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LBC Express, Inc. vs.

Court of Appeals, 236 SCRA person, a juridical person such as a corporation may validly
602, G.R. No. 108670 September 21, 1994 complain for libel or any other form of defamation and claim
for moral damages. AMECs claim for moral damages falls
Damages; Moral damages cannot be awarded to a under item 7 of Article 2219 of the Civil Code. This provision
corporation, an artificial person which has no feelings, expressly authorizes the recovery of moral damages in
emotions or senses, and which cannot experience physical cases of libel, slander or any other form of defamation.
suffering and mental anguish.The respondent court erred Article 2219(7) does not qualify whether the plaintiff is a
in awarding moral damages to the Rural Bank of Labason, natural or juridical person. Therefore, a juridical person
Inc., an artificial person. Moral damages are granted in such as a corporation can validly complain for libel or any
recompense for physical suffering, mental anguish, fright, other form of defamation and claim for moral damages.
serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. A Same; Same; Where the broadcast is libelous per se, the
corporation, being an artificial person and having existence law implies damages, in which case, evidence of an honest
only in legal contemplation, has no feelings, no emotions, mistake or the want of character or reputation of the party
no senses; therefore, it cannot experience physical suffering libeled goes only in mitigation of damages.Where the
and mental anguish. Mental suffering can be experienced broadcast is libelous per se, the law implies damages. In
only by one having a nervous system and it flows from real such a case, evidence of an honest mistake or the want of
ills, sorrows, and griefs of lifeall of which cannot be character or reputation of the party libeled goes only in
suffered by respondent bank as an artificial person. mitigation of damages. Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a
Same; Equity; The right to recover moral damages is based condition precedent to the recovery of some damages. In
on equity and he who comes to court to demand equity this case, the broadcasts are libelous per se. Thus, AMEC is
must come with clean hands.We can neither sustain the entitled to moral damages. However, we find the award of
award of moral damages in favor of the private P300,000 moral damages unreasonable. The record shows
respondents. The right to recover moral damages is based that even though the broadcasts were libelous per se, AMEC
on equity. Moral damages are recoverable only if the case has not suffered any substantial or material damage to its
falls under Article 2219 of the Civil Code in relation to Article reputation. Therefore, we reduce the award of moral
21. Part of conventional wisdom is that he who comes to damages from P300,000 to P150,000.
court to demand equity, must come with clean hands. In
the case at bench, respondent Carloto is not without fault. Collector of Internal Revenue vs. Club Filipino, Inc.
He was fully aware that his rural banks obligation would de Cebu, 5 SCRA 321, No. L-12719 May 31, 1962
mature on November 21, 1984 and his bank has set aside
cash for these bills payable. He was all set to go to Manila Taxation; Percentage Tax; Bar and Restaurant; When
to settle this obligation. He has received the documents operator not engaged in business.The liability for fixed
necessary for the approval of their rediscounting application and percentage taxes as provided by Sections 182, 183 and
with the Central Bank. He has also received the plane ticket 191 of the Tax Code does not ipso facto attach by mere
to go to Manila. Nevertheless, he did not immediately reason of the operation of a bar and restaurant. For the
proceed to Manila but instead tarried for days allegedly liability to attach, the operator thereof must be engaged in
claiming his ONE THOUSAND PESOS (P1,000.00) pocket the business as a barkeeper and restaurateur.
money. Due to his delayed trip, he failed to submit the Same; Words and Phrases; "Business", meaning of.The
rediscounting papers to the Central Bank on time and his plain and ordinary meaning of business is restricted to
bank was penalized THIRTY-TWO THOUSAND PESOS activities or affairs where profit is the purpose or livelihood
(P32,000.00) for failure to pay its obligation on its due date. is the motive, and the term business when used without
The undue importance given by respondent Carloto to his qualification, should be construed in its plain and ordinary
ONE THOUSAND PESOS (P1,000.00) pocket money is meaning, restricted to activities for profit or livelihood.
inexplicable for it was not indispensable for him to follow up
his banks rediscounting application with Central Bank. Same; Club Filipino, Inc. de Cebu; Not engaged in bar and
restaurant.The Club Filipino, Inc. de Cebu was organized
Filipinas Broadcasting Network, Inc. vs. Ago Medical to develop and cultivate sports of all class and
and Eduacational Central-Bicol Christian college of denomination, for the healthful recreation and
Medicine (AMEC-BCCM), 448 SCRA 413, G.R. No. entertainment of its stockholders and members; that upon
141994 January 17, 2005 its dissolution, its remaining assets, after paying debts shall
Libel; Damages; Corporations; Obiter Dictum; The Courts be donated to a charitable Philippine Institution in Cebu;
statement in Mambulao Lumber Co. v. PNB, 22 SCRA 359 that it is operated mainly with funds derived from
(1968), that a corporation may have a good reputation membership fees and dues; that the Club's bar and
which, if besmirched, may also be a ground for the award of restaurant catered only to its members and their guests;
moral damages is an obiter dictum.A juridical person is that there was in fact no cash dividend distribution to its
generally not entitled to moral damages because, unlike a stockholders and that whatever was derived on retail from
natural person, it cannot experience physical suffering or its bar and restaurant was used to defray its overall
such sentiments as wounded feelings, serious anxiety, overhead expenses and to improve its golf course (cost-
mental anguish or moral shock. The Court of Appeals cites plus-expenses-basis), it stands to reason that the Club is
Mambulao Lumber Co. v. PNB, et al. to justify the award of not engaged in the business of an operator of bar and
moral damages. However, the Courts statement in restaurant.
Mambulao that a corporation may have a good reputation PNOC-Energy Development Corp. vs. NLRC, 201
which, if besmirched, may also be a ground for the award of SCRA 487, G.R. No. 79182 September 11, 1991
moral damages is an obiter dictum.
Corporation Law; Civil Service Law; Jurisdiction; Doctrine
Same; Same; Same; Since Article 2219(7) of the Civil Code that employees of government-owned and/or controlled
does not qualify whether the plaintiff is a natural or juridical
corporations whether created by special law or formed as name of another corporation as a trade name. Both the
subsidiaries under the General Corporation Law are Rural Transit Company, Ltd., and the Bachrach Motor Co.,
governed by the Civil Service Law and not by the Labor Inc., are Philippine corporations and the very law of their
Code has been supplanted by the present Constitution. creation and continued existence requires each to adopt and
This issue has already been laid to rest in the case of PNOC- certify a distinctive name.
EDC vs. Leogardo, 175 SCRA 26 (July 5, 1989), involving
the same petitioner and the same issue, where this Court 2.ID.; ID.; CHANGE OP CORPORATION'S NAME.The
ruled that the doctrine that employees of government incorporators "constitute a body politic and corporate under
government-owned and/or controlled corporations, whether the name stated in the certificate." (Section 11, Act No.
created by special law or formed as subsidiaries under the 1459, as amended.) A corporation has the power "of
General Corporation law are governed by the Civil Service succession by its corporate name." (Section 13, ttrid.) The
Law and not by the Labor Code, has been supplanted by the name of a corporation is therefore essential to its existence.
present Constitution, It cannot change its name except in the manner provided
by the statute. By that name alone is it authorized to
Same; Same; Same; Same; Presently, the test in transact business.
determining whether a government-owned or controlled
corporation is subject to the Civil Service Law is the manner 3.ID. ; ID. ; ID.The law gives a corporation no express or
of its creation.Thus, under the present state of the law, implied authority to assume another name that is
the test in determining whether a government-owned or unappropriated; still less that of another corporation, which
controlled corporation is subject to the Civil Service Law is is expressly set apart for it and protected by the law. If any
the manner of its creation, such that government corporation could assume at pleasure as an unregistered
corporations created by special charter are subject to its trade name the name of another corporation, this practice
provisions while those incorporated under the General would result in confusion and open the door to frauds and
Corporation Law are not within its coverage. evasions and difficulties of administration and supervision.

Same; Same; Same; Same; The PNOC-EDC having been 4.ID.; ID.; ID.; POLICY OF THE LAW.The policy of the law
incorporated under the General Corporation Law was held as expressed in our corporation statute and the Code of
to be a governmentowned or controlled corporation whose Commerce is clearly against such a practice. (Cf. Scarsdale
employees are subject to the provisions of the Labor Pub. Co.Colonial Press vs. Carter, 116 New York
Code.Specifically, the PNOC-EDC having been Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat.
incorporated under the General Corporation Law was held Assn., 205 Illinois [Appellate Courts], 428, 434.) Red Line
to be a government-owned or controlled corporation whose Transportation Co. vs. Rural Transit Co., 60 Phil. 549, No.
employees are subject to the provisions of the Labor Code. 41570 September 6, 1934

National Coal Co. vs. Collector of Internal Revenue, Universal Mill Corporation vs. Universal Textile Mills,
46 Phil. 583, No. 22619 December 2, 1924 Inc., 78 SCRA 62, No. L-28351 July 28, 1977

THE NATIONAL COAL COMPANY, A PRIVATE Securities and Exchange Commission; Business Names; The
CORPORATION; SUBJECT TO THE PAYMENT OF INTERNAL business names Universal Mills Corporation and Universal
REVENUE UNDER THE PROVISIONS OF SECTION 1496 OF Textile Mills, Inc. though not identical are so similar as to
THE ADMINISTRATIVE CODE.The National Coal Company cause confusion to the general public, particularly where the
is a private corporation. The fact that the Government former included the manufacture, dyeing and selling of
happens to be a stockholder therein does not make it a fabrics of all kinds in which the latter had been engaged for
public corporation. It is subject to all the provisions of the more than a decade ahead of the petitioner.The corporate
Corporation Law in so far as they are not inconsistent with names in question are not identical, but they are
Act No. 2705. As a private corporation, it has no greater indisputably so similar that even under the test of
rights, powers, or privileges than any other corporation reasonable care and observation as the public generally are
which might be organized for the same purpose under the capable of using and may be expected to exercise invoked
Corporation Law. It was not the intention of the legislature by appellant We are apprehensive confusion will usually
to give it a preference, or right, or privilege over other arise, considering that under the second amendment of its
legitimate private corporations in the mining of coal. The articles of incorporation of August 14, 1964, appellant
law made no provision for its occupation and operation of included among its primary purposes the manufacturing,
coal-bearing lands, to the exclusion of other persons or dyeing, finishing and selling of fabrics of all kinds in which
corporations, under proper permission. The National Coal respondent had been engaged for more than a decade
Company being a private corporation, neither the lessee nor ahead of petitioner. Factually, the Commission found
the owner of the lands upon which it mined coal for the existence of such confusion, and there is evidence to
year in question, is subject to the payment of the internal support its conclusion. Since respondent is not claiming
revenue duty provided for in section 1496 of the damages in this proceeding, it is, of course immaterial
Administrative Code. National Coal Co. vs. Collector of whether or not appellant has acted in good faith, but We
Internal Revenue, 46 Phil. 583, No. 22619 December 2, cannot perceive why of all names, it had to choose a name
1924 already being used by another firm engaged in practically
the same business for more than a decade enjoying well
Red Line Transportation Co. vs. Rural Transit Co., 60 earned patronage and goodwill, when there are so many
Phil. 549, No. 41570 September 6, 1934 other appropriate names it could possibly adopt without
arousing any suspicion as to its motive and, more
1.PUBLIC SERVICE ; AUTHORITY OP PUBLIC SERVICE importantly, any degree of confusion in the mind of the
COMMISSION TO AUTHORIZE A CORPORATION TO public which could mislead even its own customers, existing
ASSUME THE NAME OF ANOTHER.There is no law that or prospective. Universal Milk Corporation vs. Universal
empowers the Public Service Commission or any court in Textile Mills, Inc., 78 SCRA 62, No. L-28351 July 28, 1977
this jurisdiction to authorize one corporation to assume the
Lyceum of the Philippines, Inc. vs. Court of Appeals, that at least one of the private respondents, i.e., the
219 SCRA 610, G.R. No. 101897 March 5, 1993 Western Pangasinan Lyceum, Inc., used the term "Lyceum"
seventeen (17) years before the petitioner registered its
Corporation Law; Names; Fact that other schools use own corporate name with the SEC and began using the
"Lyceum" as part of their school's name is not a deceptive word "Lyceum." It follows that if any institution had
use thereof relative to Lyceum of the Philippines.We do acquired an exclusive right to the word "Lyceum," that
not consider that the corporate names of private respondent institution would have been the Western Pangasinan
institutions are "identical with, or deceptively or confusingly Lyceum, Inc. rather than the petitioner institution. Lyceum
similar" to that of the petitioner institution. True enough, of the Philippines, Inc. vs. Court of Appeals, 219 SCRA 610,
the corporate names of private respondent entities all carry G.R. No. 101897 March 5, 1993
the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names Philips Export B.V. vs. Court of Appeals, 206 SCRA
to the word "Lyceum." Thus, we do not believe that the 457, G.R. No. 96161 February 21, 1992
"Lyceum of Aparri" can be mistaken by the general public
for the Lyceum of the Philippines, or that the "Lyceum of Corporation Law; Trademarks; A corporations right to use
Camalaniugan" would be confused with the Lyceum of the its corporate and trade name is a property right, a right in
Philippines. rem which it may assert and protect against the world in the
same manner as it may protect its tangible property, real or
Same; Same; Words and Phrases; "Lyceum" is a generic personal against trespass or conversion.As early as
name.Etymologically, the word "Lyceum" is the Latin word Western Equipment and Supply Co. v. Reyes, 51 Phil. 115
for the Greek lykeion which in turn referred to a locality on (1927), the Court declared that a corporations right to use
the river Ilissius in ancient Athens "comprising an enclosure its corporate and trade name is a property right, a right in
dedicated to Apollo and adorned with fountains and rem, which it may assert and protect against the world in
buildings erected by Pisistratus, Pericles and Lycurgus the same manner as it may protect its tangible property,
frequented by the youth for exercise and by the philosopher real or personal, against trespass or conversion. It is
Aristotle and his followers for teaching." In time, the word regarded, to a certain extent, as a property right and one
"Lyceum" became associated with schools and other which cannot be impaired or defeated by subsequent
institutions providing public lectures and concerts and public appropriation by another corporation in the same field.
discussions. Thus today, the word "Lyceum" generally refers
to a school or an institution of learning. While the Latin Same; Same; Same; The general rule as to corporations is
word "lyceum" has been incorporated into the English that each corporation must have a name by which it is to
language, the word is also found in Spanish (liceo) and in sue and be sued and do all legal acts.A name is peculiarly
French (lycee). As the Court of Appeals noted in its important as necessary to the very existence of a
Decision, Roman Catholic schools frequently use the term; corporation (American Steel Foundries vs. Robertson, 269
e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon
Masbate), "Liceo de Masbate," "Liceo de Albay." "Lyceum" is Valley R. Co., 30 Pa 42; First National Bank vs. Huntington
in fact as generic in character as the word "university." In Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of
the name of the petitioner, "Lyceum" appears to be a its attributes, an element of its existence, and essential to
substitute for "university;" in other places, however, its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule
"Lyceum," or "Liceo" or "Lycee" frequently denotes a as to corporations is that each corporation must have a
secondary school or a college. It may be (though this is a name by which it is to sue and be sued and do all legal acts.
question of fact which we need not resolve) that the use of The name of a corporation in this respect designates the
the word "Lyceum" may not yet be as widespread as the corporation in the same manner as the name of an
use of "university," but it is clear that a not inconsiderable individual designates the person (Cincinnati Cooperage Co.
number of educational institutions have adopted "Lyceum" vs. Bate, 96 Ky 356, 26 SW 538; Newport Mechanics Mfg.
or "Liceo" as part of their corporate names. Since "Lyceum" Co. vs. Starbird, 10 NH 123); and the right to use its
or "Liceo" denotes a school or institution of learning, it is corporate name is as much a part of the corporate franchise
not unnatural to use this word to designate an entity which as any other privilege granted.
is organized and operating as an educational institution. Same; Same; Same; A corporation can no more use a
Same; Same; Same; Trademarks; "Secondary meaning," corporate name in violation of the rights of others than an
defined.In Philippine Nut Industry, Inc. v. Standard individual can use his name legally acquired so as to
Brands, Inc., the doctrine of secondary meaning was mislead the public and injure another.A corporation
elaborated in the following terms: "x x x a word or phrase acquires its name by choice and need not select a name
originally incapable of exclusive appropriation with reference identical with or similar to one already appropriated by a
to an article on the market, because geographically or senior corporation while an individuals name is thrust upon
otherwise descriptive, might nevertheless have been used him (See Standard Oil Co. of New Mexico, Inc. v. Standard
so long and so exclusively by one producer with reference Oil Co. of California, 56 F 2d 973, 977). A corporation can
to his article that, in that trade and to that branch of the no more use a corporate name in violation of the rights of
purchasing public, the word or phrase has come to mean others than an individual can use his name legally acquired
that the article was his product." so as to mislead the public and injure another.

Same; Same; Same; Same; Lyceum of the Philippines has Same; Same; Same; The right to the exclusive use of a
not gained exclusive use of "Lyceum" by long passage of corporate name with freedom from infringement by
time.We agree with the Court of Appeals. The number similarity is determined by priority of adoption.The right to
alone of the private respondents in the case at bar suggests the exclusive use of a corporate name with freedom from
strongly that petitioner's use of the word "Lyceum" has not infringement by similarity is determined by priority of
been attended with the exclusivity essential for applicability adoption (1 Thompson, p. 80 citing Munn v. Americana Co.,
of the doctrine of secondary meaning. It may be noted also 82 N., Eq. 63, 88 Atl. 30; San Francisco Oyster House v.
Mihich, 75 Wash. 274; 134 Pac. 921). In this regard, there
is no doubt with respect to Petitioners prior adoption of the established. It can be sued in that place, not in the place
name PHILIPS as part of its corporate name. Petitioners where its branch office is located.
Philips Electrical and Philips Industrial were incorporated on
29 August 1956 and 25 May 1956, respectively, while Actions; Venue; Venue of a tort action against a,
Respondent Standard Philips was issued a Certificate of corporation in inferior court.Where the action filed against
Registration on 19 April 1982, twenty-six (26) years later a corporation in the inferior court is based on tort, it should
(Rollo, p. 16). Petitioner PEBV has also used the trademark be filed in the place where the corporation has its principal
PHILIPS on electrical lamps of all types and their office, not in the place where it has its branch office. To
accessories since 30 September 1922, as evidenced by allow an action against a corporation to be instituted in any
Certificate of Registration No. 1651. place where a corporate entity has its branch offices would
create confusion and work untold inconvenience to the
Same; Same; Same; In determining the existence of corporation.
confusing similarity in corporate name, the test is whether
the similarity is such as to mislead a person using ordinary Same; When provision, may be served with summons,
care and discrimination.The second requisite no less exists applies.The phrase may be served with summons in
in this case. In determining the existence of confusing section 1, Rule 4 of the Revised Rules of Court does not
similarity in corporate names, the test is whether the apply when the defendant resides in the Philippines, for, in
similarity is such as to mislead a person using ordinary care such a case, he may be sued only in the municipality of his
and discrimination. In so doing, the Court must look to the residence, regardless of the place where he may be found
record as well as the names themselves (Ohio Nat. Life Ins. and served with summons.
Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the Same; Plaintiff may not choose venue of action.The laying
corporate names of Petitioners and Private Respondent are of the venue of an action is not left to plaintiffs caprice
not identical, a reading of Petitioners corporate names, to because the matter is regulated by the Rules of Court.
wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, Clavecilla Radio System vs. Antillon, et al., 19 SCRA 379,
INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., No. L-22238 February 18, 1967
inevitably leads one to conclude that PHILIPS is, indeed,
the dominant word in that all the companies affiliated or Commissioner of Internal Revenue vs. Manning, 66
associated with the principal corporation, PEBV, are known SCRA 14, No. L-28398 August 6, 1975
in the Philippines and abroad as the PHILIPS Group of
Companies. Corporation law; Taxations; Meaning and scope of treasury
shares.Although authorities may differ on the exact legal
Same; Same; Same; Same; It is settled that proof of actual and accounting status of so-called treasury shares, they
confusion need not be shown; It suffices that confusion is are more or less in agreement that treasury shares are
probably or likely to occur.Respondents maintain, stocks issued and fully paid for and re-acquired by the
however, that Petitioners did not present an iota of proof of corporation either by purchase, donation, forfeiture or other
actual confusion or deception of the public much less a means. Treasury shares are therefore issued shares, but
single purchaser of their product who has been deceived or being in the treasury they do not have the status of
confused or showed any likelihood of confusion. It is outstanding shares. Consequently, although a treasury
settled, however, that proof of actual confusion need not be share, not having been retired by the corporation re-
shown. It suffices that confusion is probably or likely to acquiring it, may be reissued or sold again, such share, as
occur. long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot
Same; Same; Same; A corporation has an exclusive right to be declared by the corporation to itself, nor in the meetings
the use of its name which may be protected by injunction of the corporation as voting stock, for otherwise equal
upon a principle similar to that upon which persons are distribution of voting powers among stockholders will be
protected in the use of trademarks and tradenames.What effectively lost and the directors will be able to perpetuate
is lost sight of, however, is that PHILIPS is a trademark or their control of the corporation, though it still represents a
trade name which was registered as far back as 1922. paid-for interest in the property of the corporation. The
Petitioners, therefore, have the exclusive right to its use foregoing essential features of a treasury stock are lacking
which must be free from any infringement by similarity. A in the questioned shares. Thus, (a) under paragraph 4(c) of
corporation has an exclusive right to the use of its name, the trust agreement, the trustees were authorized to vote
which may be protected by injunction upon a principle all stock standing in their names x x x; (b) under paragraph
similar to that upon which persons are protected in the use 4(d), Any and all dividends paid on said shares after the
of trademarks and tradenames (18 C.J.S 574). Such death of the OWNER shall be subject to the provisions of
principle proceeds upon the theory that it is a fraud on the this Agreement; (c) under paragraph 5(b) the amount of
corporation which has acquired a right to that name and retained earnings to be declared as dividends was made
perhaps carried on its business thereunder, that another subject to the approval of the trustees of the 24,700 shares;
should attempt to use the same name, or the same name x x x. The manifest intention of the parties to the trust
with a slight variation in such a way as to induce persons to agreement was, in sum and substance, to treat the 24,700
deal with it in the belief that they are dealing with the shares of Reese as absolutely outstanding shares of Reeses
corporation which has given a reputation to the name. estate until they were fully paid.
Philips Export B.V. vs. Court of Appeals, 206 SCRA 457, G.R.
No. 96161 February 21, 1992 Same; Same; A stock dividend cannot be declared out of
outstanding stock in the guise of treasury stock dividend,
Clavecilla Radio System vs. Antillon, et al., 19 SCRA but only from retained earnings.Such being the true
379, No. L-22238 February 18, 1967 nature of the 24,700 shares, their declaration as treasury
Corporation Law; Domicile of a corporation.The residence stock dividend in 1958 was a complete nullity and plainly
of a corporation is the place where its principal office is violative of public policy. A stock dividend, being one
payable in capital stock, cannot be declared out of
outstanding corporate stock, but only from retained non-voting shares will result in the abject surrender of our
earnings. telecommunications industry to foreigners, amounting to a
clear abdication of the States constitutional duty to limit
Gamboa vs. Teves, 652 SCRA 690, G.R. No. 176579 control of public utilities to Filipino citizens. Such an
June 28, 2011 interpretation certainly runs counter to the constitutional
Corporation Law; Words and Phrases; Capital; The term provision reserving certain areas of investment to Filipino
capital in Section 11, Article XII of the Constitution refers citizens, such as the exploitation of natural resources as well
only to shares of stock entitled to vote in the election of as the ownership of land, educational institutions and
directors, and thus in the present case only to common advertising businesses. The Court should never open to
shares, and not to the total outstanding capital stock foreign control what the Constitution has expressly reserved
comprising both common and non-voting preferred to Filipinos for that would be a betrayal of the Constitution
shares.We agree with petitioner and petitioners-in- and of the national interest. The Court must perform its
intervention. The term capital in Section 11, Article XII of solemn duty to defend and uphold the intent and letter of
the Constitution refers only to shares of stock entitled to the Constitution to ensure, in the words of the Constitution,
vote in the election of directors, and thus in the present a self-reliant and independent national economy effectively
case only to common shares, and not to the total controlled by Filipinos.
outstanding capital stock comprising both common and non- Cagayan Fishing Development vs. Sandiko, 65 Phil.
voting preferred shares. 223, No. 43350 December 23, 1937
Same; Capital; Common shares cannot be deprived of the 1.CORPORATIONS; TRANSFER MADE TO A NON-EXISTENT
right to vote in any corporate meeting, and any provision in CORPORATION; JURIDICAL CAPACITY TO ENTER INTO A
the articles of incorporation restricting the right of common CONTRACT.The transfer made by T to the C, F. D. Co,,
shareholders to vote is invalid.Indisputably, one of the Inc., was effected on May 31, 1930 and the actual
rights of a stockholder is the right to participate in the incorporation of said company was effected later on October
control or management of the corporation. This is exercised 22, 1930. In other words, the transfer was made almost five
through his vote in the election of directors because it is the months before the incorporation of the company.
board of directors that controls or manages the corporation. Unquestionably, a duly organized corporation has the power
In the absence of provisions in the articles of incorporation to purchase and hold such real property as the purposes for
denying voting rights to preferred shares, preferred shares which such corporation was formed may permit and for this
have the same voting rights as common shares. However, purpose may enter into such contracts as may be
preferred shareholders are often excluded from any control, necessary. But before a corporation may be said to be
that is, deprived of the right to vote in the election of lawfully organized, many things have to be done. Among
directors and on other matters, on the theory that the other things, the law requires the filing of articles of
preferred shareholders are merely investors in the incorporation. Although there is a presumption that all the
corporation for income in the same manner as bondholders. requirements of law have been complied with in the case
In fact, under the Corporation Code only preferred or before us it can not be denied that the plaintiff was not yet
redeemable shares can be deprived of the right to vote. incorporated when it entered into the contract of sale. The
Common shares cannot be deprived of the right to vote in contract itself referred to the plaintiff as "una sociedad en
any corporate meeting, and any provision in the articles of vas de incorporacin." It was not even a de facto
incorporation restricting the right of common shareholders corporation at the time. Not being in legal existence then, it
to vote is invalid. did not possess juridical capacity to enter into the contract.
Same; Same; The term capital in Section 11, Article XII of 2.ID. ; ID. ; ID.Corporations are creatures of the law, and
the Constitution refers only to shares of stock that can vote can only come into existence in the manner prescribed by
in the election of directors.Considering that common law. General laws authorizing the formation of corporations
shares have voting rights which translate to control, as are general offers to any persons who may bring
opposed to preferred shares which usually have no voting themselves within their provisions; and if conditions
rights, the term capital in Section 11, Article XII of the precedent are prescribed in the statute, or certain acts are
Constitution refers only to common shares. However, if the required to be done, they are terms of the offer, and must
preferred shares also have the right to vote in the election be complied with substantially before legal corporate
of directors, then the term capital shall include such existence can be acquired. That a corporation should have a
preferred shares because the right to participate in the full and complete organization and existence as an entity
control or management of the corporation is exercised before it can enter into any kind' of a contract or transact
through the right to vote in the election of directors. In any business, would seem to be self-evident.
short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in 3.ID. ; ID.; ID.A corporation, until organized, has no life
the election of directors. and, therefore, no faculties. It is, as it were, a child in
ventre sa mere. This is not saying that under no
Same; Same; The term capital in Section 11, Article XII of circumstances may the acts of promoters of a corporation
the Constitution to include both voting and non-voting be ratified by the corporation if and when subsequently
shares will result in the abject surrender of our organized. There are, of course, exceptions, but under the
telecommunications industry to foreigners, amounting to a peculiar facts and circumstances of the present case the
clear abdication of the States constitutional duty to limit doctrine of ratification should not be extended because to
control of public utilities to Filipino citizens; The Court do so would result in injustice or fraud to the candid and
should never open to foreign control what the Constitution unwary. Cagayan Fishing Development vs. Sandiko, 65 Phil.
has expressly reserved to Filipinos for that would be a 223, No. 43350 December 23, 1937
betrayal of the Constitution and of the national interest.
Indisputably, construing the term capital in Section 11,
Article XII of the Constitution to include both voting and
Municipality of Malabang vs. Benito, 27 SCRA 533, Same; Same; The principal function of the Securities and
No. L-28113 March 28, 1969 Exchange Commission is the supervision and control of
corporations, partnerships and associations with the end in
Constitutional law; Municipal corporation; Inquiry into the view that investments in these entities may be encouraged
legal existence of a municipality reserved to the State; Rule and protected, and their activities pursued for the
not applicable where municipal corporation a nullity.An promotion of economic development.The first element
inquiry into the legal existence of a municipality is reserved requires that the controversy must arise out of
to the State in a proceeding f or quo warranto or other intracorporate or partnership relations between and among
direct proceeding, and that only in a f ew exceptions may a stockholders, members, or associates; between any or all of
private person exercise this function of government. But the them and the corporation, partnership or association of
rule disallowing collateral attacks applies only where the which they are stockholders, members or associates,
municipal corporation is at least a de facto corporation. For respectively; and between such corporation, partnership or
where it is neither a corporation de jure nor de facto, but a association and the State in so far as it concerns their
nullity, the rule is that its existence may be questioned individual franchises. The second element requires that the
collaterally or directly in any action or proceeding by any dispute among the parties be intrinsically connected with
one whose rights or interests are affected thereby, including the regulation of the corporation, partnership or association
the citizens of the territory incorporated unless they are or deal with the internal affairs of the corporation,
estopped by their conduct from doing so. partnership or association. After all, the principal function of
Same; Same; Where municipal corporation cannot be the SEC is the supervision and control of corporations,
considered a de facto corporation.In the cases where a de partnerships and associations with the end in view that
facto municipal corporation was recognized as such despite investments in these entities may be encouraged and
the fact that the statute creating it was later invalidated, the protected, and their activities pursued for the promotion of
decisions could fairly be made to rest on the consideration economic development.
that there was some other valid law giving corporate vitality Same; Same; There is no intracorporate nor partnership
to the organization. Hence, in the case ac bar, the mere fact relation between two jeepney drivers and operators
that Balabagan was organized at a time when the statute associations whose plan to consolidate into a single
had not been invalidated cannot conceivably make it a de common association is still a proposalconsolidation
facto corporation, as, independently of the Administrative becomes effective not upon mere agreement of the
Code provision in question, there is no other valid statute to members but only upon issuance of the certificate of
give color of authority to its creation. consolidation by the SEC.There is no intracorporate nor
Same; Unconstitutional act not a law.An unconstitutional partnership relation between petitioner and private
act is not a law; it confers no right; it imposes no duties; it respondent. The controversy between them arose out of
affords no protection; it creates no off ice; it is, in legal their plan to consolidate their respective jeepney drivers
contemplation, as inoperative as though it had never been and operators associations into a single common
passed. association. This unified association was, however, still a
proposal. It had not been approved by the SEC, neither had
Hall vs. Piccio, 86 Phil. 603, No. L-2598 June 29, its officers and members submitted their articles of
1950 consolidation in accordance with Sections 78 and 79 of the
Corporation Code. Consolidation becomes effective not upon
1.CORPORATION "DE FACTO"; DISSOLUTION BY SUIT OF mere agreement of the members but only upon issuance of
STOCKHOLDERS; JURISDICTION OF COURT.An entity the certificate of consolidation by the SEC. When the SEC,
whose certificate of incorporation had not been obtained upon processing and examining the articles of consolidation,
may be terminated in a private suit for its dissolution is satisfied that the consolidation of the corporations is not
between stockholders, without 'the intervention of the state. inconsistent with the provisions of the Corporation Code and
The question as to the right of minority stockholders to sue existing laws, it issues a certificate of consolidation which
for dissolution does not affect the court's jurisdiction, and is makes the reorganization official. The new consolidated
a matter for decision by the judge, subject to review on corporation comes into existence and the constituent
appeal by the aggrieved party at the proper time. corporations dissolve and cease to exist.
2.ID.; RIGHTS OF.Persons acting as corporation may not Same; Same; The SEC has no jurisdiction over a dispute
claim rights of "de facto" corporation if they have not between members of separate and distinct associations.
obtained certificate of incorporation. Hall vs. Piccio, 86 Phil. The KAMAJ-DA and SAMAJODA to which petitioner and
603, No. L-2598 June 29, 1950 private respondent belong are duly registered with the SEC,
but these associations are two separate entities. The
Lozano vs. De los Santos, 274 SCRA 452, G.R. No.
dispute between petitioner and private respondent is not
125221 June 19, 1997
within the KAMAJDA nor the SAMAJODA. It is between
Securities and Exchange Commission; Jurisdiction; The members of separate and distinct associations. Petitioner
jurisdiction of the Securities and Exchange Commission is and private respondent have no intracorporate relation
determined by a concurrence of two elements: (1) the much less do they have an intracorporate dispute. The SEC
status or relationship of the parties; and (2) the nature of therefore has no jurisdiction over the complaint.
the question that is the subject of their controversy.The
Same; Same; Corporation Law; Doctrine of Corporation by
grant of jurisdiction to the SEC must be viewed in the light
Estoppel; The doctrine of corporation by estoppel cannot
of its nature and function under the law. This jurisdiction is
override jurisdictional requirementsjurisdiction is fixed by
determined by a concurrence of two elements: (1) the
law and cannot be acquired through or waived, enlarged or
status or relationship of the parties; and (2) the nature of
diminished by, any act or omission of the parties, and
the question that is the subject of their controversy.
neither can it be conferred by the acquiescence of the
court.The doctrine of corporation by estoppel advanced
by private respondent cannot override jurisdictional that plaintiff was really made to believe that such
requirements. Jurisdiction is fixed by law and is not subject corporation was duly organized in accordance with law.
to the agreement of the parties. It cannot be acquired
through or waived, enlarged or diminished by, any act or 3.ID.; LIABILITY OF MEMBERS WHO ACT AS AGENTS OF
omission of the parties, neither can it be conferred by the AN UNINCORPORATED ASSOCIATION.A corporation when
acquiescence of the court. registered has a juridical personality separate and distinct
from its component members or stockholders and officers,
Same; Same; Same; Same; Equity; Corporation by estoppel such that a corporation cannot be held liable for the
is founded on principles of equity and is designed to prevent personal indebtedness of a stockholder even if he should be
injustice and unfairness, and where there is no third person its president (Walter A. Smith Co. vs. Ford, SC-G. R. No.
involved and the conflict arises only among those assuming 42420) and conversely, a stockholder cannot be held
the form of a corporation, who know that it has not been personally liable for any financial obligation by the
registered, there is no corporation by estoppel. corporation in excess of his unpaid subscription. But this
Corporation by estoppel is founded on principles of equity rule is understood to refer merely to registered corporations
and is designed to prevent injustice and unfairness. It and cannot be made applicable to the liability of members
applies when persons assume to form a corporation and of an unincorporated association. The reason behind this
exercise corporate functions and enter into business doctrine is obviousan unincorporated association has no
relations with third persons. Where there is no third person personality and would be incompetent to act and
involved and the conflict arises only among those assuming appropriate for itself the power and attributes of a
the form of a corporation, who therefore know that it has corporation as provided by law, it cannot create agents or
not been registered, there is no corporation by estoppel. confer authority on another to act in its behalf; thus, those
Lozano vs. De los Santos, 274 SCRA 452, G.R. No. 125221 who act or purport to act as its representatives or agents do
June 19, 1997 so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an
Albert vs. University Publishing Co., Inc., 13 SCRA agent without authority or without a principal is himself
84, No. L-19118 January 30, 1965 regarded as the principal, possessed of all the right and
Corporations; Principle of corporation by estoppel; Not subject to all the liabilities of a principal, a person acting or
invokable by one who misrepresented corporation as duly purporting to act on behalf of a corporation which has no
organized against his victim.One who has induced another valid existence assumes such privileges and obligations and
to act upon his wilful misrepresentation that a corporation becomes personally liable for contracts entered into or for
was duly organized and existing under the law, cannot other acts performed as such agent (Fay vs. Noble, 7
thereafter set up against his victim the principle of Cushing [Mass.] 188. Cited in II Tolentino's Commercial
corporation by estoppel. Laws of the Philippines, Fifth Ed., p. 689-690). Vda. de
Salvatierra vs. Hon. Garlitos etc, and Refuerzo, 103 Phil.
Same; Person acting for corporation with no valid existence 757, No. L-11442 May 23, 1958
is personally liable for contracts entered into as such
agent.A person acting or purporting to act on behalf of a Chiang Kai Shek School vs. Court of Appeals, 172
corporation which has no valid existence assumes such SCRA 389, G.R. No. 58028 April 18, 1989
privileges and obligations and becomes personally liable for Same; Same; Estoppel; Having contracted with respondent
contracts entered into or for other acts performed as such every year for 32 years and respondent itself is possessed
agent. of juridical personality, it is now estopped from denying
Parties to Action; Suit against corporation with no valid such personality to defeat respondents claim.There
existence; Real defendant is person who has control of its should also be no question that having contracted with the
proceedings.In a suit against a corporation with no valid private respondent every year for thirty two years and thus
existence the person who had and exercised the rights to represented itself as possessed of juridical personality to do
control the proceedings, to make defense, to adduce and so, the petitioner is now estopped from denying such
cross-examine witnesses, and to appeal from a decision, is personality to defeat her claim against it. According to
the real defendant, and .the enforcement of a judgment Article 1431 of the Civil Code, through estoppel an
against the corporation upon him is substantial observance admission or representation is rendered conclusive upon the
of due process of law. person making it and cannot be denied or disproved as
against the person relying on it.
Vda. de Salvatierra vs. Hon. Garlitos etc, and
Refuerzo, 103 Phil. 757, No. L-11442 May 23, 1958 Same; Same; Same; As the school may be sued in its own
name, there is no need to apply Sec. 15 of Rule 3 under
2.CORPORATION LAW; LlABILITY OF PERSON DEALING which persons joined in an association without any juridical
WITH ASSOCIATION AS A CORPORATE BODY; WHEN personality may be sued with such association.As the
ESTOPPEL MAY NOT BE INVOKED.While as a general rule, school itself may be sued in its own name, there is no need
a person who deals with an association in such a way to to apply Rule 3, Section 15, under which the persons joined
recognize its existence as a corporate body is estopped from in an association without any juridical personality may be
denying the same in an action arising out of such sued with such association. Besides, it has been shown that
transaction, yet this doctrine may not be held to be the individual members of the board of trustees are not
applicable where fraud takes a part in the said transaction. liable, having been appointed only after the private
In the instant case, on plaintiff's charge that she was respondents dismissal.
unaware of the fact that the defendant corporation had no
juridical personality, its president gave no confirmation or Asia Banking Corporation vs. Standard Products Co.,
denial of the same and the circumstance surrounding the 46 Phil. 144, No. 22106 September 11, 1924
execution of the contract lead to the inescapable conclusion 1.CORPORATION; CORPORATE EXISTENCE, ESTOPPEL
FROM DENYING.In the absence of fraud, a person who
has contracted or dealt with an association in such a way as by either the Philippine Amateur Athletic Federation or the
to recognize and in effect admit its legal existence as a Department of Youth and Sports Development. Accordingly,
corporate body is thereby estopped to deny its corporate we rule that the Philippine Football Federation is not a
existence in an action leading out of or involving such national sports association within the purview of the
contract or dealing, unless the existence is attacked for aforementioned laws and does not have a corporate
causes which have arisen since making the contract or other existence of its own.
dealing relied on as an estoppel.
Same; It is a settled principle in corporation law that any
International Express Travel & Tour Services, Inc. vs. person acting or purporting to act on behalf of a corporation
Court of Appeals, 343 SCRA 674, G.R. No. 119020 which has no valid existence assumes such privileges and
October 19, 2000 obligations and becomes personally liable for contracts
entered into or for such other acts performed as such
Corporation Law; National Sports Associations; Statutes; agent.This being said, it follows that private respondent
R.A. 3135 and P.D. No. 604 recognized the juridical Henry Kahn should be held liable for the unpaid obligations
existence of national sports associations.As correctly of the unincorporated Philippine Football Federation. It is a
observed by the appellate court, both R.A. 3135 and P.D. settled principle in corporation law that any person acting or
No. 604 recognized the juridical existence of national sports purporting to act on behalf of a corporation which has no
associations. This may be gleaned from the powers and valid existence assumes such privileges and obligations and
functions granted to these associations. becomes personally liable for contracts entered into or for
Same; Same; The powers and functions granted to national other acts performed as such agent. As president of the
sports associations clearly indicate that these entities may Federation, Henri Kahn is presumed to have known about
acquire a juridical personality.The above powers and the corporate existence or non-existence of the Federation.
functions granted to national sports associations clearly We cannot subscribe to the position taken by the appellate
indicate that these entities may acquire a juridical court that even assuming that the Federation was
personality. The power to purchase, sell, lease and defectively incorporated, the petitioner cannot deny the
encumber property are acts which may only be done by corporate existence of the Federation because it had
persons, whether natural or artificial, with juridical capacity. contracted and dealt with the Federation in such a manner
However, while we agree with the appellate court that as to recognize and in effect admit its existence.
national sports associations may be accorded corporate Same; Doctrine of Corporation by Estoppel; The doctrine of
status, such does not automatically take place by the mere corporation by estoppel applies to a third party only when
passage of these laws. he tries to escape liability on a contract from which he has
Same; Same; Philippine Football Association; It is a basic benefited on the irrelevant ground of defective
postulate that before a corporation may acquire juridical incorporation.The doctrine of corporation by estoppel is
personality, the State must give its consent either in the mistakenly applied by the respondent court to the
form of a special law or a general enabling act; The Court petitioner. The application of the doctrine applies to a third
cannot agree with the view of the Court of Appeals that the party only when he tries to escape liability on a contract
Philippine Football Association came into existence upon the from which he has benefited on the irrelevant ground of
passage of RA. 3135 or P.D. 604.It is a basic postulate defective incorporation. In the case at bar, the petitioner is
that before a corporation may acquire juridical personality, not trying to escape liability from the contract but rather is
the State must give its consent either in the form of a the one claiming from the contract. International Express
special law or a general enabling act. We cannot agree with Travel & Tour Services, Inc. vs. Court of Appeals, 343 SCRA
the view of the appellate court and the private respondent 674, G.R. No. 119020 October 19, 2000
that the Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be found in
R.A. 3135 or P.D. 604 any provision creating the Philippine Georg Grotjahn GMBH & Co. vs. Isnani, 235 SCRA
Football Federation. These laws merely recognized the 216, G.R. No. 109272 August 10, 1994
existence of national sports associations and provided the
manner by which these entities may acquire juridical Same; Foreign Corporations; Parties; Doing business in
personality. the Philippines; A foreign corporation performing acts
pursuant to its primary purpose and functions as
Same; Same; Same; The statutory provisions require that regional/area headquarters for its home office is clearly
before an entity may be considered as a national sports doing business in the country.The trial court erred in
association, such entity must be recognized by the holding that petitioner does not have capacity to sue in the
accrediting organization, the Philippine Amateur Athletic Philippines. It is clear that petitioner is a foreign corporation
Federation under R.A. 3135, and the Department of Youth doing business in the Philippines. Petitioner is covered by
and Sports Development under P.D. 604.Clearly the above the Omnibus Investment Code of 1987. There is no general
cited provisions require that before an entity may be rule or governing principle as to what constitutes doing or
considered as a national sports association, such entity must engaging in or transacting business in the Philip-pines.
be recognized by the accrediting organization, the Philippine Each case must be judged in the light of its peculiar
Amateur Athletic Federation under R.A. 3135, and the circumstances. In the case at bench, petitioner does not
Department of Youth and Sports Development under P.D. engage in commercial dealings or activities in the country
604. This fact of recognition, however, Henri Kahn failed to because it is precluded from doing so by P.D. No. 218,
substantiate. In attempting to prove the juridical existence under which it was established. Nonetheless, it has been
of the Federation, Henri Kahn attached to his motion for continuously, since 1983, acting as a supervision,
reconsideration before the trial court a copy of the communications and coordination center for its home
constitution and by-laws of the Philippine Football offices affiliates in Singapore, and in the process has named
Federation. Unfortunately, the same does not prove that its local agent and has employed Philippine nationals like
said Federation has indeed been recognized and accredited private respondent Romana Lanchinebre. From this
uninterrupted performance by petitioner of acts pursuant to personally liable therefor. Otherwise, all the other
its primary purposes and functions as a regional/area stockholders of the corporation, including those who came
headquarters for its home office, it is clear that petitioner is in later, and regardless of the amount of their
doing business in the country. shareholdings, would be equally and personally liable also
with the petitioners for the claims of the private respondent.
Same; Same; Same; Estoppel; A party is estopped to Caram, Jr. vs. Court of Appeals, 151 SCRA 372, No. L-48627
challenge the personality of a corporation after having June 30, 1987
acknowledged the same by entering into a contract with
it.Moreover, private respondents are estopped from Rustan Pulp & Paper Mills, Inc. vs. IAC, 214 SCRA
assailing the personality of petitioner. So we held in Merrill 665, G.R. No. 70789 October 19, 1992
Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824,
837, (1992): The rule is that a party is estopped to Civil Law; Obligations and Contracts; It is a truism in legal
challenge the personality of a corporation after having jurisprudence that a condition which is both potestative (or
acknowledged the same by entering into a contract with it. facultative) and resolutory may be valid even though the
And the doctrine of estoppel to deny corporate existence saving clause is left to the will of the obligor.A purely
applies to foreign as well as to domestic corporations; one potestative imposition of this character must be obliterated
who has dealt with a corporation of foreign origin as a from the face of the contract without affecting the rest of
corporate entity is estopped to deny its corporate existence the stipulations considering that the condition relates to the
and capacity. The principle will be applied to prevent a fulfillment of an already existing obligation and not to its
person contracting with a foreign corporation from later inception (Civil Code Annotated, by Padilla, 1987 Edition,
taking advantage of its noncompliance with the statutes Volume 4, Page 160). It is, of course, a truism in legal
chiefly in cases where such person has received the benefits jurisprudence that a condition which is both potestative (or
of the contract, x x x. (Citations omitted.) facultative) and resolutory may be valid, even though the
saving clause is left to the will of the obligor.
The Corporate Entity Theory
Corporation Law; The President and Manager of a
Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347, corporation who entered into and signed a contract in his
No. L-31061 August 17, 1976 official capacity cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that
Corporation law; Actions; Absent any showing of interest a effect due to the personality of the corporation being
corporation has no personality to bring an action to recover separate and distinct from the persons composing it.We
property belonging to its members or stockholders in their have to agree with petitioners citation of authority to the
personal capacities.It has not been claimed that the effect that the President and Manager of a corporation who
members have assigned or transferred whatever rights they entered into and signed a contract in his official capacity,
may have on the land in question to the plaintiff- cannot be made liable thereunder in his individual capacity
corporation. Absent any showing of interest, therefore, a in the absence of stipulation to that effect due to the
corporation, like plaintiff-appellant herein, has no personality of the corporation being separate and distinct
personality to bring an action for and in behalf of its from the persons composing it (Banque Generale Belge vs.
stockholders or members for the purpose of recovering Walter Bull and Co., Inc., 84 Phil. 164). And because of this
property which belongs to said stockholders or members in precept, Vergaras supposed non-participation in the
their personal capacities. contract of sale although he signed the letter dated
Caram, Jr. vs. Court of Appeals, 151 SCRA 372, No. L- September 30, 1968 is completely immaterial. The two
48627 June 30, 1987 exceptions contemplated by Article 1897 of the New Civil
Code where agents are directly responsible are absent and
Corporation Law; A bona fide corporation should alone be wanting. Rustan Pulp & Paper Mills, Inc. vs. IAC, 214 SCRA
liable for its corporate acts duly authorized by its officers 665, G.R. No. 70789 October 19, 1992
and directors.Significantly, there was no showing that the
Filipinas Orient Airways was a fictitious corporation and did Cruz vs. Dalisay, 152 SCRA 482, Adm. Matter No. R-
not have a separate juridical personality, to justify making 181-P July 31, 1987
the petitioners, as principal stockholders thereof, Same; Same; Same; Same; Same; Commercial Law;
responsible for its obligations. As a bona fide corporation, Corporation Piercing the veil of corporate entity; A
the Filipinas Orient Airways should alone be liable for its corporation has a personality distinct and separate from its
corporate acts as duly authorized by its officers and individual stockholders or members; Sheriff usurped a
directors. power that belonged to the court when he chose to "pierce
Same; Contracts; Liability of stockholders; Petitioners the veil of corporate entity.The tenor of the NLRC
cannot be held personally liable for the compensation judgment and the implementing writ is clear enough. It
claimed by private respondent for services performed by directed Qualitrans Limousine Service, Inc. to reinstate the
him in the organization of the corporation since petitioners discharged employees and pay them full backwages.
did not contract such services.In the light of these Respondent, however, chose to "pierce the veil of corporate
circumstances, we hold that the petitioners cannot be held entity" usurping a power belonging to the court and
personally liable for the compensation claimed by the assumed improvidently that since the complainant is the
private respondent for the services performed by him in the owner/president of Qualitrans Limousine Service, Inc., they
organization of the corporation. To repeat, the petitioners are one and the same. It is a well-settled doctrine both in
did not contract such services, It was only the results of law and in equity that as a legal entity, a corporation has a
such services that Barretto and Garcia presented to them personality distinct and separate from its individual
and which persuaded them to invest in the proposed airline. stockholders or members. The mere fact that one is
The most that can be said is that they benefited from such president of a corporation does not render the property he
services, but that surely is no justification to hold them owns or possesses the property of the corporation, since the
president, as individual, and the corporation are separate liability attached directly to its officers and/or members-
entities. stock-holders, when the same is used for fraudulent, unfair,
or illegal purpose. In the case at bar, there is no showing
Palay, Inc. vs. Clave, 124 SCRA 638, September 21, that the Association entered into the transaction with the
1983 private respondent for the purpose of defrauding the latter
Same; Corporation Law; General rule that a corporation of his goods or the payment thereof. More importantly,
may not be made to answer for acts or liabilities of its there is no proof whatsoever that the majority of the
stockholders or those of legal entities to which it may be directors used the distinct and separate personality of
connected and vice versa; Exceptions to rule that veil of Bacarra (I.N.) FaCoMa, Inc. as a protective shield for any
corporate fiction may not be pierced.It is basic that a wrongdoing. Therefore, the general rule on corporate
Corporation is invested by law with a personality separate liability, not the exception, should be applied in resolving
and distinct from those of the persons composing it as well this case. Consequently, the private respondents cause of
as from that of any other legal entity to which it may be action lies against the Bacarra (I.N.) FaCoMa, Inc., and not
related. As a general rule, a corporation may not be made against the petitioners.
to answer for acts or liabilities of its stockholders or those of Civil Law; Obligations and Contracts; Joint and Solidary
the legal entities to which it may be connected and vice Obligations; An obligation is presumed joint and not
versa. However, the veil of corporate fiction may be pierced solidary.In view of this ruling, there is no need to discuss
when it is used as a shield to further an end subversive of the other issues raised by the petitioners. Suffice it to state
justice; or for purposes that could not have been intended that under the law and well-established jurisprudence, an
by the law that created it; or to defeat public convenience, obligation is presumed joint and not solidary. There is
justify wrong, protect fraud, or defend crime; or to nothing in the receipt, constituting the agreement of the
perpetuate fraud or confuse legitimate issues; or to parties, which would sufficiently indicate that the petitioners
circumvent the law or perpetuate deception; or as an alter bound themselves solidarity, if they bound themselves
ego, adjunct or business conduit for the sole benefit of the personally at all. Soriano vs. Court of Appeals, 174 SCRA
stockholders. 195, G.R. No. 49834 June 22, 1989
Same; Same; Absence of badges of fraud of subdivision Soriano vs. Court of Appeals, 174 SCRA 195, G.R. No.
owner when it rescinded a contract to sell extrajudicially 49834 June 22, 1989
and sold the property to a third person.We find no badges
of fraud on petitioners part. They had literally relied, albeit Corporation Law; Liability of Officers for Corporate Debts;
mistakenly, on paragraph 6 (supra) of its contract with Piercing the Veil of Corporate Fiction; The protective mantle
private respondent when it rescinded the contract to sell of a corporations separate and distinct personality can only
extrajudicially and had sold it to a third person. be pierced and liability attached directly to its officers when
the same is used for fraudulent, unfair and illegal
Same; Same; President of real estate corporation cannot be purpose.In the light of the foregoing, it is clear that the
held personally liable where he appears to be controlling liability of the petitioners under the document subject of the
stockholder absent sufficient proof that he used the instant case, is not personal but corporate, and therefore
corporation to defraud defaulting lot buyer; Mere ownership attached to the Bacarra (I.N.) FaCoMa, Inc. which, being a
by a single stockholder or by another corporation of all or corporation, has a personality distinct and separate from
nearly all capital stock of corporation not sufficient ground that of the petitioners who are only its officers. It is the
for disregarding corporate personality; Case at bar.In this general rule that the protective mantle of a corporations
case, petitioner Onstott was made liable because he was separate and distinct personality could only be pierced and
then the President of the corporation and he appeared to be liability attached directly to its officers and/or members-
the controlling stockholder. No sufficient proof exists on stock-holders, when the same is used for fraudulent, unfair,
record that said petitioner used the corporation to defraud or illegal purpose. In the case at bar, there is no showing
private respondent. He cannot, therefore, be made that the Association entered into the transaction with the
personally liable just because he appears to be the private respondent for the purpose of defrauding the latter
controlling stockholder. Mere ownership by a single of his goods or the payment thereof. More importantly,
stockholder or by another corporation of all or nearly all of there is no proof whatsoever that the majority of the
the capital stock of a corporation is not of itself sufficient directors used the distinct and separate personality of
ground for disregarding the separate corporate personality. Bacarra (I.N.) FaCoMa, Inc. as a protective shield for any
Palay, Inc. vs. Clave, 124 SCRA 638, September 21, 1983 wrongdoing. Therefore, the general rule on corporate
Soriano vs. Court of Appeals, 174 SCRA 195, G.R. No. liability, not the exception, should be applied in resolving
49834 June 22, 1989 this case. Consequently, the private respondents cause of
action lies against the Bacarra (I.N.) FaCoMa, Inc., and not
Corporation Law; Liability of Officers for Corporate Debts; against the petitioners.
Piercing the Veil of Corporate Fiction; The protective mantle
of a corporations separate and distinct personality can only Civil Law; Obligations and Contracts; Joint and Solidary
be pierced and liability attached directly to its officers when Obligations; An obligation is presumed joint and not
the same is used for fraudulent, unfair and illegal solidary.In view of this ruling, there is no need to discuss
purpose.In the light of the foregoing, it is clear that the the other issues raised by the petitioners. Suffice it to state
liability of the petitioners under the document subject of the that under the law and well-established jurisprudence, an
instant case, is not personal but corporate, and therefore obligation is presumed joint and not solidary. There is
attached to the Bacarra (I.N.) FaCoMa, Inc. which, being a nothing in the receipt, constituting the agreement of the
corporation, has a personality distinct and separate from parties, which would sufficiently indicate that the petitioners
that of the petitioners who are only its officers. It is the bound themselves solidarity, if they bound themselves
general rule that the protective mantle of a corporations personally at all. Soriano vs. Court of Appeals, 174 SCRA
separate and distinct personality could only be pierced and 195, G.R. No. 49834 June 22, 1989
Piercing the Veil of Corporate Fiction When Corporations; Doctrine of piercing veil of corporate fiction;
Justified Circumstances of case at bar.The circumstances of the
case at bar where: (a) N. corporation owned all the
Palacio vs. Fely Transportation Company, 5 SCRA outstanding stocks of J. corporation: (b) the board of
1011, No. L-15121 August 31, 1962 directors of N corporation is constituted in such a way to
Corporations; Subsidiary Civil Liability for Damages; Fiction enable it to actual-ly direct and manage the other
of corporate entity not to be used to evade liability.Where corporation's affairs by making the same officers of the
the main purpose in forming the corporation was to evade board for both companies: (c) N corporation financed the
one's subsidiary liability for damages, in a criminal case, the operations of the other: (d) N corporation treats the other
corporation may not be heard to say that it has a employees as its own; (e) Compensation given to board
personality separate and distinct from its members, because members of corporation, who are also board members and
to allow it to do so would be to sanction the use of the or employees of N indicate that J is only a department of N;
fiction of corporate entity as a shield to further an end and (f) the offices of both corporations are located in the
subversive of justice. (La Campana Coffee Factory, et al. same compound; all lead to the conclusion that J
vs.Kaisahan ng mga Manggagawa, etc., et al., L-5677, May corporation is merely an adjunct, business conduit or alter
25, 1953). The Supreme Court can even substitute the real ego of N corporation and that the fiction of separate and
party in interest in place of the defendant corporation in distinct corporate entities should be disregarded.
order to avoid multiplicity of suits and thereby save the Taxation; Corporate fiction may not be used to evade
parties unnecessary expenses and delay (Alonso vs.Villamor, taxes.The revenue officers, in proper cases, may
16 Phil. 315). Palacio vs. Fely Transportation Company, 5 disregard the separate corporate entity where it serves but
SCRA 1011, No. L-15121 August 31, 1962 as a shield for tax evasion.
Marvel Building Corporation, et al. vs. David, 94 Phil. Same; When sales taxes to be based on sale to the public
376, No. L-5081 February 24, 1954 and not on intermediate sale to another corpration.
CORPORATIONS; CIRCUMSTANTIAL EVIDENCE SHOWING Where it is proven that two corporations are in reality but
ONE-MAN CORPORATION.The existence of endorsed one entity and that the veil of corporate fiction is being used
certificates discovered by internal revenue agents between as a shield for tax evasion by making it appear that the
1948 and 1949 in the possession of the Secretary-Treasurer original sale was that from one corporation to the other in
of a supposed corporation; the fact that twenty-five order to gain a tax advantage, it is held that the basis of the
certificates were signed by its president for no justifiable sales tax should be the sale by the latter corporation to the
reason; the fact that two sets of certificates were issued; public. Commissioner of Internal Revenue vs. Norton &
the undisputed fact that its principal stockholder had made Harrison Company, 11 SCRA 714, No. L-17618 August 31,
enormous profits and, therefore, had a motive to hide them 1964
to evade the payment of taxes; the fact that the other la Campana Coffee Factory, Inc., vs. Kaisahan ng
subscribers had no incomes of sufficient magnitude to mga Manggagawa sa La Campana (KKM), 93 Phil.,
justify their big subscriptions; the fact that the subscriptions 160, No. L-5677 May 25, 1953
were not receipted for and deposited by the treasurer in the
name of the alleged corporation but were kept by the 1.Industrial Disputes; Two Factors Operating under One
principal stockholder herself; the fact that the stockholders Management; Effect of One of Them Bieng a Registered
or the directors never appeared to have ever met to discuss Corporation.C Coffee Factory, Inc., and C Gaugau Packing
the business of the corporation; the fact that she advanced are operating as one business though with two trade
big sums of money to the corporation without any previous names. The owner of the latter is T ; and the former,
arrangement or accounting; and the fact that the books of though an incorporated business, is in reality owned
accounts were kept as if they belonged to her aloneare exclusively by and his family. The two factories had but one
circumstantial evidence which are not only convincing but office, one management and one payroll until July 17, the
conclusive that she is the sole and exclusive owner of all the day the case was certified to the Court of Industrial
shares of stock of the corporation and that the other Relations, when the person who was discharging the office
partners are her dummies. Marvel Building Corporation, et of cashier for both branches of the business began
al. vs. David, 94 Phil. 376, No. L-5081 February 24, 1954 preparing separate payrolls for the two. And the laborers of
the gaugau factory and the coffee factory were
Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 interchangeable, that is, the laborers from the gaugau
SCRA 160, No. L-13203 January 28, 1961 factory were sometimes transferred to the coffee factory
Corporations; Piercing the veil of corporate fiction.A and vice-versa. Held: The attempt to make the two factories
corporation is an entity separate and distinct from its appear as two separate businesses, when in reality they are
stockholders and from other corporations to which it may be but one, is but a device to defeat the ends of the law (the
connected. However, when the notion of legal entity is used Act governing capital and labor relations) and should not be
to defeat public convenience, justify wrong, protect fraud, permitted to prevail. Although the coffee factory is a
or defend crime, the law will regard the corporation as an corporation and, by legal fiction, an entity existing separate
association of persons, or, in the case of two corporations, and apart from the persons composing it, that is, T and his
merge them into one. When the corporation is the mere family, it is settled that this fiction of law, which has been
alter ego or business conduit of a person, it may be introduced as a matter of convenience and to subserve the
disregarded. ends of justice cannot be invoked to further an end
subversive of that purpose. (13 Am. Jur., 160-162;
Commissioner of Internal Revenue vs. Norton & Annotation 1 A. L. R. 612, s. 34 A. L. R. 599.):\
Harrison Company, 11 SCRA 714, No. L-17618
August 31, 1964 Emilio Cano Enterprises, Inc. vs. Court of Industrial
Relations, 13 SCRA 290, No. L-20502 February 26,
1965
Corporations; Separate legal personality from members Labor Law; Insolvency; Corporations; In case of corporate
disregarded when used as shield to subvert justice.The bankruptcy, wages of laborers must first be paid before
legal fiction that a corporation has a personality separate other creditors.The alleged bankruptcy of RANSOM
and distinct from its members or stockholders cannot be furnishes no justification for non-payment of backwages to
invoked if its purpose is to use it as a shield to further an the employees concerned taking into consideration Article
end subversive of justice, especially where the corporation 110 of the Labor Code, which provides: "ART. 110. Worker
is a closed family corporation. preference in case of bankruptcy.In the event of
bankruptcy or liquidation of an employer's business, his
Same; Suit against corporate officers in their official workers shall enjoy first preference as regards wages due
capacity considered as suit against corporation.Where the them for services rendered during the period prior to the
defendants are sued not in their private capacity but as bankruptcy or liquidation, any provision of law to the
president and manager, respectively, of the corporation of contrary notwithstanding. Unpaid wages shall be paid in full
which they were officers, their connection with the case before other creditors may establish any claim to a share in
must be deemed to be impressed with the representation of the assets of the employer." The term "wages" refers to all
the corporation, and verily, the order against them is in remunerations, earnings and other benefits in terms of
effect against the corporation. Emilio Cano Enterprises, Inc. money accruing to the employees or workers for services
vs. Court of Industrial Relations, 13 SCRA 290, No. L-20502 rendered. They are to be paid in full before other creditors
February 26, 1965 may establish any claim to a share in the assets of the
Telephone Engineering & Service Co., Inc. vs. WCC, employer.
104 SCRA 354, No. L-28694 May 13, 1981 Same; Same; Clearance to cease operations issued by the
Same; Same; Same; Corporation Law; Piercing the veil in Secretary of Labor to RANSOM was without prejudice to
compensation cases.Petitioner even admitted that TESCO rights of employees to seek redress, particularly to
and UMACOR are sister companies operating under one backwages ordered paid due to ULP.The Decision of the
single management and housed in the same building. CIR was rendered on August 19, 1972. Clearance to
Although respect for the corporate personality as such, is RANSOM to cease operations and terminate employment
the general rule, there are exceptions. In appropriate cases, granted by the Secretary of Labor was made effective on
the veil of corporate fiction may be pierced as when the May 1, 1973. The right of the employees concerned to
same is made as a shield to confuse the legitimate issues. backwages awarded them, therefore, had already vested at
the time and even before clearance was granted. Note
Claparols vs. CIR, 65 SCRA 613, No.L-30822 July 31, should also be taken of the fact that the clearance was
1975 without prejudice to the right of subject employees to seek
redress of grievances under existing laws and decrees.
Corporation law; Piercing the veil of corporate entity;
Dissolution of corporation and transfer of its assets to Same; Sale of corporate assets cannot prejudice rights of
another to avoid financial liability attached to the first employees to backwages.The worker preference applies
corporation; Case at bar.The second corporation seeks even if the employer's properties are encumbered by means
the protective shield of a corporate fiction whose veil could, of a mortgage contract, as in this case. So that, when
and should, be pierced as it was deliberately and maliciously machinery and equipment of RANSOM were sold to
designed to evade its financial obligation to its employees. Revelations Manufacturing Corporation for P2M in 1975, the
When the notion of legal entity is used to defeat public right of the 22 laborers to be paid from the proceeds should
convenience, justify wrong, protect fraud, or defend crime, have been recognized, even though it is claimed that those
the law will regard the corporation as an association or proceeds were turned over to the Commercial Bank and
persons, or, in the case of two corporations, will merge Trust Company (Comtrust) in payment of RANSOM
them into one. Claparols vs. CIR, 65 SCRA 613, No.L-30822 obligations, since the workers' preference is over and above
July 31, 1975 the claim of other creditors.

National Federation of Labor Union (NAFLU) vs. Ople, Same; Corporations; Sale of corporate assets to another
143 SCRA 124, No. L-68661 July 22, 1986 corporation organized previously by the same officers as the
vendor and engaged in the same line of business, using the
Same; Same; Corporation Law; Piercing the veil of machineries of the vendor in the same factory, is an
corporate fiction; When a second corporation seeks the instance where corporate veil should be pierced, vis-a-vis,
protective shield of a corporate fiction to achieve an illegal claim of laborers for backwages.Aggravating RANSOM's
purpose, the veil of corporate fiction should be pierced.It clear evasion of payment of its financial obligations is the
is very obvious from the above findings that the second organization of a "run-away corporation," ROSARIO, in 1969
corporation seeks the protective shield of a corporate fiction at the time the unfair labor practice case was pending
to achieve an illegal purpose. As enunciated in the case of before the CIR by the same persons who were the officers
Claparols v. Court of Industrial Relations (65 SCRA 613) its and stockholders of RANSOM, engaged in the same line of
veil in the present case should, therefore, be pierced as it business as RANSOM, producing the same line of -products,
was deliberately and maliciously designed to evade its occupying the same compound, using the same
financial obligations to its employees. It is an established machineries, buildings, laboratory, bodega and sales and
principle that when the veil of corporate fiction is made as a accounts departments used by RANSOM, and which is still in
shield to perpetrate a fraud or to confuse legitimate issues existence. Both corporations were closed corporations
(here, the relation of employer-employee), the same should owned and managed by members of the same family. Its
be pierced (A.D. Santos, Inc. v. Vasquez 22 SCRA 1158). organization proved to be a convenience instrument to
avoid payment of backwages and the reinstatement of the
A.C. Ransom Labor UnionCCLU vs. NLRC, 150 SCRA
22 workers. This is another instance where the fiction of
498, No. L-69494 May 29, 1987
separate and distinct corporate entities should be
disregarded.
Same; Same; Where sale of assets in fraud of workers, the to speak, no separate mind, will or existence of its own, and
buyer corporation shall be required to absorb illegally is but a conduit for its principal. It must be kept in mind
dismissed workers, pay their backwages solidarily with its that the control must be shown to have been exercised at
officers, and pay them separation pay as to those who will the time the acts complained of took place. Moreover, the
not be absorbed,WHEREFORE, the questioned Decision of control and breach of duty must proximately cause the
the National Labor Relations Commission is SET ASIDE, and injury or unjust loss for which the complaint is made.
the Order of Labor Arbiter Tito F. Genilo of March 11, 1980
is reinstated with the modification that Rosario Industrial Same; Same; Test in determining the applicability of the
Corporation and its officers and agents are hereby held doctrine of piercing the veil of corporate fiction.The test in
jointly and severally liable with the surviving private determining the applicability of the doctrine of piercing the
respondents for the payment of the backwages due the 22 veil of corporate fiction is as follows: 1. Control, not mere
union members. Rosario Industrial Corporation is hereby majority or complete stock control, but complete
ordered to reinstate the 22 union members or, if this is not domination, not only of finances but of policy and business
possible, to award them separation pay equivalent at least practice in respect to the transaction attacked so that the
to one (1) month pay or to one (1) month salary for every corporate entity as to this transaction had at the time no
year of service actually rendered by them with A.C. Ransom separate mind, will or existence of its own; 2. Such control
(Phils). Corporation, whichever is higher. A.C. Ransom Labor must have been used by the defendant to commit fraud or
UnionCCLU vs. NLRC, 150 SCRA 498, No. L-69494 May wrong, to perpetuate the violation of a statutory or other
29, 1987 positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal rights; and 3. The aforesaid
Concept Builders, Inc. vs. NLRC, 257 SCRA 149, May control and breach of duty must proximately cause the
29, 1996 injury or unjust loss complained of. The absence of any one
of these elements prevents piercing the corporate veil. In
Corporation Law; Doctrine of Piercing the Veil of Corporate applying the instrumentality or alter ego doctrine, the
Fiction; The separate and distinct personality of a courts are concerned with reality and not form, with how
corporation is merely a fiction created by law for the corporation operated and the individual defendants
convenience and to promote justice; When the notion of relationship to that operation.
separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, Same; Same; The question of whether a corporation is a
or is used as a device to defeat the labor laws, this separate mere alter ego, a mere sheet or paper corporation, a sham
personality of the corporation may be disregarded or the or a subterfuge is purely one of fact.Thus, the question of
veil of corporate fiction pierced.It is a fundamental whether a corporation is a mere alter ego, a mere sheet or
principle of corporation law that a corporation is an entity paper corporation, a sham or a subterfuge is purely one of
separate and distinct from its stockholders and from other fact.
corporations to which it may be connected. But, this
separate and distinct personality of a corporation is merely
a fiction created by law for convenience and to promote McConnel vs. Court of Appeals, 1 SCRA 722, No. L-
justice. So, when the notion of separate juridical personality 10510 March 17, 1961
is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or is used as a device to defeat the Obligations; Contracts; Corporations; When stockholders are
labor laws, this separate personality of the corporation may liable for obligations contracted by the corporation.
be disregarded or the veil of corporate fiction pierced. This Whenever the corporate entity is being used as an alter ego
is true likewise when the corporation is merely an adjunct, a or business conduit for the sole benefit of the stockholders,
business conduit or an alter ego of another corporation. or to defeat public convenience, justify wrong, protect
fraud. or defend crime, the individual stockholders may be
Same; Same; Some probative factors of identity that will held liable for the obligations contracted by the corporation.
justify the application of the doctrine of piercing the
corporate veil.The conditions under which the juridical Tan Boon Bee & Co., Inc. vs. Jarencio, 163 SCRA 205,
entity may be disregarded vary according to the peculiar No L-41337 June 30, 1988
facts and circumstances of each case. No hard and fast rule
can be accurately laid down, but certainly, there are some Corporations;Doctrine ofpiercing the veil ofcorporate
probative factors of identity that will justify the application entity.It is true that a corporation, upon coming into
of the doctrine of piercing the corporate veil, to wit: 1. being, is invested by law with a personality separate and
Stock ownership by one or common ownership of both distinct from that of the persons composing it as well as
corporations. 2. Identity of directors and officers. 3. The from any other legal entity to which it may be related
manner of keeping corporate books and records. 4. Methods (Yutivo & Sons Hardware Company vs. Court of Tax
of conducting the business. Appeals, 1 SCRA 160 [1961]; and Emilio Cano Enterprises,
Inc. vs. CIR, 13 SCRA 290 [1965]). As a matter of fact, the
Same; Same; Instrumentality Rule, Explained.The SEC doctrine that a corporation is a legal entity distinct and
en banc explained the instrumentality rule which the separate from the members and stockholders who compose
courts have applied in disregarding the separate juridical it is recognized and respected in all cases which are within
personality of corporations as follows: Where one reason ajid the law (Villa Rey Transit, Inc. vs. Ferrer, 25
corporation is so organized and controlled and its affairs are SCRA 845 [1968]). However, this separate and distinct
conducted so that it is, in fact, a mere instrumentality or personality is merely a fiction created by law for
adjunct of the other, the fiction of the corporate entity of convenience and to promote justice (Laguna Transportation
the instrumentality may be disregarded. The control Company vs. SSS, 107 Phil. 833 [1960]). Accordingly, this
necessary to invoke the rule is not majority or even separate personality of the corporation may be disregarded,
complete stock control but such domination of finances, or the veil of corporate flction pierced, in cases where it is
policies and practices that the controlled corporation has, so used as a cloak or cover for fraud or illegality, or to work an
injustice, or where necessary to achieve equity or when fiction.A corporation is an entity separate and distinct
necessary for the protection of creditors (Sulo ng Bayan, from its stockholders. While not in fact and in reality a
Inc. vs. Araneta, Inc., 72 SCRA 347 |1976]j. Corporations person, the law treats a corporation as though it were a
are composed of natural persons and the legal fiction of a person by process of fiction or by regarding it as an artificial
separate corporate personality is not a shield for the person distinct and separate from its individual
commission of injustice and inequity (Chenplex, Philippines, stockholders.
Inc., et al. vs. Hon. Pamatian, et al., 57 SCRA 408 [1974]).
Likewise, this is true when the corporation is merely an Same; Same; Same; Same; Instances when a corporate
adjunct, business conduit or alter ego of another fiction may be disregarded.However, the corporate
corporation. fiction or the notion of legal entity may be disregarded
when it is used to defeat public convenience, justify wrong,
Cease vs. Court of Appeals, 93 SCRA 483, No. L- protect fraud, or defend crime in which instances the law
33172 October 18, 1979 will regard the corporation as an association of persons, or
in case of two corporations, will merge them into one. The
Notes.A corporation is an artifical being created by corporate fiction may also be disregarded when it is the
operation of law; that, it can not refuse to yield obedience mere alter ego or business conduit of a person. There are
to acts of its state organs, including the judiciary, when many occasions when this Court pierced the corporate veil
called upon to do so. (Tayag vs. Benguet Consolidated, Inc., because of its use to protect fraud and to justify wrong. The
26 SCRA 242.) herein petition for review of a resolution of the Intermediate
Where a corporation is a dummy and serves no business Appellate Court dated February 8, 1984 seeking the reversal
purpose and is intended only as a blind, the corporate thereof and the reinstatement of its earlier decision dated
fiction may be ignored. (Liddel & Company, Inc. vs. June 30, 1983 in AC-G.R. No. 68496-R calls for the
Collector of Internal Revenue, 2 SCRA 632.) application of the foregoing principles.

Where a corporation is merely an adjunct, business conduit Same; Same; Same; Same; No cogent basis in case at bar
or alter ego of another corporation, the fiction of separate to pierce the corporate veil of the corporation, as there was
and distinct corporation entities should be disregarded. no intent to defraud.The environmental facts of this
(Commissioner of Internal Revenue vs. Norton & Harrison case show that there is no cogent basis to pierce the
Company, 11 SCRA 714.) corporate veil of Akron and hold petitioner personally liable
for its obligation to private respondent. While it is true that
The separate legal personality of a corporation from its in December, 1977 petitioner was still a member of the
members may be disregarded when it is used as a shield to board of directors of Akron and that he participated in the
subvert justice. (Emilio Cano Enterprises, Inc. vs. Court of adoption of a resolution authorizing the purchase of 13
Industrial Relations, 13 SCRA 290.) trucks for the use in the brokerage business of Akron to be
paid out of a loan to be secured from a lending institution, it
When the veil of corporate fiction is made as a shield to does not appear that said resolution was intended to
perpetuate fraud and/or confuse legitimate issues, the same defraud anyone and more particularly private respondent. It
should be pierced. (Republic vs. Razon, 20 SCRA 234; A.D. was Coprada, President and Chairman of Akron, who
Santos, Inc. vs. Vasquez, 22 SCRA 1156.) negotiated with said respondent for the purchase of 13
cargo trucks on January 25, 1978. It was Coprada who
The petitioners being the controlling stockholders of the
signed a promissory note to guarantee the payment of the
Bank and qualified to represent their interest, a judgment
unpaid balance of the purchase price out of the proceeds of
may be enforced for or against it, although not impleaded
a loan he supposedly sought from the DBP. The word WE
by name in the suit. (Ramos vs. Central Bank of the
in the said promissory note must refer to the corporation
Philippines, 41 SCRA 565).
which Coprada represented in the execution of the note and
A class suit will not prosper where brought by stockholders not its stockholders or directors. Petitioner did not sign the
who have determinable, though undivided interest, in the said promissory note so he cannot be personally bound
property in question. (Mathay vs. Consolidated Bank and thereby.
Trust Co., 58 SCRA 559).
Same; Same; Same; Same; Same; Alleged sale not
There is nothing in Section 77 of the Corporation Law which inherently fraudulent, as the cargo trucks were sold through
bars an action for the recovery of debts incurred by the a deed of absolute sale to the corporation so that the
corporation against the liquidator thereof after the lapse of corporation is free to dispose of the same.As to the sale
the 3 year period for corporate liquidation of assets and through pacto de retro of two units to a third person by the
liabilities. (Republic vs. Marsman Development Co., 44 SCRA corporation by virtue of a board resolution, petitioner
418). asserts that he never signed said resolution. Be that as it
may, the sale is not inherently fraudulent as the 13 units
If the accuse is a corporation, no criminal action can lie were sold through a deed of absolute sale to Akron so that
against it, whether such corporation be a resident or non- the corporation is free to dispose of the same. Of course, it
resident corporation, (Time, Inc. vs. Reyes, 39 SCRA 303). was stipulated that in case of default in payment to private
Cease vs. Court of Appeals, 93 SCRA 483, No. L-33172 respondent of the balance of the consideration, a chattel
October 18, 1979 mortgage lien shall be constituted on the 13 units.
Nevertheless, said mortgage is a prior lien as against the
When not Justified
pacto de retro sale of the 2 units.
Remo, Jr. vs. Intermediate Appellate Court, 172
Same; Same; Same; Same; Same; Amendment of articles of
SCRA 405, G.R. No. 67626 April 18, 1989
incorporation thereby changing the name of the corporation
Commercial Law; Corporation; A corporation is an entity is not an indication to evade payment by the corporation of
separate and distinct from its stockholders; Corporate its obligations to another.As to the amendment of the
articles of incorporation of Akron thereby changing its name wrongdoing must be clearly and convincingly established. It
to Akron Transport International, Inc., petitioner alleges cannot be presumed.
that the change of corporate name was in order to include
trucking and container yard operations in its customs Same; Same; Same; Substantial identity of the
brokerage of which private respondent was duly informed in incorporators of the two corporations does not necessarily
a letter. Indeed, the new corporation confirmed and imply fraud.Likewise, substantial identity of the
assumed the obligation of the old corporation. There is no incorporators of the two corporations does not necessarily
indication of an attempt on the part of Akron to evade imply fraud.
payment of its obligation to private respondent. Indophil Textile Mill Workers Union vs. Calica, 205
Same; Same; Same; Same; Same; A stockholder has an SCRA 697, G.R. No. 96490 February 3, 1992
inherent right to dispose of his shares of stock anytime he Corporation Law; Doctrine of piercing the veil of corporate
so desires.There is the fact that petitioner sold his entity applies when the corporate fiction is used to defeat
shares in Akron to Coprada during the pendency of the public convenience, justify wrong, protect fraud or defend
case. Since petitioner has no personal obligation to private crime or where a corporation is the mere alter ego or
respondent, it is his inherent right as a stockholder to business conduit of a person.Under the doctrine of
dispose of his shares of stock anytime he so desires. piercing the veil of corporate entity, when valid grounds
Same; Same; Same; Same; Same; If private respondent is therefore exist, the legal fiction that a corporation is an
the victim of fraud, there was no showing that the entity with a juridical personality separate and distinct from
corporation had any participation in the perpetration of the its members or stockholders may be disregarded. In such
fraud; Fraud must be established by clear and convincing cases, the corporation will be considered as a mere
evidence.Mention is also made of the alleged dumping association of persons. The members or stockholders of the
of 10 units in the premises of private respondent at Bagbag, corporation will be considered as the corporation, that is
Novaliches which to the mind of the Court does not prove liability will attach directly to the officers and stockholders.
fraud and instead appears to be an attempt on the part of The doctrine applies when the corporate fiction is used to
Akron to attend to its obligations as regards the said trucks. defeat public convenience, justify wrong, protect fraud, or
Again petitioner has no part in this. If the private defend crime, or when it is made as a shield to confuse the
respondent is the victim of fraud in this transaction, it has legitimate issues, or where a corporation is the mere alter
not been clearly shown that petitioner had any part or ego or business conduit of a person, or where the
participation in the perpetration of the same. Fraud must be corporation is so organized and controlled and its affairs are
established by clear and convincing evidence. If at all, the so conducted as to make it merely an instrumentality,
principal character on whom fault should be attributed is agency, conduit or adjunct of another corporation.
Feliciano Coprada, the President of Akron, whom private Same; Same; Fact that the businesses of private respondent
respondent dealt with personally all through out. and Acrylic are related, that some of the employees of the
Fortunately, private respondent obtained a judgment private respondent are the same persons manning and
against him from the trial court and the said judgment has providing for auxilliary services to the units of Acrylic and
long been final and executory. Remo, Jr. vs. Intermediate that the physical plants, offices and facilities are situated in
Appellate Court, 172 SCRA 405, G.R. No. 67626 April 18, the same compound are not sufficient to justify the piercing
1989 of the corporate veil of Acrylic.In the case at bar,
Del Rosario vs. National Labor Relations petitioner seeks to pierce the veil of corporate entity of
Commission, 187 SCRA 777, G.R. No. 85416 July 24, Acrylic, alleging that the creation of the corporation is a
1990 devise to evade the application of the CBA between
petitioner Union and private respondent Company. While we
Corporation Law; A corporation is bestowed judicial do not discount the possibility of the similarities of the
personality separate and distinct from its stockholders; businesses of private respondent and Acrylic, neither are we
When the judicial personality of the corporation is used to inclined to apply the doctrine invoked by petitioner in
defeat public convenience, justify wrong, protect fraud or granting the relief sought. The fact that the businesses of
defend crime, the corporation shall be considered as mere private respondent and Acrylic are related, that some of the
association of persons and its responsible officers and/or employees of the private respondent are the same persons
stockholders shall be held individually liable.Under the law manning and providing for auxilliary services to the units of
a corporation is bestowed juridical personality, separate and Acrylic, and that the physical plants, offices and facilities are
distinct from its stockholders [Civil Code, Art. 44; situated in the same compound, it is our considered opinion
Corporation Code, sec. 2]. But when the juridical personality that these facts are not sufficient to justify the piercing of
of the corporation is used to defeat public convenience, the corporate veil of Acrylic.
justify wrong, protect fraud or defend crime, the corporation
shall be considered as a mere association of persons, and Same; Same; The legal corporate entity is disregarded only
its responsible officers and/or stockholders shall be held if it is sought to hold the officers and stockholders directly
individually liable. For the same reasons, a corporation shall liable for a corporate debt or obligation.In the same case
be liable for the obligations of a stockholder, or a of Umali, et al. v. Court of Appeals (supra), We already
corporation and its successor-in-interest shall be considered emphasized that "the legal corporate entity is disregarded
as one and the liability of the former shall attach to the only if it is sought to hold the officers and stockholders
latter. directly liable for a corporate debt or obligation." In the
instant case petitioner does not seek to impose a claim
Same; Same; Same; To disregard the separate judicial against the members of the Acrylic.
personality of a corporation, the wrong doing must be
clearly and convincingly established.But for the separate Same; Same; Same; It is grave abuse of discretion to treat
juridical personality of a corporation to be disregarded, the two companies as a single bargaining unit when these
companies are indubitably distinct entities with separate
juridical personalities.Furthermore, We already ruled in Pacific Rehouse Corporation vs. Court of Appeals,
the case of Diatagon Labor Federation Local 110 of the 719 SCRA 665, G.R. No. 201537 March 24, 2014
ULGWP v. Ople (supra) that it is grave abuse of discretion
to treat two companies as a single bargaining unit when Same; Same; Jurisdiction; Piercing the Veil of Corporate
these companies are indubitably distinct entities with Fiction; The Supreme Court already ruled in Kukan
separate juridical personalities. Indophil Textile Mill Workers International Corporation v. Reyes, 631 SCRA 596 (2010),
Union vs. Calica, 205 SCRA 697, G.R. No. 96490 February 3, that compliance with the recognized modes of acquisition of
1992 jurisdiction cannot be dispensed with even in piercing the
veil of corporate fiction.The Court already ruled in Kukan
Philippine National Bank vs. Ritratto Group, Inc., 362 International Corporation v. Reyes, 631 SCRA 596 (2010),
SCRA 216, G.R. No. 142616 July 31, 2001 that compliance with the recognized modes of acquisition of
jurisdiction cannot be dispensed with even in piercing the
Same; Same; Corporation Law; Doctrine of Piercing the Veil veil of corporate fiction, to wit: The principle of piercing the
of Corporate Fiction; The mere fact that a corporation owns veil of corporate fiction, and the resulting treatment of two
all of the stocks of another corporation, taken alone is not related corporations as one and the same juridical person
sufficient to justify their being treated as one entity.The with respect to a given transaction, is basically applied only
general rule is that as a legal entity, a corporation has a to determine established liability; it is not available to confer
personality distinct and separate from its individual on the court a jurisdiction it has not acquired, in the first
stockholders or members, and is not affected by the place, over a party not impleaded in a case. Elsewise put, a
personal rights, obligations and transactions of the latter. corporation not impleaded in a suit cannot be subject to the
The mere fact that a corporation owns all of the stocks of courts process of piercing the veil of its corporate fiction. In
another corporation, taken alone is not sufficient to justify that situation, the court has not acquired jurisdiction over
their being treated as one entity. If used to perform the corporation and, hence, any proceedings taken against
legitimate functions, a subsidiarys separate existence may that corporation and its property would infringe on its right
be respected, and the liability of the parent corporation as to due process. Aguedo Agbayani, a recognized authority on
well as the subsidiary will be confined to those arising in Commercial Law, stated as much: 23. Piercing the veil of
their respective business. The courts may in the exercise of corporate entity applies to determination of liability not of
judicial discretion step in to prevent the abuses of separate jurisdiction. x x x This is so because the doctrine of piercing
entity privilege and pierce the veil of corporate entity. the veil of corporate fiction comes to play only during the
Same; Same; Same; Same; The doctrine of piercing the trial of the case after the court has already acquired
corporate veil of corporate fiction is an equitable doctrine jurisdiction over the corporation. Hence, before this doctrine
developed to address situations where the separate can be applied, based on the evidence presented, it is
corporate personality of a corporation is abused or used for imperative that the court must first have jurisdiction over
wrongful purposes.In this jurisdiction, we have held that the corporation.
the doctrine of piercing the corporate veil is an equitable Same; Same; Same; Same; If the court has no jurisdiction
doctrine developed to address situations where the separate over the corporation, it follows that the court has no
corporate personality of a corporation is abused or used for business in piercing its veil of corporate fiction because such
wrongful purposes. The doctrine applies when the corporate action offends the corporations right to due process.From
fiction is used to defeat public convenience, justify wrong, the preceding, it is therefore correct to say that the court
protect fraud or defend crime, or when it is made as a must first and foremost acquire jurisdiction over the parties;
shield to confuse the legitimate issues, or where a and only then would the parties be allowed to present
corporation is the mere alter ego or business conduit of a evidence for and/or against piercing the veil of corporate
person, or where the corporation is so organized and fiction. If the court has no jurisdiction over the corporation,
controlled and its affairs are so conducted as to make it it follows that the court has no business in piercing its veil
merely an instrumentality, agency, conduit or adjunct of of corporate fiction because such action offends the
another corporation. corporations right to due process.
Same; Same; Same; Same; Test in Determining Applicability Mercantile Law; Corporations; Alter Ego Doctrine; The
of the Doctrine of Piercing the Veil of Corporate Fiction.In question of whether one corporation is merely an alter ego
Concept Builders, Inc. v. NLRC, we have laid the test in of another is purely one of fact.The question of whether
determining the applicability of the doctrine of piercing the one corporation is merely an alter ego of another is purely
veil of corporate fiction, to wit: 1. Control, not mere one of fact. So is the question of whether a corporation is a
majority or complete control, but complete domination, not paper company, a sham or subterfuge or whether petitioner
only of finances but of policy and business practice in adduced the requisite quantum of evidence warranting the
respect to the transaction attacked so that the corporate piercing of the veil of respondents corporate entity.
entity as to this transaction had at the time no separate
mind, will or existence of its own. 2. Such control must have Mercantile Law; Corporations; Piercing the Veil of Corporate
been used by the defendant to commit fraud or wrong, to Fiction; When the notion of separate juridical personality is
perpetuate the violation of a statutory or other positive legal used to defeat public convenience, justify wrong, protect
duty, or dishonest and, unjust act in contravention of fraud or defend crime, or is used as a device to defeat the
plaintiffs legal rights; and, 3. The aforesaid control and labor laws, this separate personality of the corporation may
breach of duty must proximately cause the injury or unjust be disregarded or the veil of corporate fiction pierced.It is
loss complained of. The absence of any one of these a fundamental principle of corporation law that a
elements prevents piercing the corporate veil. In applying corporation is an entity separate and distinct from its
the instrumentality or alter ego doctrine, the courts are stockholders and from other corporations to which it may be
concerned with reality and not form, with how the connected. But, this separate and distinct personality of a
corporation operated and the individual defendants corporation is merely a fiction created by law for
relationship to the operation. convenience and to promote justice. So, when the notion of
separate juridical personality is used to defeat public as the subsidiary will be confined to those arising in their
convenience, justify wrong, protect fraud or defend crime, respective business.There was nothing on record
or is used as a device to defeat the labor laws, this separate demonstrative of Export Banks wrongful intent in setting up
personality of the corporation may be disregarded or the a subsidiary, E-Securities. If used to perform legitimate
veil of corporate fiction pierced. This is true likewise when functions, a subsidiarys separate existence shall be
the corporation is merely an adjunct, a business conduit or respected, and the liability of the parent corporation as well
an alter ego of another corporation. as the subsidiary will be confined to those arising in their
respective business. To justify treating the sole stockholder
Same; Same; Same; Where one corporation is so organized or holding company as responsible, it is not enough that the
and controlled and its affairs are conducted so that it is, in subsidiary is so organized and controlled as to make it
fact, a mere instrumentality or adjunct of the other, the merely an instrumentality, conduit or adjunct of its
fiction of the corporate entity of the instrumentality may stockholders. It must further appear that to recognize their
be disregarded.Where one corporation is so organized and separate entities would aid in the consummation of a
controlled and its affairs are conducted so that it is, in fact, wrong.
a mere instrumentality or adjunct of the other, the fiction of
the corporate entity of the instrumentality may be Same; Same; Same; Same; The Supreme Court has
disregarded. The control necessary to invoke the rule is not declared that mere ownership by a single stockholder or by
majority or even complete stock control but such another corporation of all or nearly all of the capital stock of
domination of finances, policies and practices that the a corporation is not of itself sufficient ground for
controlled corporation has, so to speak, no separate mind, disregarding the separate corporate personality. The Court
will or existence of its own, and is but a conduit for its has likewise ruled that the existence of interlocking
principal. It must be kept in mind that the control must be directors, corporate officers and shareholders is not enough
shown to have been exercised at the time the acts justification to pierce the veil of corporate fiction in the
complained of took place. Moreover, the control and breach absence of fraud or other public policy considerations.
of duty must proximately cause the injury or unjust loss for Ownership by Export Bank of a great majority or all of
which the complaint is made. stocks of E-Securities and the existence of interlocking
directorates may serve as badges of control, but ownership
Same; Same; Alter Ego Doctrine; The Court has laid down a of another corporation, per se, without proof of actuality of
three-pronged control test to establish when the alter ego the other conditions are insufficient to establish an alter ego
doctrine should be operative.The Court has laid down a relationship or connection between the two corporations,
three-pronged control test to establish when the alter ego which will justify the setting aside of the cover of corporate
doctrine should be operative: (1) Control, not mere majority fiction. The Court has declared that mere ownership by a
or complete stock control, but complete domination, not single stockholder or by another corporation of all or nearly
only of finances but of policy and business practice in all of the capital stock of a corporation is not of itself
respect to the transaction attacked so that the corporate sufficient ground for disregarding the separate corporate
entity as to this transaction had at the time no separate personality. The Court has likewise ruled that the
mind, will or existence of its own; (2) Such control must existence of interlocking directors, corporate officers and
have been used by the defendant to commit fraud or shareholders is not enough justification to pierce the veil of
wrong, to perpetuate the violation of a statutory or other corporate fiction in the absence of fraud or other public
positive legal duty, or dishonest and unjust act in policy considerations.
contravention of plaintiffs legal right; and (3) The aforesaid
control and breach of duty must [have] proximately caused Same; Same; Same; Same; Any application of the doctrine
the injury or unjust loss complained of. The absence of any of piercing the corporate veil should be done with caution.
one of these elements prevents piercing the corporate veil Any application of the doctrine of piercing the corporate veil
in applying the instrumentality or alter ego doctrine, the should be done with caution. A court should be mindful of
courts are concerned with reality and not form, with how the milieu where it is to be applied. It must be certain that
the corporation operated and the individual defendants the corporate fiction was misused to such an extent that
relationship to that operation. Hence, all three elements injustice, fraud, or crime was committed against another, in
should concur for the alter ego doctrine to be applicable. disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise,
Same; Same; Same; Piercing the Veil of Corporate Fiction; an injustice that was never unintended may result from an
There must be a perpetuation of fraud behind the control or erroneous application. Pacific Rehouse Corporation vs.
at least a fraudulent or illegal purpose behind the control in Court of Appeals, 719 SCRA 665, G.R. No. 201537 March
order to justify piercing the veil of corporate fiction.Albeit 24, 2014
the RTC bore emphasis on the alleged control exercised by
Export Bank upon its subsidiary E-Securities, [c]ontrol, by
itself, does not mean that the controlled corporation is a
mere instrumentality or a business conduit of the mother Yu vs. National Labor Relations Commission, 245
company. Even control over the financial and operational SCRA 134, G.R. Nos. 111810-11 June 16, 1995
concerns of a subsidiary company does not by itself call for Corporation Law; Corporate Name; Use of similar sounding
disregarding its corporate fiction. There must be a or almost identical name is an obvious device to capitalize
perpetuation of fraud behind the control or at least a on the goodwill which Tanduay Rum has built over the
fraudulent or illegal purpose behind the control in order to years.Such a stance is not supported by the facts. The
justify piercing the veil of corporate fiction. Such fraudulent name of the company for whom the petitioners are working
intent is lacking in this case. is Twin Ace Holdings Corporation. As stated by the Solicitor
Same; Same; Same; Same; If used to perform legitimate General, Twin Ace is part of the Allied Bank Group although
functions, a subsidiarys separate existence shall be it conducts the rum business under the name of Tanduay
respected, and the liability of the parent corporation as well Distillers. The use of a similar sounding or almost identical
name is an obvious device to capitalize on the goodwill
which Tanduay Rum has built over the years. Twin Ace or would have expressly stated so in this section or in any
Tanduay Distillers, on one hand, and Tanduay Distillery, Inc. other provision of the law.
(TDI), on the other, are distinct and separate corporations.
There is nothing to suggest that the owners of TDI, have Same; Same; Same; How change of name may be
any common relationship as to identify it with Allied Bank effected.A corporation may change its name by merely
Group which runs Tanduay Distillers. The dissertation of the amending its charter in the manner prescribed by law.
Court in Diatagon Labor Federation Local 110 of the ULGWP Same; Same; Same; Change of name does not dissolve
vs. Ople, et al. (101 SCRA 534 [1980]) is worthy of corporation.The change of name of a corporation does
restatement, thusly: We hold that the director of Labor not result in its dissolution. The changing of the name of a
Relations acted with grave abuse of discretion in treating corporation is no more the creation of a corporation than
the two companies as a single bargaining unit. That ruling is the changing of the name of a natural person is the
arbitrary and untenable because the two companies are begetting of a natural person. The act, in both cases, would
indubitably distinct entities with separate juridical seem to be what the language which we use to designate it
personalities. importsa change of name and not a change of being.
Same; Same; Corporation has a personality separate and Same; Same; Same; When change of corporate name is
distinct from those of the persons composing it.It is basic effective.The approval by the stockholders of the
that a corporation is invested by law with a personality amendment of the articles of incorporation changing the
separate and distinct from those of the persons composing corporate name does not automatically change the name of
it as well as from that of any other legal entity to which it the corporation as of that date. To be effective, Section 18
may be related (Palay, Inc. et al. vs. Clave, et al., 124 SCRA of the Corporation Law requires that a copy of the articles
641 [1983]) of incorporation as amended, duly certified to be correct by
Same; Piercing the Veil of Corporate Entity; The doctrine of the president and the secretary of the corporation and a
piercing the veil of corporate entity applies when the majority of the board of directors or trustees, shall be filed
corporate fiction is used to defeat public convenience, with the Securities & Exchange Commissioner and it is only
justify wrong, protect fraud or defend crime or where a from the time of such filing, that the corporation shall have
corporation is the mere alter ego or business conduit of a the same powers and it and the members and stockholders
person.The genuine nature of the sale to Twin Ace is thereof shall thereafter be subject to the same liabilities as
evidenced by the fact that Twin Ace was only a subsequent if such amendment had been embraced in the original
interested buyer. At the time when termination notices were articles of incorporation. Philippine First Insurance Co., Inc.
sent to its employees, TDI was negotiating with the First vs. Hartigan, 34 SCRA 252, No. L-26370 July 31, 1970
Pacific Metro Corporation for the sale of its assets. Only
after First Pacific gave up its efforts to acquire the assets
did Twin Ace or Tanduay Distillers come into the picture.
Respondents-employees have not presented any proof as to
communality of ownership and management to support Amendment of Corporate Term
their contention that the two companies are one firm or
Alhambra Cigar & Cigarette Manufacturing Co., Inc.
closely related. The doctrine of piercing the veil of corporate
vs. Securities and Exchange Commission, 24 SCRA
entity applies when the corporate fiction is used to defeat
269, No. L-23606 July 29, 1968
public convenience, justify wrong, protect fraud, or defend
crime or where a corporation is the mere alter ego or Corporation law; Term of existence; Amendment of articles
business conduit of a person (Indophil Textile Mill Workers of incorporation after expiration of its corporate life.A
Union vs. Calica, 205 SCRA 697, 703 [1992]). To disregard corporation cannot extend its life by amendment of its
the separate juridical personality of a corporation, the articles of incorporation effected during the three-year
wrong-doing must be clearly and convincingly established. statutory period for liquidation when its original term of
It cannot be presumed (Del Rosario vs. NLRC, 187 SCRA existence had already expired.
777, 780 [1990]).
Since the privilege of extension is purely statutory, all of the
Same; Same; Fiction of separate and distinct entities cannot statutory conditions precedent must be complied with in
be disregarded there being no indication that the second order that the extension may be effectuated. And,
corporation is a dummy or serves as a client of the first generally, these conditions must be complied with, and the
corporate entity.In fine, the fiction of separate and steps necessary to effect the extension must be taken,
distinct corporate entities cannot, in the instant case, be during the life of the corporation, and before the expiration
disregarded and brushed aside, there being not the least of its term of existence as originally fixed by its charter or
indication that the second corporation is a dummy or serves the general law, since, as a rule, the corporation is ipso
as a client of the first corporate entity. facto dissolved as soon as that time expires (8 Fletcher,
Cyclopedia of Corporations, Perm. ed., 1931, pp. 559-560).
Change in Corporate Name
Alhambra Cigar & Cigarette Manufacturing Co., Inc. vs.
Philippine First Insurance Co., Inc. vs. Hartigan, 34 Securities and Exchange Commission, 24 SCRA 269, No. L-
SCRA 252, No. L-26370 July 31, 1970 23606 July 29, 1968

Corporation law; Corporations; Change of name; Classification of Powers


Corporation may change its name.There is nothing in
Ramirez vs. Orientalist Co. and Fernandez., 38 Phil.
Section 18 of the Corporation Law which prohibits a
634, [No. 11897 September 24, 1918
corporation from changing its name. The inference is clear
that such a change is allowed, for if the legislature had 5.CORPORATIONS; CONTRACTS; POWER OF BOARD;
intended to enjoin corporations from changing names, it RATIFICATION.The power to make corporate contracts
resides primarily in the company's board of directors; but
the board may ratify an unauthorized contract made by an persons who in fact are not the beneficial owners of the
officer of the corporation. Ratification in this case is held to shares registered in their names on the books of the
have occurred when the board, with knowledge that the corporation becomes formally legalized (see Campos and
contract had been made, adopted a resolution recognizing Lopez-Campos, supra, p. 296) Hence, this is a clear
the existence of the contract and directing that steps be indication that in order to be eligible as a director, what is
taken to enable the corporation to utilize its benefits. material is the legal title to, not beneficial ownership of, the
stock as appearing on the books of the corporation (2
6.ID.; ID.; ACTION OF STOCKHOLDERS.Where a Fletcher, Cyclopedia of the Law of Private Corporations,
corporate contract has been effected with the approval of section 300, p. 92 [1969] citing People v. Lihme, 269111.
the board of directors, a resolution adopted at a meeting of 351, 109 N.E. 1051).
stockholders refusing to recognize the contract or
repudiating it is without effect. Same; Same; Voting Trusts; A voting trust agreement
results in the separation of the voting rights of a stockholder
Barretto vs. La Previsora Filipina, 57 Phil., 649, No. from his other rights such as the right to receive dividends
34719 December 8, 1932 and other rights to which a stockholder may be entitled until
1. Building and Loan Associations; "Ultra Vires" and Void the liquidation of the corporation.There can be no reliance
Con-tract or By-Law.Building and loan associations are on the inference that the five-year period of the voting trust
peculiar and special corporations. They are founded upon agreement in question had lapsed in 1986 so that the legal
principles of strict mutuality and equality of benefits and title to the stocks covered by the said voting trust
obligations, and the trend of the more recent decisions is agreement ipso facto reverted to the petitioners as
that any contract made or by-law provision adopted by such beneficial owners pursuant to the 6th paragraph of section
association in con-travention of the statute is ultra vires and 59 of the new Corporation Code which reads:
void. "Unless expressly renewed, all rights granted in a voting
2.Id.; Id.Article 68-A of the amended by-laws of the trust agreement shall automatically expire at the end of the
defendant corporation upon which the action is based, does agreed period, and the voting trust certificates as well as
not under the law as applied to the express provisions the certificates of stock in the name of the trustee or
thereof create any legal obligation on its part to pay to the trustees shall thereby be deemed cancelled and new
persons named therein, in-cluding the plaintiffs, a life certificates of stock shall be reissued in the name of the
gratuity or pension out of its net profits. transferors." On the contrary, it is manifestly clear from the
terms of the voting trust agreement between ALFA and the
3.Id.; Id.While building and loan associations are DBP that the duration of the agreement is contingent upon
expressly authorized by the Corporation Law to adopt by- the fulfillment of certain obligations of ALFA with the DBP.
laws for their govern-ment, section 20 of that Act, as
construed by this court in the case of Fleischer vs. Botica Detective & Protective Bureau, Inc. vs. Cloribel, 26
Nolasco Co. (47 Phil., 583), ex-pressly limits such authority SCRA 255, No. L-23428 November 29, 1968
to the adoption of by-laws which are not- inconsistent with Corporation law; Director; Stock; To qualify as a director of
the provisions of the law. a corporation, one must own at least one share of stock
4.Id.; Id.; Contracts between a Corporation and Third therein.Every director must own in his own right at least
Persons.The law is settled that contracts between a one share of the capital stock of the stock corporation of
corporation and third persons must be made by or under which he is a director, which stock shall stand in his name
the authority of its board of directors and not by its on the books of the corporation (Sec. 30, Corporation Law).
stockholders. Hence, the action of the stockholders in such So that, if the By-Laws of the Corporation provides that
matters is only advisory and not in any wise binding on the "The manager shall be elected by the Board of Directors
corporation. Barretto vs. La Previsora Filipina, 57 Phil., 649, from among its members," one could not be a managing
No. 34719 December 8, 1932 director of said corporation unless he owns at least one
share of stock thereof.
Qualifications and Disqualifications
Same; Dispute as to who owns the controlling interest in
Lee vs. Court of Appeals, 205 SCRA 752, G.R. No. the corporation; Party in control or in possession of the
93695 February 4, 1992 controlling interest is presumed to have the better right to
the position of managing corporate director.Where
Mercantile Law; Corporation Code; Every director must own ownership of the controlling interest in the corporation is in
at least one (1) share of the capital stock of the corporation dispute, the party in control or in possession of the disputed
of which he is a director which share shall stand in his name interest is presumed to have the better right (to the position
on the books of the corporation. Any director who ceases to of managing' corporate director) until the contrary is
be the owner of at least one (1) share of the capital stock of adjudged, and hence, that party should not be deprived of
the corporation of which he is a director shall thereby cease the control or possession until the court is prepared to
to be a director.Under the old Corporation Code, the adjudicate the controverted right in favor of the other party
eligibility of a director, strictly speaking, cannot be adversely (Gordillo, et al. v. Del Rosario, et al., 39 Phil. 829). Relevant
affected by the simple act of such director being a party to here is: "The rule that a court should not, by means of a
a voting trust agreement inasmuch as he remains owner preliminary injunction, transfer property in litigation from
(although beneficial or equitable only) of the shares subject the possession of one party to another is more particularly
of the voting trust agreement pursuant to which a transfer applicable where the legal title is in dispute and the party
of the stockholder's shares in favor of the trustee is required having possession asserts ownership in himself" (Gordillo, et
(section 36 of the old Corporation Code). No disqualification al. v. Del Rosario, supra; Rodulfa v. Alfonso, et al., 79 Phil.
arises by virtue of the phrase "in his own right" provided 225).
under the old Corporation Code. With the omission of the
phrase "in his own right" the election of trustees and other
Validity and Binding effect of actions of Corporate without first being approved by the Board of Directors; such
Officers approval may only be given after the contract passes
through, at least, the comptroller, who is the NIDC
Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA representative, and the legal counsel.
763, G.R, No. 53820 June 15, 1992
Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183, G.R.
Corporations; Contracts; A contract signed by the President No. 76801 August 11, 1995
and Board Chairman without authority from the Board of
Directors is void; Exceptions.While there can be no Corporation Law; A corporation, through its board of
question that Mr, Maglana was an officerthe President and directors, should act in the manner and within the
Chairmanof private respondent corporation at the time he formalities, if any, prescribed by its charter or by the
signed Exhibit "A", the above provisions of said private general law.The general rule is that a corporation,
respondent's By-Laws do not in any way confer upon the through its board of directors, should act in the manner and
President the authority to enter into contracts for the within the formalities, if any, prescribed by its charter or by
corporation independently of the Board of Directors. That the general law. Thus, directors must act as a body in a
power is exclusively lodged in the latter. Nevertheless, to meeting called pursuant to the law or the corporations by-
expedite or facilitate the execution of the contract, only the laws, otherwise, any action taken therein may be
Presidentand not all the members of the Board, or so questioned by any objecting director or shareholder.
much thereof as are required for the actshall sign it for
the corporation. This is the import of the words through the Same; An action of the board of directors during a meeting,
president in Exhibit "8-A" and the clear intent of the power which was illegal for lack of notice, may be ratified either
of the chairman "to execute and sign for and in behalf of expressly, by the action of the directors in subsequent legal
the corporation all contracts and agreements which the meeting, or impliedly, by the corporations subsequent
corporation may enter into" in Exhibit "1-1". Both powers course of conduct.Be that as it may, jurisprudence tells us
presuppose a prior act of the corporation exercised through that an action of the board of directors during a meeting,
the Board of Directors. No greater power can be implied which was illegal for lack of notice, may be ratified either
from such express, but limited, delegated authority. Neither expressly, by the action of the directors in subsequent legal
can it be logically claimed that any power greater than that meeting, or impliedly, by the corporations subsequent
expressly conferred is inherent in Mr. Maglana's position as course of conduct.
president and chairman of the corporation. Same; Ultra Vires Acts; Words and Phrases; In legal
Same; Same; Same.Petitioner's last refuge then is his parlance, ultra vires act refers to one which is not within
alternative proposition, namely, that private respondent had the corporate powers conferred by the Corporation Code or
clothed Mr. Maglana with the apparent power to act for it articles of incorporation or not necessary or incidental in the
and had caused persons dealing with it to believe that he exercise of the powers so conferred.Assuming,arguendo,
was conferred with such power. The rule is of course settled that there was no notice given to Asuncion Lopez Gonzales
that "[a]lthough an officer or agent acts without, or in during the special meetings held on August 17, 1981 and
excess of, his actual authority if he acts within the scope of September 1, 1981, it is erroneous to state that the
an apparent authority with which the corporation has resolutions passed by the board during the said meetings
clothed him by holding him out or permitting him to appear were ultra vires. In legal parlance, ultra vires act refers to
as having such authority, the corporation is bound thereby one which is not within the corporate powers conferred by
in favor of a person who deals with him in good faith in the Corporation Code or articles of incorporation or not
reliance on such apparent authority, as where an officer is necessary or incidental in the exercise of the powers so
allowed to exercise a particular authority with respect to the conferred.
business, or a particular branch of it, continuously and Same; Same; Providing gratuity pay for its employees is one
publicly, for a considerable time." Also, "if a private of the express powers of the corporation under the
corporation intentionally or negligently clothes its officers or Corporation Code.The assailed resolutions before us cover
agents with apparent power to perform acts for it, the a subject which concerns the benefit and welfare of the
corporation will be estopped to deny that such apparant companys employees. To stress, providing gratuity pay for
authority is real, as to innocent third persons dealing in its employees is one of the express powers of the
good faith with such officers or agents." This "apparent corporation under the Corporation Code, hence, petitioners
authority may result from (1) the general manner by which cannot invoke the doctrine of ultra vires to avoid any liability
the corporation holds out an officer or agent as having arising from the issuance of the subject resolutions.
power to act or, in other words, the apparent authority with
which it clothes him to act in general, or (2) the Same; Section 28 1/2 of the Corporation Law (now Section
acquiescence in his acts of a particular nature, with actual 40 of the Corporation Code) requiring authorization of the
or constructive knowledge thereof, whether within or stockholders of record for action taken by the board of
without the scope of his ordinary powers." directors applies to the sale, lease, exchange or disposition
of all or substantially all of the corporations assets.
Same; Same; Petitioner failed to prove President of herein Petitioners try to convince us that the subject resolutions
corporation clothe with apparent authority to constract with had no force and effect in view of the non-approval thereof
it.lt was incumbent upon the petitioner to prove that during the Annual Stockholders Meeting held on March 1,
indeed the private respondent had clothed Mr. Maglana with 1982. To strengthen their position, petitioners cite section
the apparent power to execute Exhibit "A" or any similar 28 1/2 of the Corporation Law (Section 40 of the
contract. This could have been easily done by evidence of Corporation Code). We are not persuaded. The cited
similar acts executed either in its favor or in favor of other provision is not applicable to the case at bench as it refers
parties. Petitioner miserably failed to do that. Upon the to the sale, lease, exchange or disposition of all or
other hand, private respondent's evidence overwhelmingly substantially all of the corporations assets, including its
shows that no contract can be signed by the president goodwill. In such a case, the action taken by the board of
directors requires the authorization of the stockholders on Same; Same; Same; Silence of corporation as ratification of
record. agreement.The silence of the corporation, taken together
with the unconditional acceptance of three subsequent
Same; Where the stockholders of petitioner, except for one, remit-tances from plaintiff, constitutes a binding ratification
also sit as members of the board of directors, it will be of the original agreement between them (Civil Code, Article
illogical and superfluous to require the stockholders 1393).
approval of certain resolutions adopted by the board of
directors.It will be observed that, except for Arturo Lopez, Same; Same; Same; Maxim that the one who made it
the stockholders of petitioner corporation also sit as pos-sible for a wrong to be done should suffer.The
members of the board of directors. Under the circumstances equitable maxim that between two innocent parties the one
in field, it will be illogical and superfluous to require the who made it possi-ble for the wrong to be done should be
stockholders approval of the subject resolutions. Thus, even the one to bear the re-sulting loss, applies when as in the
without the stockholders approval of the subject instant case a cor-poration allows one of its officers, now
resolutions, petitioners are still liable to pay private alleged to be without the proper authority, to send a
respondents gratuity pay. Lopez Realty, Inc. vs. Fontecha, telegram binding the corporation.
247 SCRA 183, G.R. No. 76801 August 11, 1995
Board of Liquidators vs, Kalaw, 20 SCRA 987, No. L-
Pua Casim & Co. vs. W. Neumark & Co., 46 Phil. 342, 18805 August 14, 1967
No. 21644 October 2, 1924
Corporations; Three methods of winding up corporate
1.CORPORATION; AUTHORITY OF MANAGER TO BORROW affairs.Accepted in this jurisdiction are three methods by
MONEY; GENERAL RULE IN THE ABSENCE OF EXPRESS which a corporation may wind up its affairs: (1) under
AUTHORITY CONFERRED BY THE BOARD OF DlRECTORS Section 3, Rule 104, of the Rules of Court (which
OF A CORPORATION.The general rule is that an officer of superseded Section 66 of the Corporation Law), whereby,
a corporation has no implied power to borrow money in its upon voluntary dissolution of a corporation, the court may
behalf; but where a general business manager of a direct "such disposi-
corporation is clothed with apparent authority to borrow and
the amount borrowed does not exceed the ordinary _______________
requirements of the business, it has often been held that
the authority is implied and that the corporation is bound.
1 Original plaintiff, National Coconut Corporation, was
2.ID.; ID.; EXCEPTION TO THE GENERAL RULE.Where it dissolved on November 24, 1950 by the President's
appears that the corporation was in need of funds to carry Executive Order 372, which created the Board of
on its business and it does not appear that the amount Liquidators. Hence, the substitution of party plaintiff.
borrowed was disproportionate to the volume of the
business, the corporation will be held responsible for any 2 Defendant Maximo M. Kalaw died in March of 1965 before
loan obtained in its behalf by an officer who, at the same trial.
time, was president, general manager, and principal
stockholder in said corporation and was clothed with 3 Substituted for defendant Casimiro Garcia, deceased.
apparent authority to do everything necessary for the
tion of its assets as justice requires, and may appoint a
conduct of its business. Pua Casim & Co. vs. W. Neumark &
receiver to collect such assets and pay the debts of the
Co., 46 Phil. 342, No. 21644 October 2, 1924
corporation"; (2) under Section 77 of the Corporation Law,
Francisco vs. Government Service Insurance System, whereby a corporation whose corporate existence is
7 SCRA 577, No. L-18287 March 30, 1963 terminated, "shall nevertheless be continued as a body
corporate for three years after the time when it would have
Corporations; Binding effect of acts of corporate officers.A been so dissolved, for the purpose of prosecuting and
corporation cannot evade the binding effect produced by a defending suits by or against it and of enabling it gradually
telegram sent by its board secretary, and the addressee of to settle and close its affairs, to dispose of and convey its
such telegram cannot be blamed for relying upon it, property and to divide its capital stock, but not for the
because if every person dealing with a corporation were purpose of continuing the business for which it was
held duty-bound to dis-believe every act of its responsible established"; and (3) under Section 78 of the Corporation
officers no matter how reg-ular it should appear on its face, Law, by virtue of which the corporation, within the three-
corporate transactions would speedily come to a standstill. year period just mentioned, "is authorized and empowered
to convey all of its property to trustees for the benefit of
Same; Same; When corporation estopped to deny apparent members, stockholders, creditors, and others interested,"
authority of its officers.If a private corporation
intentional-ly or negligently clothes its officers or agents Board of Liquidators; Trustee for government.By
with apparent power to perform acts for it, the corporation Executive Order No. 372, the government, the sole
will be estopped to deny that such apparent authority is stockholder, abolished the National Coconut Corporation
real, as to innocent third persons dealing in good faith with (NACOCO) and placed its assets in the hands of the Board
such officers or agents. (2 Fletchers Encyclopedia, Priv. of Liquidators. The Board thus became the trustee on behalf
Corp. 255, Perm. Ed.) of the government. It was an express trust. The legal
interest became vested in the trustee, the Board of
Same; Same; Same; When notice of lands by a corporate Liquidators. The beneficial interest remained with the sole
officer is notice to corporation.Knowledge of facts stockholder, the government. The Board took the place of
acquired or possessed by an officer or agent of a the dissolved government corporations after the expiration
corporation in the course of his employment, and in relation of the statutory three-year period for the liquidation of their
to matters within the scope of his authority, is notice to the affairs.
corporation, whether he communicates such knowledge or
not. (Ballentine, Law on Cor-porations, section 112.)
Same; No term for life of Board.No time limit has been a formal resolution. (Zamboanga Transportation. Co. vs.
tacked to the existence of the Board of Liquidators and its Bachrach Motors, 52 Phil., 244.)
function of closing the affairs of various government
corporations. Its term of life is not fixed. 2.ID.; ID.; PAYMENT TO STOCKHOLDER OF PERCENTAGE
OF PROFITS FOR SERVICES RENDERED TO
Same; Right of Board of Liquidators to proceed as CORPORATION.Where a stockholder claims, or services
partyplaintiff; Case at bar.At no time had the government rendered, a certain percentage of the profits of the
withdrawn the property. or the authority to continue the corporation under an agreement entered into by and
present suit, from the Board of Liquidators. Hence, the between him -and the corporation, payment cannot be
Board can prosecute this case to its final conclusion. The refused by the corporation on the ground that since the
provisions of Section 78 of the Corporation Law, the third profits form part of its assets, payment thereof requires a
method of winding up corporate affairs, find application. declaration. of dividends and/or resolution of the Board of
The Board has personality to proceed as party-plaintiff in Directors. Buenaseda vs. Bowen & Co., Inc., 110 Phil. 464,
this case. No. L-14985 December 29, 1960

Corporations; Implied authority of corporate officer to enter Removal and Filling up of Vacancies
into contracts.A corporate officer, entrusted with the
general management and control of its business, has Valle Verde Country Club, Inc. vs. Africa, 598 SCRA
implied authority to make any contract or do any other act 195, G.R. No. 151969 September 4, 2009
which is necessary or appropriate to the conduct of the Corporation Law; Board of Directors; Holdover; Words and
ordinary business of the corporation. As such officer, he Phrases; Term and Tenure, Distinguished; Term is
may, without any special authority from the Board of distinguished from tenure in that an officers tenure
Directors, perform all acts of an ordinary nature, which by represents the term during which the incumbent actually
usage or necessity are incident to his office, and may bind holds officethe tenure may be shorter (or, in case of
the corporation by contracts in matters arising in the usual holdover, longer) than the term for reasons within or
course of business. beyond the power of the incumbent.The word term has
Same; Where similar acts of manager were approved by acquired a definite meaning in jurisprudence. In several
directors.Where similar acts have been approved by the cases, we have defined term as the time during which the
directors as a matter of general practice, custom, and officer may claim to hold the office as of right, and fixes the
policy, the general manager may bind the company without interval after which the several incumbents shall succeed
formal authorization of the board of directors. In varying one another. The term of office is not affected by the
language, existence of such authority is established by proof holdover. The term is fixed by statute and it does not
of the course of business, the usages and practices of the change simply because the office may have become vacant,
company and by the knowledge which the board of nor because the incumbent holds over in office beyond the
directors has, or must be presumed to have, of acts and end of the term due to the fact that a successor has not
doings of its subordinates in and about the affairs of the been elected and has failed to qualify. Term is distinguished
corporation. Where the practice of the corporation has been from tenure in that an officers tenure represents the term
to allow its general manager to negotiate and execute during which the incumbent actually holds office. The
contracts in its copra trading activities for and in Nacoco's tenure may be shorter (or, in case of holdover, longer) than
behalf without prior board approval, and the board itself, by the term for reasons within or beyond the power of the
its acts and through acquiescence, practically laid aside the incumbent.
by-law requirement of prior approval, the contracts of the Same; Same; Same; Same; When Section 23 of the
general manager, under the given circumstances, are valid Corporation Code declares that the board of
corporate acts. directorsshall hold office for one (1) year until their
Same; Ratification by corporation of unauthorized contract successors are elected and qualified, it means that the
of its officers.Ratification by a corporation of an term of the members of the board of directors shall be only
unauthorized act or contract by its officers or others relates for one yeartheir term expires one year after election to
back to the time of the act or contract ratified and is the office; The holdover periodthat time from the lapse of
equivalent to original authority. The corporation and the one year from a members election to the Board and until
other party to the transaction are in precisely the same his successors election and qualificationis not part of the
position as if the act or contract had been authorized at the directors original term of office, nor is it a new term.
time. The adoption or ratif ication of a contract by a Based on the above discussion, when Section 23 of the
corporation is nothing more nor less than the making of an Corporation Code declares that the board of
original contract. The theory of corporate ratification is directorsshall hold office for one (1) year until their
predicated on the right of a corporation to contract, and any successors are elected and qualified, we construe the
ratification or adoption is equivalent to a grant of prior provision to mean that the term of the members of the
authority. board of directors shall be only for one year; their term
expires one year after election to the office. The holdover
Buenaseda vs. Bowen & Co., Inc., 110 Phil. 464, No. periodthat time from the lapse of one year from a
L-14985 December 29, 1960 members election to the Board and until his successors
election and qualificationis not part of the directors
1.CORPORATIONS; CONTRACTS ENTERED INTO BY THE original term of office, nor is it a new term; the holdover
PRESIDENT; IMPLIED RATIFICATION BY BOARD OF period, however, constitutes part of his tenure. Corollary,
DIRECTORS.The action of the Board of Directors of the when an incumbent member of the board of directors
corporation in taking advantage of the benefits afforded by continues to serve in a holdover capacity, it implies that the
the agreement entered into by the president in behalf of the office has a fixed term, which has expired, and the
corporation, amounted to an implied ratification of the incumbent is holding the succeeding term.
agreement and thereby bound the corporation even without
Same; Same; Theory of Delegated Power; The board of entitled to compensation, for the law is well-settled that
directors, in drawing to themselves the powers of the directors of corporations presumptively served without
corporation, occupies a position of trusteeship in relation to compensation and in the absence of an express agreement
the stockholders, in the sense that the board should or a resolution in relation thereto, no claim can be asserted
exercise not only care and diligence, but utmost good faith therefor.
in the management of corporate affairs.VVCCs
construction of Section 29 of the Corporation Code on the Same; Same; Same; Same; Power of board to control
authority to fill up vacancies in the board of directors, in corporation's property and business does not empower
relation to Section 23 thereof, effectively weakens the board to provide themselves compensation.Section 28 of
stockholders power to participate in the corporate the Corporation Law giving the exercise of corporate powers
governance by electing their representatives to the board of and the control of the corporation's business and property
directors. The board of directors is the directing and to the board of directors, or a provision of the by-laws
controlling body of the corporation. It is a creation of the empowering the board with "general supervision and control
stockholders and derives its power to control and direct the of the affairs and property of the (corporation)" is no
affairs of the corporation from them. The board of directors, justification for the adoption by the board of a resolution
in drawing to themselves the powers of the corporation, providing themselves with compensation. These provisions
occupies a position of trusteeship in relation to the of the law and the by-law pertain to the general powers of
stockholders, in the sense that the board should exercise the board merely and do not extend to giving the members
not only care and diligence, but utmost good faith in the of the board the compensation where the matter of
management of corporate affairs. providing for the compensation is specifically withheld from
the board of directors and reserved to the stockholders.
Same; Same; Same; The theory of delegated power of the
board of directors similarly explains why, under Section 29 Same; Suit against directors; Laches; When laches begin to
of the Corporation Code, in cases where the vacancy in the attach against corporation.Where the corporation is
corporations board of directors is caused not by the virtually immobilized from commencing suit against its
expiration of a members term, the successor so elected to directors such as when the board of directors, under the by-
fill in a vacancy shall be elected only for the unexpired term laws of the corporation, had the control of the affairs of the
of his predecessor in office.The underlying policy of the corporation, laches does not begin to attach against the
Corporation Code is that the business and affairs of a corporation until the directors cease to be such.
corporation must be governed by a board of directors Same; Same; Same; Six months period of time does not
whose members have stood for election, and who have amount to laches.The lapse of the period of six months
actually been elected by the stockholders, on an annual when the action was filed is too short a time for the claim to
basis. Only in that way can the directors continued be considered stale.
accountability to shareholders, and the legitimacy of their
decisions that bind the corporations stockholders, be Same; Same; Same; When defense of laches deemed
assured. The shareholder vote is critical to the theory that waived.Where the respondent member of the board of
legitimizes the exercise of power by the directors or officers directors admitted liability to the corporation for cash
over properties that they do not own. This theory of advances, he waived all defenses thereto, including laches
delegated power of the board of directors similarly explains such that there is nothing left for the court to do but to
why, under Section 29 of the Corporation Code, in cases order payment. This admission dispenses with the need of
where the vacancy in the corporations board of directors is disbursement receipts covering the cash advances to prove
caused not by the expiration of a members term, the the debt. Central Cooperative Exchange, Inc. vs. Tibe, Sr.,
successor so elected to fill in a vacancy shall be elected 33 SCRA 593, No. L-27972 June 30, 1970
only for the unexpired term of his predecessor in office.
The law has authorized the remaining members of the Western Institute of Technology, Inc. vs. Salas, 278
board to fill in a vacancy only in specified instances, so as SCRA 216, G.R. No. 113032 August 21, 1997
not to retard or impair the corporations operations; yet, in
Corporation Law; Two ways by which members of the board
recognition of the stockholders right to elect the members
can be granted compensation apart from reasonable per
of the board, it limited the period during which the
diems.There is no argument that directors or trustees, as
successor shall serve only to the unexpired term of his
the case may be, are not entitled to salary or other
predecessor in office. Valle Verde Country Club, Inc. vs.
compensation when they perform nothing more than the
Africa, 598 SCRA 195, G.R. No. 151969 September 4, 2009
usual and ordinary duties of their office. This rule is founded
Compensation of Directors upon a presumption that directors/trustees render service
gratuitously, and that the return upon their shares
Central Cooperative Exchange, Inc. vs. Tibe, Sr., 33 adequately furnishes the motives for service, without
SCRA 593, No. L-27972 June 30, 1970 compensation. Under the foregoing section, there are only
two (2) ways by which members of the board can be
Corporation law; Board of Directors; Compensation; granted compensation apart from reasonable per diems: (1)
Directors not entitled to compensation; Case at bar.Where when there is a provision in the by-laws fixing their
the by-laws of the corporation explicitly reserved unto the compensation; and (2) when the stockholders representing
stockholders the power to determine the compensation of a majority of the outstanding capital stock at a regular or
members of the board of directors and the stockholders did special stockholders meeting agree to give it to them.
restrict such compensation to "actual transportation
expenses plus the per diems of P30.00 and actual expenses Same; Members of the board may receive compensation, in
while waiting," it is not within the power of the board of addition to reasonable per diems, when they render services
directors to enact a resolution providing for themselves to the corporation in a capacity other than as
compensation for additional duties. Even without the directors/trustees.This proscription, however, against
express reservation of said power, the directors are not granting compensation to directors/trustees of a corporation
is not a sweeping rule. Worthy of note is the clear sale, deduction should be made of any period during which
phraseology of Section 30 which states: x x x [T]he the corporation was under obligation to sell the land to a
directors shall not receive any compensation, as such particular person by reason of the acceptance by the
directors, x x x. The phrase as such directors is not without corporation of his offer to buy, the sale having been made
significance for it delimits the scope of the prohibition to nugatory by virtue of the failure of the purchaser to carry
compensation given to them for services performed purely out the contract.
in their capacity as directors or trustees. The unambiguous
implication is that members of the board may receive 3.ID.; ID.; FORFEITURE OF FRANCHISE; DISCRETION OF
compensation, in addition to reasonable per diems, when COURT.In an action of quo warranto the courts have a
they render services to the corporation in a capacity other discretion with respect to the infliction of. capital
than as directors/trustees. In the case at bench, Resolution punishment upon corporations, and there are certain
No. 48, s. 1986 granted monthly compensation to private misdemeanors and misusers of franchises which are
respondents not in their capacity as members of the board, insufficient to justify dissolution.
but rather as officers of the corporation, more particularly 4.ID.; ID.; ID.; ID.; EFFECT OF SECTION 3 OF ACT No.
as Chairman, Vice-Chairman, Treasurer and Secretary of 2792.Section 3 of Act No. 2792 has not abrogated the
Western Institute of Technology. discretion of the courts with respect to the application of the
Same; Remedial Law; Action; Meaning of Derivative Suit; remedy of quo warranto to corporations which are alleged
For a derivative suit to prosper, it is required that the to have violated the provisions of the Corporation Law (Act
minority shareholder who is suing for and on behalf of the No. 1459).
corporation must allege in his complaint before the proper 5.CONSTITUTIONAL LAW; TlTLE OF ACT NOT EXPRESSING
forum that he is suing on a derivative cause of action on SUBJECT OF BILL.The title to Act No. 2792 is defective for
behalf of the corporation and all other shareholders similarly failure to express the subject-matter of section 3 of said
situated who wish to join.A derivative suit is an action Act, with the result that said section 3 is invalid for
brought by minority shareholders in the name of the repugnance to constitutional requirement.
corporation to redress wrongs committed against it, for
which the directors refuse to sue. It is a remedy designed 6.CORPORATIONS; BUILDING AND LOAN ASSOCIATION;
by equity and has been the principal defense of the minority POWER TO AcQUIRE AND HOLD REAL PROPERTY; OFFICE
shareholders against abuses by the majority. Here, BUILDING.A building and loan association may acquire
however, the case is not a derivative suit but is merely an and hold a lot in the financial district of the city where it has
appeal on the civil aspect of Criminal Cases Nos. 37097 and its principal place of business and may erect thereon a
37098 filed with the RTC of Iloilo for estafa and falsification suitable building as the site of its offices.
of public document. Among the basic requirements for a
derivative suit to prosper is that the minority shareholder 7.ID.; ID.; ID.; ID.; LEASING OF EXCESS OFFICE SPACE TO
who is suing for and on behalf of the corporation must PUBLIC. The circumstance that the building so erected by
allege in his complaint before the proper forum that he is the association has office accommodations in excess of its
suing on a derivative cause of action on behalf of the own needs and that such offices are rented to the public by
corporation and all other shareholders similarly situated who the association for its benefit and profit does not make the
wish to join. This is necessary to vest jurisdiction upon the ownership and holding of such office buiding an ultra vires
tribunal in line with the rule that it is the allegations in the act. Having acquired the property under lawful authority,
complaint that vests jurisdiction upon the court or quasi- the corporation is entitled to the full beneficial use thereof.
judicial body concerned over the subject matter and nature
8.ID.; ID.; POWER OF ASSOCIATION TO ADMINISTER
of the action. This was not complied with by the petitioners
MORTGAGED PROPERTY FOR PURPOSE OF SATISFYING
either in their complaint before the court a quo nor in the
OBLIGATIONS OF DELINQUENT SHAREHOLDERS.When
instant petition which, in part, merely states that this is a
the shareholders of a building and loan association become
petition for review on certiorari on pure questions of law to
delinquent in the performance of their obligations, the
set aside a portion of the RTC decision in Criminal Cases
association may take over the management of the
Nos. 37097 and 37098 since the trial courts judgment of
mortgaged property and administer it for the purpose of
acquittal failed to impose any civil liability against the
applying the income to the obligations of the debtor party,
private respondents. By no amount of equity considerations,
provided authority so to do is conferred in the contract of
if at all deserved, can a mere appeal on the civil aspect of a
mortgage.
criminal case be treated as a derivative suit.
9.ID.; ID. ; ASSOCIATION WITHOUT POWER TO
Government of the Philippine Islands vs. El Hogar
UNDERTAKE MANAGEMENT OF PROPERTY IN GENERAL.A
Filipino, 50 Phil. 399, No. 26649 July 13, 1927
building and loan association has no authority to conduct
1.CORPORATIONS; HOLDING OF REAL PROPERTY FOR the business of a real estate agent, as by managing and
PERIOD IN EXCESS OF THAT ALLOWED BY LAW; administering property not mortgaged to it; and the fact
FORFEITURE OF FRANCHISE.The extreme penalty of the that the owner of such property may have become a
forfeiture of its franchise will not be visited upon a shareholder of the association for the purpose of supposedly
corporation for holding a piece of real property for a period qualifying himself to receive such service from the
slightly in excess of the time allowed by law, where the association does not change the case.
conduct of the corporation does not appear to have been
10.ID.; ID.; INVALID BY-LAW; FORFEITURE OF
characterized by obduracy or pertinacity in contempt of law.
FRANCHISE.The circumstance that one of the provisions
2.ID. ; ID. ; DEDUCTION OF PERIOD DURING WHICH contained in the by-laws of a building and loan association
CORPORATION is UNDER CONTRACT TO SELL.In is invalid as conflicting with the express provision of statute
estimating the period during which a corporation may be is not a misdemeanor on. the part of the corporation for
allowed to hold property purchased at its own foreclosure which the association can be penalized by the forfeiture of
its charter.
11.ID.; ID.; FAILURE OF SHAREHOLDERS TO ATTEND 20.ID. ; ID. ; PURPOSE OF LOAN ; HOMEBUILDING.While
ANNUAL MEETING.The circumstance that the the creation of building and loan associations was intended
shareholders of a building and loan association do not to serve the beneficent purpose of enabling people to
attend the annual meetings in sufficient number to procure homes of their own, and such associations have
constitute a quorum does not render the corporation subject been fostered with this end in view, nevertheless the
to dissolution. lawmaker in this jurisdiction has not limited the activities of
building and loan associations to the exclusive function of
12.ID.; ID.; FILLING OF VACANCIES IN DIRECTORATE; making loans for the building of homes. Home building is
TERM OF OFFICE OF DIRECTORS.The directors of a only one of several purposes proposed in the creation of
building and loan association may lawfully fill vacancies such associations; and a building and loan association
occurring in the board of directors in conformity with a by- cannot be dissolved in a quo warranto proceeding. on the
law to this effect. Such officials,' as well as the original ground that it has made loans without reference to the
directors, hold until qualification of their successors. purpose for which the money was intended to be used.
13.ID.; ID.; COMPENSATION OF DIRECTORS.The power 21.ID.; ID.; DISCRETION OF BOARD AS TO SIZE OF
to fix the compensation of the directors of a building and LOAN.The law sets no limit upon the amount of the loans
loan association pertains to the corporation, to be which may be made to particular persons or entities; and a
determined in its by-laws; and where the amount of the building and loan association cannot be dissolved on the
compensation to be paid is thus fixed, the court will not ground that some of its loans have been made in large
concern itself with the question of the propriety and wisdom amounts. The matter of the size of the loan is confided to
of the measure of compensation adopted. the discretion of the board of directors.
14.ID.; ID.; CONTRACT FOR COMPENSATION OF 22.ID. ; ID. ; FINAL DISTRIBUTION OF ASSETS.A by-law
MANAGER.Where a building and loan association makes a of a building and loan association declaring that, upon the
contract with its promoter and managerwhich contract is final liquidation of the association, the funds shall be applied
expressly ratified in the by-laws of the association,by to the repayment of shares and the balance, if any,
which' the association concedes to him, in consideration of distributed in the manner established for the distribution of
valuable services rendered and to be rendered, a right to annual profits, is valid.
receive 5 per centum of the net earnings of the association,
this court will not, in a quo warranto proceeding where 23.ID.; ID.; LOANS TO ARTIFICIAL ENTITIES VALID.
there is no allegation that the contract was ultra vires or Where the statute says that "any person" may become a
vitiated 'by fraud, order the dissolution of the corporation stockholder in a building and loan association, a loan made
for entering into such contract, on the mere ground that the to an artificial entity, such as a corporation or partnership,
compensation granted is excessive; nor will the court enjoin cannot be declared invalid'; nor is the admission of such
the association from performing the same. entity to the status of stockholder an ultra vires act,
especially in the absence of any allegation that the
15.ID.; ID.; BY-LAW DEFINING QUALIFICATIONS OF particular entity so admitted is prohibited by the law of its
DIRECTORS; BYLAW DISABLING DIRECTORS FROM own organization from entering into such contracts.
RECEIVING LOANS.The shareholders of a corporation may
in the by-laws define the qualifications of directors and 24.ID. ; ID. ;. SALE OF REAL PROPERTY BY
require that shares of a specified value shall be put up as ASSOCIATION.In making sales of land which has been
security for their action. A provision in the by-laws disabling bought in by the association at its own foreclosure sales,
the directors from receiving loans from the association is the association may lawfully sell to a purchaser who
also valid. obligates himself to pay in installments. The law does not
require such sales to be made for cash; nor does the
16.ID.; ID.; VALIDITY OF SPECIAL SHARES.Severino vs. purchaser have to be a shareholder of the association.
El Hogar Filipino, G. R. No. 24926,1 and related cases Government of the Philippine Islands vs. El Hogar Filipino,
followed with respect to validity of special shares issued by 50 Phil. 399, No. 26649 July 13, 1927
respondent association.
Liability of Corporate Officers
17.ID. ; ID. ; ID. ; STATUTORY AUTHORITY FOR
PREPAYMENT OF DUES. Under a statutory provision Tramat Mercantile, Inc. vs. Court of Appeals, 238
authorizing a building and loan association to receive SCRA 14, G.R. No. 111008 November 7, 1994
payment of dues in advance, the association is authorized
to issue the two kinds of special shares described in the Corporation Law; Civil Law; Sale; There is no reason to
opinion. reverse the factual findings of both the trial court and the
appellate court, particularly in holding that the contract
18.ID. ; ID. ; AUTHORITY OF DIRECTORATE TO ALLOW between de la Cuesta and TRAMAT was one of absolute, not
FOR DEPRECIATION.The directorate of a building and conditional sale.We could find no reason to reverse the
loan association has a discretion, in determining the results factual findings of both the trial court and the appellate
of the operations of the association for any year, to write off court, particularly in holding that the contract between de la
from the assets a reasonable amount for depreciation, with Cuesta and TRAMAT was one of absolute, not conditional,
a view to the determination of the real profits. sale of the tractor and that de la Cuesta did not violate any
warranty on the sale of the tractor to TRAMAT.
19.ID.; ID.; AUTHORITY OF DIRECTORATE TO MAINTAIN
RESERVES. Under the by-laws of the respondent building Same; Same; Same; It should only be the corporation, not
and loan association, the directorate has the power to the person acting for and on its behalf, that properly could
maintain a general reserve and a special reserve, whenever be made liable under the questioned transaction.It was,
in their judgment it is advisable to do so, conformably with nevertheless, an error to hold David Ong jointly and
the by-laws. severally liable with TRAMAT to de la Cuesta under the
questioned transaction. Ong had there so acted, not in his
personal capacity, but as an officer of a corporation,
TRAMAT, with a distinct and separate personality. As such,
it should only be the corporation, not the person acting for
and on its behalf, that properly could be made liable
thereon.

Same; Same; Same; Instances when personal liability of a


corporate director, trustee or officer along with the
corporation may so validly attach.Personal liability of a
corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a
rule, only when1. He assents (a) to a patently unlawful
act of the corporation, or (b) for bad faith or gross
negligence in 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 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. Tramat Mercantile, Inc. vs. Court of
Appeals, 238 SCRA 14, G.R. No. 111008 November 7, 1994
Llamado vs. Court of Appeals, 270 SCRA 423, G.R. employees. They were the ones, who as high-ranking
No. 99032 March 26, 1997 officers and directors of Crispa, Inc., signed the Board
Resolution retrenching the private respondents on the
Same; Same; Corporation Law; Lack of involvement in the feigned ground of serious business losses that had no basis
negotiation for the transaction is not a defense to a apart from an unsigned and unaudited Profit and Loss
treasurer of the corporation who signed the check in his Statement which, to repeat, had no evidentiary value
capacity as an officer of the corporation.Petitioner failed whatsoever. This is indicative of bad faith on the part of
to rebut the presumption by paying the amount of the petitioners for which they can be held jointly and severally
check within five (5) banking days from notice of the liable with Crispa, Inc. for all the money claims of the
dishonor. His claim that he signed the check in blank which illegally terminated respondent employees in this case.
allegedly is common business practice, is hardly a defense. Uichico vs. National Labor Relations Commission, 273 SCRA
If as he claims, he signed the check in blank, he made 35, G.R. No. 121434 June 2, 1997
himself prone to being charged with violation of BP 22. It
became incumbent upon him to prove his defenses. As Three-fold duty of Directors
Treasurer of the corporation who signed the check in his
capacity as an officer of the corporation, lack of involvement Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5
in the negotiation for the transaction is not a defense. SCRA 36, No. L-15092 May 18, 1962

Same; Same; The person or persons who actually sign the Corporations; Exercise of charter powers; Test to be
check in behalf of a corporation, company or entity is liable applied."It is a question, therefore, in each case, of the
under BP 22.Petitioners argument that he should not be logical relation of the act to the corporate purpose
held personally liable for the amount of the check because it expressed in the charter. If that act is one which is lawful in
was a check of the Pan Asia Finance Corporation and he itself, and not otherwise prohibited, is done for the purpose
signed the same in his capacity as Treasurer of the of serving corporate ends, and is reasonably tributary to the
corporation, is also untenable. The third paragraph of promotion of those ends, in a substantial, and not in a
Section 1 of BP Blg. 22 states: Where the check is drawn remote and fanciful, sense, it may fairly be considered
by a corporation, company or entity, the person or persons within charter powers. The test to be applied is whether the
who actually signed the check in behalf of such drawer shall act in question is in direct and immediate furtherance of the
be liable under this Act. Llamado vs. Court of Appeals, 270 corporation's business, fairly incident to the express powers
SCRA 423, G.R. No. 99032 March 26, 1997 and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not."
Uichico vs. National Labor Relations Commission, (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
273 SCRA 35, G.R. No. 121434 June 2, 1997
Same; Same; Question on probable losses or decrease in
Same; Corporation Law; The general rule is that obligations, profits not reviewable by courts.Whether or not a valid
incurred by the corporation, acting through its directors, and binding resolution passed by the board of directors, will
officers and employees are its sole liabilities; Exceptional cause losses or decrease the profits of the corporation, may
circumstances warranting solidary liabilities.A corporation not be reviewed by the courts. Montelibano vs. Bacolod-
is a juridical entity with legal personality separate and Murcia Milling Co., Inc., 5 SCRA 36, No. L-15092 May 18,
distinct from those acting for and in its behalf and, in 1962
general, from the people comprising it. The general rule is
that obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities.
There are times, however, when solidary liabilities may be
incurred but only when exceptional circumstances warrant
such as in the following cases: 1. 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; 2. 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; 3. When a director, trustee or officer has
contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation; or 4. When a
director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.

Same; Same; In labor cases, particularly, corporate


directors and officers are solidarily liable with the
corporation for the termination of employment of corporate
employees done with malice or in bad faith.In labor cases,
particularly, corporate directors and officers are solidarily
liable with the corporation for the termination of
employment of corporate employees done with malice or in
bad faith. In this case, it is undisputed that petitioners have
a direct hand in the illegal dismissal of respondent
Strong and Strong vs. Gutierrez Repide., 41 Phil. statutory or technical law. It springs from the fact that
947, No. 110 May 3, 1909 directors have the control and guidance of corporate affairs
and property and hence of the property interests of the
2.FRAUD; CONCEALMENT; PURCHASE OF STOCK BY stockholders."
DIRECTOR.A purchase of stock in a corporation by a
director and owner of threefourths of the entire capital Same; Same; Same.On the other hand, a director's
stock, who was also administrator general of the company, contract with his corporation is not in all instances void or
and engaged in the negotiations which finally led to the sale voidable. If the contract is fair and reasonable under the
of the company's lands to the Philippine Islands circumstances, it may be ratified by the stockholders
Government at a price which greatly enhanced the value of provided a full disclosure of his adverse interest is made.
the stock, was fraudulent as procured by "insidious
machinations" inducing the execution of the contract of sale Same; Same; Same.Granting arguendo that the
within the meaning of P. I. Code, article 1269, defining "dealership agreement" involved here would be valid and
deceit where he employed an agent to make the purchase, enforceable if entered into with a person other than a
concealing both his own identity as the purchaser, and his director or officer of the corporation, the fact that the other
knowledge of the state of the negotiations and their party to the contract was a Director and Auditor of the
probable successful result petitioner corporation changes the whole situation. First of
all, We believe that the contract was neither fair nor
3.FRAUD; CONCEALMENT; PURCHASE OF STOCK.The reasonable. The "dealership agreement" entered into in
purchaser of cor porate stock cannot escape liability for his July, 1969, was to sell and supply to respondent Te 20,000
fraud in concealing facts affecting its value which he was in bags of white cement per month, for five years starting
good faith bound to disclose, on the theory that, because of September, 1970, at the fixed price of P9.70 per bag.
the insistence of the seller that her agent was not Respondent Te is a businessman himself and must have
authorized to make the sale, there had never been any known, or at least must be presumed to know, that at that
consent on her part, obtained by fraud o otherwise, where time, prices of commodities in general, and white cement in
the court finds that the agent's authority was sufficient, particular, were not stable and were expected to rise. At the
since, in legal effect, her consent will be deemed induced by time of the contract, petitioner corporation had not even
the fraud. Strong and Strong vs. Gutierrez Repide., 41 Phil. commenced the manufacture of white cement, the reason
947, No. 110 May 3, 1909 why delivery was not to begin until 14 months later. He
must have known that within that period of six years, there
Self-dealing Directors would be a considerable rise in the price of white cement.
Prime White Cement Corp. vs. Intermediate In fact, respondent Te's own Memorandum shows that in
Appellate Court, 220 SCRA 103, G.R. No. 68555 September, 1970, the price per bag was P 14.50, and by
March 19, 1993 the middle of 1975, it was already P37.50 per bag. Despite
this, no provision was made in the "dealership agreement"
Corporation Law; Contracts; When contracts signed by to allow for an increase in price mutually acceptable to the
corporate officers binding on corporation.Under the parties. Instead, the price was pegged at P9.70 per bag for
Corporation Law, which was then in force at the time this the whole five years of the contract. Fairness on his part as
case arose, as well as under the present Corporation Code, a director of the corporation from whom he was to buy the
all corporate powers shall be exercised by the Board of cement, would require such a provision. In fact, this
Directors, except as otherwise provided by law. Although it unfairness in the contract is also a basis which renders a
cannot completely abdicate its power and responsibility to contract entered into by the President, without authority
act for the juridical entity, the Board may expressly delegate from the Board of Directors, void or voidable, although it
specific powers to its President or any of its officers. In the may have been in the ordinary course of business. We
absence of such express delegation, a contract entered into believe that the fixed price of P9.70 per bag for a period of
by its President, on behalf of the corporation, may still bind five years was not fair and reasonable. Respondent Te,
the corporation if the board should ratify the same expressly himself, when he subsequently entered into contracts to
or impliedly. Implied ratification may take various forms resell the cement to his "new dealers" Henry Wee and
like silence or acquiescence; by acts showing approval or Gaudencio Galang stipulated as follows: The price of white
adoption of the contract; or by acceptance and retention of cement shall be mutually determined by us but in no case
benefits flowing therefrom. Furthermore, even in the shall the same be less than P14.00 per bag (94 Ibs)."
absence of express or implied authority by ratification, the
President as such may, as a general rule, bind the Mead vs. McCullough., 21 Phil. 95, No. 6217
corporation by a contract in the ordinary course of business, December 26, 1911
provided the same is reasonable under the circumstances. 1.CORPORATIONS; SALARY OF GENERAL MANAGER.Held:
These rules are basic, but are all general and thus quite That the verbal contract, entered into between the board of
flexible. They apply where the President or other officer, directors and the plaintiff as general manager, as to the
purportedly acting for the corporation, is dealing with a third latter's salary, was a contingent one, dependent upon the
person, i.e., a person outside the corporation. success of the business, and that, as the corporation was a
Same; Same; A board director or other corporate officer failing concern, the plaintiff was only entitled to his actual
cannot readily enter into a contract with his own and necessary expenses.
corporation; Exceptions.A director of a corporation holds a 2.ID.; INDUSTRIAL CIVIL PARTNERSHIP UNDER CIVIL
position of trust and as such, he owes a duty of loyalty to CODE.A corporation organized for the purpose of
his corporation. In case his interests conflict with those of engaging in general engineering and construction work, the
the corporation, he cannot sacrifice the latter to his own names of the organizers appearing in the articles of
advantage and benefit. As corporate managers, directors agreement which were duly inscribed in the Commercial
are committed to seek the maximum amount of profits for Register, is an industrial civil partnership (corporation) in
the corporation. This trust relationship "is not a matter of the mercantile form; an anonymous partnership, legally
constituted, and must be governed by the provisions of the a position in which his duties are incompatible with those as
Civil Code, the provisions of the Code of Commerce being such director, it is presumed that he has abandoned his
applicable subsidiarily. office as director of the corporation.

3.ID.; POWER TO ACQUIRE, HOLD, SELL AND BUY 10.ID.; DUTY OF DIRECTORS OF INSOLVENT
PROPERTY.A corporation, upon the execution of the CORPORATION.The directors of an insolvent corporation
public instrument in which its articles of agreement appear, become trustees for all the creditors, and a director who is
and the contribution of funds and personal property, also a creditor will not be permitted to secure to himself any
becomes a juridical person, an artificial being, existing only personal advantage over other creditors.
in contemplation of the law, with power to hold, buy, and
sell property. The inscribing of its articles of incorporation in 11.PERSONAL EFFECTS OR PROPERTY.Where a person
the mercantile register is not necessary to make such a abandons his personal effects or leaves them in possession
corporation a juridical person, the inscription operating only of an irresponsible person, he can not recover the value of
to show that it partakes of the form of a commercial such effects from a party who did not contribute in any
concern. manner to the loss of the same. Mead vs. McCullough., 21
Phil. 95, No. 6217 December 26, 1911
4.ID.; ARTICLES OF INCORPORATION; MEETINGS;
CONDUCT OF BUSINESS BY MAJORITY VOTE.Where the Derivative Suit
articles of incorporation prescribe that at all meetings of the Pascual vs. Del Saz Orozco., 19 Phil. 82, No. 5174
stockholders a majority of votes of those present shall be March 17, 1911
necessary to determine any question discussed, the sale or
transfer to one of its members of the corporate property is a 1.BANKS AND BANKING; CORPORATIONS; RIGHTS OF
matter which the majority of the stockholders can properly STOCKHOLDERS.A stockholder in a banking corporation
consider, and, generally speaking, the voice of the majority has a right to maintain a suit for and on behalf of the
of the stockholders is the law of the corporation within the corporation, but the extent of such right depends upon
limitation which is found in the essential compacts of the when and f or what purpose he acquired the shares of stock
articles of agreement, which have served as a basis upon of which he is the owner.
which the members united, and without which it is not
probable that they would have entered into the corporation. 2.ID.; ID.; ID.; LIMITATION UPON RIGHTS OF ACTION.A
stockholder in a corporation who was not such at the time
5.ID.; POWERS OF DIRECTORS AND STOCKHOLDERS; SALE when alleged objectionable transactions took place, or
OF CORPORATE PROPERTY.A majority of the stockholders whose shares of stock have not since devolved upon him by
or directors have the power to sell or transfer to one of its operation of law, can not maintain suits of this character,
members the corporate property, where the stockholders or unless such transactions continue and are injurious to such
directors have general ordinary powers, and where there is stockholder or affect him especially or specifically in some
nothing in the articles of incorporation which expressly other way.
prohibits such a sale.
Everett vs. Asia Banking Corporation, 49 Phil. 512,
6.ID.; ID. ; ID.A private corporation which owes no No. 25241 November 3, 1926
special duty to the public and which has not been given the
right of eminent domain, has the absolute -power as against 4.ID. ; CORPORATIONS; HOSTILE BOARD OF DIRECTORS;
the whole world, "except the State, to sell and dispose of all ACTION BROUGHT BY STOCKHOLDERS.Where the board
its property, such power resting in the board of directors or of directors in a corporation is under the complete control of
majority of the stockholders, without reference to the the principal defendants in the case and it is obvious that a
assent or authority of the minority when the corporation is demand upon the board of directors to institute an action
in failing circumstances or insolvent, or when it can no and prosecute the same effectively would be useless, the
longer continue the business with profit and when such action may be brought by one or more of the stockholders
action is regarded as an -imperative necessity. without such demand. Everett vs. Asia Banking Corporation,
49 Phil. 512, No. 25241 November 3, 1926
7.ID.; ID.; ID.; OFFICER MAY DEAL WITH THE CONCERN.
While a private corporation remains solvent, there is no Republic Bank vs. Cuaderno, 19 SCRA 671, No. L-
reason why a director or officer, by authority of the majority 22399 March 30, 1967
of its stockholders or board of managers, may not deal with
Corporation; Banks; Derivative suit by stockholder.An
the corporation, loan it money, or buy property from it in
individual stockholder may institute a derivative or
like manner as a stranger. This is likewise true of an
representative suit on behalf of the corporation, wherein he
insolvent corporation, but, in all cases, such officer or
holds stock, in order to protect or vindicate corporate rights,
director must act in good faith and pay an adequate
whenever the of f icials of the corporation refuse to sue, or
consideration, their acts being at all times subject to the
are the ones to be sued or hold control of the corporation.
most severe scrutiny.
In such actions, the suing stockholder is regarded as a
8.ID. ; ID.; ID.; DISSOLUTION; CIVIL CODE; CODE OF nominal party, with the corporation as the real party in
COMMERCE.There is nothing in the provisions of the Civil interest.
Code, nor of the Code of Commerce, dealing with the
Same; When authority of corporation to bring suit is not
manner of dissolving a corporation, which expressly or
required.Such a suit need not be authorized by the
impliedly prohibits the sale of the corporate property to one
corporation where its objective is to nullify the action taken
of its members, and the dissolution of the corporation in
by its manager and the board of directors, in which case
such a manner.
any demand for intra-corporate remedy would be futile.
9.ID. ; ID. ; PRESUMPTION OF ABANDONMENT OF OFFICE
Same; Nonjoinder of other stockholders.The fact that no
BY A DIRECTOR.Where a director in a corporation accepts
other stockholder has made common cause with the plaintiff
is irrelevant since the smallness of plaintiffs holding is no minority shareholder who is suing for and on behalf of the
ground for denying him relief. corporation must allege in his complaint before the proper
forum that he is suing on a derivative cause of action on
Same; Joinder of corporation.Whether in a derivative suit behalf of the corporation and all other shareholders similarly
filed by a stockholder, the corporation should be joined as a situated who wish to join.A derivative suit is an action
plaintiff or a defendant is not important. What is important brought by minority shareholders in the name of the
is that the corporation should be made a party in order to corporation to redress wrongs committed against it, for
make the courts judgment binding upon it and thus bar which the directors refuse to sue. It is a remedy designed
future relitigations of the issues. Misjoinder of parties is not by equity and has been the principal defense of the minority
a ground for dismissing an action. shareholders against abuses by the majority. Here,
Same; Derivative suit is not a quo warranto proceeding.A however, the case is not a derivative suit but is merely an
derivative suit by a stockholder for the purpose of annulling appeal on the civil aspect of Criminal Cases Nos. 37097 and
the appointment of a defendant as Chairman of the Board 37098 filed with the RTC of Iloilo for estafa and falsification
of Directors is not a quo warranto proceeding. The plaintiff of public document. Among the basic requirements for a
is not claiming title to the position of Chairman of the Board derivative suit to prosper is that the minority shareholder
of Directors. His action is designed to prevent diversion of who is suing for and on behalf of the corporation must
the corporate funds for the payment of the salary of said allege in his complaint before the proper forum that he is
Chairman. suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who
Same; Stockholders suit to annul actions of banks Board of wish to join. This is necessary to vest jurisdiction upon the
Directors.A stockholder has a cause of action to annul tribunal in line with the rule that it is the allegations in the
certain actions of the Board of Directors of a bank, which complaint that vests jurisdiction upon the court or quasi-
actions were considered anomalous and a breach of trust judicial body concerned over the subject matter and nature
prejudicial to the bank. of the action. This was not complied with by the petitioners
either in their complaint before the court a quo nor in the
Western Institute of Technology, Inc. vs. Salas, 278 instant petition which, in part, merely states that this is a
SCRA 216, G.R. No. 113032 August 21, 1997 petition for review on certiorari on pure questions of law to
set aside a portion of the RTC decision in Criminal Cases
Corporation Law; Two ways by which members of the board
Nos. 37097 and 37098 since the trial courts judgment of
can be granted compensation apart from reasonable per
acquittal failed to impose any civil liability against the
diems.There is no argument that directors or trustees, as
private respondents. By no amount of equity considerations,
the case may be, are not entitled to salary or other
if at all deserved, can a mere appeal on the civil aspect of a
compensation when they perform nothing more than the
criminal case be treated as a derivative suit.
usual and ordinary duties of their office. This rule is founded
upon a presumption that directors/trustees render service San Miguel Corporation vs. Kahn, 176 SCRA 447,
gratuitously, and that the return upon their shares G.R. No. 85339 August 11, 1989
adequately furnishes the motives for service, without
compensation. Under the foregoing section, there are only Corporation Law; Derivative Suit; Theory that de los Angeles
two (2) ways by which members of the board can be has no personality to bring suit in behalf of the corporation
granted compensation apart from reasonable per diems: (1) cannot be sustained.The theory that de los Angeles has
when there is a provision in the by-laws fixing their no personality to bring suit in behalf of the corporation
compensation; and (2) when the stockholders representing because his stockholding is minuscule, and there is a
a majority of the outstanding capital stock at a regular or conflict of interest between him and the PCGGcannot be
special stockholders meeting agree to give it to them. sustained, either.

Same; Members of the board may receive compensation, in Same; Same; Same; The implicit argument that a
addition to reasonable per diems, when they render services stockholder to be considered as qualified to bring a
to the corporation in a capacity other than as derivative suit must hold a substantial or significant block of
directors/trustees.This proscription, however, against stock finds no support whatever in the law; Requisites for a
granting compensation to directors/trustees of a corporation derivative suit.It is claimed that since de los Angeles 20
is not a sweeping rule. Worthy of note is the clear shares (owned by him since 1977) represent only
phraseology of Section 30 which states: x x x [T]he .00001644% of the total number of outstanding shares
directors shall not receive any compensation, as such (121,645,860), he cannot be deemed to fairly and
directors, x x x. The phrase as such directors is not without adequately represent the interests of the minority
significance for it delimits the scope of the prohibition to stockholders. The implicit argumentthat a stockholder, to
compensation given to them for services performed purely be considered as qualified to bring a derivative suit, must
in their capacity as directors or trustees. The unambiguous hold a substantial or significant block of stockfinds no
implication is that members of the board may receive support whatever in the law. The requisites for a derivative
compensation, in addition to reasonable per diems, when suit are as follows: a) the party bringing suit should be a
they render services to the corporation in a capacity other shareholder as of the time of the act or transaction
than as directors/trustees. In the case at bench, Resolution complained of, the number of his shares not being material;
No. 48, s. 1986 granted monthly compensation to private b) he has tried to exhaust intra-corporate remedies, i.e., has
respondents not in their capacity as members of the board, made a demand on the board of directors for the
but rather as officers of the corporation, more particularly appropriate relief but the latter has failed or refused to heed
as Chairman, Vice-Chairman, Treasurer and Secretary of his plea; and c) the cause of action actually devolves on the
Western Institute of Technology. corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular
Same; Remedial Law; Action; Meaning of Derivative Suit; stockholder bringing the suit.
For a derivative suit to prosper, it is required that the
Same; Same; Same; Same; Bona fide ownership by a corporate policy, programs or practice, but only for
stockholder of stock in his own right suffices to invest him demonstrably weighty and defensible grounds or when
with standing to bring a derivative action for the benefit of essential to prevent disappearance or wastage of corporate
the corporation; Number of shares is immaterial.The bona property. San Miguel Corporation vs. Kahn, 176 SCRA 447,
fide ownership by a stockholder of stock in his own right G.R. No. 85339 August 11, 1989
suffices to invest him with standing to bring a derivative
action for the benefit of the corporation. The number of his Chase vs. Buencamino, Sr., 136 SCRA 365, No. L-
shares is immaterial since he is not suing in his own behalf, 20395 May 13, 1985
or for the protection or vindication of his own particular Same; Corporation Law; Estoppel; Fact that a corporate
right, or the redress of a wrong committed against him, director filed suit in California, U.S.A. against an officer of a
individually, but in behalf and for the benefit of the local corporation in his personal capacity does not constitute
corporation. an estoppel in a derivative minority stockholders suit filed
Same; Same; Same; Theory of conflict-of-interest cannot be by the former against another officer of the corporation in
upheld.Neither can the conflict-of-interest theory be Philippine courts. Commission of fraud on the corporation by
upheld. From the conceded premise that de los Angeles Dr. Buencamino is supported by evidence.The Court
now sits in the SMC Board of Directors by the grace of the having seen with its own eyes the evidence proving the
PCGG, it does not follow that he is legally obliged to vote as fraud, can not find it easy to refuse relief unto Chase
the PCGG would have him do, that he cannot legitimately because of the failure of his auditor to discover the
take a position inconsistent with that of the PCGG, or that, anomalies; or because of the fact that he had filed a suit
not having been elected by the minority stockholders, his against Cranker in California and failed to mention Dr.
vote would necessarily never consider the latters interests. Buencamino there as a guilty party, for this would only
The proposition is not only logically indefensible, non weaken his evidence but would not be enough to put him in
sequitur, but also constitutes an erroneous conception of a estoppel for as Chase correctly says, it did not mislead Dr.
directors role and function, it being plainly a directors duty Buencamino to adopt a course of action to the latters
to vote according to his own independent judgment and his prejudice; and as well does the Court feel bound not to bar
own conscience as to what is in the best interests of the the case of Chase by reason of his letter Exh. 10 wherein he
company. Moreover, it is undisputed that apart from the blamed Cranker not Dr. Buencamino tor his predicament,
qualifying shares given to him by the PCGG, he owns 20 for the same reason; the Court of course must grant that
shares in his own right, as regards which he cannot from there was inconsistency in the position here; for there in
any aspect be deemed to be beholden to the PCGG, his California and in the letter Exh. 10, he proceeded on the
ownership of these shares being precisely what he invokes theory that the transaction an his plant was between him
as the source of his authority to bring the derivative suit. and Cranker for $250,000.00 while here his theory is that it
was a deal between him, Cranker and Dr. Buencamino
Same; Same; Same; Argument that the PCGG has no power wherein these two would pay him $100,000.00 and they
to vote sequestered shares of stock as an act of dominion three would form Amparts with 1/3 of the shares being
but only in pursuance of its power of administration is given to him fully paid up as part of the purchase price; but
strained and of no merit.It is also theorized, on the the Court while it must admit that this has weakened the
authority of the BASECO decision, that the PCGG has no case for Chase, must also admit that they have not
power to vote sequestered shares of stock as an act of altogether destroyed that since in the first place, the
dominion but only in pursuance to its power of inconsistency in theory adopted in the California Court from
administration. The inference is that the PCGGs act of that adopted here as an obstacle to the present action is as
voting the stock to elect de los Angeles to the SMC Board of the Court takes it, obviated by the very evidence of Dr.
Directors was unauthorized and void; hence, the latter could Buencamino since because the theory of California was that
not bring suit in the corporations behalf. The argument is Chase was entitled to only $250,000.00, and nothing more
strained and obviously of no merit. As already more than and what would if true, not grant unto Chase any
plainly indicated, it was not necessary for de los Angeles to personality to file this derivative suit as an Amparts
be a director in order to bring a derivative action; all he had stockholder, but the evidence of defendants proves very
to be was a stockholder, and that he wasowning in his clearly that right from the start, Chase was by them
own right 20 shares of stock, a fact not disputed by the recognized as a stockholder and initial incorporator with 600
respondents. paid up shares representing a 1/3 interest in Amparts, and
that would be enough for Chase to have the correct
Same; Same; Same; Same; Nothing in the Baseco decision personality to institute this derivative suit; the second place,
which can be interpreted as ruling that sequestered stock it also appears apparently undenied that Chase did not win
may not under any circumstances be voted by the PCGG to in California so that he did not recover the $150,000.00 that
elect a director in the company in which such stock is he had prayed for there against Overseas, which if he had
held.Nor is there anything in the Baseco decision which would really in the mind of the Court have put him in
can be interpreted as ruling that sequestered stock may not estoppel to intervene in any manner as incorporator or
under any circumstances be voted by the PCGG to elect a stockholder of Amparts; and in the third place and most
director in the company in which such stock is held. On the important it should not be forgotten that Chase has filed the
contrary, that it held such act permissible is evident from present case not for his personal benefit, but for the benefit
the context of its reference to the Presidential Memorandum of Amparts, so that to the Court the argument of estoppel
of June 26, 1986 authorizing the PCGG, pending the as against him would appear to be out of place; the
outcome of proceedings to determine the ownership of x x estoppel to be valid as a defense must be an estoppel
sequestered shares of stock, to vote such shares x x at all against Amparts itself; the long and short of it is that the
stockholders meetings called for the election of directors x Court is impelled and constrained to discard all the other
x the only caveat being that the stock is not to be voted defenses set up by Dr. Buencamino on the principal
simply because the power to do so exists, whether it be to complaint; the result of all these would be to sustain so far,
oust and replace directors or to effect substantial changes in the position of Chase that Dr. Buencamino must account for
the P570,000,00 used to pay the second series of payment could he conclude that the directors were remiss in their
on the subscription, the P330,000.00 used in paying the 1st duty to protect the corporation property and business.
series on the subscription, plus another sum of P245,000.00
entered as loan on his favor and against Amparts, for the Same; When expedient is necessary.Where the directors
sum of P434,000,00 earned in the blackmarketing of the of the corporation permitted the fraudulent transaction to
excess of $140,000.00 dollars on the forwarding costs and go unpunished by allowing the importation of finished
promotional expenses, for the sum of P391,200.00 earned textile instead of raw cotton for the textile mill, and nothing
in the blackmarketing of the excess of $117,000.00 in the appears to have been done to remove the erring purchasing
transaction with Bertoni and Cotti, and all these would reach managers, the appointment of a receiver may have been
a total of P1,970,200.00; and as the appropriation of the thought of by the court so that the dollar allocation for raw
profits for himself was a quasi-delict, the liability therefore material may be reviewed and the textile mill placed on an
assuming that it had been done with the cooperation of operating basis, because it is possible that if a receiver in
Cranker would have to be solidary, 2194 New Civil Code, which the Central Bank may have confidence is appointed,
because it was a quasi-delict; but the next question is the dollar allocation for raw material may be restored.
whether these findings must justify the remedy of change of Reyes vs. Tan, 3 SCRA 198, No. L-16982 September 30,
management and dissolution; before going to this, the 1961
Court seeing that this is a question interrelated to the Gamboa vs. Victoriano, 90 SCRA 40, No. L-40620
counterclaims, will proceed to examine them. May 5, 1979
Same; Mr. Chase is guilty on two counts on the Corporation Law; Remedial Law; Civil Procedure; Order
counterclaims.The result of the foregoing will be that the denying motion to dismiss complaint is an interlocutory
Court must find it proved on the counterclaims, that Chase order not subject of petition for certiorari.The questioned
had helped a competitor contrary to his position of trust as order denying the petitioners motion to dismiss the
director of Amparts, and that Chase had also spread rumors complaint is merely interlocutory and cannot be the subject
against Amparts, and its management; for these acts, the of a petition for certiorari. The proper procedure to be
Court will impose some damages which in the absence of followed in such a case is to continue with the trial of the
better proof the Court will fix at five hundred (P500.00) case on the merits and, if the decision is adverse, to
pesos; We go to the most important point of debate, reiterate the issue on appeal It would be a breach of orderly
namely, the final remedy that the Court must now concede. procedure to allow a party to come before this Court every
It will above be noted that while the Court found Chase time an order is issued with which he does not agree.
guilty on two counts, on the counterclaims the guilt referred
to acts performed during the litigation; they do not show Same; Derivative Suit; When derivative suit should be
that Chase had come to Court already guilty; as the Court instituted.An individual stockholder is permitted to
has found, when he came to Court on 20 August, 1960, he institute a derivative suit on behalf of the corporation
was an innocent party and Amparts was the victim of fraud. wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation
Corporation Law; Removal of a majority stockholder from refuse to sue, or are the ones to be sued or hold the control
management or the dissolution of the corporation is a of the corporation. In such actions, the suing stockholder is
drastic measure.The removal of a stockholder (in this case regarded as a nominal party, with the corporation as the
a majority stockholder) from the management of the real party in interest. In the case at bar, however, the
corporation and/or the dissolution of a corporation in a suit plaintiffs are alleging and vindicating their own individual
filed by a minority stockholder is a drastic measure. It interests or prejudice, and not that of the corporation.
should be resorted to only when the necessity is clear which
is not the situation in the case at bar. Chase vs. 2.PARTIES; CORPORATION; MISMANAGEMENT BY ITS
Buencamino, Sr., 136 SCRA 365, No. L-20395 May 13, 1985 OFFICER; RIGHT OF STOCKHOLDERS TO BRING SUIT.
The plaintiff stockholders have brought the action not for
Reyes vs. Tan, 3 SCRA 198, No. L-16982 September the benefit of the corporation but f or their own benefit,
30, 1961 since they ask that the defendant make good the losses
Corporations; Appointment of a receiver; When derivative occasioned by his mismanagement and pay to them the
suit may be brought.Where corporate directors are guilty value of their respective participation in the corporate assets
of a breach of trustnot of mere error of judgment or on the basis of their respective holdings.
abuse of discretionand intra-corporate remedy is futile or Clearly, this cannot be, done until all corporate debts, if
useless, a stockholder may institute a suit in behalf of there be any, are paid and the existence of the corporation
himself and other stockholders and for the benefit of the terminated by the limitation of its charter or by lawful
corporation, to bring about a redress of the wrong inflicted dissolution in view of the provisions of section 16 of the
directly upon the corporation and indirectly upon the Corporation Law. Evangelista vs. Santos, 86 Phil. 387, No.
stockholders (Angeles vs. Santos, 64 Phil. 697). L-1721 May 19, 1950
Same; Failure of stockholder to take remedial steps against
the corporation within two years from commission of fraud
not fatal to suit.Although the stockholder did not take Corporate Powers and Authority
steps to remedy the illegal importation by the corporation
for a period of two years, that act does not bar him from Delta Motor Sales Corporation vs. Mangosing, 70
bringing an action for the appointment of a receiver, SCRA 598, No. L-41667 April 30, 1976
because during that period of time he had the right to
Summons; Corporations law; Strict compliance with the
assume and expect that the directors would remedy the
mode of service of summons to a corporation is
anomalous situation of the corporation brought about by
necessary.A strict compliance with the mode of service is
their own wrong doing. Only after such period had elapsed
necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must summons should have been served at the firms principal
be one who is named in the statute, otherwise the service is office. In First Integrated Bonding & Ins. Co., Inc. vs. Dizon,
insufficient. x x x The purpose is to render it reasonably it was held that the service of summons on the general
certain that the corporation will receive prompt and proper manager of the insurance firms Cebu branch was improper;
notice in an action against it or to insure that the summons default order could have been obviated had the summons
be served on a representative so integrated with the been served at the firms principal office.
corporation that such person will know what to do with the
legal papers served on him. In other words, to bring home Same; Same; Same; Same; Court rules that the service of
to the corporation notice of the filing of the action. In the summons upon the branch manager of petitioner at its
instant case the Manila court did not acquire jurisdiction branch office at Cagayan de Oro, instead of upon the
over Delta Motor because it was not properly served with general manager at its principal office at Davao City is
summons. The service of summons on Dionisia G. Miranda, improper; Trial court did not acquire jurisdiction over the
who is not among the persons mentioned in section 13 of person of the petitioner.Accordingly, we rule that the
Rule 14 (being a mere secretary to the head of the service of summons upon the branch manager of petitioner
personnel department who was then on sick leave) was at its branch office at Cagayan de Oro, instead of upon the
insufficient. It did not bind Delta Motor. x x x Consequently, general manager at its principal office at Davao City is
the order of default, the judgment by default and the improper. Consequently, the trial court did not acquire
execution in Civil Case No. 97373 are void and should be set jurisdiction over the person of the petitioner.
aside. Luneta Motor Company vs. A. D. Santos, Inc., 5 SCRA
E.B. Villarosa & Partner Co., Ltd. vs. Benito, 312 809, No. L-17716 July 31, 1962
SCRA 65, G.R. No. 136426 August 6, 1999 Corporations; Power to purchase and deal with personal or
Remedial Law; Civil Procedure; Summons; Jurisdiction; The real property; Purpose of the corporation to be
designation of persons or officers who are authorized to considered.Under Section 13(5) of the Corporation Law, a
accept summons for a domestic corporation or partnership corporation created thereunder may purchase, hold and
is now limited and more clearly specified in Section 11, Rule otherwise deal in such real and personal property as the
14 of the 1997 Rules of Civil Procedure.The designation of purpose for which the corporation was formed may permit,
persons or officers who are authorized to accept summons and the transaction of its lawful business may reasonably
for a domestic corporation or partnership is now limited and and necessarily require. A corporation authorized under its
more clearly specified in Section 11, Rule 14 of the 1997 articles of incorporation to operate and otherwise deal in
Rules of Civil Procedure. The rule now states general automobiles and automobile accessories and to engage in
manager instead of only manager; corporate secretary the transportation of persons by water, may not engage in
instead of secretary; and treasurer instead of cashier. the business of land transportation, which is an entirely
The phrase agent, or any of its directors is conspicuously different line of business, and, for this reason, may not
deleted in the new rule. acquire any certificate of public convenience to operate a
taxicab service, because such acquisition would be without
Same; Same; Same; Same; Strict compliance with the rules purpose and would have no necessary connection with the
has been enjoined; The liberal construction rule cannot be corporation's legitimate business. Luneta Motor Company
invoked and utilized as a substitute for the plain legal vs. A. D. Santos, Inc., 5 SCRA 809, No. L-17716 July 31,
requirements as to the manner in which summons should 1962
be served on a domestic corporation.It should be noted
that even prior to the effectivity of the 1997 Rules of Civil Director of Lands vs. Court of Appeals, 158 SCRA
Procedure, strict compliance with the rules has been 568, No. L-56613 March 14, 1988
enjoined. In the case of Delta Motor Sales Corporation vs. Same; Same; Public Land Act; Majority ruling in Meralco vs.
Mangosing, the Court held: A strict compliance with the Castro-Bartolome et al., 114 SCRA 799 is no longer deemed
mode of service is necessary to confer jurisdiction of the to be binding precedent; The correct rule x x x is that
court over a corporation. The officer upon whom service is alienable public land held by a possessor, personally or
made must be one who is named in the statute; otherwise through his predecessors-in-interest, openly, continuously
the service is insufficient. x x x. The purpose is to render it and exclusively for thirty (30) years is converted to private
reasonably certain that the corporation will receive prompt property by mere lapse or completion of said period, ipso
and proper notice in an action against it or to insure that jure.Since then, however, this Court had occasion to re-
the summons be served on a representative so integrated examine the rulings in these cases vis-a-vis the earlier cases
with the corporation that such person will know what to do of Carino v. Insular Government, 41 Phil. 935; Susi v.
with the legal papers served on him. In other words, to Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
bring home to the corporation notice of the filing of the others, Thus, in the recent case of Director of Lands v,
action. x x x. The liberal construction rule cannot be Intermediate Appellate Court, 146 SCRA 509, We
invoked and utilized as a substitute for the plain legal categorically stated that the majority ruling in Meralco is "no
requirements as to the manner in which summons should longer deemed to be binding precedent", and that "[T]he
be served on a domestic corporation. x x x. (italics correct rule, x x x is that alienable public land held by a
supplied). possessor, personally or through his predecessorsin-interest,
Same; Same; Same; Same; Service of summons upon openly, continuously and exclusively for the prescribed
persons other than those mentioned in Section 13 of Rule statutory period [30 years under the Public Land Act, as
14 (old rule) has been held as improper.Service of amended] is converted to private property by mere lapse or
summons upon persons other than those mentioned in completion of said period, ipso jure." We further reiterated
Section 13 of Rule 14 (old rule) has been held as improper. therein the time-honored principle of non-impairment of
Even under the old rule, service upon a general manager of vested rights. Director of Lands vs. Court of Appeals, 158
a firms branch office has been held as improper as SCRA 568, No. L-56613 March 14, 1988
Republic vs. Acoje Mining Co., Inc., 7 SCRA 361, No. welfare of the corporation. Thus, the Court, finding that a
L-18062 February 28, 1963 post office is a vital improvement in the living condition of
its employees and laborers who came to settle in its mining
Corporations; Ultra vires act defined; When corporate acts camp which is far removed from the postal facilities or
may be performed outside the scope of powers expressly means of communication accorded to people living in a city
con-ferred.While as a rule an ultra vires act is one or municipality [Id., at p. 365], held that respondent
committed out-side the object for which a corporation is mining corporation was empowered to operate and maintain
created as defined by the law of its organization and postal facilities servicing its employees and their families at
therefore beyond the powers conferred upon it by law (19 its mining camp in Sta. Cruz, Zambales despite absence of a
C.J.S., Section 965, p. 419), there are however certain provision in the companys charter authorizing the former to
corporate acts that may be performed out-side of the scope do so.
of the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation, such as Powers vs. Marshall, 161 SCRA 176, No. L-48064
the establishment, in the case at bar, of a local post office May 9, 1988
in a mining camp which is far removed from the postal
facilities or means of communications accorded to- people Same; Same; A valid exercise of corporate power by the
living in a city or municipality. Board, binding upon all members of the corporation.Since
the collection of the development fee had been approved by
Same; Same; Ultra vires act distinguished from illegal act; the Board of Trustees of the lnternational School, Inc., it
Enforcement of ultra vires act on the ground of estoppel. was a valid exercise of corporate power by the Board, and
An illegal act is void and cannot be validated, while an ultra said assessment was binding upon all the members of the
vires act is merely voidable and can be enforced by corporation. Their action to stop the collection of said fee
performance, ratifi-cation or estoppel, or on equitable was correctly dismissed by the trial court for lack of a valid
grounds. In the present case the validity of the resolution of cause of action against the school. Powers vs. Marshall, 161
the Board of Directors of the corporation accepting full SCRA 176, No. L-48064 May 9, 1988
responsibility in connection with funds to be received by its
postmaster, should be upheld on the ground of estoppel. Philippine Trust Co. vs. Rivera, 44 Phil. 469, No.
19761 January 29, 1923
Same; Assumption of responsibility; Responsibility in
pres-ent case that of principal and not that of guarantor. CORPORATIONS; DIMINUTION OF CAPITAL.A corporation
That the responsibility of the defendant corporation is not has no power to release an original subscriber to its capital
just that of a guarantor but of a principal is clear from the stock from the obligation of paying for his shares, without a
resolution of its Board of Directors in which the corporation valuable consideration. for such release; and as against
assumed full responsibility for all cash received by the creditors a reduction of the capital stock can take place only
Postmaster. Republic vs. Acoje Mining Co., Inc., 7 SCRA in the manner and under the conditions prescribed by law.
361, No. L-18062 February 28, 1963 Philippine Trust Co. vs. Rivera, 44 Phil. 469, No. 19761
January 29, 1923
Teresa Electric & Power Co., Inc. vs. Public Service
Commission, 21 SCRA 198, No. L-21804 September Madrigal & Company, Inc. vs. Zamora, 151 SCRA
25, 1967 355, No. L-48237, No. L-49023 June 30, 1987

Public Service Commission; Issuance of certificates of public Labor Law; Dividends received by the company are
convenience; Municipal or legislative franchise; When not a corporate earnings arising from corporate investment.The
condition precedent; Case at bar.The requirement of a petitioner would, however, have us believe that it in fact
municipal franchise under the provisions of Act No. 667 was sustained losses. Whatever profits it earned, so it claims
intended to apply exclusively to any person or corporation were in the nature of dividends declared on its
who desires a franchise to construct and maintain an shareholdings in other companies in the earning of which
electric line or power plant and line for business purposes; it the employees had no participation whatsoever. Cash
should not be made to apply to one who, like respondent, dividends, according to it, are the absolute property of the
applied for a certificate of public convenience and service to stockholders and cannot be made available for disposition if
operate and maintain an electric plant exclusively for its only to meet the employees economic demands. There is
own use in connection with the operation of its cement no merit in this contention. We agree with the National
factory and for free use of its employees living within the Labor Relations Commission that [t]he dividends received
compound of the factory. by the company are corporate earnings arising from
corporate investment. Indeed, as found by the
National Power Corporation vs. Vera, 170 SCRA 721, Commission, the petitioner had entered such earnings in its
G.R. No. 83558 February 27, 1989 financial statements as profits, which it would not have
done if they were not in fact profits. Moreover, it is incorrect
Same; Same; Powers of a Corporation; A corporation is not to say that such profitsin the form of dividendsare
restricted to exercise only those powers expressly conferred beyond the reach of the petitioners creditors since the
upon it by its charter, it may also exercise those powers petitioner had received them as compensation for its
which are reasonably necessary or proper to promote its management services in favor of the companies it managed
interests and welfare.This Court is guided by as a shareholder thereof. As such shareholder. the
jurisprudence in the application of the above standard. In dividends paid to it were its own money, which may then be
the 1963 case of Republic of the Philippines v. Acoje Mining available for wage increments. It is not a case of a
Company, Inc. [G.R. No. L-18062, February 28, 1963, 7 corporation distributing dividends in favor of its
SCRA 361] the Court affirmed the rule that a corporation is stockholders, in which case, such dividends would be the
not restricted to the exercise of powers expressly conferred absolute property of the stockholders and hence, out of
upon it by its charter, but has the power to do what is reach by creditors of the corporation. Here, the petitioner
reasonably necessary or proper to promote the interest or was acting as stockholder itself, and in that case, the right
to a share in such dividends, by way of salary increases, knowing that they form a definite proportionate part of the
may not be denied its employees. whole number of authorized shares. When the shares left
unsubscribed are later reoffered, he cannot therefore claim
Same; Unfair Labor Practice; Reduction of capital to evade a dilution of interest. (Campos and Lopez-Campos Selected
employees demand for salary adjustments, mass lay-off of Notes and Cases on Corporation Law, p. 855, citing Yasik V.
employees under the guise of retrenchment policy Wachtel, 25 Del. Ch. 247, 17A. 2d 308 (1941). (pp. 33-34,
constitute unfair labor practice.Accordingly, this court is Rollo)
convinced that the petitioners capital reduction efforts
were, to begin with, a subterfuge, a deception as it were, to Islamic Directorate of the Phils. vs. Court of Appeals,
camouflage the fact that it had been making profits, and 272 SCRA 454, G.R. No. 117897 May 14, 1997
consequently, to justify the mass lay off in its employee
ranks, especially of union members. They were nothing but Same; Same; Same; Same; Same; Corporation Law; A
a premature and plain distribution of corporate assets to juridical person can not be considered essentially a formal
obviate a just sharing to labor of the vast profits obtained party to a case where it was not duly represented by its
by its joint efforts with capital through the years. Surely, we legitimate governing board.In this connection, although it
can neither countenance nor condone this. It is an unfair is true that Civil Case No. Q-90-6937, which gave rise to
labor practice. As we observed in Peoples Bank and Trust G.R. No. 107751, was entitled, Iglesia Ni Kristo, Plaintiff v.
Company v. Peoples Bank and Trust Co. Employees Union: Islamic Directorate of the Philippines, Defendant, the IDP
xxx xxx xxx As has been held by this Court in Insular can not be considered essentially a formal party thereto for
Lumber Company vs. CA, et al., L-23875, August 29, 1969, the simple reason that it was not duly represented by a
29 SCRA 371, retrenchment can only be availed of if the legitimate Board of Trustees in that case. As a necessary
company is losing or meeting financial reverses in its consequence, Civil Case No. Q-90-6937, a case for Specific
operation, which certainly is not the case at bar. Undisputed Performance with Damages, a mere action in personam ,
is the fact, that the Bank at no time incurred losses. As a did not become final and executory insofar as the true IDP
matter of fact. the net earnings of the Bank would be in is concerned since petitioner corporation, for want of
the average of P2,000,000.00 a year from 1960 to 1969 legitimate representation, was effectively deprived of its day
and, during this period of nine (9) years, the Bank in court in said case. Res inter alios judicatae nullum aliis
continuously declared dividends to its stockholders. Thus praejudicium faciunt. Matters adjudged in a cause do not
the mass layoff or dismissal of the 65 employees under the prejudice those who were not parties to it. Elsewise put, no
guise of retrenchment policy of the Bank is a lame excuse person (natural or juridical) shall be affected by a
and a veritable smoke-screen of its scheme to bust the proceeding to which he is a stranger.
Union and thus unduly disturb the employment tenure of Corporation Law; Jurisdiction; Securities and Exchange
the employees concerned, which act is certainly an unfair Commission; The SEC has the unquestionable authority to
labor practice. Madrigal & Company, Inc. vs. Zamora, 151 pass upon the issue as to who among the different
SCRA 355, No. L-48237, No. L-49023 June 30, 1987 contending groups is the legitimate governing board of a
Datu Tagoranao Benito vs. Securities & Exchange corporate body.There can be no question as to the
Commission, 123 SCRA 722, No. L-56655 July 25, authority of the SEC to pass upon the issue as to who
1983 among the different contending groups is the legitimate
Board of Trustees of the IDP since this is a matter properly
Corporation Law; No stockholders meeting or approval is falling within the original and exclusive jurisdiction of the
necessary for issuance of unsubscribed portion of capital SEC by virtue of Sections 3 and 5(c) of Presidential Decree
stock.As aptly stated by the Securities and Exchange No. 902-A: Section 3. The Commission shall have absolute
Commission in its decision: x x x the questioned issuance of jurisdiction, supervision and control over all corporations,
the unsubscribed portion of the capital stock worth partnerships or associations , who are the grantees of
P110,980.00 is not invalid even if assuming that it was primary franchises and/or a license or permit issued by the
made without notice to the stockholders as claimed by government to operate in the Philippines x x x x x x. x x x x
petitioner. The power to issue shares of stocks in a x x x x x Section 5. In addition to the regulatory and
corporation is lodged in the board of directors and no adjudicative functions of the Securities and Exchange
stockholders meeting is necessary to consider it because Commission over corpora ti ons , partnerships and other
additional issuance of shares of stocks does not need forms of associations registered with it as expressly granted
approval of the stockholders. The by-laws of the corporation under existing laws and decrees, it shall have original and
itself states that the Board of Trustees shall, in accordance exclusive jurisdiction to hear and decide cases involving: x x
with law, provide for the issue and transfer of shares of x x x x x x x c) Controversies in the selection or
stock of the Institute and shall prescribe the form of the appointment of directors, trustees, officers, or managers of
certificate of stock of the Institute (Art. V, Sec. 1). such corporations, partnerships or associations. x x x.

Same; A stockholder enjoys no pre-emptive right to buy Same; Contracts; Sales; Where a corporate body never
unissued shares of originally authorized capital stock. gave its consent, thru a legitimate governing board, to a
Petitioner bewails the fact that in view of the lack of notice deed of absolute sale, the subject sale is void and produces
to him of such subsequent issuance, he was not able to no effect whatsoever.Premises considered, all acts carried
exercise his right of pre-emption over the unissued shares. out by the Carpizo Board, particularly the sale of the
However, the general rule is that pre-emptive right is Tandang Sora property, allegedly in the name of the IDP,
recognized only with respect to new issue of shares, and have to be struck down for having been done without the
not with respect to additional issues of originally authorized consent of the IDP thru a legitimate Board of Trustees.
shares. This is on the theory that when a corporation at its Article 1318 of the New Civil Code lays down the essential
inception offers its first shares, it is presumed to have requisites of contracts: There is no contract unless the
offered all of those which it is authorized to issue. An following requisites concur: (1) Consent of the contracting
original subscriber is deemed to have taken his shares parties; (2) Object certain which is the subject matter of the
contract; (3) Cause of the obligation which is established. 2.DUTIES OF DIRECTORS.The directors of a corporation
All these elements must be present to constitute a valid are bound to care for its property and manage its affairs in
contract. For, where even one is absent, the contract is good faith, and for a violation of their duties resulting in
void. As succinctly put by Tolentino, consent is essential for waste of its assets or injury to its property, they are liable to
the existence of a contract, and where it is wanting, the account the same as any other trustee.
contract is non-existent. In this case, the IDP, owner of the
subject parcels of land, never gave its consent, thru a 3.LIABILITY OF DIRECTORS.If the directors of a
legitimate Board of Trustees, to the disputed Deed of corporation do acts clearly beyond their power, by reason of
Absolute Sale executed in favor of INC. This is, therefore, a which a loss ensued, or dispose of its property without
case not only of vitiated consent, but one where consent on authority, they will be required to make good the loss out of
the part of one of the supposed contracting parties is totally their private estate.
wanting. Ineluctably, the subject sale is void and produces 4.IGNORANCE IS NO DEFENSE.A director of a corporation
no effect whatsoever. is bound to exercise ordinary skill and judgment and cannot
Same; Same; Same; For the sale of the only property of a excuse his negligence or unlawf ul acts on the ground of
corporation to be valid, the majority vote of the legitimate ignorance or inexperience. Steinberg vs. Velasco, 52 Phil.
board, concurred in by the vote of at least 2/3 of the bona 953, No. 30460 March 12, 1929
fide m embers of the corporation, should be obtained.The De la Rama vs. Ma-ao Sugar Central Co., Inc., 27
Tandang Sora property, it appears from the records, SCRA 247, Nos. L-17504 February 28, 1969
constitutes the only property of the IDP. Hence, its sale to a
third-party is a sale or disposition of all the corporate Corporation Law; Investment of corporate funds in another
property and assets of I DP falling squarely within the corporation; When not violative of Section of the
contemplation of the foregoing section. For the sale to be Corporation Law.Plaintiffs-appellants contend that the
valid, the m a jorit y vot e of the legitimate Board of investment of corporate funds by defendants-appellants in
Trustees, concurred in by the vote of at least 2/3 of the another corporation constitutes a violation of section of
bona fide members of the corporation should have been the Corporation Law. The Supreme Court held that such an
obtained. These twin requirements were not met as the act, if done pursuance of the corporate purpose, does not
Carpizo Group which voted to sell the Tandang Sora need the approval of the stockholders; but when the
property was a fake Board of Trustees , and those whose purchase of shares of another corporation is done solely for
names and s ignatures were affixed by the Carpizo Group investment and not to accomplish the purpose of its
together with the sham Board Resolution authorizing the incorporation, the vote of approval of the stockholders is
negotiation for the sale were, from all indications, not bona necessary, and further states that when purpose or
fide members of the IDP as they were ma de to appear to purposes as stated in its articles of incorporation, the
be. Apparently, there are only fifteen (15) official members approval of the stockholders is not necessary. (Guevara,
of the petitioner corporation including the eight (8) Philippine Corp. Law, 1967 ed., p. 89).
members of the Board of Trustees.
Corporation Law; Investment of corporation for other
Edward J. Nell Company vs. Pacific Farms, Inc., 15 corporations not similar with its business; Deemed proper
SCRA 415, No. L-20850 November 29, 1965 by Section 17 of the Corporation Law.The lower courts
order refraining the appellant corporation from making
Corporations; Sale of assets by one corporation to another; investment in other companies whose purpose is not
Liability for debts of the transferor.Generally, where one connected with the sugar central business should be
corporation sells or otherwise transfers all of its assets to reversed. This is because section 17 of the Corporation
another corporation, the latter is not liable for the debts and Law allows a corporation to invest its funds in any other
liabilities of the transferor, except: (1) where the purchaser corporation or business, or for any purpose other than the
expressly or impliedly agrees to assume such debts; (2) main purpose for which it was organized, provided that its
where the transaction amounts to a consolidation or merger board of directors has been so authorized by the affirmative
of the corporations; (3) where the purchasing corporation is vote of stockholders holding shares entitling them to
merely a continuation of the selling corporation; and (4) exercise at least two-thirds of the voting power. De la Rama
where the transaction is entered into fraudulently in order vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247, Nos. L-
to escape liability f or such debts. 17504 February 28, 1969
Same; Same; Merger of two corporations; Case at bar. Gokongwei, Jr. vs. Securities and Exchange
Appellant's claim that the transactions betwe the two Commission, 89 SCRA 336, No. L-45911 April 11,
corporations have resulted in their consilidation or merger is 1979
negated by its theory to the effect that one of the said
corporations is an alter ego of the other. For, a corporation Supreme Court; Judgments; Securities and Exchange
cannot be its own alter ago. Edward J. Nell Company vs. Commission; Corporation Law; Supreme Court always
Pacific Farms, Inc., 15 SCRA 415, No. L-20850 November strives to settle a legal controversy in a single proceeding.
29, 1965 xxx In the case at bar, there are facts which cannot be
denied, viz.: that the amended by-laws were adopted by the
Steinberg vs. Velasco, 52 Phil. 953, No. 30460 March Board of Directors of the San Miguel Corporation in the
12, 1929 exercise of the power delegated by the stockholders
1.WHAT CREDITORS MAY ASSUME.The creditors of a ostensibly pursuant to section 22 of the Corporation Law;
corporation have the right to assume that so long as there that in a special meeting on February 10, 1977 held
are debts and liabilities, the board of directors of the specially for that purpose, the amended by-laws were
corporation will not use its assets to purchase its own stock ratified by more than 80% of the stockholders of record;
or to declare dividends to its stockholders when the that the foreign investment in the Hongkong Brewery and
corporation is insolvent. Distillery, a beer manufacturing company in Hongkong, was
made by the San Miguel Corporation in 1948; and that in seem improbable, if not impossible, for the director, if he
the stockholders annual meeting held in 1972 and 1977, all were to discharge effectively his duty, to satisfy his loyalty
foreign investments and operations of San Miguel to both corporations and place the performance of his
Corporation were ratified by the stockholders. corporate duties above his personal concerns.

Corporation Law; While reasonableness of a by-law is a Same; Same.Sound principles of corporate management
legal question, where reasonableness of a by-law provision counsel against sharing sensitive information with a director
is one in which reasonable minds may differ a court will not whose fiduciary duty to loyalty may well require that he
be justified in subsisting its judgment for those authorized disclose this information to a competitive rival. These
to make the by-laws.The validity or reasonableness of a dangers are enhanced considerably where the common
by-law of a corporation is purely a question of law. Whether director such as the petitioner is a controlling stockholder of
the by-law is in conflict with the law of the land, or with the two of the competing corporations. It would seem manifest
charter of the corporation, or is in a legal sense that in such situations, the director has an economic
unreasonable and therefore unlawful is a question of law. incentive to appropriate for the benefit of his own
This rule is subject, however, to the limitation that where corporation the corporate plans and policies of the
the reasonableness of a by-law is a mere matter of corporation where he sits as director.
judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in Same; Another reason for upholding a by-law provision that
substituting its judgment instead of the judgment of those forbids a competitor to be elected as corporate director are
who are authorized to make by-laws and who have the laws prohibiting cartels.There is another important
exercised their authority. consideration in determining whether or not the amended
by-laws are reasonable. The Constitution and the law
Same; Under the Corporation Law a corporation is prohibit combinations in restraint of trade or unfair
authorized to prescribe the qualification of its directors.In competition. Thus, Section 2 of Article XIV of the
this jurisdiction, under Section 21 of the Corporation Law, a Constitution provides: That State shall regulate or prohibit
corporation may prescribed in its by-laws the qualifications, private monopolies when the public interest so requires. No
duties and compensation of directors, officers and combinations in restraint of trade or unfair competition shall
employees ***. This must necessarily refer to a be allowed.
qualification in addition to that specified by section 30 of the
Corporation Law, which provides that every director must Same; Same.Basically, these anti-trust laws or laws
own in his right at least one share of the capital stock of the against monopolies or combinations in restraint of trade are
stock corporation of which he is a director * * *. aimed at raising levels of competition by improving the
consumers effectiveness as the final arbiter in free markets.
Same; Stockholder has no vested right to be elected as These laws are designed to preserve free and unfettered
stockholder.Any person who buys stock in a corporation competition as the rule of trade. It rests on the premise
does so with the knowledge that its affairs are dominated that the unrestrained interaction of competitive forces will
by a majority of the stockholders and that he implied yield the best allocation of our economic resources, the
contracts that the will of the majority shall govern in all lowest prices and the highest quality ***. They operate to
matters within the limits of the act of incorporation and forestall concentration of economic power. The law against
lawfully enacted by-laws and not forbidden by law. To this monopolies and combinations in restraint of trade is aimed
extent, therefore, the stockholder may be considered to at contracts and combinations that, by reason of the
have parted with his personal right or privilege to regulate inherent nature of the contemplated acts, prejudice the
the disposition of his property which he has invested in the public interest by unduly restraining competition or unduly
capital stock of the corporation and surrendered it to the obstructing the course of trade.
will of the majority or his fellow incorporators. **** It can
not therefore be justly said that the contract, express or Same; Election of petitioner as San Miguel Corporation
implied, between the corporation and the stockholders is Director may run counter to the prohibition contained in
infringed *** by any act of the former which is authorized Section 13(5) of Corporation Law on investments in
by a majority, ***. corporations engaged in agriculture.Finally, considering
that both Robina and SMC are, to a certain extent, engaged
Same; A director stands in a fiduciary relation to the in agriculture, then the election of petitioner to the Board of
competition and its stockholders. The disqualification of a SMC may constitute a violation of the prohibition contained
competition from being elected to the board of directors is a in Section 13(5) of the Corporation Law. Said section
reasonable exercise of corporate authority. Although in the provides in part that any stockholder of more than one
strict and technical sense, directors of a private corporation corporation organized for the purpose of engaging in
are not regarded as trustees, there cannot be any doubt agriculture may hold his stock in such corporations solely for
that their character is that of a fiduciary insofar as the investment and not for the purpose of bringing about or
corporation for the collective benefit of the stockholders, attempting to bring about a combination to exercise control
they occupy a fiduciary relation, and in these sense the of such corporations. ***.
relation is one of trust.
Same; The by-law amendment of SMC applies equally to all
Same; Same.It is obviously to prevent the creation of an and does not discriminate against petitioner only.
opportunity for an officer or director of San Miguel However, the by-law, by its terms, applies to all
Corporation, who is also the officer or owner of competing stockholders. The equal protection clause of the
corporation, from taking advantage of the information which Constitution requires only that the by-laws operate equally
he acquires as director to promote his individual or upon all persons of a class. Besides, before petitioner can
corporate interests to the prejudice of San Miguel be declared ineligible to run for director, there must be
Corporation and its stockholders, that the questioned hearing and evidence must be submitted to bring his case
amendment of the by-laws was made. Certainly, where two within the ambit of the disqualification. Sound principles of
corporations are competitive in a substantial sense, it would public policy and management, therefore, support the view
that a by-law which disqualifies a competitor from election requirement is for the benefit of the stockholders. The
to the Board of Directors of another corporation is valid and stockholders for whose benefit the requirement was enacted
reasonable. may, therefore, ratify the investment and its ratification by
said stockholders obliterates any defect which it may have
Same; Petitioner is not ipso facto disqualified to run on SMC had at the outset. Mere ultra vires acts, said this Court in
director. He must be given full opportunity by the SEC to Pirovano, or those which are not illegal and void ab initio,
show that he is not covered by the disqualification.While but are not merely within the scope of the articles of
We here sustain the validity of the amended by-laws, it incorporation, are merely voidable and may become binding
does not follow as a necessary consequence that petitioner and enforceable when ratified by the stockholders.
is ipso facto disqualified. Consonant with the requirement of
due process, there must be due hearing at which the Corporation Law; Judgment; The doctrine of the law of the
petitioner must be given the fullest opportunity to show that case.We hold on our part that the doctrine of the law of
he is not covered by the disqualification. As trustees of the the case invoked by Mr. Justice Barredo has no applicability
corporation and of the stockholders, it is the responsibility for the following reasons: a) Our jurisprudence is quite clear
of directors to act with fairness to the stockholders. that this doctrine may be invoked only where there has
Pursuant to this obligation and to remove any suspicion that been a final and conclusive determination of an issue in the
this power may be utilized by the incumbent members of first case later invoked as the law of the case.
the Board to perpetuate themselves in power, any decision
of the Board to disqualify a candidate for the Board of Same; Same; When doctrine of the law of the case not
Directors should be reviewed by the Securities and applicable.The doctrine of the law of the case, therefore,
Exchange Commission en banc and its decision shall be final has no applicability whatsoever herein insofar as the
unless reversed by this Court on certiorari. question of the validity or invalidity of the amended by-laws
is concerned. The Courts judgment of April 11, 1979 clearly
Same; Every stockholder has the right to inspect corporate shows that the voting on this question inconclusive with six
books and records.The stockholders right of inspection of against four Justices and two other Justices (the Chief
the corporations books and records is based upon their Justice and Mr. Justice Fernando) expressly reserving their
ownership of the assets and property of the corporation. It votes thereon, and Mr. Justice Aquino while taking no part
is, therefore, an incident of ownership of the corporate in effect likewise expressly reserved his vote thereon. No
property, whether this ownership or interest be termed an final aad conclusive determination could be reached on the
equitable ownership, a beneficial ownership, or a quasi- issue and pursuant to the provisions of Rule 56, section 11,
ownership. This right is predicated upon the necessity of since this special civil action originally commenced in this
selfprotection. It is generally held by majority of the courts Court, the action was simply dismissed with the result that
that where the right is granted by statute to the no law of the case was laid down insofar as the issue of the
stockholder, it is given to him as such and must be validity or invalidity of the questioned by-laws is concerned,
exercised by him with respect to his interest as a and the relief sought herein by petitioner that this Court
stockholder and for some purpose germane thereto or in bypass the SEC which has yet to hear and determine the
the interest of the corporation. In other words, the same issue pending before it below and that this Court itself
inspection has to germane to the petitioners interest as a directly resolve the said issue stands denied.
stockholder, and has to be proper and lawful in character
and not inimical to the interest of the corporation. Same; Same; Reservation of the vote of the Chief Justice.
As expressly stated in the Chief Justices reservation of his
Same; The right of stockholder to inspect corporate books vote, the matter of the question of the applicability of the
extends to a wholly-owned subsidiary.In the case at bar, said section 13(5) to petitioner would be heard by this Court
considering that the foreign subsidiary is wholly owned by at the appropriate time after the proceedings below (and
respondent San Miguel Corporation and, therefore, under its necessarily the question of the validity of the amended by-
control, it would be more in accord with equity, good faith laws would be taken up anew and the Court would at that
and fair dealing to construe the statutory right of petitioner time be able to reach a final and conclusive vote).
as stockholder to inspect the books and records of the
corporation as extending to books and records of such Same; Same; Validity of the amended by-laws.The six
wholly owned subsidiary which are in respondent votes cast by Justices Makasiar, Antonio, Santos, Abad
corporations possession and control. Santos, De Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of
Same; Purely ultra vires corporate acts of corporate officers this Court, namely, Justices Teehankee, Concepcion Jr.,
to invest corporate funds in another business or Fernandez and Guerrero opining otherwise, and with Chief
corporation, i.e., acts not contrary to law, morals, public Justice Castro and Justice Fernando reserving their votes
order as public policy, may be ratified by the stockholders thereon and Justice Aquino and Melencio Herrera not
holding 2/3 of the voting power.Assuming arguendo that voting, thereby resulting in the dismissal of the petition
the Board of Directors of San Miguel Corporation had no insofar as it assails the validity of the amended by-laws . . .
authority to make the assailed investment, there is no . for lack of necessary votes, has no other legal
question that a corporation, like an individual, may ratify consequence than that it is the law of the case far as the
and thereby render binding upon it the originally parties herein are concerned, albeit the majority opinion of
unauthorized acts of its officers or other agents. This is true six against four Justices is not doctrinal in the sense that it
because the questioned investment is neither contrary to cannot be cited as necessarily a precedent for subsequent
law, morals, public order or public policy. It is a corporate cases. This means that petitioner Gokongwei and the
transaction or contract which is within the corporate respondents, including the Securities and Exchange
powers, but which is defective from a purported failure to Commission, are bound by the foregoing result, namely,
observe in its execution the requirement of the law that the that the Court en banc has not found merit in the claim that
investment must be authorized by the affirmative vote of the amended by-laws in question are invalid. Indeed, it is
the stockholders holding twothirds of the voting power. This one thing to say that dismissal of the case is not doctrinal
and entirely another thing to maintain that such dismissal not fall under the category of "stock dividends". A
leaves the issue unsettled. corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a
Same; Same; Where petitioner can no longer revive the stockholder, or in payment of its indebtedness. It is the
issue validity of the amended by-laws.I reiterate, shares of stock ,that are originally issued by the corporation
therefore, that as between the parties herein, the issue of and forming part of the capital that can be exchanged for
validity of the challenged bylaws is already settled. From cash or services rendered, or property; that is, if the
which it follows that the same are already enforceable corporation has original shares of stock unsold or
insofar as they are concerned. Petitioner Gokongwei may unsubscribed, either coming from the original capitalization
not hereafter act on the assumption that he can revive the or from the increased capitalization. Those shares of stock
issue of validity whether in the Securities Exchange may be issued to a person who is not a stockholder, or to a
Commission, in this Court or in any other forum, unless he person already a stockholder in exchange for services
proceeds on the basis of a factual milieu different from the rendered or for cash or property. But a share of stock
setting of this case. Not even the Securities and Exchange coming from stock dividends declared cannot be issued to
Commission may pass on such question anymore at the one who is not a stockholder of a corporation.
instance of herein petitioner or anyone acting in his stead or
on his behalf. The vote of four justices to remand the case Under Section 16 of the Corporation Law stock dividends
thereto cannot alter the situation. cannot be issued to a person who is not a stockholder in
payment of services rendered.
Same; Same; Where Court has not found merit in the claim
that the amended by-laws in question are valid.I concur in Same; "Stock dividend"; "Dividend"; Concept and nature.
Justice Barredos statement that the dismissal (for lack of A "stock dividend" is any dividend payable in shares of stock
necessary votes) of the petition to the extent that it assails of the corporation declaring or authorizing such dividend. It
the validity of the amended by-laws, is the law of the case is, as what the term itself implies, a distribution of the
at bar, which means in effect that as far and only in so far shares of stock of the corporation among the stockholders
as the parties and the Securities and Exchange Commission as dividends. A stock dividend of a corporation is a dividend
are concerned, the Court has not found merit in the claim paid in shares of stock instead of cash, and is properly
that the amended by-laws in question are valid. payable only out of surplus profits (Sec. 16, Corporation
Law). So, a stock dividend is actually two things: (1) a
Same; Same; Term and meaning of farming.This is my dividend, and (2) the enforced use of the dividend money to
view, even as I am for a restrictive interpretation of Section purchase additional shares of stock at par. (Words and
13(5) of the Philippine Corporation Law, under which I Phrases, p. 270). When a corporation issues stock
would limit the scope of the provision to corporations dividends, it shows that the corporation's accumulated
engaged in agriculture, but only as the word agriculture profits have been capitalized instead of distributed to the
refers to its more limited meaning as distinguished from its stockholders or retained as surplus available f or
general and broad connotation. The term would then mean distribution, in money or kind, should opportunity offer. Far
farming or raising the natural products of the soil, such as from being a realization of profits for the stockholder, it
by cultivation, in the acquisition of agricultural land such as tends rather ,to postpone said realization, in ,that the fund
by homestead, before the patent may be issued. represented by the new stock has been transferred from
Same; Same; Poultry raising or piggery is included in the surplus to assets and no longer available for actual
term agriculture.It is my opinion that under the public distribution (Fisher v. Trinidad, 43 Phil. 973). Thus, it is
land statute, the development of a certain portion of the apparent that stock dividends are issued only to
land applied for a specified in the law as a condition stockholders. This is so because only stockholders are
precedent before the applicant may obtain a patent, is entitled to dividends. They are the only ones who have a
cultivation, not let us say, poultry raising or piggery, which right to a proportional share in that part of the surplus
may be included in the term Agriculture in its broad sense. which is declared as dividends. A stock dividend really adds
For under Section 13(5) of the Philippine Corporation Law, nothing to the interest of the stockholder; the proportional
construed not in the strict way as I believe it should interest of each stockholder remains the same (Towne v.
because the provision is in derogation of property rights, the Eisner, 62 L. Ed. 372). If a stockholder is deprived of his
petitioner in this case would be disqualified from becoming stock dividendsand this happens if the shares of stock f
an officer of either the San Miguel Corporation or his own orming part of the stock dividends are issued to a
supposedly agricultural corporations. Gokongwei, Jr. vs. nonstockholderthen the proportion of the stockholder's
Securities and Exchange Commission, 89 SCRA 336, No. L- interest changes radically. Stock dividends are civil fruits of
45911 April 11, 1979 the original investment, and to the owners of the shares
belong the civil fruits (Art. 441, Civil Code). The term
Nielson & Company, Inc. vs. Lepanto Consolidated "dividend" both in the technical sense and its ordinary
Mining Company, 26 SCRA 540, No. L-21601 acceptation, is that part or portion of the profits of the
December 28, 1968 enterprise which the corporation, by its governing agents,
sets apart for ratable division among the holders of the
Corporation law; Shares of stock; Consideration for which capital stock. It means the fund actually set aside, and
shares of stock may be issued; A share of stock coming declared by the directors of the corporation as a dividend,
from stock dividends declared cannot be issued to one who and duly ordered by the directory, or by the stockholders, at
is not a stockholder of a corporation.From the provision of a corporate meeting, to be divided or distributed among the
Section 16 of the Corporation Law, the consideration for stockholders according to their respective interests (7
which shares of stock may be issued are: (1) cash; (2) Thompson on Corporations 134135). Nielson & Company,
property; and (3) undistributed profits. Shares of stock are Inc. vs. Lepanto Consolidated Mining Company, 26 SCRA
given the special name "stock dividends" only if they are 540, No. L-21601 December 28, 1968
issued in lieu of undistributed profits. If shares of stocks are
issued in exchange of cash or property then those shares do
Pirovano, et al. vs. De la Rama Steamship Co., 96 empowered to guarantee the bonds of the Mindoro S'ugar
Phil. 335, No. L-5377 December 29, 1954 Company which it acquired, and is therefore obliged to
redeem the four bonds held by the appellant, and which
1.CORPORATIONS; DONATIONS; DONATION GlVEN "OUT have become due by reason of a violation of the conditions.
OF GRATITUDE FOR SERVICES RENDERED" Is Carlos vs. Mindoro Sugar Co., 57 Phil., 343, No. 36207
REMUNERATIVE.A donation given by the corporation to October 26, 1932
the minor children of its late president because he "was to a
large extent responsible for the rapid and very successful Japanese War Notes Claimants Asso Inc. vs.
development and expansion of the activities of this Securities and Exchange Com., 101 Phil. 540, No. L-
company" is remunerative in nature in contemplation of law. 8987 May 23, 1957

2.ID.; ID.; PERFECTED DONATION CAN ONLY BE PRIVATE CORPORATIONS ; JAPANESE WAR NOTES
RESCINDED ON LEGAL GROUNDS.Where the donation CLAIMANTS ASSOCIATION; EXERCISE OF POWERS NOT
made by the corporation has not only been granted in GRANTED IN THE ARTICLES OF INCORPORATION, EFFECT
several resolutions duly adopted by its board of directors OF.Although the articles of incorporation give petitioner
but also it has been formally ratified by its stockholders, the privilege to work for the redemption of the Japanese
with the concurrence of its only creditor, and accepted by war notes of its members alone, it can not offer its services
the donee, the donation -has reached the stage of to the public for a valuable consideration, because there is
perfection which is valid and binding upon the corporation nothing definite and tangible about the redemption of the
and as such cannot be rescinded unless there exist legal war notes and its success is speculative. Thus, when
grounds for doing so. petitioner engaged in the business of registering war notes
for deposit upon payment of fees, and of accepting and
3.ID.; ID.; DONATION DISTINGUISHED FROM GRATUITY. collecting fees for reparation claims for civilian casualties
While a donation may technically be different from a and other injuries, it acted beyond the powers embodied in
gratuity, in substance they are the same. They are even its articles of incorporation. Japanese War Notes Claimants
similar to a pension. Thus, it was said that "A pension is a Asso Inc. vs. Securities and Exchange Com., 101 Phil. 540,
gratuity only when it is granted for services previously No. L-8987 May 23, 1957
rendered, and which at the time they were rendered gave
rise to no legal obligation." (Words and Phrases, Permanent Crisologo-Jose vs. Court of Appeals, 177 SCRA 594,
Edition, p. 675; O'Dea vs. Ck, 169 Pac., 306, 176 Cal., G.R. No. 80599, G.R. No. 81949 September 15, 1989
659.)
Negotiable Instruments Law; Corporations; Rule that an
4.ID.; POWERS OF A CORPORATION; ACTS PERFORMED accommodation party liable on the instrument to a holder
WITHIN THE POWERS GRANTED ARE NOT "ULTRA for value does not apply to corporations which are
VIRES".Where the corporation was given broad and accommodation parties; Reasons.The aforequoted
almost unlimited powers to carry out the purposes for which provision of the Negotiable Instruments Law which holds an
it was organized among them, to aid in any other manner accommodation party liable on the instrument to a holder
any person in the affairs and prosperity of whom it has a for value, although such holder at the time of taking the
lawful interest, a donation made to the heirs of its late instrument knew him to be only an accommodation party,
president in recognition of the valuable services rendered by does not include nor apply to corporations which are
the latter which had immensely contributed to its growth, accommodation parties. This is because the issue or
comes within this broad grant of power and can not be indorsement of negotiable paper by a corporation without
considered an ultra vires act. consideration and for the accommodation of another is ultra
vires. Hence, one who has taken the instrument with
5.ID.; ID.; "ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; knowledge of the accommodation nature thereof cannot
EFFECT OF RATIFICATION BY STOCKHOLDERS.Illegal recover against a corporation where it is only an
acts of a corporation contemplate the doing of an act which accommodation party. If the form of the instrument, or the
is contrary to law, morals, or public order, or contravene nature of the transaction, is such as to charge the indorsee
some rules of public policy or public duty, and are, like with knowledge that the issue or indorsement of the
similar transactions between individuals, void. They can not instrument by the corporation is for the accommodation of
serve as basis of a court action, nor acquire validity by another, he cannot recover against the corporation thereon.
performance, ratification, or estoppel. On the other hand,
ultra vires acts or those which are not illegal and void ab Same; Same; Same; Same; Exception; An officer or agent
initio but are merely within the scope of the article of of a corporation shall have the power to execute or indorse
incorporation, are merely voidable and may become binding a negotiable paper in the name of the corporation for
and enforceable when ratified by the stockholders. accommodation only if specifically authorized to do so;
Personal liability of signatories in the instrument.By way
6.ID.; ID.; "ULTRA VIRES" ACTS; RATIFICATION BY of exception, an officer or agent of a corporation shall have
STOCKHOLDERS OF "ULTRA VIRES" ACTS CURES the power to execute or indorse a negotiable paper in the
INFIRMITY.The ratification by the stockholders of an ultra name of the corporation for the accommodation of a third
vires act which is not illegal cures the infirmity of the person only if specifically authorized to do so. Corollarily,
corporate act and makes it perfectly valid and enforceable, corporate officers, such as the president and vice-president,
specially so if it is not merely executory but executed and have no power to execute for mere accommodation a
consummated and no creditors are prejudiced thereby. negotiable instrument of the corporation for their individual
Carlos vs. Mindoro Sugar Co., 57 Phil., 343, No. debts or transactions arising from or in relation to matters in
36207 October 26, 1932 which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the
2.Corporations; Power to Guarantee Bonds Issued by corporation, especially since it is not involved in any aspect
Another Corporation.In view of the facts proved in this of the corporate business or operations, the inescapable
case, it is held: That the Philippine Trust Company was conclusion in law and in logic is that the signatories thereof
shall be personally liable therefor, as well as the cases where by-laws are unnecessary to corporate existence
consequences arising from their acts in connection or to the valid exercise of corporate powers, thus: In the
therewith. absence of charter or statutory provisions to the contrary,
by-laws are not necessary either to the existence of a
Loyola Grand Villas Homeowners (South) corporation or to the valid exercise of the powers conferred
Association, Inc. vs. Court of Appeals, 276 SCRA 681, upon it, certainly in all cases where the charter sufficiently
G.R. No. 117188 August 7, 1997 provides for the government of the body; and even where
Corporation Law; Statutory Construction; Words and the governing statute in express terms confers upon the
Phrases; Ordinarily, the word must connotes an corporation the power to adopt by-laws, the failure to
imperative act or operates to impose a duty which may be exercise the power will be ascribed to mere nonaction which
enforcedit is synonymous with ought which connotes will not render void any acts of the corporation which would
compulsion or mandatoriness though the word must in a otherwise be valid. (Italics supplied.)
statute, like shall, is not always imperative and may be Same; Same; Same; Due Process; There can be no
consistent with an exercise of discretion.As correctly automatic corporate dissolution simply because the
postulated by the petitioner, interpretation of this provision incorporators failed to abide by the required filing of by-
of law begins with the determination of the meaning and lawsthe incorporators must be given the chance to explain
import of the word must in this section. Ordinarily, the their neglect or omission and to remedy the same.Even
word must connotes an imperative act or operates to under the foregoing express grant of power and authority,
impose a duty which may be enforced. It is synonymous there can be no automatic corporate dissolution simply
with ought which connotes compulsion or mandatoriness. because the incorporators failed to abide by the required
However, the word must in a statute, like shall, is not filing of by-laws embodied in Section 46 of the Corporation
always imperative. It may be consistent with an exercise of Code. There is no outright demise of corporate existence.
discretion. In this jurisdiction, the tendency has been to Proper notice and hearing are cardinal components of due
interpret shall as the context or a reasonable construction process in any democratic institution, agency or society. In
of the statute in which it is used demands or requires. This other words, the incorporators must be given the chance to
is equally true as regards the word must. Thus, if the explain their neglect or omission and remedy the same.
language of a statute considered as a whole and with due
regard to its nature and object reveals that the legislature Same; Same; Same; Presidential Decree 902-A; Statutes in
intended to use the words shall and must to be Materia; Securities and Exchange Commission; The failure
directory, they should be given that meaning. of the Corporation Code to provide for the consequences of
the non-filing of by-laws on time has been rectified by P.D.
Same; Same; By-Laws; The legislative deliberations No. 902-A; Every statute must be so construed and
demonstrate that automatic corporate dissolution for failure harmonized with other statutes as to form a uniform system
to file the bylaws on time was never the intention of the of jurisprudence.Although the Corporation Code requires
legislature.This exchange of views demonstrates clearly the filing of by-laws, it does not expressly provide for the
that automatic corporate dissolution for failure to file the consequences of the non-filing of the same within the
by-laws on time was never the intention of the legislature. period provided for in Section 46. However, such omission
Moreover, even without resorting to the records of has been rectified by Presidential Decree No. 902-A, the
deliberations of the Batasang Pambansa, the law itself pertinent provisions on the jurisdiction of the Securities and
provides the answer to the issue propounded by petitioner. Exchange Commission of which state: * * * That the failure
Same; Same; Same; Taken as a whole and under the to file by-laws is not provided for by the Corporation Code
principle that the best interpreter of a statute is the statute but in another law is of no moment. P.D. No. 902-A, which
itself (optima statuli interpretatix est ipsum statutum), took effect immediately after its promulgation on March 11,
Section 46 of the Corporation Code reveals the legislative 1976, is very much apposite to the Code. Accordingly, the
intent to attach a directory, and not mandatory, meaning provisions abovequoted supply the law governing the
for the word must in the first sentence thereof.Taken as situation in the case at bar, inasmuch as the Corporation
a whole and under the principle that the best interpreter of Code and P.D. No. 902-A are statutes in pari materia.
a statute is the statute itself (optima statuti interpretatix est Interpretare et concordare legibus est optimus
ipsum statutum), Section 46 aforequoted reveals the interpretandi. Every statute must be so construed and
legislative intent to attach a directory, and not mandatory, harmonized with other statutes as to form a uniform system
meaning for the word must in the first sentence thereof. of jurisprudence.
Note should be taken of the second paragraph of the law Same; By-Laws; Failure to file the by-laws within the period
which allows the filing of the by-laws even prior to required by law by no means tolls the automatic dissolution
incorporation. This provision in the same section of the of a corporation.As the rules and regulations or private
Code rules out mandatory compliance with the requirement laws enacted by the corporation to regulate, govern and
of filing the by-laws within one (1) month after receipt of control its own actions, affairs and concerns and its
official notice of the issuance of its certificate of stockholders or members and directors and officers with
incorporation by the Securities and Exchange Commission. relation thereto and among themselves in their relation to
It necessarily follows that failure to file the by-laws within it, by-laws are indispensable to corporations in this
that period does not imply the demise of the corporation. jurisdiction. These may not be essential to corporate birth
Same; Same; Same; By-laws may be necessary for the but certainly, these are required by law for an orderly
government of the corporation but these are subordinate governance and management of corporations. Nonetheless,
to the articles of incorporation as well as to the Corporation failure to file them within the period required by law by no
Code and related statutes.By-laws may be necessary for means tolls the automatic dissolution of a corporation.
the government of the corporation but these are Same; Administrative Law; Subdivisions; Home Insurance
subordinate to the articles of incorporation as well as to the and Guaranty Corporation; Jurisdiction; With respect to
Corporation Code and related statutes. There are in fact
homeowners associations, the HIGC shall exercise all the 1.CORPORATION LAW; LABOR ASSOCIATIONS;
powers, authorities and responsibilities that are vested on PROVISIONS OF CONSTITUTION AND BY-LAWS SHOULD
the Securities and Exchange Commission.That the BE COMPLIED WITH.The constitution and by-laws of the
corporation involved herein is under the supervision of the petitioner association provide that notice of a special
HIGC does not alter the result of this case. The HIGC has meeting of members should be given at least five days
taken over the specialized functions of the former Home before the date of the meeting. It appears that the notice
Financing Corporation by virtue of Executive Order No. 90 was posted on 26 March and the election was set for 28
dated December 17, 1986. With respect to homeowners March. Therefore, the five days previous notice required
associations, the HIGC shall exercise all the powers, would not be complied with.
authorities and responsibilities that are vested on the
Securities and Exchange Commission x x x, the provision of 2.ID.; ID.; AUTHORITY OF COURTS TO APPOINT
Act 1459, as amended by P.D. 902-A, to the contrary COMMITTEE TO SUPERVISE ELECTION OF OFFICIALS.
notwithstanding. Loyola Grand Villas Homeowners (South) When it appears that a fair election cannot be had, the
Association, Inc. vs. Court of Appeals, 276 SCRA 681, G.R. court in the exercise of its equity jurisdiction may appoint a
No. 117188 August 7, 1997 committee with the authority to call, conduct and supervise
the election of the directors of the association. Board of
HENRY FLEISCHER, plaintiff and appellee, vs. BOTICA Directors and Election Committee of SMB Workers Savings
NoLASCO Co., INC., defendant and appellant., 47 Phil. 583, and Loan Asso., Inc. vs. Tan, etc., et al., 105 Phil. 426, No.
No. 23241 March 14, 1925 L-12282 March 31, 1959

1.CORPORATIONS; CORPORATE STOCK; RlGHT OF National Investment and Development Corp. vs.
CORPORATIONS TO IMPOSE A LIMITATION ON Aquino, 163 SCRA 153, No. L-34192, No. L-34213
TRANSFERS OF STOCK.A stock corporation in adopting June 30, 1988
by-laws governing the transfer of shares of stock should
take into consideration the specific provisions of the Remedial Law; Certiorari; Mjotion to Quash; General Rule;
Corporation Law. The by-laws of corporations should be An order denying a motion to quash or to dismiss is
made to harmonize with the provisions of the Corporation interlocutory and cannot be subject ofa petition for
Law. By-laws must not be inconsistent with the provisions of certiorari; Remedies ofthe aggrieved party; Exceptions to
the Corporation Law. By-laws of a corporation are valid if the general ruJe.As a general rule, an order denying a
they are reasonable and calculated to carry into effect the motion to quash or to dismiss is interlocutory and cannot be
objects of the corporation provided they are not the subject of a petition for certiorari. The remedy of the
contradictory to the general policy of the laws of the land. aggrieved party in a denied motion to dismiss is to file an
Under a statute authorizing by-laws for the transfer of stock answer and interpose, as defense or defenses, the objection
of a corporation, it can do no more than prescribe a general or objections raised by him in said motion to dismiss, then
mode of transfer on the corporate books and cannot justify proceed to trial and, in case of adverse decision, to elevate
an unreasonable restriction upon the right to sell. The the entire case by appeal in due course. However, under
shares of stock of a corporation are personal property and certain situations, recourse to the extraordinary legal
the holder thereof may transfer the same without remedies of certiorari, prohibition and mandamus to
unreasonable restrictions. question the denial of a motion to dismiss or quash is
considered proper, in the interest of more enlightened and
2.ID. ; TRANSFER OF SHARES OF STOCK.The power to substantial justice. As the Court said in Pineda andAmpil
enact by-laws restraining the sale and transfer of stock Manufacturing Co. vs. Bartolome, 95 Phil. 930, 938: "For
must be found in the governing statute or charter. analogous reasons it may be said that the petition for
Restrictions upon the traffic in stock must have their source certiorari interposed by the accused against the order of the
in legislative enactments, as the corporation itself cannot court a quo denying the motion to quash may be
create such impediments. By-laws of a corporation are entertained, not only because it was rendered in a criminal
intended merely for the protection of the corporation, and case, but because it was rendered, as claimed, with grave
prescribe regulations and not restrictions; they are always abuse of discretion, as found by the Court of Appeals, xxx."
subject to the charter of the corporation. The corporation, in and reiterated in Mead v. Argel citing Yap v. Lutero (105
the absence of such a power, cannot ordinarily inquire into Phil. 1307): "However, were we to require adherence to this
or pass upon the legality of the transaction by which its pretense, the case at bar would have to be dismissed and
stock passes from one person to another, nor can it petitioner required to go through the inconvenience, not to
question the consideration upon which a sale is based. A by- say the mental agony the torture, of submitting himself to
law of a corporation cannot take away or abridge the trial on the merits in Case No. 166443, apart from the
substantial rights of stockholders. Courts will carefully expenses incidental thereto, despite the fact that his trial
scrutinize any attempt on the part of a corporation to and conviction therein would violate one of this [sic]
impose restrictions or limitations upon the right of constitutional rights, and that, an appeal to this Court, we
stockholders to sell and assign their stock. Restrictions would, therefore, have to set aside the judgment of
cannot be imposed upon a stockholder by a by-law without conviction of the lower court. This would, obviously, be
statutory or charter authority. The owner of corporate stock most unfair and unjust. Under the circumstances obtaining
has the same uncontrollable right to sell or alienate, which in the present case, the flaw in the procedure followed by
attaches to the ownership of any other species of property. petitioner herein may be overlooked, in the interest of a
HENRY FLEISCHER, plaintiff and appellee, vs. BOTICA more enlightened and substantial justice." Thus, where
NoLASCO Co., INC., defendant and appellant., 47 Phil. 583, there is patent grave abuse of discretion, in denying the
No. 23241 March 14, 1925 motion to disrniss, as in the present case, this Court may
entertain the petition for certiorari interposed by the party
Board of Directors and Election Committee of SMB against whom the said order is issued.
Workers Savings and Loan Asso., Inc. vs. Tan, etc., et
al., 105 Phil. 426, No. L-12282 March 31, 1959
Same; Same; Same; Jurisdiction; Jurisdiction of CFI to issue Batjak particularly the three (3) oil mills and to make the
a writ of preliminary or permanent injunction is confmed order permanent, after trial, and ordering NIDC and PNB to
within the province where the land in question is situated. submit a complete accounting of the assets, management
Anent the first ground, it is a well-settled rule that the and operation of Batjak from 1965. In effect, what Batjak
jurisdiction of a Court of First Instance to issue a writ of seeks to recover is title to, or possession of, real property
preliminary permanent injunction is confmed within the (the three (3) oil mills which really made up the assets of
boundaries of the province where the land in controversy is Batjak) but which the records show already belong to NIDC.
situated. The petition for mandamus of Batjak prayed that It is not disputed that the mortgages on the three (3) oil
NIDC and PNB be ordered to surrender, relinquish and mills were foreclosed by PNB and NIDC and acquired by
turnover to Batjak the assets, management and operation them as the highest bidder in the appropriate foreclosure
of Batjak particularly the three (3) oil mills located in Sasa, sales. Ownership thereto was subsequently consolidated by
Davao City, Jimenez, Misamis Occidental and Tanauan, PNB and NIDC, after Batjak failed to exercise its right of
Leyte. redemption. The three (3) oil mills are now titled in the
name of NIDC. From the foregoing, it is evident that Batjak
Same; Same; Same; Venue; Respondent Batjak's complaint had no clear right to be entitled to the writ prayed for. In
should have been filed in the provinces where the oil mills Lamb vs. Philippines (22 Phil. 456) citing the case of
are located pursuajit to Sec. 2, Rule 4, par. A ofRules Gonzales V. Salazar vs. The Board ofPharmacy, 20 Phil. 367,
ofCourt.On the matter of proper venue, Batjak's complaint the Court said that the writ of mandamus will not issue to
should have been filed in the provinces where said oil mills give to the applicant anything to which he is not entitled by
are located. Under Rule 4, Sec. 2, paragraph A of the Rules law.
of Court, "actions affecting title to, or for recovery of
possession, or for partition or condemnation of, or Same; Same; Same; Receivership; A receiver of property
foreclosure of mortgage on, real property, shall be subject of the action may be appointed by the court when
commenced and tried in the province where the property or the party applying for the appointment of a receiver has an
any part thereof lies." interest in said property.A receiver of real or personal
property, which is the subject of the action, may be
Same; Same; Same;Actions; Every action must be appointed by the court when it appears from the pleadings
prosecuted and defended in the name ofthe real party in that the party applying for the appointment of receiver has
interest.In support of the third ground of their motion to an interest in said property. The right, interest, or claim in
dismiss, PNB and NIDC contend that Batjak's complaint for property, to entitle one to a receiver over it, must be
mandamus is based 011 its claim or right to recovery of present and existing.
possession of the three (3) oil mills, on the ground of an
alleged breach of fiduciary relationship. Noteworthy is the Same; Same; Same; Same; Prevention of imminent danger
fact that, in the Voting Trust Agreement, the parties thereto to property, the guiding principle that governs courts in
were NIDC and certain stockholders of Batjak. Batjak itself appointing receivers.Moreover, the prevention of
was not a signatory thereto. Under Sec. 2, Rule 3 of the imminent danger to property is the guiding principle that
Rules of Court, every action must be prosecuted and governs courts in the matter of appointing receivers. Under
defended in the name of the real party in interest. Applying Sec. l(b), Rule 59 of the Rules of Court, it is necessary in
the rule in the present case, the action should have been granting the relief of receivership that the property or fund
filed by the stockholders of Batjak, who executed the Voting be in danger of loss, removal or material injury. In the case
Trust Agreement with NIDC; and not by Batjak itself which at bar, Batjak in its petition for receivership, or in its
is not a party to said agreement, and therefore, not the real amended petition therefor, failed to present any evidence to
party in interest in the suit to enforce the same. establish the requisite condition that the property is in
danger of being lost, removed or materially injured unless a
Same; Same; Same; Mandamus, nature of; Legal Right, receiver is appointed to guard and preserve it.
defined in Sec. 3, Rule 65 of Rules of Court.Moreover, the
action instituted by Batjak before the respondent court was Corporations; Voting Trust Agreement; A voting trust
a special civil action for mandamus with prayer for transfers only voting or other rights pertaining to the shares
preliminary mandatory injunction. Generally, mandamus is subject of the agreement or control over the stock.ln any
not a writ of righiand its allowance or refusal is a matter of event, a voting trust transfers only voting or other rights
discretion to be exercised on equitable principles and in pertaining to the shares subject of the agreement, or
accordance with well-settled rules of law, and that it should control over the stock. The law on the matter is Section 59,
never be used to effectuate an injustice, but only to prevent paragraph 1 of the Corporation Code (BP 68) which
a failure of justice. The writ does not issue as a matter of provides: "Sec. 59. Voting TrustsOne or more
course. It will issue only where there is a clear legal right stockholders of a stock corporation may create a voting
sought to be enforced. It will not issue to enforce a doubtful trust for the purpose of confering upon a trustee or trusties
right. A clear legal right within the meaning of Sec. 3, Rule the right to vote and other rights pertaining to the shares
65 of the Rules of Court means a right clearly founded in or for a period not exceeding five (5) years at any one time: x
granted by law, a right which is enforceable as a matter of x x" National Investment and Development Corp. vs.
law. Aquino, 163 SCRA 153, No. L-34192, No. L-34213 June 30,
1988
Same; Same; Same; Same; Writ of mandamus will not issue
to give the applicant anything to which he is not entitled by
law; Case at bar. Applymg the above-cited principles of
law in the present case, the Court fmds no clear right in
Batjak to be entitled to the writ prayed for. It should be
noted that the petition for mandamus filed by it prayed that
NIDC and PNB be ordered to surrender, relinquish and turn-
over to Batjak the assets, management, and operation of