-laws were adopted by
the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders
ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held
specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record;
that the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong,
was made by the San Miguel Corporation in 1948; and that in the stockholders annual meeting held in 1972 and
1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders. (I think
this also answers the first contention of Gokongwei)
[Note: among the parties involved only OSG contends that primary jurisdiction is with the SEC.]
2. YES, for several reasons:
First, the authority of a Corp. to prescribe qualifications of directors is expressly conferred by law, every
corporation has the inherent power to adopt by-laws for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. And under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws the qualifications, duties and compensation of directors, officers and
employees ... . They also cited a case which allowed a Corp. to add a qualification for a Board of Director.
Second, The stockholder has no vested right to be elected as director, Any person who buys stock in a corporation
does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of the law. And under section 18
of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment
changes, diminishes or restricts the rights of the existing shareholders then the dissenting minority has only one
right, viz.: to object thereto in writing and demand payment for his share.
Third, since the Director stands in a fiduciary relation to the Corporation and its Shareholders.
Fourth, it has been held in our jurisdiction, that an amendment to the by-laws which renders a stockholder to be
ineligible to be a director of a corp, if he is a director of another corp. in competition with the other one, is valid.
For the doctrine of corporate opportunity is precisely a recognition by the courts that the fiduciary standards
could not be upheld where the fiduciary was acting for two entities with competing interests.
Finally, There are legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of
trade, specifically the Constitution, Revised Penal Code Corporation Law, it is obvious that the election of
Gokongwei to the Board of SMC could bring illegal results. Access to SMC pricing policy by CFC-Robina would
in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.
3. Yes, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the
statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to
books and records of such wholly subsidiary which are in respondent corporations possession and control.
4. Yes, Since, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated
as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. Since the original

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investment was a purchase of a beer brewery in Hong-Kong, but the investment was restructured thru SMI in
Bermuda, tax free.
In sum, the amendment was held valid, but without prejudice to the question of the actual disqualification of petitioner
John Gokongwei.
The Separate Opinion:
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, they
voted against the validity of the questioned amended bylaws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction.
I shall present one separate opinion only of Teehankee et. al. concurring.
He argued that, the questioned amended by-laws as being specifically tailored to discriminate against petitioner and
depriving him in violation of substantive due process of his vested substantial rights as stockholder of respondent
corporation.
Also said amended by-laws violated the Corporation Law which grant and recognize the right of a minority stockholder
like petitioner to be elected director by the process of cumulative voting ordained by the Law and the right of a minority
director once elected not to be removed from office of director except for cause by vote of the stockholders holding 2/3 of
the subscribed capital stock. If a minority stockholder could be disqualified by such a by-laws amendment under the guise
of providing for qualifications, these mandates of the Corporation Law would have no meaning or purpose.
Also as said above he believes that the SEC has primary jurisdiction.

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57 - Rosita Pea v. The Honorable Court of Appeals, Sps. Yap (1991) (void resolution, no quorum)
Doctrine:
The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the
corporation. In this sense they become part of the fundamental law of the corporation with which the corporation
and its directors and officers must comply.
Facts:
[Petitioner Pea is represented in this case by CLV. Alam na sino panalo J ]
Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. The lots were foreclosed and were sold to
Rosita Pea, as highest bidder, in a public bidding. Now, PAMBUSCO, through three of its five directors resolved to
authorize one of their directors, Briones, to execute a deed of assignment of their right of redemption in favor of
Marcelino Enriquez. It must be noted that the three who voted were the only ones who attended the meeting.
Enriquez then redeemed the properties. A day after he executed a deed of sale covering the same properties in favor of the
spouses Yap (private respondents).
[Pambusco assigned to -> Enriquez, sold to - > Spouses Yap]
Pea contends that there could be no valid sale to the spouses Yap because the deed of assignment in favor of
Enriquez was void. She prays that a final deed of sale be executed in her favor because the redemption period had
already lapsed without a valid redemption being effected. According to her, the deed of assignment was executed ultra
vires and against the by-laws of the corporation which provided:
Sec. 4. ... No failure or irregularity of notice of meeting shall invalidate any regular meeting or
proceeding thereat; Provided a quorum of the Board is present, nor of any special meeting;
Provided at least four Directors are present.
In the case at bar, only three out of five directors were present. The RTC ruled in favor of Pea, the CA,
however reversed. According to the CA, the section would only apply if there were failure or irregularity of notice, which
according to them, Pea failed to prove. They also ruled that the by-laws provided no categorical declaration that
failure to abide by the four directors requirements would result to a void resolution. Moreover, the CA ruled that
the RTC had no jurisdiction to hear the case.
Issues:
1. W/N the RTC had jurisdiction to hear the case
2. W/N the act of the board was against the corporations by-laws, and consequently, void.
Held:
1. YES. The SEC only has jurisdiction over intra-corporate disputes. In the case at bar, neither respondents Yap, nor
petitioner Pea were stockholders of PAMBUSCO. The issue regarding the validity of the resolution resulting to
the sale of the property was properly cognizable by the RTC.
2. YES. The By-laws are the corporations own private laws. They become the fundamental laws of the corporation
which the corporation and its officers should follow. Sec. 4 of PAMBUSCOs by-laws provided that at least
four directors should be present to constitute a quorum. According to the Corporation Code any action
resolved by the board with less than the number provided in the by-laws of the corporation to constitute a quorum
would not bind the corporation. When a quorum is not reached, all the present directors could do is to
adjourn.
Moreover, the purported directors who attended the meeting and voted in favor of the assignment were bogus
directors as they were not listed in the SEC as directors, nor were they stockholders of the company.
[Side issue: Because there was no consideration for the deed of assignment, the Court deemed it as merely a donation and
because it lacked the proper formalities for a valid donation, the donation is void.]

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58 - San Miguel Corporation v. Mandaue Packing Union (2005) (by-laws; Union)
Doctrine:
By-laws has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance, including rules for routine matters such as calling meetings and
the like. Without such provisions governing the internal governance of the organization, such as rules on meetings
and quorum requirements, there would be no apparent basis on how the corporation could operate.
Facts:
On 15 June 1998, Mandaue Union, claiming to be a local chapter of FFW, filed a petition for certification election
with the DOLE, claiming that it represents the rank-and-file employees of San Miguel Corporation. More than a month
later in July 1998, the Union submitted to the Bureau of Labor Relations the same documents earlier attached to its
petition for certification, along with an accompanying letter stating that such documents were submitted in compliance
with the requirements for the creation of a local/chapter pursuant to the Labor Code; and it was hoped that the
submissions would facilitate the listing of respondent under the roster of legitimate labor organizations. A month after on
3 August 1998, the DOLE issued Certificate of Creation of Local/Chapter certifying that the Union has acquired legal
personality as a labor organization, it having submitted all the required documents. In its Comment, San Miguel reiterated
that the Union was not a legitimate labor organization at the time of the filing of the petition because it lacked certain
documents.
In September 1998, the DOLE Arbiter dismissed the Unions petition saying that as of the date of filing (15 June
1998), the Union did not have the legal personality to file the said petition for certification election. The Undersecretary
reversed this, concluding that the Union acquired legal personality as early as June 1998, the date it submitted the required
documents.
Eh ano bang kulang ng Union? Hindi sila nag-submit ng By-Laws.
Issue:
1. W/N as of the date of filing the petition for certification election, the Union had the requisite legal personality.
a. Kasi ganito: If it acquired legal personality on 15 June 1998 (the date of filing), then the petition for
certification election is meritorious. If it acquired legal personality anytime after 15 June 1998 (the date of
issuance of the certificate), then its petition must fail for lack of legal personality.
2. BY-LAWS RELATED ISSUE: W/N the failure of the Union to include the labor organizations by-laws is
enough to dismiss its petition.
Held/Ratio:
1. YES. The issuance of the certificate of registration by the Bureau or Regional Office is not the operative act that
vests legal personality upon a local/chapter under pertinent rules. Such legal personality is acquired from the
filing of the complete documentary requirements. Although the manner by which the Union was deemed to have
acquired legal personality by the DOLE and the Court of Appeals was not in strict conformity with the provisions
of Department Order 9, these derivations are not enough to overrule the constitutional right to self-organization.
2. NO. In this case, the Union never submitted separate by-laws, when the Department Order 9 provides that the
submission of both a constitution and a set of by-laws is required. A literal reading of the provision might indicate
that the failure to submit a specific set of by-laws is fatal to the recognition of the local/chapter. A more critical
analysis of this requirement though must be made, especially as it should apply to this petition which seeks to
impair self-organization.
By-laws has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance, including rules for routine matters such as calling meetings and
the like. Without such provisions governing the internal governance of the organization, such as rules on meetings
and quorum requirements, there would be no apparent basis on how the union could operate. Without a set of by-

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laws that provides how the local/chapter arrives at its decisions or otherwise wields its attributes of legal
personality, then every action of the local/chapter may be put into legal controversy.
However, if those key by-law provisions on matters such as quorum requirements, meetings, or on the internal
governance of the local/chapter are themselves already provided for in the constitution, then it would be feasible
to overlook the requirement for by-laws. Indeed in such an event, to insist on the submission of a separate
document denominated as By-Laws would be an undue technicality, as well as a redundancy.
59 - China Banking Corp. v. CA (1997) (binding effects of by-laws)

Doctrines:
General Rule: Third persons are not bound by the by-laws of a corporation since they are not privy thereto.
o Exception: When third persons have actual knowledge or constructive knowledge of the same. However,
this knowledge of the by-laws must be present at the time of the perfection of the contract, and not only
during the proceedings.
Facts:
Galicano Calapatia, Jr. is a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI). He
pledged his Stock Certificate to petitioner China Banking Corp. (CBC). To assure that such agreement will be honored by
VGCCI, CBC wrote a letter requesting that the pledge agreement be recorded in the corporate books, to which VGCCI
replied in the affirmative.
Carpatia loaned P20,000 from CBC which was secured by the agreement. He failed to pay his obligations, so
CBC filed a petition for extrajudicial foreclosure before a notary public, requesting the latter to conduct a public auction
sale of the pledged stock. CBC informed VGCCI of this petition and requested that the pledged stock be transferred to
CBCs name and the same be recorded in the corporate books. However, VGCCI also informed CBC that it will not be
able to do so because Calapatia has unsettled accounts with the club. CBC was the highest bidder in the auction and was
issued the corresponding certificate of sale.
The debts of Calapatia with VGCCI have become due therefore it sent the demand the letters, but, as always in all
the cases, Calapatia was not able to pay. So VGCCI published a notice of auction sale of a number of its stock certificates,
including Calapatias own (under Sec. 3 Art. VIII of its by-laws, after a member shall have been posted as delinquent, the
Board may order his/her/its share sold to satisfy the claims of the Club). VGCCI informed Calapatia that he was no longer
a member because his shares of stock were already sold.
Three years after, CBC informed VGCCI that it was the new owner by virtue of the auction sale, however,
VGCCI replied that for reason of delinquency, the same share of stock was sold at the public auction.
So of course, CBC protested and filed a case with the RTC of Makati for the nullification of the auction sale and
the issuance of a new stock certificate in its name. RTC dismissed the case for lack of jurisdiction (intra-corporate dispute
daw kasi), so CBC filed a complaint with SEC. It first held that VGCCI has the right not to transfer the share to CBC until
the liquidation of the delinquency, but it reversed the decision stating that CBC has a prior right over the pledged share.
SEC dismissed VGCCIs MR so it turned to CA to seek redress. CA dismissed the case for lack of jurisdiction.
Hence, this appeal.
(Oke. So ung public auction ni CBC was in 1985, same year sinabi nya kay VGCCI ung nangyaring sale. Ung
public auction naman ni VGCCI was in 1986, despite its knowledge of the previous auction sale. And it is also important
to note that Carpatia has been delinquent in paying his monthly dues since 1975.)
Issues:
1. NOT SO MUCH RELATED: W/N SEC has jurisdiction.
2. W/N the by-laws of VGCCI can affect CBC.

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Held/Ratio:
1. YES. The Commission has jurisdiction over any of the following relationships: 1) between the corporation and
the public; 2) between the corporation and its stockholders; 3) between the corporation and the state in so far as its
franchise, permit or license to operate is concerned; and 4) among the stockholders themselves. VGCCI is
contending that CBC is not among those enumerated since it is a third person as to the corporation. So the test that
should be applied first is whether CBC is a stockholder by virtue of the auction sale.
The transfer ownership to CBC through the public auction and the issuance of the corresponding Certificate of
Sale entitles CBC to have the said share registered in its name as a member of VGCCI. This was not assailed by
either VGCCI or Calapatia.
2. NO. VGCCI only began sending notices of delinquency to Calapatia after it was informed by CBC of its
foreclosure proceedings. Also, even though VGCCI acknowledged the pledge agreement between Calapatia and
CBC, it completely disregarded CBCs rights as a pledge by not informing it of the public auction it initiated.
However, VGCCI countered this by saying that CBC has actual knowledge of the by-laws of the corporation
(when VGCCI informed CBC that it cannot transfer and record the shares in the corporate book). It cited
Fleishcer v. Botica which stated that as a general rule, third persons are not bound by the by-laws of a corporation
since they are not privy thereto; however the exception to this is when third persons have actual or constructive
knowledge of the same. VGCCI is contending that CBC has actual knowledge and therefore must be bound by the
by-laws.
The Court ruled that in order to be bound, the third party must have acquired knowledge of the by-laws at the time
the agreement was entered into between him and the shareholder. In the case at bar, CBC was only informed of
the by-laws after it informed VGCCI of the public auction. Also, VGCCI could have easily informed petitioner of
its by-laws when it sent notice formally recognizing CBC as pledge of one of its shares registered in Calapatias
name.

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CORPORATE POWERS AND AUTHORITY

60 - De La Rama v Ma-Ao Sugar Central (1969)
Facts:
De La Rama and 3 other minority stockholders of Ma-Ao Sugar Central filed a derivative suit against the Ma-Ao
Sugar Central Co., Inc., and Amado Araneta and 3 other directors of the corporation. Among the allegations in the
complaint include gross mismanagement, fraudulent use and diversion of corporate funds, disregard of corporate
requirements and etc.
De La Rama claims that the directors made an illegal investment in Phil. Fibers Processing Co., Inc. He contends
that since the investment was made NOT in pursuance of the corporate purpose and without the requisite authority of 2/3
of the stockholders, then the investment was thus illegal (in violation of Sec. 17-1/2 of the Corporation Law).
On the other hand, Araneta claims that the investment was not illegal. He admits having invested in Phil Fibers
but that this was subsequently ratified by the board of directors in a resolution, more than that, he also contends that since
the company was engaged in the manufacture of sugar bags, it was thus perfectly legitimate for Ma-Ao Sugar either to
manufacture sugar bags or invest in another corporation engaged in said manufacture.
Issue:
1. W/N the affirmative vote of the stockholders representing 2/3 of the voting power is necessary
Held/Ratio:
1. No. the court held that the affirmative vote of the stockholders representing 2/3 of the voting power is not
necessary. The corporation code allows a corporation to invest its funds in another corporation for any other
purpose other than the main purpose. Provided that the board has been authorized by affirmative vote of the
stockholders representing 2/3 of the voting power. But if the investment is made in a corporation whose business
is important to the investing corporation and would aid it in its purpose, then to require authority of the
stockholders would be to unduly curtail the power of the board of directors.
According to the book of Professor Guevarra of the University of the Philippines, College of Law, a well-known
authority in commercial law:
j. Power to acquire or dispose of shares or securities. A private corporation, in order to
accomplish its purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary.
40. Power to invest corporate funds. A private corporation has the power to invest its corporate
funds in any other corporation or business, or for any purpose other than the main purpose for
which it was organized, provided that its board of directors has been so authorized in a resolution
by the affirmative vote of stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such a proposal at a stockholders meeting
called for that purpose, and provided further, that no agricultural or mining corporation shall in
anywise be interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the
approval of the stockholders is NOT necessary.

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61 - Nielson & Co. v. Lepanto Consolidated Mining (1966) (dividends, mining management and operation, World
War II)
Doctrines:
Under Section 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a stockholder
in payment of services rendered.
Facts:
In 1937, Lepanto entered into a Management Contract with Nielson. In this agreement, Nielson was to manage
and operate the Mankayan Mining Claim of Lepanto in consideration for
1. P2,500 a month and
2. 10% of dividends declared and paid.
In 1941, Lepanto declared dividends amounting to P175,000, 10% of which Nielson was entitled to (so,
P17,500). Lepanto never paid Nielson. During the liberation in 1945 (i.e., after World War II), Lepanto unilaterally
terminated the management contract with Nielson.
In 1958, Nielson instituted an action for its 10% share in the dividends declared by Lepanto in 1941. The suit
reached the SC and it decided against Lepanto in 1941. The suit between Nielson and Lepanto was suspended in 1942
when the US Army bombarded the Mankayan mining claims, thus preventing Nielson from complying with its obligation
(i.e. operating and managing the claim). The tribunal further said that the contract remained suspended even after the war
was over in 1945 until 1948 when the mines were fully operational; and that the management contract still had five years
to go from 1948.
Thus, the SC stated that Nielson was entitled to 10% of the dividend declarations in 1949 and 1950 worth P3M.
Lepanto sought reconsideration of SCs decision in 1966. (1) What is the nature of the management contract? Is it one of
agency and hence terminable at the principals will or is it a contract of lease of services which may be terminated only
upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend even though Lepanto is not a stockholder?
(Heres the gist they had a management contract that will pay Nielson 10% of dividends. However, due to the war, the
contract was suspended as per a stipulation in their contract that if theres force majure, they will suspend the contract.
Lepanto now contends that hes not entitled to pay the dividends because the contract is done. He refuses to consider the
war-time and rebuilding-of-the-mine-time as suspended periods.)
Issues:
1. W/N the nature of the Management Contract is one of a contract of lease of services which may be terminated
only upon agreed causes
2. CORP: W/N Nielson entitled to 10% of the stock dividend even though Lepanto is not a stockholder
Held/Ratio:
1. YES. Nielson was hired to manage and operate the mine of Lepanto. It was not allowed to make decisions without
Lepantos approval.
2. NO. Under Section 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. The understanding between Lepanto and Nielson was simply to
make the cash value of the stock dividends declared as the basis for determining the amount of compensation
that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. It
does not mean that the compensation of Nielson would be taken from the amount actually declared as cash
dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as
stock dividends, but from the other assets or funds of the corporation which are not burdened by the dividends
thus declared.

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Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special name stock dividends only if they
are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property then
those shares do not fall under the category of stock dividends. A corporation may legally issue shares of
stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness.
A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property,
because services is equivalent to property.
It is the shares of stock that are originally issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold
or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares
of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for
services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be
issued to one who is not a stockholder of a corporation.
A stock dividend is any dividend payable in shares of stock of the corporation declaring or authorizing
such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of
cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par.
When a corporation issues stock dividends, it shows that the corporations accumulated profits have been
capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or
kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets
and no longer available for actual distribution.
Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders
are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the
surplus, which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder;
the proportional interest of each stockholder remains the same .If a stockholder is deprived of his stock dividends
- and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder then
the proportion of the stockholders interest changes radically. Stock dividends are civil fruits of the original
investment, and to the owners of the shares belong the civil fruits.
The term dividend is that part or portion of the profits of the enterprise which the corporation, by its governing
agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside,
and declared by the directors of the corporation as dividends and duly ordered by the director, or by the
stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their
respective interests.
Under Section 16 of the Corporation Law stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. And so, in the case at bar Nielson cannot be paid in shares of
stock which form part of the stock dividends of Lepanto for services it rendered under the management
contract.

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62 - Tuason & Co. v. Bolanos (1954)
Doctrines:
Although a corporation has no power to enter into a partnership, it may nonetheless enter into a joint venture w/
another where the nature of that venture is in line w/ the business authorized by its charter.
Facts:
This is an action for the recovery of possession of real property against Bolanos. Bolanos alleges ownership of
the land by prescription. The case was ruled in favor of Tuason (prescription does not run against registered property).
On appeal, Bolanos alleges, among others, that the complaint by Tuason should have been dismissed for not having
been brought by the real party in interest. This is because the action is brought in behalf of JM Tuason & Co. Inc. by
Gregorio Araneta Inc., its managing partner.
Issues:
1. W/N case should have been dismissed on the ground that the case was not brought by the proper party in interest
Held/Ratio:
1. No. What Section 2, Rule 2 of the Rules of Court provide is that the action be brought in the name of, but not
necessarily by the real party in interest. While the complaint states that the plaintiff is represented herein by its
Managing Partner Gregorio Araneta, Inc., another corporation, there is nothing against one corporation being
represented by another person, natural or juridical, in a suit in court.
The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the theory that it is
illegal for two corporations to enter into a partnership is without merit. The true rule is that though a
corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with
another where the nature of that venture is in line with the business authorized by its charter.
There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta,
Inc. as its managing partner is not in line with the corporate business of either of them.

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63 - Atrium Management Corp. v. Court of Appeals (2001)
Doctrines:
An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of
its organization and therefore beyond the power conferred upon it by law. The term ultra vires is distinguished
from an illegal act, for the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.
Personal liability of a corporate director, trustee, or officer along (although not necessarily) with the corporation
may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
the directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.
Facts:
Once upon a time, there were three companies, Hi-Cement Corporation, E.T. Henry and Co., and Atrium
Management Corporation. Hi-Cement issued 4 postdated crossed checks worth P2 million in favor of E.T. Henry as
payee. These were issued through Hi-Cements corporate signatories Lourdes M. de Leon (Lourdes) as Hi-Cements
treasurer and Antonio de las Alas as Chairman (but he died so nawala na sya sa eksena).
E.T. Henry was in need of cash right away, so it entered into a discounting agreement with Atrium. Before
entering into the agreement, E.T. Henry and Atrium first confirmed with Lourdes if this was possible and if Hi-Cement
would consent. She said that it was OK, and that the checks were issued to E.T. Henry as payment of petroleum
products. So the checks were then indorsed to Atrium.
When Atrium tried to collect on the checks, the drawee bank (unnamed) dishonored all four checks for the reason
payment stopped. Naturally, Atrium went to the courts to collect.
The trial court ruled that Lourdes, E.T. Henry, and Hi-Cement were solidarily liable for the payment of P2 million
to Atrium. However, on appeal, the CA absolved Hi-Cement, saying Lourdes was not authorized to issue the checks
(constituting ultra vires acts), and the checks were not issued for valuable consideration.
Issues:
1. W/N the issuance of the checks constituted an ultra vires act
2. W/N Lourdes (and de las Alas) were personally liable for the checks issued as corporate officers and authorized
signatories of the checks
3. W/N Atrium is a holder in due course
Held/Ratio:
1. NO, the acts were not ultra vires. The issuance of the checks was for the procurement of a loan to finance the
activities of the corporation, and was well within the ambit of a valid corporate act, and hence, not an ultra vires
act. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law
of its organization and therefore beyond the power conferred upon it by law. The term ultra vires is
distinguished from an illegal act, for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.

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2. YES, Lourdes (and de las Alas, but he died so the case against him was dismissed) is personally liable on the
checks she issued, even if she was authorized to issue the checks, because she was negligent. Lourdes signed the
confirmation letter requested by E.T. Henry and Atrium for the rediscounting of the checks, even if she was aware
that the checks were strictly endorsed for deposit only to E.T. Henrys account and not to be further negotiated
(being a crossed check).
Moreover, in the said confirmation letter, Lourdes said the checks were for payment of petroleum products, when
in fact they were for a financing agreement with E.T. Henry. Due to her negligence, Atrium suffered damage, and
therefore, she must be held personally liable (see 2nd doctrine).
3. NO, Atrium is not a holder in due course, as it was aware that the checks were crossed. However, this doesnt
mean that it could no longer collect on the checks.

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64 - Pirovano v. De la Rama Steamship (1954)
Doctrine:
Ultra vires acts - acts of corporation performed merely outside the scope of power granted to it by its article of
incorporation.
Ultra vires acts are those acts which are not illegal and void ab initio. They are merely voidable and may become
binding and enforceable when ratified by the stockholders.
Facts:
The case involves numerous corporate resolutions and the quest of a family in seeking that valued recognition
from the corporation for the efforts of a father named Pirovano (bff of then President Roxas).
It all started when the heirs of Pirovano filed before CFI of Rizal an action seeking to enforce some board
resolutions which gives the children the proceeds of the insurance policies taken on the life of the deceased Enrico
Pirovano. Pirovano, former president of steamship corporation, was said to have contributed greatly to progress of the
company by raising its paid up capital from P240k to P15.5 M. Few years before he died in the hands of the Japanese, the
company insured the life of Pirovano in various insurance companies for P1M.
With this in mind, the first in the series of corporate resolutions was issued wherein a sum of P400k convertible to
4k shares of stock at par shall be set aside for his heirs. Then another resolution was passed which changes the form of
donation of shares of stocks to a sum of money. The wife then executed a memorandum of agreement regarding this. Then
another resolution followed wherein the corporation said that the interest shall be paid only upon paying of the debts of
the company (at that time the corp had a debt with Natl Devt company. After a few years the stockholders of the
steamship corp formally ratified the donation stated in the resolutions. With this, the president of the corp, Sergio Osmena
filed an inquiry before SEC alleging that said donation was void because the corporation acted beyond its scope of powers
(corp cant dispose of his assets by gift).
Issues:
1. W/N the grant of proceeds of insurance policies taken on the life of Pirovano embodied in resolutions is a
renumerative donation.
2. W/N donation has already perfected before its rescission or nullification by stockholders
3. W/N the donation is an ultra vires act (corp related issue) thus unenforceable and invalid
Held/Ratio:
1. YES. Court held that the said donation is renumerative in nature. It was clearly expressed that the thought of
giving donation to his heirs was due to the big contribution of Pirovano in the progress and success of the
corporation. This was donation made to a person in consideration of his merits or for services rendered to the
donor.
2. YES, the court held that the donation has reached the stage of perfection (upon the grant of resolutions and
ratifications by stockholders and accepted by donee). It is therefore valid and binding upon the parties and cannot
be rescinded unless there is a legal ground. In this case, the court sees no reason for rescission.
3. YES. The court held that even if the donation given was outside the scope of the powers of the corporation, (ultra
vires act) such donation may still be held valid and enforceable upon the formal ratification of the stockholders. In
this case, it was clearly and expressly shown that stockholders have formally ratified said donation, thus it may be
effected and binding upon the parties.

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65 - Fred Harden et.al. v. Benguet Consolidated Mining Co. (1933) (illegal per se + No private Wrong)
Doctrine:
CLV Book: Even where corporate contracts are illegal per se, when only public or government policy is at stake
and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original
contractual expectations.
Facts:
Benguet Consolidated, a sociedad anonima, and Balatoc Mining Co., a corporation, were engaged in the business
of mining gold. During its early years, Balatoc was underdeveloped. Because of this, Benguet and Balatoc entered into a
contract wherein Benguet will erect power plants and develop a milling plant for Balatoc. In return, Balatoc gave Benguet
shares with a par value of P600K. The contract was a result of a general stockholders meeting held by Balatoc.
The project soon after turned out well, with Benguet profiting from their shares. Harden, a stockholder of
Balatoc, as well as other stockholders, viewed the arrangement with complacency. (Nega lang talaga sila, kasi kumikita
yung Benguet dahil nagging successful ung stocks nila.) They filed a case against Benguet and Balatoc praying that
the contract be declared unlawful, and subsequently annulled, and that the shares of stock issued to Benguet be
obliterated. They based their complaint on a provision in the then Corporation Law (adopted from the Act of Congress of
1916) which states that it shall be unlawful for any member of a corporation engaged in agriculture or mining ()
to be in any wise interested in any other corporation engaged in agriculture or in mining.
Issues:
1. W/N the contract be annulled for illegality.
2. W/N Benguet, as a sociedad anonima, falls under the Corporation Law.
Held/Ratio:
1. NO. The provision was enacted based on public policy which dictates the need to regulate mining rights.
Moreover, the penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an
action of quo warranto. But these proceedings can be maintained only by the Attorney-General in
representation of the Government. Moreover, Benguet Company has committed no civil wrong against the
plaintiffs.
The SC cited a decision which states that a corporation which is limited by its charter and the law has all the
power than any other individual has until the State acts against it. It has an absolute title against the entire
world except the State, after a proper proceeding is begun in a court of law.
2. NOT DECIDED. The SC ruled that because Harden et. Al. had no legal standing, this issue need not be passed
upon.

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DIRECTORS, TRUSTEES, AND OFFICERS

66 - Manila Metal Container Corporation v. PNB (2006) (SAMD)
Doctrines:
Contracts or acts not made either by the Board of Directors or by a corporate agent duly authorized by the Board
are not binding on the corporation.
Facts:
Manila Metal Container mortgaged its 8, 015-square meter property in Mandaluyong to PNB as security for a
loan. Several amendments were made to the loan agreement, increasing the amount and extending the payment period.
Manila Metal failed to pay in time. PNB extrajudicially foreclosed the property. It was also the winning bidder at P
911,532.21. The sale was annotated on the title on February 17, 1983, giving Manila Metal until February 17, 1984 to
redeem the property.
Manila Metal sent its first letter to PNB asking for an extension of the redemption period. PNB sent its first reply
stating that the request was pending at its Pasay City branch. Eventually, the redemption period expired and a new title
was issued to PNB.
Meanwhile, the Special Assets Management Department (SAMD) of PNB rendered a statement of account to
Manila Metal covering its total obligation in the amount of P 1,574,560.47. Manila Metal remitted P 725,000 as deposit
to repurchase. SAMD also recommended to PNB that Manila Metal be allowed to repurchase the Mandaluyong property
at 47 cents less the amount in the statement of account. PNB wrote Manila Metal informing the latter that SAMDs
recommendation was rejected and that the repurchase price was set at P 2,660,000, the minimum market value of the
property according to PNB. PNB likewise gave Manila Metal until December 15, 1984 to accept the offer or else the P
725,000 remittance will be returned and the property will be offered to other buyers. A series of offers and counter-offers
ensued.
Manila Metals assertion was that it had already accepted SAMDs offer which was why it made the earlier
remittance (earnest money, allegedly). Again, offers and counter-offers were made until Manila Metal filed a complaint
for Annulment of Mortgage, and Specific Performance with damages.
Issues:
1. W/N there was a perfected contract of sale to repurchase the foreclosed property
2. W/N SAMDs purported offer was binding on the corporation
Held/Ratio:
1. NO. At no point was there a meeting of the minds as to the consideration.
2. NO. SAMD was not duly authorized by the Board of the Directors to enter into a repurchase agreement. In fact, it
was made quite clear to Manila Metal that the P 725,000 remittance was only accepted on the condition that the
repurchase price was still subject to the approval of the Board.
Section 23 of the Corporation Code provides:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of

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which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
67 - Filipinas Port Services v. Go (2007) (additional positions, derivative suit)

Doctrines:
Raison detre behind the conferment of corporate powers: The concentration in the board of the powers of
control of corporate business and of appointment of corporate officers and managers is necessary for efficiency
in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to
choose the directors who shall control and supervise the conduct of corporate business.
Facts:
Petitioner Filport is represented by its previous Board Director Eliodoro Cruz and stockholder Mindanao
Terminal and Brokerage Services, Inc. (Minderbro). Only these two appealed from the CA decision being assailed in this
case. In 1993, Filports Board of Directors (herein respondents) enacted a resolution creating six new positions
(AVPs for Corporate Planning, Operations, Finance, and Administration, as well as Special Assistants to the
President and to the Chairman), and 6 people were elected into said offices, all with a monthly salary of P13,050
each. They also increased the salaries of the Chairman and other officers. Cruz wrote a letter to the Board questioning
these decisions, saying that the Board was not authorized to do so by the companys by-laws. The Board did not act upon
the matter so Cruz and the other stockholders filed a derivative suit of damages due to mismanagement with the SEC.
After a few years, the Securities Regulations Code was enacted, which changed the rules on venue, so the case was
eventually moved to the Davao RTC.
The RTC ruled in favor of Cruz, et al., even if it decided that the Board had the authority to create positions not
found in the by-laws and the salary increases were reasonable, and declared that the AVP for Corporate Planning and the
Special Assts. should restore whatever salary they received because Filport wasnt a big corporation that needed multiple
executive positions, and that these positions were just created for accommodation. The CA overturned the RTC decision.
Cruz contends that the board does not have the authority to create an executive committee because it is not
provided for in Filports by-laws as required by Sec. 35 of the Corp Code.
Issues:
1. W/N the Board had the power to create the assailed positions (most impt.)
2. W/N the positions were created merely for accommodation
3. W/N the Board is guilty of mismanagement
4. W/N Cruz has standing to bring the case
Held/Ratio:
1. YES, the governing body of a corporation is its board of directors. As per Sec. 23 of the Corp Code, the corporate
powers of all corporations formed under the code shall be exercised by the board, and all property owned and
business conducted by the corporation shall also be held and controlled by the board. The board is the sole
authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within
the scope of its charter. However, the authority of the board is restricted to the management of the corps regular
business affairs, unless more extensive power is expressly conferred.
In this case, while the by-laws do not expressly provide for the boards authority to create an executive
committee, the Court cannot deem that the positions created automatically formed an executive committee. The
executive committee referred to in Sec. 35 means a committee that has equal powers with the board and must be
distinguished from other committees that can be created and controlled by the board. In this case, the positions
created are ordinary positions were created in accordance with the regular business of Filport; thus, it is entirely

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within the boards power to create them and provide remuneration therefor. Plus, Cruz himself moved to create
the positions of AVPS for Finance, Operations, and Administration during his incumbency as Filport president.
2. NO. There is no evidence to substantiate Cruzs allegations. He who alleges a fact has the burden of proving his
existence. Mere allegations are not enough. In this case, Cruz only presented his testimony to prove that the
positions were created for mere allegation, but this cannot serve as the proof needed. It only served as an
allegation.
3. NO. Mismanagement connotes the presence of bad faith and malice, not just negligence, error, or bad business
judgment. Bad faith connotes a dishonest purpose or some moral obliquity or conscious doing of a wrong that
partakes of the nature of fraud.
4. YES. The SC ruled that this suit is indeed a derivative suit, wherein a corporate stockholder may bring an action
to protect or vindicate corporate rights whenever the board refuses to sue, or when the board is the one to be sued.
In order to be considered a derivative suit, the ff. requisites must concur: 1) the party bringing the suit must have
been a shareholder as of the time of the act or transaction complained of; 2) he has tried intra-corporate remedies
but they have failed or the board refused to hear his plea; and 3) the cause of action devolves around the
corporationthe wrongdoing or harm was done to the corporation itself and not merely to a particular
stockholder. This petition clearly satisfies all three requisites: 1) Cruz was a stockholder at the time of the
positions were enacted and the raises were given; 2) he wrote to the board to do the necessary action about his
complaint but the board never acted on it; and 3) in the end, Filport, not Cruz, stands to benefit from the case.

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68 - Angeles v. Santos (1937)
Doctirines:
Where corporate directors are guilty of a breach of trust not of mere error of judgment or abuse of discretion
and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon
the corporation and indirectly upon the stockholders
The board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a
position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good
faith, care and diligence in the administration of the affairs of the corporation and should protect not only the
interest of the majority but also those of the minority of the stock
Facts:
The plaintiff and the defendant are all stockholders and member of the board of directors of the Paraaque Rice
Mill, Inc. On September 6, 1932, a complaint was instituted by Angeles, de Lara, Bernabe, as stockholders, for and in
behalf of the corporation, Paraaque Rice Mill, Inc., against Santos, Mayuga, Pascual, and Rodriguez. The complaint
avers subtantially the following:
1. that the plaintiffs are stockholders and constitute the minority and the defendants are also stockholers
and constitute the majority of the board of directors of the Paraaque Rice Mill, Inc.;
2. that at an extraordinary meeting held on February 21, 1932, the stockholders appointed an investigation
committee of which the plaintiff Jose de Lara was chairman and the stockholders Dionisio Tomas and
Aguedo Bernabe were members, to investigate and determine the properties, operations, and losses of the
corporation as shown in the auditors report corresponding to the year 1931, but the defendants, particularly
Teodorico B. Santos, who was the president of the corporation, denied access to the properties, books
and record of the corporation which were in their possession;
3. that the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession
of the books, vouchers, and corporate records as well as of the funds and income of the Paraaque Rice
Mill, Inc., all of which, according to the by-laws, should be under the exclusive control and possession of
the secretary-treasurer, the plaintiff Aguedo Bernabe;
4. that notwithstanding written requests made in conformity with the by-laws of the corporation of three
members of the board of directors who are holders of more than one-third of the subscribed capital stock of
the corporation, the defendant Teodorico B. Santos as president of the corporation refused to call a meeting
of the board of directors and of the stockholders;
5. that Teodorico B. Santos as president of the corporation, in connivance with his co-defendants, was
disposing of the properties and records of the corporation without authority from the board of
directors or the stockholders of the corporation and without making any report of his acts to the said
board of directors or to any other officer of the corporation, and that, to prevent any interferrence with or
examination of his acts, he arbitrarily suspended plaintiff Jose de Lara from the office of general manager to
which office the latter had been lawfully elected by the stockholders.
On the date of the filling of the complaint, September 6, 1932, the court issue an ex parte order of receivership
appointing Melchor de Lara as receiver of the corporation upon the filling of a bond of P1,000 by the plaintiffs-appellees.
The bond of the receiver was fixed at P4,000.
The defendant-appellants objected to the petition for the appointment of a receiver on the ground, among others,
that the court had no jurisdiction over the Paraaque Rice Mill, Inc., because it had not been include as party defendant in
this case and that, therefore the court could not properly appoint a receiver of the corporation pendente lite. The motions
for reconsideration and new trial and the special appearance were, by separate orders bearing date of December 19, 1934,
denied by the trial court. The case was finally elevated to the Supreme Court by bill of exceptions.

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Issues:
1. W/N the trial court was without jurisdiction to appoint a receiver and should have dismissed the case
2. W/N the lower court erred in ordering the destitution of the defendants from their office as members of the board
of directors of the corporation, until the new election of the stockholders, which shall be held once the decision
has become final.
Held/Ratio:
1. NO. That the action was properly instituted by the plaintiff as stockholders for and in behalf of the corporation
Paraaque Rice Mill, Inc. and the lower court committed no reveiwable error in appointing a receiver of the
corporation pendente lite.
The board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a
position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good
faith, care and diligence in the administration of the affairs of the corporation and should protect not only the
interest of the majority but also those of the minority of the stock. Where a majority of the board of directors
wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires
acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is
unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of
the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress
the injuries of the minority stockholders against the wrongdoing of the majority.
2. YES. Our Corporation Law (Act No. 1459, as amended), does not confer expressly upon the court the
power to remove a director of a corporation. There are abundant authorities, however, which hold that if the
court has acquire jurisdiction to appoint a receiver because of the mismanagement of directors, these may
thereafter be removed and others appointed in their place by the court in the exercise of its equity jurisdiction. In
this case, however, the properties and assets of the corporation being amply protected by the appointment of a
receiver. Hence, the removal of the directors is, under the circumstances, unnecessary and unwarranted.

ALS2014B 100 of 199
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69 - Tan et al. v. Sycip (2006) (quorum; non-stock corporation; deceased members)
Doctrines:
For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the number of
outstanding voting stocks.
For nonstock corporations, only those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum during members meetings. Dead members shall not be counted.
The accepted rule in Philippine jurisdiction is that a corporation can release a subscriber from liability on the
subscription, in whole or in part, only with the express or implied consent of all of the shareholders, and only
when there is no prejudice to corporate creditors.
Facts:
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen
(15) regular members, who also constitute the board of trustees. During the annual members meeting held on April 6,
1998, there were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7)
attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr.
over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners
Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), Tan et al. maintained that the
deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members
automatically lost all their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She
held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles
of incorporation, not simply the number of living members.
Issues:
1. W/N in nonstock corporations, dead members should still be counted in determination of quorum for purpose of
conducting the Annual Members Meeting.
Held/Ratio:
1. NO. In nonstock corporations, the voting rights attach to membership. Under Section 52 of the Corporation
Code, the majority of the members representing the actual number of voting rights, not the number or
numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum.
Membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide otherwise. The determination of whether or not
dead members are entitled to exercise their voting rights (through their executor or administrator), depends on
the articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of
the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a
member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster
in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the
requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members
meeting, conducted with six members present, was valid (as to other resolutions).
[Note: The case also details the rule for stock corporations. It is a short and concise case by CJ Panganiban]

ALS2014B 101 of 199
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But, while a majority of the remaining corporate members were present, however, the election of the four
trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members,
not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also
constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that
vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-
trustees must sit as a board in order to validly elect the new ones. Thus, petition was partly granted.The
assailed Resolutions of the Court of Appeals are hereby reversed and set aside. The remaining members of the
board of trustees of GCHS may convene and fill up the vacancies in the board by sitting as a board.
Stock Corporations: shareholders may generally transfer their shares. On the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.
Non-stock Corporations: membership in and all rights arising from a nonstock corporation are personal and non-
transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. The determination of
whether or not dead members are entitled to exercise their voting rights (through their executor or administrator),
depends on those articles of incorporation or bylaws.

ALS2014B 102 of 199
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70 - Board of Liquidators v. Heirs of Kalaw (1967)

Doctrine:
It is possible for an express provision of the by-laws to be violated and the Board may, in certain corporate
actions, bind the corporation in spite of the fact that it is contrary to the by-law provision.
There are 2 ways by which corporate actions may come about through its Board of Directors:
o The board may empower or authorize the act or contract; or
o Ratification from the board
As long as there is approval by the board, express or implied, it is valid to bind the corporation.
Facts:
National Coconut Corporation (NACOCO) was a chartered as a non-profit governmental organization, in charge
of all transactions involving coconut and its by-products. Maximo Kalaw sat as its General Manager and board chairman.
Because of 4 typhoons that hit the country in, NACOCO was unable to fulfill its obligations under the numerous contracts
it entered into with several buyers. The aggrieved buyers threatened to bring damage suits but most of these were settled,
except for one who actually pushed through with the suit (Louis Dreyfus ltd.). Subsequently, NACOCO was abolished by
EO 372, giving the Board of Liquidators the function of settling and closing its affairs.
All the settlements sum up to P1,343,274.52. It is this sum that NACOCO, through the Board of Liquidators, now
seeks to recover from General Manager Kalaw and the other two directors, charging the latter with negligence and bad
faith/breach of trust for having approved entered into the aforementioned unprofitable contracts. It is alleged that while
the by-laws required prior approval of the board, Kalaw entered into the contracts alone as general manager and without
the boards prior approval. Sometime after, Kalaw died and the suit was brought against his estate.
Issues:
1. W/N Kalaw and the rest of the board were guilty negligence and bad faith and/or breach of trust for having
entered into the unprofitable contracts
2. [civpro related] w/n the action survives his death; and if so, is his heirs liable
Held:
1. NO. Under the circumstances, Kalaws acts were valid corporate acts. Although the by-laws required that a
general manager first procure approval of the board members before entering into contracts that would bind the
corporation, the contrary practice by Kalaw was ratified by the Board. Evidence shows that it was the practice of
the corporation to allow its general manager to negotiate contracts, in its copra trading for and in NACOCOs
behalf, without prior board approval. The Court ruled that if the by-laws were to be literally followed, the
board should give its stamp of prior approval on all corporate contracts. But [in this case] the board itself, by its
acts and through acquiescence, practically laid aside the by-law requirement of prior approval [please see
above doctrine J]
2. [civpro related] The action, being one for a tort, does survive his death.

ALS2014B 103 of 199
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71 - Montelibano v. Bacolod-Murcia Milling (1962) (milling concession grants / business judgment)

Facts:
The Bacolod-Murica Milling entered into Milling Contracts with Montelibano and Gonzaga & Co. (planters).
Originally executed in 1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop, and
provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. This was
then amended to give the planters an increased participation of 60%.
The Board of Bacolod-Murica later adopted a Resolution granting further concessions to the planters depending
on the granting by the other Sugar Centrals of Negros the similar concessions to the said planters. This was in fact
further consideration for the planters (and was incorporated into the milling contracts) who now claim that their
concessions should appropriately be increased pursuant to the Resolution. Bacolod-Murica seeks to renege on the
undertaking alleging it is void.
Issue:
1. W/N the additional consideration before adoption of the Resolution is void
Held/Ratio:
1. YES. Bacolod-Murcia Milling Co., Inc. cannot deny its obligation to increase the participation of their planters as
embodied in the resolution duly adopted by its Board of Directors when the corporation extended its milling
contract with the planters. The court said that the act in question is in direct and immediate furtherance of the
corporations business, fairly incident to the express powers and reasonable necessary to their exercise. The court
also reiterated the rule that questions of policy or of management are left solely to the honest decision of officers
and directors of a corporation, and the court is without authority to substitute its judgment with that of the Board
of Directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are
nor reviewable by the courts.
Bacolod-Murica should be bound by the terms of the agreement. It is w/in the powers of the Board to
amend the contracts to make them more acceptable to the planters. The Resolution has been passed in good
faith, and the fact that it may cause losses to the corporation does not suffice to warrant the courts to
review them. This is a matter left to the judgment of the Board, a question of policy, and as long as they are
not illegal and are executed in good faith, they will not be disturbed by the courts. Bacolod must honor its
undertakings.

ALS2014B 104 of 199
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72 - Philippine Stock Exchange v. CA (1997) (Listing of shares: Business Judgment)
Doctrines:
The PSE is engaged in a business imbued with high public interest and is under the control and supervision of the
SEC, moreso due to the fact that the PSE was granted a public franchise by the government, where it is mandated
to protect the interest of the investing public. However, though under such control and supervision by the SEC,
the PSE cannot be questioned on matters of internal management, policies, and administration in the
absence of bad faith.
Facts:
Puerto Azul Land Inc. (PALI), a domestic real estate corporation, made an application to the SEC for the purpose
of having its stocks listed in order for it to be sold in the public. A year after a permit to sell was granted, heirs of the
former President Marcos claimed that Pres. Marcos was the legal owner of certain properties forming part of the Puerto
Azul Beach Hotel Complex which PALI claims to be among its assets.
The PSE, taking into consideration these claims, rejected the application for listing. In response, PALI sought the
decision of the SEC which then reversed the decision of the PSE and ordered the latter to list the PALI stocks.
Issue:
1. W/N did the SEC act arbitrarily in reversing the decision of the PSE and ordering the listing of PALI stocks?
Held/Ratio:
1. YES. The PSE is engaged in a business imbued with high public interest and is under the control and supervision
of the SEC, moreso due to the fact that the PSE was granted a public franchise by the government, where it is
mandated to protect the interest of the investing public.
However, though under such control and supervision by the SEC, the PSE cannot be questioned on matters of
internal management, policies, and administration in the absence of bad faith.
In fact, in the decision rendered by the board of the PSE, was found of good standing by the court. PSE was
correct in denying the listing of the PALI stocks since there were various allegations against the listing:
a. Portions of the properties are alleged to be owned by former Pres. Marcos
b. Portion of the properties are alleged to pertain to public domain
c. The manner of transfer of properties were questionable
d. A sequestration order was issued by the PCGG against some portions of properties
Taking all these into consideration, the PSE deemed that PALI stocks are not for the best interest of the investing
public and will deteriorate the high standards and goodwill upheld by the PSE.

ALS2014B 105 of 199
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73 - Woodchild Holding Inc. v. Roxas Electric Constructions Company Inc (2004)
Doctrines:
The apparent power of an agent is to be determined by the acts of the principal.
Facts:
Roxas Electric and Construction Company Inc (RECCI) owned 2 parcels of land, Lot 491-A-3-B1(B1) and Lot
491-A-3-B2 (B2). RECCIs Board of Directors issued a resolution authorizing the corporation through its
President, Roberto Roxas, to sell B2 and to sign and execute the necessary documents4. Roxas sold B2 to Woodchild
Holdings Inc (WHI) through its President, Jonathan Dy, for P 5M who wanted to build a warehouse in the land. In the
Deed of Absolute Sale, Roxas also granted WHI a right of way over B1and an option to purchase certain portions
thereof in case the need arose as earlier requested by WHI. After Roxas died, WHI demanded that RECCI sell a
portion of B1 but it refused claiming it never authorized Roxas to do so. WHI filed a case for specific performance
and damages. The trial court ruled that RECCI was estopped from disowning the apparent authority of Roxas under the
Resolution of its Board finding WHI in good faith. The CA reversed claiming that Roxas was merely authorized to sell B2
and therefore the provisions in the deed of sale not binding to RECCI.
Issue:
1. W/N RECCI is bound by the provisions in the deed of absolute sale granting beneficial use and a right of way and
option to buy over a portion of B1
Held/Ratio:
1. NO. Contracts entered into by corporate officers beyond the scope of their authority are unenforceable
against the corporation unless ratified by the corporation, whether expressly or impliedly.
WHIs contention that by allowing Roxas to execute the deed of absolute sale and failing to disapprove the same,
RECCI gave him apparent authority to grant a right of way and option to buy over B1.
For the principle of apparent authority to apply, the WHI was burdened to prove the following: (a) the acts
RECCI justifying belief in the agency by the WHI; (b) knowledge by RECCI which is sought to be held; and, (c)
reliance thereon by WHI consistent with ordinary care and prudence.
The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.
There is no evidence of specific acts made by the RECCI showing or indicating that it had full knowledge of
any representations made by Roxas to WHI that it had authorized Roxas to grant WHI an option to buy B1, or
to create a burden or lien thereon. There is no implied ratification when RECCI received the P5M purchase
price for B2. RECCI sold B2 to WHI and the latter took possession of the property, building a warehouse.
RECCI had a right to retain the P5M. For an act of the principal to be considered as an implied ratification of an
unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and
intended to adopt what had been done in his name.
Ratification is based on waiver the intentional relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do independently of the unauthorized act of the agent.
Moreover, if a writing is required to grant an authority to do a particular act, ratification of that act must
also be in writing. Since RECCI had not ratified the unauthorized acts of Roxas, the same are unenforceable.

4. Board Resolution: RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested buyer, its 7,213-sq.-meter
property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and on terms and
conditions which he deems most reasonable and advantageous to the corporation; FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS,
President of the corporation, be, as he is hereby authorized to execute, sign and deliver the pertinent sales documents and receive the proceeds of
sale for and on behalf of the company

ALS2014B 106 of 199
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74 - Francisco v. GSIS (1963) (telegram, lawyer-father, apparent authority)
Doctrines:
If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform
acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents.
Facts:
Trinidad J. Francisco, in consideration of a loan, mortgaged in favor of the defendant, Government Service
Insurance System a parcel of land with 21 bungalows, known as Vic-Mari Compound, located at Baesa, Quezon City,
payable within ten 10 years in monthly installments and with interest of 7% per annum compounded monthly. Sometime
in Jan 1959, The System extrajudicially foreclosed the mortgage on the ground that up to that date the plaintiff-mortgagor
was in arrears on her monthly installments in the amount of P52,000. The System itself was the buyer of the property in
the foreclosure sale.
On February 1959, the plaintiffs father, Atty. Vicente J. Francisco, sent a letter to the general manager of the
defendant corporation, Mr. Rodolfo P. Andal. Atty. Francisco in effect wanted to pay back the arrears on the monthly
installments but then instead of giving the whole P52,000, he would just first give P30,000 and as for the balance, he
proposes for the GSIS to take over the administration of the mortgaged property and to collect the monthly installments
until the same is fully covered.
On the same date, Atty. Franciscos request was approved by the GSIS board which was sent in the form of a
telegram with the signature of Andal. Pursuant to the agreement Atty. Francisco remitted to the System, through Andal,
a check for P30,000, with an accompanying letter, which reads:
I am sending you ... [P30,000] in accordance with my letter of February 20th and your reply
thereto of the same date, which reads: GSIS BOARD APPROVED YOUR REQUEST RE
REDEMPTION OF FORECLOSED PROPERTY OF YOUR DAUGHTER
The defendant received the said amount however it did not, take over the administration of the compound. Thus,
the Franciscos continued to administer the same, but remitting the proceeds to the GSIS. Subsequently, letters were sent
asking the plaintiff for a proposal for the payment of her indebtedness, since the one-year period for redemption had
expired. In reply, Atty. Francisco protested against this, saying that they have already accepted his offer and that he has
already commenced his part on the terms of his contract. Later on, the GSIS consolidated ownership of the compound
alleging that the telegram did not express the contents of the Board Resolution (incorrect wording). The GSIS maintain
that the true intent was for the Franciscos to also bear the expenses of foreclosure.
Issues:
1. W/N the compromise made is binding upon defendant corporation.
Held/Ratio:
1. YES
The compromise made through the telegrams is binding. There was apparent authority that of the GM,
Andal. Even assuming it is true that Andal didnt sign it and that it was sent by the Secretary in his name, how are
the Franciscos to know? Persons transacting with corporations need not disbelieve every act of its officers,
especially those regular on their face. They are entitled to rely upon external manifestations of corporate
consent. And if a corporation knowingly permits its officers to do acts w/ apparent authority, it is estopped
from denying such authority. Also, assuming there was a mistake in the telegram, GSIS notified the Franciscos
too late and only after having received several remittances. There was also notice to the GSIS, because
Vicente attached the disputed telegram in replying to that w/c was sent by GSIS. Notice to an officer with
regard to matters within his authority is tantamount to notice to the corporation. There was thus implied
ratification.

ALS2014B 107 of 199
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75 - Prime White Cement Corp v. Honorable IAC and Alejandro Te (1993) [Self-dealing director]
Doctrines:
Te was not only an ordinary stockholder of PWCC, but was a member of the Board of Directors and Auditor of
the corporation. He is what is often referred to as a self-dealing director.
Facts:
Prime White Cement Corp (PWCC) filed a petition for review on certiorari seeking to reverse the trial court and
IACs decision, awarding private respondent Te actual damages (P3,302,400), moral damages (P100,000) and attorneys
fees and costs (P10,000).
PWCC thru its President (Mr. Falcon) and Chairman of the Board (Mr. Trazo) entered into a dealership agreement
with Alejandro Te, which obligated the latter to become the exclusive dealer and/or distributor of PWCCs cement
products in the entire Mindanao area for 5 years. Important to note with this agreement is that the price of cement per
bag (P9.70) is fixed for the entire 5-year period.
Relying on the said agreement, Te began contracting with distributors in the area, marketing the product to ensure
that he is able to sell his allocation (20,000 bags per month). However, PWCC through its corporate secretary informed Te
that the board of directors decided to impose limitations on their agreement, including limiting the period of the dealership
(3 months), decreasing allocation (8,000 bags) and increasing the price per bag (P13.30). Te demanded the enforcement of
the original dealership agreement but PWCC refused to comply. The latter even entered into an exclusive dealership
agreement with Napoleon Co for the marketing of the cement in Mindanao, hence this suit.
Issues:
1. W/N the dealership agreement referred by the President and Chairman of the Board is a valid and enforceable
contract.
Held/Ratio:
1. NO, the SC does not agree with the conclusion of the IAC.
The general rules5 provided by the Corporate Law (in force at the time of the case) as well as the present
Corporation Code cannot apply with the case on hand, since the said rules pertain to dealings with 3rd persons
(i.e., person outside the corporation)
The case on hand is different because Te was not only an ordinary stockholder of PWCC, but was a member
of the Board of Directors and Auditor of the corporation. He is what is often referred to as a self-dealing
director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. This
trust relationship is not a matter of statutory or technical law. It springs from the fact that the directors have the
control and guidance of corporate affairs and property and hence the property interest of the stockholders.
Not all contracts between a director and his corporation is void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the stockholders, provided a full disclosure of his
adverse interest is made.
Sec 32 of the Corporation Code provides the general rule as well as the exception on dealings of directors,
trustees or officers with the corporation. Although the old Corp Law does not contain a similar provision, the
said provision incorporates well-settled principles in corporate law.

5. All corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law;
The Board may expressly delegate powers to its President or any of its officers;
In the absence of express delegation, the President may still bind the corporation, by the ratification of his acts or if contract was entered into the
ordinary course of business.

ALS2014B 108 of 199
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Granting arguendo that the dealership agreement involved here would be valid and enforceable if entered into
with a person other than a director or officer of the corporation, the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation changes the whole situation. First of all, the SC believes that
the contract was neither fair nor reasonable. Based on the original agreement that provided a flat rate of P9.70
per bag for 5-years, respondent Te must have knowledge that within that period, there would be a considerable
rise in the price of white cement. This unfairness in the contract is also a basis, which renders a contract entered
into by the President, without authority from the Board of Directors, void or voidable, although it may have been
in the ordinary course of business.
As director, respondent Tes bounden duty was to act in such manner as not to unduly prejudice PWCC.
However, it is quite clear that he was guilty of disloyalty to the corporation, that he was attempting in effect,
to enrich himself at the expense of the corporation. Furthermore, there is no showing that the stockholders
ratified the dealership agreement or that they were fully aware of its provisions. The contract was therefore not
valid and this Court cannot allow him to reap the fruits of his disloyalty.

ALS2014B 109 of 199
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76 - Yao Ka Sin Trading V. CA (1992)
Doctrines:
A corporate officer or agent may represent and bind the corporation in transactions with third parties to the extent
that authority to do so has been conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred.
The burden of proof is first with the corporation to prove that the agent is not with authority then it shifts to the
other party to prove that the agent was clothed with apparent authority.
Facts:
The root of the controversy is the undated letter-offer (Exhibit A) of Constancio B. Maglana, President and
Chairman of the Board of Prime White Cement Corp (PWCC) to Yao Ka Sin Trading (YKS) with the terms (pertinent
terms only):
Prime White Cement, Price: P24.30 per 94lbs bag FOB Cebu City, Qty: 45,000 bags
withdrawable at 15,000 monthly, Payment: Downpayment of P243,000 payable upon signing
of this contract, balance upon presentation of shipping docs.
This was accepted by YKS. June 30, 1973 or 23 days after the signing of Exhibit A, the BOD of PWCC
disapproved the same and the rejection was evidenced by the Minutes.
The 10,000 bags of white cement sold to YKS Trading is sold not because of the alleged
letter-contract adhered to them, but must be understood as a new separate contract, and has in
no way to do with the letter-offer.
July 5, 1973, PWCC wrote a letter to YKS informing it of the disapproval of Exhibit A and with respect to the
10,000 bags of cement, it issued the corresponding Delivery Order and Official Receipt for the payment of P243,000.
YKS accepted without protest both the Delivery Order and Official Receipts. YKS denied having received the letter.
An exchange of letters between PWCC and YKS followed until on March 4, 1974, YKS filed with the CFI of
Leyte an action for specific performance w/ Damages against PWCC based on Exhibit A.
During the Pre-trial, the parties admitted that the By-Laws of PWCC provided that the Chairman of the Board,
who is also the President has the power to execute and sign, for and in behalf of the corporation, all contracts or
agreements which the corporation enter into, subject to the qualification that all the presidents actuations, prior to and
after he had signed and executed said contracts, shall be given to the board of directors of the defendant corporation. All
contracts of the corporation should also meet the approval of the NIDC and/or the PNB board.
Per standard of practice of the corporation, contracts should first pass through the marketing and intelligence unit
before they are finalized. NIDC controller goes over the contracts, the legal counsel is to review the contracts before they
are submitted to the Board.
The trial court rendered its decision in favor of YKS because it interpreted the provision of the By-Laws to mean
that the President may enter into such contract/agreement at anytime and the same is not subject to ratification by the
Board. The By-Laws also provided that the President can operate and conduct the business of the corporation according to
his own judgment and discretion as long as it is not expressly limited by the orders, directives or resolutions of the board
of directors.
The CA reversed the decision of the TC.
Issue:
1. W/N Exhibit a is binding upon the corporation?

ALS2014B 110 of 199
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Held/Ratio:
1. No. Exhibit A is not binding upon PWCC, Mr. Magalana, its President and Chairman was not empowered to
execute it.
A corporate officer or agent may represent and bind the corporation in transactions with 3rd parties to the extent
that authority to do so has been conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred.
Provisions of PWCCs By-laws:
The power of the BOD to ...enter into agreement / contract of any kind with any person in the name and
for and in behalf of the corp through its President, subject only to the declared objects and purpose of the
corp and the existing provisions of the law.
The power of the Chairman of the BOD to execute and sign, for and in behalf of the corp, all contracts or
agreements which the corp may enter into.
The provisions of PWCCs By-Laws do not in any way confer upon the President the authority to enter into
contracts for the corp independently of the Board of Directors. That power is exclusively lodged in the BOD.
Nevertheless, to expedite and facilitate the execution of the contract, only the President-not all the members of the
Board-shall sign it for the corporation. Both powers presuppose a prior act of the cororation exercised through the
BOD.
There is no evidence to show that Mr. Maglana had in the past entered into contracts similar to that of Exhibit A
either with petitioner or other parties. Petitioners alternative proposition that PWCC had clothed Mr. Maglana w/
the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such
power is w/out merit. It is incumbent upon the petitioner to prove that indeed PWCC had clothed Mr. Maglana w/
the apparent authority to execute Exhibit A or any similar contract but petitioner miserably failed to do that. On
the other hand, PWCCs evidence overwhelmingly shows that no contract can be signed by the president w/out
first being approved by the BOD, such approval may only be given after the contract passes through, at least, the
comptroller(NIDC representative) and the legal counsel.

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77 - Westmont Bank v. Inland Construction and Dev. Corp. (2009)
Doctrine:
Doctrine of Apparent Authority General Rule states that in the absence of authority from the board of directors,
no person, not even its officers can validly bind a corporation. BUT, if a corporation consciously lets one of its
officers or any other agents act within the scope of apparent authority it will be estopped from denying
such officers authority.
Facts:
The case started when Inland Construction and Development Corp (Inland) executed real estate mortgages over
its 3 properties and 3 promissory notes for the loans it obtained from Westmont Bank (previously Associated Citizens
Bank.) Inland defaulted in payment.
A Deed of Assignment, Conveyance and Release was executed by Aranda (President of Inland)wherein he
assigns all his rights and interest in Hanil-Gonzalez Corp in favour of Abrantes. In the deed, the obligations of Inland
(including that with Westmont Bank) shall be transferred to Abrantes. It must be noted that Westmont Banks Account
officer, Calo, signed for its conformity to the deed.
Inland then filed a complaint for injunction in the RTC against Westmont Bank when the latter foreclose the
properties mortgaged by Inland.
In their Answer, the bank claimed that it had no knowledge of such assignment of obligation and did not conform
to it. RTC held that the Bank ratified the act of Calo when it failed to repudiate the said assignment within a reasonable
time. The CA affirmed the decision of RTC stating that the bank indeed ratified the deed of assignment.
Issue:
1. W/N Westmont Bank is bound by the deed of Assignment
Held/Ratio:
1. YES. The Court held that Westmont Bank is bound by the deed of Assignment. In this case, records show that
Calo (signee in the deed of assignment) was the one assigned to transact on behalf of the Bank with respect to the
loan transactions with Inland. Because of this, it is presumed that he had the authority to sign for the bank in the
Deed of Assignment. The Court stated that if a corporation consciously lets one of its officers, or any other agent,
to act within the scope of an apparent authority it will be estopped from denying such officers authority. The
burden of proof is set upon the Corporation. In this case the Bank failed to discharge its primary burden of
proving that Calo was not authorized to bind it. The inter-office memo stating that Calo has no signing authority
was disregarded by the Court for it was considered as self-serving and did not form part of Banks body of
evidence.
OTHER NOTES: (just in case he asks)
With regard to SCs Decision in Yao Ka Sin Trading v. CA (where Court held that Yao Ka Sin had to prove that
the cement company had clothed its president with apparent power to execute the contract by evidence)
o The SC stated that for the Yao Ka Sin Case, the cement company had shown by clear and convincing
evidence that its president was not authorized to undertake such particular transaction. Thus the burden of
proof is shifted to Yao Ka Sin. In the present case, Westmont Bank failed to prove that Calo has no such
authority, thus the burden of proof remains with the Bank.
Dissenting Opinion of Brion:
o Inland had the burden to prove that there was valid consent by the bank (prove that Calo had the authority
to sign and bind the bank.) According to Brion, Calo merely signed the deed to give conformity (as the
Deed is primarily between assignor Inland and Abrantes) and he did not likewise indicate or attach proof
of his authority to sign for the bank.

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o Apparent authority may be established by proof of the course of business, the usage and practices of the
bank, and by the knowledge of the Board of Directors. Mere title of Calo as officer in charge of accounts
of Inland with the bank is not enough. In this case, the majority decision did not refer to any past acts of
the bank which creates an impression that Calo was clothed with apparent authority.
78 - Nyco Sales Corporation v. BA Finance Corp (2001)

Facts:
Nyco Sales Corp is in the business of selling construction materials. Its President and General Manager Rufino
Yao was approached by Santiago and Renato Fernandez (Fernandez brothers) of Sanshell Corporation for credit
accommodation. They requested Nyco via Yao to grant Sanshell discounting privileges which Nyco had with BA Finance
Corp, to which Yao agreed. In 1978, a post-dated BPI check from the Fernandez bros was given to Yao (check was
payable to Nyco). Then Nyco thru Yao endorsed the check in favor of BA Finance. In turn, BA Finance issued a check to
Nyco and thereafter endorsed it in favor of Sanshell, and this check was used by Sanshell. A Deed of Assignment was also
executed by Nyco in favor of BA Finance with the conformity of Sanshell. At the back of the document was a Continuing
Suretyship Agreement where the Fernandez bros unconditionally guaranteed to BA Finance the full, faithful and prompt
payment and discharge of any and all indebtedness of Nyco. However the BPI check was dishonored. When BA Finance
reported this to the Fernandez bros, they issued a Security Bank check in favor of BA Finance, but again this was
dishonored. Nyco and the Fernandez bros failed to settle their obligation with BA Finance. A case was instituted by BA
Finance but the other parties were not able to file their answers. Thus Nyco and the Fernandez bros were ordered to jointly
and severally pay P65, 536.67 (plus 14% interest) to BA Finance. Nyco asked for the oreder of default be lifted so as to be
able to implead Sanshell, however this was denied. On appeal, the ruling of the lower court was upheld with modifications
on the date in which the interest is to run. Nyco filed a MR but was denied.
Issues:
1. W/N Nyco (assignor) is liable to BA Finance (assignee)
2. W/N Nyco is discharged from liability since a subsequent SBTC check was issued/ Whether novation took place
when BA Finance accepted the SBTC check
3. W/N Nyco can be liable for the Presidents (unauthorized) acts
Held/Ratio:
1. YES. According to Art 1628 of the Civil code, the assignor-vendor warrants both the existence and legality of the
credit itself and the person of the debtor including his solvency. If there be any breach of the aforementioned
warranties, the assignor-vendor is liable.
2. NO. So long as the credit remains outstanding Nyco is liable to BA Finance, however this doesnt mean BA
Finance can collect from both BPI and the replacement SBTC check (1 obligation lang). Neither can it be said
that there was novation since there was no express agreement that the acceptance of the SBTC check will
discharge Nyco from liability nor was there incompatibility of obligations since both checks were issued to
extinguish the outstanding obligation. In novation there are 2 distinct obligations which is not the case here.
3. YES. Nyco cannot disowns its Presidents acts by stating that Yao was not authorized to do such acts by
stating that there was no Board resolution giving him such authority, the By-Laws clearly provide for the power
of the President which includes executing contracts and agreements, borrowing money, signing, indorsing
and delivering checks all in behalf of the corporation. Furthermore, there was already a previous transaction
of discounting of checks involving the same personalities wherein any enabling resolution from Nyco was
dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was able to discharge its own
undertakings. Such effectively places Nyco under estoppel in pais. Nyco remained silent in the course of the
transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped from
denying Rufino Yaos authority as far as the latters transactions with BA Finance are concerned.

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79 - Associated Bank v. Sps. Pronstroller (2008)
Doctrine:
If a corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent
authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any
person who has dealt in good faith with the corporation through such agent, be estopped from denying such
authority.
Facts:
The Spouses Vaca executed a Real Estate Mortgage in favor of Associated Bank over their parcel of residential
land in Green Meadows Subdivision, QC. For failure of the spouses Vaca to pay their obligation, the subject property was
sold at public auction with Associated Bank as the highest bidder. However, the Vacas commenced an action for the
nullification of the real estate mortgage and the foreclosure sale. The case reached the SC and while the parties were
waiting for the resolution, Associated Bank advertised the subject property for sale. Rafael and Monaliza Pronstroller
offered to purchase the property. Said offer was made through Atty. Jose Soluta, the banks VP, and a member of its
BOD.
On March 18, 1993 .Atty. Soluta, acting on behalf of the bank and the Pronstrollers executed a Letter-Agreement
which states that the 10% deposit and the remaining balance will be deposited under escrow agreement. Said escrow
deposit shall be applied as payment upon delivery of the aforesaid property to the buyers free from occupants. The deposit
shall be made within ninety (90) days. A month after the payment deadline had lapsed, the Pronstrollers and Atty. Soluta,
acting for the bank, executed another Letter-Agreement (July 14, 1993) allowing the former to pay the balance of the
purchase price upon receipt of a final order from the SC (Vaca case) and/or the delivery of the property to them free from
occupants.
Towards the end of the year (1993), the bank reorganized its management. Atty. Dayday became the banks
Asst.VP, while Atty. Soluta was relieved of his responsibilities. Atty. Dayday reviewed banks records and discovered
that the Pronstrollers failed to deposit the balance of the purchase price of the subject property. Atty. Dayday informed the
spouses of the rescission and forfeiture of their deposit. The spouses gave him the second Letter-Agreement to show that
they were granted an extension (They will only pay purchase price upon the receipt of final order from SC). However,
Atty. Dayday claimed that the letter was a mistake and that Atty. Soluta was not authorized to give such extension.
On July 14, 1994, in the Vaca case, the SC upheld the banks right to possess the subject property. The
Pronstrollers commenced the suit by filing a Complaint for Specific Performance before the RTC of Antipolo. The
spouses prayed that the bank be ordered to sell the subject property to them in accordance with their letter-agreement of
July 14, 1993. While the case was pending, the bank sold the subject property to the spouses Vaca, who eventually
registered the sale and a new TCT was issued in their names. As new owners, the Vacas started demolishing the house on
the subject property which, however, was not completed by virtue of the writ of preliminary injunction issued by the
court. The RTC ruled in favor of the Pronstrollers and ordered Associated Bank to accept their payment of the balance and
to deliver the title and possession to subject property.
On appeal, the CA affirmed the RTC decision and upheld Atty. Solutas authority to represent the petitioner. It
further ruled that petitioner had no right to unilaterally rescind the contract. Associated Bank assails the CA decision,
hence this petition.
Issues:
1. W/N Associated Bank is bound by the Letter-Agreement signed by Atty. Soluta under the doctrine of apparent
authority.
Held/Ratio:
1. YES. The general rule is that, in the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation. The power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board of directors. However, just as a natural

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person may authorize another to do certain acts for and on his behalf, the board may validly delegate some of its
functions and powers to officers, committees and agents.
The doctrine of apparent authority, with special reference to banks, had long been recognized in this
jurisdiction. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1)
the general manner in which the corporation holds out an officer or agent as having the power to act, or in other
words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary
powers.
Undoubtedly, the Associated Bank had previously allowed Atty. Soluta to enter into the first agreement without a
board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same
via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the
vesting of a corporate officer with the power to bind the corporation.
Naturally, the third person has little or no information as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions
can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance
with law. What transpires in the corporate board room is entirely an internal matter. Hence, Associated Bank may
not impute negligence on the part of the Pronstrollers in failing to find out the scope of Atty. Solutas authority.
Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts.

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80 - Lee v. CA (1992)
Doctrine:
Beneficial ownership under voting trust arrangement no longer qualifies.
Facts:
International Corporate Bank (ICB) filed a complaint for a sum of money against Sacoba Manufacturing Corp.,
Pablo Gonzales Jr., and Tomas Gonzales who who in turn, filed a third party complaint against Alfa Integrated Textile
Mills (Alfa), Ramon Lee (Alfas president) and Antonio Lacdao (Alfas VP). Lee and Lacdao filed a motion to dismiss
the third party complaint but this was denied, so they filed their answer.
They then sent a letter to the court informing the court that the summons for Alfa was erroneously served upon
them considering that the management of Alfa had been transferred to DBP. The RTC issued an order requiring the
issuance of an alias summons upon Alfa.
In their manifestation, DBP claimed that it was not authorized to receive summons on behalf of Alfa since DBP
had not taken over the company which has a separate and distinct corporate personality and existence. The RTC then
issued an order advising Sacoba Manufacturing, et al. to take the appropriate steps to serve the summons to Alfa. Sacoba
Manufacturing, et al., filed a manifestation and motion for the declaration of proper service of summons which the trial
court granted.
Lee and Lacdao filed a motion for reconsideration submitting that rule 14 sec. 13 of the Revised Rules of Court is
not applicable since they were no longer officers of Alfa, Sacoba should have availed of another mode of service under
rule 14 sec. 16 of the said rules (through publication to effect proper service to Alfa).
Lee and Lacdao filed a motion for reconsideration reiterating their stand by virtue of the voting trust
agreement,they ceased to be officers and directors of Alfa, hence they could no longer receive summons in behalf of Alfa.
Attached in their MR is the voting trust agreement between all the stockholders of Alfa and the DBP, whereby
management and control of Alfa became vested upon DBP. TC reversed its decision saying that service to officers of Alfa
cannot be considered summons.
Issues:
1. W/N the execution of the voting trust agreement by Lee and Lacdao whereby all their shares to the corporation
have been transferred to the trustee deprives the stockholder of their positions as directors of the corporation?
2. W/N the 5 year period of the voting trust agreement in question had lapsed in 1986 so that the legal title to the
stocks covered by the said voting trust agreement ipso facto reverted to Lee and Lacdao as beneficial owners
pursuant to the 6th paragraph of sec. 59 of the new corporation code?
Held/Ratio:
1. Yes. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of DBP, as trustee. Consequently, Lee and Lacdao ceased to own at least one
outstanding share in their names on the books of Alfa as required under Sec. 23 of the new Corporation code.
They also ceased to have anything to do with the management of the enterprise, they ceased to be directors.
Hence, the transfer of their shares to the DBP created vacancies in their respective positions as directors of Alfa.
The transfer of shares from the stockholders of Alfa to DBP is the essence of the subject voting trust agreement.
Considering that the voting trust agreement between Alfa and DBP transferred legal ownership of the stocks
covered by the agreement to DBP as trustee, DBP became the stockholder of record with respect to the said shares
of stock.
In the absence of a showing that DBP had caused to be transferred in their names one share of stock for the
purpose of qualifying as directors of Alfa, Lee and Lacdao could no longer deemed to retain their status as
officers of Alfa. Hence, the service of summons to Alfa through Lee and Lacbao was invalid. To rule otherwise
would contravene the general principle that the corporation can only be bound by such acts which are within the
scope of the officers or agents authority.

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2. No. The 6th paragraph of sec. 59 of the new corporation code reads that unless expressly renewed, all rights
granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby deemed cancelled
and new certificates of stock shall be reissued in the name of the transferors.
However it is manifestly clear from the voting trust agreement of Alfa and DBP that the duration of the agreement
is contingent upon the fulfillment of certain obligations of Alfa with the DBP. Had the 5-year period of the voting
trust agreement expired, DBP would not have transferred its rights and interests to the national government
through the Asset Privatization Trust later that year.

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81 - Valle Verde Country Club, Inc. v. Africa (2009) (vacancy, VVCC Stockholders or remaining members, term,
holdover capacity)
Doctrines:
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed
by a board of directors whose members have stood for election, and who have actually been elected by the
stockholders, on an annual basis. Only in that way can the directors continued accountability to the shareholders,
and the legitimacy of their decisions that bind the corporations stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do
not own.
The theory of delegated power of the board of directors similarly explains why, under Section 29 of the
Corporation Code, in cases where the vacancy in the corporations board of directors is caused not only by the
expiration of a members termm the successor so elected to fill in a vacancy shall be elected only for the
unexpired term of his predecessors office. The law has authorized the remaining members of the board to fill in a
vacancy only in specified instances, so as not to retard or impair the corporations operations; yet, in recognition
of the stockholders right to elect the members of the board, it limited the period during which the successor shall
serve only to the unexpired term of his predecessor in office.
Facts:
On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde Country Club, Inc.
(VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato
Dee, Augusto Sunico, and Ray Gamboa. 9-member board (those who will resign later are in BOLD)
In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders
meeting could not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a
hold-over capacity.
DATE RESIGNED REPLACEMENT
Sept. 1, 1998 Dinglasan Eric Roxas Quorum
Nov. 10, 1998 Makalintal Jose Ramirez Remaining members
Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of
the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC), respectively.
AFRICAS CONTENTIONS
the election of Roxas was contrary to Section 296, in relation to Section 237, of the Corporation Code.
a year after Makalintals election as member of the VVCC Board in 1996, Makalintals term as well as those
of the other members of the VVCC Board should be considered to have already expired. Thus, according to
Africa, the resulting vacancy should have been filled by the STOCKHOLDERS in a regular or special meeting
called for that purpose, and not by the remaining members of the VVCC Board, as was done in this case.

6. Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal
by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. xxx.
[Emphasis supplied.]
7. Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees
to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office
for one (1) year until their successors are elected and qualified.

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for the members to exercise the authority to fill in vacancies in the board of directors, Section 29 requires, among
others, that there should be an unexpired term during which the successor-member shall serve. Since
Makalintals term had already expired with the lapse of the one-year term provided in Section 23, there is no
more unexpired term during which Ramirez could serve.
VVCCs DEFENSE
Under Section 29 of the Corporation Code, a vacancy occurring in the board of directors caused by the expiration
of a members term shall be filled by the corporations stockholders. Correlating Section 29 with Section 23 of the
same law, VVCC alleges that a members term shall be for one year and until his successor is elected and
qualified; otherwise stated, a members term expires only when his successor to the Board is elected and
qualified. Thus, until such time as [a successor is] elected or qualified in an annual election where a quorum is
present, VVCC contends that the term of [a member] of the board of directors has yet not expired.
As the vacancy in this case was caused by Makalintals resignation, not by the expiration of his term, VVCC
insists that the board rightfully appointed Ramirez to fill in the vacancy.
Issues:
1. To answer the issue below, we must tackle: what constitutes a directors term of office.
2. W/N the remaining directors of a corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director
Held/Ratio:
1. TERM
a. the time during which the officer may claim to hold the office as of right, and fixes the interval after
which the several incumbents shall succeed one another.
b. The term of office is not affected by the holdover.
c. fixed by statute and it does not change simply because the office may have become vacant, nor because
the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been
elected and has failed to qualify.
d. distinguished from tenure in that an officers tenure represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term of office
is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity
cannot be considered as extending his term. To be precise, Makalintals term of office began in 1996 and
expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to
hold office until his resignation on November 10, 1998. This holdover period, however, is not to be considered
as part of his term, which, as declared, had already expired. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintals term had been created long
before his resignation.
2. NO. It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the
directors term of office. When a vacancy is created by the expiration of a term, logically, there is no more
unexpired term to speak of. Hence, Section 29 declares that it shall be the corporations stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a members term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace
Makalintal, there was no more unexpired term to speak of, as Makalintals one-year term had already expired.
Pursuant to law, the authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs
stockholders, not the remaining members of its board of directors.

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82 - Steinberg v. Velasco (1929)
Doctrines:
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
Facts:
Steinberg(Plaintiff) was the receiver of Sibugey Trading Company, while Velasco et. al(defendants) where the
members of the board of director of Sibugey Co.
On June 30, 1922, the BOD of Sibugey authorized the purchase of, and purchased, 330 shares of the capital stock
of the corporation at the price of P3,300, and that at the time the purchase, the corporation was indebted in the sum of
P13,807.50, and that, it had accounts receivable in the sum of P19,126.02.
And on June 24, 1922, the officers and directors of the corporation approved a resolution for the payment of
P3,000 as dividends to its stockholders.
On September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its
accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47.
Stienberg now alleges, this was all, wrongfully done and in bad faith, and to the injury and fraud of its creditors.
He now prays that Velasco et. al. pay the sums of money wrongfully given to them with interest and cost.
It is to be noted when Stienberg was appointed a receiver, he tried to collect the remaining accounts receivable,
but failed to because most of the debtors have no property, and he has no money to pay for docket fees.
Issue:
1. W/N the board of directors did not act in good faith and grossly ignorant, and therefore should pay for the losses?
Held/Ratio:
1. Yes. It is very apparent that the BOD assumed that, because it appeared from the books of the corporation that it
had accounts receivable of P19,126.02, therefore it had a surplus over its liabilities. But there is no stipulation as
to the actual cash value of those accounts, and On February 28, P12,512.47 of those accounts had almost no
value, and, in the purchase of its own stock to the amount of P3,300 and in declaring the dividends to the amount
of P3,000, the real assets of the corporation were diminished P6,300.
It also appears that the dividends were made in instalments so as not to affect the financial condition of the
corporation. In other words, that the corporation did not then have an actual bona fide surplus from which the
dividends could be paid.
It is peculiar that the board in purchasing the stock from the corporation and in declaring the dividends on the
stock was all done at the same meeting of the board of directors, and Ganzon and Mendaros both, former
directors, resigned before the board approved the purchase and declared the dividends. In other words, that the
directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized
capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid
up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation, it is
apparent the directors did not act in good faith or that they were grossly ignorant of their duties.
Upon each of those points,(the court cited two laws of, Ruling Case Law which in essence means), General Duty
to Exercise Reasonable Care. The directors of a corporation are bound to care for its property and manage its
affairs in good faith, and for a violation of these duties resulting they will be liable for damages cause, and that if
they act beyond their power, and the corporation losses, or dispose of its property without authority, they will be
required to make good the loss out of their private estates.

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Want of Knowledge, Skill, or Competency. If directors commit an error of judgment through mere
recklessness or want of ordinary prudence or skill, they may be held liable for the consequences. A director
is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to
exercise ordinary skill and judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
Therefore, the BOD are liable.
83 - Bates v. Dresser (1920) (bank, Coleman)

Doctrines:
Duty of diligence
Facts:
Dresser was the president and executive officer, a large stockholder, of the National City Bank of Cambridge.
Earl was the cashier and Coleman was the banks bookkeeper. An auditor reported that the daily balance book was very
much behind, that it was impossible to prove the deposits and that a competent bookkeeper should be employed. Coleman
kept the deposit ledger and this was the work that fell into his hands. Coleman then acted as paying and receiving teller, in
addition to his other duty. Coleman took $2,000 from the vault, but restored them the next day. Later, he began a series of
thefts. (He would draw checks for the amount he wanted, exchange them with a Boston broker, get cash for the brokers
check and when his own check came to the bank through the clearing house, would abstract it from the envelope, enter the
others on his book and conceal the difference by a charge to some other account or a false addition in the column of drafts
or deposits in the depositors ledger.) So far as Coleman was concerned, he took care that his balances should agree with
those in the cashiers book. The directors noticed that the amount of monthly deposits declined but concluded that it was
due to competition with rival banks. The banks semi-annual examinations by national bank examiners found nothing that
would raise suspicion. The directors also relied on the cashier since he was an honest man. However, if only Earl had
opened the envelopes that came from the clearinghouse, he wouldve discovered the fraud. By 1910, Coleman had stolen
$310,143.02.
Issues:
1. W/N the directors neglected their duty by accepting the cashiers statement of liabilities and failing to inspect the
depositors ledger
2. W/N Dresser should be liable
Held/Ratio:
1. NO. The Court held that the directors should not be held answerable for taking the cashiers statement of
liabilities to be as correct as the statement of assets always was. The directors confidence seemed warranted by
the semi-annual examinations and they were encouraged in their belief that all was well by the president, whose
responsibility and knowledge were greater than theirs. They were not bound by virtue of the office gratuitously
assumed by them to call in the pass books and compare them with the ledger, and until the event showed the
possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud.
2. YES. Dresser was the master of the situation. He was daily at the bank, he had the deposit ledger in his hands, he
had hints and warning. Cutting, a bank teller, and Fillmore gave Dresser hints that there was a thief in the bank.
He knew that Coleman had bought a new car, considering that Coleman only made $12 a week. In accepting the
presidency, Dresser must be taken to have contemplated responsibility for losses to the bank, if chargeable to his
fault. Those that happened was chargeable to his fault, after he had warnings that should have led to steps that
would have made the fraud impossible.

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84 - Alden Smith v. Jerome W. Van Gorkom (1985) US Case (Trans Union Case)
Doctrine:
Under the business judgment rule there is no protection for directors who have made an unintelligent or unadvised
judgment.
Facts:
This is a class suit of Trans Union stockholders against Van Gorkom. Trans Union was suffering a tax credit
problem prompting it Van Gorkom to sell his shares but eventually negotiated to involve all the stocks of Trans Union. A
corporation called Marmon was attempting a leverage buy-out of Trans Union. Van Gorkom proposed a price of $55 a
share. Van Gorkom and his CFO didnt bother to do any research to see how much the company was actually worth. He
didnt even inform Trans Unions legal department about the transaction.
$55 a share was only about 60% of what the company was later appraised at. In Van Gorkoms defense, at the
time of the merger, the stock was only selling for $37.25 a share, so $55 seemed like a lot. Van Gorkom called an
emergency meeting of the board of directors, proposed the merger, and the directors gave preliminary approval. Van
Gorkom failed to disclose a number of things at the board meeting where the vote was taken, including the fact that there
was no basis for the $55 price, and that there had been objections by TransUnion management regarding the merger. Van
Gorkom didnt even provide the directors with copies of the merger agreement. The facts get a little complicated, but
basically, there was some wheeling and dealing and the directors eventually wound up recommending that the
shareholders approve the merger, even though the directors never really bothered to learn if the terms of the merger were a
good deal for the company or not. Some shareholders instituted a derivative lawsuit against the directors for breach of
fiduciary duty. The Trial Court decided in favor for Van Gorkom. The shareholders appealed. The Trial Court found that
Van Gorkoms actions fell within the business judgment rule. The business judgment rule says that the courts should not
second guess business decisions made by directors. The Appellate Court reversed. The Appellate Court found that the
directors were grossly negligent because they approved the merger without substantial inquiry or any expert advice.
Therefore they breached their duty to care.
Issue:
1. W/N the actions of Van Gorkom and the board is protected by the Business Judgement Rule Doctrine.
Held/Ratio:
1. NO. The Court found that the directors breached their fiduciary duty by their failure to inform themselves of all
information reasonably available to them and relevant to their decision to recommend the merger, and The Court
found that there was a failure to disclose all material information such as a reasonable stockholder would consider
important in deciding whether to approve the merger. The Court found that Van Gorkom breached his duty to care
by offering $55 a share because, the record is devoid of any competent evidence that $55 represented the per
share intrinsic value of the Company. The Court found that the business judgment rule was not a defense because
the directors and Van Gorkom didnt use any business judgment when they came to their decision. The rule
itself is a presumption that in making a business decision, the directors of a corporation acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interests of the company. ...Thus,
the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an
informed one. Under the business judgment rule there is no protection for directors who have made an
unintelligent or unadvised judgment.Basically, the actual decision is not so important, what the courts will look
to is whether there was an adequate decision-making process. In this case, the Court basically said that in order to
hide behind the business judgment rule, you have to show that you made an informed decision based on some
principle of business. If you pull numbers out of thin air or cast votes without doing due diligence, then the courts
can overturn your decisions. The idea behind the business judgment rule is that people who work in the business
have more experience and are better judges of what a corporation should do than a court would be. But when
businessmen show that they didnt use any of that experience to make a decision, then there is no reason for the
courts to defer to them.

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85 - Sanchez v. Republic (2009)
Facts:
In July 1980, the University of Life Foundation, Inc., (ULFI) a non-stock, non-profit corporation, was given the
management and operation of the University of Life Complex constructed by the Human Settlements Development
Corporation (HSDC). ULFI was to get all the incomes from the Complex (rents) but had to give HSDC an annual fee of
14% of HSDCs investment in it.
After the fall of the Marcos Regime, the new government reorganized the HSDC into the Strategic Investments
Devt Corp. (SIDCOR), during which it was discovered that ULFI never paid the 14% it was supposed to pay HSDC
(totaling P316 million), and so the SIDCOR rescinded the HSDC-ULFI agreement, but ULFI was allowed by SIDCOR to
continue managing and operating the COMPLEX, under an Interim Management Agreement.
In 1989, DECS was given the ownership of ULFIs properties, and in 1990, under RA 6847, was also given full
control and management of the Complex, effective 2 years from enactment. In 1991 SIDCOR transferred all its rights in
the Complex to the government which in turn transferred it to DECS.
In January 1991, DECS granted ULFI the authority to manage and operate the Complex until the end of 1991,
during which period ULFI was expressly mandated to remit all incomes from the Complex, net of allowable expenses. At
the end of 1991, ULFI was given notice to vacate premises, which it declined, and so DECS filed an action for unlawful
detainer in MeTC (Pasig) which was dismissed, and the RTC affirmed such dismissal upon appeal. The CA, on petition
for review filed by DECS in 1995, reversed the decisions of the MeTC and RTC, and ordered ULFI to vacate and pay
rentals as the MeTC might fix. The SC dismissed ULFIs appeal. The MeTC fixed the rents, which totaled to P
22,559,215.14 (Feb 1992-Jan1996). ULFI was successfully ejected but did not pay the rents.
(ITO NA YUNG TALAGANG FOR THIS CASE)
In 1998 DECS filed a complaint for collection of the rents and damages against Henri Kahn, President and
Managing Director, and Manuel Sanchez, Exec. VP and Finance Director, of the ULFI, based on their personal liability
under Sec. 31 of the Corporation Code. The underlying theory of the case was that both operated ULFI as if it were their
own property, handled the collections and spent the money as if it were theirs. Sanchez, in his defense, alleged that as
mere officer he cannot be made personally liable, saying that the complaint is an attempt to pierce the corporate veil.
The RTC ordered Kahn and Sanchez to pay jointly and severally the unremitted rents with legal interest until fully
paid, as well as exemplary damages and attys fees.
Both appealed to the CA and only Sanchez was given due course because Kahns was filed out of time. The CA
affirmed RTC decision. Hence, this petition for review on certiorari.
Issues:
1. W/N Sanchez can be held liable in damages under Sec 31 of Corp. Code for gross neglect or bad faith in directing
the corporations affairs
2. W/N action is barred by res judicata and constitutes forum shopping
Held/Ratio:
1. Yes. Sec. 31 Corporation Code provides: Liability of Directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons. (DOCTRINE OF
CORPORATE OPPORTUNITY)
The CA found that even after ULFIs authority expired, it still continued to collect and keep the rents, knowing
these belonged to DECS. Both acted in bad faith and with gross negligence when they did not turn over even one
centavo nor render an accounting of their collections. Sanchez, as the officer charged with approving and

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implementing corp disbursements, had the duty to present documents showing how the incomes were spent,
which he failed to do.
DECS does not have to invoke the piercing of the corporate veil, which was exactly why they filed the complaint
based on Sec 31 of the Code, which lays down Kahns and Sanchezs liability for damages arising from their
gross negligence or bad faith in directing corporate affairs. Gross negligence is the absence of care, acting or
omitting to act where there is duty to act, willfully and intentionally, with a conscious indifference to
consequences. Bad Faith implies breach of faith, imports a dishonest purpose, partakes the nature of fraud.
Moreover, in a piercing case, the test is complete control or domination, which is not the case here. Sec 32 makes
a corporate director, who may not be a stockholder or member, accountable for his management of the corporate
affairs.
2. NO. The ejectment suit and the complaint for collection and damages have different causes of action. The essence
of forum shopping is the filing of multiple suits involving the same parties for the same cause of action to obtain
favorable judgment.

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86 - Mead v. McCullough (1911) (wrecking contract)
Doctrine:
Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon the power of the majority. xxx Notwithstanding
these limitations upon the power of the majority of the stockholders, their (the majoritys) resolutions, when
passed in good faith and for a just cause, deserve careful consideration and are generally binding upon the
minority.
Facts:
The complaint contains three causes of action, which are substantially as follows: The first, for salary; the second,
for profits; and the third, for the value of the personal effects alleged to have been left Mead and sold by the
defendants.
Charles Mead (petitioner), Edwin McCullough (respondent), Hartigan, Green and, Hilbert organized the Phil.
Engineering & Construction Co. (PECC). The incorporators were also the only stockholders and directors of the
corporation. They each gave $2000 mexican currency cash, except for Mead who contributed property. They held a
meeting and elected Mead as the general manager. Mead held the position for nine months, until he resigned to accept a
position as engineer of the Canton & Shanghai Railway Co.
Several contracts entered by Mead as general manager failed, specifically a wrecking contract with the navy.
Because of these failures, the board voted to sell all the rights and interests of PECC to the wrecking contract in
favor of McCullough. McCullough then incorporated a new company, Manila Salvage Association, and transferred all
his rights and interests to the contract to MSA.
Now Mead goes after McCullough for his salary, part of the profits of the contract and, the value of the properties
he contributed to the company. He claims that the transfer and sale of the rights and interests were done in bad faith, when
they also sold Meads personal effects along with the contract transfer, violating both the articles of agreement (old name
for articles of incorporation) and national laws.
Issue:
1. Whether the sale or transfer to McCullough of the assets of said corporation was done within the laws and powers
of the corporation.
Held/Ratio:
1. YES. The articles of agreement made the incorporators not only as the sole stockholders but also the board of
directors. This means that their decisions are made in the name of both the directors and stockholders of PECC. It
would be unreasonable to question the decision based on the complaints of a minority stockholder (Mead)
when the entire corporation assented to such transfer. Especially since the contract was not profitable and
McCullough was transferring the rights to himself despite incurring losses.
Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without such a limit the
will of the majority would be absolute and irresistible and might easily degenerate into an arbitrary tyranny. The
reason for these limitations is that in every contract of partnership (and a corporation can be something
fundamental and unalterable which is beyond the power of the majority of the stockholders, and which constitutes
the rule controlling their actions. this rule which must be observed is to be found in the essential compacts of such
partnership, which gave served as a basis upon which the members have united, and without which it is not
probable that they would have entered not the corporation. Notwithstanding these limitations upon the power
of the majority of the stockholders, their (the majoritys) resolutions, when passed in good faith and for a
just cause, deserve careful consideration and are generally binding upon the minority.
A private corporation, which owes no special duty to the public and which has not been given the right of eminent
domain, has the absolute right and power as against the whole world except the state, to sell and dispose of

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all of its property. A transaction done in good faith w/c achieves substantial justice cannot be disturbed based on
mere suspicions.
NOTE: Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the assets of the
insolvent corporation was made, but they were also directors and stockholders. In addition to being a creditor,
McCullough sustained the corporation the double relation of a stockholder and president. The plaintiff was
only a stockholder, since he severed his relations with the company when he left for China.
87 - Peoples Aircargo and Warehousing Co. Inc v. CA and Stefano Sano (2011) (bonded warehouse at
International Airport)
Doctrines:
Contracts entered into by a corporate president without express prior board approval bind the corporation, when
such officers apparent authority is established and when these contracts are ratified by the corporation.
Facts:
Peoples Aircargo is a domestic corporation, which was organized in the middle of 1986 to operate a customs
bonded warehouse at the old Manila International airport in Pasay City.
To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation
president, solicited a proposal from private respondent for the preparation of a feasibility study. Private respondent
submitted a letter-proposal dated October 17, 1986 (First Contract) to Punsalan
Punsalan preferred Sanos services because of the latters membership in the Task force, which was supervising
the transition of the Bureau of Customs from the Marcos Government to the Aquino administration. On Oct. 17, 1986,
Peoples Aircargo, through Punsalan, sent to Private respondent a letter confirming their agreement. Accordingly, Sano
prepared a feasibility study for petitioner which eventually paid him the balance of the contract price.
On December 14, 1986, upon Punsalans request, Sano sent petitioner another letter-proposal (Second
Contract). The Second Contract is for Consultany Services consisting of an Operations Manual and Seminar/Workshop
for the employees of Peoples Aircargo. Petitioner received the operations manual and submitted such to the Bureau of
Customs in connection with the petitioners application to become one of the three public customs bonded warehouses at
the international airport. Sano also conducted in the warehouse of petitioner, a three-day training seminar for the latters
employees. Sano was not paid for his 2nd contract. Hence, he filed a collection case against the corporation. Meanwhile,
Punsalan sold his shares in Peoples Aircardo and resigned as its President.
Peoples Aircargo denied that Sano conducted Constultancy services. It alleged that the contract entered into
between Sano and Punsalan was without authority. RTC ruled that the Second Contract was unenforceable or simulated.
However, since private respondent had actually prepared the operations manual and conducted a training seminar for
petitioner and its employees, the RTC awarded P60,000 to the former, on the ground that no one should be unjustly
enriched at the expense of another (Article 2142, Civil Code). CA ruled for the contracts validity and enforceability.
Hence, this petition.
Issues:
1. W/N Punsalan, as president, has apparent authority to enter into the second contract that could bind the
corporation
2. W/N the said contract was valid and not merely simulated
Held/Ratio:
1. YES. The general rule is that, in the absence, of authority from the board of directors, no person, not event its
officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its
stockholders and members, having powers, attributes and properties expressly authorized by law or incident to its
existence. Being a juridical entity, a corporation may act through its Board of Directors, which exercises almost

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all corporate powers, lays down all corporate business policies and is responsible for the efficiency of
management as is under Sec. 23 of the Corp Code.
SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees x x x.
However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to officers, committees or agents.
In the case at bar, since the corporation had previously allowed Punsalan to enter into the first contract with Sano
without a board resolution expressly authorizing him, thus, it had clothed its president with apparent authority to
execute the Second Contract.
If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts, and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents
authority. Hence, private respondent should not be faulted for believing that Punsalans conformity to the contract
in dispute was also binding on petitioner.
Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of
petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau
of Customs and allowed the seminar for its employees. As a result of this, petitioner was given by the Bureau of
Customs a license to operate a bonded warehouse. Even if the Second Contract was outside the usual powers of
the president, petitioners ratification of said contract and acceptance of benefits have made it binding,
nonetheless.
2. YES. It is a valid contract and not merely simulated. In the case at bar, petitioner received from private respondent
a letter-offer containing the terms of the former, including a stipulation of the consideration for the latters
services. Punsalans conformity, as well as the receipt and use of the operations manual, shows petitioners
consent to or, at the very least, ratification of the contract. petitioner even submitted the manual to the Bureau of
Customs and allowed private respondent to conduct the seminar for its employees. Private respondent heard no
objection from the petitioner, until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting
parties. The circumstances mentioned, do not establish any intention to simulate the contract in dispute. On the
contrary, the legal presumption is always on the validity of contracts. A corporation, by accepting benefits of a
transaction entered into without authority, has ratified the agreement and is, therefore, bound by it.

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88 - Gurrea v. Lezama (1958)
Facts:
Gurrea sought to have Resolution No. 65 of the Board of Directors of the La Paz Ice Plant and Cold
Storage Co., Inc., removing him from his position of manager of said corporation declared null and void and to
recover damages incident thereto. The action is predicated on the ground that said resolution was adopted in
contravention of the provisions of the by-laws of the corporation, of the Corporation Law and of the understanding,
intention and agreement reached among its stockholders.
Jose Manuel Lezama answered the complaint setting up as defense that Gurrea had been removed by virtue of a
valid resolution.
Gurrea moved for the issuance of a writ of preliminary injunction to restrain Lezama from managing the
corporation pending the determination of this case, but after hearing where parties presented testimonial and documentary
evidence, the court denied the motion. Thereafter, by agreement of the parties and without any trial on the merits, the case
was submitted for judgment on the sole legal question of whether plaintiff could be legally removed as manager of
the corporation merely by resolution of the board of directors or whether the affirmative vote of 2/3 of the paid
shares of stocks was necessary for that purpose. The trial court held that the removal of Gurrea was legal and dismissed
the complaint without pronouncement as to costs. Gurrea appealed to the Court of Appeals but finding that the question at
issue is one of law, the latter certified the case to the SC for decision.
Issue:
1. W/N Gurrea was properly removed from his position as manager of La Paz Ice Plant by a mere resolution.
Held/Ratio:
1. YES. Section 33 of the Corporation Law provides: Immediately after the election, the directors of a corporation
must organize by the election of a president, who must be one of their number, a secretary or clerk who shall be a
resident of the Philippines . . . and such other officers as may be provided for in the by-laws.
The by-laws of the instant corporation in turn provide that in the board of directors there shall be a
president, a vice-president, a secretary and a treasurer. These are the only ones mentioned therein as
officers of the corporation. The manager is not included although the latter is mentioned as the person in
whom the administration of the corporation is vested, and with the exception of the president, the by-laws provide
that the officers of the corporation may be removed or suspended by the affirmative vote of 2/3 of the
corporation.
From the above the following conclusion is clear: that we can only regard as officers of a corporation those
who are given that character either by the Corporation Law or by its by-laws. The rest can be considered
merely as employees or subordinate officials. And considering that Guerra has been appointed manager by
the board of directors and as such does not have the character of an officer, the conclusion is inescapable that he
can be suspended or removed by said board of directors under such terms as it may see fit and not as
provided for in the by-laws, without the 2/3 vote of the stockholders, as required when an officer is to be
removed. Evidently, the power to appoint carries with it the power to remove, and it would be incongruous to
hold that having been appointed by the board of directors he could only be removed by the stockholders.
One distinction between officers and agents of a corporation lies in the manner of their creation. An officer is
created by the charter of the corporation, and the officer is elected by the directors or the stockholders. An
agency is usually created by the officers, or one or more of them, and the agent is appointed by the same
authority. It is clear that the two terms officers and agents are by no means interchangeable.
In this case, Guerras position was only created by the officers. The by laws did not provide for the creation of
his position. Therefore, he may not be considered as an officer and the manner of removal provided for in
the by laws shall not be made applicable to him. He may thus be removed by a mere resolution by the officers
of the corporation.

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89 - Pardo de Tavera v. Philippine Tuberculosis Society (1982)
Doctrines:
An appointment held at the pleasure of the appointing power is in essence temporary in nature. It is co-
extensive with the desire of the Board of Directors. Hence, when the Board opts to replace the incumbent,
technically there is no removal but only an expiration of term and in an expiration of term, there is no need of
prior notice, due hearing or sufficient grounds before the incumbent can be separated from office.
Facts:
Dr. Buktaw, then executive secretary of the Board of Directors of the Philippine Tuberculosis Society (Society)
retired. Dr. Mita Pardo de Tavera was appointed as his replacement. President Canizares sent an appointment letter.8 The
letter of appointment, however, didnt include a fixed term. Subsequently, de Tavera was removed from her post
without telling her the cause. One of the defendants, Alberto Romulo was appointed to her position with a vote of
7(affirm)-2(abstain)-1(objection). De Tavera alleged that co-defendants Pardo, Garcia, Nubla, and Anil were unqualified
to be elevated to their positions as members of the board, hence their meeting which installed Romulo as Executive
Secretary should be declared null and void.
The defendants filed their answer specifically denying that plaintiff was illegally removed from her position as
Executive Secretary and averring that under the Societys by-laws, said position is held at the pleasure of the Board of
Directors and when the pleasure is exercised, it only means that the incumbent has to vacate the same because her
term has expired; that defendants Pardo, Nubla, Adil and Garcia were, at the time of their election, members of the
defendant Society and qualified to be elected as members of the Board. Defendant Anil also filed a Motion to Dismiss,
contending that de Tavera had no cause of action or even if she does have one, it had already prescribed. Inasmuch as
plaintiff seeks reinstatement, Anil argued that the complaint is an action for quo warranto and hence, the same should be
commenced within one year from May 29, 1974 when the plaintiff was ousted from her position. De Tavera filed an
opposition stating that the complaint is a suit for damages under Sec. 6, Art 11 of the Constitution in relation to Article 12
and 32(6) of the Civil Code, and equal protection of the law. The lower court decided that the complaint is in the nature of
a quo warranto, hence it should have been filed within one year after her ouster.
Issues:
1. W/N de Tavera was illegally dismissed
Held/Ratio:
1. No. The lower court did not err in deciding in favor of the defendants.
[Not so important] While it is true that the complaint questions petitioners removal from the position of
Executive Secretary and seeks her reinstatement thereto, the nature of the suit is not necessarily one of quo
warranto. The nature of the instant suit is one involving a violation of the rights of the plaintiff under the

8. Dr. Mita Pardo de Tavera
Philippine Tuberculosis Society, Inc.
Manila
Madam:
I am pleased to inform you that at the meeting of the Board of Directors held on April 25, 1973, you were appointed Executive Secretary,
Philippine Tuberculosis Society, Inc. with such compensation ,petition and allowances as are provided for in the Budget of the Society, effective
immediately, vice Dr. Jose Y. Buktaw, retired.
Congratulations.
Very truly yours,
For the Board of Directors:
(Sgd) Miguel Canizares,
M.D. MIGUEL CARIZARES, M.D.
President

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By-Laws, the Civil Code and the Constitution, which allegedly renders the individuals responsible, therefore,
accountable for damages. Further, it must be noted that the action is not only against Alberto Romulo, the person
appointed in her stead, but also against the Society and the past and present members of the Board. Therefore, it
could not be held as a quo warranto case. Corollarily, the one-year period fixed in Sec. 16, Rule 66 of the Revised
Rules of Court within which a petition for quo warranto should be filed, counted from the date of ouster, does not
apply to the case at bar. The action must be brought within 4 years, in accordance with Valencia v. Cebu Portland
Cement Co.
[Important part] Nonetheless, although the action is not barred by the statute of limitations, the case will not
prosper. Contrary to her claim, petitioner was not illegally removed or from her position as Executive Secretary in
violation of the By-laws, the New Civil Code and the pertinent provisions of the Constitution.
Although the minutes of the organizational meeting show that the Chairman mentioned the need of appointing a
permanent Executive Secretary, such statement alone cannot characterize the appointment of petitioner without
a contract of employment definitely fixing her term because of the specific provision of Section 7.02 of the Code
of By-Laws that: The Executive Secretary shall hold office at the pleasure of the Board of Directors, unless their
term of employment shall have been fixed in their contract of employment. Besides the word permanent could
have been used to distinguish the appointment from acting capacity.
The absence of a fixed term in the letter addressed to petitioner informing her of her appointment as
Executive Secretary is very significant. This could have no other implication than that petitioner held an
appointment at the pleasure of the appointing power.
An appointment held at the pleasure of the appointing power is in essence temporary in nature. It is co-
extensive with the desire of the Board of Directors. Hence, when the Board opts to replace the incumbent,
technically there is no removal but only an expiration of term and in an expiration of term, there is no need of
prior notice, due hearing or sufficient grounds before the incumbent can be separated from office.

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90 - Matling Industrial and Commercial Corporation, et al. v. Coros (2010) (illegal dismissal; office v.
employee; RTC v. NLRC)
Doctrine:
If the dismissed officer is deemed a corporate officer, then the RTC (before, SEC) has jurisdiction. However, if he
is a regular employee, then jurisdiction lies with the NLRC.
A position must be expressly mentioned in the By-laws in order to be considered as a corporate office. The
creation of an office under a by-law enabling provision is not enough to make a position a corporate office.
An office is created by the charter of the corporation, and the officer is elected by the directors or stockholders.
An employee occupies no office and generally is employed by the managing officer who also determines the
compensation to be paid.
An intra-corporate controversy is one, which arises between a stockholder and a corporation. In determining
which body has jurisdiction over a case, one has to consider the status or relationship of the parties and the nature
of the question that is the subject matter of their controversy.
Facts:
Ricardo R. Coros is the Vice President for Finance and Administration of Matling Industrial and Commercial
Corporation. However, Matling dismissed him. As a result, Coros filed a complaint for illegal suspension and illegal
dismissal against Matling and some of its corporate officers before the NLRC.
Matling, et al. moved to dismiss the petition. They claimed that SEC, and not NLRC, had jurisdiction over the
case, the matter being an intra-corporate in nature. This is because Coros was also a member of the corporations Board of
Directors prior to his termination. Coros alleged that his status as a member of the Board was doubtful he was never
formally elected; he did not own a single share of stock; he had been made to sign in blank an undated indorsement of the
certificate of stock he had been given but Matling had taken back and retained the certificate of stock in its custody; and
that even assuming that he had been a Director of Matling, he had been removed as the Vice President for Finance and
Administration, not as a Director.
The Labor Arbiter granted Matlings motion to dismiss. Coros appealed before the NLRC. The NLRC set aside
the dismissal and held that the matter was not intra-corporate in nature. Matling appealed to the CA and eventually, to the
SC.
Issues:
1. W/N Coros, as Vice President for Finance and Administration, was a corporate office of Matling Industrial and
Commercial Corporation.
a. W/N the NLRC or the RTC has jurisdiction over his complaint for illegal dismissal.
2. W/N Coros status as Director and Stockholder automatically convert his dismissal into an intro-corporate
dispute.
Held/Ratio:
1. NO. Section 25 of the Corporate Code provides, the directors of a corporation must formally organize by the
election of a presidenta treasurera secretaryand such other officers as may be provided for in the by-
laws. A position must be expressly mentioned in the By-laws in order to be considered as a corporate office. The
creation of an office under a by-law enabling provision is not enough to make a position a corporate office. A
different interpretation can easily allow the Board to circumvent the constitutional guarantee of security of tenure
by including an enabling clause on the creation of any corporate office in the by-laws. The Board may create
appointive positions other than those expressly mentioned in the by-laws. However, persons occupying such
positions are not considered as corporate officers within the meaning of Section 25.
In this case, Matlings By-laws did not list Coros position as Vice President for Finance and Administration as a
corporate officer. It only listed four corporate offices President, Executive Vice President, Secretary and

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Treasurer. The position of Vice President for Finance and Administration was not explicitly written in the by-
laws.
Further, there is a distinction between an officer and employee. An office is created by the charter of the
corporation, and the officer is elected by the directors or stockholders. An employee occupies no office and
generally is employed by the managing officer who also determines the compensation to be paid.
Coros was appointed Vice President by Matlings general manager and not by the Board of Directors. It was also
the general manager who determined the amount of compensation he received. Therefore, Coros is merely an
employee and not a corporate officer.
If the dismissed officer is deemed a corporate officer, then the RTC (before, SEC) has jurisdiction. However, if he
is a regular employee, then jurisdiction lies with the NLRC. Since Coros was a regular employee, the NLRC has
jurisdiction over his complaint for illegal dismissal.
2. NO. An intra-corporate controversy is one, which arises between a stockholder and a corporation. In determining
which body has jurisdiction over a case, one has to consider the status or relationship of the parties and the nature
of the question that is the subject matter of their controversy.
Coros was not appointed as Vice President because of his being a stockholder or Director of Matling. His ascent
to the position of Vice President had been gradual but steady. His promotion to the position was due to the length
of service he had rendered as an employee of the corporation. There is no relation between his acquisition of his
status as stockholder or Director and his position as Vice President of Finance and Administration. Further, his
position as stockholder or Director remained unaffected by his dismissal as Vice President.

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91 - De Rossi v. NLRC (1999) (removal of officers: SEC jurisdiction)
Doctrines:
The SEC has the jurisdiction over removal of corporate officers as well as intra-corporate affairs regarding
election and appointment of corporate officers.
Jurisdiction of a tribunal, agency, or office, is conferred by law, and its lack of jurisdiction may be questioned at
any time even on appeal.
Facts:
Armando de Rossi is an Italian Citizen and was the Executive Vice-President and General Manager of Matling
Industrial and Commercial Corp. (MICC). He started to work in 1985 and was terminated in 1988 for failing to secure his
employment permit and grossly mismanaged the business affairs of the companyhe allegedly diverted corporate
funds to his personal use. Aggrieved, he then filed a case against MICC in the NLRC for illegal dismissal.
Issue:
1. W/N the NLRC has jurisdiction over illegal dismissal cases and intra-corporate affairs regarding elections and
appointments.
Held/Ratio:
1. NO. It is the SEC who has jurisdiction in the abovementioned cases. The Articles of Incorporation of MICC
expressly states that de Rossis position as Executive Vice-President was considered to be an officer position.
The court held that de Rossis act of diverting corporate funds to his personal use amounted to an act of fraud
something that is detrimental to the interest of not only the corporation, but also its members. This type of
controversy is encompassed by the SECs jurisdiction. The court deemed SEC to possess the competence and
adjudicative expertise on this case.

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92 - Vasquez v. Borja (1944)
Doctrine:
A corporation is an artificial being invested by law with a personality of its own, separate and distinct from that of
its stockholders and from that of its officers who manage and run its affairs. The mere fact that its personality is
owing to a legal fiction and that it necessarily has to act thru its agents, does not make the latter personally liable
on a contract duly entered into, or for an act lawfully performed, by them for an in its behalf. The legal fiction by
which the personality of a corporation is created is a practical reality and necessity. Without it no corporate
entities may exists and no corporate business may be transacted. Such legal fiction may be disregarded only when
an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose.
Facts:
In January 1932, De Borja obligated himself to sell 4000 cavans of rice at P2.10 per cavan to Natividad-Vasquez
Sabani Development Co.(NVSD). . NVSD Co. only delivered 2,488 cavans and failed and refused in spite demand to
deliver the rest hence De Borja incurred damages (apparently, NVSD Co was insolvent). De Borja sued Vasquez for
payment of damages. Vasquez denied having entered into the contract in his own personal capacity and alleged that the
agreement was made by De Borja with NVSD.
Issue:
1. W/N Vasquez entered into the contract in his personal capacity
Held/Ratio:
1. Yes. Vasquez is not party to the contract as it was NVSD Co which De Borja contracted with. (See doctrine).
The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the
contract did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was the
corporations contract, its non fulfillment, whether due to negligence or fault or to any other cause, made the
corporation and not its agent liable.
On the other hand if independently of the contract Vazquez by his fault or negligence cause damaged to the
plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then the plaintiffs cause of
action should be based on culpa aquiliana and not on the contract alleged in his complaint herein; and Vazquez
liability would be principal and not merely subsidiary,
JUSTICE PARAS Dissenting:
Vasquez as president of NVSD Co is liable for damages. Vasquez, as acting president and manager of Natividad-
Vazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent status of his company,
agreed to sell to De Borja 4,000 cavans of palay. Further, NVSD Co was soon thereafter dissolved.

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93 - Palay, Inc. v. Clave (1983)
Doctrine:
The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or
for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify
wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent the
law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
Facts:
Palay, Inc., through its President, Albert Onstott executed a Contract to Sell a parcel of land to Dumpit. The sale
price was P23,300 with 9% interest per annum, payable with a downpayment of P4,660 and monthly installments of
P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of 1 month, without
need of notice and with forfeiture of all installments paid.
Dumpit paid the downpayment and several installments. The last payment was made on December 5, 1967 for
installments up to September 1967.
Almost 6 years later, Dumpit wrote Palay, Inc. offering to update all his overdue accounts with interest, and
seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. Palay, Inc. informed him that his
Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.
Dumpit filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative
prayer for refund. NHA, found the rescission void in the absence of either judicial or notarial demand and ordered Palay,
Inc. and Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Dumpit the
amount of P13,722.50 with 12% interest
Issue:
1. W/N notice or demand is not mandatory under the circumstances and may be dispensed with by stipulation in a
contract to sell.
2. W/N petitioners may be held liable for the refund of the installment payments made by Dumpit.
3. W/N the doctrine of piercing the veil of corporate fiction has application.
Held/Ratio:
1. YES. An extrajudicial rescission has legal effect where the other party does not oppose it. Where it is objected to,
a judicial determination of the issue is still necessary. In other words, resolution of reciprocal contracts may be
made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be
subject to judicial determination.
The contention that Dumpit had waived his right to be notified under paragraph 6 of the contract is neither
meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private
respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such
waiver follows only where liberty of choice has been fully accorded. Moreover, it is a matter of public policy to
protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice
is one such onerous and oppressive condition to buyers of real estate on installment payments.
2. YES. Rights to the lot should be restored to Dumpit or the same should be replaced by another acceptable lot.
However, considering that the property had already been sold to a third person and there is no evidence on record
that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if
petitioners were to be allowed to retain private respondents payments and at the same time appropriate the
proceeds of the second sale to another.

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3. NO. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those
of the legal entities to which it may be connected and vice versa. There were no badges of fraud on petitioners
part. They had literally relied, albeit mistakenly, on paragraph 6 of its contract with Dumpit when it rescinded the
contract to sell extrajudicially and had sold it to a third person.
Onstott was made liable because he was then the President of the corporation. No sufficient proof exists on record
that said petitioner used the corporation to defraud private respondent. He cannot be made personally liable just
because he appears to be the controlling stockholder. Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding the separate corporate personality.
94 - Aratea and Canonigo v. Suico (2007) (mining, bad faith of officers, Section 31)
Doctrine:
While the piercing the veil doctrine may not apply, officers of a corporation may still be held personally and
solidarily liable with the corporation in exceptional circumstances as when they act in bad faith in directing
corporate affairs.
Facts:
This involves a loan agreement between debtor Samar Mining Development Corporation (SAMDECO) and
creditor Esmeraldo Suico.
Debtor SAMDECO Creditor Mr. Suico
Will pay the loans and cash advances by giving Will extend loan and cash advances to SAMDECO
creditor Suico the exclusive right to market 50% of
the total coal that SAMDECO will extract from its
mining site.
Represented by Aratea and Canonigo who are the Will have the right of first priority to operate the
controlling stockholders of SAMDECO and its mining facilities of SAMDECO if it becomes
duly authorized officers incapable of coping with the work demands
However, Suico was never paid because:

1. Suico was never able to market or sell the 50% share of the coal. All her prospective buyers whom she
directed to Aratea and Canonigo and who offered competitive prices for the coal were refused by the two for
no reason other than the prices tendered were too low.
Meanwhile, Aratea and Canonigo were able to successfully market and sell their other 50% of the coal. Still,
they did not pay Suico.
2. Later, the ownership of SAMDECO was transferred to Southeast Pacific Marketing Inc. (SPMI). In other
words, Suico was not given the right of first priority over SAMDECO.
Suico sued SAMDECO, the new owner SPMI, and officers Aratea and Canonigo for the payment of the loan and
asked that they be held solidarily liable to him.
Issue:
1. Should Aratea and Canonigo be held solidarily liable to the corporation for the obligation to Suico?
Held/Ratio:
1. Yes. Aratea and Canonigo, as corporate officers who represented SAMDECO in their loan agreement, must be
held solidarily liable with the corporation to Suico.

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While the fiction of separate juridical personality of SAMDECO may not be pierced because the loan agreement
was really for the mining operation of the corporation, Aratea and Canonigo should still be held personally and
solidarily liable to Suico because they acted in bad faith in dealing with him.
It was they who prevented Suico from marketing his 50% of the coals mined and they did not allow him to
exercise his right of first priority.
The Court held that these are the exceptional circumstances when corporate officers may be held liable even if the
piercing the veil of corporate fiction will not apply:
a. Section 31 of the Corporation Code:
When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;
b. Section 65 of the Corporation Code:
When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection
thereto;
c. Jurisprudence: De Asis v. CA 136 SCRA 599
When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation; or
d. Article 144 Corporation Code and in Section 13, PD 115 (Trust Receipts Law)
When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.

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95 - Singian v. Sandiganbayan (2005)
Doctrine:
Officers of a corporation other than members of the board of directors can be made criminally liable for their
criminal acts if it can be proven that they participated therein.
Facts:
Atty. Salvador was a consultant for the Presidential Commission on Good Goverment who was detailed with the
Presidential Ad Hoc Committee on Behest Loan (behest loan: loans without appropriate securities and was approved
based on favors and influence). The Committee investigated the loans granted to Integrated Shoe, Inc. (ISI) by the PNB. It
appeared that ISI applied for a 5 yr confirmed irrevocable letter of credit amounting to US$2.5M (P16M) to finance its
purchase of machinery and equipment. This was recommended to the PNB board of director by its Senior VP Bautista.
PNB approved the loan subject to several conditions which included the mortgage of ISIs property along with other
collaterals. It was provided further that the letter of credits be subjected to several conditions: a) the letter of credits be
subject to the joint and several signatures of ISIs corporate officers including Petitioner Singian, b) that ISI would
increase its paid up capital and authorized capital, c) ISI shall submit other collaterals in case the appraised value of the
new machineries and equipment be insufficient. In addition, ISI was given the loan accommodations in the total amount
of P29.6M. In reviewing the loan, the Committee found that the loan bore characteristics of behest loans specifically for
not having been secured by sufficient collaterals and was obtained with undue haste. Atty. Salvador filed with the
Ombudsman a complaint against the corporate officers and board of directors of PNB and ISI including Singian who was
not a member of the board of director of ISI but was a corporate officer of ISI being its Executive VP. Initial
recommendations by investigators of the OMB was for the dismissal of the charges, however, the then Ombudsman
Disierto disapproved this recommendations and found probable cause and initiated the filing of charges against the
respondents with the Sandiganbayan. Respondents and petitioner Singian filed a motion for re-determination of existence
of probable cause which was denied by the Sandiganbayan. Hence, this petition for certiorari.
Issue:
1. W/N the Ombudsman and the Sandiganbayan acted with grave abuse of discretion when they denied the motion
of the petitioner Singian for re-determination of the existence of probable cause.
Held/Ratio:
1. NO. In the absence of grave abuse of discretion, the SC would not interfere with the discretion of the Ombudsman
and the Sandiganbayan. In the case at bar, Singian was made liable for participation in the loan transaction based
on his signature affixed in the undertaking. Singian argues that he cannot be made liable for ISIs failure to put up
additional capitalization and collateral because it was the responsibility of the board to comply and as only an
Executive Vice President he has no legal power to compel them to do so. The SC held that while the power to
increase capitalization and to offer collateral to secure indebtness is with thr board of directors, this does not mean
that officers of the corporation other than the board of directors cannot be made criminally liable for their criminal
acts if it can be proven that they participated therein. There is evidence that Singian participated in the loan
transaction when he signed the undertaking. They cited with approval the findings of the Sandiganbayan which
found that even if Singian is not a stockholder or a board of director of ISI but when he acted as a Executive VP
he executed jointly with the officers and board of directors the undertaking in connection with the loan application
to which the loan is unpaid to date.

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96 - Tramat Mercantile v. CA (1994) (tractor and land mower)

Facts:
Melchor dela Cuesta doing business under the name of Farmers Machineries sold a tractor to Tramat
Corporation. In payment, David Ng, the president and manager of Tramat, gave a check worth P33,500.
Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to NAWASA for P67,000.
David Ong caused a stop payment of the check when NAWASA refused to pay after finding out that, aside
from some defects of the lawn mower, the engine sold by de la Cuesta was a reconditioned unit.
Dela Cuesta filed an action for the recovery of P33,500, as well as attorneys fees of P10,000, and the costs of suit
against Tramat and Ong to pay it solidarily. Ong contended that de la Cuesta had no cause of action; that the questioned
transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the
payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit.
RTC granted this. The CA affirmedthe decision. Hence, this petition
Issues:
1. W/N Ong should be held solidarily liable with Tramat
Held/Ratio:
1. NO. The SC agreed that Tramat is liable but as to David Ong, he must not be held liable in his personal capacity.
Ong acted as an officer of Tramat- a corporation with a separate and distinct personality. As such, it should only
be the corporation, not the person acting for and on its behalf, that should be liable. But, a corporate director,
trustee or officer may be held personally liable if:
a. He assents to a patently unlawful act of the corporation, or for bad faith, or gross negligence in directing its
affairs, or for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
b. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
c. He agrees to hold himself personally and solidarily liable with the corporation; or
d. He is made, by a specific provision of law, to personally answer for his corporate action.
In this case, there is no circumstance mentioned above that Ong can be held liable for.

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STOCKHOLDERS AND MEMBERS

97 - Garcia v. Lim Chu Sing (1934) shareholders not corporate creditors
Doctrine:
A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and,
therefore, it is not a credit.
Stockholders, as such, are not creditors of the corporation. The capital stock of a corporation is a trust fund to be
used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of
its capital stock
Facts:
Lim Cuan Sy delivered to Mercantile Bank of China a promissory note guaranteed by Lim Chu Sing as surety and
also secured by a chattel mortgage. It also has a stipulation that in case of default, the whole amount will become due and
demandable Lim Cuan Sy failed to comply with his obligation and so the bank required Lim Chu Sing as surety to deliver
the promissory note (P19, 605.17) with interest at 6% p.a.
Lim Chu Sing had been paying the monthly installments with interest thereon, leaving a balance of P9,105.17,
after which he defaulted in the payment of the installments which made the promissory note due and demandable. The
Mercantile Bank of China then foreclosed the chattel mortgage and privately sold the property without the knowledge of
Lim Chu Sing. Lim Chu Sing is also the owner of shares of stock at the Mercantile Bank amounting to P10,000.
Mercantile Bank seeks to apply the amount of P10,000 representing the value of his shares of stock to defendants
indebtedness of P9,105.17.
Issue:
1. W/N it is proper to compensate the indebtedness with the value of the shares of stock
Held/Ratio:
1. No. The defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the
latter is a creditor of the former, there is no sufficient ground to justify a compensation. The shares of a banking
corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the latter is not
a creditor of the former for such shares. he iTndebtedness of a shareholder to a banking corporation cannot be
compensated with the amount of his shares therein, there being no relation of creditor and debtor with respect to
such shares.

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98 - Alfonso Tan v. SEC (1992) (may, stock certificate no. 2)
Doctrines:
Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement,
coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner/s or transferors creditor may have under the
law. (De los Santos v. McGrath, 96 Phil. 577)
Facts:
Private respondent Visayan Educational Supply Corp. (Visayan) was registered on October 1, 1979. Petitioner
Alfonso Tan (Alfonso) held 400 shares as incorporator, and was elected as President of Visayan until 1982, and was a
director until 1983.
On January 31, 1981, two incorporators, namely Young and Ong, assigned their shares to Visayan and withdrew
from the company. To satisfy the 5-member minimum requirement of the Board of Directors, petitioner Alfonso sold 50
of his shares to his brother Angel. With the sale, Petitioner Alfonsos stock certificate no. 2 was cancelled, and stock
certificates no. 6 (Angels 50 shares) and no. 8 (remaining 350 shares) were signed and issued by Angel as the new
director and VP of Visayan, upon orders of the president, Alfonso. Allegedly, Alfonso was required to endorse stock
certificate no. 2 but he failed to give it back and decided to keep it.
On January 29, 1983, private respondent Tan Su Ching was elected as president, while Alfonso became the VP.
Alfonso did not sign the minutes acknowledging the elections. Alfonso then withdrew from the corporation on the
condition that he be paid stock-in-trade corresponding to 33.3% par value of P35,000. The board of Visayan voted and
cancelled stock certificates no. 2 and no. 8.
Three (3) years later, Alfonso brought a case to the SEC Cebu questioning, for the first time, the cancellation of
stock certificates no. 2 and no. 8. He contends the cancellation on the ground that there was never any endorsement from
Alfonso and that he never delivered his stock certificates, rendering the transfer ineffective. SEC Cebu held that the
cancellations made were null and void, but was overturned by the SEC en banc on appeal by Visayan.
Issue:
1. Whether Alfonsos argument that the wording of Sec. 63 of the Corporation Code requires delivery as a mode of
transfer is correct.
2. Whether the transfer was valid despite absence of endorsement and delivery.
Held/Ratio:
1. NO. Sec. 63 provides that xxx Shares of stocks so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner. The Court held that the use of the word may is
merely permissive rather than mandatory. The word may indicates that the transfer may be effected in a manner
different from that provided for in the law.
It was also safe to assume that there was valid delivery when stock certificates no. 6 and no. 8 were issued from
the split of stock certificate no. 2.
2. YES. There is no doubt that there was delivery of Stock Certificate No. 2 made by the petitioner to the
Corporation before its replacement with the Stock Certificate no. 6 no. 8. The problem arose when petitioner was
given back stock certificate no. 2 for him to endorse and instead he deliberately withheld it. The transfer was
recognized when Angel, became a director and the Vice President of the company by reason of his fifty (50)
shares from Alfonso.
The certificate is not stock in the corporation but is merely evidence of the holders interest and status in
the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such
ownership.

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99 - De Los Santos v. Republic (1955)
(Disclaimer: Sorry for the length. I suggest reading the original case for clarity.)
Doctrine:
It is well settled that a stock certificate is non-negotiable, because the holder thereof takes it without prejudice to
such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by the principles governing estoppel.
Section 35 of the Corporation Law reads that A share of stock may be transferred by endorsement of the
corresponding stock certificate, coupled with its delivery. However, the transfer shall not be valid, except as
between the parties, until it is entered and noted upon the books of the corporation. No such entry in the name
of the plaintiffs having been made, it follows that the transfer allegedly effected by alleged seller in their favor is
not valid, except as between themselves. It does not bind either Madrigal or the Mitsuis, who are not parties to
said alleged transaction.
Facts:
This involves the title to 1,600,000 shares of stock of the Lepanto Consolidated Mining Co., Inc. (Lepanto), a
corporation duly organized and existing under the laws of the Philippines. Originally, one-half of said shares of stock
were claimed by Apolinario de los Santos, and the other half, by Isabelo Astraquillo. During the pendency of this case,
Astraquillo has allegedly conveyed and assigned his interest in his shares to de los Santos. The shares in question are
covered by several stock certificates issued in favor of Vicente Madrigal, who is registered in the books of Lepanto
as owner of said stocks and whose indorsement in blank appears on the back of said certificates
De los Santos contends that he bought 55,000 shares from Juan Campos and 1,200,000 shares from Carl Hess. By
virtue of vesting P-12, title to the 1,600,000 shares of stock in dispute was vested in the Alien Property Custodian of the
U. S. (Property Custodian) as Japanese property. In due course, they decreed that title to the shares in question shall
remain in the name of the Philippine Alien Property Administrator.
The US Attorney General contends that prior to the outbreak of the war in the Pacific, said shares of stock were
bought by Vicente Madrigal, in trust for, and for the benefit of, the Mitsui Bussan Kaisha (Mitsuis), a corporation
organized in accordance with the laws of Japan, with branch office in the Philippines. They further contend that Madrigal
delivered the corresponding stock certificates to the Mitsuis, which kept them in its office in Manila, until the liberation of
the city by the American forces early in 1945. They add that the Mitsuis had never sold, or otherwise disposed of the
shares and that these must have been looted during the liberation.
Pursuant to the Philippine Property Act, all property vested in the United States, or any of its officials, under the
Trading with the Enemy Act, located in the Philippines at the time of such vesting, or the proceeds thereof, shall be
transferred to the Republic of the Philippines.
The CFI of Manila judged in favor of the plaintiffs. Government moved to appeal the decision, introducing the
testimony of Madrigal, Matsune Kitajima and Kingy Miwa (office manager of Mitsui and his successor), Miguel Simon
(brother of Carl Hess), E. A. Perkins (a lawyer with the law firm DeWitt, Perkins & Ponce Enrile) and Victor E. Lednicky
(the same Lednicky in Tax J).
Madrigal stated that he purchased the shares of stock in question for the Mitsuis and held them with the
understanding that he would transfer to the Mitsuis upon demand; and that, shortly before the outbreak of war, he
delivered said stock certificates to the Mitsuis. Kitajima declared that he received the stock certificates and that all these
certificates were in kept in a steel safe in the Manila branch office. He had the stock certificates in his possession
continuously until he delivered the same to Miwa, who also kept them in his possession until he had his assistant transfer
all important documents to their residence and headquarters, at Taft Avenue, Manila. However, he did not know
personally whether or not the transfer was actually carried out. Simon testified that at that time De Los Santos had bought
the shares from Hess, the latter did not have in possession any certificates of stock, for being American, he was under
Japanese surveillance and cannot make any stock transactions. Perkins testified that a certain Leonardo Recio showed
Lepanto shares to Clyde DeWitt. Upon checking with the Property Custodian, Perkins advised Recio that the share was

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one of the stock certificates looted from the Mitsuis and that DeWitt would have to report the matter to said official. Recio
left the room, leaving the share. Lednicky asserted that he saw many documents scattered on the desks and floor of the
abandoned Mitsui office building. Among said papers, he noticed two stock certificates of the Lepanto, one, in the name
of either a Japanese or Chinese, and the other, in the name of Vicente Madrigal. But he wasnt able to examine them as he
heard noises.
Issue:
1. W/N plaintiffs had purchased the shares of stock.
Held/Ratio:
1. NO. The CFI overlooked the fact that the burden of proof is upon the plaintiffs, and that a decision in their favor
is not in order unless a preponderance of the evidence supports their claim. Alleged improbabilities in the
testimony of the witnesses for the defense will not justify a judgment against the latter, if the evidence for
the plaintiffs is more improbable than, or, at least, as improbable as, that of the defense.
It appears that the only evidence on the alleged sale of the shares of stock in question is the testimony of de los
Santos. Campos and Hess, the alleged vendors, could not take the witness stand because both are already dead. It
cannot be denied that the demise of Campos and Hess before the filing of plaintiffs claim seriously impairs the
weight. Also, Recio, allegedly acting on behalf of Astraquillo, left a share of stock with DeWitts law firm and
received a receipt. This receipt, if produced, would have surely afforded us tangible proof of the veracity of, at
least this part of plaintiffs story. Yet, one day Recios house accidentally caught fire and the receipt was lost.
Arent there too many accidents in plaintiffs version?
As an enterprise controlled by Americans, Lepanto had been seized by the Japanese who, accordingly,
were operating it. The conditions were such as to warrant the general belief that Lepanto would remain under the
authority and management of the Japanese for an indefinite period of time. As such, the Lepanto stock had not
merely a doubtful value, but as admitted by de los Santos even, no market value at all. The
stockholders could neither collect dividends nor exercise their voting power, or otherwise participate in the
operation of the enterprise. Moreover, there was a possibility of its assets being fully confiscated, for all practical
purposes, should Japan emerge victorious in the wars in the Pacific. The parties had even stipulated that such
transfers and dealings in said stock were prohibited by the Japanese during the occupation and hence were
dangerous..
The record shows that Madrigal had never disposed of said shares of stock in any manner, except by turning over
the corresponding stock certificates to the Mitsuis, the beneficial and true owners. Neither has Mitsui sold,
conveyed, or alienated said shares of stock, nor delivered the stock certificates, to anybody during said period.
At any rate, at the time of the alleged sales, plaintiffs were aware of sufficient facts to put them on notice of
the need of inquiring into the regularity of the transactions and the title of the supposed vendors. Indeed,
the certificates of stock in question were in the name of Madrigal. Obviously, Campos and Hess were not
registered owners of the corresponding shares of stock. Being presumed to know the law and, as experienced
traders in shares of stock, plaintiffs must have, accordingly, been conscious of the consequent infirmities in the
title of the supposed vendors, or of the handicaps. Moreover, the aforementioned sales were admittedly hostile to
the Japanese, who had prohibited it and plaintiffs had actual knowledge of these facts and of the risks attendant to
the alleged transaction. In other words, plaintiffs advisedly assumed those risks and, hence, they cannot validly
claim, against the registered stockholder, the status of purchasers in good faith.
J. Bengzon (dissenting):
During the Japanese occupation, the plaintiffs secretly purchased shares of an American corporation, whose assets
had been seized by the enemy invader. Risking Japanese wrath, they staked their funds (perhaps their freedom or
lives) on the eventual return of the American forces. After two years, these came back in victorious liberation; but
oddly enough plaintiffs lose their money and the shares.

ALS2014B 143 of 199
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The Mitsui Company stands to benefit from a declaration that these shares still belong to it. True, they will be
confiscated now. But, they are nevertheless Japanese assets which may ultimately have to be credited to the said
corporation.
Parenthetically, the defendants and this decision doubt the plaintiffs purchase partly because Campos and
Hess were dead. During the Japanese occupation and the battle of liberation, death was no unusual occurrence in
the city.
A purchaser for value is not bound to show affirmatively that the certificates were delivered by a former owner to
his own grantor. Such a contention is quite fallacious because neither the law nor the established custom of the
trade requires a purchaser in good faith to trace back all its predecessors in interest. That would be requiring the
purchaser to prove an utter impossibility, because as shown by the cases cited and also in the actual practice of
trade, a certificate endorsed in blank may travel through different hands which may number 10, 20, 50 or 100.
Even on grounds of equity, plaintiffs should win. Who caused these shares to be endorsed in blank? Who kept
them thus even knowing the dangers of loss or confusion? Who allowed its officers to have access to those
shares? Who appointed those officers? Incidentally, these shares, are now worth much more than the amount
invested by plaintiffs. In contracts involving speculation, the resultant profit to the purchaser, however sizable,
can never of itself serve to becloud the genuineness of the transaction.

ALS2014B 144 of 199
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100 - Ponce v. Alsons Cement (2002)
Doctrine:
A certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock
is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence
of the holders interest and status in the corporation, his ownership of the share represented thereby. The
certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the
relation of shareholder to the corporation.
Facts:
The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to
and fully paid 239,500 shares of VCC. Gaid and Ponce executed a Deed of Undertaking and Indorsement
whereby Gaid acknowledges that Ponce is now the owner of said shares and he was assigning/endorsing the same
to Ponce. VCC was then renamed Floro Cement Corporation (FCC) and then to Alsons Cement Corporation (ACC).
From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed
and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or Ponce. Despite repeated demands, ACC
refused to issue to Ponce the certificates of stocks corresponding to the 239,500 shares of Gaid. Ponce filed a
complaint for mandamus to compel the corporate secretary to issue certificates of stock in Ponces name by virtue
of the indorsement executed by Gaid in his favor.
Issues:
1. W/N Ponce can compel ACC to issue certificates of stock in his name.
Held/Ratio:
1. NO. Ponce cannot compel the corporation to issue in his name Gaids shares of stock for two reasons: there
is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or
authority from the transferor (Gaid) for such assignment or transfer. Indeed, nothing is alleged in the complaint on
these two points. Moreover, there is not even any indorsement of any stock certificate to speak of, because no
stock certificate has ever been issued, even in Gaids name. What Ponce possesses is a document by which Gaid
supposedly transferred the shares to him. Assuming the document has this effect, nevertheless there is neither
any allegation nor any showing that it is recorded in the books of the defendant corporation, such
recording being a prerequisite to the issuance of a stock certificate in favor of the transferee. Section 63 of
the Corporation Code states that No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of shares transferred. Pursuant to
the foregoing provision, a transfer of shares of stock not recorded in the stock and transfer book of the corporation
is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer
book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the
consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize
arises.
Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent
ALSONS, Ponce has no cause of action and there appears no basis for a clear and indisputable duty or
clear legal obligation that can be imposed upon the respondent corporate secretary, so as to justify the
issuance of the writ of mandamus to compel him to perform the transfer of the shares to Ponce.

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101 - Makati Sports Club, Inc.9 v. Cheng (2010) (treasurer accused fraud in selling shares)
Doctrines:
A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests
therein. The certificate is not a stock in the corporation but is merely evidence of the holders interest and status in
the corporation, his ownership of the share represented thereby. It is not in law the equivalent of such ownership.
It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a
share of stock or the nature of the relation of shareholder to the corporation.
Facts:
On October of 1994, Makati Sports Club, Inc. (MSCI) Board of Directors adopted a resolution authorizing
the sale of 19 unissued shares at a floor price of P400,000 and P450,000 per share for Class A and Class B shares,
respectively. Michelle Cheng was a treasurer and director of MSCI. In June of 1995, Joseph Hodreal (Hodreal) with wife
Lolita expressed in a letter his interest to buy a share and requested therein that he be included in the waiting list. In
November of 1995, Mc Foods expressed interest in buying a share of MSCI, and one was acquired with the payment by
Mc Foods of P 1,800,000 through Urban Bank. On December 15, 1995, the Deed of Absolute Sale was executed by
MSCI. On December 27, 1995, Mc Foods sent a letter to MSCI giving advice of its offer to resell the share. Mc Foods
Stock Certificate No. A 2243 was issued to Mc Foods on January 5, 1996.
It appears that while the sale between the MSCI and Mc Foods was still under negotiations, there were
negotiations between Mc Foods and Hodreal for the purchase by the latter of a share of the MSCI. On November
24, 1995, Hodreal paid Mc Foods P1,400,000. Another payment of P1,400,000 was made by Hodreal to Mc Foods on
December 27, 1995, to complete the purchase price of P2,800,000. On February 7, 1996, MSCI was advised of the sale by
Mc Foods to Hodreal of the share evidenced by Certificate No. 2243 for P2.8 Million. Upon request, a new certificate was
issued. In 1997, an investigation was conducted and the committee held that there is prima facie evidence to show
that defendant Cheng profited from the transaction because of her knowledge.
Evidence of fraud presented by MSCI, among others, are [a] letter of Hodreal where he expressed interest in
buying one share from MSCI with the request that he be included in the waiting list of buyers; [b] declaration of Lolita
Hodreal in her Affidavit that in October 1995, she talked to Cheng who assured her that there was one available Class A
share at the price of P2,800,000. The purchase to be validated by paying 50% immediately and the balance after thirty
days; [c] Head of the Membership Section of MSCI, Punzalan, declared that she informed Cheng of the intention of
Hodreal to purchase one share and that Cheng asked if there was a quoted price and for Hodreals telephone number,
which the Punzalan gave to Cheng; and [d] Cheng claimed Certificate A-2243 on behalf of Mc Foods, per letter of
authority dated January 26, 1996, executed by Mc Foods through its President Ramon Sabarre in favor of Cheng.
MSCI asserts that Mc Foods never intended to become a legitimate holder of its purchased Class A share but
did so only for the purpose of realizing a profit in the amount of P1,000,000 at the expense of the former. MSCI further
claims that Cheng confabulated [this means talked] with Mc Foods by providing it with an insiders information as to
the status of the shares of stock of MSCI and even, allegedly with unusual interest, facilitated the transfer of ownership of
the subject share of stock from Mc Foods to Hodreal, instead of an original, unissued share of stock.

9. Source: http://www.makatisportsclub.com/ is an urban oasis and valuable lifestyle investment. The Makati Sports Club is a premier sports club
which offers diverse facilities for business and leisure right in the heart of the Makati business district. With its strategic location, it provides an
accessible and convenient place for rest and recreation needs of city residents and businessmen. The Makati Sports Club is the first proprietary
stock, non-profit, sports and social Club in the Philippines. It was conceived, organized and developed by the Ayala Investment and
Development Corporation (AIDC) the investment house of the Ayala Group of Companies in 1975-1976 under the presidency of Mr. Jovencio
F. Cinco. The Makati Sports Club was incorporated on June 6, 1975 as stated in the original Articles of Incorporation.
AIDC decided to establish and organize the Makati Sports Club when it failed to win the award for the development of the Elks Club (now
Metropolitan Club) into a proprietary sports and social Club. On the very day in 1975 that AIDC failed to win the award for the development of
Elks Club, Mr. Jovencio Cinco, then President of AIDC, wrote a short memo to Mr. Enrique Zobel, then President and Chief Executive Officer
of Ayala Group of Companies, recommending the establishment of a sports and social Club on a 1.3 hectare lot in Salcedo Village, Makati. In
less than an hour, the memo with the approval of Mr. Zobel was back on the desk of Mr. Jovencio Cinco. Thus, the Makati Sports Club was
born.

ALS2014B 146 of 199
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Issues:
1. W/N Cheng, MC Foods, and Ramon Sabarre should pay the sum of P 1,000,000 representing the amount
allegedly defrauded, together with interest and damages, to MSCI.
Held/Ratio:
1. NO. MSCI, having the burden on proof, failed to prove with clear and convincing evidence the existence of
fraud. The mere fact that she performed acts upon authority of Mc Foods, i.e., receiving the payments of Hodreal
in her office and claiming the stock certificate on behalf of Mc Foods, do not by themselves, individually or taken
together, show badges of fraud, since Mc Foods did acts well within its rights and there is no proof that Cheng
personally profited from the assailed transaction.
First, as a procedural infirmity, the issue is a question of facts, as it is a question on the probative value of the
evidence presented. Section 1 of Rule 45 provides that a petition for review on certiorari shall raise only
questions of law. Furthermore, it does not fall under the exemptions under Rule 45.
Second, although established by Punzalans affidavit that she informed Cheng about Hodreals desire to purchase
a Class A share and that Cheng asked for Hodreals contact number, it is not clear when Punzalan relayed the
information to Cheng or if Cheng indeed initiated contact with Hodreal to peddle Mc Foods purchased share.
[Yun lang talaga sabi ng case.]
Third, charged with ascertaining the compliance of all the requirements for the purchase of MSCIs shares of
stock under Section 29 of MSCIs amended by-laws, the Membership Committee failed to question the alleged
irregularities attending Mc Foods purchase of one Class A share at P1,800,000. If there was really any
irregularity in the transaction, this inaction of the Management Committee belies MSCIs cry of foul play on Mc
Foods purchase of the subject share of stock.
Fourth, considering that Mc Foods tendered its payment of P1,800,000 to MSCI on November 28, 1995, even
assuming arguendo that it was driven solely by the intent to speculate on the price of the share of stock, it
had all the right to negotiate and transact, at least on the anticipated and expected ownership of the share,
with Hodreal. In other words, there is nothing wrong with the fact that the first installment paid by Hodreal
preceded the payment of Mc Foods for the same share of stock to MSCI because eventually Mc Foods
became the owner of a Class A share covered by Certificate A 2243.
Fifth, MSCIs stance that Mc Foods violated Section 30(e) of MSCIs Amended By-Laws on its pre-emptive
rights, which provides that ...the club shall have thirty days from receipt of written offer to purchase such share if
the club has unrestricted revenue and with approval of 2/3 vote of the Board , is untenable. When Mc Foods
offered for sale one Class A share of stock to MSCI for the price of P 2,800,000 for the latter to exercise its pre-
emptive right, MSCI failed to repurchase Mc Foods Class A share within the thirtyday pre-emptive period.
Therefore Mc Foods complied with the requirement. Neither can MSCI argue that Mc Foods was not yet a
registered owner of the share of stock when the latter offered it for resale, in order to void the transfer
from Mc Foods to Hodreal. The corporations obligation to register is ministerial upon the buyers
acquisition of ownership of the share of stock. The corporation, either by its board, its by-laws, or the act of
its officers, cannot create restrictions in stock transfers. [See doctrine.]
MSCIs petition is denied.

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102 - Bachrach Motors v. Lacson Ledesma (1937)
Doctrine:
Certificates of stock or of stock dividends, under the corporation law, are quasi-negotiable instruments in the
sense that they may be given in pledge or mortgage to secure an obligation.
Facts:
Bacharach Motors and PNB are both creditors of Lacson Ledesma. Lacson has 6,300 stocks of TalisaySilay
Milling in his name. As security for his debts with PNB, Bachrach mortgaged various real properties and pledged the
certificate of stocks of the said shares. The certificate was delivered to PNB but was not duly notarized. Alternatively,
Bachrach Motors filed a civil case against Lacson and subsequently obtained a favourable judgment. Thus, a writ of
execution was issued against the properties of Lacson including the said stocks. (Note: the stock dividends were pledged
to the Bank more than 5 months prior to the attachment)
Bachrach now claims that his right over the Talisay-Silang certificate of stocks should be preferred as against
PNBs right because the pledge could not legally exist. Bachrach argues that because the certificate is not the actual
shares themselves, it is understood that a certificate of stocks or of stock dividends cannot be the subject matter of the
contract of pledge.
Issues:
1. W/N the certificate of stocks or of stock dividends may be pledged
2. W/N the pledge of certificate of stocks even when not embodied in a public instrument may bind 3rd parties
Held/Ratio:
1. Yes. Certificates of stock or of stock dividends, under the corporation law, are quasi negotiable instruments in
the sense that they may be given in pledge or mortgage to secure an obligation. Modern commercial practice has
been towards the trend of placing them near the plane of commercial paper. They may pass from hand to hand and
whenever accompanied by duly executed Deeds of Assignment and powers of attorney (w/c may be in blank),
they confer good title.
2. Yes. Section 4 of the Chattel mortgage Law implicitly modified Article 1865 of the civil code in the sense that a
contract of pledge and that of chattel mortgage to be effective as against third persons, need not appear in a
public instrument. Provided, that the thing pledged or mortgaged be delivered or placed in the possession of the
creditor.

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103 - Razon v. IAC (1992)
Doctrines:
For an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be
followed. As provided under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Corporation Code
of the Philippines, shares of stock may be transferred by delivery to the transferee of the certificate properly
indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock. However,
no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the
corporation.
Facts:
E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose of participating in the bidding
for the arrastre services in South Harbor, Manila. The business, however, did not start operations until 1966. According to
Razon, some of the incorporators withdrew from the said corporation.
Razon then distributed the stocks previously placed in the names of the withdrawing nominal incorporators to
some friends, among them is the deceased Juan T. Chuidian to whom he gave 1,500 shares of stock. The shares of stock
were registered in the name of Chuidian only as nominal stockholder and with the agreement that the said shares of stock
were owned and held by the petitioner but Chuidian was given the option to buy the same.
In view of this arrangement, Chuidian delivered to the petitioner the stock certificate covering the 1,500 shares of
stock of E. Razon, Inc. Since then, the petitioner had in his possession the certification of stock until the time he delivered
it for deposit with the Philippine Bank of Commerce under parties joint custody pursuant to their agreement embodied in
the trial courts order.
Issues:
1. W/N Razons oral testimony as regards the true nature of the agreement sufficient to prove his ownership over the
said 1,500 shares of stock
Held/Ratio:
1. NO. The agreement was not sufficient to prove his ownership over the shares of stock.
According to Embassy Farms, Inc. v. Court of Appeals: For an effective, transfer of shares of stock the mode and
manner of transfer as prescribed by law must be followed. As provided under Section 3 of Batas Pambansa
Bilang, 68 otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by
delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery
of the duly indorsed certificate of stock. However, no transfer shall be valid, except as between the parties until
the transfer is properly recorded in the books of the corporation.
There is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan
Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was
elected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the
corporation. From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of
stock.
Razon who claims ownership over the questioned shares of stock must show that the same were transferred to him
by proving that all the requirements for the effective transfer of shares of stock in accordance with the
corporations by laws, if any, were followed.
The petitioner did not present any by-laws which could show that the 1,500 shares of stock were effectively
transferred to him. In the absence of the corporations by-laws or rules governing effective transfer of shares of
stock, the provisions of the Corporation Law are made applicable to the instant case.

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104 - Nora Bitong v. CA (1998)
Doctrines:
Quasi-negotiable character of the Certificate of Stock
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other
person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the
same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the
operative act of transfer of shares from the lawful owner to the new transferee. But to be valid against 3rd parties,
the transfer must be recorded in the books of the corporation.
For a valid transfer of stocks, the requirements are as follows:
o There must be delivery of the stock certificate
o Certificate must be endorsed by the owner or his attorney-in-fact or other legally authorized to make the
transfer
o To be valid against 3rd persons, the transfer must be recorded in the books of the corporation.
Facts:
The 2 cases originated from a derivative suit filed by petitioner-Bitong before the SEC. Petitioner complained of
irregularities committed by Eugenia Apostol, President and Chairperson of the Board of Directors of Mr & Ms. Publishing
Co, Inc. (Mr & Ms Co.) She claims that Eugenia and her husband Jose were liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr & Ms Co. to the damage and
prejudice of the corporation, its stockholders, including petitioner.
Among the acts complained of by the petitioner are the alleged cash advances of Mr & Ms Co. to Philippine Daily
Inquirer (were the spouses Apostol were stockholders, directors and officers) without any interest. Petitioner also raised
the purchase of PDI shares of stock through Mr & Ms Cos money by Eugenia, Leticia Magsanoc & Adoracion Nudya
(also respondents in the case) originally treated as receivable from officers and employees, but were allegedly never paid.
Private respondents refuted the allegations of the petitioner by recounting the beginnings of the Mr & Ms Co.
When a prior venture (Ex Libris Publishing Co, Inc.) failed, JAKA Investment Corporation (owned by Senator Enrile and
Cristina Enrile) and the Apostols, together with new investors restructured the failed corporation by organizing a new
corporation known as Mr & Ms. Co. It was then agreed that being close friends, the corporation would be operated as a
partnership or a close corporation, with Eugenia Apostol managing the its affairs. Further, no shares of stock would be
sold to 3rd parties without first offering the shares to the other stockholders so that transfer would be limited to and only
among the original stockholders.
Among the defenses raised by private respondents was petitioners lack of personality to initiate and prosecute the
derivative suit. They averred that petitioner was not the true party of the case, the real party being JAKA, which continued
to be the true stockholder of Mr & Ms Co. Petitioner-Bitong, being merely a holder-in-trust of the JAKA shares, only
represented and continued to represent JAKA in the board.
The SEC Hearing Panel, after the trial on merits dismissed the derivative suit. The panel concluded that no serious
mismanagement of the corporation would warrant drastic corrective measures and that based on evidence presented, the
real-party-in-interest was indeed JAKA and/or Senator Enrile but petitioner was allowed to prosecute the suit only to
resolve the real issue (mismanagement of Apostol).
The SEC En Banc reversed the Hearing Panels decision. The respondents then filed a petition for review (private
respondents) and petition for certiorari and prohibition (filed by Espiritu, to whom the PDI shares of Mr & Ms Co were
sold) before the CA, which were then consolidated. The CA reversed the SEC En Bancs decision and held that the from
the evidence on record, petitioner was not the owner of any share of stock in Mr & Ms Co and therefore not a real-party-
in-interest to prosecute the complaint she had instituted against private respondents. For not being the real party-in-
interest, petitioners complaint did not state a cause of action, a defense which was never waived; hence, her
petition should have been dismissed.

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Issues:
1. W/N private respondents admission that petitioner has 1,000 shares of stock registered in her name in the books
of Mr & Ms Co forecloses any question on her status and right to bring a derivative suit on behalf of Mr & Ms
Co.
2. W/N private respondents failure to appeal the December 6 (1990) Order and August 3 (1993) Decision of the
SEC Hearing Panel declaring that petitioner was a real-party-in-interest and had legal personality to sue has
estopped them.
3. MOST IMPORTANT - W/N petitioner was a stockholder, therefore giving her personality to prosecute a
derivative suit against private respondents.
Held/Ratio:
1. NOT NECESSARILY. The answer of private respondents shows that there was no judicial admission that
petitioner was a stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of the corporation.
Furthermore, the affirmative defenses they raised directly refute the representation of petitioner. When taken in
their totality, the pleadings filed by private respondents clearly raise an issue to the legal personality of
petitioner to file the complaint.
2. NOT QUITE. The Order was clearly interlocutory and cannot be considered as having finally resolved the issue
of legal capacity of petitioner. On the other hand, the Decision of the Hearing Panel categorically stated that the
evidence presented showed that the real-party-in-interest was not petitioner Bitong but JAKA and/or Senator
Enrile and that she was allowed to prosecute only in order to resolve the real issue of the case.
3. NO. The records are unclear on how petitioner allegedly acquired the shares of stock of JAKA. Petitioner being
the CEO of JAKA and the sole person in charge of all the business and financial transactions and affairs of JAKA
was supposed to be in the best position to show convincing evidence on the alleged transfer of shares to her, if
indeed there was a transfer.
As found by the SEC Hearing Panel, there was overwhelming evidence despite what appears on the certificate of
stock and stock and transfer book, petitioner was not a bona fide stockholder of Mr. & Ms. before March 1989 or
at the time the complained acts were committed to qualify her to institute a stockholders derivative suit against
private respondents. Aside from petitioners own admissions (Bitong admitted that Apostol (as president of the
corporation) only signed her certificate of stocks in 1989; Bitong repeatedly referred to Senator Enrile as my
principal in the 1988 board meeting) several corporate documents disclose that the true party-in-interest is not
petitioner but JAKA (alleged endorsement of JAKAs certificate in favor of petitioner, as against deed of sale
executed by JAKA transferring the share to respondent Apostol; receipt of dividends by JAKA).
For a valid transfer of stocks, the requirements are as follows:
a. There must be delivery of the stock certificate
b. Certificate must be endorsed by the owner or his attorney-in-fact or other legally authorized to make the
transfer
c. To be valid against 3rd persons, the transfer must be recorded in the books of the corporation.
At most, petitioner has satisfied the 3rd requirement. Compliance with the first 2 requisites has not been clearly
and sufficiently shown. Considering that the requirements provided under Sec. 63 of The Corporation Code
should be mandatorily complied with, the rule on presumption of regularity cannot apply. The regularity and
validity of the transfer must be proved. As it is, even the credibility of the stock and transfer book and the entries
thereon relied upon by petitioner to show compliance with the third requisite to prove that she was a stockholder
since 1983 is highly doubtful.

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105 - Rural Bank of Lipa City v. Court of Appeals (2001) (assignment, valid transfer of stocks)
Doctrine:
Even when a formal deed of assignment covering the shares was duly executed, without the endorsement and
delivery of the covering certificates of stocks, the covered shares cannot be deemed to be transferred and
registered in the names of the assignees.
Facts:
Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed of Assignment,
assigning his shares, as well as those of 8 other shareholders under his control with a total of 10, 467 shares, in
favor of the stockholders of the Bank represented by its directors Bernardo Bautista, Jaime Custodio and Octavio
Katigbak. Sometime thereafter, Villanueva and his wife, Avelina, (Private respondents) executed an agreement
acknowledging their indebtedness to the Bank (P4M), and stipulated that said debt will be paid out of the proceeds of the
sale of their real property described in the agreement.
At a meeting of the Board of Directors of the Bank on November 15, 1993, the spouses assured the Board that
they would pay their debt on or before December 31 of that same year; otherwise, the Bank would be entitled to liquidate
their shareholdings, including those under their control. The spouses failed to settle their obligation and ignored the
Banks demands, whereupon their shares of stock were converted into Treasury Stocks.
On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers for the year.
The Villanuevas were not notified. In a letter, Atty. Amado Ignacio, counsel for the spouses, questioned the legality of
the meeting and the validity of all the proceedings therein. In reply, the new set of officers informed Atty. Ignacio that
the Villanuevas were no longer entitled to notice of the said meeting since they had relinquished their rights as
stockholders in favor of the Bank.
The spouses filed with the SEC a petition for annulment of the stockholders meeting and election of directors and
officers, with damages and prayer for preliminary injunction. Respondents were the newly-elected officers and directors
of the Bank namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak and Juanita Bautista (Petitioners herein).
On April 6, 1994, the SEC Hearing Officer denied the spouses application for the issuance of a writ of
preliminary injunction on the ground of lack of sufficient basis for the issuance thereof. However, a motion for
reconsideration was granted upon finding that since the Villanuevas have not disposed of their shares, whether voluntarily
or involuntarily, they were still stockholders entitled to notice of the annual stockholders meeting was sustained by SEC.
Accordingly, a writ of preliminary injunction was issued enjoining Bautista, et. al from acting as directors and officers of
the bank. The latter filed an urgent motion to quash the writ of preliminary injunction, challenging the propriety of the
said writ considering that they have not received a copy of the order granting the application for the writ of preliminary
injunction.
With the impending 1995 annual stockholders meeting only 9 days away, the Villanuevas filed an Omnibus
Motion praying that the said meeting and election of officers scheduled on January 14, 1995 be suspended or held in
abeyance, and that that 1993 Board of Directors be allowed, in the meantime to act as such. A day before the scheduled
meeting, the SEC Hearing Officer granted the Omnibus Motion by issuing a temporary restraining order preventing
Petitioners from holding the stockholders meeting and electing the board of directors and officers of the Bank.
A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and officers
before the SEC en banc. On June 7, 1995, the latter denied the petition for certiorari. A subsequent motion for
reconsideration was likewise denied by the SEC en banc in a resolution dated September 29, 1995. A petition for review
was filed before the Court of Appeals, assailing the Order dated June 7, 1995 and the Resolution dated September 29,
1995 of the SEC en banc in SEC EB No. 440. The appellate court held the ruling of the SEC. Bautista, et. als motion for
reconsideration was likewise denied by the Court of Appeals in an order dated March 29, 1996. Hence, the instant petition
for review on certiorari.
Issue:
1. W/N there was a valid transfer of the shares to the Bank.

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Held/Ratio:
1. NO. Petitioners argue that by virtue of the Deed of Assignment, the spouses had relinquished to them any and all
rights they may have had as stockholders of the Bank. While it may be true that there was an assignment of the
spouses shares to the petitioners, said assignment was not sufficient to effect the transfer of shares since there
was no endorsement of the certificates of stock by the owners, their attorneys-in-fact or any other person legally
authorized to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled with
delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock certificated duly
endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee.
Thus, title may be vested in the transferee only by delivery of the duly indorsed certificate of stock.
For a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law.
The requirements are: (a) There must be delivery of the stock certificate; (b) The certificate must be
endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and
(c) To be valid against third parties, the transfer must be recorded in the books of the corporation. As it is,
compliance with any of these requisites has not been clearly and sufficiently shown.
Still, while the assignment may be valid and binding on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the status
of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares
are concerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders,
until and unless the issue of ownership and transfer of the shares in question is resolved with finality.

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106 - Baltazar v. Lingayen Gulf Electric Power Co., Ungson et. al. (1965)
Doctrine:
A corporation may, apply payment by them to the full par value of shares of capital leaving its collection later of
the accrued interest on unpaid subscriptions, and that once such option has been exercised and the corresponding
stock certificates have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the
capital stock certificates so issued.
Note: this ruling was before the Corporation Code. please see of the corporation code Sec. 64. - No certificate of stock
shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid. But according to the CLV the principles in the case is still good, despite
what SEC says. see pages 563 - 564.
Facts:
This was a consolidation of three cases.
Plaintiffs Baltazar and Rose (Batazar Group) were incorporators of Lingayen Gulf Electric Power Co, subscribed
to 600 and 400 shares of the capital stock, respectively. Of the 600 shares of capital stock subscribed by Baltazar, he had
fully paid 535 shares of stock, and the Corporation issued to him several certificates of stock, corresponding to the 535
shares. Of the 400 shares of stock subscribed by Rose, he had 375 shares of fully paid stock, duly covered by certificates
of stock issued to him.
The respondents Ungson, Estrada, Fernandez and Yuson ( Ungson Group) were stockholders of the Corporation,
all holding a total number of fully paid-up shares of stock, of less than100 shares. and the defendant Acena (part of the
Ungson Group), was an incorporator and stockholder, holding 600 shares of stock. Ungson, Estrada, Fernandez and
Yuzon, where Directors of the Corporation.
The Ungson group, passed three (3) resolutions which essentially says that:
a. all watered stocks issued to Acena, Baltazar, Rose and Jubenville, of no value and consequently cancelled
b. all unpaid subscriptions will have interest, payments should be applied to the interest first
c. That shares of stock, issued to stock holder, but still has unpaid subscribed shares, all of his stock even
those paid are not entitled to vote. (basically it prohibited Baltazar et. al. the power to vote until all their
subscriptions are paid.)
Baltazar and Rose filled a complaint to allow them to vote, their fully paid up shares of stocks, and to declare said
three resolutions illegal and invalid. they had a tentative settlement. the lower court rendered a decision, approving the
agreement. The Ungsons did not agree with the decision of the court hence this appeal.
Issue:
1. W/N a stockholder who subscribes shares of stock, and he pays only partially, and he is issued certificates of
stock, is he entitled to vote those, even if he has not fully paid his subscription?
2. W/N paid shares of stock will be deprived of the right to vote, until the entire subscribed shares of stock are fully
paid, including interest?
Held/Ratio:
1. Yes, he is entitled to vote on those issued certificates of stock paid, Section 37, of the current law makes payment
of the par value as prerequisite for the issuance of certificates of par value stocks, and makes payment of the
full subscription as prerequisite for the issuance of certificates of no par value stocks. No such distinction was
contained in section 36 of our Corporation Law of 1906, corresponding to section 37 now. The present law
requires as a condition before a share holder can vote his shares, that his full subscription be paid in the case of no
par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid by
him only, irrespective of the unpaid delinquent shares. A corporation may now, in the absence of provisions in

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their by-laws to the contrary, apply payment made by , subscribers-stockholders, either as: (a) full payment for the
corresponding number of shares of stock, the par value of each of which is covered by such payment; or (b) as
payment pro-rata to each and all the entire number of shares subscribed for. In the cases at bar, the corporation
had chosen to apply payments by its stockholders to definite shares of the capital stock of the corporation and had
fully paid capital stock shares certificates for said payments; its call for payment of unpaid subscription and its
declaration of delinquency for non-payment of said call affecting only the remaining number of shares of its
capital stock for which no fully paid capital stock shares certificates have been issued, and only do not have
voting rights by said declaration of delinquency.
2. No, although the agreement, unilaterally cancelled all capital stock shares certificates issued as fully paid up, upon
payments made by stockholders, when interests on unpaid subscription from date of subscription were not paid.
Art. 1253 NCC which provides that if the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered, is merely directory, and not mandatory. In the present
case, the Corporation had applied the payments made by the stockholders to the full par value of the shares of
stock subscribed by them, instead of the accepted interest, as shown by the capital stock shares certificate issued
for the payments made, and the stockholders had accepted such certificates issued for such payments. This being
the case, the said application of payments must be deemed to have been agreed upon by the Corporation and the
stockholders, and cannot now be changed without the consent of the stockholders concerned. The Corporation
Law and the by-laws of the Corporation do not contain any provision, prohibiting the application of stockholders
payments to the full par value of a corporations capital stock, ahead of the payment of accrued interest for unpaid
subscriptions. Therefore, a corporation may, upon request of an interested stockholder, as his option, apply
payment by them to the full par value of shares of capital leaving its collection later of the accrued interest on
unpaid subscriptions, and that once such option has been exercised and the corresponding stock certificates have
been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the capital stock certificates so
issued.
It is argued that the Baltazar group waived, under the agreement, the right to enforce the voting power they were
claiming to exercise, upon the principle of estoppel, However agreements estoppel cannot be predicated on acts
which are prohibited by law or are against public policy. (not important)

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107 - Santamaria v. HSBC (1951) (stocks negotiated in blank)
Doctrine:
A buyer not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it received
the same
Facts:
In 1937, Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the offices of
Woo, Uy-Tioco & Naftaly, a stock brokerage firm. It was endorsed in blank to her. She then used the certificate as a
security for the purchase of 10,000 shares of the Crown Mines, Inc. with R.J. Campos & Co., another brokerage firm.
Two days later, she returned to RJ. Campos & Co. to pay for the shares and redeem her certificate only to find out
that the firm was prohibited by the SEC from transacting business. Also, her stocks that were used as security have been
transferred to HSBC.
When the RJ. Campos & Co. became insolvent, HSBC secured the stocks by virtue of the document of
hypothecation (probably to pay for its obligations.)
Issues:
1. W/N Santamaria has a right to recover the stocks from HSBC
Held/Ratio:
1. No. In making said deposit, plaintiff did not take any precaution to protect herself against the possible misuse of
the shares represented by the certificate of stock. Plaintiff could have asked the corporation that had issued said
certificate to cancel it and issue another in lieu thereof in her name to apprise the holder that she was the owner of
said certificate. This she failed to do, and instead she delivered said certificate, as it was, to R.J. Campos & Co.,
Inc., thereby clothing the latter with apparent title to the shares represented by said certificate including apparent
authority to negotiate it by delivering it to said company while it was indorsed in blank by the person or firm
appearing on its face as the owner thereof. The defendant Bank had no knowledge of the circumstances under
which the certificate of stock was delivered to R.J. Campos & Co., Inc., and had a perfect right to assume that R.J.
Campos & Co., Inc. was lawfully in possession of the certificate.
The Bank was not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it
received the same from R.J. Campos & Co., Inc., for it was given to the Bank pursuant to their letter of
hypothecation. Also, it is a well-known practice that a certificate of stock, indorsed in blank, is deemed quasi
negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor

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108 - Neugene v. CA (1999)
Doctrine:
To constitute a valid transfer, a stock certificate must be delivered and its delivery must be coupled with an
intention of constituting the person to whom the stock is delivered the transferred (sic) thereof. Furthermore, in
order that there is a valid transfer, the person to whom the stock certificates are endrosed (sic) must be a bona fide
transferee and for value.
Facts:
NEUGENE had authorized capital stock of P3 MILLION (eventually became P7 MILLION), P600K of which is
subscribed and P150K of those subscribed were paid up. On October 24, 1987, the private respondents, Charles O. Sy,
Arsenio Yang, Jr. and Lok Chun Suen, constituting 2/3 of the total shares, sent notice to the directors of NEUGENE for a
board meeting to be held on November 30, 1987. They also sent notice for a special stockholders meeting on the same
day, November 30, 1987, to consider the dissolution of NEUGENE in which they voted in AFFIRMATIVE. Upon private
respondentss Petition for Dissolution, SEC issued a Certificate of Dissolution but was reversed by the SEC Panel of
Hearing Officers. This was again reversed by the CA, upholding the validity of NEUGENEs dissolution, thus the
petition.
Issue:
1. W/N the private respondents lacked the requisite number of shares of stock when they voted for the resolution
dissolving NEUGENE.
Held/Ratio:
1. NO. In the case at bar, Nicanor Martin and Leoncio Tan (petitioners) were not bona fide transferees for value and
in good faith. Petitioner Johnson Lee alleged that petitioners Sy, Lok and Yang, Jr. indorsed and delivered their
stock certificates to Nicanor Martin and Leoncio Tan. However, Johnson Lee testified that he acquired his shares
of stock from Johnny Uy, who in turn sold them to Nicanor Martin and Leoncio Tan. Evidence shows that no
consideration was paid by Leoncio Tan and Nicanor Martin when they allegedly acquired the stock
certificates from the Uy Family. In fact the CA found that the certificates of stock of the private respondents
were stolen and therefore not validly transferred, and the transfers of stock relied upon by petitioners were
fraudulently recorded in the Stock and Transfer Book of NEUGENE under the column Certificates Cancelled.
Johnson Lee failed to produce any document evidencing the transaction or a receipt showing his payment for the
stocks. Therefore, it is clear that they were not bona fide transferees for value and in good faith. Consequently,
petitioners cannot be considered stockholders for the purpose of determining the 2/3 votes of the
outstanding capital stock required to dissolve NEUGENE, in accordance with Sec. 118 of the Corporate
Code.
To constitute a valid transfer, a stock certificate must be delivered and its delivery must be coupled with an
intention of constituting the person to whom the stock is delivered the transferred (sic) thereof.
Furthermore, in order that there is a valid transfer, the person to whom the stock certificates are endrosed
(sic) must be a bona fide transferee and for value.

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109 - Fua Cun v. Summers (1923) (assignee has better right over corporation)
Doctrines:
Chattel mortgages on shares of stock and other choses in action are valid as between the parties and that the
recording of the mortgage will furnish constructive notice to third parties.
A bank can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws provide
that the shares shall be transferable only on the books of the corporation and that no such transfer shall be made if
the holder of the shares is indebted to the corporation.
Its upon the recording in the transfer book that solidifies the fact of ownership
Facts:
Chua Soco subscribed for 500 shares of stock of China Bank at P100 per share, he paid 25,000 representing half
of the subscription for which a receipt was issued. Subsequently, Chua Soco issued a promissory note in favor of the
plaintiff, Fua Cun or Tua Cun (whichever you fancy), and secured the note with a chattel mortgage on the said shares of
stock.
There came the a point that Chua Soco became indebted to China Bank and failed to pay such which lead to the
attachment of the same shares of stock in favor of the bank. Fua Cun contested this and claims that he acquired the right to
the 250 fully paid shares and he must be given priority over the ownership plus damages.
Issues:
1. W/N Fua Cun is the owner of the 250 shares
2. Who has a better right on these shares?
Held/Ratio:
1. NO. The Court erred in holding Fua Cun as owner of the 250 shares. The right of the plaintiff consists of an
equity on the whole 500 shares upon payment of the unpaid portion of the subscription price. Upon payment of
the whole price, he becomes entitled to the issuance of certificate for the said 500 shares.
2. FUA CUN has a better right. There can be no doubt that an equity in shares of stock may be assigned and that the
assignment is valid as between the parties and as to persons to whom notice is brought home. Such an assignment
exists here, though it was made for the purpose of securing a debt. And such endorsement was accompanied by
the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage, which
mortgage, at least, operated as a conditional equitable assignment.
The bank has no lien unless by virtue of the attachment. Wherein such attachment was levied after the bank has
received notice of the assignment of Chua Socos interest to Fua Cuntherefore subject to his rights, not of the
banks.

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110 - Monserrat v. Ceron (1933)
Doctrines:
Only the transfer or absolute conveyance of the ownership of the title to shares needs to be entered and noted
upon the books of the corporation. Hence, inasmuch as a chattel mortgage is not a complete and absolute
alienation of the dominion and ownership thereof, its entry and notation upon the books of the corporation is not a
necessary requisite to its validity.
Facts:
Monserrat was the president and manager of Manila Yellow Taxicab Co., Inc., and the owner of P1,200 common
shares of stock thereof. Monserrat assigned to Ceron a usufruct of half of the common shares of stock. Certificate of Stock
No. 7 was then issued in the name of Ceron. It was also recorded on the Stock and Transfer Book of the company.
However, such assignment only gave Ceron the right to enjoy, during his lifetime, the profits which might be derived
from the shares assigned him, prohibiting him from selling, mortgaging encumbering or otherwise exercising any act
implying absolute ownership of all the shares. Monserrat had reserved for himself and his heirs the right to vote derived
from said shares of stock and to recover the ownership thereof at the termination of the usufruct.
Ceron mortgaged to Matute 600 common shares of stock. Ceron also endorsed to Matute the Certificate of Stock.
Ceron showed Matute the Stock and Transfer Book of the company. Matute saw that the stocks were in the name of
Ceron, free from any lien or encumbrance. When Ceron mortgaged the stocks, he did not inform Matute of Monserrats
reservation.
Issues:
1. W/N it is necessary to enter upon the books of the corporation a mortgage constituted on common shares of stock
in order for the mortgage to be valid?
Held/Ratio:
1. NO. Section 35 of the (old) corporation law does not require an entry except of transfers of shares of stock in
order that such transfers may be valid against third persons.
Transfer means an act by which property of one person is vested in another and transfer of shares implies any
means whereby one may be divested of and another acquire ownership of stock.
A chattel mortgage refers to personal property given as security for payment of a debt. Such personal property has
to be delivered. But the transfer is not absolute, being a mere security. A chattel mortgage is not a transfer because
there is no intent of passing the rights the transferor has to the transferee. A chattel mortgage is not the transfer
referred to in the (old) corporation law, which transfer should be entered and noted upon the books of a
corporation in order to be valid. Only the transfer or absolute conveyance of the ownership of the title to shares
needs to be entered and noted upon the books of the corporation. Hence, inasmuch as a chattel mortgage is not a
complete and absolute alienation of the dominion and ownership thereof, its entry and notation upon the books of
the corporation is not a necessary requisite to its validity.
In addition, Matute was in good faith. There was nothing in the stock book regarding Monserrats reservation.
Matute was a conditional purchaser in good faith.

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111 - Chua Guan v. Samahang Magsasaka (1935)
Facts:
Toco, a resident of Manila, owns 5,894 shares of capital stock with Samahang Magsasaka Inc., which has
principal office in Nueva Ecija. It was represented by 9 certificates having a par value of P 5 per share. Toco, mortgaged
the said shares to Chiu to guarantee his debt of P 20,000. The stocks were delivered to Chiu and were registered in the
register of deeds in Manila. Chiu then subsequently assigned all his rights and interest to Chua Guan and registered it
in the register of deeds in Manila and in the office of the corporation.
When Toco defaulted in payment, the shares were foreclosed by Chua Guan who was thereafter declared as the
highest bidder. However, when he tendered the certificates of cancellation and issuance of new shares in his name, the
officers of the Corporation refused.
The officers refused because apparently prior to Chua Guans demand, and even before the notice of mortgage of
Chiu, several attachments against the shares covered by the certificates had been recorded in its books. (The corporation
received the notice of mortgage only after 2 years from date of registration)
Chua Guan filed a writ of mandamus to require the officers to transfer the shares of stock to him by cancelling the
old certificates and issuing new ones in their stead.
Issues:
1. W/N the mortgage takes priority over the writ of attachments
2. W/N the Registration in the Register of Deeds in Manila constitute constructive notice to the attaching creditors
Held/Ratio:
1. No. The writ of attachments takes priority over the mortgage. The Corporation received the writ of attachments
on the shares prior to the notice of registration of the mortgage. The basis for notice is the actual notice
because there was no valid constructive notice (see no. 2).
2. No, The Chattel Mortgage Law provides that to execute a valid chattel mortgage, the mortgage must be recorded
in the register of deeds.
It is the general rule that the situs of shares is the domicile of the owner. However, It is also generally held that
for the purpose of execution, attachment, and garnishment, it is the domicile of the corporation that is decisive.
Going by these principles, it is deemed reasonable that chattel mortgage of shares be registered both at the
owners domicile and in the province where the corporation has its principal office. Thus, the mortgage
should have been registered in the Register of Deeds of Manila and Nueva Ecija. (It should be understood that the
property mortgaged is not the certificate but the participation and share of the owner in the assets of the
corporation.)
Note: the registration of the chattel mortgage in the office of the corp. is not necessary and has no legal effect.
Note: The provision of the Chattel Mortgage Law (Act No. 1508) providing for delivery of mortgaged property to the
mortgagee as a mode of constituting a chattel mortgage is no longer valid in view of the Civil Code provision defining
such as a pledge.

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112 - Uson v. Diosomito (1935)
Doctrines:
All transfers not so entered on the books of the corporation are absolutely void; not because they are without
notice or fraudulent in law or fact, but because they are made so by statute.
Facts:
Uson filed a civil action for debt in the CFI against Diosomito. Upon institution of the action, an attachment was
duly issued and levied upon the property of Diosomito, including 75 shares of the North Electric Co., Inc., which stood
in his name on the books of the company. Uson won the case. Diosomito was made to pay P2,300. To satisfy the
judgment, the sheriff sold the 75 shares at a public auction. Uson was the highest bidder. H.P.L. Jollye now claims to be
the owner of the 75 shares. He presented a certificate of stock issued to him by the company.
Apparently, Diosomito, the original owner of the shares, sold the same to Barcelon and delivered to the latter the
corresponding certificates Nos. 2 and 19. Barcelon later sold the shares to Jollye. It must be noted that the transfer of
shares by Diosomito to Barcelon was registered and noted on the books of the corporation 9 months AFTER the
attachment had been levied on the said shares.
Issues:
1. W/N a transfer of shares, not registered or noted on the books of the corporation, is valid as against a subsequent
lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or
not
Held/Ratio:
1. NO. Section 35 of the (Old) Corporation Law states that: No transfer, however shall be valid, except as between
the parties, until the transfer is entered and noted upon the books of the corporation as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificated, and the number of shares
transferred.
(Kung tanungin lang) US jurisprudence tells us three things. First, no transfer of shares is valid for any purpose
unless registered on the books of the corporation. Second, no transfer shall be valid except as between the parties
until the transfer is duly registered. And third, an unregistered transfer is valid as against the lien of a subsequent
attachment sued out by a creditor of the assignor, whether such creditor has notice of the transfer or not. This is
because an attachment reaches only such title or interest as the defendant may have in the property at the time of
the levy.
The SC decided to apply the ruling of the SC of Massachusetts and Wisconsin: all transfers of shares should be
entered on the books of the corporation. And it is equally clear to us that all transfers of shares not so
entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and
to subsequent purchasers in good faith. All transfers not so entered on the books are absolutely void; not
because they are without notice or fraudulent in law or fact, but because they are made so void by statute.

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113 - Escao v. Filipinas Mining Corp. (1944)
Doctrines:
Requirement in Section 35 of Corporation Law is also applicable not only to issued shares but also to
unissued shares held by the corporation in escrow.
o Sec 35: Registration of transfers of shares of stocks upon the books of the corporation is the
condition precedent for its validity against the corporation and third parties.
Reasons why recording upon books of corporation of transfers of shares is required for validity:
1. To enable the corporation to know at all times who its actual stockholders are
2. To afford the corporation the opportunity to object or refuse its consent to transfer (in case corp
has claim against the said stocks)
3. To avoid fictitious or fraudulent transfers
Facts:
In the original case, CFI Manila ordered Salvosa to transfer and deliver to Escano 116 active shares and a
undetermined number of shares in escrow of Filipinas Mining. On June 25, 1937 a writ of garnishment was served by
sheriff to Filipinas Mining to satisfy judgment.
Note that said shares of stocks were sold to Bengzon then to Standard investment of the Philippines during the
pendency of the said case. The transfers, however, were not recorded in the books of Filipinas Mining and it was only
after around 3 years ( Dec 7, 1940) that the sale to Standard Investment was recorded. On Jan. 24, 1941 Filipinas Mining
issued in favour of Standard Investment certificate of stocks for 18,580 shares formerly held in escrow. This then
prompted Escano to file this present case against Filipinas Mining Corp and Standard and Investment.
(Timeline: transfer of unissued shares held in escrow)
Orig Case filed case ongoing Salovsa sold his shares to Judgement rendered and orders
by Escano Fil. Mining to Bengzon Salvosa to transfer his shares in
against salvosa who then sold it to Fil. Mining to Escano; writ of
Standard (not recorded in garnishment issued
books)
3 yrs after
Escano filed the present Certificate of stocks for shares Transfer of shares to Standard
case formerly in escrow was issued Investment was recorded in
to Standard Investment books of Fil. Mining
Issue:
1. W/N the issuance by Filipinas Mining Corp of 18,580 shares in escrow to Standard Investment of Phil. was valid
against the attaching creditor Escano.
Held/Ratio:
1. NO. The Supreme Court (in agreement with the lower court) held that unrecorded transfer of escrow shares
could not prevail over the garnishment previously made. The Court resulted to Section 35 of Corporation Law
and stated that for transfer of shares to be valid against the corporation and third parties it must be recorded in the
book of records of the corporation. Even if the law expressly stated that this is for issued shares, the Court in this
case held that through analogy, such requirement also applies to unissued shares held in escrow. According to the
Court there is no valid reason for treating unissued shares held in escrow differently from the issued shares insofar

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as the sale and transfer is concerned. In both cases the possibility of fraudulent transfers exists and the aim of
requiring such recording of transfer is to prevent this. In this case, therefore, the transfer of shares (whether
issued shares or unissued shares held in escrow) must be recorded in the book of record of the corporation
inorder to be valid against the corporation and third parties.
114 - Nava v. Peers Marketing Corproration (1927)

Facts:
Teofilo Po subscribed to 80 shares of Peers Marketing at P100/share. Po paid 25% of the amount of his
subscription. Po then sold to Nava 20 of his 80 shares. Nava requested the officers of Peers Marketing to register the sale
in the books of the corporation but the corporation refused because Po was delinquent in the payment of the balance of his
subscription. Nava filed a mandamus action to compel the corporation to register the shares in Navas name. The
respondents (executive VP and secretary) pleaded the defense that no shares of stock which holds an unpaid claim are
transferable in the books of the corporation.
Issue:
1. W/N the officers of Peers Marketing can be compelled by mandamus to register the sale in the books of the
corporation
Held/Ratio:
1. NO. The transfer made by Po to Nava is not the alienation, sale, or transfer of stock that is supposed to be
recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law. As a rule, the
shares which may be alienated are those which are covered by certificates of stock. As prescribed in section 35,
shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be
vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof. There
should be compliance with the mode of transfer prescribed by law.
Also, A corporation cannot release an original subscriber from paying for his shares without a valuable
consideration or without the unanimous consent of the stockholders. In this case, there is no clear legal duty on
the part of the officers of the corporation to register the twenty shares in Navas name, Hence, there is no cause of
action for mandamus. In this case no stock certificate was issued to Po. Without stock certificate, which is the
evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties
to the transaction. The delivery of the stock certificate, which represents the shares to be alienated , is essential for
the protection of both the corporation and its stockholders
Cited: Baltazar case: There is no parallelism between this case and the Baltazar case. It is noteworthy that in
the Baltazar case the stockholder, an incorporator, was the holder of a certificate of stock for the shares the par
value of which had been paid by him. The issue was whether the said shares had voting rights although the
incorporator had not paid fully the total amount of his subscription. That is not the issue in this case.

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115 - Batangas Laguna Tayabas Bus Co, Inc. (BLTB) v. Bitanga (2001) sorry for the length.
Doctrines:
o Under Sec 63 of the Corp Code, the sale of stocks shall not be recognized as valid unless registered in the books of
the corporation insofar as 3rd persons, including the corporation was concerned as between the parties to the sale,
the transfer shall be valid even if not recorded in the books of the corporation.
o Until registration is completed, the transfer, though valid between the parties, cannot be effective as against the
corporation. The purpose of registration is 2-fold, namely:
a. To enable the transferee to exercise all the rights of a stockholder, including the right to vote and be voted for
b. To inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the
rights and subject to the liabilities of a stockholder.
o Punos dissent.
Facts:
The Potencio family originally owned 87.5% of the outstanding capital stock of BLTB.
On October 2007 some of the BLTBs stockholders (Dolores, Max Joseph & Mercedelin POTENCIANO, Delfin
Yarro and Maya Industries, Inc.) entered into a SALE AND PURCHASE AGREEMENT with Benjamin BITANGA
(representing BMB Property Holdings, Inc. as its President). 21,071,114 BLTB shares representing 47.98% of total
outstanding capital stock of BLTB were sold.
The payment scheme was agreed to be as follows:
Purchase Price P72,076,425
Downpayment upon signing of Agreement 44,354,723
BALANCE payable on November 26, 1997 27,721,702
There was a stipulation that the downpayment was conditioned upon the receipt by the buyer of certain documents
upon signing of the Agreement. It was also agreed upon that the management and operation of BLTB shall be turned over
to the buyer with the understanding that in case the balance is not paid on the date agreed upon, the management and
control of BLTB shall revert back to the sellers.
A month later, in a BLTB stockholders meeting, Benjamin BITANGA and Monica Grace Lim were elected as
directors replacing Dolores and Max Joseph POTENCIANO. A few days thereafter, in another stockholders meeting, the
other sellers also resigned from their positions as directors and were replaced and Benjamin BITANGA was elected as
Chairman of the Board, President and CEO (there were other officers elected)
During the meeting of the BoD on April 14, 1998 the newly elected directors scheduled the annual stockholders
meeting. Before this scheduled meeting, Michael POTENCIANO wrote Benjamin BITANGA requesting for a
postponement of the scheduled meeting, due to the absence of the 30-day advance notice. No response was given to such
request but on the day of the meeting itself, a notice of postponement was published in the Manila Bulletin. Many
stockholders (representing 87% of the shares of BLTB) came due to the late notice of postponement and a majority
rejected the postponement. The POTENCIANO group were re-elected to the BoD and a new set of officers were re-
elected. Inspite of this, the BITANGA group refused to relinquish their position and continued to act as directors and
officers of BLTB.
A series of cases* were filed, the last of which was before the CA who rendered the herein assailed Decision,
which upheld the Order of the Hearing Panel, declaring void the stockholders meeting.

*. Bitanga group filed before the SEC a Complaint for Damages and Injunction. Potenciano group then also filed a Complaint for Injunction and
Damages with Preliminary Injunction and TRO. The latter TRO was approved and enjoined Bitanga from acting as officers and directors of

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Issues:
1. W/N the CA committed grave abuse of discretion in upholding the Order of the SEC En Banc resolved the main
case.
2. W/N the CA committed grave abuse of discretion in upholding that the Bitanga Group were denied their right to
due process.
3. W/N the SEC En Banc committed error in jurisdiction as to entitle Bitanga Group to the extraordinary remedy of
certiorari.
Held/Ratio:
The SC found petition impressed with merit.
1. YES, the Order merely delved on the propriety of granting a writ of preliminary injunction against
Bitanga Group.
Contrary to Bitanga Groups assertion, there were still several issues still awaiting resolution. As such, there is no
merit to the contention that the SEC En Bancs ruling is a prejudgment of the main case.
2. YES, since the BITANGA GROUP were not deprived of due process when the SEC En Banc issued its
Order.
Due process in essence is simply an opportunity to be heard. Both parties were able to present their case during
the hearing on the prayer for injunction. It is not material that the injunction order was allegedly issued with
deliberate speed even before Bitanga Group filed its Comment to Potenciano Groups Petition. Also, the Rules
of Court do not require that issues be joined before preliminary injunction may issue.
3. NO, since at the time of the SEC En Bancs Order, the validity of the BLTB stockholders meeting was sustained,
in light of the time-honored doctrine in corporation law that a transfer is not valid unless recorded in the
books of the corporation.
Until registration is completed, the transfer, though valid between the parties, cannot be effective as against
the corporation. The purpose of registration is 2-fold, namely:
a. To enable the transferee to exercise all the rights of a stockholder, including the right to vote and be voted
for
b. To inform the corporation of any change in share ownership so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a stockholder.
Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote
can be properly counted to determine whether a stockholders resolution was approved, despite the claim of the
alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a
stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the
corporate books.
Until the transfer is registered, the transferee is not a stockholder but an outsider.
PUNO, J dissenting
He found that the CAs decision valid. Based on the facts, the assailed stockholders meeting was void due to lack
of quorum (Bitanga Group owned 50.26% of the outstanding capital stock of BLTB).

BLTB. Bitanga group then seeks to annul the stockholders meeting. The SEC Hearing Panel decided in favor of Bitanga and declared the
stockholders meeting void. Potenciano filed a petition for certiorari with the SEC En Banc which then set aside the Panels decision.

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Furthermore, Sec 63 was intended to protect the interest of the corporation and 3rd persons who may be prejudiced
by the transfer of the shares of stock. It follows therefore, that as between the parties to the sale, the transfer
shall be valid even if not recorded in the books of the corporation.
Just in case, the dissent provided the reasons behind the registration requirement are:
a. to enable the corporation to know at all times who its actual stockholders are, because mutual rights and
obligations exist between the corporation and its stockholders;
b. to afford to the corporation an opportunity to object or refuse its consent to the transfer incase it has any
claim against the stock sought to be transferred, or for any other valid reason; and
c. to avoid fictitious or fraudulent transfers.

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116 - Garcia v. Jomouad (2000) lent POC, attachment, transfer not recorded on books
Doctrine:
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent lawful
attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All
transfers not so entered on the books of the corporation are absolutely void; not because they are without
notice or fraudulent in law or fact, but because they are made so void by statute.
Facts:
Petitioner Nemesio Garcia filed with the RTC of Cebu an action for injunction with prayer for preliminary
injunction against respondents spouses Jose and Sally Atinon and Nicolas Jomouad, ex-officio sheriff of Cebu. Said
action stemmed from an earlier case for collection of money filed by the spouses Atinon against Jaime Dico. In that case
(collection case), the trial court rendered judgment ordering Dico to pay the spouses Atinon the sum of P900,000 plus
interests. After said judgment became final and executory, respondent sheriff Jomouad proceeded with its execution. In
the course thereof, the Propriety Ownership Certificate (POC) No. 0688 in the Cebu Country Club, which was in
Dicos name, was levied on and scheduled for public auction. Claiming ownership over the subject certificate, Garcia
filed the aforesaid action for injunction with prayer for preliminary injunction to enjoin respondents from proceeding with
the auction.
Garcia avers that Dico, the judgment debtor of the spouses Atinon, was employed as manager of his (petitioners)
Young Auto Supply. To assist him in entertaining clients, Garcia lent his POC, then bearing the number 1459, in the
Cebu Country Club to Dico so the latter could enjoy the signing of privileges of its members. The Club issued POC
No. 0668 in the name of Dico. Thereafter, Dico resigned as manager. Upon demand of Garcia, Dico returned the POC.
The latter then executed a Deed of Transfer covering the subject certificate in favor of Garcia. The Club was
furnished with a copy of said deed but the transfer was not recorded in the books of the club because Garcia failed
to present proof of payment of the requisite capital gains tax.
The lower court dismissed the complaint for lack of merit. On appeal, the CA affirmed. Hence, this petition for
review on certiorari.
Issue:
1. W/N a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is
valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not.
Held/Ratio:
1. NO. In the present case, the Court held that the transfer of the subject certificate made by Dico to Garcia was
not valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the
judgment debtor, at the time of the levy on execution. In a similar case (Uson v. Diosomito), the Court ruled that,
All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as
to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the
parties to such transfers. All transfers not so entered on the books of the corporation are absolutely void; not
because they are without notice or fraudulent in law or fact, but because they are made so void by statute.
Section 63 of the Corporation Code expressly states that No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of shares
transferred. As correctly ruled by the CA, the entry in the minutes of the meeting of the Clubs board of
directors noting the resignation of Dico as proprietary member thereof does not constitute compliance with
Section 63. Said provision of law strictly required the recording of the transfer in the books of the
corporation and not elsewhere, to be valid against third parties.

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RIGHTS OF STOCKHOLDERS
117 - Datu Tagoranao Benito v. SEC (1983)
Doctrines:
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not
with respect to additional issues of originally authorized shares. When a corporation at its inception offers its
first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is
deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of
interest.
Sec. 39 All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by
the articles of incorporation or an amendment thereto: provided
Facts:
The Articles of Incorporation of Jamiatul Philippine-Al Islamia, Inc. (Jamiatul) were filed with the SEC and
thereafter, approved. The corporation had an authorized capital stock of P 200,000 divided into 20,000 shares at par value
of P 10 each. Of the authorized capital stock, 8,058 shares worth P80,580 were subscribed and fully paid for. Datu
Tagoranao Benito subscribed to 460 shares worth P4,600.
Some years later, a certificate of increase of its capital stock was filed. Capital increased from P200,000 to
P1,000,000. A stockholders meeting was held where P191, 560 worth of shares were represented. P110,980 worth of
shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of
P200,000. Of the increased capital stock of P1,000,000, P160,000 worth of shares were subscribed by Ramos, Lucman
and Alonto.
Datu Tagoranao filed with the SEC a petition alleging that the additional issue (worth P110,980) was made in
violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock was illegal
considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the
agenda. The SEC held that the issuance by the corporation of its unissued shares was validly made and was not subject to
the pre-emptive rights of stockholders. It directed Jamiatul to allow Datu Tagoranao to subscribe thereto, at par value,
proportionate to his present shareholdings, adding thereto the 2,540 shares transferred to him by the Spouses Alonto.
Issues:
1. W/N the issuance of the P110,980 of authorized capital stock of P200,000 is in violation of pre-emptive right
(Sec. 39 of Corporation Code)
Held/Ratio:
1. NO. The power to issue shares of stocks in a corporation is lodged in the Board of Directors and no stockholders
meeting is necessary.
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not
with respect to additional issues of originally authorized shares. When a corporation at its inception offers its
first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is
deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of
interest.
Moreover, it was found that a stockholders meeting was held which included the increase of its capital stock. He
was not notified of the meeting and he never attended the same as he was out of the country at the time. The
decision (by an administrative body) is not to be interfered with by the courts in the absence of grave abuse of
discretion.

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118 - Dee v. SEC (1991) (election; preemptive right)
Doctrine:
The general rules is that pre-emptive right is recognized only with respect to new issues of shares, and not with
respect to additional issued of originally authorized shares.
The power to issue shares of stocks in a corporation is vested in the Board of Directors. No stockholders meeting
is required.
Facts:
Naga Telephone Company (Natelco) was organized in 1954. The authorized capital stock was P100,000. In 1974,
Natelco decided to increase its authorized capital stock to P3,000,000. Natelco filed an application for the approval of the
increased authorized capital stock with the Board of Communications. The increase was approved on the condition that
the issuance of the shares of stocks will be for one year from the date of the approval. After such date, further issues must
be made with the previous authority of the Board.
Natelco filed its Amended Articles of Incorporation with the SEC. When these were filed, the original authorized
capital of P100,000 was already paid. As for the increased capital of P2,900,000, subscribers subscribe to P580,000.
P145,000 of the P580,000 was paid.
Natelco and Communication Services, Inc. (CSI) entered into a contract for the manufacture, supply, delivery and
installation of telephone equipment. Natelco issued 24,000 shares of common stock to CSI as down payment.
Natelco held its annual stockholders meeting to elect their seven directors to their Board of Directors. Pedro
Lopez Dee (Dee) lost his title as Chairman of the Board and President of the Corporation but her was elected as one of the
directors. The new Board of Directors (Maggay Group) entered into another contract with CSI. It also issued 113,800
shares of common stock to CSI.
Case before the SEC
Dee filed a petition in the SEC questioning the validity of the elections. He contended that there was no valid list
of stockholders through which the right to vote could be determined. The SEC issued a restraining order and placed the
Maggay Group in hold-over capacity. This was elevated to the SC and was dismissed on the ground that it was premature.
As a result, the Maggay Group was unseated and the Lopez Dee Group was reinstated.
Civil Case
One of the petitioners, a certain Antonio Villasenor, filed a civil case against the Maggay Group and CSI. He
claimed that he was an assignee of an option to repurchase 36,000 shares of common stocks of Natelco under a Deed of
Assignment. However, the Maggay Group refused to allow the repurchase of the stocks when Villasenor offered to
repurchase of said stocks to CSI.
Pursuant to the civil case, the court issued a restraining order commanding Natelco to desist from the scheduled
elections. Natelco defied the order and the Maggay Group won again. However, the Lopez Dee Group refused to vacate
their positions. They claimed that there were really no elections. SEC ordered them to vacate and they eventually did.
After some time, Villasenor filed a charge for contempt against the Maggay Group because they were claiming in
press conferences that they actually held and conducted elections. The lower court ruled against the Maggay Group and
the Lopez Dee Group was reinstated as hold-over directors of Natelco. The Maggay Group appealed and they were
eventually restored as directors.
Issues:
1. W/N the issuance of 113,800 shares of Natelco to CSI made during the pendency of the SEC case was valid.
2. W/N Natelco stockholders have a right of pre-emption in the 113,800 shares.

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Held/Ratio:
1. YES. Though the shares were issued pursuant to a Board Resolution and stockholders approval when CSI was
not yet in control of the shares, it is still valid. There is a distinction between an order to issue shares and actual
issuance of shares. Actual issuance occurred when CSI was in control of the shares.
2. NO. Even assuming that the issuance was made without the consent of the stockholders, the issuance is still valid.
The power to issue shares of stocks in a corporation is vested in the Board of Directors. No stockholders meeting
is required. The general rules is that pre-emptive right is recognized only with respect to new issues of shares, and
not with respect to additional issued of originally authorized shares. The additional issuance of shares of stocks
does not require the approval of stockholders. Therefore, there is no violation of a pre-emptive right.
119 - Lambert v. Fox (1914)

Doctrines:
Restriction on transfers
The suspension of the power to sell has a beneficial purpose.
Facts:
John R. Edgar & Co found itself in such condition financially that its creditors, including Lambert and Fox,
agreed to take over the business, incorporate it and accept stock in payment of their respective credits. Eventually,
Lambert and Fox became the two largest stockholders in the new corporation, John R. Edgar & Co., Incorporated.
A few days after incorporation, Lambert and Fox entered into an agreement where they mutually agreed not to
sell, transfer, or otherwise dispose of any part of their shareholdings until after one year from the date of the agreement.
They further agreed that the party violating such agreement would pay P1,000 to the other party as liquidated damages in
breach of contract.
Fox sold his stock to one of the corporations competitors, E.C. McCullough & Co. This sale was made against
the protest of Lambert and with the warning that Fox would be held liable under their previous agreement.
The trial court ruled in favor of Fox, claiming that the intention of the parties as it appeared from the contract was
that the agreement should be good and continue only until the corporation reached a sound financial basis.
Issues:
1. W/N Lambert be allowed to recover a penalty prescribed on a contract as punishment for the breach thereof
Held/Ratio:
1. YES, so that we have a categorical answer.
The parties expressly stipulated that the contract should last one year. No reason is shown for saying that it shall
last only 9 months. Whatever the object was in specifying the year, it was their agreement that the contract should
last a year and it was their judgment and conviction that their purposes would not be subversed in any less time.
The Court finds no reason for refusing to follow the plain words of the contract.
Fox contends that the stipulation in the contract suspending the power to sell the stock is an illegal stipulation, is
in restraint of trade and offends public policy. The Court sees otherwise. The suspension of the power to sell has
a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the
contract, and is reasonable as to the length of time of the suspension. But the Court also said that the
mentioned doctrine did not mean to cover the suspension of the right of alienation of stock, limiting ourselves to
the statements that the suspension in this particular case is legal and valid.

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120 - Padgett v. Babcock & Templeton, Inc. (1933)
Doctrines:
Shares of corporate stock being regarded as property, the owner of such shares may, as a general rule, dispose of
them as he sees fit.
Any restriction on a stockholders right to dispose of his shares must be construed strictly
Facts:
Padgett was an employee of Babcock & Templeton, Inc. (BTI) and bought 35 shares of the corporation. He was
given 9 additional shares as Christmas Bonuses. The Certificates of Stock bore the words Non-transferable on their
faces.
Before he left BTI, Padgett proposed to the President that BTI buy his 44 shares at par value plus interest or that
he be authorized to sell them to other people. (Note that BTI bought other employees shares at par value.) The President
offered to buy Padgetts shares first at P85 then bargained for P80 which Padgett refused.
Issue:
1. W/N the labeling of the Certificates as Non-transferable is a valid restriction?
Held/Ratio:
1. No! The court held that the notation be held null and void because it is a limitation on the right of ownership and a
restraint on trade.
Shares of corporate stock being regarded as property, the owner of such shares may, as a general rule, dispose of
them as he sees fit.
Any restriction on a stockholders right to dispose of his shares must be construed strictly. Any attempt to restrain
a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and
except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such
restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the
corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to
an insolvent person, or even though a controlling interest is sold to one purchaser.

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121 - Fleischer v. Botica Nolasco Co., Inc. (1925)
Doctrine:
The ruling in Fleischer does not declare provisions on rights of first refusal illegal per se. The ruling was
meant to put by-laws in their proper hierarchical place, that is, it is not the function of by-laws to take away or
abridge the substantial rights of stockholders. In fact, the ruling recognized that the same may be done pursuant to
a legal provision or in the articles of incorporation.
Any privilege or restriction pertaining to shares of stock should be found in the articles of incorporation.
Fleischer also seems to support the opinion that by-law provisions are essentially intramural covenants and do
not bind the public.
Facts:
Manuel Gonzales was the original owner of five shares of stock of Botica Nolasco Inc. Gonzales assigned
and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on
the back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez to
Fleischer. Doctor Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry
Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500 invoking
article 12 of the by-laws of Botica Nolasco, Inc., which says that the corporation had a preferential right to buy
from Manuel Gonzalez said shares. Gonzales refused to sell them to the corporation. Thereafter, Gonzales requested
Doctor Miciano to register said shares in his name but the latter refused to do so, saying that it would be in
contravention of the by-laws of the corporation.
Issue:
1. W/N article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation
Law (Act No. 1459)
Held/Ratio:
1. YES. The Court ruled that the by-law provision granting preferential right to the corporation was void because it
was in contravention of The Corporation law, among other things.
Article 12 of the by-laws creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same
conditions, the share or shares of stock of a retiring shareholder. On the other hand, section 13, paragraph 7 of the
Corporation Law, empowers a corporation to make by-laws, not inconsistent with any existing law, for the
transferring of its stock. It follows from said provision that a by-law adopted by a corporation relating to
transfer of stock should be in harmony with the law on the subject of transfer of stock.
Moreover, section 35 of The Corporation Law specifically provides that the shares of stock are personal
property and may be transferred by delivery of the certificate indorsed by the owner, etc. Said section 35
defines the nature, character and transferability of shares of stock. Under said section they are personal property
and may be transferred as therein provided. The holder of shares, as owner of personal property, is at liberty,
under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in
this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law
governing transfer of shares of stock should take into consideration the specific provisions of section 35 of
The Corporation Law, and said by-law should be made to harmonize with said provisions. It should not be
inconsistent therewith. Moreover, as a general rule, the by-laws of a corporation are valid if they are reasonable
and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of
the laws of the land.
Lastly, the Court relied upon American rulings which state that the power to enact by-laws restraining sale and
transfer of stock must be found in the governing statute or charter of the corporation.

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122 - Gonzales v. PNB (1983) Corp Law v. Corp. Code
Doctrines:
Remedies if denied: mandamus
The unqualified provision of the right of inspection previously contained in Sec 51 of the Corporation LAW, NO
LONGER HOLDES TRUE under the Corporation CODE.
Stockholders seeking to exercise the right of inspection must set forth the reasons and the purposes for which he
desires such inspection.
Facts:
Gonzales, in his capacity as taxpayer, instituted several cases questioning different transactions entered into by
PNB with other parties. In the course of the hearing, his personality to sue the bank was raised. In view thereof, he
expressed and made known his intention to acquire one share of stock from Congressman Montano, which, on the
following day, was transferred in his name in the books of the bank.
Subsequently, in his dual capacity as taxpayer and stockholder, he filed cases against the bank and the members
of its BoD. He also addressed a letter to the President of the Bank requesting submission to look into the records of its
transactions. Since this request was refused by the corporation, he filed a petition for mandamus against PNB in the CFI.
His purpose was to satisfy himself as to the truth of the published reports of PNB in relation to guaranteed obligations,
financing constructions and to inquire into the validity of certain transactions.
The court a quo denied the prayer of Gonzales on the grounds that the right of a stockholder to inspect the
record of the business transactions of a corporation granted under Sec 51 of the former Corporation Law is not
absolute, but is limited to purposes reasonably related to the interest of the stockholder, and must be asked for in good
faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes. Also, the court
declared that such examination would violate the confidentiality of the records of PNB as provided in Sec 16 of its
charter. Hence this petition.
Issues:
1. W/N the lower court erred in denying Gonzaless request to inspect/examine the books and records of PNB
pursuant to Sec 51 of the Corporation LAW.
Held/Ratio:
1. NO. Petition is without merit. The unqualified provision on the right of inspection previously contained in
Section 51, of the Corporation Law, no longer holds true under the provisions of the Corporation Code. Gonzales
clearly cannot hold on to his view that his right to inspect the records of the corporation is not dependent on the
propriety of his motive or purpose. The changes in the Corporation Code clearly set forth that right to inspect is
dependent upon showing of proper motive on the part of the requesting stockholder.
Gonzales has not set forth the reasons and the purposes for which he desires such inspection except to satisfy
himself as to the truth of published reports regarding certain transactions of PNB. Further, the circumstance upon
which he acquired only 1 share of stock cannot be viewed as good faith and proper motivation. After all, he
admitted that such purchase was for the purpose of prying into transactions entered into by the bank which is not
germane to his interest as a stockholder.
Lastly, the Court also found merit to the contention of PNB in that the inspection sought to be exercised would be
violative of the provisions of its charter (RA No. 1300). Sec 74 [right to inspection] of the Corporation Code
cannot be reconciled with PNBs charter; hence it may not apply in a supplementary capacity the said section, to
the charter of the respondent bank.

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123 - Ang-Abaya v. Ang (2008) (battle for family corp.)
Doctrines:
The stockholders right of inspection of the corporations books and records is based upon their ownership of the
assets and property of the corporation, but the inspection has to be germane to his interest as a stockholder, and
has to be proper and lawful in character and not inimical to the interest of the corporation
In a criminal complaint for violation of Sec. 74 of the Corp Code, the defense of improper use or motive is in the
nature of a justifying circumstance that would exonerate those who raise and are able to prove the same
Facts:
Petitioners Flordeliza Ang-Abaya, Francis and Hannah Ang, and Vicente Genato, as well as respondent Eduardo
Ang (who is also Flordelizas dad) are all shareholders and directors of two family-owned corporations, Vibelle
Manufacturing Corp (VMC) and Genato Investments. Because Eduardo was trying to take over the companies by
harassing them constantly, petitioners instituted a civil case for damages with a prayer for TRO or permanent injunction
against him. While this case was pending, Eduardo requested to inspect the corporate books of VMC and Genato,
supposedly because he hasnt been updated on their financial and business activities. However petitioners denied his
request, reasoning that he would use such information for purposes inimical to the corporations interests.
So Eduardo filed a criminal complaint against petitioners charging them w/ violations of Sec. 74 of the Corp Code
(which states that a stockholder may inspect the corporate books) in relation to Sec. 114 (which penalizes violations of the
Corp Codes provisions). Petitioners filed a join counter-affidavit seeking dismissal of the complaint for lack of factual
and legal basis or its suspension since a civil case was still pending. The City Prosecutor of Malabon issued a Resolution
recommending that petitioners be charged, but the DOJ set this aside. Eduardo appealed to the CA, which granted his
petition.
Issues:
1. W/N petitioners are guilty of violating Sec. 74, in relation to Sec. 114
Held/Ratio:
1. NO. A stockholders right to inspect the corporations books is not absolute. Sec. 74 expressly requires that as a
condition for examining the books, the one requesting 1) must not be guilty of improperly using any information
secured through a prior examination of the books OR 2) he must be acting in good faith, and for a legitimate
purpose. For there to be a violation so that Sec. 114 would apply, four elements must be present:
a. Director/trustee/stockholder/member has made a prior demand in writing for a copy of excerpts from the
corporations records or minutes
b. Any officer/agent of the corporation shall refuse to allow the one who requested to examine and copy said
excerpts
c. If such refusal is made pursuant to a Board of Directors or Trustees resolution or order, the liability shall
be imposed upon those who voted for such refusal; and
d. The one requesting examination has the burden to prove the contrary if the officer/agent of the
corporation sets up the defense that such person has either:
i. improperly used any information secured through any prior examination of the records of the said
corporation or any other corporation OR
ii. was not acting in good faith for a legitimate purpose in making his demand
In a criminal complaint, the defense of improper use or motive is in the nature of a justifying circumstance, so the
burden of proof shifts to the corporation to prove that the denial of examination is proper. When the corporation
denies inspection on the ground of improper motive or purpose, it has the burden to prove such allegations. In this
case, petitioners have proven that Eduardo was in bad faith in requesting examination of the records, and that his

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request was for purposes inimical to the corporations. (so yung burden of proof nasa shareholder first to show that
he is not disqualified to examine the records so he can file a complaint. Afterwards, pag may complanint na, it
shifts to the corporation to prove the shareholders disqualification)
124 - Hi-Yield v. CA (2009) (family problems L)

Doctrine:
Where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to protect or vindicate
corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the
corporation, is only a nominal party.
Facts:
Private respondent Roberto Torres (Roberto), on behalf of Honorio Torres & Sons, Inc. (HTSI) filed a
Petition for Annulment of Real Estate Mortgage and Foreclosure Sale over two lots in Marikina and QC against
Leonora, Ma. Theresa, Glenn and Stephanie Torres, Makati Register of Deeds and petitioner Hi-Yield Realty. The suit
was filed in the Makati RTC.
Hi-Yield moved to dismiss on grounds of improper venue and non-payment of docket fees, but the RTC denied
the motion. The court held that the case was a derivative suit cognizable by a special commercial court. Hi-Yield filed a
MR, but was denied as well.
Hi-Yield appealed before the CA, but the appellate court denied the appeal and upheld the RTCs decision,
agreeing that the case was a derivative suit. The CA also ruled that the annulment of mortgage was merely incidental to
the main action. Hi-Yields MR was also denied.
Issues:
1. Whether the action was a derivative suit
2. Whether venue was properly laid
Held/Ratio:
1. YES. A derivative action is a suit by a shareholder to enforce a corporate cause of action. Roberto alleged that he
sought to compromise with the board/his relatives before filing the petition. He maintains that Leonora, Ma.
Theresa, Glenn and Stephanie excluded him from the affairs of the corporation. Even more glaring was the fact
that from June 10, 1992, when the first mortgage deed was executed until July 23, 2002, when the properties
mortgaged were foreclosed, the Board of Directors of HTSI did nothing to rectify the alleged unauthorized
transactions of Leonora. Clearly, Roberto could not expect relief from the board. Hence, the petition was
filed on behalf of the corporation.
Where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an
individual stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to
protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be
sued, or hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing
stockholder, on behalf of the corporation, is only a nominal party.
2. YES. Since the case is a derivative suit, A.M. No. 01-2-04-SC governs over venues of derivative suits, which
states that:
SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of the corporation,
partnership, or association concerned. Where the principal office of the corporation,

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partnership or association is registered in the Securities and Exchange Commission as Metro
Manila, the action must be filed in the city or municipality where the head office is located.
125 - San Miguel Corp. v. Kahn (1989)

Doctrine:
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in
his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong
committed against him, individually, but in behalf and for the benefit of the corporation.
The law lays down three (3) requisites for a derivative suit: a) the party bringing suit should be a shareholder as of
the time of the act or transaction complained of, b) he has exhausted intra-corporate remedies and c) the cause of
action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and
not to the particular stockholder bringing the suit.
Facts:
33,133,266 shares of the outstanding capital stock of the San Miguel Corporation (SMC) were owned by 14 other
corporations and placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the he died,
Eduardo Cojuangco, Jr. was elected Substitute Trustee, delegating the trusteeship in writing to Andres Soriano III. After
the Revolution of February, 1986, Cojuangco left the country amid reports that huge and unusual cash disbursements
from the funds of SMC had been irregularly made, and the resources of the firm were used in support of the candidacy of
Ferdinand Marcos during the 1986 snap elections.
An Agreement was executed between Soriano and the 14 corporations where Soriano would buy, for himself and
others, all the shares of stock at the price of P100 per share in specified installments. The Agreement revoked the voting
trust and expressed the desire of the 14 corporations to sell the shares of stock in order to pay certain outstanding and
unpaid debts, and Sorianos own wish to purchase the same in order to institutionalize and stabilize the management of
SMC in accordance with the companys by-laws. Actually, according to Soriano and the others, the buyer of the shares
was a foreign company, Neptunia Corporation Limited of HK (a wholly owned subsidiary of San Miguel International
which is, in turn, a wholly owned subsidiary of SMC) and made the down payment of P500,000,000 from the proceeds
of certain loans.
At this point the shares were sequestered by the PCGG, on the ground that the stock belonged to Cojuangco, who
was allegedly a close associate and dummy of former President Marcos, and the sale was in direct contravention of
Executive Orders 1 and 2 which prohibited the transfer, conveyance, encumbrance, concealment or liquidation of assets
and properties acquired by former President Marcos, his wife, their close relatives, subordinates, business associates.
SMC suspended payment of the other installments of the price.
PCGG directed SMC to issue qualifying shares in the corporation to 7 individuals, including Eduardo de los
Angeles, from the sequestered shares registered to Anscor- Hagedorn Securities, Inc., to be held in trust for the benefit
whoever shall finally be determined to be the owner/owners of the shares.
The SMC Board by a resolution decided to assume the loans incurred by Neptunia for the down payment
(P500M) on the shares, opining that there was nothing illegal in this assumption since Neptunia was an indirectly wholly
owned subsidiary of SMC and that there was no additional expense or exposure for the SMC Group. (Essentially, this was
an attempt to use the corporate funds of SMC to pay for personal obligations and allow the purchase by Neptunia of SMC
shares using SMC itself.) However, de los Angeles, one of the PCGG representatives in the SMC board, stated that it was
merely an agreement to further study the action suggested in the meeting.
He filed a derivative suit in behalf of SMC, against 10 of the 15-member Board of Directors who voted for the
resolution. Kahn, one of the directors, moved to dismiss de los Angeles derivative suit arguing that De los Angeles was
merely imposed by the PCGG on SMC and has no standing to bring a minority derivative suit. Also, he holds only 20
shares which cannot adequately represent the minority stockholders of SMC. Furthermore, SEC has no jurisdiction over
the controversy because the matters involved are exclusively within the business judgment of the Board of Directors.

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Issue:
1. W//N De los Angeles could file a derivative suit as stockholder and/or director of the SMC.
2. W/N the SEC has jurisdiction over the case.
3. W/N De los Angeles has a conflict of interest, being a member of the PCGG and a director of the SMC at the
same time.
Held/Ratio:
1. YES. Since De los Angeles is a) admittedly the owner of 20 shares of SMC stock in his own right, having
acquired those shares as early as 1977, (2) he had sought without success to have the board of directors remedy
with wrong, and (3) that wrong was in truth a wrong against the stockholders of the corporation, generally, and
not against him individually and it was the corporation, and not he, that would be entitled to the appropriate
relief the propriety of his suit cannot be gainsaid.
2. YES. The subject matter of his complaint in the SEC does not involve any property illegally acquired or
misappropriated by Marcos, et al., or any incidents arising from, incidental to, or related to any case involving
such property, but assets indisputably belonging to San Miguel Corporation which were, in de los Angeles view,
being illicitly committed by a majority of its board of directors to answer for loans assumed by a sister
corporation, Neptunia Co., Ltd. His complaint is confined to the issue of the validity of the assumption by the
corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and
stockholders. De los Angeles dispute, as stockholder and director of SMC, with other SMC directors, an intra-
corporate one is of no concern to the Sandiganbayan, having no relevance whatever to the ownership- of the
sequestered stock.
3. NO. The fact that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not
follow that he is legally obliged to vote as the PCGG would have him do, or that, not having been elected by the
minority stockholders, his vote would necessarily never consider the latters interests. It is an erroneous
conception of a directors role and function that it is plainly a directors duty to vote according to his own
independent judgment and his own conscience as to what is in the best interests of the company. Moreover, it is
undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as
regards which he cannot from any aspect be deemed to be beholden to the PCGG, his ownership of these shares
being precisely what he invokes as the source of his authority to bring the derivative suit.

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126 - Chua v. Court of Appeals (2004) (falsification of corporate minutes)

Doctrines:
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as
a nominal party, with the corporation as the real party in interest.
Facts:
Lydia Hao, treasurer of Siena Realty Corporation, filed a criminal complaint against Francis Chua and his wife,
Elsa Chua for four counts of falsification of public documents under Article 172 in relation to Article 171 of the Revised
Penal Code. Allegedly, Francis Chua prepared, certified, and falsified the Minutes of the Annual Stockholders meeting
of the Board of Directors of Siena Realty Corporation, which were notarized (hence, public in nature) by making it
appear that Lydia Hao was present in the proceedings recorded therein.
The City Prosecutor filed the Information before the Metropolitan Trial Court of Manila against Francis Chua but
dismissed the accusation against Elsa Chua. Chua moved to exclude Haos private prosecutors on the ground that Hao
failed to allege and prove any civil liability. The motion was granted. Hao filed a petition for certiorari before the RTC
entitled Lydia C. Hao, in her own behalf and for the benefit of Siena Realty Corporation v. Francis Chua, and the
Honorable Hipolito dela Vega, Presiding Judge, Branch 22, MTC of Manila. In this way, Siena Realty was impleaded as
a co-petitioner. RTC granted the petition. The Court of Appeals affirmed the RTCs decision.
Issues:
1. W/N the criminal complaint is in the nature of a derivative suit
2. W/N Siena Realty is a proper petitioner
3. W/N private prosecutors should be allowed to actively participate in the criminal case
Held/Ratio:
1. NO. It was not stated that the criminal complaint was filed by Hao in behalf and for the benefit of the corporation.
In a derivative suit, the plaintiff must allege that he is suing in behalf and for the benefit of the corporation and all
other stockholders who may wish to join him. The corporation must be impleaded as a party and must be served
with process.
2. YES. Even though the corporation was not a complainant in the criminal action, the subject of the falsification
was the corporations project and the falsified documents were corporate documents thus, the criminal
proceedings directly and adversely affected Siena Realty.
3. YES. One criminally liable is likewise civilly liable. In this case, Lydia Hao did not reserve the right to institute
the civil action separately, nor waive the civil action, nor institute the action for damages beforehand.

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CAPITAL STRUCTURE: SHARES OF STOCK

127 - Republic Planters Bank v. Hon Enrique Agana, Sr. (Presiding Judge of CFI Rizal), Robes-
Francisco Realty & Development Corp and Adalia Robes (1997)
Doctrines:
This case explained the basic concepts on preferred shares and redemption. Pls. check ratio first part.
Facts:
In 1961, Robes-Francisco secured a loan from the Bank in the amount of P120,000.00. Instead of giving the
whole amount of the loan as legal tender, the Bank gave the loan partially in the form of money and partially in the form
of stock certificates (2 certificates, with 400 shares each at par value of P10.00 per share, for a total of P8,000.00)
The certificate of stocks bear the following terms and conditions:
The Preferred Stock shall have
1. Right to receive a quarterly dividend of 1% cumulative and participating.
2. Shares may be redeemed, by the system of drawing lots, at any time after 2 years from
the date of issue at the option of the Corporation.
In 1979 (almost 18 years later), Robes-Francisco proceeded against the Bank and filed a Complaint for specific
perfromance, to redeem 800 preferred shares of stock with a face value of P8,000.00 and to pay 1% quarterly interest as
owing under the terms and conditions of the certificate of stocks.
The Banks Motion to Dismiss (based on lack of jurisdiction, unenforceability of action and prescription and/or
laches) was denied by the trial court. The trial court later ruled in favor of Respondent Robes-Francisco. Aggrieved by the
decision, the Bank elevated the case before the SC on pure questions of law, hence this petition for certiorari seeking to
annul the aforementioned Decision.
Issues:
1. W/N the respondent judge committed grave abuse of discretion in ordering petitioners to pay respondents
the amount of P8,213.69 as interests from 1961 to 1979 on her preferred shares.
2. W/N the respondent judge committed grave abuse of discretion in ordering petitioner to redeem
respondents preferred shares for P8,000.00.
3. W/N the trial court erred in not holding that the claim of respondents are barred by prescription or laches.
Held/Ratio:
The Court for the petition meritorious. But before passing upon the merits of the case, an overview of the nature of
preferred shares and the redemption thereof was made by the Court.
A preferred share of stock is one which entitles the holder to certain preferences over the holders of common stock.
it is designed to induce persons to subscribe for shares in a corporation. The most common forms may be classified as
follows:
1. Preferred shares as to ASSETS preference in the distribution of the assets of the corporation in case of
liquidation.
2. Preferred shares as to DIVIDEDNDS entitled to receive dividends on said share to the extent agreed upon
before any dividends at all are paid to the holders of common stock.
Both the old Corporation Law and the present Corporation Code, require the existence of surplus profits/unrestricted
retained earnings, before any dividend may be declared. Dividends are payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits, the BOD has the discretion to determine whether or
not dividends are to be declared.

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Redeemable shares, are usually preferred, which by their term are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a certain redemption price. Redemption is in a sense, a repurchase of
stock for cancellation. The Corporation Code allows redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. This is only qualified by the condition that the corporation should have
enough assets to cover debts and liabilities after such redemption.
1. YES. There is no legal basis as to the respondents judge ruling that the payment of dividends is a matter of right
without necessity of a prior dividend declaration. As mentioned earlier, declaration of dividends is dependent on
the existence of unrestricted retained earnings, but still dependent upon the discretion of the BOD. Clearly, the
payment of dividends is not a matter of right but a matter of consensus.
Furthermore, interest bearing stocks (this is how the respondent judge classified the shares of stock), on which
the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only
when construed as requiring payment of interest as dividends from net earnings or surplus only
2. YES. While the stock certificate allow redemption, the option to do so was clearly vested in the Bank. The
wording of the certificate clearly show the words optional and may which denotes discretion and cannot be
construed as having a mandatory effect, contrary to the respondent judges ruling.
Furthermore, the redemption of said shares cannot be allowed due to the Central Banks finding that the Bank has
been suffering from chronic reserve deficiency. The directive issued by the Central Bank Governor (prohibiting
the redemption of the shares) was for a just cause since it was done in order to prevent the financial ruin of the
Bank.
3. YES. The claim of the private respondent was barred by both prescription [since founded on a written contract, 10
years only, which has clearly elapsed] and laches [considering that redemption may be done 2 yeas from date of
issue, and 16 years has passed since that time, the respondents were clearly negligent in exercising their rights.]

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128 - Government v. Phil. Sugar Estates (1918)
Doctrine:
It is therefore necessary in order to secure a judicial forfeiture of respondents charter to show a misuse of its
franchises justifying such. The object being to protect the public, and not to redress private grievances, the misuse
must be such as to work or threaten a substantial injury to the public, or such as to amount to a violation of the
fundamental condition of the contract by which the franchise was granted and thus defeat the purpose of the grant;
and ordinarily the wrong or evil must be one remediable in no other form of judicial proceeding.
Facts:
The case involves a quo warranto proceeding initiated by the government for the purpose of forfeiting the
franchise granted to defendant corporation. The government alleges that Phil. Sugar estates continuously offended against
the laws of the Philippine Islands and had misused its corporate authority, franchises, and privileges and had assumed
privileges and franchises not granted.
In 1913, defendant entered into a contract with the Tayabas Land Company for the purpose of engaging in the
business of purchasing lands along the right of way of the Manila Railroad Company through the Province of Tayabas
with a view to reselling the same to the Manila Railroad Company at a profit.
Defendant admitted the existence of such contract but countered that the Tayabas Land Company was only a
partnership and that the subject of the contract, money amounting to P304,459.42, which defendant delivered to Tayabas
was not an investment to the capital of Tayabas, as the government alleges but was a loan extended by it, to Tayabas.
Such money was used by Tayabas to purchase land along the right of way of the Manila Railroad Company which it
sought to resell to the Manila Railroad Company or any other person offering an acceptable price.
The government finds this action of buying and selling lands to the Manila Railroad Company as an abuse and a
violation that constitute or threaten a substantial injury to the public or such as to amount to a violation of the fundamental
conditions of the contract (charter) by which the franchises were granted and thus defeat the purpose of the grant. Under
the law, the people have guaranteed the payment of the interest upon cost of the construction of the railroad which
occupied or occupies at least some of the lands purchased by the defendant.
Every additional dollar of increase in the price of the land purchased by the railroad company added that much to
the costs of construction and thereby increased the burden imposed upon the people. Hence, must be condemned by the
courts through the forfeiture of the franchise granted.
Issues:
1. W/N the contract entered into by defendant with Tayabas was a contract of loan or a cuentas en participation
(partnership agreement)
2. W/N such contract is a ground to forfeit the corporation franchise granted to defendant.
Held/Ratio:
1. Contract is one of Cuentas en participacion. The court reasoned that the terms of the contract show not a contract
of loan as there was no date fixed for the return of the money and there was no fixed return to be made for the use
of the money. The return was dependent solely upon the profits of the business. It is possible for the defendant to
receive a return from the business even after all of the capital has been returned. The capital was to be
returned as soon as the land was sold and apparently, from clause decima, there were to be no profits until this
capital was returned. The defendant was not to receive anything for the use of said sum until after the capital
had been fully repaid, which is not consistent with the idea of a loan. It is not impossible to provide that the
capital be repaid first but the usual method is to pay the interest first. In the present instance after sufficient land
had been sold to repay the capital the remaining land unsold represented the profit between the defendant and The
Tayabas Land Company in the proportion of 25 to 75. The remaining land, under the agreement, must be sold at a
profit and the result must be therefore a profit upon the profit. Defendant at least has an equitable interest in the

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land itself; it has in fact an equitable title to 25 percent of all the remaining land. If these lands were to be
registered, the defendant could demand that its interest be noted to be register.
2. Yes. The very and sole purpose of the intervention of the defendants in the purchase of the land from the original
owners was for the purpose of selling the same to the Railroad Company at profit at an increased price, thereby
directly increasing the burden of the people by way of additional taxation. The purpose of the intervention of the
defendant in the transactions in question, was to enrich itself at the expense of the taxpayers of the Philippine
Islands, who had, by a franchise granted, permitted the defendant to exist and do business as a corporation. The
defendant was not willing to allow the Railroad Company to purchase the land of the original owners. Its
intervention with The Tayabas Land Company was to obtain an increase in the price of the land in a resale of the
same to the railroad company. The conduct of the defendant in the premises merits the severest condemnation of
the law.

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ACQUISITIONS, MERGERS, AND CONSOLIDATIONS

129 - The Edward J. Nell Company v. Pacific Farms, Inc. (1965) [alter ego]
Doctrines:
GEN RULE: Where one corporation sells or otherwise transfers all of its assets to another corporation, the
transferee is not liable for the debts and liabilities of the transferor.
EXCEPTIONS:
1. Purchaser expressly or impliedly agrees to assume such debts
2. Transactions amount to a consolidation or merger
3. Purchasing corporation merely a continuation of the selling corporation
4. Transaction is entered into fraudulently in order to escape liability of such debts.
Facts:
Edward J. Nell Company (EJNC) secured a judgment for the sum of P1,853.80 against Insular Farms, Inc.
representing unpaid balance of the price of a pump sold by EJNC to the former. A writ of execution after the judgment
had become final was returned unsatisfied, stating the Insular Farms had no leviable property.
A few months later, EJNC filed this present action against Pacific Farms, Inc. for the collection of the judgment
against Insular Farms, upon the theory that Pacific Farms is the alter ego of Insular Farms.
The CFI and subsequently the CA, denied EJNCs petition, hence this appeal by certiorari.
Issue:
1. W/N the CA erred in not holding Pacific Farms liable for the unpaid obligation of Insular Farms (and not granting
attorneys fees to EJNC)
Held/Ratio:
1. NO. The SC agree with the CA that the facts of the case do not prove that Pacific Farms is an alter ego of
Insular Farms, or is liable for its debts.
The theory of EJNC that Pacific Farms is an alter ego of Insular Farms, arose because the former purchased all or
substantially all of the shares of stock, as well as the real and personal properties of the latter, including the
pumping equipment it sold to Insular Farms.
In Fletcher Cyclopedia Corporations, the rule set forth provides:
GEN RULE: Where one corporation sells or otherwise transfers all of its assets to another
corporation, the transferee is not liable for the debts and liabilities of the transferor.
EXCEPTIONS:
i. Purchaser expressly or impliedly agrees to assume such debts
ii. Transactions amount to a consolidation or merger
iii. Purchasing corporation merely a continuation of the selling corporation
iv. Transaction is entered into fraudulently in order to escape liability of such debts.
In the case at bar, there is neither proof nor allegation that Pacific Farms had expressly or impliedly agreed to
assume the debt of Insular Farms nor is it the continuation of the latter. Moreover, the sale transaction was not
entered into fraudulently. In fact, the sale between Insular and Pacific took place nearly 6 months before the
rendition of the judgment sought to be collected. In addition, Pacific purchased the shares of stock of Insular as
the highest bidder at an action sale at the instance of a bank.

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There was also no claim that these transactions have resulted in the consolidation or merger of Insular and Pacific.
Actually, contrary to EJNCs theory, the effect that Pacific is an alter ego of Insular would negate such claim for
consolidation or merger because a corporation cannot be its own alter ego.
The claim that the amount paid (P10,000) is grossly inadequate cannot be assailed because the sale was submitted
to and approved by the SEC and as such, presumed fair and reasonable.
No need to discuss claim for attorneys fees because of the decision that claim was not valid.
130 - McLeod v. NLRC (2007) (Peggy Mills and benefits. Sorry ang haba talaga ng kaso!)
Doctrines:
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when
any of the following is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2)
where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing
corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently
enters into the transaction to escape liability for those debts.
Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated
corporation. Merger, on the other hand, is a union whereby one corporation absorbs one or more existing
corporations, and the absorbing corporation survives and continues the combined business.
Facts:
John F. McLeod filed a complaint for retirement benefits, vacation and sick leave benefits, non-payment of
unused airline tickets, holiday pay, underpayment of salary and 13th month pay, moral and exemplary damages, attorneys
fees plus interest against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc.,
Patricio Lim and Eric Hu (respondents).
McLeod said that he is an expert in textile manufacturing process. He was hired as the Manager of Universal
Textiles, Inc. (UTEX) under its President, Patricio Lim. Lim later formed Peggy Mills, Inc. with Filsyn having controlling
interest. McLeod was absorbed by the new company as its VP and Plant Manager. He started receiving the benefits
mentioned above at this time. Respondents failed to pay his benefits. Filsyn then sold Peggy Mills to Far Eastern Textile
Mills with Lim as the chairman and president. Peggy Mills was renamed Sta. Rosa Textile. When McLeod reached
retirement age, he was only given a reduced 13 month pay. Lim offered McLeod a compromise settlement of P300,000
which McLeod rejected.
Respondents allege that Filsyn and Far Eastern Textiles are separate legal entities and have no employer
relationship with McLeod. Sta. Rosa only acquired the assets and NOT the liabilities of Peggy Mills. Respondents also
allege that they relied on McLeod to settle labor problems but due to his lack of attention and absence the strike continued
resulting in closure of the company. They also said that Peggy Mills does not have a retirement program; that whatever
amount McLeod is entitled to should be offset with counterclaims (which they also filed). They also claim that McLeod
was just hired as a consultant and not as an employee; that McLeods attendance record of absence and two hours daily
work during the period of the labor problems wipes out any vacation/sick leave he may have accumulated; that there is no
basis for his claim of airline tickets, that he is not entitled to 13th month pay as a consultant; and that he had already
received his holiday pay. They also claim that they offered McLeod retirement benefits but McLeod refused.
In McLeods reply, he alleged that all the respondents are solidarily liable for all salaries and benefits he is
entitled to, being one and the same entity. McLeod said that their offices were all in the same building, their counsel holds
office in the same address, and that all respondents have the same key personnel such as Lim.
The Labor Arbiter ruled in favor of McLeod, ordering respondents to pay P5,528,996.55. The NLRC reversed the
decision. It ordered only Peggy Mills to pay McLeod his retirement pay. The CA affirmed the NLRC decision and added
that Lim is jointly and solidarily liable for the retirement pay, moral and exemplary damages, and attorneys fees.

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Issues:
1. W/N an employer-employee relationship exists between private respondents and McLeod
2. W/N private respondents may avoid their financial obligations to McLeod by invoking the veil of corporate
fiction
3. W/N McLeod is entitled to the relief he seeks against the private respondents
Held/Ratio:
1. YES BUT he was an employee of Peggy Mills ONLY. He was a managerial employee of Peggy Mills. He could
have presented evidence to support his allegation of an employer-employee relationship between him and any of
Filsyn, Sta. Rosa Textile, and Far Eastern Textile Mills. But he didnt.
McLeod claims that Peggy Mills was merely renamed Sta. Rosa Textile and that he had continued to work at the
same company with the same responsibilities. However, the SC said that what happened between Peggy Mills and
Sta. Rosa textile was dation in payment with lease. Peggy Mills had ceded, conveyed and transferred all of its
rights, title and interests in and to the assets to Sta. Rosa Textile.
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets,
except when any of the following is present: (1) where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3)
where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the
selling corporation fraudulently enters into the transaction to escape liability for those debts. None of the
exceptions is present in the case. Peggy Mills transferred its assets to Sta. Rosa Textile to settle its obligations.
The SC held that Peggy Mills did NOT fraudulently transfer its assets to escape liability for any of its debts. As it
is, they had already paid its employees their money claims, except for McLeod.
Consolidation is the union of two or more existing corporations to form a new corporation called the
consolidated corporation. It is a combination by agreement between two or more corporations by which their
rights, franchises, and property are united and become those of a single, new corporation, composed generally,
although not necessarily of the stockholders of the original corporations. Merger, on the other hand, is a union
whereby one corporation absorbs one or more existing corporations, and the absorbing corporation
survives and continues the combined business. The parties to a merger or consolidation are called constituent
corporations. In consolidation, all constituents are dissolved and absorbed by the new enterprise. In merger, all
constituents, except the surviving corporation are dissolved. In both cases, there is no liquidation of assets of the
dissolved corporations, and the surviving corporation or consolidated corporation acquires all their properties,
rights and franchises and their stockholders usually become its stockholders. In this case, there is no showing that
the subject dation in payment involved any corporate merger or consolidation. Neither is there any showing of
those indicative factors that make Sta. Rosa Textile a mere instrumentality of Peggy Mills.
2. YES. To disregard the separate judicial personality of a corporation, the wrongdoing must be established clearly
and convincingly. It cannot be presumed. Respondent corporations may be engaged in the same business as that
of Peggy Mills but that is not enough reason to pierce the veil of corporate fiction. That the respondent
corporations also have interlocking incorporators, directors, and officers is of no moment since it does not
necessarily imply fraud. Hence, Lim is absolved from personal liability.
3. NO. As a managerial employee, the Labor Code provides that McLeod can only be entitled to payment of
vacation leave and sick leave if he had an agreement with his employer. There is no showing that Peggy Mills and
McLeod had an agreement concerning payment of these benefits. Regarding the airline tickets, he was reimbursed
by the company once. It cannot be deemed an established practice. Later, as a consultant, he was no longer
entitled to 13th month pay. McLeod was also aware that his salary was going to be reduced. He was informed that
Peggy Mills were short in finances. McLeod knew that Peggy Mills was suffering from serious business losses.
Yet he continued to work there. There is also no basis for the award of moral damages since there is no bad faith
on the part of Peggy Mills.

ALS2014B 185 of 199
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132 - A.D. Santos v. Vasquez (1968) (taxi driver; tuberculosis)
[The link for the case is down, so I based this on several digests. L]
Doctrine:
(from the book): The Court upheld the judgment against the taxi cab company observing that although in truth
the majority stockholder operated the business under a sole proprietorship scheme, it was subsequently transferred
to the taxi cab company.
Business Enterprise Transfers: the transferee is liable for the liabilities of his transferor arising from the business
enterprise transferred.
Facts:
A.D. Santos, Inc. operates taxi cabs. Ventura Vazquez was one of his taxi drivers. While driving A.D. Santos,
Inc.s taxi cab, Vazquez vomited blood. The companys physician, Dr. Roman, treated him. He was sent to and confined
in Santo Tomas Hospital. Afterwards, he was admitted at the Quezon Institute where he was diagnosed with pulmonary
tuberculosis. He did not resume work.
Vazquez filed a claim with the Workmens Compensation Commission. A.D. Santos, Inc. was ordered to pay
compensation and reimburse Vazquez the amount he spent for his treatment.
Issues:
1. W/N Vazquez has a cause of action against petitioner.
Held/Ratio:
1. YES. Vazquez cause of action against A.D. Santos, Inc. is complete. In its answer to Vazquezs claim, A.D.
Santos, Inc. categorically admitted that Vazquez was its taxi driver. Further, Vazquez contracted pulmonary
tuberculosis by reason of his employment.
Vazquez cited in his testimony that he worked for City Cab, a company operated by a certain Amador Santos.
This does not detract the validity of Vazquez right to compensation. Amador Santos was the sole owner and
operator of City Cab (sole proprietorship). It was subsequently transferred to A.D. Santos, Inc. in which Amador
Santos was a majority stockholder. In business enterprise transfers, the transferee is liable for the liabilities of his
transferor arising from the business enterprise transferred.
Mentioning Amador Santos as his employer should not confuse the facts relating to the employer-employee
relationship. In this case, the veil of the corporate fiction is used as a shield to perpetrate a fraud or confuse
legitimate issues.

ALS2014B 186 of 199
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133 - Laguna Transportation Company Inc. v. SSS (1960)
Facts:
In 1940 the Bian Transportation Co., a corporation duly registered with the SEC, sold part of the lines and
equipment it operates to G. Mercado, A. Mercado, Mata and Vera Cruz. After this, the vendees formed an unregistered
partnership under the name of Laguna Transportation Company which continued to operate the lines and equipment
bought from Bian Transportation Co. Later on, the original partners forming Laguna Transport Company along with 2
new members organized a corporation known as the Laguna Transportation Co., Inc. and the corporation was registered in
the SEC on June 20, 1956, which continued the same transportation business of the unregistered partnership. Laguna
Trans. Co. Inc. requested for exemption from coverage by the System on the ground that it started operation only on June
20, 1956, when it was registered with the Securities and Exchange Commission but on November 11, 1957, the Social
Security System notified plaintiff that it was covered. Thereafter, SSS served notice upon Laguna Trans. Co. Inc.
requiring it to register as member of System and remit premiums due from all their employees and Laguna Trans.
contribution to the System.
Issue:
1. W/N Laguna Trans Co. Inc. was bound by the compulsory coverage of the Social Security Act
Held/Ratio:
1. YES. The law states that: coverage in the System shall be compulsory upon all employees between the ages of
sixteen and sixty years, inclusive, if they have been for at least six months in the service of an employer who is a
member of the System. Provided, That the Commission may not compel any employer to become a member of the
System unless he shall have been in operation for at least two years. While it is true that a corporation once
formed is conferred a juridical personality separate and district from the persons composing it, it is but a
legal fiction introduced for purposes of convenience and to subserve the ends of justice. To adopt Laguna
Trans. Co. Inc.s argument would defeat, rather than promote, the ends for which the Social Security Act
was enacted. An employer could easily circumvent the statute by simply changing his form of organization every
other year, and then claim exemption from contribution to the System as required, on the theory that, as a new
entity, it has not been in operation for a period of at least 2 years. In this case, it can be said that there was only a
change in the form of organization of the entity in the common carrier business. This is said to be so because
when the unregistered partnership was turned into a corporation, the firm name was not altered save for the fact
that Inc. was added to show that it was duly incorporated under existing laws. Furthermore, unlike in the
conveyance made by the Bian Transportation Company to the partners of the unregistered partnership no
mention whatsoever is made either in the pleadings or in the stipulation of facts that the lines and equipment of
the unregistered partnership had been sold and transferred to the corporation, this omission was deemed by the
court as in fact not a transfer of interest, but a mere change in the form of the organization of the business. Thus,
the company has already been operating for 3 years prior to the Social Security Act and being a
continuation of the unregistered partnership, must assume the obligations of the latter.

ALS2014B 187 of 199
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134 - Pantranco Employees Association v. NLRC (2009) (Employees Association)
Doctrine:
Where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not,
by that fact alone, liable for the debts and liabilities of the transferor.
Facts:
The Gonzales family owned two corporations, namely, the PNEI and Macris Realty Corporation (Macris). PNEI
provided transportation services, and had its terminal at Quezon City. The terminal stood on four pieces of real estate
(Pantranco properties) registered under the name of Macris. The Gonzales family later incurred financial losses and
their creditors took over the management of PNEI and Macris. Subsequently ownership was transferred to, the National
Investment Development Corporation (NIDC), a subsidiary of the PNB.
Macris was later renamed and merged to another corporation to form the new PNB subsidiary, the PNB-Madecor.
NIDC sold PNEI to NETI, PNEI was later placed under sequestration by the PCGG. Subsquently the Asset
Privatization Trust (APT) took over the management of PNEI.
Eventually PNEI ceased its operation which came with the various labor claims commenced by the former
employees of PNEI where the employees won.
The labor abirter issued a writ of execution, which levied the Pantrnco Properties, to satisfy the 722M due to the
employees of PNEI. Later the Labor Arbiter declared that the subject Pantranco properties were owned by PNB-Madecor.
It being a corporation with a distinct and separate personality, its assets could not answer for the liabilities of PNEI.
Considering, however, that PNB-Madecor executed a promissory note in favor of PNEI for 7M, the writ of execution to
the extent of the said amount was concerned was considered valid. Note: now Mega Prime is the successor of interest of
PNB-Madecor
Basically this decision was affirmed by the lower courts.
Issue:
1. W/N the former PNEI employees can attach the properties (specifically the Pantranco properties) of PNB, PNB-
Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI?
Held/Ratio:
1. No, First, the subject property is not owned by the judgment debtor, PNEI. The properties were owned by Macris,
the predecessor of PNB-Madecor. Hence, they cannot be pursued against by the creditors of PNEI. It is a settled
rule, that the court in executing judgments extends only to properties unquestionably belonging to the judgment
debtor alone.
Second, The general rule is that a corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected. Obviously, PNB, PNB-Madecor, Mega
Prime, and PNEI are corporations with their own personalities. PNB was only a stockholder of PNB-
Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the
Pantranco properties. Moreover, these corporations are registered as separate entities and, absent any
valid reason, we maintain their separate identities and we cannot treat them as one. Neither can we merge
the personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule that
where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter
is not, by that fact alone, liable for the debts and liabilities of the transferor.
Lastly, the piercing of the corporate veil cannot apply in the present case because it was not shown that the
requirements for piercing the veil is present.
Note: PNB cannot also ask for the annulment of the execution sale because it is not a real party in interest, PNBs interest
is only inchoate being Mega Primes creditor only, but still the proper part is Mega Prime. Also they did not elevate the
matter to the CA hence it is presumed that they agree with it.

ALS2014B 188 of 199
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135 - Pepsi-Cola Bottling Co. v. NLRC (1992)
Doctrine:
Although a corp. may have cease business operations and an entirely new company has been organized to take
over, it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier
firm.
Facts:
Encabo, a licensed mechanical and electrical engineer, was employed by Pepsi-Cola Bottling Co. as maintenance
manager of its beverage plant.
Latter the plants soaker machine needed rehabilitation. A contractor, PREMACOR won the bid to rehabilitate said
machine, the Plant General Manager of the company, petitioner Sian, wired co-petitioner Castillo and Dormal to help in
the rehabilitaion. PREMACOR failed to make the soaker machine fully operational. Petitioner Castillo then asked Encabo
to take over the work, which he did. The soaker machine became operational again.
Later the company informed Encabo that he might be fired because of the delay in the rehabilitation of the soaker
machine. Disappointed he went on leave. subsequently he was of terminated. Encabo then filed a complaint for illegal
dismissal and unfair labor practice against petitioners before the NLRC, where he won.
Pepsi-Cola Products Philippines, Inc. (PCPPI) received the writ of execution, addressed to Pepsi-Cola Bottling
Co. (PBC) and ordering Pepsi-Cola Distributors of the Philippines (PCD) to reinstate Encabo. PCPPI stated that it was
returning the writ unsatisfied since it is a corporation separate and distinct from PBC or PCD, making it an inappropriate
party to which the writ of execution should be served. In the motion for reconsideration filed with the NLRC, the
petitioners alleged that reinstatement is no longer possible since the petitioner company closed down its business on July
24, 1989 and the new franchise holder, Pepsi-Cola Products Philippines (PCPPI) is a new entity. NLRC ruled that PBC
and its successor-in-interest PCPPI were held liable for the reinstatement of Encabo. Hence this petition.
Issue:
1. W/NEncabo was illegally dismissed? (not important)
2. W/N PCPPI was liable for the reinstatement of Encabo
Held/Ratio:
1. Yes, the Labor Arbiter found that Encabo was not remiss of his duties, he was able to maintain functional the
dilapidated machine, and in the case of the rehabilitation of the machine his suggestions where ignored, and the
rehabilitation was placed under the complete control of the independent contractor, as the petitioners wanted, but
when the independent contractor failed, he was the one that repaired the machine. Apart from the Labor Arbiters
finding that there is no sufficient basis for the PBC to justify Encabos dismissal on the ground of loss of trust and
confidence, it appears that the dismissal was merely to cover up managements embarrassment. Encabo was by-
passed and ignored in the task of rehabilitating the soaker machine and he is now being punished for the mistake
of management and the failure of its hired contractor and its favored supervisor. Also the requirements of due
process were not met by the PBC.
2. Yes, PCPPI claims that it is an entirely separate and distinct entity from the PCD. On the ground of serious
business losses, PCD alleged that it ceased to operate and PCPPI, a company separate and distinct from PCD
acquired the franchise to sell the Pepsi-Cola products. Pepsi-Cola Distributors of the Philippines may have
ceased business operations and Pepsi-Cola Products Philippines Inc. may be a new company but it does not
necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. The
complaint was filed when PCD was still in existence. Pepsi-Cola never stopped doing business in the Philippines.
The same soft drinks products sold in 1988 when the complaint was initiated continue to be sold now. The sale of
products, purchases of materials, payment of obligations, and other business acts did not stop at the time PCD
bowed out and PCPPI came into being.

ALS2014B 189 of 199
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In fact in the surety bond put up by the petitioners as appeal bond, both PCD and PCPPI bound themselves to
answer the monetary awards of the private respondent in case of an adverse decision of the appeal, which clearly
implies that the PCPPI as a result of the transfer of the franchise bound itself to answer for the liability of PCD to
its employees.
Moreover, the liability of petitioners A. C. Sian and Virgilio Castillo as Plant General Manager and
Manufacturing Manager respectively of PCD is beyond question as they are the architects of the dismissal of
private respondent.
137 - Phividec v. CA (1990)

Facts:
Violeta M. Borres was injured in an accident and was held by the trial courts to be due to the negligence of
Phividec Railways, Inc (PRI). The accident occurred on March 29, 1979. But before that, on May 25, 1979 Phividec sold
all its rights and interests in the PRI to the Philsucom. Two days later, Philsucom caused the creation of a wholly-owned
subsidiary, the Panay Railways Inc to operate the railway assets of Phividec.
Borres filed a complaint for damages against PRI and Panay where Panay filed a third-party complaint against
herein petitioner (PRI). It alleged that upon the sale to PHILSUCOM of PRI, the corporate name of PRI was changed to
Panay Railways, Inc. Panay disclaimed liability on the ground that in the Agreement concluded between PHIVIDEC and
PHILSUCOM, it was provided that Phividec holds Philsucom free from any action that might arise from any act of
omission prior to the turn-over.
Issue:
1. W/N Phividec should be held liable
Held/Ratio:
1. Yes. It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and
PHILSUCOM, particularly the stipulation exempting the latter from any claim or liability arising out of any
act or transaction prior to the turn-over, PHIVIDEC had expressly assumed liability for any claim against
PRI. Since the accident happened before that agreement and PRI ceased to exist after the turn-over, it should
follow that PHIVIDEC cannot evade its liability for the injuries sustained by the private respondent.
A contrary conclusion would leave the private respondent without any recourse for her legitimate claim. In the
interest of justice and equity, and to prevent the veil of corporate fiction from denying her the reparation to which
she is entitled, that veil must be pierced and PHIVIDEC and PRI regarded as one and the same entity.

ALS2014B 190 of 199
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138 - Sundowner Development Corporation v. Drilon (1989)
Doctrine:
As a general rule, there is no law requiring a bona fide purchaser of assets of an on-going concern to absorb in its
employ the employees of the latter. However, although the purchaser of the assets or enterprise is not legally
bound to absorb in its employ the employers of the seller of such assets or enterprise, the parties are liable to the
employees if the transaction between the parties is colored or clothed with bad faith.
Unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are
not enforceable against a transferee of an enterprise, labor contracts being in personam, thus binding only
between the parties. A labor contract merely creates an action in personally and does not create any real right
which should be respected by third parties.
Facts:
Hotel Mabuhay, Inc. (Mabuhay) leased the premises belonging to Santiago Syjuco, Inc. (Syjuco) but failed to pay
their rentals. A case for ejectment was filed by Syjuco against Mabuhay who offered to amicably settle the case by
surrendering the premises to Syjuco and to sell its assets and personal property to any interested party. Sundowner
Development Corporation (Sundowner) leased the premises from Syjuco and also agreed to buy Mabuhays assets and
personal properties located in the premises.
Subsequently, the National Union of Workers in Hotel, Restaurant and Allied Services (NUWHRAIN) picketed
the leased premises, barricaded the entrance and denied Sundowners officers, employees and guests free access to and
egress. The Secretary of Labor Drilon assumed jurisdiction over the labor dispute and in the interim, ordered all striking
employees to return to work and for Mabuhay to accept all returning employees pending final determination of the issue
of the absorption of the former employees of Mabuhay.
Mabuhay submitted that since it has ceased operations and had sold all its assets and personal properties to
Sundowner, there exists a legal and physical impossibility on its part to comply with the return to work order specifically
on absorption. Instead, it entered into a tripartite agreement with Sundowner and NUWHRAIN so that the employees
would cease picketing and that Sundowner could continue its operations.
NUWHRAIN alleged that Mabuhay and Sundownder connived to sell the assets and close the hotel to escape its
obligations to the employees and asked that Sundowner accept the workforce of Mabuhay and pay backwages. The
Secretary of Labor issued an order requiring Sundowner to absorb the union members and to pay backwages.
Issue:
1. W/N the purchaser of the assets of an employer corporation can be considered a successor employer of the latters
employees.
Held/Ratio:
1. NO. In the case at bar, contrary to the claim of the Labor Secretary that the transaction between Sundowner and
Mabuhay was attended with bad faith, the court finds no cogent basis for such contention. It was only when
Mabuhay offered to sell its assets and personal properties in the premises to Sundowner that they came to deal
with each other. Thus, the absorption of the employees of Mabuhay may not be imposed on Sundowner.
Moreover, in a tripartite agreement that was entered into by Sundowner with NUWHRAIN and Mabuhay, it is
clearly stipulated that Immediately after the execution of this Agreement, the FIRST PARTY shall give a list of its
members to the THIRD PARTY that it desires to recommend for employment so that the latter can consider them
for employment, with no commitment whatsoever on the part of the THIRD PARTY to hire them in the business
that it will operate in the premises formerly occupied by the Hotel Mabuhay.
It is clear that Sundowner has no liability whatsoever to the employees of Mabuhay and its responsibility if at all,
is only to consider them for re-employment in the operation of the business in the same premises. There is no
implied acceptance of the employees of Mabuhay by Sundowner and no commitment or duty to absorb them.

ALS2014B 191 of 199
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Also, while it is true that Sundowner is using the leased property for the same type of business as that of
Mabuhay, there can be no continuity of the business operations from Mabuhay to Sundowner because Mabuhay
had not retained control of the business. Sundowner is a corporation entirely different from Mabuhay and has no
controlling interest whatever in the same.
What is obvious is that the Sundowner, by purchasing the assets in the hotel premises, enabled Mabuhay to pay its
obligations to its employees. There being no employer-employee relationship between the Sundowner and the
Mabuhay employees, it cannot be compelled to absorb the latter and to pay them backwages.
139 - Central Azucarera del Danao v. CA (1985)

Doctrines:
Change of ownership or management of a business establishment or enterprise is not one of the just causes for
lawful termination under the law, and cannot be construed as synonymous with nor analogous to closing or
cessation of operation of an establishment or enterprise and therefore cannot exempt the transferor from liability
for separation pay.
Facts:
Private respondents Bana-ay, Coscolluela, and Palma were among the regular and permanent employees of
Central Azucarera del Danao (Central Danao), owner-operator of a sugar mill in Negros Occidental. Central Danao
sold its sugar mill properties and other assets to Danao Development Corporation (Dadeco), a duly organized
corporation composed of sugar planters. Immediately thereafter, Dadeco took over the management and operation of the
properties pursuant to the terms and conditions of the Deed of Sale.
Although the deed made no express mention of the continued employment status of the old employees of Central
Danao upon the consequent change of its ownership and management, Dadeco nevertheless hired Central Danaos regular
and permanent employees but in accordance with its own hiring and selection policies.
During the period of their new employment with Dadeco, Bana-ay, Cosculleula, and Palma were terminated. They
filed separate complaints for recovery of termination pay with damages against Dadeco and Central Danao as common
defendants with the CFI of Negros Occidental. They alleged among other things, that Dadeco maliciously and
fraudulently dismissed them without justifiable cause or any advance notice of separation.
Dadeco denied liability for the termination pay asserting lack of cause of action since it was not private
respondents employer for the period in question. It averred that Central Danao, as previous owner and employer should
shoulder the liability.
Central Danao invoked the defense of lack of cause of action, prescription, and laches in denying liability and by
way of cross-claim, shifted the burden to Dadeco. It claimed that Dadeco assumed liability for termination pay upon the
sale of the assets. Thus, at the time of private respondents termination, Dadeco was already their employer.
CFI ruled in favor of Bana-ay, Coscolluela, and Palma, ordering Central Danao to pay them. However, complaints
against Dadeco were dismissed (Coscullela actually received some amount from Dadeco, Palma was found to have been
overpaid, and Bana-ay is not entitled to separation pay for being a temporary laborer only). CA affirmed. Central Danaos
MR was denied. Hence, this petition to review.
Issue:
1. W/N a change of ownership or management of an establishment or corporation by virtue of the sale or disposition
of all or substantially all of its properties and assets operate to insulate the selling corporation (Central Danao)
from its obligation to its employees under the Termination Pay Law.
Held/Ratio:
1. NO. An employee may be terminated with or without just cause. Under the Termination Pay Law, if there is just
cause, the employer is not required to serve notice nor pay termination pay to employees concerned. If without

ALS2014B 192 of 199
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just cause, the employer must serve timely notice to the employee; otherwise, the employer is obliged to pay
termination pay, except where there are other applicable statutes that provide a remedy for unfair labor practice.
In the exercise of its management prerogative, the employer may merge or consolidate its business with another,
or sell or dispose of all or substantially all of its assets and properties which may bring about the dismissal or
termination of its employees in the process. Such dismissal or termination should not however be interpreted in
such a manner as to permit the employer to escape payment of termination pay.
The sale or disposition must be motivated by good faith as an element of exemption from liability. An
innocent transferee of a business establishment has no liability to the employees of the transferor to
continue employing them. Nor is the transferee liable for past unfair labor practices of the previous owner,
except when the liability therefor is assumed by the new employer under the contract of sale, or when
liability arises because of the new owners participation in defeating the rights of the employees.
The Deed of Sale does not contain any express stipulation to the continued employment by Dadeco of the former
employees of Central Danao. Also, there is no law requiring the purchaser to absorb the employees of the
selling company. The most that the former could do is to give preference to the qualified separated employees of
the selling company. In reality then, the employees herein were rehired by Dadeco, their new employer.
The records also reveal that negotiations for the sale were made behind the back of the employees who were taken
by surprise upon its consummation. Technically then, the employees were terminated on the date of the sale.
Worse, they were not even given the required notice of termination.

ALS2014B 193 of 199
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141 - Pepsi Cola Distributors of the Phils v. NLRC and Tertuliano Yute (1994) (employee with stomach ache)
Doctrine:
Pepsi Cola Distributors of the Philippines may have ceased business operations and Pepsi-Cola Products
Philippines, Inc. may be a new company but it does not necessarily follow that no one may now be held liable for
illegal acts committed by the earlier firm.
Facts:
Tertuliano P. Yute started working with Pepsi Bottling Company of the Philippines (PBCP) in Butuan City as a
contractual maintenance electrician in 1979. Eventually Pepsi Cola Distributors of the Philippines, Inc. (PCD) took
over the bottling companys manufacturing operations in 1981, he was absorbed as a regular employee.
On December 1988, PCD terminated Yutes employment on the grounds of alleged abandonment of work
and/or absence without leave. Yute filed a case before the Sub-Regional Arbitration Branch 10 of the NLRC in Butuan
City for illegal dismissal against PCD. Labor Arbiter Solamo declared as illegal the dismissal of Yute and ordered PCD to
reinstate him with full backwages from the time he was illegally dismissed up to the time of his actual reinstatement. PCD
appealed the decision to the NLRC Cagayan De Oro City. Meanwhile, PCD reinstated Yute and included him in the
payroll effective May 1989. However, 33 days after he was included in the payroll, PCD stopped payment of Yutes
salary again on the ground that it allegedly sold its business interest to Pepsi Cola Products Philippines Inc.
(PCPPI).
PCCPI filed in the case a manifestation/motion praying that the change of ownership be taken cognizance of the
NLRC. Stating among others that it was the new owner, manufacturer and operator of the properties and assets of
PCD and that it has a legal personality separate and distinct from PCD and that although PCCPI assumed the
business and had offered employment to regular employees of good standing, the fact remains that PCPPI is not a
party respondent to this case nor is PCCPI an alter ego, agent or respondent of PCD. NLRC ruled in favor of Yute.
Issues:
1. W/N Yute was accorded due process
2. W/N the dismissal of Yute was proper
3. W/N the dismissal of Yute on the ground that the company already sold its business interest to PCCPI
proper
Held/Ratio:
1. YES. Yute was accorded due process before he was dismissed on Dec 15, 1998. The Court has consistently held
that due process does not necessarily mean or require a hearing but simply an opportunity to be heard. Yute was
notified twice about the hearing to be conducted by the administrative committee created to look into his case but
he refused to sign the notice to attend the scheduled hearings.
2. NO. The court finds that the penalty of dismissal is disproportionate, under the attendant circumstances, which
appears to be excusable. Yute, at this stage, had just recovered from a complained stomach ache which, in
accordance with the company physicians diagnosis, required him to rest for 25 days.
Also, as found by the Labor Arbiter, Yutes absences during 1979-1980, for which he was twice reprimanded
were incurred during his employment with PCBCPI (1st Pepsi). When the business interests of PCBCPI were
taken over by PCD (2nd Pepsi), and Yute was absorbed as a regular employee, his previous absences were
obliterated from his records by such change of employment status from contractual to regular.

ALS2014B 194 of 199
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The facts alleged in Yutes position paper10 were not contested by Petitioner. Yute shouldve been given a
warning first, then reprimand or even suspension but not outright dismissal from employment.
3. NO. The contention that the second dismissal of private respondent presents an issue separate and distinct from
the issue of the earlier dismissal on December 15, 1988 is nothing but an attempt of PCD to evade liability for
illegally dismissing private respondent and to shield the purchasing corporation, PCPPI, from the said liability. It
must be noted that the issue of whether or not Pepsi Cola Products Philippines, Inc. (PCPPI) is liable for the
illegal acts of its predecessor-in-interest PCD, as in the instant case, has already been settled in the case of Pepsi
Cola Bottling Co. v. NLRC. In said case, the Court ruled:
Pepsi Cola Distributors of the Philippines may have ceased business operations and Pepsi-Cola Products
Philippines, Inc. may be a new company but it does not necessarily follow that no one may now be held liable for
illegal acts committed by the earlier firm. The complaint was filed when PCD was still in existence. Pepsi-Cola
never stopped doing business in the Philippines. The same soft drinks products sold in 1988 when the complaint
was initiated continue to be sold now. The sale of products, purchases of materials, payment of obligations, and
other business acts did not stop at the time PCD bowed out and PCPPI came into being. There is no evidence
presented showing that PCPPI, as the new entity or purchasing company is free from any liabilities incurred by
the former corporation.
There is thus no grave abuse of discretion on the part of public respondent NLRC when it ordered PCD and
PCPPI to reinstate private respondent to his former position.
10. [O]n 21 November 1988 while he was working, he suffered stomach ache and he was accompanied by his supervisor to the company nurse and
he was given needed medicines. Later, upon the agreement of the complainant and his immediate supervisor the former went on one (1) day
vacation leave, and left the respondent plant and he immediately proceeded to their company physician, Teodoro BP. Vesagas for further
treatment and the herein complainant was advised to rest for 25 days per medical certificate issued by company's physician Thereafter, he went
to Magallanes, Agusan del Norte to take the necessary rest. Later on 9 December 1988 he collected his 13th month pay as he went also for
check-up from the company's physician and asked for a medical certificate. On that day he met his immediate supervisor and informed (him
about) his illness and presented his medical certificate.
However, on 16 December 1988 while complainant reported back for work, he was informed by his supervisor that his services was (sic)
already terminated effective 15 December 1988 for alleged absence without leave (AWOL) as there was already an administrative investigation
conducted by management for the said AWOL

ALS2014B 195 of 199
sof

142 - Manlimos et. al v. NLRC(1995)
Facts:
There are 16 petitioners in this case. Manlimos, along with the other petitioners, were regular employees of Super
Mahogany Plywood Corporation, a domestic corporation based in Butuan City. In 1991, a new management group
acquired complete ownership over Super Mahogany. The employees were advised of the change of ownership, and were
eventually terminated with their conformity in December 1991. By virtue of such termination, the employee-petitioners
received separation pay and all other benefits due them. Upon receipt of such amounts, they were made to sign a release
and waiver in the presence of the hearing officer of the DOLE.
After such termination, the new owners caused the publication of a notice for the hiring of new workers. The
employee-petitioners applied and were re-hired on probationary status.
During the course of their probationary employment, two of the petitioners, Cumpay and Etic, were dismissed on
the ground of abandonment on May 4, 1992. The rest of the petitioners were also eventually dismissed, upon the ground
that they committed acts prejudicial to the interest of the new management, specifically alleging unsatisfactory work
performance. The date of their termination was pushed from June 13 to June 20, 1992, due to the pleas of the employees.
Subsequently, two groups of employees filed their separate complaints for illegal dismissal, with prayers for
reinstatement, backwages and other amounts due them before the NLRC. These separate complaints were consolidated.
The employee-petitioners allege that they remained regular employees of the corporation because the change in
ownership and management of Super Mahogany left its separate juridical personality unaffected. In their defense, the
corporation claims that it was within their management prerogative to terminate the employee-petitioners, as they were re-
hired by the new management under probationary status. The Labor Arbiter ruled in favor of the employees. Upon appeal,
the fifth division of the NLRC reversed. Hence, this petition.
Issues:
1. W/N the employees were illegally dismissed
Held/Ratio:
1. No as to the employees who were dismissed based on unsatisfactory performance; Yes as to the two employees
dismissed on the ground of abandonment.
The Supreme Court emphasized that the issue in this case is the validity of the termination of the employees as
a result of the change of corporate ownership. Thus, it was not incumbent upon the corporation to prove that
the cessation of business operations was based on just cause because there was no cessation to speak of, only a
change of ownership. Such change in ownership had no effect on the distinct and separate juridical entity of
Super Mahogany which continued to exist.
It is within the new owners prerogative to hire new employees in place of old ones, as long as such termination is
not used as a mechanism to escape payment of termination pay. In this case, it must be noted that the employees
signed a waiver upon termination, acknowledging receipt of amounts due them. The fact that they were re-hired
by the new owners did not change the fact that they were terminated upon change of corporate ownership. Their
re-employment under probationary status was not a continuation of their regular employment under the
old management of Super Mahogany.
Termination of the employees was effective June 20. This date coincided with the date of expiration of the six-
month probationary period, thus rendering moot the question of illegal dismissal, it being within the sole
prerogative of management to renew the probationary contracts.
While the other petitioners were validly dismissed, the same cannot be said for Cumpay and Etic. They were
dismissed on an earlier date (May 4) on the ground of abandonment. Because Super Mahogany failed to prove the
intent to abandon on the part of these two employees, their premature dismissal was consequently illegal.
However, since their contracts already expired prior to the rendering of the present decision, they were no longer

ALS2014B 196 of 199
sof

reinstated but were instead granted backwages covering the period from the date they were illegally dismissed, to
the date of expiration of their probationary contracts.
143 - Filipinas Port Services v. NLRC (1989)

Doctrine:
Unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise, labor contracts
being in personam.
Facts:
On Feb. 16, 1977, the government adopted a policy in Davao that only one company can operate stevedoring and
arrastre services in the ports of Davao. This was approved in Customs Memorandum Order 28075 which was later
superseded by the General Port Regulations of the Philippine Ports Authority (PPA) which fully implemented the policy.
Because of this, the companies providing such services consolidated together and formed a corporation named
Davao Dockhandlers, Inc. which was later renamed Filipinas Port Services. Among the corporations in the consolidation
agreement was Davao Maritime Stevedoring Corporation (DAMASTICOR) (others were: Allied Stevedoring
Corporation, Davao Southern Stevedoring Corporation, Mt. Apo Stevedoring Corporation, United Stevedoring
Corporation, Mindanao Terminal Brokerage Services, Inc. and Bay United Stevedoring Corporation)
In the articles of incorporation of the new corporation, it provided that:
Sec. 118. Absorption of labor - Subject to the provisions of the immediate preceding section,
and consistent with the actual operational requirements of the new management, all labor force
together with its necessary personnel complement, of the merging operators shall be absorbed by
the merged or integrated organization to constitute its labor force.
Hence, most of the employees of the consolidating companies were employed by Filipinas.
Private respondent, an employee of DAMASTICOR, upon retirement from Filipinas, was paid his retirement fee
from 1977-1987. He however contends that his employment from DAMASTICOR should be counted in computing his
retirement fee. He brought the case against the labor arbiter which upheld his claim and ordered petitioner to pay
respondent at the rate of one-half month pay for every year of service, a fraction of at least six months being considered as
one year, less payment made arguing that as successor, Filipinas should be liable to the employees of its consolidating
companies.
Issue:
1. W/N the successor-in-interest of an employer is liable for the differential retirement pay of an employee earned by
him when he was still under the employment of the predecessor-in-interest.
Held/Ratio:
1. No. Unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise, labor
contracts being in personam. Petitioner cannot be held liable for the payment of the retirement pay of private
respondent while in the employ of DAMASTICOR. It is the latter who is responsible for the same as the labor
contract of private respondent with DAMASTICOR is in personam and cannot be passed on to the petitioner.

ALS2014B 197 of 199
sof

144 - SMC Union v. Confessor (1996)
Facts:
SMC-Union entered into a Collective Bargaining Agreement (CBA) with SMC to take effect upon the
expiration of the previous CBA or on June 30, 1992. SMC management informed its employees in a letter that the
company which was composed of 4 operating divisions (1) beer, (2) packaging, (3) feed and livestocks and (4) Magnolia
and Agri-business would undergo a restructuring.
Magnolia and Feeds and Livestock divisions were spun-off and became 2 separate and distinct corporations:
Magnolia Corp. (Magnolia) and San Miguel Foods (SMFI). Notwithstanding the spin-offs, the CBA remained in force
and effect. After June 30, 1992, the CBA was renegotiated with the two parties submitting respective proposals.
During the negotiations, SMC-Union insisted that the bargaining unit of SMC should still include the employees
of the spun-off corporation and the CBA shall be effective for 2 years.
SMC, on the other hand, contended that the members/employees who had moved to Magnolia and SMFI,
automatically ceased to be part of the bargaining unit at the SMC and that the CBA should be effective for 3 years
PURSUANT TO THE LABOR CODE (Art. 253-A).
There was a deadlock. SMC-Union filed a notice of strike against SMC. In order to avert the strike, the Secretary
of Labor assumed jurisdiction over the dispute. The secretary of labor issued an order that the renegotiated terms of
the CBA shall be effective for 3 years and the such CBA shall cover only the employees of SMC and not of
Magnolia and SMFI.
Issues:
1. W/N the duration of the renegotiated terms of the CBA is to be effective for three years or for only two years
2. W/N the bargaining unit of SMC includes also the employees of Magnolia and SMFI.
Held/Ratio:
1. YES. Art. 253-A states that the CBA has a term of five (5) years instead of three years, before the amendment
of the law as far as the representation aspect is concerned. All other provisions of the CBA shall be
negotiated not later than three (3) years after its execution. The representation aspect refers to the identity
and majority status of the union that negotiated the CBA as the exclusive bargaining representative of the
appropriate bargaining unit concerned. All other provisions simply refers to the rest of the CBA, economic as
well as non-economic provisions, except representation.
The framers of the law wanted to maintain industrial peace and stability by having both management and labor
work harmoniously together without any disturbance. Thus, no outside union can enter the establishment within
five (5) years and challenge the status of the incumbent union as the exclusive bargaining agent. Likewise, the
terms and conditions of employment (economic and non-economic) cannot be questioned by the employers or
employees during the period of effectivity of the CBA. The CBA is a contract between the parties and the parties
must respect the terms and conditions of the agreement.
2. NO. Magnolia and SMFI were spun-off to operate as distinct companies. Undeniably, the transformation of the
companies was a management prerogative and business judgment which the courts can not look into unless it
is contrary to law, public policy or morals. Neither can we impute any bad faith on the part of SMC so as to
justify the application of the doctrine of piercing the corporate veil. As a result of the spin-offs:
a. Each of the companies are run by, supervised and controlled by different management teams including
separate human resource/personnel managers.
b. Each Company enforces its own administrative and operational rules and policies and are not dependent
on each other in their operations.
c. Each entity maintains separate financial statements and are audited separately from each other.

ALS2014B 198 of 199
sof

Magnolia and SMFI became distinct entities with separate juridical personalities. Thus, they can not belong to
a single bargaining unit. In determining an appropriate bargaining unit, the test of grouping is mutuality or
commonality of interests. Considering the spin-offs, the companies would consequently have their respective
and distinctive concerns in terms of the nature of work, wages, hours of work and other conditions of
employment.

ALS2014B 199 of 199
sof

02 Case Digests - Corporation Law PDF

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CORPORATION LAW DIGESTS ALS2014B ATTY.

NATURE AND ATTRIBUTES OF A CORPORATION

16 - Tatad v. Garcia Jr. (1995) (EDSA LRT)

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE

39 - Francisco v. Mejia (2001) (intentional delinquency in payment of real taxes)

CORPORATE CONTRACT LAW

59 - China Banking Corp. v. CA (1997) (binding effects of by-laws)

CORPORATE POWERS AND AUTHORITY

DIRECTORS, TRUSTEES, AND OFFICERS

67 - Filipinas Port Services v. Go (2007) (additional positions, derivative suit)

70 - Board of Liquidators v. Heirs of Kalaw (1967)

71 - Montelibano v. Bacolod-Murcia Milling (1962) (milling concession grants / business judgment)

78 - Nyco Sales Corporation v. BA Finance Corp (2001)

83 - Bates v. Dresser (1920) (bank, Coleman)

However, Suico was never paid because:

96 - Tramat Mercantile v. CA (1994) (tractor and land mower)

STOCKHOLDERS AND MEMBERS

114 - Nava v. Peers Marketing Corproration (1927)

119 - Lambert v. Fox (1914)

124 - Hi-Yield v. CA (2009) (family problems L)

125 - San Miguel Corp. v. Kahn (1989)

126 - Chua v. Court of Appeals (2004) (falsification of corporate minutes)

CAPITAL STRUCTURE: SHARES OF STOCK

ACQUISITIONS, MERGERS, AND CONSOLIDATIONS

137 - Phividec v. CA (1990)

139 - Central Azucarera del Danao v. CA (1985)

143 - Filipinas Port Services v. NLRC (1989)

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