CORPORATION CODE
GRANDFATHER RULE
1. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners, vs. REDMONT
CONSOLIDATED MINES CORP., Respondent.
Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether
Filipino or foreign. In their previous petitions, they had been adamant in insisting that
they were Filipino corporations, until they submitted their Manifestation and
Submission dated October 19, 2012 where they stated the alleged change of
corporate ownership to reflect their Filipino ownership. Thus, there is a need to
determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion
No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the controlling interests in
enterprises engaged in the exploitation of natural resources owned by Filipino
citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded
as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality," pertains to the control test or
the liberal rule. On the other hand, the second part of the DOJ Opinion which
provides, "if the percentage of the Filipino ownership in the corporation or partnership
is less than 60%, only the number of shares corresponding to such percentage shall
be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the
application of the "control test" under RA 7042, as amended by RA 8179, otherwise
known as the Foreign Investments Act (FIA), rather than using the stricter grandfather
rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a
corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos
or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefit of Philippine nationals: Provided, That were a corporation
and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors, in order that the corporation shall be considered a
Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case
since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide
for it. They further claim that the grandfather rule "has been abandoned and is no
longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the
FIA admits the application of a "corporate layering" scheme of corporations.
Petitioners claim that the clear and unambiguous wordings of the statute preclude the
court from construing it and prevent the courts use of discretion in applying the law.
They said that the plain, literal meaning of the statute meant the application of the
control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned
must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora
and fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is
owned by such citizens. Such agreements may be for a period not exceeding twenty-
five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxxx
 CORPORATION CODE
The President may enter into agreements with Foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to the general
terms and conditions provided by law, based on real contributions to the economic
growth and general welfare of the country. In such agreements, the State shall
promote the development and use of local scientific and technical resources.
(emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different
types of agreements for the exploration, development, and utilization of natural
resources with entities who are deemed Filipino due to 60 percent ownership of
capital is pertinent to this case, since the issues are centered on the utilization of our
countrys natural resources or specifically, mining. Thus, there is a need to ascertain
the nationality of petitioners since, as the Constitution so provides, such agreements
are only allowed corporations or associations "at least 60 percent of such capital is
owned by such citizens."
It is apparent that it is the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution
and a statute, the Constitution will prevail. In this instance, specifically pertaining to
the provisions under Art. XII of the Constitution on National Economy and Patrimony,
Sec. 3 of the FIA will have no place of application. As decreed by the honorable
framers of our Constitution, the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino
interest in a corporation for purposes, among others, of determining compliance with
nationality requirements (the Investee Corporation). Such manner of computation is
necessary since the shares in the Investee Corporation may be owned both by
individual stockholders (Investing Individuals) and by corporations and partnerships
(Investing Corporation). The said rules thus provide for the determination of
nationality depending on the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the
nationality of the Investee Corporation. The first case is the liberal rule, later coined
by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states, (s)hares belonging
to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality. Under the liberal
Control Test, there is no need to further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation since a corporation which is at
least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the Investee Corporation must be
traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the
level of the Investing Corporation and added to the shares directly owned in the
Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule
or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity
ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino
and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in
other joint venture corporation which is either 60-40% Filipino-alien or the 59% less
Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
doubt, the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls
for the application of the grandfather rule since, as ruled by the POA and affirmed by
the OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as
found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners
Narra, McArthur and Tesoro, since their common investor, the 100% Canadian
corporationMBMI, funded them. However, petitioners also claim that there is
"doubt" only when the stockholdings of Filipinos are less than 60%. 43
The assertion of petitioners that "doubt" only exists when the stockholdings are less
than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted
in their petition, only made an example of an instance where "doubt" as to the
ownership of the corporation exists. It would be ludicrous to limit the application of the
said word only to the instances where the stockholdings of non-Filipino stockholders
are more than 40% of the total stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly strive to have "60% Filipino
Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate
schemes and layerings are utilized to circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Courts mind. To
determine, therefore, the actual participation, direct or indirect, of MBMI, the
grandfather rule must be used.
 CORPORATION CODE
In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it may apply the "grandfather rule."
SEPARATE PERSONALITY/PIERCING THE VEIL
2. SHRIMP SPECIALISTS, INC., vs. FUJI-TRIUMPH AGRI-INDUSTRIAL
CORPORATION
A corporation is vested by law with a personality separate and distinct from the people
comprising it. Ownership by a single or small group of stockholders of nearly all of the
capital stock of the corporation is not by itself a sufficient ground to disregard the
separate corporate personality. Thus, obligations incurred by corporate officers,
acting as corporate agents, are direct accountabilities of the corporation they
represent.43 In Uy v. Villanueva,44 the Court explained:
The general rule is that obligations incurred by the corporation, acting through its
directors, officers, and employees, are its sole liabilities. However, solidary liability
may be incurred, but only under the following exceptional circumstances:
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;
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;
When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation; or
When a director, trustee or officer is made, by specific provision of law, personally
liable for his corporate action.45
3. EDSA SHANGRI-LA HOTEL AND RESORT, INC vs. BF CORPORATION
The Court notes that the appellate court, by its affirmatory ruling, effectively
recognized the applicability of the doctrine on piercing the veil of the separate
corporate identity. Under the circumstances of this case, we cannot allow such
application. A corporation, upon coming to existence, is invested by law with a
personality separate and distinct from those of the persons composing it. Ownership
by a single or a small group of stockholders of nearly all of the capital stock of the
corporation is not, without more, sufficient to disregard the fiction of separate
corporate personality.23 Thus, obligations incurred by corporate officers, acting as
corporate agents, are not theirs but direct accountabilities of the corporation they
represent. Solidary liability on the part of corporate officers may at times attach, but
only under exceptional circumstances, such as when they act with malice or in bad
faith.24 Also, in appropriate cases, the veil of corporate fiction shall be disregarded
when the separate juridical personality of a corporation is abused or used to commit
fraud and perpetrate a social injustice, or used as a vehicle to evade obligations. 25 In
this case, no act of malice or like dishonest purpose is ascribed on petitioner Roxas-
del Castillo as to warrant the lifting of the corporate veil.
The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time
ESHRI defaulted in paying BF's monthly progress bill, was still a director, for, before
she could be held personally liable as corporate director, it must be shown that she
acted in a manner and under the circumstances contemplated in Sec. 31 of the
Corporation Code, which reads:
Section 31. Directors or trustees who willfully or knowingly vote for or
assent to patently unlawful acts of the corporation or acquire any
pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
(Emphasis ours.)
4. PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) vs NLRC
Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI
employees is whether they can attach the properties (specifically the Pantranco
properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims
against PNEI.
We answer in the negative.
The general rule is that a corporation has a personality separate and distinct from
those of its stockholders and other corporations to which it may be connected. 39 This
is a fiction created by law for convenience and to prevent injustice. 40 Obviously, PNB,
PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities.
The "separate personalities" of the first three corporations had been recognized by
this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty
and Holdings Corporation v. PNB41 where we stated that PNB was only a stockholder
of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor
was the owner of the Pantranco properties. Moreover, these corporations are
registered as separate entities and, absent any valid reason, we maintain their
separate identities and we cannot treat them as one.
 CORPORATION CODE
Neither can we merge the personality of PNEI with PNB simply because the latter
acquired the former. Settled is the rule that where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter is not, by that fact
alone, liable for the debts and liabilities of the transferor. 42
Lastly, while we recognize that there are peculiar circumstances or valid grounds that
may exist to warrant the piercing of the corporate veil, 43 none applies in the present
case whether between PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group.44 Another formulation of this doctrine is that when two
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or as
one and the same.45
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to
disregard the corporate veil when it is misused or when necessary in the interest of
justice. After all, the concept of corporate entity was not meant to promote unfair
objectives.
For one, in the said cases, the persons made liable after the companys cessation of
operations were the officers and agents of the corporation. The rationale is that, since
the corporation is an artificial person, it must have an officer who can be presumed to
be the employer, being the person acting in the interest of the employer. The
corporation, only in the technical sense, is the employer.49 In the instant case, what is
being made liable is another corporation (PNB) which acquired the debtor corporation
(PNEI).
Moreover, in the recent cases Carag v. National Labor Relations Commission50 and
McLeod v. National Labor Relations Commission,51 the Court explained the doctrine
laid down in AC Ransom relative to the personal liability of the officers and agents of
the employer for the debts of the latter. In AC Ransom, the Court imputed liability to
the officers of the corporation on the strength of the definition of an employer in Article
212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer
includes any person acting in the interest of an employer, directly or indirectly, but
does not include any labor organization or any of its officers or agents except when
acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the
Labor Code, by itself, does not make a corporate officer personally liable for the debts
of the corporation. It added that the governing law on personal liability.
Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the
corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation.54 In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made personally
liable for corporate liabilities.55
Assuming, for the sake of argument, that PNB may be held liable for the debts of
PNEI, petitioners still cannot proceed against the Pantranco properties, the same
being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a
subsidiary of PNB. The general rule remains that PNB-Madecor has a personality
separate and distinct from PNB. The mere fact that a corporation owns all of the
stocks of another corporation, taken alone, is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a subsidiarys separate
existence shall be respected, and the liability of the parent corporation as well as the
subsidiary will be confined to those arising in their respective businesses.57
In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parent-
corporation, to wit:
1. The parent corporation owns all or most of the capital stock of the
subsidiary;
2. The parent and subsidiary corporations have common directors or
officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital stock of the subsidiary
or otherwise causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of
the subsidiary;
7. The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation;
8. In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent
 CORPORATION CODE
corporation, or its business or financial responsibility is referred to as the
parent corporations own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in
the interest of the subsidiary, but take their orders from the parent
corporation;
11. The formal legal requirements of the subsidiary are not observed.
5. MANUEL C. ESPIRITU, ET. AL vs PETRON CORP., ET. AL
The only point left is the question of the liability of the stockholders and members of
the board of directors of Bicol Gas with respect to the charge of unlawfully filling up a
steel cylinder or tank that belonged to Petron. The Court of Appeals ruled that they
should be charged along with the Bicol Gas employees who were pointed to as
directly involved in overt acts constituting the offense.
Bicol Gas is a corporation. As such, it is an entity separate and distinct from the
persons of its officers, directors, and stockholders. It has been held, however, that
corporate officers or employees, through whose act, default or omission the
corporation commits a crime, may themselves be individually held answerable for the
crime.15
The "owners" of a corporate organization are its stockholders and they are to be
distinguished from its directors and officers. The petitioners here, with the exception
of Audie Llona, are being charged in their capacities as stockholders of Bicol Gas. But
the Court of Appeals forgets that in a corporation, the management of its business is
generally vested in its board of directors, not its stockholders. 17 Stockholders are
basically investors in a corporation. They do not have a hand in running the day-to-
day business operations of the corporation unless they are at the same time directors
or officers of the corporation. Before a stockholder may be held criminally liable for
acts committed by the corporation, therefore, it must be shown that he had knowledge
of the criminal act committed in the name of the corporation and that he took part in
the same or gave his consent to its commission, whether by action or inaction.
6. QUEENSLAND TOKYO COMMODITIES INC., ET. AL vs THOMAS GEORGE
Doctrine dictates that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it, such that, save for certain exceptions,
corporate officers who entered into contracts in behalf of the corporation cannot be
held personally liable for the liabilities of the latter. Personal liability of a corporate
director, trustee, or officer, along (although not necessarily) with the corporation, may
validly attach, as a rule, only when (1) he assents to a patently unlawful act of the
corporation, or when he is guilty of bad faith or gross negligence in directing its affairs,
or when there is a conflict of interest resulting in damages to the corporation, its
stockholders, or other persons; (2) he consents to the issuance of watered down
stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto; (3) he agrees to hold himself personally and
solidarily liable with the corporation; or (4) he is made by a specific provision of law
personally answerable for his corporate action.
7. ERIC GODFREY STANLEY LIVESEY, vs. BINSWANGER PHILIPPINES, INC.
ET. AL
It has long been settled that the law vests a corporation with a personality distinct and
separate from its stockholders or members. In the same vein, a corporation, by legal
fiction and convenience, is an entity shielded by a protective mantle and imbued by
law with a character alien to the persons comprising it. 43 Nonetheless, the shield is
not at all times impenetrable and cannot be extended to a point beyond its reason and
policy. Circumstances might deny a claim for corporate personality, under the
"doctrine of piercing the veil of corporate fiction."
Piercing the veil of corporate fiction is an equitable doctrine developed to address
situations where the separate corporate personality of a corporation is abused or
used for wrongful purposes.44 Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes, such as
to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud
or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions,45 in which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical. 46
8. GERARDO LANUZA, JR. ET AL. vs. BF CORPORATION, ET AL
A corporation is an artificial entity created by fiction of law. 76 This means that while it
is not a person, naturally, the law gives it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with a personality that is distinct and
separate from other persons including its stockholders, officers, directors,
representatives,77 and other juridical entities. The law vests in corporations
rights,powers, and attributes as if they were natural persons with physical existence
and capabilities to act on their own.78 For instance, they have the power to sue and
enter into transactions or contracts. Section 36 of the Corporation Code enumerates
some of a corporations powers, thus:
Section 36. Corporate powers and capacity. Every corporation incorporated under
this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate ofincorporation;
 CORPORATION CODE
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided
in this Code;
9. To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers asmay be essential or necessary to carry
out its purpose or purposes as stated in its articles of incorporation. (13a)
Because a corporations existence is only by fiction of law, it can only exercise its
rights and powers through itsdirectors, officers, or agents, who are all natural persons.
A corporation cannot sue or enter into contracts without them.
A consequence of a corporations separate personality is that consent by a
corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its representatives, are its
own. A stockholder, director, or representative does not become a party to a contract
just because a corporation executed a contract through that stockholder, director or
representative.
Hence, a corporations representatives are generally not bound by the terms of the
contract executed by the corporation. They are not personally liable for obligations
and liabilities incurred on or in behalf of the corporation.
As a general rule, therefore, a corporations representative who did not personally
bind himself or herself to an arbitration agreement cannot be forced to participate in
arbitration proceedings made pursuant to an agreement entered into by the
corporation. He or she is generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this
piercing the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a
corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues."85 It is also warranted in alter ego cases "where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation."86
When corporate veil is pierced, the corporation and persons who are normally treated
as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.
Among the persons who may be treatedas the corporation itself under certain
circumstances are its directors and officers. Section 31 of the Corporation Code
provides the instances when directors, trustees, or officers may become liable for
corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been
reposed inhim in confidence, as to which equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation. (n)
 CORPORATION CODE
Based on the above provision, a director, trustee, or officer of a corporation may be
made solidarily liable with it for all damages suffered by the corporation, its
stockholders or members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a
patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in
directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict
with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) "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";87
b) "When a director, trustee or officer has contractually agreed or stipulated
to hold himself personally and solidarily liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action."89
When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these
persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction should be
pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts or
tribunals must first determine whether circumstances exist towarrant the courts or
tribunals to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made by one
tribunal or court in a proceeding participated in by all parties involved, including
current representatives of the corporation, and those persons whose personalities are
impliedly the sameas the corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for
corporate acts. The corporations distinct personality is disregarded, and the
corporation is seen as a mere aggregation of persons undertaking a business under
the collective name of the corporation.
Hence, when the directors, as in this case, are impleaded in a case against a
corporation, alleging malice orbad faith on their part in directing the affairs of the
corporation, complainants are effectively alleging that the directors and the
corporation are not acting as separate entities. They are alleging that the acts or
omissions by the corporation that violated their rights are also the directors acts or
omissions.90 They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate
veilbe pierced because the cause of action between the corporation and the directors
is the same.
9. IRENE MARTEL FRANCISCO, vs. NUMERIANO MALLEN, JR.
In Santos v. National Labor Relations Commission,9 the Court held that "A corporation
is a juridical entity with legal personality separate and distinct from those acting for
and in its behalf and, in general, from the people comprising it. The rule is that
obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities."10
To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer
was guilty of gross negligence or bad faith;11 and (2) complainant must clearly
and convincingly prove such unlawful acts, negligence or bad faith. 12
xxxx
To hold a director personally liable for debts of the corporation, and thus pierce
the veil of corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed. Bad faith does
not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad
faith means breach of a known duty through some ill motive or interest. Bad faith
partakes of the nature of fraud.
In McLeod v. NLRC,15 the Court did not hold a director, an officer, and other
corporations personally liable for corporate obligations of the employer because the
second requisite was lacking. The Court held:
A corporation is an artificial being invested by law with a personality separate and
distinct from that of its stockholders and from that of other corporations to which it
may be connected.
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation.
 CORPORATION CODE
To disregard the separate juridical personality of a corporation, the wrongdoing
must be established clearly and convincingly. It cannot be
presumed.16 (Emphasis supplied)
In Lowe, Inc. v. Court of Appeals,17 the Court did not hold the officers personally liable
for corporate obligations because the second requisite was lacking, thus:
It is settled that in the absence of malice, bad faith, or specific provision of law, a
director or an officer of a corporation cannot be made personally liable for corporate
liabilities.
xxxx
10. PACIFIC REHOUSE CORPORATION vs. COURT OF APPEALS
The Court already ruled in Kukan International Corporation v. Reyes49 that
compliance with the recognized modes of acquisition of jurisdiction cannot be
dispensed with even in piercing the veil of corporate fiction, to wit:
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability; it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over
a party not impleaded in a case. Elsewise put, a corporation not impleaded in a
suit cannot be subject to the courts process of piercing the veil of its corporate
fiction. In that situation, the court has not acquired jurisdiction over the corporation
and, hence, any proceedings taken against that corporation and its property would
infringe on its right to due process. Aguedo Agbayani, a recognized authority on
Commercial Law, stated as much:
"23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes
to play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied, based
on the evidence presented, it is imperative that the court must first have jurisdiction
over the corporation. x x x"50 (Citations omitted)
"The question of whether one corporation is merely an alter ego of another is purely
one of fact. So is the question of whether a corporation is a paper company, a sham
or subterfuge or whether petitioner adduced the requisite quantum of evidence
warranting the piercing of the veil of respondents corporate entity."
"It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other 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 justice. So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat the labor laws, this
separate personality of the corporation may be disregarded or the veil of corporate
fiction pierced. This is true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation." 61
"Where one corporation is so organized and controlled and its affairs are conducted
so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made."62
The Court has laid down a three-pronged control test to establish when the alter ego
doctrine should be operative:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must [have] proximately caused
the injury or unjust loss complained of.63
The absence of any one of these elements prevents piercing the corporate veil in
applying the instrumentality or alter ego doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendants
relationship to that operation.64 Hence, all three elements should concur for the alter
ego doctrine to be applicable.
11. HEIRS OF FE TAN UY , ET AL vs. INTERNATIONAL EXCHANGE BANK, ET
AL
Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its directors, officers and
 CORPORATION CODE
employees, are its sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the
corporation.24 Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate
issues.25 This is consistent with the provisions of the Corporation Code of the
Philippines, which states:
Sec. 31. Liability of directors, trustees or officers. Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
Solidary liability will then attach to the directors, officers or employees of the
corporation in certain circumstances, such as:
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; and (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.26
Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant must clearly and convincingly prove such unlawful acts, negligence
or bad faith.27
Under a variation of the doctrine of piercing the veil of corporate fiction, when two
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or
one and the same.39
While the conditions for the disregard of the juridical entity may vary, the following are
some probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:40
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.41
12. PNB vs HYDRO RESOURCES CONTRACTORS CORP
A corporation is an artificial entity created by operation of law. It possesses the right
of succession and such powers, attributes, and properties expressly authorized by
law or incident to its existence.37 It has a personality separate and distinct from that of
its stockholders and from that of other corporations to which it may be
connected.38 As a consequence of its status as a distinct legal entity and as a result
of a conscious policy decision to promote capital formation, 39 a corporation incurs its
own liabilities and is legally responsible for payment of its obligations. 40 In other
words, by virtue of the separate juridical personality of a corporation, the corporate
debt or credit is not the debt or credit of the stockholder. 41 This protection from liability
for shareholders is the principle of limited liability.42
Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.43
However, the rule is that a court should be careful in assessing the milieu where the
doctrine of the corporate veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application. 44 Thus, cutting through the
corporate cover requires an approach characterized by due care and caution:
Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed. x x
x.45 (Emphases supplied; citations omitted.)
Sarona v. National Labor Relations Commission 46 has defined the scope of
application of the doctrine of piercing the corporate veil:
 CORPORATION CODE
The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. (Citation omitted.)
In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality theory,
namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused
the injury or unjust loss complained of.50 (Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. 51 It
examines the parent corporations relationship with the subsidiary. 52 It inquires
whether a subsidiary corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent corporation
such that its separate existence as a distinct corporate entity will be ignored. 53 It
seeks to establish whether the subsidiary corporation has no autonomy and the
parent corporation, though acting through the subsidiary in form and appearance, "is
operating the business directly for itself."54
The second prong is the "fraud" test. This test requires that the parent corporations
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful.55 It
examines the relationship of the plaintiff to the corporation. 56 It recognizes that
piercing is appropriate only if the parent corporation uses the subsidiary in a way that
harms the plaintiff creditor.57 As such, it requires a showing of "an element of injustice
or fundamental unfairness."58
The third prong is the "harm" test. This test requires the plaintiff to show that the
defendants control, exerted in a fraudulent, illegal or otherwise unfair manner toward
it, caused the harm suffered.59 A causal connection between the fraudulent conduct
committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it will have been treated unjustly by the
defendants exercise of control and improper use of the corporate form and, thereby,
suffer damages.60
To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing the corporate veil. 61
In applying the alter ego doctrine, the courts are concerned with reality and not form,
with how the corporation operated and the individual defendants relationship to that
operation.62 With respect to the control element, it refers not to paper or formal control
by majority or even complete stock control but actual control which amounts to "such
domination of finances, policies and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own, and is but a conduit for its
principal."63 In addition, the control must be shown to have been exercised at the time
the acts complained of took place.64
13. KUKAN INTL CORP vs HON. AMOR REYES ET. AL
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
Commission,32 the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is that when two
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or as
one and the same.
Whether the separate personality of the corporation should be pierced hinges
on obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to
disregard the corporate veil when it is misused or when necessary in the interest of
justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories,
Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
 CORPORATION CODE
piercing the veil of corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must
be established clearly and convincingly. It cannot be presumed. 33 (Emphasis
supplied.)
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability;34 it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over
a party not impleaded in a case. Elsewise put, a corporation not impleaded in a suit
cannot be subject to the courts process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction over the corporation and, hence,
any proceedings taken against that corporation and its property would infringe on its
right to due process. Aguedo Agbayani, a recognized authority on Commercial Law,
stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have jurisdiction over the
corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of piercing the veil of corporate
entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service.
As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company37 explains why:
A corporation is an artificial being created by operation of law. x x x It has a
personality separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from an erroneous
application.
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
and convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate
a fraud or like wrongdoings. To be sure, the Court has, on numerous
occasions,38applied the principle where a corporation is dissolved and its assets are
transferred to another to avoid a financial liability of the first corporation with the result
that the second corporation should be considered a continuation and successor of the
first entity.
In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to
avoid a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such
that the second corporation should be considered as a continuation and
successor of the first corporation.
14. TIMOTEO SARONA vs NLRC, ROYALE SECURITY AGENCY, ET AL
Royale is a continuation or successor of Sceptre.
A corporation is an artificial being created by operation of law. It possesses the right
of succession and such powers, attributes, and properties expressly authorized by
law or incident to its existence. It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which it may be
related. This is basic.45
 CORPORATION CODE
Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.46
Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of rights. The wrongdoing
must be clearly and convincingly established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result from an erroneous application.47
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to
disregard the corporate veil when it is misused or when necessary in the interest of
justice. After all, the concept of corporate entity was not meant to promote unfair
objectives.48
The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.49
As ruled in Prince Transport, Inc., et al. v. Garcia, et al.,55 it is the act of hiding behind
the separate and distinct personalities of juridical entities to perpetuate fraud, commit
illegal acts, evade ones obligations that the equitable piercing doctrine was
formulated to address and prevent:
A settled formulation of the doctrine of piercing the corporate veil is that when two
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that these two entities are distinct and treat them as identical or as one
and the same.
15. VIVIAN T. RAMIREZ, ET AL vs MAR FISHING CO, INC
At the fore, the question of whether one corporation is merely an alter ego of another
is purely one of fact generally beyond the jurisdiction of this Court.35 In any case,
given only these bare reiterations, this Court sustains the ruling of the LA as affirmed
by the NLRC that Miramar and Mar Fishing are separate and distinct entities, based
on the marked differences in their stock ownership. 36 Also, the fact that Mar Fishings
officers remained as such in Miramar does not by itself warrant a conclusion that the
two companies are one and the same. As this Court held in Sesbreo v. Court of
Appeals, the mere showing that the corporations had a common director sitting in all
the boards without more does not authorize disregarding their separate juridical
personalities.37
Neither can the veil of corporate fiction between the two companies be pierced by the
rest of petitioners submissions, namely, the alleged take-over by Miramar of Mar
Fishings operations and the evident similarity of their businesses. At this point, it
bears emphasizing that since piercing the veil of corporate fiction is frowned upon,
those who seek to pierce the veil must clearly establish that the separate and distinct
personalities of the corporations are set up to justify a wrong, protect a fraud, or
perpetrate a deception.38 This, unfortunately, petitioners have failed to do. In Indophil
Textile Mill Workers Union vs. Calica, we ruled thus:39
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic,
alleging that the creation of the corporation is a devi[c]e to evade the application of
the CBA between petitioner Union and private respondent company. While we do not
discount the possibility of the similarities of the businesses of private respondent and
Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting
the relief sought. The fact that the businesses of private respondent and Acrylic are
related, that some of the employees of the private respondent are the same persons
manning and providing for auxiliary services to the units of Acrylic, and that the
physical plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of the
corporate veil of Acrylic. (Emphasis supplied.)
16. CHINA BANKING CORPORATION vs DYNE SEM ELECTRONICS CORP
The general rule is that a corporation has a personality separate and distinct from that
of its stockholders and other corporations to which it may be connected. 14 This is a
fiction created by law for convenience and to prevent injustice.15
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may
exist to warrant the disregard of its independent being and the piercing of the
corporate veil.16 In Martinez v. Court of Appeals,17 we held:
The veil of separate corporate personality may be lifted when such
personality is used to defeat public convenience, justify wrong, protect fraud
or defend crime; or used as a shield to confuse the legitimate issues; or
when the corporation is merely an adjunct, a business conduit or an alter
ego of another corporation or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation; or when
the corporation is used as a cloak or cover for fraud or illegality, or to work
injustice, or where necessary to achieve equity or for the protection of the
creditors. In such cases, the corporation will be considered as a mere
 CORPORATION CODE

association of persons. The liability will directly attach to the stockholders or

to the other corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must

be proven clearly and convincingly.18

RESIDENCE OF A CORPORATION

17. HYATT ELEVATORS INC. vs GOLDSTAR ELEVATORS PHILS.

The resolution of this case rests upon a proper understanding of Section 2 of Rule 4
of the 1997 Revised Rules of Court:

"Sec. 2. Venue of personal actions. All other actions may be commenced and tried
where the plaintiff or any of the principal plaintiff resides, or where the defendant or
any of the principal defendant resides, or in the case of a non-resident defendant
where he may be found, at the election of the plaintiff."

Since both parties to this case are corporations, there is a need to clarify the meaning
of "residence." The law recognizes two types of persons: (1) natural and (2) juridical.
Corporations come under the latter in accordance with Article 44(3) of the Civil Code. 8

Residence is the permanent home -- the place to which, whenever absent for
business or pleasure, one intends to return.9 Residence is vital when dealing with
venue.10 A corporation, however, has no residence in the same sense in which this
term is applied to a natural person. This is precisely the reason why the Court
in Young Auto Supply Company v. Court of Appeals 11 ruled that "for practical
purposes, a corporation is in a metaphysical sense a resident of the place where its
principal office is located as stated in the articles of incorporation."12 Even before this
ruling, it has already been established that the residence of a corporation is the place
where its principal office is established.13

This Court has also definitively ruled that for purposes of venue, the term "residence"
is synonymous with "domicile."14 Correspondingly, the Civil Code provides:

"Art. 51. When the law creating or recognizing them, or any other provision does not
fix the domicile of juridical persons, the same shall be understood to be the place
where their legal representation is established or where they exercise their principal
functions."15

It now becomes apparent that the residence or domicile of a juridical person is fixed
by "the law creating or recognizing" it. Under Section 14(3) of the Corporation Code,
the place where the principal office of the corporation is to be located is one of the
required contents of the articles of incorporation, which shall be filed with the
Securities and Exchange Commission (SEC).
 CORPORATION CODE

CLAIM FOR MORAL DAMAGES
18. ABS-CBN BROADCASTING CORPORATION, vs. CA
Under Corporation Code,46 unless otherwise provided by said Code, corporate
powers, such as the power; to enter into contracts; are exercised by the Board of
Directors. However, the Board may delegate such powers to either an executive
committee or officials or contracted managers. The delegation, except for the
executive committee, must be for specific purposes, 47 Delegation to officers makes
the latter agents of the corporation; accordingly, the general rules of agency as to the
bindings effects of their acts would apply. For such officers to be deemed fully
clothed by the corporation to exercise a power of the Board, the latter must specially
authorize them to do so.
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil
Code. Article 2217 thereof defines what are included in moral damages, while Article
2219 enumerates the cases where they may be recovered, Article 2220 provides that
moral damages may be recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only
under item (10) of Article 2219, thereof which reads:
recoverable in criminal cases as part of the civil liability when the crime was
committed with one or more aggravating circumstances; in quasi-contracts, if the
defendant acted with gross negligence; and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary
damages can only be based on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of
a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of
prejudicing or injuring another. Article 20 speaks of the general sanction for all other
provisions of law which do not especially provide for their own sanction; while Article
21 deals with acts contra bonus mores, and has the following elements; (1) there is
an act which is legal, (2) but which is contrary to morals, good custom, public order, or
public policy, and (3) and it is done with intent to injure.
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad
faith implies a conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity. Such must be substantiated by evidence.

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered. and not to impose a penalty on the wrongdoer. The award is
not meant to enrich the complainant at the expense of the defendant, but to enable
the injured party to obtain means, diversion, or amusements that will serve to obviate
then moral suffering he has undergone. It is aimed at the restoration, within the limits
of the possible, of the spiritual status quo ante, and should be proportionate to the
suffering inflicted. Trial courts must then guard against the award of exorbitant
damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial
court.

The award of moral damages cannot be granted in favor of a corporation because,

being an artificial person and having existence only in legal contemplation, it has no
feelings, no emotions, no senses, It cannot, therefore, experience physical suffering
and mental anguish, which call be experienced only by one having a nervous
system. The statement in People v. Manero and Mambulao Lumber Co. v. PNB that
a corporation may recover moral damages if it "has a good reputation that is debased,
resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of
the Civil Code. These are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated or compensatory damages. They are
 CORPORATION CODE

DOCTRINE OF APPARENT AUTHORITY
19. ADVANCE PAPER CORP, ET. AL vs ARMA TRADERS CORP ET. AL
Arma Traders is liable to pay the loans on the basis of the doctrine of apparent
authority.
The doctrine of apparent authority provides that a corporation will be estopped from
denying the agents authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the
public as possessing the power to do those acts.76 The doctrine of apparent authority
does not apply if the principal did not commit any acts or conduct which a third party
knew and relied upon in good faith as a result of the exercise of reasonable prudence.
Moreover, the agents acts or conduct must have produced a change of position to
the third partys detriment.77
In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals,79 we ruled that
the doctrine of apparent authority is applied when the petitioner, through its president
Antonio Punsalan Jr., entered into the First Contract without first securing board
approval. Despite such lack of board approval, petitioner did not object to or repudiate
said contract, thus "clothing" its president with the power to bind the corporation.
"Inasmuch as a corporate president is often given general supervision and control
over corporate operations, the strict rule that said officer has no inherent power to act
for the corporation is slowly giving way to the realization that such officer has certain
limited powers in the transaction of the usual and ordinary business of the
corporation."80 "In the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual duties."81

In Inter-Asia Investment Industries v. Court of Appeals,78 we explained:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and
responsibility to decide whether the corporation should enter into a contract that will
bind the corporation is lodged in the board, subject to the articles of incorporation,
bylaws, or relevant provisions of law. However, just as a natural person who may
authorize another to do certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers, committees or agents.
The authority of such individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or impliedly by
habit, custom or acquiescence in the general course of business, viz.:

A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon
him, and this includes powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers
added by custom and usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred.

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority to
act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporate officer with
the power to bind the corporation. [emphases and underscores ours]
 CORPORATION CODE
TRUST FUND DOCTRINE
20. DONNINA C. HALLEY vs PRINTWELL
Settled is the rule that when the veil of corporate fiction is used as a means of
perpetrating fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievements or perfection of monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers
and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals (First
Philippine International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under
this doctrine, the corporate existence may be disregarded where the entity is formed
or used for non-legitimate purposes, such as to evade a just and due obligations or to
justify wrong (Claparols vs. CIR, 65 SCRA 613).
Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine,
under which corporate debtors might look to the unpaid subscriptions for the
satisfaction of unpaid corporate debts, stating thus:
It is an established doctrine that subscription to the capital stock of a corporation
constitute a fund to which creditors have a right to look up to for satisfaction of their
claims, and that the assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its debts (PNB vs.
Bitulok Sawmill, 23 SCRA 1366).
Premised on the above-doctrine, an inference could be made that the funds, which
consists of the payment of subscriptions of the stockholders, is where the creditors
can claim monetary considerations for the satisfaction of their claims. If these funds
which ought to be fully subscribed by the stockholders were not paid or remain an
unpaid subscription of the corporation then the creditors have no other recourse to
collect from the corporation of its liability.
Moreover, a corporation has no power to release a subscription or its capital stock,
without valuable consideration for such releases, and as against creditors, a reduction
of the capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the Articles of Incorporation. (PNB vs.
Bitulok Sawmill, 23 SCRA 1366).
Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers,26such separate and distinct personality is merely
a fiction created by law for the sake of convenience and to promote the ends of
justice.27The corporate personality may be disregarded, and the individuals
composing the corporation will be treated as individuals, if the corporate entity is
being used as a cloak or cover for fraud or illegality;as a justification for a wrong; as
an alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.28 As a general rule, a corporation is looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. Thus,the courts always
presume good faith, andfor that reason accord prime importance to the separate
personality of the corporation, disregarding the corporate personality only after the
wrongdoing is first clearly and convincingly established.29It thus behooves the courts
to be careful in assessing the milieu where the piercing of the corporate veil shall be
done.30
Unpaid creditor may satisfy its claim from unpaid subscriptions;stockholders
must prove full payment oftheir subscriptions
The trust fund doctrineenunciates a xxx rule that the property of a corporation is a
trust fund for the payment of creditors, but such property can be called a trust fund
only by way of analogy or metaphor. As between the corporation itself and its
creditors it is a simple debtor, and as between its creditors and stockholders its assets
are in equity a fund for the payment of its debts.32
The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,33was adopted in our jurisdiction in Philippine Trust Co. v. Rivera,34where
thisCourt declared that:
It is established doctrine that subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802)
xxx35
We clarify that the trust fund doctrineis not limited to reaching the stockholders
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts.36All assets and
property belonging to the corporation held in trust for the benefit of creditors thatwere
distributed or in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.
Also, under the trust fund doctrine,a corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part,37 without a valuable consideration,38 or fraudulently, to the
prejudice of creditors.39The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the satisfaction
of its debt.40To make out a prima facie case in a suit against stockholders of an
insolvent corporation to compel them to contribute to the payment of its debts by
making good unpaid balances upon their subscriptions, it is only necessary to
establish that thestockholders have not in good faith paid the par value of the stocks
of the corporation.41
Liability of stockholders for corporate debts isup to the extent of their unpaid
subscription
 CORPORATION CODE
CAPITAL
21. WILSON P. GAMBOA, Petitioner, vs. FINANCE SECRETARY MARGARITO B.
TEVES, ET AL
The crux of the controversy is the definition of the term "capital." Does the term
"capital" in Section 11, Article XII of the Constitution refer to common shares or to the
total outstanding capital stock (combined total of common and non-voting preferred
shares)?
The evident purpose of the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national interest. 27 This specific
provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to "conserve and develop our
patrimony"28 and ensure "a self-reliant and independent national
economy effectively controlled by Filipinos."29
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to
be a stockholder of record of PLDT, contended that the term "capital" in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:
The forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common
shares, considering that it is through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations and
restrictions on fully nationalized and partially nationalized activities is for Filipino
nationals to be always in control of the corporation undertaking said activities.
Otherwise, if the Trial Courts ruling upholding respondents arguments were to be
given credence, it would be possible for the ownership structure of a public utility
corporation to be divided into one percent (1%) common stocks and ninety-nine
percent (99%) preferred stocks. Following the Trial Courts ruling adopting
respondents arguments, the common shares can be owned entirely by foreigners
thus creating an absurd situation wherein foreigners, who are supposed to be minority
shareholders, control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the
beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock entitled to vote,
i.e., common shares. Furthermore, ownership of record of shares will not suffice but it
must be shown that the legal and beneficial ownership rests in the hands of Filipino
citizens.
In this connection, the Corporation Code which was already in force at the time the
present (1987) Constitution was drafted defined outstanding capital stock as
follows:
Section 137. Outstanding capital stock defined. The term "outstanding capital
stock", as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.
We agree with petitioner and petitioners-in-intervention. The term "capital" in Section
11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares,41 and not
to the total outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par value as may be provided for in
the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to
its creditors in respect thereto: Provided; That shares without par value may not be
 CORPORATION CODE

issued for a consideration less than the value of five (5.00) pesos per share:
Provided, further, That the entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be available for distribution
as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. 45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47
Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term "capital" in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term "capital" shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to vote in
the election of directors. In short, the term "capital" in Section 11, Article XII of
the Constitution refers only to shares of stock that can vote in the election of
directors.
This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, "capital" refers to
the voting stock or controlling interest of a corporation

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or

other corporations;

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of directors and on other
 CORPORATION CODE
BOARD OF DIRECTORS/POWER OF THE BOD
22. VALLE VERDE COUNTRY CLUB, INC. vs. VICTOR AFRICA
In his nullification complaint before the RTC, Africa alleged that the
election of Roxas was contrary to Section 29, in relation to Section 23, of the
Corporation Code of the Philippines (Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified.
xxx
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders
or members or by expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only for the unexpired term of his predecessor in office. xxx.
[Emphasis supplied.]
To repeat, the issue for the Court to resolve is whether the remaining
directors of a corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director.
The resolution of this legal issue is significantly hinged on the determination of what
constitutes a directors term of office.
The holdover period is not part of the term of office of a member of
the board of directors.
The word term has acquired a definite meaning in jurisprudence. In
several cases, we have defined term as the time during which the officer may
claim to hold the office as of right, and fixes the interval after which the several
incumbents shall succeed one another. The term of office is not affected by the
holdover. The term is fixed by statute and it does not change simply because the
office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and
has failed to qualify.
Term is distinguished from tenure in that an officers tenure represents
the term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or beyond the
power of the incumbent.
Based on the above discussion, when Section 23 of the Corporation Code declares
that the board of directors shall hold office for one (1) year until their successors are
elected and qualified, we construe the provision to mean that the term of the
members of the board of directors shall be only for one year; their term expires
one year after election to the office. The holdover period that time from the lapse of
one year from a members election to the Board and until his successors election and
qualification is not part of the directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors continues to serve in a holdover capacity,
it implies that the office has a fixed term, which has expired, and the incumbent is
holding the succeeding term
The powers of the corporations board of directors emanate from its
stockholders
The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of
the corporation from them. The board of directors, in drawing to themselves the
powers of the corporation, occupies a position of trusteeship in relation to the
stockholders, in the sense that the board should exercise not only care and diligence,
but utmost good faith in the management of corporate affairs.
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.
This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations
board of directors is caused not by the expiration of a members term, the successor
so elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office. The law has authorized the remaining members of the board to
fill in a vacancy only in specified instances, so as not to retard or impair the
corporations operations; yet, in recognition of the stockholders right to elect the
members of the board, it limited the period during which the successor shall serve
only to the unexpired term of his predecessor in office.
It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the directors term of office. When a vacancy is created
by the expiration of a term, logically, there is no more unexpired term to speak of.
Hence, Section 29 declares that it shall be the corporations stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a members term.
 CORPORATION CODE

23. FILIPINAS PORT SERVICES vs. GO

The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held by
a board of directors. Thus, with the exception only of some powers expressly granted
by law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws
and relevant provisions of law. Verily, the authority of the board of directors is
restricted to the management of the regular business affairs of the corporation, unless
more extensive power is expressly conferred.
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.

The raison detre behind the conferment of corporate powers on the board of
directors is not lost on the Court. Indeed, the concentration in the board of the powers
of control of corporate business and of appointment of corporate officers and
managers is necessary for efficiency in any large organization. Stockholders are too
numerous, scattered and unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is for the stockholders to
choose the directors who shall control and supervise the conduct of corporate
business.

The election of officers of a corporation is provided for under Section 25 of the Code
which reads:

Sec. 25. Corporate officers, quorum. Immediately after their election, the
directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. (Emphasis
supplied.)

Under the Corporation Code, where a corporation is an injured party, its

power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit in behalf of the corporation
in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary action
would be futile because they are the ones to be sued, or because they hold control of
the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal party.

Besides, the requisites before a derivative suit can be filed by a stockholder are
present in this case, to wit:
 CORPORATION CODE
CORPORATE OFFICERS
24. MATLING INDL AND COMMERCIAL CORP., ET. AL. vs. COROS
The decisive issue is whether the respondent was a corporate officer of Matling or
not.
Section 25 of the Corporation Code provides:
Section 25. Corporate officers, quorum.--Immediately after their election, the directors
of a corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be held concurrently by the
same person, except that no one shall act as president and secretary or as president
and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined
on them by law and the by-laws of the corporation. Unless the articles of incorporation
or the by-laws provide for a greater majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall require the vote of a
majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy
at board meetings.
Conformably with Section 25, a position must be expressly mentioned in
the By-Laws in order to be considered as a corporate office. Thus, the creation of an
office pursuant to or under a By-Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama, the first ruling on the matter, held that
the only officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:
An office is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and
generally is employed not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid
to such employee.
The criteria for distinguishing between corporate officers who may be ousted from
office at will, on one hand, and ordinary corporate employees who may only be
terminated for just cause, on the other hand, do not depend on the nature of the
services performed, but on the manner of creation of the office. In the respondents
case, he was supposedly at once an employee, a stockholder, and a Director of
Matling.
Also, an intra-corporate controversy is one which arises between a stockholder and
the corporation. There is no distinction, qualification or any exemption whatsoever.
The provision is broad and covers all kinds of controversies between stockholders
and corporations.
In order to determine whether a dispute constitutes an intra-corporate controversy or
not, the Court considers two elements instead, namely: (a) the status or relationship
of the parties; and (b) the nature of the question that is the subject of their
controversy. This was our thrust in Viray v. Court of Appeals:
The establishment of any of the relationships mentioned above will not necessarily
always confer jurisdiction over the dispute on the SEC to the exclusion of regular
courts. The statement made in one case that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in determining which body has
jurisdiction over a case would be to consider not only the status or relationship of the
parties but also the nature of the question that is the subject of their controversy.
Not every conflict between a corporation and its stockholders involves
corporate matters that only the SEC can resolve in the exercise
of its adjudicatory or quasi-judicial powers. If, for example, a
person leases an apartment owned by a corporation of which
he is a stockholder, there should be no question that a
complaint for his ejectment for non-payment of rentals would
still come under the jurisdiction of the regular courts and not of
the SEC. By the same token, if one person injures another in a
vehicular accident, the complaint for damages filed by the
victim will not come under the jurisdiction of the SEC simply
because of the happenstance that both parties are
stockholders of the same corporation. A contrary interpretation
would dissipate the powers of the regular courts and distort the
meaning and intent of PD No. 902-A.
In another case, Mainland Construction Co., Inc. v. Movilla,
Court reiterated these determinants thuswise:
In order that the SEC (now the regular courts) can take cognizance of a
case, the controversy must pertain to any of the following relationships:
a) between the corporation, partnership or association and the public;
b) between the corporation, partnership or association and its
stockholders, partners, members or officers;
c) between the corporation, partnership or association and the State as
far as its franchise, permit or license to operate is concerned; and
d) among the stockholders, partners or associates themselves.
 CORPORATION CODE
25. MARC II MARKETING, INC. vs. JOSON
Under Section 5 of Presidential Decree No. 902-A, intra-corporate
controversies are those controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation,
partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity. It also includes controversies in the
election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.
Accordingly, in determining whether the SEC (now the RTC) has
jurisdiction over the controversy, the status or relationship of the parties and the
nature of the question that is the subject of their controversy must be taken into
consideration.
In Easycall Communications Phils., Inc. v. King, this Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those officers of a
corporation who are given that character either by the Corporation Code or by
the corporations by-laws. Section 25 of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3)
treasurer; and (4) such other officers as may be provided for in the by-laws.
The aforesaid Section 25 of the Corporation Code, particularly the phrase
such other officers as may be provided for in the by-laws, has been clarified and
elaborated in this Courts recent pronouncement in Matling Industrial and Commercial
Corporation v. Coros, where it held, thus:
Conformably with Section 25, a position must
be expressly mentioned in the [b]y-[l]aws in order to be
considered as a corporate office. Thus, the creation of an
office pursuant to or under a [b]y-[l]aw enabling
provision is not enough to make a position a corporate
office. [In] Guerrea v. Lezama [citation omitted] the first ruling
on the matter, held that the only officers of a corporation
were those given that character either by the Corporation
Code or by the [b]y-[l]aws; the rest of the corporate
officers could be considered only as employees or
subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King [citation omitted]:
An "office" is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and
generally is employed not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid
to such employee.
xxxx
This interpretation is the correct application of Section 25 of the Corporation
Code, which plainly states that the corporate officers are the President, Secretary,
Treasurer and such other officers as may be provided for in the [b]y-[l]aws.
Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code
or by the corporations [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of Directors to
circumvent the constitutionally guaranteed security of tenure of the employee by the
expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of Section 25 of
the Corporation Code in its Opinion dated November 25, 1993 [citation omitted], to
wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever
are the corporate officers enumerated in the by-laws are the exclusive Officers of the
corporation and the Board has no power to create other Offices without amending first
the corporate [b]y-laws. However, the Board may create appointive positions other
than the positions of corporate Officers, but the persons occupying such positions are
not considered as corporate officers within the meaning of Section 25 of the
Corporation Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and duties
are to be determined by the Board of Directors/Trustees. [Emphasis supplied.]
26. LESLIE OKOL vs. SLIMMERS WORLD INTERNATIONAL, BEHAVIOR
MODIFICATIONS, INC., and RONALD JOSEPH MOY
The issue revolves mainly on whether petitioner was an employee or a corporate
officer of Slimmers World. Section 25 of the Corporation Code enumerates corporate
officers as the president, secretary, treasurer and such other officers as may be
provided for in the by-laws. In Tabang v. NLRC, we held that an office is created by
the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee usually occupies no office and
generally is employed not by action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid
to such employee.
27. GLORIA V. GOMEZ vs. PNOC DEVELOPMENT AND MANAGEMENT
CORPORATION (PDMC) (formerly known as FILOIL DEVELOPMENT
AND MANAGEMENT CORPORATION [FDMC])
Ordinary company employees are generally employed not by action of the directors
and stockholders but by that of the managing officer of the corporation who also
determines the compensation to be paid such employees. Corporate officers, on the
 CORPORATION CODE
other hand, are elected or appointed by the directors or stockholders, and are those
who are given that character either by the Corporation Code or by the corporations
by-laws.
But the relationship of a person to a corporation, whether as officer or agent or
employee, is not determined by the nature of the services he performs but by the
incidents of his relationship with the corporation as they actually exist.
LIABILITY OF CORPORATE OFFICER
28. RODOLFO LABORTE and PHILIPPINE TOURISM AUTHORITY, vs.
PAGSANJAN TOURISM CONSUMERS COOPERATIVE, ET. AL
The PTA is a government owned and controlled corporation which was mandated to
administer tourism zones. Based on this mandate, it was the PTAs obligation to
adopt a comprehensive program and project to rehabilitate and upgrade the facilities
of the PTA Complex as shown in Annexes "H-2" to "H-4" of the petition. The Court
finds that there was indeed a renovation of the Pagsanjan Administration Complex
which was sanctioned by the PTA main office; and such renovation was done in good
faith in performance of its mandated duties as tourism administrator. In the exercise of
its management prerogative to determine what is best for the said agency, the PTA
had the right to terminate at any moment the PTCCs operations of the restaurant and
the boat ride services since the PTCC has no contract, concession or franchise from
the PTA to operate the above-mentioned businesses. As shown by the records, the
operation of the restaurant and the boat ride services was merely tolerated, in order to
extend financial assistance to its PTA employee-members who are members of the
then fledging PTCC.
With respect to Laborte's liability in his official and personal capacity, the Court finds
that Laborte was simply implementing the lawful order of the PTA Management. As a
general rule the officer cannot be held personally liable with the corporation, whether
civilly or otherwise, for the consequences of his acts, if acted for and in behalf of the
corporation, within the scope of his authority and in good faith.73
29. MAM REALTY DEVELOPMENT CORPORATION and MANUEL
CENTENO vs. NATIONAL LABOR RELATIONS COMMISSION and
CELSO B. BALBASTRO
A prime focus in the instant petition is the question of when to hold a director or officer
of a corporation solidarily obligated with the latter for a corporate liability.
A corporation, being a juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate agents, are not
theirs but the direct accountabilities of the corporation they represent. True, solidary
liabilities may at times be incurred but only when exceptional circumstances warrant
such as, generally, in the following cases:9
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. 11
3. When a director, trustee or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the Corporation.
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action.13
30. HARPOON MARINE SERVICES, INC. and JOSE LIDO T. ROSIT vs.
FERNAN H. FRANCISCO
As held in the case of MAM Realty Development Corporation v. National Labor
Relations Commission, obligations incurred by [corporate officers], acting as such
corporate agents, are not theirs but the direct accountabilities of the corporation they
represent. As such, they should not be generally held jointly and solidarily liable with
the corporation. The Court, however, cited circumstances when solidary liabilities may
be imposed, as exceptions:
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 the director or officer has consented to the issuance of watered stock
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.
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action.
The general rule is grounded on the theory that a corporation has a legal personality
separate and distinct from the persons comprising it.To warrant the piercing of the veil
of corporate fiction, the officers bad faith or wrongdoing must be established clearly
and convincingly as [b]ad faith is never presumed.
31. SPI TECHNOLOGIES, INC. and LEA VILLANUEVA vs. VICTORIA K.
MAPUA
On the issue of the solidary obligation of the corporate officers impleaded vis--vis the
corporation for Mapuas illegal dismissal, "[i]t is hornbook principle that personal
 CORPORATION CODE
liability of corporate directors, trustees or officers attaches only when: (a) they assent
to a patently unlawful act of the corporation, or when they are guilty of bad faith or
gross negligence in directing its affairs, or when there is a conflict of interest resulting
in damages to the corporation, its stockholders or other persons; (b) they consent to
the issuance of watered down stocks or when, having knowledge of such issuance,
do not forthwith file with the corporate secretary their written objection; (c) they agree
to hold themselves personally and solidarily liable with the corporation; or (d) they are
made by specific provision of law personally answerable for their corporate action." 53
32. MIRANT (PHILIPPINES) CORPORATION AND EDGARDO A. BAUTISTA
vs. JOSELITO A. CARO
A corporation has a personality separate and distinct from its officers and board of
directors who may only be held personally liable for damages if it is proven that they
acted with malice or bad faith in the dismissal of an employee. 57 Absent any evidence
on record that petitioner Bautista acted maliciously or in bad faith in effecting the
termination of respondent, plus the apparent lack of allegation in the pleadings of
respondent that petitioner Bautista acted in such manner, the doctrine of corporate
fiction dictates that only petitioner corporation should be held liable for the illegal
dismissal of respondent.
STOCKHOLDERS
33. JOSELITO MUSNI PUNO (as heir of the late Carlos Puno) vs. PUNO
ENTERPRISES, INC., represented by JESUSA PUNO
In any case, Sections 74 and 75 of the Corporation Code enumerate the
persons who are entitled to the inspection of corporate books, thus
Sec. 74. Books to be kept; stock transfer agent. x x x.
The records of all business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his
expense. x x x x
Sec. 75. Right to financial statements. Within ten (10) days from receipt of a written
request of any stockholder or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance sheet as of the end of the
last taxable year and a profit or loss of statement for said taxable year, showing in
reasonable detail its assets and liabilities and the result of its operations.
The stockholders right of inspection of the corporations books and records is based
upon his ownership of shares in the corporation and the necessity for self-protection.
After all, a shareholder has the right to be intelligently informed about corporate
affairs. Such right rests upon the stockholders underlying ownership of the
corporations assets and property.
Similarly, only stockholders of record are entitled to receive dividends
declared by the corporation, a right inherent in the ownership of the shares.
Upon the death of a shareholder, the heirs do not automatically become
stockholders of the corporation and acquire the rights and privileges of the deceased
as shareholder of the corporation. The stocks must be distributed first to the heirs in
estate proceedings, and the transfer of the stocks must be recorded in the books of
the corporation. Section 63 of the Corporation Code provides that no transfer shall be
valid, except as between the parties, until the transfer is recorded in the books of the
corporation. During such interim period, the heirs stand as the equitable owners of the
stocks, the executor or administrator duly appointed by the court being vested with
the legal title to the stock. Until a settlement and division of the estate is effected, the
stocks of the decedent are held by the administrator or executor. Consequently,
during such time, it is the administrator or executor who is entitled to exercise the
rights of the deceased as stockholder.
34. DAVID C. LAO and JOSE C. LAO vs. DIONISIO C. LAO
IS the mere inclusion as shareholder in the General Information Sheet of
a corporation sufficient proof that one is a shareholder in such corporation?
A certificate of stock is the evidence of a holders interest and status in a
corporation. It is a written instrument signed by the proper officer of a corporation
stating or acknowledging that the person named in the document is the owner of a
designated number of shares of its stock. It is prima facie evidence that the holder is a
shareholder of a corporation.
Section 63 of the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
or vice-president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the
corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares
transferred.
The mere inclusion as shareholder of petitioners in the General Information
Sheet of PFSC is insufficient proof that they are shareholders of the company.
The information in the document will still have to be correlated with the corporate
books of PFSC. As between the General Information Sheet and the corporate books,
it is the latter that is controlling.
 CORPORATION CODE
BY-LAWS
35. LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC.
vs. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO
May the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the Corporation Code, result in its
automatic dissolution?
The pertinent provision of the Corporation Code that is the focal point of controversy
in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under this Code, must
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws
for its government not inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members, in the case of
non-stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of
the corporation, subject to the stockholders or members voting for them and shall be
kept in the principal office of the corporation, subject to inspection of the stockholders
or members during office hours; and a copy thereof, shall be filed with the Securities
and Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted
and filed prior to incorporation; in such case, such by-laws shall be approved and
signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this
Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or
any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational institution
or other special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-laws or
amendments are in accordance with law.
automatic corporate dissolution for failure to file the by-laws on time was never the
intention of the legislature.
Taken as a whole and under the principle that the best interpreter of a statute is the
statute itself (optima statuli interpretatix est ipsum statutum), 14 Section 46
aforequoted reveals the legislative intent to attach a directory, and not mandatory,
meaning for the word "must" in the first sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws "within one (1) month after
receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission." It necessarily follows that failure to file the by-
laws within that period does not imply the "demise" of the corporation. By-laws may
be necessary for the "government" of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code and related statutes. 15
There are in fact cases where by-laws are unnecessary to corporate existence or to
the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, by-laws are not
necessary either to the existence of a corporation or to the valid exercise of the
powers conferred upon it, certainly in all cases where the charter sufficiently provides
for the government of the body; and even where the governing statute in express
terms confers upon the corporation the power to adopt by-laws, the failure to exercise
the power will be ascribed to mere nonaction which will not render void any acts of the
corporation which would otherwise be valid. 16 (Emphasis supplied.)
Even under the foregoing express grant of power and authority, there can be no
automatic corporate dissolution simply because the incorporators failed to abide by
the required filing of by-laws embodied in Section 46 of the Corporation Code. There
is no outright "demise" of corporate existence. Proper notice and hearing are cardinal
components of due process in any democratic institution, agency or society. In other
words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same.
Non-filing of the by-laws will not result in automatic dissolution of the corporation.
Under Section 6(I) of PD 902-A, the SEC is empowered to "suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of a corporation"
on the ground inter alia of "failure to file by-laws within the required period." It is clear
from this provision that there must first of all be a hearing to determine the existence
of the ground, and secondly, assuming such finding, the penalty is not necessarily
revocation but may be only suspension of the charter. In fact, under the rules and
regulations of the SEC, failure to file the by-laws on time may be penalized merely
with the imposition of an administrative fine without affecting the corporate existence
of the erring firm.
36. PETRONILO J. BARAYUGA vs. ADVENTIST UNIVERSITY OF THE
PHILIPPINES, THROUGH ITS BOARD OF TRUSTEES, REPRESENTED
BY ITS CHAIRMAN, NESTOR D. DAYSON
Section 108 of the Corporation Code determines the membership and number of
trustees in an educational corporation, viz:
Section 108. Board of trustees. Trustees of educational institutions organized as
educational corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples of five (5).
 CORPORATION CODE

SEC. 91. Termination of membership.Membership shall be terminated in the

Unless otherwise provided in the articles of incorporation or the by-laws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as
soon as organized, so classify themselves that the term of office of one-fifth (1/5) of
their number shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by
expiration of term shall hold office for five (5) years. A majority of the trustees
shall constitute a quorum for the transaction of business. The powers and authority of
trustees shall be defined in the by-laws.
manner and for the causes provided in the articles of incorporation or the by-
laws. Termination of membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property, unless otherwise provided in the articles
of incorporation or the by-laws. (Emphasis supplied)
Does the Corporation Code permit the termination of membership without due notice
to the member? The Code itself is silent on that matter, and the argument can be
made that if no notice is provided for in the articles of incorporation or in the by-laws,
then termination may be effected without any notice at all.

For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.
The second paragraph of the provision, although setting the term of the members of
the Board of Trustees at five years, contains a proviso expressly subjecting the
duration to what is otherwise provided in the articles of incorporation or by-laws of the
educational corporation. That contrary provision controls on the term of office.
37. VALLEY GOLF & COUNTRY CLUB, INC. vs. ROSA O. VDA. DE CARAM
May a non-stock corporation seize and dispose of the membership share of a fully-
paid member on account of its unpaid debts to the corporation when it is authorized to
do so under the corporate by-laws but not by the Articles of Incorporation?
Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to
provide any formal notice and hearing procedure before a members share may be
seized and sold. The Court would have been satisfied had the by-laws or the articles
of incorporation established a procedure which assures that the member would in
reality be actually notified of the pending accounts and provide the opportunity for
such member to settle such accounts before the membership share could be seized
then sold to answer for the debt. As we have emphasized, membership in Valley Golf
and many other like-situated non-stock corporations actually involves the purchase of
a membership share, which is a substantially expensive property. As a result,
termination of membership does not only lead to loss of bragging rights, but the actual
deprivation of property.

Firstly, they correctly noted that the procedure under Section 67 of the Corporation
Code for the stock corporations recourse on unpaid subscriptions is inapt to a non-
stock corporation vis--vis a members outstanding dues. The basic factual backdrops
in the two situations are disperate. In the latter, the member has fully paid for his
membership share, while in the former, the stockholder has not yet fully paid for the
share or shares of stock he subscribed to, thereby authorizing the stock corporation to
call on the unpaid subscription, declare the shares delinquent and subject the
delinquent shares to a sale at public auction.

Secondly, the two bodies below concluded that following Section 6 of the Corporation
Code, which provides:

The shares of stock of stock corporation may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation x x x

The lien on the Golf Share in favor of Valley Golf is not valid, as the power to
constitute such a lien should be provided in the articles of incorporation, and not
merely in the by-laws.

However, there is a specific provision under the Title XI, on Non-Stock Corporations
of the Corporation Code dealing with termination of membership. Section 91 of the
Corporation Code provides:
 CORPORATION CODE
DERIVATIVE SUIT
38. JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD),
INC. vs. SPOUSES ROBERTO and RACHEL ANG
A derivative suit is an action brought by a stockholder on behalf of the corporation to
enforce corporate rights against the corporations directors, officers or other
insiders.29 Under Sections 2330 and 3631 of the Corporation Code, the directors or
officers, as provided under the by-laws,32 have the right to decide whether or not a
corporation should sue. Since these directors or officers will never be willing to sue
themselves, or impugn their wrongful or fraudulent decisions, stockholders are
permitted by law to bring an action in the name of the corporation to hold these
directors and officers accountable.33 In derivative suits, the real party ininterest is the
corporation, while the stockholder is a mere nominal party.
This Court, in Yu v. Yukayguan,34 explained:
The Court has recognized that a stockholders right to institute a derivative suit is not
based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for
mismanagement, waste or dissipation of corporate assets because of a special injury
to him for which he is otherwise without redress. In effect, the suit is an action for
specific performance of an obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in default by the wrongful
refusal of the directors or management to make suitable measures for its protection.
The basis of a stockholders suit is always one in equity. However, it cannot prosper
without first complying with the legal requisites for its institution. (Emphasis in the
original)
Section 1, Rule 8 of the Interim Rules imposes the following requirements for
derivative suits:
(1) The person filing the suit must be a stockholder or member at the time the
acts or transactions subject of the action occurred and the time the action
was filed;
(2) He must have exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a
nuisance or harassment suit under Section 1(b) of the Interim Rules. Section 1(b)
thereof provides:
b) Prohibition against nuisance and harassment suits. - Nuisance and harassment
suits are prohibited. In determining whether a suit is a nuisance or harassment suit,
the court shall consider, among others, the following:
(1) The extent of the shareholding or interest of the initiating stockholder or
member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in
relation to the relief sought.
In case of nuisance or harassment suits, the court may, motu proprio or upon motion,
forthwith dismiss the case.
39. LEGASPI TOWERS 300, INC., ET. AL. vs. AMELIA P. MUER, ET. AL.
A derivative suit must be differentiated from individual and representative or class
suits, thus:
Suits by stockholders or members of a corporation based on wrongful or fraudulent
acts of directors or other persons may be classified into individual suits, class suits,
and derivative suits. Where a stockholder or member is denied the right of inspection,
his suit would be individual because the wrong is done to him personally and not
to the other stockholders or the corporation. Where the wrong is done to a
group of stockholders, as where preferred stockholders' rights are violated, a class
or representative suit will be proper for the protection of all stockholders
belonging to the same group. But where the acts complained of constitute a
wrong to the corporation itself, the cause of action belongs to the corporation
and not to the individual stockholder or member. Although in most every case of
wrong to the corporation, each stockholder is necessarily affected because the value
of his interest therein would be impaired, this fact of itself is not sufficient to give him
an individual cause of action since the corporation is a person distinct and separate
from him, and can and should itself sue the wrongdoer. Otherwise, not only would the
theory of separate entity be violated, but there would be multiplicity of suits as well as
a violation of the priority rights of creditors. Furthermore, there is the difficulty of
determining the amount of damages that should be paid to each individual
stockholder.
However, in cases of mismanagement where the wrongful acts are committed
by the directors or trustees themselves, a stockholder or member may find that he
has no redress because the former are vested by law with the right to decide whether
or not the corporation should sue, and they will never be willing to sue themselves.
The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right
of a stockholder to sue on behalf of a corporation in what eventually became
known as a "derivative suit." It has been proven to be an effective remedy of the
minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he
holds stock in order to protect or vindicate corporate rights, whenever officials
 CORPORATION CODE

of the corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party-in- interest.

Since it is the corporation that is the real party-in-interest in a derivative suit, then the
reliefs prayed for must be for the benefit or interest of the corporation. When the
reliefs prayed for do not pertain to the corporation, then it is an improper derivative
suit.

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; and

(c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.

The stockholders right to file a derivative suit is not based on any express provision of
The Corporation Code, but is impliedly recognized when the law makes corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties,[ which is not the issue in this case.

40. MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION

vs. MIGUEL LIM, ET. AL.

A derivative action is a suit by a shareholder to enforce a corporate cause of action. It

is a remedy designed by equity and has been the principal defense of the minority
shareholders against abuses by the majority. For this purpose, it is enough that a
member or a minority of stockholders file a derivative suit for and in behalf of a
corporation. An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are the ones to
be sued or hold the control of the corporation. In such actions, the suing stockholder
is regarded as the nominal party, with the corporation as the party in interest.
 CORPORATION CODE
TRANSFER OF STOCK OWNERSHIP
41. SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS
OF THE LATE GRACE G. CHEU vs. GILBERT G. GUY
x-----------------------x
SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS
OF THE LATE GRACE G. CHEU vs.
THE HON. OFELIA C. CALO, in her capacity as Presiding Judge of the
RTC -Mandaluyong City - Branch 211 and GILBERT G. GUY
Suits by stockholders or members of a corporation based on wrongful or fraudulent
acts of directors or other persons may be classified into individual suits, class suits,
and derivative suits.30
An individual suit may be instituted by a stockholder against another stockholder for
wrongs committed against him personally, and to determine their individual rights 31
this is an individual suit between stockholders. But an individual suit may also be
instituted against a corporation, the same having a separate juridical personality,
which by its own may be sued. It is of course, essential that the suing stockholder has
a cause of action against the corporation.32
Individual suits against another stockholder or against a corporation are remedies
which an aggrieved stockholder may avail of and which are recognized in our
jurisdiction as embedded in the Interim Rules on Intra-Corporate Controversy.
Together with this right is the parallel obligation of a party to comply with the
compulsory joinder of indispensable parties whether they may be stockholders or the
corporation itself.
Failure to specifically allege the fraudulent acts in intra-corporate controversies is
indicative of a harassment or nuisance suit and may be dismissed motu proprio.
When a stock certificate is endorsed in blank by the owner thereof, it constitutes
what is termed as "street certificate," so that upon its face, the holder is entitled to
demand its transfer his name from the issuing corporation.
In Santamaria v. Hongkong and Shanghai Banking Corp., 61 this Court held that when
a stock certificate is endorsed in blank by the owner thereof, it constitutes what is
termed as "street certificate," so that upon its face, the holder is entitled to demand its
transfer into his name from the issuing corporation. Such certificate is deemed quasi-
negotiable, and as such the transferee thereof is justified in believing that it belongs to
the holder and transferor.
While there is a contrary ruling, as an exception to the general rule enunciated above,
what the Court held in Neugene Marketing Inc., et al., v CA, 62 where stock certificates
endorsed in blank were stolen from the possession of the beneficial owners thereof
constraining this Court to declare the transfer void for lack of delivery and want of
value, the same cannot apply to Gilbert because the stock certificates which Gilbert
endorsed in blank were in the undisturbed possession of his parents who were the
beneficial owners thereof and who themselves as such owners caused the transfer in
their names. Indeed, even if Gilberts parents were not the beneficial owners, an
endorsement in blank of the stock certificates coupled with its delivery, entitles the
holder thereof to demand the transfer of said stock certificates in his name from the
issuing corporation.63
42. FIL-ESTATE GOLF AND DEVELOPMENT, INC. and FILESTATE LAND,
INC. vs. VERTEX SALES AND TRADING, INC.
Physical delivery is necessary to transfer ownership of stocks
The factual backdrop of this case is similar to that of Raquel-Santos v. Court of
Appeals,9 where the Court held that in "a sale of shares of stock, physical delivery of
a stock certificate is one of the essential requisites for the transfer of ownership of the
stocks purchased."
In that case, Trans-Phil Marine Ent., Inc. (Trans-Phil) and Roland Garcia bought Piltel
shares from Finvest Securities Co., Inc. (Finvest Securities) in February 1997. Since
Finvest Securities failed to deliver the stock certificates, Trans-Phil and Garcia filed an
action first for specific performance, which was later on amended to an action for
rescission. The Court ruled that Finvest Securities failure to deliver the shares of
stock constituted substantial breach of their contract which gave rise to a right on the
part of Trans-Phil and Garcia to rescind the sale.
Section 63 of the Corporation Code provides:
SEC. 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
or vice-president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer.1wphi1 No transfer, however, shall be
valid, except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
 CORPORATION CODE
SALE OF DELINQUENT STOCKS
43. CALATAGAN GOLF CLUB, INC. vs. SIXTO CLEMENTE, JR.
There are fundamental differences that defy equivalence or even analogy between
the sale of delinquent stock under Section 68 and the sale that occurred in this case.
At the root of the sale of delinquent stock is the non-payment of the subscription price
for the share of stock itself. The stockholder or subscriber has yet to fully pay for the
value of the share or shares subscribed.
Under Section 91 of the Corporation Code, membership in a non-stock corporation
"shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws." The By-law provisions are elaborate in explaining the
manner and the causes for the termination of membership in Calatagan, through the
execution on the lien of the share. The Court is satisfied that the By-Laws, as written,
affords due protection to the member by assuring that the member should be notified
by the Secretary of the looming execution sale that would terminate membership in
the club. In addition, the By-Laws guarantees that after the execution sale, the
proceeds of the sale would be returned to the former member after deducting the
outstanding obligations. If followed to the letter, the termination of membership under
this procedure outlined in the By-Laws would accord with substantial justice.
QUOROM
44. PAUL LEE TAN, ET. AL. vs. PAUL SYCIP and MERRITTO LIM
For stock corporations, the "quorum" referred to in Section 52 of the Corporation
Code is based on the number of outstanding voting stocks. For nonstock
corporations, only those who are actual, living members with voting rights shall be
counted in determining the existence of a quorum during members meetings. Dead
members shall not be counted.
Basis for Quorum
Generally, stockholders or members meetings are called for the purpose of electing
directors or trustees 23 and transacting some other business calling for or requiring
the action or consent of the shareholders or members, 24 such as the amendment of
the articles of incorporation and bylaws, sale or disposition of all or substantially all
corporate assets, consolidation and merger and the like, or any other business that
may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the board of
directors or trustees, who are charged with the management of the corporation. 25
The board, in turn, periodically elects officers to carry out management functions on a
day-to-day basis. As owners, though, the stockholders or members have residual
powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits,
the management and direction of the corporation are lodged with their representatives
and agents -- the board of directors or trustees. 26 In other words, acts of
management pertain to the board; and those of ownership, to the stockholders or
members. In the latter case, the board cannot act alone, but must seek approval of
the stockholders or members. 27
Conformably with the foregoing principles, one of the most important rights of a
qualified shareholder or member is the right to vote -- either personally or by proxy --
for the directors or trustees who are to manage the corporate affairs. 28 The right to
choose the persons who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the
management of corporate affairs, or in which a member in a nonstock corporation can
have a say on how the purposes and goals of the corporation may be achieved. 29
Once the directors or trustees are elected, the stockholders or members relinquish
corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary, the general
rule is that every member of a nonstock corporation, and every legal owner of shares
in a stock corporation, has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right to vote. 30
Voting may be expressed personally, or through proxies who vote in their
representative capacities. 31 Generally, the right to be present and to vote in a
meeting is determined by the time in which the meeting is held. 32
 CORPORATION CODE
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations."
In stock corporations, the presence of a quorum is ascertained and counted on the
basis of the outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares." (Underscoring supplied)
The Right to Vote in Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks. 33
It is settled that unissued stocks may not be voted or considered in determining
whether a quorum is present in a stockholders meeting, or whether a requisite
proportion of the stock of the corporation is voted to adopt a certain measure or act.
Only stock actually issued and outstanding may be voted. 34 Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided
in the articles of incorporation or declared delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares that have
never passed to the ownership of stockholders; or, having so passed, have again
been purchased by the corporation. 36 These shares are not to be taken into
consideration in determining majorities. When the law speaks of a given proportion of
the stock, it must be construed to mean the shares that have passed from the
corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, that there shall always be a class or series of
shares which have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to vote
on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the
intention of the lawmakers was to base the quorum mentioned in Section 52 on the
number of outstanding voting stocks. 38
The Right to Vote in Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39 Members vote as
persons, in accordance with the law and the bylaws of the corporation. Each member
shall be entitled to one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for determining the
quorum for stock corporations is applied by analogy to nonstock corporations, only
those who are actual members with voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the members representing
the actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum. 41
Section 25 of the Code specifically provides that a majority of the directors or
trustees, as fixed in the articles of incorporation, shall constitute a quorum for the
transaction of corporate business (unless the articles of incorporation or the bylaws
provide for a greater majority). If the intention of the lawmakers was to base the
quorum in the meetings of stockholders or members on their absolute number as
fixed in the articles of incorporation, it would have expressly specified so. Otherwise,
the only logical conclusion is that the legislature did not have that intention.
Effect of the Death of a Member or Shareholder
Having thus determined that the quorum in a members meeting is to be reckoned as
the actual number of members of the corporation, the next question to resolve is what
happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the
death of a shareholder, the executor or administrator duly appointed by the Court is
vested with the legal title to the stock and entitled to vote it. Until a settlement and
division of the estate is effected, the stocks of the decedent are held by the
 CORPORATION CODE
administrator or executor. 44
On the other hand, membership in and all rights arising from a nonstock corporation
are personal and non-transferable, unless the articles of incorporation or the bylaws
of the corporation provide otherwise. 45 In other words, the determination of whether
or not "dead members" are entitled to exercise their voting rights (through their
executor or administrator), depends on those articles of incorporation or bylaws.
Vacancy in the Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the
Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for
the unexpired term of his predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that those remaining
still constitute a quorum. The phrase "may be filled" in Section 29 shows that the
filling of vacancies in the board by the remaining directors or trustees constituting a
quorum is merely permissive, not mandatory. 48 Corporations, therefore, may choose
how vacancies in their respective boards may be filled up -- either by the remaining
directors constituting a quorum, or by the stockholders or members in a regular or
special meeting called for the purpose. 49
APPRAISAL RIGHT
45. PHILIP TURNER and ELNORA TURNER vs. LORENZO SHIPPING
CORPORATION
Stockholders Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to demand
payment of the fair value of his or her shares. This right, known as the right of
appraisal, is expressly recognized in Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental change
in the charter or articles of incorporation substantially prejudicing the rights of the
stockholders. It does not vest unless objectionable corporate action is taken. 13 It
serves the purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation.14
Now, however, a corporation can purchase its own shares, provided payment is made
out of surplus profits and the acquisition is for a legitimate corporate purpose. 18 In the
Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power
to purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the
implications of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the
proposed corporate action by making a written demand on the corporation within 30
days after the date on which the vote was taken for the payment of the fair value of
his shares. The failure to make the demand within the period is deemed a waiver of
the appraisal right.19
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of
the shares within a period of 60 days from the date the stockholders approved the
corporate action, the fair value shall be determined and appraised by three
disinterested persons, one of whom shall be named by the stockholder, another by
the corporation, and the third by the two thus chosen. The findings and award of the
majority of the appraisers shall be final, and the corporation shall pay their award
within 30 days after the award is made. Upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his or her shares to
the corporation.20
3. All rights accruing to the withdrawing stockholders shares, including voting and
dividend rights, shall be suspended from the time of demand for the payment of the
 CORPORATION CODE

fair value of the shares until either the abandonment of the corporate action involved
or the purchase of the shares by the corporation, except the right of such stockholder
to receive payment of the fair value of the shares.21

4. Within 10 days after demanding payment for his or her shares, a dissenting
stockholder shall submit to the corporation the certificates of stock representing his
shares for notation thereon that such shares are dissenting shares. A failure to do so
shall, at the option of the corporation, terminate his rights under this Title X of the
Corporation Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of the transferor
as a dissenting stockholder under this Title shall cease and the transferee shall have
all the rights of a regular stockholder; and all dividend distributions that would have
accrued on such shares shall be paid to the transferee. 22

5. If the proposed corporate action is implemented or effected, the corporation shall

pay to such stockholder, upon the surrender of the certificates of stock representing
his shares, the fair value thereof as of the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in anticipation of such corporate
action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting

stockholder unless the corporation has unrestricted retained earnings in its books to
cover the payment. In case the corporation has no available unrestricted retained
earnings in its books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders. Under the
doctrine, the capital stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets.24 The creditors of a corporation have the right to
assume that the board of directors will not use the assets of the corporation to
purchase its own stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the stockholders without first
paying corporate debts. Thus, any disposition of corporate funds and assets to the
prejudice of creditors is null and void.26
 CORPORATION CODE
CORPORATE BOOKS AND RIGHT TO INSPECT
46. MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG,
HANNAH ZORAYDA A. ANG, and VICENTE G. GENATO vs. EDUARDO
G. ANG
In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the
rationale behind a stockholder's right to inspect corporate books, to wit:
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This
right is predicated upon the necessity of self-protection. It is generally held by majority
of the courts that where the right is granted by statute to the stockholder, it is given to
him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's
interest as a stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation.30
In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or
examine the records of a corporation under Section 74 of the Corporation Code is
circumscribed by the express limitation contained in the succeeding proviso, which
states that:
[I]t shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand. (Emphasis
supplied)
Thus, contrary to Eduardos insistence, the stockholders right to inspect corporate
books is not without limitations. While the right of inspection was enlarged under the
Corporation Code as opposed to the old Corporation Law (Act No. 1459, as
amended),
It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information secured
through a prior examination, or that the person asking for such examination must be
acting in good faith and for a legitimate purpose in making his demand. 32 (Emphasis
supplied)
In order therefore for the penal provision under Section 144 of the Corporation Code
to apply in a case of violation of a stockholder or members right to inspect the
corporate books/records as provided for under Section 74 of the Corporation Code,
the following elements must be present:
First. A director, trustee, stockholder or member has made a prior demand in writing
for a copy of excerpts from the corporations records or minutes;
Second. Any officer or agent of the concerned corporation shall refuse to allow the
said director, trustee, stockholder or member of the corporation to examine and copy
said excerpts;
Third. If such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal; and,
Fourth. Where the officer or agent of the corporation sets up the defense that the
person demanding to examine and copy excerpts from the corporations records and
minutes has improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand, the contrary
must be shown or proved.
Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the
defense of improper use or motive is in the nature of a justifying circumstance that
would exonerate those who raise and are able to prove the same. Accordingly, where
the corporation denies inspection on the ground of improper motive or purpose, the
burden of proof is taken from the shareholder and placed on the corporation. 33 This
being the case, it would be improper for the prosecutor, during preliminary
investigation, to refuse or fail to address the defense of improper use or motive, given
its express statutory recognition. In the past we have declared that if justifying
circumstances are claimed as a defense, they should have at least been raised during
preliminary investigation;34 which settles the view that the consideration and
determination of justifying circumstances as a defense is a relevant subject of
preliminary investigation.
47. ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA vs. CEZAR T.
QUIAMBAO and ERIC C. PILAPIL
The act of ref using to allow inspection of the stock and transfer book of a corporation,
when done in violation of Section 74(4) of the Corporation Code, is punishable as an
offense under Section 144 of the same code.
We first address the inaccurate pronouncement of the RTC.
Section 74 is the provision of the Corporation Code that deals with the books a
corporation is required to keep. It reads:
Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and
carefully preserve at its principal office a record of all business transactions and
minutes of all meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of holding the meeting,
how authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done at
the meeting. Upon the demand of any director, trustee, stockholder or member, the
time when any director, trustee, stockholder or member entered or left the meeting
 CORPORATION CODE
must be noted in the minutes; and on a similar demand, the yeas and nays must be
taken on any motion or proposition, and a record thereof carefully made. The protest
of any director, trustee, stockholder or member on any action or proposed action must
be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member
of the corporation at reasonable hours on business days and he may demand, in
writing, for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its
records or minutes, in accordance with the provisions of this Code, shall be liable to
such director, trustee, stockholder or member for damages, and in addition, shall be
guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal: and Provided, further, That
it shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the records
or minutes of such corporation or of any other corporation, or was not acting in good
faith or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book'', in which must be kept a record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment of any installment; a statement
of every alienation, sale or transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws may prescribe. The stock and
transfer book shall be kept in the principal office of the corporation or in the office of
its stock transfer agent and shall be open for inspection by any director or stockholder
of the corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be
renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee
herein provided, shall be applicable. (5 la and 32a; P.B. No. 268.) (Emphasis
supplied)
Section 144 of the Corporation Code, on the other hand, is the general penal
provision of the Corporation Code. It reads:
Section 144. Violations of the Code. - Violations of any of the provisions of this Code
or its amendments not otherwise specifically penalized therein shall be punished by a
fine of not less than one thousand (1,000.00) pesos but not more than ten thousand
(10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more
than five (5) years, or both, in the discretion of the court. If the violation is committed
by a corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director,
trustee or officer of the corporation responsible for said violation: Provided, further,
That nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code. (190 112 a) (Emphasis supplied)
While Section 74 of the Corporation Code expressly mentions the application of
Section 144 only in relation to the act of "refus[ing] to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from [the
corporation's] records or minutes," the same does not mean that the latter section no
longer applies to any other possible violations of the former section.
It must be emphasized that Section 144 already purports to penalize "[v]iolations" of
"any provision" of the Corporation Code "not otherwise specifically penalized therein."
Hence, we find inconsequential the fact that that Section 74 expressly mentions the
application of Section 144 only to a specific act, but not with respect to the other
possible violations of the former section.
Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be
made to apply to violations of the right of a stockholder to inspect the stock and
transfer book of a corporation under Section 74(4) given the already unequivocal
intent of the legislature to penalize violations of a parallel right, i.e., the right of a
stockholder or member to examine the other records and minutes of a corporation
under Section 74(2). Certainly, all the rights guaranteed to corporators under Section
7 4 of the Corporation Code are mandatory for the corporation to respect. All such
rights are just the same underpinned by the same policy consideration of keeping
public confidence in the corporate vehicle thru an assurance of transparency in the
corporation's operations.
48. BANK OF COMMERCE vs. RADIO PHILIPPINES NETWORK, INC., ET.
AL.
Merger and De Facto Merger
Merger is a re-organization of two or more corporations that results in their
consolidating into a single corporation, which is one of the constituent corporations,
one disappearing or dissolving and the other surviving. To put it another way, merger
is the absorption of one or more corporations by another existing corporation, which
retains its identity and takes over the rights, privileges, franchises, properties, claims,
liabilities and obligations of the absorbed corporation(s). The absorbing corporation
continues its existence while the life or lives of the other corporation(s) is or are
terminated.13
The Corporation Code requires the following steps for merger or consolidation:
(1) The board of each corporation draws up a plan of merger or consolidation.
Such plan must include any amendment, if necessary, to the articles of
 CORPORATION CODE

incorporation of the surviving corporation, or in case of consolidation, all the

statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for
approval. A meeting must be called and at least two (2) weeks notice must
be sent to all stockholders or members, personally or by registered mail. A
summary of the plan must be attached to the notice. Vote of two-thirds of the
members or of stockholders representing two thirds of the outstanding
capital stock will be needed. Appraisal rights, when proper, must be
respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation.
These take the place of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the surviving
corporation.
(4) Submission of said articles of merger or consolidation to the SEC for
approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.14

In his book, Philippine Corporate Law,20 Dean Cesar Villanueva explained that under
the Corporation Code, "a de facto merger can be pursued by one corporation
acquiring all or substantially all of the properties of another corporation in exchange of
shares of stock of the acquiring corporation. The acquiring corporation would end up
with the business enterprise of the target corporation; whereas, the target corporation
would end up with basically its only remaining assets being the shares of stock of the
acquiring corporation." (Emphasis supplied)

It is pointed out that under common law,23 if one corporation sells or otherwise
transfers all its assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor if it has acted in good faith and has paid adequate
consideration for the assets, except: (1) where the purchaser expressly or impliedly
agrees to assume such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered into
fraudulently in order to escape liability for such debts. 24
 CORPORATION CODE
MERGER AND CONSOLIDATION
49. MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by
its Liquidator, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION
vs. EDWARD WILLKOM, ET. AL.
Ordinarily, in the merger of two or more existing corporations, one of the corporations
survives and continues the combined business, while the rest are dissolved and all
their rights, properties, and liabilities are acquired by the surviving corporation. 20
Although there is a dissolution of the absorbed or merged corporations, there is no
winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as
their liabilities.21
The merger, however, does not become effective upon the mere agreement of the
constituent corporations.22 Since a merger or consolidation involves fundamental
changes in the corporation, as well as in the rights of stockholders and creditors,
there must be an express provision of law authorizing them. 23
The steps necessary to accomplish a merger or consolidation, as provided for in
Sections 76,24 77,25 78,26 and 7927 of the Corporation Code, are:
(1) The board of each corporation draws up a plan of merger or consolidation.
Such plan must include any amendment, if necessary, to the articles of
incorporation of the surviving corporation, or in case of consolidation, all the
statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for
approval. A meeting must be called and at least two (2) weeks notice must
be sent to all stockholders or members, personally or by registered mail. A
summary of the plan must be attached to the notice. Vote of two-thirds of the
members or of stockholders representing two-thirds of the outstanding
capital stock will be needed. Appraisal rights, when proper, must be
respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation.
These take the place of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the surviving
corporation.
(4) Submission of said articles of merger or consolidation to the SEC for
approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.28
Clearly, the merger shall only be effective upon the issuance of a certificate of merger
by the SEC, subject to its prior determination that the merger is not inconsistent with
the Corporation Code or existing laws.29 Where a party to the merger is a special
corporation governed by its own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government agency should first be
obtained.30
The issuance of the certificate of merger is crucial because not only does it bear out
SECs approval but it also marks the moment when the consequences of a merger
take place. By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights and properties, as well as liabilities, shall be
taken and deemed transferred to and vested in the surviving corporation. 31
The same rule applies to consolidation which becomes effective not upon mere
agreement of the members but only upon issuance of the certificate of consolidation
by the SEC.32 When the SEC, upon processing and examining the articles of
consolidation, is satisfied that the consolidation of the corporations is not inconsistent
with the provisions of the Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official. 33 The new consolidated
corporation comes into existence and the constituent corporations are dissolved and
cease to exist.34
A corporation is an artificial being created by operation of law. It possesses the right
of succession and such powers, attributes, and properties expressly authorized by
law or incident to its existence.35 It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which it may be
related.36 Being separate entities, the property of one cannot be considered the
property of the other.
50. METROPOLITAN BANK & TRUST COMPANY, INC. (as successor-in-
interest of the banking operations of Global Business Bank, Inc.
formerly known as PHILIPPINE BANKING CORPORATION) vs. THE
BOARD OF TRUSTEES OF RIVERSIDE MILLS CORPORATION
PROVIDENT AND RETIREMENT FUND, ET. AL.
Under Section 12227 of the Corporation Code, a dissolved corporation shall
nevertheless continue as a body corporate for three (3) years for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established. Within those three (3)
years, the corporation may appoint a trustee or receiver who shall carry out the said
purposes beyond the three (3)-year winding-up period. Thus, a trustee of a dissolved
corporation may commence a suit which can proceed to final judgment even beyond
the three (3)-year period of liquidation.28
51. Supra #48
 CORPORATION CODE
CORPORATE DISSOLUTION
52. VITALIANO N. AGUIRRES II and FIDEL N. AGUIRRE vs. FQB+7, INC.,
NATHANIEL D. BOCOBO, PRISCILA BOCOBO and ANTONIO DE VILLA
Section 122 of the Corporation Code prohibits a dissolved corporation from continuing
its business, but allows it to continue with a limited personality in order to settle and
close its affairs, including its complete liquidation, thus:
Sec. 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall nevertheless be continued as
a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it
was established.
A partys stockholdings in a corporation, whether existing or dissolved, is a property
right44 which he may vindicate against another party who has deprived him thereof.
The corporations dissolution does not extinguish such property right. Section 145 of
the Corporation Code ensures the protection of this right, thus:
Sec. 145. Amendment or repeal. No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or of any part
thereof. (Emphases supplied.)
Intra-corporate disputes remain even when the corporation is dissolved.
Jurisdiction over the subject matter is conferred by law. R.A. No. 879945 conferred
jurisdiction over intra-corporate controversies on courts of general jurisdiction or
RTCs,46 to be designated by the Supreme Court. Thus, as long as the nature of the
controversy is intra-corporate, the designated RTCs have the authority to exercise
jurisdiction over such cases.
So what are intra-corporate controversies? R.A. No. 8799 refers to Section 5 of
Presidential Decree (P.D.) No. 902-A (or The SEC Reorganization Act) for a
description of such controversies:
a) Devices or schemes employed by or any acts, of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or
organizations registered with the Commission;
b) Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members, or associates; between any or all of
them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers
or managers of such corporations, partnerships or associations.
The Court reproduced the above jurisdiction in Rule 1 of the Interim Rules of
Procedure Governing Intra-corporate Controversies under R.A. No. 8799:
SECTION 1. (a) Cases Covered These Rules shall govern the procedure to be
observed in civil cases involving the following:
(1) Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation,
partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association
relations, between and among stockholders, members, or associates; and
between, any or all of them and the corporation, partnership, or association
of which they are stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers,
or managers of corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
Meanwhile, jurisprudence has elaborated on the above definitions by providing tests
in determining whether a controversy is intra-corporate. Reyes v. Regional Trial Court
of Makati, Br. 14247 contains a comprehensive discussion of these two tests, thus:
A review of relevant jurisprudence shows a development in the Court's approach in
classifying what constitutes an intra-corporate controversy. Initially, the main
consideration in determining whether a dispute constitutes an intra-corporate
controversy was limited to a consideration of the intra-corporate relationship existing
between or among the parties. The types of relationships embraced under Section
5(b) x x x were as follows:
a) between the corporation, partnership, or association and the public;
b) between the corporation, partnership, or association and its stockholders, partners,
members, or officers;
c) between the corporation, partnership, or association and the State as far as its
franchise, permit or license to operate is concerned; and
d) among the stockholders, partners or associates themselves. xxx
The existence of any of the above intra-corporate relations was sufficient to confer
jurisdiction to the SEC now the RTC, regardless of the subject matter of the dispute.
This came to be known as the relationship test.
 CORPORATION CODE
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve,
Inc., the Court introduced the nature of the controversy test. We declared in this case
that it is not the mere existence of an intra-corporate relationship that gives rise to an
intra-corporate controversy; to rely on the relationship test alone will divest the regular
courts of their jurisdiction for the sole reason that the dispute involves a corporation,
its directors, officers, or stockholders. We saw that there is no legal sense in
disregarding or minimizing the value of the nature of the transactions which gives rise
to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also
be considered for the purpose of ascertaining whether the controversy itself is intra-
corporate. The controversy must not only be rooted in the existence of an intra-
corporate relationship, but must as well pertain to the enforcement of the parties'
correlative rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship and its incidents
are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.
The Court then combined the two tests and declared that jurisdiction should be
determined by considering not only the status or relationship of the parties, but also
the nature of the question under controversy. This two-tier test was adopted in the
recent case of Speed Distribution, Inc. v. Court of Appeals:
'To determine whether a case involves an intra-corporate controversy, and is to be
heard and decided by the branches of the RTC specifically designated by the Court to
try and decide such cases, two elements must concur: (a) the status or relationship of
the parties, and [b] the nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation,
partnership, or association of which they are stockholders, members or associates,
between any or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and between such
corporation, partnership, or association and the State insofar as it concerns the
individual franchises. The second element requires that the dispute among the parties
be intrinsically connected with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character, necessarily, the case
does not involve an intra-corporate controversy.' (Citations and some emphases
omitted; emphases supplied.)
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of
intra-corporate or partnership relations, and (b) the nature of the question subject of
the controversy must be such that it is intrinsically connected with the regulation of the
corporation or the enforcement of the parties rights and obligations under the
Corporation Code and the internal regulatory rules of the corporation. So long as
these two criteria are satisfied, the dispute is intra-corporate and the RTC, acting as a
special commercial court, has jurisdiction over it.
Examining the case before us in relation to these two criteria, the Court finds and so
holds that the case is essentially an intra-corporate dispute. It obviously arose from
the intra-corporate relations between the parties, and the questions involved pertain
to their rights and obligations under the Corporation Code and matters relating to the
regulation of the corporation. We further hold that the nature of the case as an intra-
corporate dispute was not affected by the subsequent dissolution of the corporation.
It bears reiterating that Section 145 of the Corporation Code protects, among others,
the rights and remedies of corporate actors against other corporate actors. The
statutory provision assures an aggrieved party that the corporations dissolution will
not impair, much less remove, his/her rights or remedies against the corporation, its
stockholders, directors or officers. It also states that corporate dissolution will not
extinguish any liability already incurred by the corporation, its stockholders, directors,
or officers. In short, Section 145 preserves a corporate actors cause of action and
remedy against another corporate actor. In so doing, Section 145 also preserves the
nature of the controversy between the parties as an intra-corporate dispute.
The dissolution of the corporation simply prohibits it from continuing its business.
However, despite such dissolution, the parties involved in the litigation are still
corporate actors. The dissolution does not automatically convert the parties into total
strangers or change their intra-corporate relationships. Neither does it change or
terminate existing causes of action, which arose because of the corporate ties
between the parties. Thus, a cause of action involving an intra-corporate controversy
remains and must be filed as an intra-corporate dispute despite the subsequent
dissolution of the corporation.
53. PARAMOUNT INSURANCE CORP. vs. A.C. ORDOEZ CORPORATION
and FRANKLIN SUSPINE
Although the cancellation of a corporations certificate of registration puts an end to its
juridical personality, Sec. 122 of the Corporation Code, however provides that a
corporation whose corporate existence is terminated in any manner continues to be a
body corporate for three years after its dissolution for purposes of prosecuting and
defending suits by and against it and to enable it to settle and close its affairs. 11
Moreover, the rights of a corporation, which is dissolved pending litigation, are
accorded protection by law pursuant to Sec. 145 of the Corporation Code, to wit:
Section 145. Amendment or repeal. No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members, directors, trustees,
or officers, shall be removed or impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of this Code or of any
part thereof. (Emphasis ours)
Dissolution or even the expiration of the three-year liquidation period should not be a
bar to a corporations enforcement of its rights as a corporation. 12
54. ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS
VILLAGE ASSOCIATION and RAFAEL TINIO
SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for
 CORPORATION CODE
other purposes is terminated in any other manner, shall nevertheless be continued as
a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it
was established.
At any time during said three (3) years, said corporation is authorized and empowered
to convey all of its property to trustees for the benefit of stockholders, members,
creditors, and other persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the
city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities.
This Court has held that:
It is to be noted that the time during which the corporation, through its own officers,
may conduct the liquidation of its assets and sue and be sued as a corporation is
limited to three years from the time the period of dissolution commences; but there is
no time limit within which the trustees must complete a liquidation placed in their
hands. It is provided only (Corp. Law, Sec. 78 now Sec. 122]) that the conveyance to
the trustees must be made within the three-year period. It may be found impossible to
complete the work of liquidation within the three-year period or to reduce disputed
claims to judgment. The authorities are to the effect that suits by or against a
corporation abate when it ceased to be an entity capable of suing or being sued (7
R.C.L., Corps., par. 750); but trustees to whom the corporate assets have been
conveyed pursuant to the authority of Sec. 78 [now Sec. 122] may sue and be sued
as such in all matters connected with the liquidation... 7
In the absence of trustees, this Court ruled, thus:
Still in the absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of
the corporation, acting for and in its behalf, might make proper representations with
the Securities and Exchange Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement of the corporate
concerns.8
FOREIGN CORPORATION
55. STEELCASE, INC. vs. DESIGN INTERNATIONAL SELECTIONS, INC.
The rule that an unlicensed foreign corporations doing business in the Philippine do
not have the capacity to sue before the local courts is well-established. Section 133 of
the Corporation Code of the Philippines explicitly states:
Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
The phrase "doing business" is clearly defined in Section 3(d) of R.A. No. 7042
(Foreign Investments Act of 1991), to wit:
d) The phrase "doing business" shall include soliciting orders, service
contracts, opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization: Provided, however,
That the phrase "doing business" shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own
account; (Emphases supplied)
This definition is supplemented by its Implementing Rules and Regulations, Rule I,
Section 1(f) which elaborates on the meaning of the same phrase:
f. "Doing business" shall include soliciting orders, service contracts, opening offices,
whether liaison offices or branches; appointing representatives or distributors,
operating under full control of the foreign corporation, domiciled in the Philippines or
who in any calendar year stay in the country for a period totalling one hundred eighty
[180] days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to and in progressive prosecution of commercial gain or of
 CORPORATION CODE
the purpose and object of the business organization.
The following acts shall not be deemed "doing business" in the Philippines:
1. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as
such investor;
2. Having a nominee director or officer to represent its interest in such
corporation;
3. Appointing a representative or distributor domiciled in the Philippines which
transacts business in the representative's or distributor's own name and
account;
4. The publication of a general advertisement through any print or broadcast
media;
5. Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;
6. Consignment by a foreign entity of equipment with a local company to be
used in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale which
are not on a continuing basis, such as installing in the Philippines machinery
it has manufactured or exported to the Philippines, servicing the same,
training domestic workers to operate it, and similar incidental services.
(Emphases supplied)
From the preceding citations, the appointment of a distributor in the Philippines is not
sufficient to constitute "doing business" unless it is under the full control of the foreign
corporation. On the other hand, if the distributor is an independent entity which buys
and distributes products, other than those of the foreign corporation, for its own name
and its own account, the latter cannot be considered to be doing business in the
Philippines.14 It should be kept in mind that the determination of whether a foreign
corporation is doing business in the Philippines must be judged in light of the
attendant circumstances.15
A foreign corporation doing business in the Philippines may sue in Philippine Courts
although not authorized to do business here against a Philippine citizen or entity who
had contracted with and benefited by said corporation. To put it in another way, a
party is estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the doctrine of
estoppel to deny corporate existence applies to a foreign as well as to domestic
corporations. One who has dealt with a corporation of foreign origin as a corporate
entity is estopped to deny its corporate existence and capacity: The principle will be
applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes chiefly in cases where such person
has received the benefits of the contract.
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria sua non
habere debet no person ought to derive any advantage of his own wrong. This is
as it should be for as mandated by law, "every person must in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."
Concededly, corporations act through agents, like directors and officers. Corporate
dealings must be characterized by utmost good faith and fairness. Corporations
cannot just feign ignorance of the legal rules as in most cases, they are manned by
sophisticated officers with tried management skills and legal experts with practiced
eye on legal problems. Each party to a corporate transaction is expected to act with
utmost candor and fairness and, thereby allow a reasonable proportion between
benefits and expected burdens. This is a norm which should be observed where one
or the other is a foreign entity venturing in a global market. Xxx
Thus, our consistent pronouncement, as held in cases such as Merril Lynch Futures
v. Court of Appeals, is apropos:
The rule is that a party is estopped to challenge the personality of a corporation after
having acknowledged the same by entering into a contract with it. And the doctrine of
estoppel to deny corporate existence applies to foreign as well as to domestic
corporations; "one who has dealt with a corporation of foreign origin as a corporate
entity is estopped to deny its existence and capacity." The principle "will be applied to
prevent a person contracting with a foreign corporation from later taking advantage of
its noncompliance with the statutes, chiefly in cases where such person has received
the benefits of the contract . . ."
56. GLOBAL BUSINESS HOLDINGS, INC. (formerly Global Business Bank,
Inc.) vs. SURECOMP SOFTWARE, B.V.
As a rule, unlicensed foreign non-resident corporations doing business in the
Philippines cannot file suits in the Philippines.23 This is mandated under Section 133
of the Corporation Code, which reads:
Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
A corporation has a legal status only within the state or territory in which it was
organized. For this reason, a corporation organized in another country has no
personality to file suits in the Philippines. In order to subject a foreign corporation
doing business in the country to the jurisdiction of our courts, it must acquire a license
from the Securities and Exchange Commission and appoint an agent for service of
process. Without such license, it cannot institute a suit in the Philippines.241avvphi1
The exception to this rule is the doctrine of estoppel. Global is estopped from
challenging Surecomps capacity to sue.
A foreign corporation doing business in the Philippines without license may sue in
 CORPORATION CODE
Philippine courts a Filipino citizen or a Philippine entity that had contracted with and
benefited from it.25 A party is estopped from challenging the personality of a
corporation after having acknowledged the same by entering into a contract with it. 26
The principle is applied to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the contract. 27
57. CARGILL, INC. vs. INTRA STRATA ASSURANCE CORPORATION
Doing Business in the Philippines and Capacity to Sue
The principal issue in this case is whether petitioner, an unlicensed foreign
corporation, has legal capacity to sue before Philippine courts. Under Article 12313 of
the Corporation Code, a foreign corporation must first obtain a license and a
certificate from the appropriate government agency before it can transact business in
the Philippines. Where a foreign corporation does business in the Philippines without
the proper license, it cannot maintain any action or proceeding before Philippine
courts as provided under Section 133 of the Corporation Code:
Sec. 133. Doing business without a license. No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
Thus, the threshold question in this case is whether petitioner was doing business in
the Philippines. The Corporation Code provides no definition for the phrase "doing
business." Nevertheless, Section 1 of Republic Act No. 5455 (RA 5455), 14 provides
that:
x x x the phrase "doing business" shall include soliciting orders, purchases, service
contracts, opening offices, whether called liaison offices or branches; appointing
representatives or distributors who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or periods totalling one hundred
eighty days or more; participating in the management, supervision or control of any
domestic business firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or
of the purpose and object of the business organization. (Emphasis supplied)
This is also the exact definition provided under Article 44 of the Omnibus Investments
Code of 1987.
Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Investments Act of
1991, which repealed Articles 44-56 of Book II of the Omnibus Investments Code of
1987, enumerated not only the acts or activities which constitute "doing business" but
also those activities which are not deemed "doing business." Section 3(d) of RA 7042
states:
[T]he phrase "doing business" shall include "soliciting orders, service contracts,
opening offices, whether called liaison offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty (180) days
or more; participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization: Provided, however, That the phrase
doing business shall not be deemed to include mere investment as a shareholder by
a foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and
for its own account.
To be doing or "transacting business in the Philippines" for purposes of Section 133 of
the Corporation Code, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine
territory on a continuing basis in its own name and for its own account. Actual
transaction of business within the Philippine territory is an essential requisite for the
Philippines to to acquire jurisdiction over a foreign corporation and thus require the
foreign corporation to secure a Philippine business license. If a foreign corporation
does not transact such kind of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no jurisdiction to require such foreign
corporation to secure a Philippine business license.23 (Emphasis supplied)
58. STRATEGIC ALLIANCE DEVELOPMENT CORPORATION vs. STAR
INFRASTRUCTURE DEVELOPMENT CORPORATION ET AL.
An intra-corporate dispute is understood as a suit arising from intra-corporate
relations29 or between or among stockholders or between any or all of them and the
corporation.30 Applying what has come to be known as the relationship test, it has
been held that the types of actions embraced by the foregoing definition include the
following suits: (a) between the corporation, partnership or association and the public;
(b) between the corporation, partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership or association and the
State insofar as its franchise, permit or license to operate is concerned; and, (d)
among the stockholders, partners or associates themselves.31 As the definition is
broad enough to cover all kinds of controversies between stockholders and
corporations, the traditional interpretation was to the effect that the relationship test
brooked no distinction, qualification or any exemption whatsoever.32
However, the unqualified application of the relationship test has been modified on the
ground that the same effectively divests regular courts of jurisdiction over cases for
the sole reason that the suit is between the corporation and/or its corporators. It was
 CORPORATION CODE
held that the better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but also the
nature of the question that is the subject of their controversy.33 Under the nature of
the controversy test, the dispute must not only be rooted in the existence of an intra-
corporate relationship, but must also refer to the enforcement of the parties'
correlative rights and obligations under the Corporation Code as well as the internal
and intra-corporate regulatory rules of the corporation. 34 The combined application of
the relationship test and the nature of the controversy test has, consequently, become
the norm in determining whether a case is an intra-corporate controversy or is purely
civil in character.
CORPORATION SOLE
59. IGLESIA EVANGELICA METODISTA EN LAS ISLAS FILIPINAS
(IEMELIF), INC. vs. NATANAEL B. JUANE x - - - - - - - - - - - - - - - - - - - - - -
-x G.R. No. 179404 NATANAEL B. JUANE vs. IGLESIA EVANGELICA
METODISTA EN LAS ISLAS FILIPINAS (IEMELIF), INC.
As held by the Court of Appeals, even if the transformation of IEMELIF from a
corporation sole to a corporation aggregate was legally defective, its head or
governing body, i.e., Bishop Lazaro, whose acts were approved by the Highest
Consistory of Elders, still did not change. A corporation sole is one formed by the
chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious
denomination, sect, or church, for the purpose of administering or managing, as
trustee, the affairs, properties and temporalities of such religious denomination, sect
or church.8 As opposed to a corporation aggregate, a corporation sole consists of a
single member, while a corporation aggregate consists of two or more persons. If
the transformation did not materialize, the corporation sole would still be Bishop
Lazaro, who himself performed the questioned acts of removing Juane as Resident
Pastor of the Tondo Congregation. If the transformation did materialize, the
corporation aggregate would be composed of the Highest Consistory of Elders, which
nevertheless approved the very same acts. As either Bishop Lazaro or the Highest
Consistory of Elders had the authority to appoint Juane as Resident Pastor of the
IEMELIF Tondo Congregation, it also had the power to remove him as such or
transfer him to another congregation.
INTRA-CORPORATE DISPUTE
60. RENATO REAL vs. SANGU PHILIPPINES, INC. and/ or KIICHI ABE
Two-tier test in determining the existence of intra-corporate controversy
Respondents strongly rely on this Courts pronouncement in the 1997 case of Tabang
v. National Labor Relations Commission, to wit:
[A]n intra-corporate controversy is one which arises between a stockholder and the
corporation. There is no distinction, qualification nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between stockholders and
corporations.16
In view of this, respondents contend that even if petitioner challenges his being a
corporate officer, the present case still constitutes an intra-corporate controversy as
petitioner is undisputedly a stockholder and a director of respondent corporation.
It is worthy to note, however, that before the promulgation of the Tabang case, the
Court provided in Mainland Construction Co., Inc. v. Movilla17 a "better policy" in
determining which between the Securities and Exchange Commission (SEC) and the
Labor Arbiter has jurisdiction over termination disputes, 18 or similarly, whether they
are intra-corporate or not, viz:
The fact that the parties involved in the controversy are all stockholders or that the
parties involved are the stockholders and the corporation does not necessarily place
the dispute within the ambit of the jurisdiction of the SEC (now the Regional Trial
Court19). The better policy to be followed in determining jurisdiction over a case
should be to consider concurrent factors such as the status or relationship of
the parties or the nature of the question that is subject of their controversy. In
the absence of any one of these factors, the SEC will not have jurisdiction.
Furthermore, it does not necessarily follow that every conflict between the corporation
and its stockholders would involve such corporate matters as only SEC (now the
Regional Trial Court20) can resolve in the exercise of its adjudicatory or quasi-judicial
powers. (Emphasis ours)
And, while Tabang was promulgated later than Mainland Construction Co., Inc., the
"better policy" enunciated in the latter appears to have developed into a standard
approach in classifying what constitutes an intra-corporate controversy. This is
explained lengthily in Reyes v. Regional Trial Court of Makati, Br. 142,21 to wit:
Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in the Courts approach in
classifying what constitutes an intra-corporate controversy. Initially, the main
consideration in determining whether a dispute constitutes an intra-corporate
controversy was limited to a consideration of the intra-corporate relationship existing
between or among the parties. The types of relationships embraced under Section
5(b) x x x were as follows:
 CORPORATION CODE
a) between the corporation, partnership or association and the public;
b) between the corporation, partnership or association and its stockholders, partners,
members or officers;
c) between the corporation, partnership or association and the State as far as its
franchise, permit or license to operate is concerned; and
d) among the stockholders, partners or associates themselves.
The existence of any of the above intra-corporate relations was sufficient to confer
jurisdiction to the SEC (now the RTC), regardless of the subject matter of the dispute.
This came to be known as the relationship test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve,
Inc., the Court introduced the nature of the controversy test. We declared in this case
that it is not the mere existence of an intra-corporate relationship that gives rise to an
intra-corporate controversy; to rely on the relationship test alone will divest the regular
courts of their jurisdiction for the sole reason that the dispute involves a corporation,
its directors, officers, or stockholders. We saw that there is no legal sense in
disregarding or minimizing the value of the nature of the transactions which gives rise
to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also
be considered for the purpose of ascertaining whether the controversy itself is intra-
corporate. The controversy must not only be rooted in the existence of an intra-
corporate relationship, but must as well pertain to the enforcement of the parties
correlative rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship and its incidents
are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.
The Court then combined the two tests and declared that jurisdiction should be
determined by considering not only the status or relationship of the parties, but also
the nature of the question under controversy. This two-tier test was adopted in the
recent case of Speed Distribution Inc. v. Court of Appeals:
To determine whether a case involves an intra-corporate controversy, and is to be
heard and decided by the branches of the RTC specifically designated by the Court to
try and decide such cases, two elements must concur: (a) the status or relationship of
the parties, and (2) the nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation,
partnership, or association of which they are not stockholders, members or
associates, between any or all of them and the corporation, partnership or association
of which they are stockholders, members or associates, respectively; and between
such corporation, partnership, or association and the State insofar as it concerns the
individual franchises. The second element requires that the dispute among the parties
be intrinsically connected with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character, necessarily, the case
does not involve an intra-corporate controversy. [Citations omitted.]
61. CHATEAU DE BAIE CONDOMINIUM CORPORATION vs. SPS.
RAYMOND and MA. ROSARIO MORENO
The facts of this case are similar to the facts in Wack Wack Condominium
Corporation, et al. v. Court of Appeals, et al.,20 where we held that the dispute as to
the validity of the assessments is purely an intra-corporate matter between Wack
Wack Condominium Corporation and its stockholder, Bayot, and is, thus, within the
exclusive original jurisdiction of the Securities and Exchange Commission (SEC). 21
We ruled in that case that since the extrajudicial sale was authorized by Wack Wack
Condominium Corporations by-laws and was the result of the nonpayment of the
assessments, the legality of the foreclosure was necessarily an issue within the
exclusive original jurisdiction of the SEC.
62. WACK WACK CONDOMINIUM CORPORATION, WELBILT
CONSTRUCTION CORPORATION and EUGENIO JUAN GONZALES vs.
TEH CORT OF APPEALS, HON. JUANITO ALMOSA, JR., in his capacity
as Securities and Exchange Commission Hearing Officer, and
JOSEFINA M. BAYOT
We agree with the Court of Appeals and the SEC that the dispute as to the validity of
the assessments is purely an intra-corporate matter between Wack Wack and its
stockholder, Bayot, and is thus within the exclusive original jurisdiction of the SEC. 3
And since the extrajudicial sale was authorized by Wack Wack's by-laws and was the
result of the non-payment of said assessment, the legality of such foreclosure is
necessarily an issue also within the exclusive original jurisdiction of the SEC, contrary
to petitioner's contention that the SEC has no jurisdiction over such foreclosure it
being an action quasi-in-rem. Just because the property has already been sold
extrajudicially does not mean that the questioned assessment have now become
legal and valid or that they have become immaterial. In fact, the validity of the
foreclosure depends on the legality of the assessments and the issue must
determined by the SEC if only to insure that the private respondent was not deprived
of her property without having been heard. If there were no valid assessments, then
there was no lein on the property, and if there was no lien, what was there to
foreclosure? Thus, SEC Case No. 2675 has not become moot and academic and the
SEC retains its jurisdiction to hear and decide the case despite the extrajudicial sale.
63. RAUL C. COSARE vs. BROADCOM ASIA, INC. and DANTE AREVALO
As regards the issue of jurisdiction, the Court has determined that contrary to the
ruling of the CA, it is the LA, and not the regular courts, which has the original
jurisdiction over the subject controversy. An intra-corporate controversy, which falls
within the jurisdiction of regular courts, has been regarded in its broad sense to
pertain to disputes that involve any of the following relationships: (1) between the
corporation, partnership or association and the public; (2) between the corporation,
partnership or association and the state in so far as its franchise, permit or license to
operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders,
 CORPORATION CODE

partners or associates, themselves.29 Settled jurisprudence, however, qualifies that
when the dispute involves a charge of illegal dismissal, the action may fall under the
jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination disputes
and claims for damages arising from employer-employee relations as provided in
Article 217 of the Labor Code. Consistent with this jurisprudence, the mere fact that
Cosare was a stockholder and an officer of Broadcom at the time the subject
controversy developed failed to necessarily make the case an intra-corporate dispute.
dispute which falls within the jurisdiction of the trial courts.
To support their argument that Cosare was a corporate officer, the respondents
referred to Section 1, Article IV of Broadcoms by-laws, which reads:
ARTICLE IV
OFFICER

In Matling Industrial and Commercial Corporation v. Coros, 30 the Court distinguished
between a "regular employee" and a "corporate officer" for purposes of establishing
the true nature of a dispute or complaint for illegal dismissal and determining which
body has jurisdiction over it. Succinctly, it was explained that "[t]he determination of
whether the dismissed officer was a regular employee or corporate officer unravels
the conundrum" of whether a complaint for illegal dismissal is cognizable by the LA or
by the RTC. "In case of the regular employee, the LA has jurisdiction; otherwise, the
RTC exercises the legal authority to adjudicate.31
Section 1. Election / Appointment Immediately after their election, the Board of
Directors shall formally organize by electing the President, the Vice-President, the
Treasurer, and the Secretary at said meeting.
The Board may, from time to time, appoint such other officers as it may determine to
be necessary or proper. Any two (2) or more compatible positions may be held
concurrently by the same person, except that no one shall act as President and
Treasurer or Secretary at the same time.37 (Emphasis ours)

Applying the foregoing to the present case, the LA had the original jurisdiction over
the complaint for illegal dismissal because Cosare, although an officer of Broadcom
for being its AVP for Sales, was not a "corporate officer" as the term is defined by law.
We emphasized in Real v. Sangu Philippines, Inc. 32 the definition of corporate officers
for the purpose of identifying an intra-corporate controversy. Citing Garcia v. Eastern
Telecommunications Philippines, Inc.,33 we held:

" Corporate officers in the context of Presidential Decree No. 902-A are those
officers of the corporation who are given that character by the Corporation Code or by
the corporations by-laws. There are three specific officers whom a corporation must
have under Section 25 of the Corporation Code. These are the president, secretary
and the treasurer. The number of officers is not limited to these three. A corporation
may have such other officers as may be provided for by its by-laws like, but not
limited to, the vice-president, cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the corporations by-laws."34
(Emphasis ours)

In Tabang v. NLRC,35 the Court also made the following pronouncement on the
nature of corporate offices:

It has been held that an "office" is created by the charter of the corporation and the
officer is elected by the directors and stockholders. On the other hand, an "employee"
usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.36 (Citations omitted)

As may be deduced from the foregoing, there are two circumstances which must
concur in order for an individual to be considered a corporate officer, as against an
ordinary employee or officer, namely: (1) the creation of the position is under the
corporations charter or by-laws; and (2) the election of the officer is by the directors
or stockholders. It is only when the officer claiming to have been illegally dismissed is
classified as such corporate officer that the issue is deemed an intra-corporate