Chapters I: Introduction o General law: The Corporation Code

o Compliance with the Code=acquisition of juridical

Role of corporation in modern business personality
— There must be an underlying contract among the
— Corporate form of business organization permits the individuals forming the corporation
combination of funds from various sources to raise the o Interplay of State grant and contractual relations
big capital needed for large business and industrial (3) right of succession
enterprise — Continued existence cannot be affected by any change in
— Combination of resources+advantages of limited liability= the members or SHs
corporation’s popularity (4) powers, attributes, and properties expressly authorized by law
or incident to its existence
Definition and attributes of a corporation
Four attributes: Advantages of Corporate Form
(1) artificial being—
— By operation of law, becomes a being with the attributes 1. strong legal personality
of an individual with full capacity to enter into 2. limited liability to investors
contractual relations a. limited to their shares
— a juridical person capable of having rights and b. in partnerships—creditors can still go after individual
obligations; properties of the partners
— with a personality separate and distinct from its 3. free transferability of units of investment
members or SHs a. GR: shares of stocks can be transferred even without
— fundamental principle in corporate law: SHs are not the consent of other SHs
personally liable for corporate obligations, and cannot be 4. Centralized management
liable beyond their contribution to the corporate capital a. Centralized in the Board
— corporation not liable for personal obligations of its SHs b. SHs are not agents and cannot bind the corporation
(2) created by operation of law c. SHs are bound by management decisions and
— from a strict legal point of view, a corporation cannot transactions of the board, generally
come into being by mere consent of the parties
o mere consent insufficient Advantages Disadvantages
— State must have given its consent either through a 1 Strong legal personality Complicated and costly
special law or general enabling law formation

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2 Limited liability Lack of personal element o Death or insolvency of partner will result in
3 Free transferability Abuse of corporate dissolution
management o Corporations cannot be voluntarily dissolved except
by 2/3 vote of stock + some State act, whether
4 Centralized management Limited liability hits innocent
judicial or administrative (SEC)
victims
— Mere agreement is sufficient to give rise to a
5 Double taxation
partnership v. substantial compliance with the Corpo
Code for corporations
— Management—every partner is an agent of the
Laws governing Philippine corporations partnership, with capacity to bind vs. centralized
management in the BoD for corporations
Choice of Business organizations o SH has no voice in the management except to elect
directors
(1) The Individual Proprietorship
— works well for carrying simple or small businesses (3) The Close Corporation
— owner’s unlimited personal liability
— difficulties in expansion — Small closely-knit group like a family
— upon death business will have to stop and be liquidated — They act and feel as partners but wishing to avail of
limited liability
(2) The Partnership — Most distinct characteristic: all or most SHs are active
— 1767: two or more persons bind themselves to contribute in the corporate business either as directors or officers
money or industry to a common fund, with the intention — “De facto partnership with a corporate shell”
of dividing the profits among themselves o AOI of close corp can do away with a BOD
— partners are personally liable for debts of the o Can vest management exclusively with the SHs
partnership; while SHs cannot be made to personally o SHs active in management are made liable for
answer to corporate creditors beyond the amount personal torts
contributed o Business/industry imbued with public interest cannot
— much simpler to form a partnership: 5 incorporators vs. be by a close corporation
at least 2 for partners
— Personal relationship between and among partners based (4) The Joint Venture—a form of partnership and should be
on mutual trust and confidence governed by the law on partnerships

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 — Common defn: organization formed for some temporary
purpose
— Community of interests, sharing of profits and losses,
mutual agency
— Formed for the execution of a single transaction, and is
thus of a temporary nature
— Form of partnership and should be governed by the law
on partnerships
— SC has ruled that a corporation can enter into a JV, but
not a partnership
— Separate juridical personality
— Mutual agency
— Unlimited liability
The Business Trust—a vesting of title to the assets of a
business enterprise in trustees who act as representative thereof,
for the benefit of others called the cestui que trust
— deed of trust which is easier and less expensive to
constitute for it is not bound by any legal requirements
— No separate juridical personality
— Governed by contract law and common law principles on
trusts
Government regulation of corporations
By the Legislature
By the SEC
Union Glass v SEC.
Union Glass has no intra-corporate relation with either the
complainant or the DBP, its joinder as party-defendant in SEC Case
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No. 2035 brings the cause of action asserted against it outside the
jurisdiction of the respondent SEC, as delineated by Section 5 of
PD No. 902-A. This grant of jurisdiction must be viewed in the light
of the nature and function of the SEC under the law. Section 3 of
PD No. 902-A confers upon the latter (SEC) "absolute jurisdiction,
supervision, and control over all corporations, partnerships or
associations, who are grantees of primary franchise and/or license
or permit issued by the government to operate in the Philippines ...
"
SEC 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 in so far as its franchise, permit or license to operate is
concerned; and
[d] among the stockholders, partners or associates themselves.
The fact that the controversy at bar involves the rights of
petitioner Union Glass who has no intra-corporate relation either
with complainant or the DBP, places the suit beyond the jurisdiction
of the respondent SEC. The case should be tried and decided by
the court of general jurisdiction, the Regional Trial Court.
Abejo v dela Cruz.
the case falls under paragraph (a). The dispute is likewise an intra-
corporate controversy between and among the majority and
minority stockholders as to the transfer and disposition of the
controlling shares of the corporation, falling under paragraph (b) of
Sec 5 PD 902-A.
An 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.
Effect of Corporation Code on Existing Corporations
— Must be understood to be subject to the accrued or vested
rights of the existing corporation, its SHs and 3 rd parties
— Any rights accrued or liabilities incurred prior to the
effectivity of the latter in favor of or against such corporation,
its SHs must be respected
— Any additional requirements imposed by the Code must be
complied with within 2 years from its effectivity
Magalad v Premiere Financing Corporation (209 SCRA 261).
Considering that Magalad's complaint sufficiently alleges acts
amounting to fraud and misrepresentation committed by Premiere,
the SEC must be held to retain its original and exclusive
jurisdiction over the case, despite the fact that the suit involves
collection of sums of money paid to said corporation, the recovery
of which would originally fall within the jurisdiction of regular
courts. The fraud committed is detrimental to the interest of the
public and, therefore, encompasses a category of relationship
within the SEC jurisdiction.
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The fact that Premiere's authority to engage in financing already
expired will not have the effect of divesting the SEC of its original
and exclusive jurisdiction. The expanded jurisdiction of the SEC
was conceived primarily to protect the interest of the investing
public.
Upon appointment of a . . . rehabilitation receiver . . . all actions for
claims against corporations . . . under receivership pending before
any court, tribunal, board or body shall be suspended accordingly."
By so doing, SEC has exercised its original and exclusive
jurisdiction to hear and decide cases involving: "a) Petitions of
corporations, partnerships or associations to be declared in the
state of suspension of payments.”
Theories about the formation of corporations:
(1) Theory of concession – the corporation owes its life to the
state, its birth being purely dependent on the will of the state
(2) Theory of enterprise entity
The corporate entity takes its significance from the reality of the
underlying enterprise; the State’s approval of the corporate form
sets up a prima facie case that the assets, liabilities and operations
of the corporation are those of the enterprise.
Note:
 A corporation, unlike a human being, does not have inherent
rights.
  Corporations exist only because the law allows them to exist.  Natural resources - Art. XII, Sec. 2
Corporations have only such rights as the law grants to
them.  Land ownership - Art. XII, Sec. 7

 Corporations must have a social purpose; thus it must have  Public utilities – Art. XII, Sec. 11
social responsibilities
 Educational institutions – Art. XIV, Sec. 4(2)
 Profit is the main objective, but corporations are
independent social actors who owe not only contract or legal Who may engage in partly nationalized activities?
duties but also some measure of loyalty to those affected
by its operation.  Filipino citizens

 Corporations or associations organized under Philippine law

Interests within the corporation at least 60% of the capital of which is owned by Filipino
 Corporation as a distinct legal entity citizens
 Stockholders
 Directors Tests for determining compliance
 Officers
 Employees  Grandfather Rule
 Other stakeholders  Control test

The corporate hierarchy Paragraph 7, DOJ Opinion No. 020, Series of 2005
Stockholders Management
Board of Directors Board of Directors SEC Rules provide for the manner of calculating the Filipino
Management Stockholders interest in a corporation for purposes, among others, of
determining compliance with nationality requirements. Such manner
NATIONALITY of computation is necessary since shares in a corporation may be
owned both by individual stockholders and by corporations and
Nationalized or partly nationalized activities partnerships.
1987 Philippine Constitution

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  Under the SEC Rules, there are two cases in determining
the nationality of an investee corporation. 5
CONTROL TEST
- The ‘liberal rule’, later known as the Control Test in the 30
May 1990 SEC Opinion, and pertains to the portion in
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 since
a corporation which is at least 60% Filipino-owned is
considered as Filipino.
GRANDFATHER RULE
- The second case is the Strict Rule or Grandfather Rule
Proper and pertains to the portion in 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.
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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.
In Narra Nickel Mining, the Supreme Court held:
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).
This case calls for the application of the grandfather rule since, as
ruled by the Panel of Arbitrators and affirmed by the Office of
the President, doubt prevails and persists in the corporate
ownership of petitioners.
Gamboa v Teves et al, G.R. No. 176579, 28 June 2011
How is the term “capital” defined?
“The term capital in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and
non-voting preferred shares).
Chapter II: Classification of Private Corporations
Stock and Non-stock Corporations

— 2 elements to become a stock corporation:
o capital stock divided into shares
o stock must be authorized to distribute dividends to
its SHs
o because the main purpose of the corporation is to
make profits for its shareholders
— GR: a business corporation should organize as a stock
corporation
— Non-stock corporation: special kind of corporation with
needs different from those of stock corporations
CIR v Club Filipino.
It has been held that the liability for fixed and percentage taxes,
as provided by these sections, does not ipso facto attach by mere
reason of the operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur.
Having found as a fact that the Club was organized to develop and
cultivate sports of all, class and denomination, for the healthful
recreation and entertainment of its stockholders and members;
that upon its dissolution, its remaining assests, after paying debts,
shall be donated to a charitable Philippine Institution in Cebu; that
it is operated mainly with funds derived from membership fees and
dues; that the Club's bar and restaurant catered only to its
members and their guests; that there was in fact no cash dividend
distribution to its stockholders and that whatever was derived on
retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus-
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expenses-basis), it stands to reason that the Club is not engaged in
the business of an operator of bar and restaurant (same
authorities, cited above).
It is conceded that the Club derived profit from the operation of
its bar and restaurant, but such fact does not necessarily convert
it into a profit-making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its purposes and the
profits derived therefrom are necessarily incidental to the primary
object of developing and cultivating sports for the healthful
recreation and entertainment of the stockholders and members.
That a Club makes some profit, does not make it a profit making
club.
The fact that the capital stock of the respondent Club is divided
into shares, does not detract from the finding of the trial court
that it is not engaged in the business of operator of bar and
restaurant. What is determinative of whether or not the Club is
engaged in such business is its object or purpose, as stated in its
articles and by-laws.
Moreover, for a stock corporation to exist, two requisites must be
complied with, to wit: (1) a capital stock divided into shares and (2)
an authority to distribute to the holders of such shares, dividends
or allotments of the surplus profits on the basis of the shares held
(see. 3, Act No. 1459). In the case at bar, while the respondent
Club's capital stock is divided into shares, nowhere in its articles of
incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits.
"A tax is a burden, and, as such, it should not be deemed imposed
upon fraternal, civic, non-profit, non-stock organizations, unless the
intent to the contrary is manifest and patent."
Manual R. Dulay Ent. Inc. v. CA (225S 678).
In the instant case, petitioner corporation is classified as a close
corporation and consequently a board resolution authorizing the
sale or mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate, a
corporate action taken at a board meeting without proper call or
notice in a close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with
the secretary of the corporation after having knowledge of the
meeting which, in this case, petitioner Virgilio Dulay failed to do.
The Supreme Court had repeatedly disregarded the separate
personality of the corporation where the corporate entity was used
to annul a valid contract executed by one of its members.
Petitioner corporation is liable for the act of Manuel Dulay and the
sale of the subject property to private respondents by Manuel
Dulay is valid and binding. The sale between Manuel R. Dulay
Enterprises, Inc. and the spouses Maria Theresa V. Veloso and
Castrense C. Veloso, was a corporate act of the former and not a
personal transaction of Manuel R. Dulay. This is so because Manuel
R. Dulay was not only president and treasurer but also the general
manager of the corporation. The corporation, was a closed family
corporation, where the incorporators and directors belong to one
single family. It cannot be concealed that Manuel R. Dulay as
president, treasurer and general manager almost had absolute
control over the business and affairs of the corporation.
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*President + Treasurer at the same time – Allowed in close
corporation?
NDC v Philippine Veterans Bank (192 SCRA 257.
Does a defective incorporation result into a partnership? NO.
1. If parties intended to create a corporation, then a
partnership arrangement cannot be created in its stead
since such is not within their intent
2. Important differences between the corporation and
partnership, such as limited liability, centralized
management, and easy transferability of shares are by
themselves strong factors to be bound by a corporate
agreement
Pioneer Insurance v CA (175 SCRA 668).
It is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name
occupy the position of partners inter se. Where persons associate
themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come
short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be
recognized.
In this case, it was established by the evidence contrary to Lim’s
postulations, that Cervantes, Bormacheo, and Maglana contributed
the amount needed by Lim to put up the corporation as he
promised, which he received. It is therefore clear that the
petitioner never had the intention to form a corporation with the
respondents despite his representations to them.
Necessarily, no de facto partnership was created among the parties
which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows
that the petitioner was acting on his own and not in behalf of his
other would-be incorporators in transacting the sale of the
airplanes and spare parts.
(When parties come together intending to form a corporation, but
no corporation is formed due to some legal cause:
(1) parties who intended to participate or actually participated
in the business affairs of the proposed corporation would be
considered as partners under a de facto corporation
(2) parties who took no part except to subscribe for stock in a
proposed corporation, do not become partners with the
subscribers engaged in the business of the corporation)
Corporation Sole
— only a religious corporation can become a corporation
sole
Parent and Subsidiary corporations; holding companies; affiliate
corporations
— subsidiary corporation: one where the control, in the
form of ownership of majority shares, is in another
corporation called the parent corporation
— parent has the power to elect the subsidiary’s
directors, thus controlling management properties
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— holding company: a parent company where the sole
function is to hold the shares of other corporations
which it controls
i. no other business other than holding of shares
— investment company: a corporation which holds
shares not for control but for investment
— affiliates: corporations subject to common control
and operated as part of a system
i. also called sister corporations
Collector v Club Filipino de Cebu, GR L-12719, 31 May 1962, 5
SCRA 321
Club Filipino was a civic corporation organized to operate and
maintain recreational facilities for golf, tennis, etc. It operated a
bar and restaurant for members.
The Commissioner of Internal Revenue assessed the club for non-
payment of certain taxes imposed on business. SC held that the
club was not engaged in business and thus was not liable for such
taxes
Two requisites for stock corporations:
Capital stock divided into shares and
Authority to distribute dividends or allotments of surplus profits
on basis of shares held (sec. 3, Act 1459).
In this case, articles/by-laws did not provide authority for
distribution of its dividends or surplus profits.
Can Congress pass a law creating a private corporation?
NO. A private corporation can only be created under a general law
like the Corporation Code can create a private corporation
Art. XII, Sec. 16, 1987 Constitution: The Congress shall not,
except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in
the interest of the common good and subject to the test of
economic viability.
Ownership of shares of stock is not determining factor of whether
corporation is a public or private corporation. Government can own
shares in a private corporation.
Employee of PNOC EDC, wholly owned subsidiary of PNOC, a
government owned and controlled corporation (GOCC), filed
complaint for illegal dismissal with NLRC.
Issue: Whether matters of employment affecting a GOCC are
within jurisdiction of the NLRC (v Civil Service Law)
Held: Test in determining whether a GOCC is subject to the Civil
Service Law is the manner of its creation, such that those created
by special charter are subject to its provisions while those
incorporated under the general Corporation Law are not within its
coverage. PNOC-EDC being incorporated under the general
Corporation Law is a GOCC whose employees are subject to the
Labor Code.

National Coal Co. v Collector of Internal Revenue GR L-22619,

2 Dec 1924

• The Court held that NCC is a private corporation. The mere

fact that Government happens to the majority stockholder
does not make it a public corporation.

• As a private corporation, it has no greater rights, powers or

privileges than any other corporation which might be
organized for the same purpose under the Corporation Law.

PNOC EDC v NLRC, GR 79182, 11 September 1991

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