I.

GENERAL

A. Definition

Sec 2. Corporation Defined – A corporation is an artificial being created by operation of

law, having the right of succession and the powers, attributes, and properties
expressly authorized by law or incident to its existence.

Art 44. The following are juridical persons:

(3) Corporations, partnerships and associations for private interest or purpose to
which the law grants a juridical personality, separate and distinct from that of each
shareholder, partner or member.

Art 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are
governed by the laws creating or recognizing them.

Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the
provisions of this Code concerning partnerships.

Art 46. Juridical persons may acquire and possess property of all kinds, as well as
incur obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization.

Art 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with
third persons, shall have no juridical personality, and shall be governed by the
provisions relating to co-ownership.

Attributes of a Corporation:

1. Artificial being – it is a juridical, as opposed to natural, entity; it has a separate

personality from its stockholders/members
2. Created by operation of law – it must be recognized by the State and must comply
with the requisites of law on incorporation
3. Succession – the death, insolvency, incapacity of any stockholder does not
automatically result in dissolution of the corporation; it may likewise be an
assignor/assignee of contracts
4. Powers authorized by law – it possesses limited powers which if the corporation
transgresses, (the act) would be considered ultra vires (therefore, voidable)

Laws Governing Philippine Corporations

The law presently applicable is the Corporation Code of the Philippines. During the Spanish
regime, Philippine corporations were governed by the provisions of the Code of Commerce.
Reference was not “corporations” but to “sociedades anonimas”. With the advent of American
socereignty, the Corporation Law took effect and replaced the sociedad anonimas with the
American concept of corporate entity. But the sociedad anonimas had the option to continue
to remain as such and be governed by the Code of Commerce in matters relating to its
organization and method of transacting business as well as to the rights of members among
themselves. But not with respect to its relations to the public and public officials wherein the
Corporation Law would still govern. In the absence of an election, the SC presumes that they
elected to remain as sociedad anonimas. The Corporation Law, however, prohibited the
extension of the corporate term of the sociedad anonimas beyond 50 years – a modification
of the rule in the Code of Commerce.
In 1955, the Code Commission submitted to Congress a proposed Corporation Code but this
proposal was not considered seriously. In 1970, the UP Law center prepared a draft of the
proposed Corporation Code. This was approved on 1980. This Code applies to all private
corporations in general. There are special laws to govern special kidns of corporations like the
Insurance Code, the General Banking Act and the Investment Company Act. GOCCs also
have their special charters. In these cases, the Corporation Code would have suppletory
effect.

Choice of Business Organization

Individual proprietorship – a one-man business wherein the owner is at the same time the
worker but there is no prohibition to employ others. The incomes are subject to income tax
only once. Built-in disadvantages: unlimited personal liability for all the debts and obligations
of the business, capital limited by his resources, upon the owner's death or disability the
business will probably have to stop and be liquidated.

Limited Partnership – makes possible the sharing of profits by an investor whose liability is
limited to his investment but the limited partner cannot take part in the management and leave
the same exclusively to the hands of the general partners. This partnership must at least have
one general partner who is willing to answer personally for the debts of the partnership.

Business Trust – the vesting of title to the assets of a business enterprise in trustees, who act
as representatives thereof, for the benefit of others, called the cestui que trust. It does not
have the juridical personality which a corporation or partnership has. Same with a corporation,
it allows for centralized management in the hands of trustees and easy transferability of
beneficiaries' interest. The deed of trust is just like the articles of incorporation. If the trustees
are given complete control without any right of the beneficiaries to intervene, the beneficiaries
are exempt from personal liability for debts incurred by the trustees on behalf of the business
trust. If the deed gives the beneficiaries indirect control by allowing them to elect trustees and
fill vacancies or to amend or dissolve the trust, they are subject to personal liability as
partners carrying on a business.

Government Regulation of Corporations

1. By the legislature – by amendment or repeal of the Corporation Code

2. By the SEC – administrative supervision with exclusive jurisdiction for intra-corporate
conflicts (transferred to RTC).

MONFORT HERMANOS AGRICULTURAL DEVT CORP V MONFORT III – Salvatierra, as

President of Monfort Corporation sued the successors in interst of Monfort III for unlawful
detainer and replevin for allegedly taking possession of real and personal properties
belonging to the corporation. Salvatierra brought the suit empowered by a Board Resolution
signed by Board Members who do not appear in the General Information Sheet of the
Corporation filed with the SEC.

Held: A corporation has no power except those expressly conferred on it by the Corporation
Code and those that are implied or incidental to its existence. The corporation exercises these
powers through its board of directors and/or its duly authorized officers and agents. A
Corporation has the right to sue and be sued but this can only be exercised by the natural
person authorized by its board of directors. And the constitution of the Board which issues
such authorization must be reflected in the GIS filed before the SEC for the same to be valid.
It is in the interest of the state that the public have the way to know whether the acts of a
corporation are done pursuant to a resolution by a valid Board membership.

B. Theories on Formation
TAYAG v BENGUET CONSOLIDATED INC. – The domiciliary administrator (the County Trust
Company of New York) of the estate of the deceased Idonah Perkins refused to surrender to
the ancillary administrator the stock certificates owned by her in the Philippine corporation
Benguet Consolidated, Inc to satisfy the legitimate claims of the deceased's local creditors.
Thus, the lower court considered as lost the stock certificates, ordered the said certificates
cancelled and directed the corporation to issue new certificates to either the incumbent
ancillary administrator or to the Probate Division of the court. An appeal is made by the
domestic corporation, Benguet Consolidated.

Held: A corporation is an artificial being created by operation of law. It owes its life to the state
(a rejection of the genossenchaft theory the basic theme of which is the reality of the group as
a social and legal entity independent of state recognition and concession). As such, it cannot
legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the
judiciary, whenever called upon to do so.

PSE v COURT OF APPEALS – PALI sought to offer its shares to the public to raise its funds.
PALI was issued a permit to sell by the SEC. PALI intended to course the trading of its shares
through the PSE for which purpose It filed with the said stock exchange an application to list
its shares, with supporting documents attached. Pending the deliberation of PALI's
application, PSE was informed that some of the properties of PALI were being claimed by the
Marcos family and was the subject matter of other cases filed by the PCGG. Thus, PSE
denied the application of PALI at which point PALI complained before the SEC. SEC ordered
PSE to list the shares of PALI. PSE appealed.

Held: A corporation owes its existence to the concession of its corporate franchise from the
state and in recognition of this, the SEC's regulatory authority over private corporations
encompasses a wide margin of areas touching nearly all of a corporation's concerns.
However, the SEC may exercise such power only if the PSE's judgment is attended by bad
faith. In this case, the PSE refused the application of PALI due to the uncertainty of the
properties' ownership and alienability which puts to question the qualification of PALI's
offering. A corporation is an association of individuals allowed to transact under an assumed
corporate name and with a distinct legal personality. It waives no constitutional immunities
and perquisites appropriate to such a body.

TAN BOON BEE v JARENCIO – Anchor Supply sold on credit to Graphic paper products.
Graphic made partial payments by check. Due to failure of Graphic to pay any installment,
petitioner filed with the CFI a civil case for sum of money. The CFI ruled against Graphic and
eventually a writ of execution was issued. However, it remained unsatisfied. Thus the sheriff
levied upon an “Original Hiedelberg Cylinder Press” found within the premises of Graphic.
Respondent PADCO informed the sheriff that it is the owner and not Graphic.

Held: The controlling stockholder of PADCO is Graphic. The separate and distinct personality
invested by law in a corporation is merely a fiction created for convenience and to promote
justice. As such, it may be disregarded, or the veil of corporate fiction pierced, in cases where
it is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to
achieve equity or when necessary for the protection of creditors. Petitioner's evidence
established that PADCO was never engaged in the printing business, that the board of
directors and officers of Graphic and PADCO were the same, that PADCO holds 50% of the
share of stock of Graphic and that the printing machine had been in the premises of Graphic
long before PADCO even acquired its alleged title from Capitol Publishing. PADCO's claim of
ownership is not only farce and sham but also unbelievable.

C. Advantages and Disadvantages

Advantages:
1. Limited liability of those forming the corporation
2. Continued existence despite the change in membership, i.e. greater stability
 3. Makes possible extension of more credit
4. No agency relationship among stockholders so answerability with respect to unlawful
acts do not affect the corporation itself and the stockholders who did not
consent/conform thereto
5. Powers of management are centralized (in the Board of Directors) and therefore,
there is no need for a stockholder to be personally involved

Disadvantages:
1. Steps towards formation is more complicated
2. Management may be costly because of numerous requirements provided by law
3. Difficult to pinpoint who among the stockholders/managers is personally liable for
fraud

D. Distinguished from other entities

Sole Proprietorship
SOLE PROPRIETORSHIP CORPORATION
One-man business (owner and worker is the Generally, at least 5 incorporators
same, but not precluded from employment of
others)
Free from regulations and requirements Like partnerships, required by SEC to abide
besides obtaining proper municipal licenses by certain regulations and requirements it
and permits promulgates
Subject to income tax only once Taxed on income of the corporation and the
income of the shareholders (separately, i.e.
twice)
Unlimited personal liability for all debts and Liability limited to share in capital
obligations of the business
Upon death or incapacity of the owner, the Subject to succession
business will probably have to stop and be
liquidated unless someone is willing and
capable to take over

Joint Venture
JOINT VENTURE CORPORATION
Organization formed for some temporary
purpose

Cooperative
COOPERATIVE CORPORATION
Formed under the Cooperative Cood Formed under the Corporation Code
Tax-exempt -
Coop members are not personally liable to (same)
the Cooperative's debts

Sociedad Anonimas
SOCIEDAD ANONIMAS CORPORATION
Under the Corporation Law (predecessor of Under the Corporation Code
Corporation Code)

Cuentas en Participacion
CUENTAS EN PARTICIPACION CORPORATION
Under the Corporation Law (predecessor of Under the Corporation Code
Corporation Code)
Partnership with silent partners (there is no
way for 3rd parties to know that it is a
partnership)
Corporation Sole
CORPORATION SOLE CORPORATION
Incorporation office held by only one person Must be formed by at least 5 persons
(corporation aggregate)
Grew out of convenience it affords to
religious sects in the administration of church
properties and funds

Sec 110. Corporation Sole – For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such religious denomination, sect or church.

E. Nature and Attributes

SMITH BELL v NATIVIDAD – Smith Bell wants to compel the Collector of Customs to issue it
a certificate of Philippine Registry for its motor vessel Bato. Smith Bell is a corporation
organized under the laws of the Philippine Islands. A majority of its stockholders are British
subjects. Thus, the government refused to issue it the certificate by virtue of Act No. 2761
which denies the registry of vessels in its coastwise trade to corporations having alien
stockholders.

Held: The guaranties of the 14th Amendment (due process and equal protection) are
universal in their application and extend to private corporations who are likewise “persons” so
far as their property is concerned. But the 14th Amendment was not designed to interfere with
the exercise of the police power of the state to prescribe regulations to promote the health,
peace, morals, education and good order of the people, and to legislate so as to increase the
industries of the State, develop its resources and add to its wealth the prosperity. The firm
stand of the government is with reference to the presence of undesirable foreigners. The
government has assumed to act for the benefit and protection of its own citizens and for the
self-preservation and integrity of its dominion. Moreover, the ultimate purpose of the
Legislature in enacting the said act is to encourage Philippine ship-building.

BACHE & CO. v RUIZ – The Commissioner of Internal Revenue wrote a letter addressed to
Judge Ruiz requesting the issuance of a search warrant against petitioners for violation of the
NIRC. At the time of the application, the Judge was hearing another case so, by means of a
note, he instructed his Deputy Clerk of Court to take the depositions of De Leon and his
witness. The stenographer then read to the judge her steno notes and thereafter the judge
asked the witness to take the oath and warned him of the penalty for perjury. Then, the judge
signed the application for a search warrant. Days later, the BIR agents served the search
warrant. Bache (petitioner) prayed that the Court declare the search warrant null and void.

Held: Although officers of a corporation cannot refuse to produce books and papers of the
corporation, this does not mean that a corporation is not entitled to immunity against
unreasonable searches and seizures. A corporation is, after all, but an association of
individuals under an assumed name and with distinct legal identity and in organizing itself, it
waives no constitutional immunity appropriate to such body. The Constitution requires that the
judge personally examine the witnesses before issuing the warrant. The warrant was not
issued for one specific offense as there are various offenses in the NIRC. nor is there a
particular description of the things to be seized. [In Stonehill, only the officers of the
corporation were petitioners; in the present case, the corporation itself is a petitioner]

STONEHILL v DIOKNO – Upon application of the officers of the government, 42 search

warrants were issued against petitioners herein and/or corporations of which they were
officers to search the persons named and the premises of their offices, warehouses and/or
residences and to seize and take possession of the named personal properties therein. The
offense alleged was violation of “Central Bank Laws, Tariff and Customs Laws, Internal
Revenue and the Revised Penal Code.”

Held: With respect to the properties seized in the offices of the corporations, the petitioners
have no cause of action. Corporations have their respective personalities, separate and
distinct from the personality of their officers – regardless of the amount of shares of stock or of
the interest of each of them in said corporations, and whatever the offices they hold may be.
With respect to the rest, the warrant constitutes a general warrant which is abhorred by the
Constitution.

BATAAN SHIPYARD & ENGINEERING v PCGG – Bataan Shipyard questioned the validity of
the executive orders issued by President Aquino ordering the sequestration of Bataan
Shipyard, among other companies. By virtue of these orders, the PCGG addressed a letter to
the president and other officers of Bataan Shipyard for the production of certain documents.
The company questioned the legality of this order invoking the right against self-incrimination
guaranteed by the Constitution.

Held: Corporations are not entitled to all of the constitutional protections which private
individuals have – they do not have the right against self-incrimination. It is a creature of the
state and presumed to be incorporated for the benefit of the public. There is a reserved right
in the legislature to investigate its contracts and find out whether it has exceeded its powers,
and thus the state cannot be prevented to inspect or compel the production of corporate
books, papers for that purpose.

PNB v CA – Philamgen executed its bond with defendant Gueco as principal in favor of PNB
to guarantee the payment of Gueco's account with said bank. In return, to guarantee the
payment of whatever amount Philamgen would pay to PNB, Gueco executed the indemnity
agreement with Philamgen. Gueco failed to pay despite demands so Philamgen paid the
bank. Gueco admitted her non-payment but claimed that she had an agreement with a certain
Tuazon to lease to the latter her unused export sugar quota wherein she would earn enough
money to pay the bank but PNB has placed obstacles to the consummation of the lease
resulting in its rescission. Since the quota was mortgaged to PNB, it requires the latter's
approval.

Held: The failure of the negotiation for the lease was due to the fault of the directors of the
PNB who kept on insisting on increasing the amount of the lease by a measly P200. Tapnio's
failure to utilize her sugar quota was due to the disapproval of the lease by the Board of
Directors of PNB when it new that time is of the essence in the approval of the lease of sugar
quota allotments since the same may only be utilized during the milling season. The Civil
Code provides that every person “must in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good faith. A
corporation is civilly liable in the same manner as natural persons for a tort committed by its
agents because the rules governing the liability of a principal or master for a tort committed by
an agent or servant are the same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial person.

CHING v SECRETARY OF JUSTICE – Ching was the senior vice president of PBMI. PBMI,
through Ching, applied with the RCBC for the issuance of commercial letters of credit to
finance its importation of assorted goods. The bank approved the application but in return,
Ching was made to sign 13 trust receipts as surety. Ching agreed to hold the goods in trust
for the bank with authority to sell but not by way of conditional sale, pledge or otherwise and
then to turn over the proceeds to apply against the indebtedness to the bank. If, however, the
goods remained unpaid, they were to be returned to the bank without need of demand. When
the trust receipts matured, Ching failed to return the goods or turn over their value. Thus, the
bank filed a criminal complaint for estafa against Ching.

Held: Ching's being a senior vice president of PBMI does not exculpate him from any liability.
The failure of a trustee to turn over the proceeds of the sale constitutes the crime of estafa.
Though a corporation cannot be arrested and imprisoned, it may be charged and prosecuted
for a crime if the imposable penalty is a fine (or even if imposable penalty is both fine and
imprisonment, a corporation may be prosecuted and if found guilty may be fined). Though the
entrustee is a corporation, the law specifically makes the officers, employees or other officers
or persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible for
the offense.

PRIME WHITE CEMENT CORP v IAC – Prime White, through its President and Chairman of
the Board, entered into a dealership agreement with one of its directors Te to authorize the
latter to act as the exclusive dealer and/or distributor of the corporation for its cement
products in the entire Mindanao area for a term of 5 years without change in purchase price of
the bags of cement. Prime White rescinded the contract for which reason Te sued the
corporation for damages. The Corporation claims that the officers who signed the dealership
agreement had no authority to do so.

Held: All corporate powers shall be exercised by the Board of Directors, except as otherwise
provided by law. The Board may expressly delegate specific powers to its President or to any
of its officers, but in the absence of such express delegation, a contract entered into by the
latter may still bind the corporation if the Board should ratify the same either expressly or
impliedly. Even in the absence of express or implied ratification, the President may bind the
corporation by a contract in the ordinary course of business, provided the same is reasonable
under the circumstances. However, this rule only applies when the President is dealing with a
third person – a person outside the corporation. Te, a director himself, cannot be said to have
not known the absence of authority of the officials he dealt with. Thus, he knew all along that
the contract was void.

FILIPINAS BROADCASTING NETWORK v AGO MEDICAL AND EDUCATION CENTER –

Ago Medical and Educational Center is suing Filipinas Broadcasting Network and its
broadcasters Alegre and Rima for libel. Rima and Alegre exposed various alleged complaints
from students, teachers and parents against AMEC. Filipinas Broadcasting filed a motion to
dismiss claiming that it exercised due diligence in the selection and supervision of Rima and
Alegre.

Held: A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. [Statement in the earlier case of Mambulao to
the effect that a corporation may have a good reputation which, if besmirched, may also be a
ground for moral damages, is obiter dictum]. AMEC's claim for moral damages is, however,
grounded on item 7 of Art 2219 of the Civil Code which expressly authorizes recovery of
moral damages in cases of libel, slander or any other form of defamation (as in this case).
Thus, it may be granted.

F. Kinds of Corporations

1. Vis-à-vis State: Public, quasi-public, private

Public – created by special charter

Quasi-public – essentially public but performs proprietary functions
Private – created under a general law (the Corporation Code)

Domestic – incorporated under the laws of the Philippines

Foreign – incorporated under the laws of other countries

Corporation Sole – with only one incorporator (bishop, archbishop, priest, minister, rabbi, etc)
Close Corporation – family corporations
Aggregate Corporation – ordinary corporation with 5-15 incorporators (at least 5 are natural
persons)
Stock – stock divided into shares with intent to distribute profits to their shareholders
Non-Stock – no distribution of profits, i.e. would be used in furtherance of corporation's
purposes.

De Jure Corporation – established under the Corporation Code after complying with all the
requirements (substantially); corporate existence cannot be attacked by anyone (including the
State) under any circumstances.
De Facto Corporation – defectively organized corporations with good faith on the part of
incorporators; corporate existence cannot be assailed collaterally but the State may file quo
warranto proceedings
Corporation by estoppel – (see: Cranson)

Subsidiary Corporation – control, usually in the form of ownership of majority of its shares, is
in another corporation, called the Parent Corporation. The latter has the power to elect the
subsidiary's directors thus controlling its management policies.
Parent Company – sole function is to hold the shares (holding company)
Investment Company 0 corporation which holds shares in other corporations not for the
purpose of controlling them but merely to invest therein
Affiliates – corporations which are subject to common control and operated as part of a
system (sister corporations)

FELICIANO v COMMISION ON AUDIT – Feliciano requests COA to stop charging auditing

fees to Leyte Metropolitan Water District (LMWD) on LMWD's theory that it is a private
corporation and therefore not covered by COA's audit jurisdiction. LMWD is among the local
water districts (LWDs) created pursuant to PD 198 which mandated the creation of Districts
that would perform public service and supply public wants.

Held: LMWD is a public corporation (a GOCC with original charter) subject to COA's audit.
The Constitution recognizes only two types of corporations – private corporations which are
incorporated under a general law (Corporation Code) and public corporations which include
GOCCs with original charters. The Constitution prohibits the creation of private corporations
except by a general law because of the possibility of granting special privileges to a select
individual, family or group. LWDs are not private corporations because they are created not
under the Corporation Code but by virtue of PD 198, are not registered with the SEC, have no
articles of incorporation, no incorporators and no stockholders or members. Likewise, the
contention that LWDs are private corporations because PD 198 declares them to be quasi-
public in nature is inconsequential. The constitutional criterion on the exercise of COA's audit
jurisdiction depends on the government's ownership or control of a corporation, not its nature
– private, quasi-public or public. The provision in PD 198 which states that “auditing shall be
performed by a CPA not in the government service” cannot prevail over the Constitution.

SHIPSIDE INC v CA – Galvez was the holder of an OCT for 4 lots. He conveyed Lots 1 and 4
to Mamaril, et al. Mamaril, et al sold the same lots to Lepanto Consolidated Mining Company.
Unknown to Lepanto, the CFI already declared Galvez' OCT to be null and void. Lepanto then
sold the two lots to Shipside Incorporated. The cancellation of his OCT was appealed to the
CA which affirmed the lower court's ruling and which decision has become final. Despite the
lapse of 24 years, the judgment has not been executed so the Sol Gen filed a complaint for
revival of judgment impleading as one of the defendants the latest vendee Shipside
Incorporated. Shipside filed a motion to dismiss on the ground that the plaintiff was not the
real party-in-interest, the real property being owned by the Bases Conversion Development
Authority (BCDA) and not the plaintiff.

Held: The action has been barred by prescription. While it is true that prescription does not
run against the State, this protection can no longer be invoked by the government since it is
no longer interested in the subject matter. While the lot may have belonged to the government
at the time of Galvez's title was ordered cancelled, the same has been transferred to BCDA
already. The Republic is no longer the owner. BCDA is an entity invested with a personality
separate and distinct from the government.

The functions of the government may be classified into governmental or proprietary. The
functions performed by BCDA are basically proprietary in nature. It should thus be BCDA
which files the action.

BOY SCOUTS OF THE PHILIPPINES v NLRC – Respondents were rank and file employees
of BSP. The Secretary General of BSP ordered them to be transferred from BSP Camp in
Makiling to BSP Davao del Norte. Despite the promise that the transfer would not result in
diminution of salary and that they would receive allowance, they refused to comply and even
filed with the DOLE a complaint to enjoin the implementation of the orders for their transfer.
Meanwhile, they all received a letter from the BSP National President stating that their refusal
to obey the order of transfer constituted rank disobedience with a warning that continued
refusal may amount to their termination from employment. This letter was unheeded by the
respondents, thus they were suspended then later terminated. Thereupon, respondents
included in the complaint before the Labor Arbiter a claim of illegal dismissal.

Held: The question is whether or not BSP is in fact a GOCC and therefore within the Civil
Service which would remove it from the jurisdiction of the Labor Arbiter. BSP's functions do
not relate to the governance of any part of the territory of the Philippines. BSP is not a public
corporation in the same sense that municipal corporations or local government units are
public corporations. BSP's functions cannot also be described as proprietary functions or
activities of GOCCs. Nevertheless, the public character of BSP's functions and activities must
be conceded for they pertain to educational, civic and social development of the youth. BSP
combines aspects of both public and private entities, is designated statutorily as “a public
corporation” and the Government substantially participates in the selection of the members of
the National Executive Board of the BSP. The BSP as presently constituted under its charter
is a GOCC. It therefore follows that the employees of petitioner BSP are embraced within the
Civil Service and are accordingly governed by the Civil Service Law and Regulations. The
Labor Arbiter and NLRC have no jurisdiction.

PNOC-ENERGY DEVELOPMENT CORP v NLRC – Mercado was an employee of the PNOC-

EDC who was terminated for numerous acts of dishonesty. He filed a complaint for illegal
dismissal before the Labor Arbiter and obtained a favorable ruling.

Held: The Civil Service Law applies to government corporations created by special charter
and does not apply to those incorporated under the General Corporation Code. As already
held in PNOC-EDC v Leogardo, PNOC-EDC having been incorporated under the General
Corporation Law is a GOCC whose employees are subject to the provisions of the Labor
Code and are within the jurisdiction of the Labor Arbiter.

DAVAO CITY WATER DISTRICT v CIVIL SERVICE COMMISSION – Petitioners are among
the 500 water districts existing throughout the country created pursuant to PD 198 which
authorized the different local legislative bodies to form and create their respective water
districts through a resolution. In 1989, the Supreme Court held in Tanjay Water District v
Gabaton that all water districts in the country come under the coverage of the Civil Service
Law, rules and regulations. As an offshoot, the CSC issued a Resolution stating the same
principle. However, in 1990, in the case of Metro Iloilo Water District v NLRC, the 3rd Div of
the SC ruled that water districts are not covered by Civil Service Laws and even suspended
the implementation of the CSC Resolution which stated otherwise.

Held: We reiterate our ruling in the Tanjay case. PD 198 is a special law applicable only to the
different water districts created pursuant thereto. By GOCC with original charter, it is meant
GOCC created by special law and not under the Corporation Code of the Philippines.
Excluded from the coverage of the CSC are those corporations created pursuant to the
Corporation Code. The petitioners are not created under said code, but on the contrary, they
were created pursuant to a special law and are governed primarily by its provisions. PD 198 is
the source of authorization and power to form and maintain a district. It contains all the
essential terms necessary to constitute a charter creating a juridical person – numbers and
qualifications of the members of the Board of Directors, their appointment and nominations,
their terms of office, the manner of filling up vacancies, the compensation and personal
liability of the members of the Board of Directors. These are similar to those contained in
other corporate charters. The resolution of the local sanggunian, although necessary to create
the water districts, is not the charter.

Bidin, dissent: PD 198 is a general legislation which authorizes the formation of water districts
but the operative act which creates them is the resolution of the Sanggunian. It is apparent
that in their creation PD 198 is not an original charter but a general act similar to the
Corporation Code. Petitioners are quasi-public corporations performing public service without
original charters and therefore not embraced by the Civil Service

CAMPOREDONDO v NLRC – the Secretary General of Philippine National Red Cross

(PNRC) wrote petitioner requiring him to restitute within 72 hours the amount their field
auditor found to be unaccounted for. Camporedondo requested for a re-audit and at the same
time applied for an early retirement. Both requests were denied. Thus, Camporedondo filed
with the NLRC a complaint for illegal dismissal.

Held: PNRC is a GOCC with an original charter under RA 95, as amended. The test to
determine whether a corporation is government owned or controlled or private: those with
special charters are government corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission. Petitioner must have known that he
was always covered by the GSIS which is why he could apply for early retirement. Thus, the
NLRC had no jurisdiction.

1. As to place of incorporation: Domestic, foreign

Sec 123. Definition and rights of foreign corporations - For the purposes of this Code, a
foreign corporation is one formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do
business in its own country or state. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate
government agency.

1. As to purpose: municipal, religious, educational, charitable, scientific or vocational,

business

Sec 88. Purposes. - Non-stock corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing particular
classes of non-stock corporations.

Sec 106. Incorporation – Educational corporations shall be governed by special laws

and by the general provisions of this Code.

Sec 107. Pre-requisites to incorporation – Except upon favorable recommendation of

the Ministry of Education and Culture, the Securities and Exchange Commission shall
not accept or approve the articles of incorporation and by-laws of any educational
institution.

Sec 108. Board of trustees – Trustees of educational institutions organized as non-

stock 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).
Unless otherwise provided in the articles of incorporation on 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.

For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.

Sec 109. Classes of religious corporations – Religious corporations may be

incorporated by one or more persons. Such corporations may be classified into
corporations sole and religious societies.

Religious corporations shall be governed by this Chapter and by the general

provisions on non-stock corporations insofar as they may be applicable.

Sec 116. Religious societies – Any religious society or religious order, or any diocese,
synod, or district organization of any religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, or discipline of the religious
denomination, sect or church of which it is a part, or by competent authority, may,
upon written consent and/or by an affirmative vote at a meeting called for the purpose
of at least two-thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and estate by filing with
the Securities and Exchange Commission, articles of incorporation verified by the
affidavit of the presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:

1. That the religious society or religious order, or diocese, synod, or district

organization is a religious organization of a religious denomination, sect or
church;

2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the body;

3. That the incorporation of the religious society or religious order, or diocese,

synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of the
religious denomination, sect, or church of which it forms a part;

4. That the religious society or religious order, or diocese, synod, or district

organization desires to incorporate for the administration of its affairs,
properties and estate;

5. The place where the principal office of the corporation is to be established and
located, which place must be within the Philippines; and

6. The names, nationalities, and residences of the trustees elected by the

religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be prescribed
by the laws of the religious society or religious order, or of the diocese, synod,
 or district organization, the board of trustees to be not less than five (5) nor more
than fifteen (15).

1. As to number of members: Corporation sole, close, aggregate

Sec 110. Corporation sole – For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such religious denomination, sect or church.

Sec 96. Definition and applicability of Title – A close corporation, within the meaning of
this Code, is one whose articles of incorporation provide that: (1) All the corporation's
issued stock of all classes, exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance
with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That
the provisions of other Titles of this Code shall apply suppletorily except insofar as
this Title otherwise provides.

ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v LRC – Rodis executed a

deed of sale over a parcel of land in favor of the Roman Catholic Administrator of Davao, a
corporation sole, with Msgr. Thibault (a Canadian) as actual incumbent. The vendee
presented the deed of sale to the Register of Deeds for registration but the latter returned the
same and required the corporation sole to submit an affidavit declaring that 60% of its
members were Filipino citizens.

Held: A corporation sole is a special form of corporation usually associated with the clergy
designated to facilitate the exercise of the functions of ownership carried on by the clerics for
and on behalf of the church which was regarded as the property owner. Bishops or
archbishops are mere administrators of the church properties. The church properties acquired
by the incumbent of the corporation sole pass by operation of law upon his death not to his
personal heirs but to his successor in office.

The nationality or citizenship of the corporation sole created under the laws of the Philippines
is not altered by the change of citizenship of the incumbent bishops or heads of said
corporation sole. The Roman Catholic Apostolic Church in the Philippines has no nationality.
The framers of the Constitution did not have in mind corporations sole when they provided
that 60% of the capital thereof be owned by Filipino citizens.

The Roman Catholic Apostolic Administrator of Davao is registered with the SEC. according
to our Corporation Law, a corporation sole is organized and composed of a single individual,
the head of any religious society or church, for the administration of the temporalities of such
society or church. By temporalities is meant estates and properties not used exclusively for
religious worship. It further states that any corporation sole may purchase and hold real
estate and personal property for its church, charitable, benevolent, or educational purposes,
and may receive bequests or gifts for such purposes. Lands held in trust for specific purposes
may be subject of registration and the capacity of a corporation sole, like petitioner herein, to
register lands belonging to it is acknowledged, and title thereto may be issued in its name.
REPUBLIC v IAC – in 1979, The Roman Catholic Bishop of Lucena represented by Msgr.
Sanchez filed an application for confirmation of title to 4 parcels of land claiming title thereto
through either purchase or donation as far back as 1928. The legal requirements of
publication and posting were duly complied with as was the service of copies of notice of
initial hearing on the proper government officials.

Held: Since the acquisition of the 4 lots by the applicant, it has been in continuous possession
and enjoyment thereof. By prescription therefore, it has become the owner and the
confirmation proceedings is a mere formality. The Court is not here saying that a corporation
sole should be treated like an ordinary private corporation. A corporation sole, by nature of its
incorporation, is vested with the right to purchase and hold real estate and personal property.
It need not, therefore, be treated as an ordinary private corporation because whether or not it
be so treated as such, the Constitutional provision (No private corporation or association may
hold alienable lands of the public domain except by lease not to exceed 1000 ha in area)
involved, will nevertheless, not be applicable.

1. As to existence of shares: Stock, non-stock

Sec 3. Classes of corporations – Corporations formed or organized under this Code

may be stock or non-stock corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock corporations.
Sec 87. Definition – For the purposes of this Code, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this Code on dissolution: Provided, That any
profit which a non-stock corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized, subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall be applicable to

non-stock corporations, except as may be covered by specific provisions of this Title.

Sec 88. Purposes – Non-stock corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing particular
classes of non-stock corporations.
1. As to legal status: de jure, de facto, corporation by estoppel

Sec 20. De facto corporations – The due incorporation of any corporation claiming in
good faith to be a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a
quo warranto proceeding.
Sec 21. Corporation by estoppel – All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
ARNOLD HALL v PICCIO – A Hall, B Hall (petitioners) and F Brown, E Brown, Chapman and
Abella (respondents) singed the articles of incorporation of Far Eastern Lumber and
Commercial Co to engage in a general lumber business. The said articles were filed with the
SEC. Pending action thereon, the respondents filed a civil case against the Halls for the
dissolution of the Far Eastern due to bitter dissention among the members, mismanagement,
fraud and heavy financial losses. The petitioners filed a motion to dismiss contending that the
court had no jurisdiction because (1) this involving a de facto corporation, dissolution may
only be ordered in a quo warranto proceeding instituted under the Corporation Law; and, (2)
the respondents have signed the articles of incorporation so that they are estopped from
claiming that it is not a corporation.

Held: The SEC has not, so far, issued the corresponding certificate of incorporation. The
personality of a corporation begins to exist only from the moment such certificate of
incorporation is issued – not before. The complaining associates have not represented to the
others that they were incorporated any more than the latter had made similar representations
to them. And as nobody was led to believe anything to his prejudice and damage, the
principle of estoppel does not apply.

The Corporation Law provides: the due incorporation if any corporation claiming in good faith
to be a corporation and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which a corporation may be a party but such inquiry may be
had at the suit of the Insular Government on information of the Attorney General. But, not
having obtained the certificate of incorporation, the Far Eastern may not claim “in good faith”
to be a corporation. The immunity to collateral attack may, therefore, not be claimed. Also, this
is not a suit with the corporation as a party. This litigation is between stockholders. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.

SAWADJAAN v CA – AIIBP was created by virtue of RA 6848 which transferred all assets,
liabilities and capital accounts of PAB to the former including the existing personnel of the
latter. Petitioner was among the personnel retained by AIIBP from PAB. The Board of
Directors of AIIBP found petitioner guilty of dishonesty in the performance of official duties
and/or conduct prejudicial to the best interest of the service and thus dismissed him from
service. The lower courts ruled against Sawadjaan. Thus, petitioner raised as defense that
AIIBP has not yet adopted its corporate by-laws at the time of the termination of his
employment. It is his theory that at the time of the institution of the administrative case against
him, the AIIBP had no legal standing and personality to do so.

Held: AIIBP was created by RA 6848. At the very least, by its failure to submit its by-laws on
time (within 60 days from enactment of the enabling law as such law provides), the AIIBP may
be considered a de facto corporation whose right to exercise corporate powers may not be
inquired into collaterally in any private suit to which such corporation may be a party. A
corporation which has failed to file its by-laws within the prescribed period does not ipso facto
lose its powers as such.

ALBERT v UNIVERSITY PUBLISHING CO – Albert sued University Publishing alleging that

the defendant, a corporation duly organized under the Philippine laws, through its President
Aruego entered into a contract with plaintiff for the exclusive right to publish his revised
Commentaries on the Revised Penal Code. That defendant had undertaken to pay in eight
quarterly installments but that it failed to pay the second installment and per contract, failure
to pay one installment would render the rest due. Defendant admitted plaintiff's allegation of
its corporate existence but raised the defense that it was plaintiff who failed to deliver his
manuscript and counterclaimed for damages. A final judgment against the corporation was
rendered and a writ for its execution issued. However, it was later discovered that there is no
such entity as University Publishing Co according to the records of the SEC. Albert thus
moved that the ruling be executed against the estate of Aruego (who died pendente lite).

Held: On account of the non-registration, University Publishing cannot be considered a

corporation, not even a corporation de facto. The corporation-by-estoppel doctrine is likewise
inapplicable. Aruego represented a non-existent entity and induced not only the plaintiff but
even the court to believe such a representation. One who has induced another to act upon his
willful misrepresentation that a corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of corporation by estoppel. Aruego
was in fact, if not in name, the defendant. A person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts performed as such
agent.

INTERNATIONAL EXPRESS TRAVEL v CA – Kahn as President of the Philippine Football

Federation (PFF) accepted the offer of the International Express Travel to be the former's
travel agent for the trips of the athletes and officials to the SEA Games. Airline tickets were
secured for the purpose. The PFF made two partial payments but has not yet paid the entire
amount due. The petitioner wrote a demand letter. Kahn issued a personal check as partial
payment but no further payments were made thereafter. Thus, petitioner sued Kahn in his
personal capacity and as President of the PFF impleading the PFF as alternative defendant.

Held: RA 3135 and PD 604 both recognize the juridical existence of national sports
associations. But such corporate status does not automatically take place by the mere
passage of these laws. Before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act. Neither of the two
laws provide for the creation of the PFF. However, RA 3135 states that applications for
recognition as a National Sports' Association shall be filed with the executive committee
together with, among others, a copy of the constitution and by-laws and a list of the members
of the proposed association, and a filing fee of ten pesos. Kahn failed to substantiate the
claim that PFF has complied with the aforementioned requirements. The PFF does not have a
corporate existence of its own. Therefore, Kahn should be held liable for the unpaid
obligations of the unincorporated PFF.

[Corporation by estoppel applies to a third party only when he tries to escape liability on a
contract from which he has benefitted on the irrelevant ground of defective incorporation. In
this case, the petitioner is not trying to escape liability from the contract but rather is the one
claiming from the contract.]

CRANSON v INTERNATIONAL BUSINESS MACHINES CORP – IBM brought this action

against Cranson for the balance due on electric typewriters purchased by the Real Estate
Service Bureau on the theory that the Bureau was neither a de jure nor de facto corporation.
Cranson was asked to invest in a new business corporation about to be created. Upon being
advised by the attorney that the corporation had been formed, he paid for and received a
stock certificate and was shown the corporate seal and minute book. The business of the new
venture was conducted as if it were a corporation. Cranson was then elected president but at
no time did he assume personal obligation or pledge his individual credit to IBM. Due to an
oversight on the part of the attorney of which Cranson was not aware, the certificate of
incorporation was not filed until after the Bureau purchased from IBM eight typewriters.

Held: Traditionally, two doctrines have been used by the courts to clothe an officer of a
defectively incorporated association with the corporate attribute of limited liability. The first is
the doctrine of de facto corporations, which elements are: (1) the existence of a law
authorizing incorporation; (2) an effort in good faith to incorporate under the existing law; and,
(3) actual user or exercise of corporate powers. The second is the doctrine of estoppel where
the person seeking to hold the officer personally liable has contracted or otherwise dealt with
the association in such a manner as to recognize and in effect admit its existence as a
corporate body. When there is concurrence of the three elements necessary for the
application of the de facto corporation doctrine, there exists an entity which is a corporation
de jure against all persons but the state. On the other hand, the estoppel theory is applied
only to the de facts of each particular case and may be invoked even where there in no
corporation de facto. Thus, the omission may have prevented the Bureau from being a
corporation de jure or de facto but IBM, having dealt with the Bureau as if it were a
corporation and relied on its credit rather than that of Cranson, is estopped to assert that the
Bureau was not incorporated at the time the typewriters were purchased.

Additional Campos Cases:

MUNICIPALITY OF MALABANG v BENITO – Balindong is the mayor of Malabang, Lanao del
Sur while Benito is the mayor of the municipality of Balabagan which was created by EO 386.
Balindong brought this action for prohibition to nullify EO 386 relying on the ruling of Pelaez v
Auditor General in which case, the Court held that the power of the President over local
government units is limited to supervision and that Sec 68 of the Administrative Code which
gives the President the power to create municipalities is unconstitutional for being an undue
delegation of legislative powers. The municipality of Balabagan, on the other hand, argues
that the case is not applicable to it since Balabagan, unlike the municipalities in Pelaez v
Auditor General, is at least a de facto corporation – (1) having been organized under color of
a statute before this was declared unconstitutional; (2) its officers having been elected or
appointed; (3) the municipality itself having discharged its functions. It thus asserts that it
cannot be collaterally attacked and its legal existence may only be inquired into directly
through a quo warranto proceeding at the instance of the State.

Issue: WON Balabagan is a de facto municipal corporation

Held: No. The following principles apply to de facto corporations:

1. The color of authority requisite to the organization of a de facto municipal
corporations may be:
a. An unconstitutional law valid on its face, either
i. Upheld for a time by the courts
ii. Not yet been declared void
Provided that a warrant for its creation can be found in some other valid law
or in the recognition of its potential existence by the general laws or
constitution of the state
1. There can be no de facto municipal corporation unless either directly or potentially
such de jure corporation is authorized by some legislative fiat
2. There can be no color of authority in an unconstitutional statute alone, the invalidity of
which is apparent on its face
3. There can be no de facto corporation created to take the place of an existing de jure
corporation as such organization would clearly be a usurper.

That Balabagan was organized at a time when the statute has not been invalidated cannot
make it a de facto corporation as, independently of the Admin Code, there is no other valid
statute to give color of authority to its creation. This is not to say, however, that the acts done
by the municipality in the exercise of its corporate powers are a nullity because the EO
creating it is an operative fact which cannot be ignored.

BERGERON v HOBBS – Hobbs, under the name of Bayfield Agri Assoc, employed several
persons to perform labor in improving their grounds and in erecting fences and buildings.
Time checks were given by the employers to the laborers who assigned the same to
Bergeron. Bergeron is suing Hobbs, et al on the checks claiming that they form a co-
partnership. Hobbs, et al insist that they transacted with the laborers as a corporation. It
appears that the articles of organization and the certificate showing the election of officers of
the defendants had been recorded in the office of the register of deeds but were not on file
there. They had been deposited, with instruction to record and return them which had been
complied with.

Issue: WON the mere recording of the articles of incorporation with the certificate of election
of officers without the papers remaining in the officer makes the entity a corporation.

Held: No. The statute provides that upon the filing of a certificate of organization with a copy
of the constitution in the office of the register of deeds, such society shall have the powers of
a corporation. “Filing” entails that the paper is to remain in its proper order on file in the office.
As a general rule, where an attempt to organize a corporation fails, by omission of some
substantial step or proceeding required by the statute, its members or stockholders are liable
as partners for its acts and contracts. An exception to this rule is when the corporation can
pass itself off as a de facto corporation. Its actions must be under a color, at least, of a right. It
is immaterial that they have carried on business under the supposed authority to act as a
body corporate in entire good faith. Until the articles of incorporation are filed in the office of
the register of deeds of the country, there is no color of legal right to act as a corporation.
Since the defendants are not a corporation either de jure or de facto, they are liable to the
plaintiff's claim as partners.

Marshall, dissent: A person who contracts with a de facto corporation, the members of the
latter and such person believing in good faith in its legal existence, such members cannot be
held personally liable. We necessarily, concede that it is not essential to freedom from such
liability that all the statutory requirements to the existence of a corporation be complied with,
because, when that is done, the organization is obviously not a corporation de facto only.
Moreover, only the state can challenge the legality of the exercise of corporate powers. The
unauthorized exercise of power constitutes a public offense, not against any individual, but
against the sovereignty of the state.

Every element necessary to make the Agri Assoc a de facto corporation is present. There was
a law under which it might have existed. The association prepared their constitution, and
adopted it in the form of ordinary articles of incorporation and, by mistake, filed it for record
instead of filing and leaving it with the office as the law requires. They assumed to act as a
corporation and exercised corporate powers for a considerable length of time in utmost good
faith.

HARILL v DAVIS – The four defendants, after having agreed to form a corporation, ordered
foods from the plaintiff even before they filed their articles of incorporation. After the filing in
one of the two offices required by law, they ordered more goods. An action is herein
commenced against the defendants for recovery of the purchase price from the defendants as
partners.

Issue: WON the defendants should be made personally liable

Held: No. The general rule is that parties who associate themselves together actively engage
in business for profit under any name are liable as partners for the debs they incur under that
name. an exception to this rule (where such associates may escape individual liability) is by
compliance with the incorporation laws or by a real attempt to comply with them which gives
the color of a legal corporation, and by the user of the franchise of such corporation in the
honest belief that it is duly incorporated. In every one of those cases where the court
recognized the exemption, the articles of incorporation have been filed under a general
enabling act or a charter had been issued and there had been a user of the franchise of the
supposed corporation which had been colorably created by such filing. Nothing of this nature
had been done before the debt was incurred.

[elements of estoppel in pais: ignorance of the truth and absence of equal means of
knowledge of it by the party who claims the estoppel, and action by the latter induced by the
misrepresentation of a party against whom the estoppel is invoked]

HALL v PICCIO – Hall et al signed and acknowledged the articles of incorporation of the Far
Eastern Lumber and Commercial Co. Immediately after the execution of the articles, the
corporation proceeded to do business with the adoption of the by-laws and the election of its
officers. On Dec 1947, the articles were filed in the SEC for the issuance of the corresponding
certificate of incorporation. Pending action by the SEC on their application, some of the
incorporators (Brown et al) filed a case before the CFI praying for the dissolution of the
existing partnership with Hall et al on the ground of bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial losses. The Hall camp filed a
motion to dismiss claiming that the court has no jurisdiction as the suit may only be filed by
the state through a proper quo warranto proceeding (therefore, the Halls already claim
existence as a corporation)
Issue: WON the corporate personality is acquired even before the issuance of a certificate of
incorporation.

Held: No. Not having obtained the certificate of incorporation, the Far Eastern Lumber and
Commercial Co and its stockholders may not claim “in good faith” to be a corporation. The
personality of the corporation begins to exist only from the moment such certificate is issued –
not before.

EMPIRE MANUFACTURING COMPANY v STUART – The plaintiff in error was sued upon a
promissory note given by it in its corporate name. The principal defense was that the
company, by mistake, was not, at the time of giving the note,, properly organized under any
law of the State and that after ascertaining such fact, the corporation was dissolved and a
new corporation formed under a different name.

Issue: WON the creditors of the defunct “corporation” could still sue the new corporation
under the different name

Held: Yes. The corporation was one that could have been legally organized under laws
existing at the time of its formation. Having attempted to organize in good faith and having in
the course of its business given negotiable paper in its corporate name, it could not
afterwards repudiate the transaction or evade responsibility when sued thereon. The
dissolution would not deprive the creditors of still following and looking to the old organization
for payment. Statutes allow three years after dissolution, for certain purposes, in winding up
the affairs.

LOWELL-WOODWARD v GR WOODS (SUPERIOR LEASING COMPANY) – Lowell-

Woodward sued Superior Leasing Company upon a promissory note. The defendant
contends that there was no competent evidence of the plaintiff's corporate existence. He said
that the plaintiff was running a hardware store, that he inferred it was a corporation from its
name and its mode of doing business, and that a bank president had told him that it was a
corporation.

Issue: WON the plaintiff, not having a corporate personality, can sue the defendant

Held: Yes. One who enters into a written contract with a party described therein as a
corporation is precluded, in an action brought thereon by such party under the same
designation, from denying its corporate existence. “The Lowell-Woodward Hardware
Company” imports a corporation. One who has signed a promissory note running to a payee
described by a name appropriate to a corporation, although not employing the term, cannot in
an action brought against him thereon by such payee under the same name, in which it
alleges itself to be a corporation, be heard to question the plaintiff's corporate existence,
unless upon a showing that his obligation to make payment would be thereby affected. The
defendant, having given his promise to pay, should not be permitted to escape or delay
performance by raising an issue as to the character of the organization to which he is
indebted, unless his substantial rights might thereby be affected.

ASIA BANKING CORP v STANDARD PRODUCTS – Action is brought by Asia Banking to

recover the balance due on a promissory note executed by Standard Products. At the trial, the
plaintiff failed to prove affirmatively the corporate existence of the parties and the defendant
insists that under these circumstances, the lower court erred in finding that the parties were
corporations with juridical personality and worse, holding the defendant liable to the plaintiff.

Issue: WON the defendant is liable to the plaintiff despite lack of proof of the latter's corporate
existence

Held: Yes. In the absence of fraud of a person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its legal existence in any action
leading our of or involving such contract or dealing, unless its existence is attacked for causes
which have arisen since making the contract or other dealing relied on as an estoppel and this
applies to foreign as well as domestic corporations. The defendant, having recognized the
corporate existence of the plaintiff by making a promissory note in its favor and making partial
payments thereon estopped to deny said plaintiff's corporate existence.

SALVATIERRA v GARLITOS – Salvatierra appeared to be the owner of a parcel of land which

was rented by the Philippine Fiber Producers represented by its President Refuerzo. The
lifetime of the lease was 10 years and the agreement was that the land would be planted to
kenaf, ramie or other crops suitable to the soil and that the lessor would be entitled to 30% of
the net income accruing from the harvest. The aforementioned obligations were not complied
with so Salvatierra brought suit against the Philippine Fibers Producers Co and Refuerzo.
Refuerzo, after finality of the decision holding him and the corporation solidarily liable,
questioned the judgment against him claiming that he should not have been held personally
liable. The plaintiff, on the other hand, averred that the personal liability was due to the fact
that all the time she was under the impression that the Phil Fibers represented by Refuerzo
was a duly registered corporation but upon inquiry with the SEC, she learned that it was not.

Issue: WON the President of a corporation should be held solidarily liable for the obligations
of the corporation

Held: Yes. A corporation, when registered, has a juridical personality separate and distinct
from its component members. But this rule is understood to refer only to registered
corporations and cannot be made applicable to the liability of members of an unincorporated
association. Those who act or purport to act as its representatives or agents do so without
authority and at their own risk. A person who acts as an agent without a principal is himself
the principal. A person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent.

II. ESTABLISHMENT OF CORPORATIONS

A. Requirements for Incorporation

Sec. 10. Number and qualifications of incorporators.

Any number of natural persons not less than 5 but not more than 15, all of legal age
and a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of a stock
corporation must own or be subscribed to at least 1 share of the capital stock of the
corporation.

Sec. 11. Corporate Term.

A corporation shall exist for a period not exceeding 50 years from the date of
incorporation unless sooner dissolved or unless said period is extended. The
corporate terms as originally stated in the articles of incorporation may be extended
for periods not exceeding 50 years in a single instance by amendment of the articles of
incorporation, in accordance with this Code: Provided, that no extension earlier than 5
years prior to the original or subsequent expiry dates unless there are justifiable
reasons for an earlier extension as may be determined by the SEC.

Sec. 12. Minimum capital stock required of stock corporations.

Stock corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided for by
special law, and subject to the provisions of the following section.

Sec. 13. Amount of capital stock to be subscribed and paid for purposes of
incorporation.
At least 25% of the authorized capital stock as stated in the AOI must be subscribed at
the time of incorporation, and at least 25% of the total subscription must be paid upon
subscription, the balance to be payable in a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date o dates, upon call
for payment by the board of directors: Provided, however, That in no case shall the
paid up capital be less than Php5,000.

Sec. 14. Contents of Articles of Incorporation.

All corporations organized under this Code shall file with the SEC articles of
incorporation in any of the official languages duly signed and acknowledged by all of
the incorporators, containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purposes, the
articles of incorporation shall state which is the primary purpose and which
is/are the secondary purpose or purposes; Provided, That a nonstock
corporation may not include a purpose which would change or contradict its
nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than 5 nor more
than 15.
7. The names, nationalities, and residences of the persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected
and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided, and in
case the shares are par value shares, the par value of each, the names,
nationalities, and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the
shares are without par value, such fact must be stated;
9. If it be a nonstock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.

The SEC shall not accept the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected by the subscribers
showing that at least 25% of the authorized capital stock of the corporation has been
subscribed, and at least 25% of the total subscription has been fully paid to him in
actual cash and/or property the fair valuation of which is equal to at least 25% of said
subscription, such paid-up capital being not less than PHp5,000.

Sec. 15 . Form of Articles of Incorporation

Unless otherwise prescribed by special law, articles of incorporation of all domestic
corporations shall comply substantially with the following form: (See Annex #)

Sec. 18. Corporate Name.

No corporate name may be allowed by the SEC if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission
shall issue an amended certificate of incorporation under the amended name.

i. Articles of Incorporation
Sec. 14 (see above)
Sec. 15 (see above)

Sec. 97. Articles of Incorporation.

The articles of incorporation of a close corporation may provide:
1. For classification of shares or rights and the qualifications for owning and
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For classification of directors into one or more classes, each of which may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.

The articles of incorporation of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the corporation rather than by
a board of directors so long as this provision continues in effect:

No meeting of stockholders need be called to elect directors;

Unless the context clearly requires otherwise, the stockholders of the corporation shall
be deemed to be directors for purposes of applying provisions of this Code; and

The stockholders and the corporations shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders
instead of by the board of directors.

i. Corporate Name

(See Annexes for SEC Memo Circ. #5 2008; SEC Memo Circ. #12 2008)

LYCEUM OF THE PHILIPPINES V. CA – Lyceum of the Philippines Inc. instituted

proceedings with the SEC to compel the respondents (education institutions) to delete the
word “Lyceum” from their corporate name and to permanently enjoin them from using
“Lyceum” as part of their respective names. Under Sec. 18 of the Code, there is a prohibition
against the registration of a corporate name which is “identical or deceptively confusing or
confusingly similar” to that of any existing corporation or which is “patently deceptive” or
“patently confusing” or “contrary to existing laws”. The ratio for the prohibition is:

1. The avoidance of fraud upon the public which would have the occasion to deal with
the entity concerned
2. The evasion of legal obligations and duties; and
3. The reduction of difficulties of administration and supervision over corporations.

Unfortunately for Lyceum of the Philippines, the Court did not consider its case as falling
within the above prohibitions. The confusion as to the word “Lyceum” is effectively precluded
by appending of geographic names next to it. The public in general would not be mistaken or
confused by “Lyceum of the Philippines” and “Lyceum of Appari”. Besides, Lyceum, from the
Greek word “lykeion” evolved into the word that is now associated with educational institutions
in general.

Neither has “Lyceum” acquired a secondary meaning it the petitioner's case. The doctrine of
secondary meaning is applied when a word or phrase originally incapable of exclusive
appropriation with reference to an article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so exclusively by one producer
with reference to his article that, in that trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his product. However, petitioner was
not able prove in evidence that it has acquired secondary meaning. Therefore, petitioner was
not entitled to a legally enforceable exclusive right to use the word “Lyceum” in its corporate
name.

PHILIPS EXPORT B.V. ET AL V. CA – Philips Export BV filed a letter complaint with the SEC
asking for the cancellation of the word “Philips” from respondent Standard Philips
Corporation's corporate name. Standard's defense is that its corporate name is not similar to
that of Philips BV's since the former's products consist of chain rollers, belts, bearings, and
cutting saw while the latter deals with electronics.

The Court ruled for Philips BV. It first declared that a corporation's right to use its corporate
and trade name is a property right, a right in rem, which it may assert and protect against the
whole world in the same manner as it may protect its tangible property.

Next it discussed the requisites for the prohibition on confusingly similar names under the
Code:

1. That the complainant corporation acquired a prior right over the use of such corporate
name; and
2. The proposed name is either:
3. Identical
4. Deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
5. Patently deceptive, confusing or contrary to existing law.
This case meets the requisites for prohibition under the Code. Philips BV had registered its
name as early as 1956 (as opposed to Standard's 1982). As to the degree of proof, the Court
held that proof of actual confusion need not be shown. It is sufficient that confusion is
probably or likely to occur. However, the Court looked at the AOI of both corporations and
showed that in Standard's one of the primary purposes is to sell wiring devices, electrical
component parts, electrical supplies – and this is similar to those of Philips BV. This tends to
show an intention of Standard to ride on the popularity and established good will of Philips BV.

PHIL. FIRST INSURANCE CO. V. HARTIGAN – The Yek Tong Lin Fire and Marine and
Insurance Co. changed its name to Philippine First Insurance Co. in 1961. As Yek Tong, it
signed as co-maker with Maria Carmen Hartigan for a P/N in favor of the China Banking
Corporation. It also signed an indemnity agreement which made it joint and severally liable
with Hartigan in case of default. When the P/N fell due, Philippine First Insurance denies
liability on the ground that the indemnity agreement was in favor of Yek Tong and not Phil.
First Insurance. Its defense is that there was no privity of contract between itself and China
Bank because it was Yek Tong who signed the indemnity agreement. The issue that the
Court tired to resolve was: may a Philippine corporation change its name and still retain its
original personality and individuality as such?

The Court held that corporations are allowed to change their names, otherwise legislature
would have stated that it was not allowed. The name of a corporation is peculiarly important
as necessary to the very existence of the corporation. The general rule as to corporations is
that each corporation shall have a name by which it is to sue and be sued and do all legal
acts. The name of the corporation in this respect designates the corporation in the same
manner as the name of an individual designates the person. Since an individual has the right
to change his name under certain conditions, there is no compelling reason why a corporation
may not enjoy the same right. There is nothing sacrosanct in a name when it comes to
artificial beings.

The Court also held that contrary to the argument of Yek Tong, the change of its name did not
cause its dissolution. A mere change in name of a corporation, either by the legislature or by
the corporators/stockholders under legislative authority, does not generally speaking affect the
identity of the corporation, nor in any way affect the rights, privileges or obligations previously
acquired or incurred by it. The corporation, upon such change in its name, is in no sense a
new corporation, not the successor of the original corporation. It is the same corporation with
a different name, and its character is in no respect changed.

Lastly, the Court held that the approval by the stockholders of the amendment in the AOI of
Yek Tong to change its name to Philippine First Insurance did not automatically change the
name of the corporation. To be effective, the Corporation Law requires that a copy of the AOI
as amended by duly certified to be correct by the President and the Corporate Secretary and
a majority of the BOD or trustees shall be filed with the SEC. It is only from the time of such
filing that the corporation shall have the same powers and it and the members/stockholders
thereof shall thereafter be subject to the same liabilities as if the amendment had been
embraced in the original AOI.

3. Purpose

Sec. 14(2). The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose and which is/are he secondary
purpose or purposes: Provided, That a non-stock corporation may not include a
purpose which would change or contradict its nature as such;

Sec. 88: Purposes. - Non-stock corporations may be formed or organized for

charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of this Title
governing particular classes of non-stock corporations. (n)

ULEP V. THE LEGAL CLINIC INC. – This case states the doctrine that corporations cannot be
engaged in the legal profession. The Legal Clinic Inc. advertised certain legal services such
as secret marriage, divorce, and remarriage to the public. Ulep submits that the ads are
unethical and demeaning to the legal profession and destructive to the confidence of the
community in the integrity of the members of the bar and of the legal profession. The Legal
Clinic's defense is that it is not engaged in the legal profession, but merely renders legal
support services to the public through paralegals.

The Court held that the Clinic was indeed engaged in the practice of law – a profession which
can only be practiced by members of the bar as admitted in accordance with the Rules of
Court and those who are in good are regular standing. These services are beyond the
domain of paralegals and is a limited privilege of those individuals qualified in education and
character. The ratio for this is for the protection of the public from being advised and
represented in legal matter by incompetent and unreliable persons over whom the judicial
department can exercise legal control.

The Court took note of the comment of the Philippine Bar Association on this subject: Only
natural persons can engage in the practice of the law, and such limitation cannot be evaded
by a corporation employing competent lawyers to practice for it. Obviously, this is the scheme
or device by which The Legal Clinic Inc. holds out itself to the public and solicits employment
of its legal services. It is an odious vehicle for deception, especially so when the public
cannot ventilate any grievance for malpractice against the business conduit.

ALHAMBRA CIGAR & CIGARETTE MFG. V. SEC – This case speaks about the doctrine that
corporate existence cannot be extended with the corporation has already been dissolved.
Alhambra Cigar and Cigarette Manufacturing Company was incorporated on January 15,
1912, and its AOI state that it was to exist for 50 years. This term expired on January 15,
1962 and from this date it ceased to transact business. A new corporation – Alhambra
Industries was formed to carry on its business. On June 1963, Republic Act 3531 was
passed and this law allowed domestic private corporations to extend their corporate life
beyond the period fixed in the AOI for a term not to exceed 50 years in any one instance. On
July 1963, a special meeting with Alhambra's BOD resolved to amend its AOI to extend its
corporate life for another 50 years. The SEC returned the amended AOI – stating that the law
did not have any retroactive effect. The Court agreed with the SEC and held that when
Alhambra decided to extend its corporate life, its original term of 50 years had already expired
on January 1962. And while a 3-year grace period is granted to every corporation, this is only
for the purpose of prosecuting and defending suits by or against it and to enable it to
gradually close its affairs. This privilege to extend must be availed of during the life of the
corporation and this Alhambra failed to do. The ratio for this is to prevent the mischief that
would certainly open the gates for all defunct corporations whose charter have expires even
long before RA 3531 came it to being to resuscitate their corporate existence.

Lastly, the Court that the old corporate name cannot be retained fully in its exact form. What
is important though is that the word Alhambra, the name that counts (it has goodwill),
remains.

1. Principal Office

CALEVECILLA RADIO SYSTEMS V. ANTILLON – New Cagayan Grocery filed a complaint

against Clavecilla Radio System for the latter's wrong transmittal of the message: “Reurtel
washed not available refined 20-50 if agreeable shall ship later”. The insertion of the word
“NOT” between “washed” and “available” completely changed he contents of the message
which caused New Cagayan to suffer damages. The complaint was filed in Clavecilla Radio's
Bacolod Branch Office. Clavecilla Radio alleges that the complaint was improperly laid. The
Court agreed with this and held that the suit should be filed in Manila where Clavecilla Radio
holds its residence. The Rules of Court provide that service of summons must be in the
municipality where the defendant resides. The residence of a corporation is the place where
its principal office is established. Since it was not disputed that the Clavecilla Radio System
has its principal office in Manila, if follows that the suit against it may properly filed in the City
of Manila. The fact that a corporation maintains branch officer in some parts of the country
does not mean that it can be sued in any of these places. To allow an action to be instituted
in any place where a corporate entity has its branch officer would create confusion and work
untold inconvenience to the corporation.

HYATT ELEVATORS V. GOLDSTAR ELEVATORS – Goldstar Elevator Philippines is engaged

in the business of marketing, distributing, selling, importing, installing, and maintaining
elevators and escalators – with address in Guadalupe, Makati. Hyatt Elevators and
Escalators Company is the business of selling, installing, maintaining/servicing elevators,
escalators and parking equipment – with address at Legaspi Village, Makati. Hyatt filed a
complaint for unfair trade practices and damages against LG International Systems Co. and
LG International Corporation in Mandaluyong City. Hyatt alleged that it was assigned by LG
as exclusive distributor of elevators and escalators in the Philippines. LGISC and LGIC filed a
motion to dismiss on the ground of improper venue, among others. Hyatt filed a motion for
leave of court to include Goldstar as a party-defendant because the latter corporation was
allegedly being utilized by the LG companies to perpetrate unlawful and unjustified acts. The
Court held that the venue in Mandaluyong was improperly laid. It defined residence as the
principal place of business of the corporation. It held: it now becomes apparent that the
residence or domicile of a juridical person is fixed by the law creating or recognizing it. Under
the Code, the place where the principal office of the corporation is to be located is one of the
required contents if the AOI which shall be filed to the SEC. Goldstar's principal place of
business is in Makati as stated in the AOI. Since the principal place of business of a
corporation determines its residence or domicile, then the place indicated in Hyatt's AID
becomes controlling in determining the venue of the case. The Court found inconclusive the
bare allegations of Hyatt that it had closed its Makati office and relocated to Mandaluyong.
What is controlling is the place indicated in the AOI – in this case, Makati.

Rules of Court: “All other action 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.
 1. Corporate Term

Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may
be extended for periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the Securities and Exchange Commission.

1. Incorporators

Sec. 10. Number and qualifications of incorporators. - Any number of natural persons
not less than five (5) but not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of s stock corporation must own or be
a subscriber to at least one (1) share of the capital stock of the corporation.

1. Capitalization

Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations
incorporated under this Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by special law, and subject
to the provisions of the following section

Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos.

1. Concept of Capital/Share

Concepts

Capital stock: amount fixed in the AOI to be subscribed and paid in or secured to be paid in
by the shareholders of a corporation, at the organization of the corporation or afterwards, and
upon which it is to conduct its operations. It this sets the limit to the total par or issued value
of the shares which a corporation may issue.

Subscription: mutual agreement of the subscribers to take and pay for the stock of a
corporation. Pre-incorporation subscription is the amount which each incorporator or
stockholder agrees to contribute to the corporation. Articles of a stock corporation must state
the amount of its authorized capital stock and the number of shares into which it is divided.
Such shares may be par value shares or no par value shares.

Par value share: one in the certificate of stock of which appears an amount as the nominal
value of the shares. Such par value must be stated in the AOD and par shares cannot be
issued at lass than such par value, which can be changed only by an amendment of the AOI.

No par value shares: the consideration to which the may be issued is referred to as its issued
value and may be fixed by:
 1. AOI
2. Board of directors when so authorized by AOI or By-laws
3. Stockholders representing at least majority of the outstanding capital stock.
If no par value shares will be issued by the corporation, such fact must be stated in the AOI
and the consideration for their issuance cannot be less than Php5 for each. Some
corporations cannot issue no part value shares like banks, trust companies, insurance
companies, public utilities and building and loan associations.

NTC v. CA – The NTC assessed PLDS with supervision and regulation fees based on its
outstanding capital stock and permit fee for the approval of it increase n authorized capital
stock. PLDT challenged this assessment, arguing that the basis for the assessments should
only be the par values of the outstanding capital stock. The NTC counters that the basis
should be the market value of PLDT's capital stock inclusive of stock dividends and premium.
The Court held that the proper basis of the fee is capital stock subscribed and paid. It defined
the following terms:

“Capital” and other terms used to describe the capital structure of a corporation refers to the
value of the property or assets of a corporation.

Capital subscribed is the total amount of the capital that subscribers or shareholders have
agreed to pay for which need not necessarily be, and can be more than, the par value of the
shares. It is the amount the corporation receives, inclusive of premiums.

Stock dividends is the amount that the corporation transfers from its surplus profit account to
its capital account. It can be loosely termed as the “trust fund” of the corporation.

As in the doctrine in PLDT v. PSC, the Court disallowed the computation based on the par
value of the capital stock subscribed or paid excluding stock dividends, premiums, or capital
in excess of par. Neither is the assessment of the NTC on the market value of the shares
acceptable. The proper basis is strictly the capital stock subscribed or paid.

STOCKHOLDERS OF F. GUANZON AND SONS, INC. V. REGISTER OF DEEDS OF

MANILA – 5 stockholders of F. Guanzon & Sons executed a Certificate of Liquidation of the
corporation's assets stating that: a Resolution of stockholders dissolving the corporation, they
have distributed among themselves in proportion to their shareholdings as liquidating
dividends the assets of the corporation including real properties in Manila. The Register of
Deeds denied the registration because of unpaid registration fees, DST, uncertified number of
parcels, and because the judgment of the Court approving the dissolution and directing the
disposition of the assets needed to be presented. The issue was the propriety or impropriety
of the 3 grounds depends on WON the Certificate of Liquidation should be considered a
distribution of the corporation's assets or a transfer or conveyance. The stockholders argue
that they are merely a distribution of the assets of the corporation as seen in the Minutes of
the Dissolution attached to it. Since it was not a conveyance, the Certificate of Liquidation
need not contain a statement in the acknowledgement, the number of parcels of land involved
in the distribution. The Commissioner of Land Registration argues that in the last analysis,
the distribution of the corporation's assets is a transfer of the said assets from the corporation
to the stockholders. The Court agreed with the Commissioner. It held that properties
registered in the name of the corporation are owned by it as a distinct and separate entity
from its stockholders. The stockholders' Shares of Stock are personalty and do not represent
the property of the corporation. A share of stock:

Only represents an aliquot part of the corporation's property or right to share in the proceeds
to that extent when distributed according to law and equity.

Its holder does not own any part of the capital of the corporation nor is he entitled to the
possession of any definite portion of its property/assets

Ownership of it by the shareholder does not make him a co-owner of the corporation.
The act of liquidating the corporation's assets made by the stockholders cannot be
considered a partition of community property. It is a transfer or conveyance of the title of its
assets to the individual stockholders because the purpose of liquidation and distribution is the
transfer of the title of the properties from the corporation (who owns them in its own name) to
the stockholders in proportion to their stockholdings.

1. Kinds of shares of stock

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
issued for a consideration less than the value of five (P5.00) 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;

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.

Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of

incorporation may be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period not to exceed five (5)
years subject to the approval of the Securities and Exchange Commission. The five-
year period shall commence from the date of the aforesaid approval by the Securities
and Exchange Commission.

Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation

when expressly so provided in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation, and upon
such other terms and conditions as may be stated in the articles of incorporation,
which terms and conditions must also be stated in the certificate of stock representing
said shares.

Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.

Campos on the Classification of Shares:

Capital Stock
Its amount is fixed in the AOI.
Example: Authorized capital stock Php500,000: The corporation can issue as many as 5000
shares @100 each to represent the contribution of subscribers. It does not have to use the
shares at one time, but once it reaches that number, it can no longer issue new shares
without amending the AOI to increase its capital stock.
Remains the same unless the AOI is amended to increase or reduce.

Terms:
OUTSTANDING or SUBSCRIBED CAPITAL STOCK are those shares that the corporation
has not yet issued. It is the amount subscribed which may be less than the authorized capital
stock as stated in the AOI.

Legal or Stated Capital: is the aggregate par or issued value of the subscribed capital stock.
It sets the minimum limit of corporate assets that should be retained by the corporation as
protection to creditors. The amount as a rule may not be withdrawn nor distributed to the
shareholders.

Capital: is the actual property of the corporation including cash, real or personal property. It
includes all corporate assets (such as contributions of stockholders, loans by third parties,
earning less than any loss which may have been incurred in the business). It fluctuates
depending on current profits obtained or losses suffered by the business.

Common Shares/Stocks
 Most commonly issued by corporations
 Entitles the owner of such stocks to an equal pro rate division
of profits, if any
 One stockholder does not have an advantage, priority, or
preference over any other stockholder of the same class
 In the presence of preferred stocks, common stocks are
usually vested with:
o Exclusive right to vote
o Residuary rights to the profits and net assets upon
liquidation after the preferences have been complied with
 Preferred Stocks
 Entitles the holder to some preference in:
o Dividends
o Distribution of assets upon liquidation
o Both
o Other preferences not inconsistent with the Code
 2 Limitations under Sec. 6:
o Can only be issued with a stated par value
o The preferences must be stated in the AOI and the
Certificate of Stock, otherwise, each share shall be in all
respects equal to every other share.
 Qualification: the Code allows AOI to authorize BOD
to fix the terms and conditions of the preferred
stocks, provided that these shall be effective only
after filing a certificate with SEC. The legal effect
given to the BOD is the same as providing for terms
in the AOI.
o Preference as to Dividends
 P/S have the privilege of being paid first before any
dividend is paid to C/S.
 Amount of preference is usually stated in the
contract – usually a fixed percentage of the par value
of his stocks.
 If no surplus remains after paying the P/S, common
stockholders cannot complaint.
 PARTICIPATING P/S: after getting their fixed
dividend preference, they share with C/S the rest of
the dividends.
 NON-PARTICIPATING P/S: unless expressly
provided otherwise, P/S are non-participating
 CUMULATIVE P/S: in the absence of express
stipulation, P/S are cumulative. If in any given year,
no dividends are declared, the arrears have to be
made up in subsequent years before any dividends
can be paid to C/S. The reason for failure to
distribute is irrelevant.
 NON-CUMULATIVE P/S: must be expressly
stipulated. Depends on the existence of profits for
the year. No need to make up for arrears.
o Ballantine's 3 Principal Varieties
 Discretionary Dividend Type: right of the P/S holder
to get dividends in a particular year depends on the
discretion of the BOD even if the corporation made
profits during such year. P/S holder loses his right to
any dividends for that particular year if BOD does not
 allow distribution. He cannot ask that they be made
up unless the BOD abused their discretion as to
result in oppression and unfair discrimination.
 Mandatory Dividend Type: P/S Contract imposes a
positive duty on the BOD to declare preferred
dividends every year where profit are earned.
Failure to do so does not deprive the P/S holder of
his dividend right for the particular year.
 Earned Cumulative / Dividend Credit Type: contract
gives the P/S holder a right to arrears where there
were dividends earned during the years when
dividends were not declared. It merely postpones
the receipt of dividends to a later date. The moment
the dividends are declared, P/S holder must first be
paid all his arrears for all unpaid years there were
profits.
o Preference as to Voting Rights
 P/S by contract are usually denied the right to vote.
 Unless the right to vote is clearly withheld, a P/S
would have the right to vote since it is incidental to
stock ownership.
 Oftentimes even if withheld, a contingent right to vote
is provided for (e.g. after a number of years)
 Code grants even non-voting stocks the right to vote
in instances involving major changes in the
corporation.
o Preferences upon Liquidation
 P/S holders my be given preference in the
distribution of corporate assets upon liquidation
 In the absence of any provision granting such
preference, P/S holders participate pro rata with C/S
holders, since each share is presumed to be equal to
every other share.
 If P/S is cumulative, preference is liquidation often
includes arrears in cumulative dividends.
 Par Value Shares
 These are fixed in the AOI or the minimum issue price.
Considered as watered stock if sold at less than par, but
selling them at a premium is valid.
 No Par Shares
 Those whose issued price is not stated in the certificate but
may be fixed in the AOI or by the BOD when authorized by
the AOI/by-laws, in the absence thereof, by the stockholders
themselves.
 The subscriber must pay the full consideration whether par or
no par value shares.
 Limitations on the issuance:
o Deemed fully paid once issued therefore non-
assessable; the corporation can no longer increase the
price issued. NPV shares cannot demand additional
payment
o Consideration for issuance cannot be less than Php5
o Entire consideration for issuance constitutes capital,
hence no part of it is available for distribution as
dividends
o Cannot be issued as P/S
o Cannot be issued by banks, trust companies, insurance
companies, public utilities, building and loan associations
 o AOI must state the fact that corporation issued NPV
shares and the number of such shares.
 Treasury Shares
 Shares of stock which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by
purchase, redemption, donation, or other lawful means.
 May be again disposed of for a reasonable price fixed by
BOD.
 May be sold at a reasonable price – even less than part, but
the purchaser for less than par is not liable to creditors for
the difference between par value and purchase price.
 They do not revert to part of the unissued shares of the
corporation.
 Regarded as property of the corporation which can be sold or
declared as stock dividends.
 Redeemable Shares
 May be issued by the corporation when expressly so
provided in the AOI.
 May be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of existence of
unrestricted earnings in the corporation's books.
 Redemption privilege is usually given to P/S
 Common feature of debt securities
 Ordinarily takes the form of an option on the part of the
corporation to purchase the shares or bonds usually at par
value plus a specified premium.
 Its significance is it permits adjustment of the capital
structure to meet the varying conditions. It may enable the
corporation to pay off the securities and avoid restrictions
usually appurtenant thereto, at a time when economic and
financial conditions are favorable to such a move.
 Founder's Shares
 Some provided in their by-laws that only holders of F/S may
qualify for directorship – this is allowed by the Code within
certain limitations.
 Shares which were originally owned by those who founded
the corporation and may be transferred to others without
losing their character as F/S
 Privilege granted is intended to compensate in some way the
efforts which the organizers of the corporation may have
spent in initiating the venture and putting the business on its
feet.

REPUBLIC PLANTERS BANK V. AGANA – Robles-Francisco Realty Corporation obtained a

Php120,000 loan from Republic Planters Bank. The loan was part legal tender, part P/S of
the Bank in the form of 2 Stock Certificates for 400 P/S each. The terms and conditions of the
certificate included preferences as to cumulative and participating dividends; and provided
that it may be redeemed by the bank within 2 years. 18 years later, Robles-Francisco filed a
complaint against the bank on its right to collect dividends on the P/S and to compel the bank
to redeem the shares. The Court held that Republic Planters bank cannot be compelled to
redeem stocks, firstly because the certificate is worded permissively (“may be redeemed”)
and because of a Central Bank directive prohibiting banks from redeeming P/S – Philippines
at that time was suffering from reserve deficiency and redemption would reduce the assets to
the prejudice of depositors and creditors. The Court also discussed the difference between
Preferred Shares and Redeemable Shares:

Preferred Shares: entitles the holder preference over C/S. In the old Corporation Law, no
corporation shall make or declare dividends except from surplus profit; nor to distribute its
capital stock or property other than actual profits until after payment of debts and dissolution.
In the new Corporation Code: BOD may declare dividends only out of unrestricted retained
earnings (replaced surplus profit). P/S holders do not have a lien on properties of the
corporation and neither are they creditors of the corporation. Even if the corporation earns
profit, the BOD has discretion not to declare dividends.

Redeemable Shares: are usually P/S but by their term are redeemable at a fixed date or at
the option of the issuing corporation, stockholders or both, at a certain redemption price. A
redemption is in a sense a repurchase for cancellation. The new provision in the Code allows
redemption of such shares even if the corporation does not have unrestricted retained
earnings, but subject to the condition that the corporation has after such redemption, assets in
its books to cover debts and liabilities inclusive of C/S. Redemption cannot be made if the
corporation is insolvent or if such redemption will cause insolvency or inability to meet
corporate debts as they mature.

CIR V. MANNING – A trust agreement was issued between the law firm Ross, Selph,
Carrascoso and Janda regarding the interests of Manning, McDonald, and Simmons on the
shares they owned and those owned by Reese in the Manila Trading and Supply Co. The
BIR assessed the latter 3 for deficiency income taxes on the ground that the distribution of
Reese's shares was in effect a distribution of assets or properties of the corporation as
gleaned from the payment of cash for redemption and subsequently distributing the shares as
a stock dividend. The parties here were both working on the assumption that the dividends
were treasury shares, and the Court decided that they were not. Treasury shares are those
issued by the corporation, fully paid for, and subsequently reacquired by purchase, donation,
forfeiture, or other lawful means. The following are its essential features:

They are issued shares but do not have the status of outstanding shares.

A treasury share not retired by the corporation may be reissued and sold again.

They do not participate in dividends because dividends cannot be declared by the corporation
to itself.

It is a non-voting stock because voting powers among stockholders will be effectively lost and
the directors will be able to perpetuate their control of the corporation, though it still
represents a paid for interest in the property of the corporation.

The Court held that the intention of the Trust Agreement was to treat the shares as absolutely
outstanding shares until fully paid. The declaration of them as treasure shares was null and
void. A stock dividend, being one payable in capital stock, cannot be declared out of
outstanding corporate stock, but only from retained earnings. The nature of a stock dividend
always involves transfer of surplus (or profit) to capital stock. It was clear that the ultimate
purpose of the parties of the trust agreement was to make it appear that formal declaration of
non-existing stock in the treasury that they have not received any income from those firms
when in fact, y that declaration, they secured to themselves the means to turn around as full
owners of Reese's shares. They used the trust instrument as a device to bestow unto
themselves the full worth and value of Reese's corporate holdings, to avoid the payment of
income taxes.

SAN MIGUEL CORP. V. SANDIGANBAYAN – The Coconut Industry Investment Fund Holding
Companies sold 33,133,266 shares of it the outstanding capital stock of San Miguel
Corporation to Andres Soriano (transacting in the name of Anscor-Hagedorn Securities) of the
SMC Group. Soriano paid the initial Php500 million to UCPB as administrator of the CIIF.
PCGG sequestered the shares of stock and due to the sequestration, SMC group suspended
payment of the balance of the purchase price. UCPB in retaliation rescinded the sale. A
Compromise Agreement was made entitling the first installment of 500 million paid by Anscor
to be reverted to the SMC Treasury. It was also agreed that they pay an arbitration fee
consisting of 5,500,000 SMC shares to the PCGG to be held in trust for the CARP. The
Sandiganbayan then ordered that the SMC shares be delivered to the PCGG and their
dividends should be paid pending the determination of their real ownership in the
sequestration proceedings. The Court held that there was nothing capricious about this order
because such was merely preservative in nature to prevent loss or dissipation in their value.
The conversion of the SMC shares to treasury shares would result in a change in status since
treasure shares do not earn dividends, the retained dividends which would have accrued to
those shares if converted to treasury would go into the corporation, and will alter the voting
power of the shares since treasury shares do not vote. Lastly, the Anscor group argues that
they can no longer comply with the Sandiganbayan's order to turn over the SMC shares
because they have already been converted to treasury shares. To this, the Court answers
that their conversion into treasury shares only depends if the sale between the Anscor Group
and the UCPB is allowed, otherwise, the shares cannot be deemed to have been re-acquired
by the issuing corporation yet.

DELPHER TRADES COR. V. IAC (see discussion on no-par value shares) – Delphin
Pacheco and his sister Pelagia owned a parcel of land in Bulacan. They leased it to
Construction Components International, who assigned its rights and obligations under the
lease to Hydro Pipes Philippines with the Pachecos' consent. A deed of exchange was
executed between the Pachecos and Delpher Trades Corporation where the siblings
conveyed the property to the corporation in exchange for 2,500 shares of stock with a total
value of Php1,500,000. Hydro Pipes sued a complaint for reconveyance of the title of the
property unto itself because it was not given by the siblings the first option to buy the property
pursuant to a provision in the lease agreement. The Court ruled for the Pachecos, stating
that Delpher Trades was set up as a business conduit by the Pachecos to save taxes. Under
the Deed of Exchange the siblings acquired 2500 unissued no par value shares consisting of
55% majority, while the rest were owned by other family members. This scheme was referred
to as estate planning and is not prohibited by law. The significance of subscription of no par
value shares in exchange for property is that no-par value shares do not purport to represent
any proportionate interest in the capital stock measured by value, but only an aliquot part of
the whole number of such shares of the issuing corporation. The holder of a no-par shares
may see that he is only an aliquot sharer in the assets of the corporation. But this character
of proportionate interest is not hidden beneath a false appearance of a given sum in money,
as in the case of par value shares. The capital stock of a corporation issuing only no-par
value shares is not set forth by a stated amount of money, but instead is express to be divided
into a stated number of share, such as 1000 shares. This indicates that a shareholder of 100
such shares is an aliquot sharer in the assets of the corporation, no matter what value they
may have, to the extent of 100/1000 or 1/10. Thus by removing the par value of shares, the
attention of persons interested in the financial condition of a corporation is focused upon the
value of the assets and the amount of its debts.

1. Purpose of classification of shares

1. Stock ownership in certain corporations

Sec. 140. Sec. 140. Stock ownership in certain corporations. - Pursuant to the duties
specified by Article XIV of the Constitution, the National Economic and Development
Authority shall, from time to time, make a determination of whether the corporate
vehicle has been used by any corporation or by business or industry to frustrate the
provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa,
whenever deemed necessary, a report of its findings, including recommendations for
their prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in

corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals related to
each other by consanguinity or affinity or by close business interests, or whenever it is
necessary to achieve national objectives, prevent illegal monopolies or combinations
in restraint or trade, or to implement national economic policies declared in laws, rules
and regulations designed to promote the general welfare and foster economic
development.
In recommending to the Batasang Pambansa corporations, business or industries to
be declared vested with a public interest and in formulating proposals for limitations
on stock ownership, the National Economic and Development Authority shall consider
the type and nature of the industry, the size of the enterprise, the economies of scale,
the geographic location, the extent of Filipino ownership, the labor intensity of the
activity, the export potential, as well as other factors which are germane to the
realization and promotion of business and industry.

RA 7042, as amended by RA 8179: Foreign Investments Act of 1991 (see appendix)

IRR (see appendix)

EO 582: Promulgating the 7th Regular Foreign Investment Negative List (see appendix)

Commonwealth Act. No. 108: An Act to Punish Acts of Evasion of the Laws in the
Nationalization of Certain Rights, Franchises or Privileges (see appendix)

1. Close corporations

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning
of this Code, is one whose articles of incorporation provide that:

(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall
be held of record by not more than a specified number of persons, not exceeding
twenty (20);

(2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and

(3) The corporation shall not list in any stock exchange or make any public offering of
any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation
within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance
with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That
the provisions of other Titles of this Code shall apply suppletorily except insofar as
this Title otherwise provides.

RAMIREZ TELEPHONE CO. V. BANK OF AMERICA – Ruben Ramirez (President of the

Ramirez Telephone Co.) was sued for the payment of money. He was ordered to pay
Php300. Garnishment was made upon his deposit account with the Bank of America, which
was considered as part of the properties of the Telephone Company for the debts owed by it.
Bank of America replied to the sheriff that they do not have any depositor in the name of
Ruben Ramirez. According to the sheriff however, Ruben Ramirez and the Telephone Co.
were the same entities. Ramirez' defense is that him and the corporation have separate and
distinct personalities therefore there can be no attachment on the funds of the corporation for
his personal debts. The Court here pierced the corporate veil because of the finding that
Ruben and his wife owned 75% of the corporation and that Ruben used his personal checks
to pay for the rent of the corporation.
 1. No transfer clause

Sec. 15(ELEVENTH). Form of Articles of Incorporation:

ELEVENTH: (Corporations which will engage in any business or activity reserved for
Filipino citizens shall provide the following):

"No transfer of stock or interest which shall reduce the ownership of Filipino citizens
to less than the required percentage of the capital stock as provided by existing laws
shall be allowed or permitted to recorded in the proper books of the corporation and
this restriction shall be indicated in all stock certificates issued by the corporation."

Sec. 97. Articles of incorporation. - The articles of incorporation of a close corporation

may provide:

1. For a classification of shares or rights and the qualifications for owning or holding
the same and restrictions on their transfers as may be stated therein, subject to the
provisions of the following section;

2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and

3. For a greater quorum or voting requirements in meetings of stockholders or

directors than those provided in this Code.

The articles of incorporation of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the corporation rather than by
a board of directors. So long as this provision continues in effect:

1. No meeting of stockholders need be called to elect directors;

2. Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose of applying the provisions of this
Code; and

3. The stockholders of the corporation shall be subject to all liabilities of directors.

The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders,
instead of by the board of directors.

1. By-Laws

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 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 inspection of the stockholders or members during office
hours. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, 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. (20a)

Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code,
other special laws, and the articles of incorporation, a private corporation may provide
in its by-laws for:

1. The time, place and manner of calling and conducting regular or special meetings of
the directors or trustees;

2. The time and manner of calling and conducting regular or special meetings of the
stockholders or members;

3. The required quorum in meetings of stockholders or members and the manner of

voting therein;

4. The form for proxies of stockholders and members and the manner of voting them;

5. The qualifications, duties and compensation of directors or trustees, officers and

employees;

6. The time for holding the annual election of directors of trustees and the mode or
manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all officers other
than directors or trustees;

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock certificates; and

10. Such other matters as may be necessary for the proper or convenient transaction
of its corporate business and affairs.

SMC V. MANDAUE PACKING PRODUCTS UNION-FFW – This is a certification election case

which the respondent Mandaue Packing union filed with the DOLE. San Miguel Corporation
filed a motion to dismiss, arguing that Mandaue Packing was not a legitimate labor
organization at the time of filing because of the presence of supervisory employees in its
membership. There was a finding by the Med-Arbiter that the union had not acquired the
personally to file the certification of election, so the question the Court tried to resolve in this
case was: when did Mandaue Packing acquire legal personality? According to the Court, the
operative date is when the Regional Office or Bureau had received the complete documentary
requirements. The Department Order setting forth the requirements provide that the union
must submit both its constitution and by-laws. The court held that while a literal reading of the
provision implies that failure to submit these documents is fatal, a more liberal approach is
called for. By-laws has traditionally been defined as regulations, ordinances, rules or laws
adopted by an association or corporation or the like for its internal governance, including rules
for routine matters such as calling meetings and the like. Without such provisions governing
the internal governance of the organization, such as rules on meetings and quorum
requirements, there would be no apparent basis on how the organization could operate.
Without a set of by-laws which provides how an organization arrives at its decisions or
otherwise wields its attributes of legal personality, then every action of the organization would
be put into controversy.

GRACE CHRISTIAN HIGH SCHOOL V. CA – The Grace Christian Highs School is a member
of the Grace Village Association. The committee of the BOD prepared a draft amendment to
the by-laws containing a provision that would make the GCHS a permanent director of the
association. This draft was presented to the board, but it was never approved. The Board
decided that it would re-examine a permanent position, but in the mean time the 1968 By-
Laws would be observed. In 1990, it was given notice for the impending elections for
directorship, but GCHS was of the opinion that the notice procedure should be change on
account of its permanent position. When the Association refused, GCHS brought suit against
the association to recognize its permanent directorship. The SEC rendered an opinion that
the practice of allowing an unelected board member was contrary to the Association's By-laws
and the Corporation Code. The proposed amendments the GCHS was invoking remained
merely proposals and were never approved or registered with the SEC. the Court held that
what GCHS is asking for is against the Corporation Law and Corporation code because the
requirement of being elected is mandatory for board members. While there are cases that
unelected officers in the Board, they merely sit as ex-officio members. GCHS has no vested
right to have a permanent seat in the Board of the association.

CHINA BANKING CORP. V. CA – Galicano Calapatia pledged his shares in the Valley Golf
Country Club to China Bank for a Php20,000 loan. Upon default, China Bank extrajudicially
foreclosed on his shares and emerged as highest bidder. China Bank informed Valley Golf of
the proceedings and requested that the stock be transferred in its name. Valley Golf refused
because of Calapatia's unsettled accounts. Valley Gold in turn declared Calapatia's stocks as
delinquent and sold them at public auction, and this sale was protested by China Bank and
filed a nullification suit with the RTC. The trial court and Court of Appeals both dismissed the
case, believing that this was an intra-corporate dispute, hence, jurisdiction with the SEC. The
Court held that to determine who had jurisdiction over the case, it was necessary to determine
whether China Bank is a stockholder of Valley Golf – and to this the Court ruled that the sale
made China Bank a bona fide shareholder. Valley Golf never assailed the transfer directly
and in fact recognized the pledge made by Calapatia. Being a stockholder, this was an intra-
corporate dispute within the jurisdiction of the SEC.

As to the issue on who had a prior right over the shares, Valley Golf invokes a provision in its
by-laws that after a member is declared as delinquent, the BOD may order that its shares be
sold to satisfy the claim. While this may be true, the Court held that there was no good faith
in Valley Golf's sale. It only send notices of delinquency after the foreclosure sale of the
shares and China Bank was not informed of Calapatia's overdue accounts, even as Valley
Golf recognized the pledge. In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time of the transaction or agreement between said
third party and the shareholder was entered into. In this case, at the time the pledge
agreement was executed, Valley Gold could have easily informed China Bank of its by-laws
when it sent notice to formally recognize the pledge as those registered in Calapatia's name.
The belated notice of the by-laws at the time of the foreclosure is not sufficient. By-laws
signifies the rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in relation to it. The
purpose of a by-law is to regulate the conduct and define the duties of the members towards
the corporation and among themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law. The general rule is that third
persons are not bound by by-laws, except when the have knowledge of the provisions either
actually or constructively. In case of a transaction made in good faith and for valuable
consideration where the buyer was not a privy to the contract created by the by-law, the said
by-law cannot operate to defeat the right of the purchaser.

B. Requirements under Special Laws

J.G. SUMMIT HOLDINGS INC. V. CA – The National Investment Development Corporation, a

government corporation, entered into a Joint Venture Agreement with Kawasaki Heavy
Industries of Japan for the construction, operation, and management of the Subic National
Shipyard Inc. (later on the Philippine Shipyard and Engineering Corp.). Under the JVA, NIDC
and Kawasaki will contribute for the capitalization of Philseco in a 60%-40% proportion. The
JVA also has a grant of the right of first refusal should either of them decide to sell, assign, or
transfer interest in the property. NIDC transferred its shares to the PNB and the latter
thereafter to the National Government. The Government's shareholdings in Philseco
increased to 97.41% while Kawasaki's shareholdings were reduced to 2.59%. The
Committee on Privatization (COP) and Asset Privatization (APT) took charge of Philseco as
one of the non-performing government assets and decided to share the shares of the National
Government in Philseco. It was thereafter between APT and Kawasaki that instead of the
right of first refusal granted by the JVA, the parties instead had the right to top by 5% the
highest bid for the government's shares. A bidding commenced and JG Summit Holdings
emerged as highest bidder of 87.6% shares, but this was subject to Kawasaki's right to top by
5% - a right Kawasaki in the form of Kawasaki-Philyards. JG Summit protested Kawasaki-
PHI's offer and upon reaching the SC, the Court held that Philseco is a public utility whose
capitalization must be strictly 60% Filipino. The right to top granted to Kawasaki-PHI was
illegal because it allows foreign corporation to own more than 40% in a public utility. However
on Motion for Reconsideration, the Court reversed and held that Philseco was not a public
utility. The issue here WON their right of first refusal and right to top by 5% the highest bid
given to Kawasaki-PHI is valid considering it already owns 40% of Philseco. The Court held
that it was valid and does not violate the Constitutional provisions on limiting land ownership
to Filipinos. In fact, it can even be said that if the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign stockholders' ownership of the shares which is
adversely affect but the capacity of the corporation to own land – that is, the corporation
becomes disqualified to own land. This finds support in the corporate law principle that the
corporation and the stockholders are separate juridical entities. No law disqualifies a person
from purchasing shares in a landholding corporation even if the latter will exceed the allowed
foreign equity. What the law disqualifies is the corporation owning land.

C. Amendment of Articles of Incorporation and By-Laws

Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this

Code or by special law, and for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this
Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a
non-stock corporation.

The original and amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation. Such articles, as amended shall be
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or
trustees stating the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall be submitted to
the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon
within six (6) months from the date of filing for a cause not attributable to the
corporation.

Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a majority

vote thereof, and the owners of at least a majority of the outstanding capital stock, or
at least a majority of the members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-laws or adopt new
by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
(2/3) of the members in a non-stock corporation may delegate to the board of directors
or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided,
That any power delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such amendment or new by-
laws shall be attached to the original by-laws in the office of the corporation, and a
copy thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange Commission the
same to be attached to the original articles of incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code.

D. Commencement of Corporate Existence

Sec. 19. Commencement of corporate existence. - A private corporation formed or

organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law.

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a

corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from
the date of its incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.

This provision shall not apply if the failure to organize, commence the transaction of
its businesses or the construction of its works, or to continuously operate is due to
causes beyond the control of the corporation as may be determined by the Securities
and Exchange Commission.

CAGAYAN FISHING DEVELOPMENT CO. V. SANDIKO – Tabora executed 3 mortgages on 4

parcels of land to secure several loans. Tabora sold the lands to Cagayan Fishing
Development Corp. in consideration of Php1, with the condition that the lands shall not be
transferred to the corporation until after Tabora will have paid off his loans. Cagayan Fishing
filed its Articles of Incorporation with the Bureau of Commerce in 1930 and a year later,
passed a resolution authorizing its President to sell the 4 parcels of land to Teodoro Sandiko.
Since Sandiko defaulted in his payments, Cagayan Fishing sued him for the sum stated in the
P/N. The Court dismissed the complaint against transfer made by Tabora to Cagayan Fishing
was effected on May 31, 1930 while the actual incorporation of Cagayan Fishing was only
effected on October 22, 1930. While a duly organized corporation has the power to purchase
and hold such real property as the purposes for which such corporation was formed may
permit and for this purpose may enter into such contracts ad may be necessary, this
presumes that a corporation had already performed the requisites to make it a lawfully
organized one such as the filing of the AOI. In this case, Cagayan Fishing was not yet
incorporated when it entered the contract of sale with Tabora. It was not even a de facto
corporation at the time. Not being in legal existence then, it did not possess juridical capacity
to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general laws authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statue, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired.

A corporation should have a full and complete organization and existence as an entity before
it can enter into any kind of contract or transact any business. A corporation, until organized,
has no being, franchises or faculties. Nor do those engaged in bringing it into being have any
power to bind it by contract, unless so authorized by the Charter. Until organized as
authorized by the charter, there is not a corporation, nor does it possess franchises or
faculties for it or others to exercise until it acquires a complete existence.

An exception to this rule is when the acts of promoters are ratified by the corporation that is
subsequently organized.

However under the particular circumstances of the case, the court declined to extend the
doctrine of ratification which would result in the commission of injustice or fraud.

III. THE CORPORATION AS AN ENTITY

A. In General: Separate Juridical Personality

Theory of Corporate Entity: Its effects

 A corporation has a juridical personality separate and distinct from the SHs or
members who compose it
 Issuance of certificate of incorporation marks beginning of the corporation's existence
as a legal entity

Sec 19. Commencement of corporate existence. - A private corporation formed or

organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law. (n)

 Not affected by personal rights, obligations, and transactions

 Stockholders have no claim on corporate property as owners —they only have an
inchoate right to it
 A corporation has no interest in the individual property of its stockholders, unless
transferred to the corporation
  A corporation, as a juridical person, is entitled to immunity against unreasonable
search and seizure
 A corporation is civilly liable for torts in the same manner

EPG CONSTRUCTION V CA – EPG undertook the construction of the UP Law Library for
around P7.5M. Upon completion, the building was turned over to UP Law. Sometime
thereafter, the aircon in the 3rd floor was not functioning properly, and this was reported to
EPG. After inspection EPG agreed to repair the same and shoulder the expenses thereof, but
for whatever reason the repair was never undertaken despite repeated demands. EPG
demanded a hefty sum, which UP claims should be covered by the guarantee provision in
their contract. UP then contracts with another repair company, and demands reimbursement
from EPG. UP sues EPG and its President, Emmanuel de Guzman. TC ruled ifo UP, and
order both the company and its president to pay UP solidarily. The president Guzman claims
that as to him, UP was suing him in his official capacity and not in his personal capacity, thus
his inclusion as president of the company is superfluous, because his acts were corporate
acts imputable to EPG itself as his principal.

Held: A corporation is invested by law with a personality separate and distinct from those of
the persons composing it as well as from that of any other entity to which it may be related.
Mere ownership by a since SH or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate personality.

The GM of a corporation cannot be made personally liable for his official acts in behalf of the
corporation, with the exception that if he official had acted maliciously or in BF, which would
make him liable personally. Since it was not proven that Guzman acted maliciously or in BF,
whatever damage was caused to UP as a result of his acts is the sole responsibility of EPG
even though Guzman is the principal officer and controlling SH.

SECOSA ET AL V HEIRS OF ERWIN SUAREZ FRANSCISCO – On June 27, 1996, at

around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy
student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue,
near the Veteran Shipyard Gate in the City of Manila. At the same time, petitioner, Raymundo
Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same
road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc.

Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in
turn was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing
the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck,
he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then
ran over Francisco, which resulted in his instantaneous death. Fearing for his life, petitioner
Secosa left his truck and fled the scene of the collision. Respondents, the parents of Erwin
Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad
Warehousing and Port Services, Inc. and Dassad's president, El Buenasucenso Sy.

Held: It is a settled precept in this jurisdiction that a corporation is invested by law with a
personality separate from that of its stockholders or members. It has a personality separate
and distinct from those of the persons composing it as well as from that of any other entity to
which it may be related. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality. A corporation's authority to act and its liability
for its actions are separate and apart from the individuals who own it.

The so-called veil of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be looked
upon as a legal entity; unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such cases as fraud that may
work inequities among members of the corporation internally, involving no rights of the public
or third persons. In both instances, there must have been fraud and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be
clearly and convincingly established. It cannot be presumed.

The records of this case are bereft of any evidence tending to show the presence of any
grounds enumerated above that will justify the piercing of the veil of corporate fiction such as
to hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it.

The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad
Warehousing and Port Services, Inc., and not in the name of El Buenasenso Sy. Raymundo
Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El
Buenasenso Sy. All these things, when taken collectively, point toward El Buenasenso Sy's
exclusion from liability for damages arising from the death of Erwin Francisco.

MANILA GAS V CIR

LAND BANK OF THE PHILIPPINES V CA – Appellant Land Bank of the Philippines (LBP)
extended a series of credit accommodations to appellee ECO, using the trust funds of the
Philippine Virginia Tobacco Administration (PVTA) in the aggregate amount of
P26,109,000.00. The proceeds of the credit accommodations were received on behalf of
ECO by appellee Oñate. On the respective maturity dates of the loans, ECO failed to pay the
same. Oral and written demands were made, but ECO was unable to pay. ECO claims that
the company was in financial difficulty for it was unable to collect its investments with
companies which were affected by the financial crisis by the Dewey Dee scandal. The primary
issues for resolution here are (1) whether or not the corporate veil of ECO Management
Corporation should be pierced; and (2) whether or not Emmanuel C. Oñate should be held
jointly and severally liable with ECO Management Corporation for the loans incurred from
Land Bank. Petitioner contends that the personalities of Emmanuel Oñate and of ECO
Management Corporation should be treated as one, for the particular purpose of holding
respondent Oñate liable for the loans incurred by corporate respondent ECO from Land Bank.
According to petitioner, the said corporation was formed ostensibly to allow Oñate to acquire
loans from Land Bank which he used for his personal advantage.
Petitioner submits the following arguments to support its stand: (1) Respondent Oñate owns
the majority of the interest holdings in respondent corporation, specifically during the crucial
time when appellees applied for and obtained the loan from LANDBANK, sometime in
September to November, 1980. (2) The acronym ECO stands for the initials of Emmanuel C.
Oñate, which is the logical, sensible and concrete explanation for the name ECO, in the
absence of evidence to the contrary. (3) Respondent Oñate has always referred to himself as
the debtor, not merely as an officer or a representative of respondent corporation. (4)
Respondent Oñate personally paid P1 Million taken from trust accounts in his name. (5)
Respondent Oñate made a personal offering to pay his personal obligation. (6) Respondent
Oñate controlled respondent corporation by simultaneously holding two (2) corporate
positions, viz., as Chairman and as treasurer, beginning from the time of respondent
corporation's incorporation and continuously thereafter without benefit of election. (7)
Respondent corporation had not held any meeting of the stockholders or of the Board of
Directors Statement of Assets and Liabilities.
Held: A corporation, upon coming into existence, is invested by law with a personality
separate and distinct from those persons composing it as well as from any other legal entity to
which it may be related. By this attribute, a stockholder may not, generally, be made to
answer for acts or liabilities of the said corporation, and vice versa. This separate and distinct
personality is, however, merely a fiction created by law for convenience and to promote the
ends of justice. For this reason, it may not be used or invoked for ends subversive to the
policy and purpose behind its creation or which could not have been intended by law to which
it owes its being. This is particularly true when the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial
issues, perpetrate deception or otherwise circumvent the law. This is likewise true where the
corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit
of the stockholders or of another corporate entity. In all these cases, the notion of corporate
entity will be pierced or disregarded with reference to the particular transaction involved.
The burden is on petitioner to prove that the corporation and its stockholders are, in fact,
using the personality of the corporation as a means to perpetrate fraud and/or escape a
liability and responsibility demanded by law. In order to disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly established. In
the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be
made personally liable for corporate liabilities.
The mere fact that Oñate owned the majority of the shares of ECO is not a ground to
conclude that Oñate and ECO is one and the same. Mere ownership by a single stockholder
of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate personalities. Neither is the fact that the name
“ECO” represents the first three letters of Oñate's name sufficient reason to pierce the veil.
Even if it did, it does not mean that the said corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is lawful. There is nothing illegal in a
corporation acquiring the name or as in this case, the initials of one of its shareholders.
GOOD EARTH EMPORIUM V CA – A Lease Contract, dated October 16, 1981, was entered
into by and between ROCES-REYES REALTY, INC., as lessor, and GOOD EARTH
EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981 and
ending October 31, 1984 at a monthly rental of P65,000.00. From March 1983, up to the time
the complaint was filed, the lessee had defaulted in the payment of rentals, as a consequence
of which, private respondent ROCES-REYES REALTY, INC. TC favored the Roces, Inc.
Roces, Inc. asked for a writ of execution. Marcos Roces and subsequently asked for
quashing the execution judgment. They alleged that it is pacto de retro sale.

Issue: WON payment to Marcos Roces is payment to the corporation?

Held: No. In the case at bar, the supposed payments were not made to Roces-Reyes Realty,
Inc. or to its successor in interest nor is there positive evidence that the payment was made to
a person authorized to receive it. Corporation has a personality distinct and separate from its
individual stockholders or members. Being an officer or stockholder of a corporation does not
make one's property also of the corporation, and vice-versa, for they are separate entities
(Traders Royal Bank v. CA-G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152 SCRA
482). Shareowners are in no legal sense the owners of corporate property (or credits) which
is owned by the corporation as a distinct legal person (Concepcion Magsaysay-Labrador v.
CA-G.R. No. 58168, December 19, 1989). As a consequence of the separate juridical
personality of a corporation, the corporate debt or credit is not the debt or credit of the
stockholder, nor is the stockholder's debt or credit that of the corporation (Prof. Jose Nolledo's
"The Corporation Code of the Philippines, p. 5, 1988 Edition, citing Professor Ballantine). The
fact that at the time payment was made to the two Roces brothers, GEE was also indebted to
respondent corporation for a larger amount, is not supportive of the Regional Trial Court's
conclusions that the payment was in favor of the latter, especially in the case at bar where the
amount was not receipted for by respondent corporation and there is absolutely no indication
in the receipt from which it can be reasonably inferred, that said payment was in satisfaction
of the judgment debt. Likewise, no such inference can be made from the execution of the
pacto de retro sale which was not made in favor of respondent corporation but in favor of the
two Roces brothers in their individual capacities without any reference to the judgment
obligation in favor of respondent corporation.

DBP V NLRC – This petition calls for the interpretation of Article 110 of the Labor Code which
gives the workers preferences as regards wages in case of liquidation or bankruptcy of an
employer's business. Petitioner Development Bank of the Philippines (DBP) maintains the
Article 110 does not apply where there has been an extra-judicial foreclosure proceeding
while the respondents claim otherwise. Labor Arbiter Ariel C. Santos sustained the private
respondent's position.

Issue: WON EE salary must first be satisfied before DBP can foreclose the property?
Held: No. There must be a judicial declaration, or at the very least, a cognizance by an
appropriate court or administrative agency of bankruptcy or inability of the employer to meet
its obligations. But in this case, no judicial insolvency proceeding was initiated.

SUNIO V NLRC – This case involves the selling of an ice plant. It was first EM Ramos &
Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc. (CIPI for short), sister
corporations, sold an ice plant to Rizal Development and Finance Corporation RDFC with a
mortgage on the same properties constituted by the latter in favor of the former to secure the
payment of the balance of the purchase price. By virtue of that sale, EMRACO-CIPI
terminated the services of all their employees including private respondents herein, and paid
them their separation pay. RDFC hired its own own employees and operated the plant.
DFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC headed by its
President and General Manager, petitioner Alberto S. Sunio. Petitioners also hired their own
employees as private respondents were no longer in the plant. The sale was subject to the
mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to pay the balance of the
purchase price, as a consequence of which, EMRACO-CIPI instituted extrajudicial foreclosure
proceedings. The properties were sold at public auction on August 30, 1974, the highest
bidders being EMRACO CIPI. On the same date, said companies obtained an ex-parte Writ of
Possession from the Court of First Instance of Ilocos Sur in Civil Case No. 3026-V.
On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva,
suspect to the right of redemption of RDFC. Nilo Villanueva then re-hired private respondents.
On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva,
EMRACO-CIPI were unable to turn over possession to RDFC and/or petitioners, prompting
the latter to file a complaint for recovery of possession against EMRACO-CIPI with the then
Court of First Instance of Ilocos Sur
(SORRY magulo, to cut the story short bumalik ung company sa unang owner--- remember
ung unang owner nafire na nya ung employees)

Issue: WON the first company who reacquired the ice plant is liable to reinstate the
employees? Are they liable to pay back wages? No
WON Sunio as the manager can be held personally liable? No
Held: Petitioners deny any employer-employee relationship with private respondents arguing
that no privity of contract exists between them, the latter being the employees of Nilo
Villanueva who re-hired them when he took over the operation of the ice plant from CIPI; that
private respondents should go after Nilo Villanueva for whatever rights they may be entitled
to, or the CIPI which is still existing, that no succession of rights and obligations took place
between Villanueva and petitioners as the transfer of possession was a consequence of the
exercise of the right of redemption; that the amount of backwages was determined without
petitioners being given a chance to be heard and that granting that respondents are entitled to
the reliefs adjudged, such award cannot be enforced against petitioner Sunio, who was
impleaded in the complaint as the General Manager of ICC.
It is true that the sale of a business of a going concern does not ipso facto terminate the
employer-employee relations insofar as the successor-employer is concerned, and that
change of ownership or management of an establishment or company is not one of the just
causes provided by law for termination of employment. The situation here, however, was not
one of simple change of ownership. Of note is the fact that when, on July 30, 1973,
EMRACO-CIPI sold the plant to RDFC, CIPI had terminated the services of its employees,
including herein private respondents, giving them their separation pay which they had
accepted. When RDFC took over ownership and management, therefore, it hired its own
employees, not the private respondents, who were no longer there. RDFC subsequently sold
the property to petitioners on November 28, 1973. But by reason of their failure to pay the
balance of the purchase price, EMRACO-CIPI foreclosed on the mortgage over the ice plant;
the property was sold at public auction to EMRACO-CIPI as the highest bidders, and they
eventually re-possessed the plant on August 30, 1974. During all the period that RDFC and
petitioners were operating the plant from July 30, 1973 to August 30, 1974, they had their own
employees. CIPI-EMRACO then sold the plant, also on August 30, 1974, to Nilo Villanueva,
subject to RDFC's right of redemption. Nilo Villanueva then rehired private respondents as
employees of the plant, also in 1974.
Sunio cannot be held personal liable. Petitioner Sunio was impleaded in the Complaint in his
capacity as General Manager of petitioner corporation. When appears to be no evidence on
record that he acted maliciously or in bad faith in terminating the services of private
respondents. His act, therefore, was within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity to which it may
be related. 4 Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 5 Petitioner Sunio, therefore, should not have been made
personally answerable for the payment of private respondents' back salaries.
VELARDE V LOPEZ – Velarde is the manager of a cable company which is a subsidiary of
Lopez Company. V obtained a loan from L with an express agreement stating that his
retirement package will be used as payment if the company fails to pay. Cable Company was
not able to pay. Consequently, L's company enforced the agreement. V was not able to
receive his retirement package.

Now, V filed a complaint against L company.

Issue: WON L Company (parent company) is liable? No

Held: The filing thereof against respondent is improper, it not being the real party-in-interest,
for it is petitioner's employer Sky Vision, respondent's subsidiary. It cannot be gainsaid that a
subsidiary has an independent and separate juridical personality, distinct from that of its
parent company, hence, any claim or suit against the latter does not bind the former and vice
versa. Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by
piercing the veil of corporate fiction. Piercing the veil of corporate fiction is warranted,
however, only in cases when the separate legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law
will regard the corporations as merged into one. The rationale behind piercing a corporation's
identity is to remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities.
In applying the doctrine of piercing the veil of corporate fiction, the following requisites must
be established: (1) control, not merely majority or complete stock control; (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 acts in contravention of plaintiff's legal
rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
Nowhere, however, in the pleadings and other records of the case can it be gathered that
respondent has complete control over Sky Vision, not only of finances but of policy and
business practice in respect to the transaction attacked, so that Sky Vision had at the time of
the transaction no separate mind, will or existence of its own. The existence of interlocking
directors, corporate officers and shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy considerations.

TRADERS ROYAL BANK V CA (SEE NEXT SECTION)

B. Exception: Disregarding Corporate Entity/Piercing the Veil of Corporate Entity

 the privilege of being treated as an entity distinct and separate from the stockholders
is confined to legitimate uses and is subject to equitable limitations to prevent its
being exercised for fraudulent, unfair or illegal purposes
 in piercing cases, it is always important to consider that the aim is not to use the
piercing doctrine as “a ram to break down the ramparts of the main doctrine of
separate juridical personality, but more properly for the ancillary piercing doctrine to
act as a regulating valve by which to preserve the powerful engine that is the main
doctrine of separate juridical personality
  the main effect of disregarding the corporate fiction is that stockholders will be held
personally liable for the acts and contracts of the corporation whose existence, at
least for the purpose of the particular situation involved, is ignored
 not to be confused with the de facto doctrine, where it may be presumed that the
corporation is de jure or even de facto and therefore not subject to collateral attack
 when the court disregards the corporate entity in a proper case, it is not denying
corporate existence for all purposes, but merely refuses to allow the corporation to
use the corporate property
 Piercing is to prevent fraud or a wrong, and not for any other purpose
 where no fraud or injustice would be prevented as to make directors and officers
liable personally, doctrine does not apply
 Boyer-Roxas: piercing cannot be used or resorted to merely establish a right or
interest, and the SC denied piercing when it was employed to justify under a theory of
co-ownership the continued use and possession by SHs of corporate properties
 In all piercing cases, the effect has always been to make the active or intervening SH
or officer liable for corporate debts and obligations

Classification of piercing cases:

1. To commit FRAUD or justify a wrong, or defend a crime (Villa Rey, Palay, Concept
Builders)
a. There must be a fraud or evil motive in the affected transaction; mere proof of
control of the corporation—by itself—would not justify piercing
b. Main action should seek for the enforcement of pecuniary claims
c. Corporate entity was used in the perpetration of the fraud or in the justification of
wrong or to escape personal liability

1. as an ALTER EGO, business conduit of another person or entity, or mere farce to

defeat public convenience
a. use of corporation as an alter ego is in direct violation of the separate juridical
entity doctrine
b. by not respecting the separate personality, others who deal with the corporation
are not also expected to be bound by the separate personality of the corporation,
and may treat the interests of the controlling SH/officer/director and the
corporation as the same
c. piercing alter ego may prevail even when no pecuniary claims are sought to be
enforced
d. since only the medium by which the business enterprise is changed, then the veil
may be pierced to allow the business creditors to recover from whoever has
actual control

1. necessary to achieve EQUITY or justice

TRADERS ROYAL BANK vs. CA- Filriters executed a "Detached Assignment" whereby
Filriters transferred Philfinance all its rights and title to Central Bank Certificates of
Indebtedness. Traders entered into a Repurchase Agreement with PhilFinance whereby,
PhilFinance sold to petitioner CBCI No. D891 which CBCI was among those previously
acquired by PhilFinance from Filriters. Pursuant to the aforesaid Philfinance agreed to
repurchase CBCI No. D891. PhilFinance failed to repurchase when the checks it issued were
dishonored for insufficient funds. PhilFinance executed a Detached Assignment in favor of the
Petitioner to enable the latter to have its title completed and registered. Philfinance
transferred and assigned all, its rights and title in the said CBCI to petitioner and, "irrevocably
authorize the Central Bank to transfer the bond/certificate. Traders presented the CBCI
Detached Assignments to the Central Bank, and requested the latter to effect the transfer of
the CBCI on its books and to issue a new certificate in the name of petitioner as absolute
owner thereof. Central Bank refused to register the transfer as requested, and continues to do
so. Traders claims the express provisions governing the transfer of the CBCI were
substantially complied with.
Issue (As presented by Traders):
Philfinance owns 90% of Filriters equity and the two corporations have identical corporate
officers, thus demanding the application of the doctrine or piercing the veil of corporate fiction,
as to give validity to the transfer of the CBCI

Held/Ratio:
1. PIERCING IS NOT PROPER HERE. Other than the allegation that Filriters is 90% owned
by Philfinance, and the identity of one shall be maintained as to the other, there is nothing
else which could lead the court undercircumstance to disregard their corporate personalities.
The fact that Filfinance owns majority shares in Filriters is not by itself a ground to disregard
the independent orporate status of Filriters. Liddel & Co., Inc. vs. Collector: The mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of Itself a sufficient reason for disregarding the fiction of separate
corporate personalities.

Doctrine: Piercing the veil of corporate entity, may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime or where a corporation is a mere alter ego or business conduit of a person. The court
must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or
crime was committed upon another, disregarding, thus, his, her, or its rights. It is the
protection of the interests of innocent third persons dealing with the corporate entity which the
law aims to protect by this doctrine.

INDOPHIL vs. CALICA- Indophil Textile Union executed a CBA with Indophil Textile Mills, Inc.
Indophil Acrylic Mfg. Corp. was incorporated and registered with the SEC; when it became
operational, it hired employees according to its own criteria. The workers of Acrylic unionized
and a CBA was subsequently executed. A year after the CBA with Acrylic, the Indohil Textile
Union claimed that the plant facilities set-up by Acrylic should be considered a mere extension
of Indophil Textiles; in effect it is claiming that Acrylis is merely a part of the Indphil Textile
bargaining unit. It argues:

a. Acrylic is but a devise to evade application of the CBA

b. The two entities are engaged in the same kind of business (manufacture and sale of yarns)
c. They have the same incorporators, directors and officers
d. Physical plants, offices are in the same compound
e. Indophil Textile's manchinery are now installed in Acrylic's plant
f. Services of Indophil Textile's various departments are used by Acrylic
g. Employees of Indophil Textile are the same persons manning the units of Acrylic

Indophil Textiles counters that it is a separate entity

from Acrylic:
a. Its business purpose is the manufacturing of yarns while Acryli's is the manufacturing and
trading of yarms
b. Diatogon vs. Ople: Two corporations cannot be treated as a single bargaining unit even if
their businesses are related
c. That there are as many bargaining units in a conglomerate is proof that a corporation is
endowed with a distinct personality
d. The services it purportedly provides Acrylic are only auxiliary
e. Essential services in Acrylic's business are dine by Acrylis itself

Issue: WON the operations of Indophil Acrylic is a mere extension or expansion of Indophil
Textile

Held/Ratio:
1. NO. “While we do not discount the possibility of similarities, neither are we inclined to apply
the doctrine invoked”. The facts cited by the union alone are not sufficient to justify piercing.
2. Instances when piercing is allowed: when corporate fiction is used to:
a. defeat public convenience
b. justify wring
c. protect fraud
d. defend crime
e. shield to cinfuse legitimate issues
f. make the corp a mere alter ego/ conduit
3. Umali vs. CA: “the legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation”

HI-CEMENT CORP. vs. INSULAR BANK OF ASIA & AMERICA (now Equitable-PCI Bank) and
E.T HENRY & CO. and SPOUSES TAN vs. INSULAR BANK OF ASIA & AMERICA – Spouses
Tan were the controlling stock holder of ET Henry & Co., Inc., a company engaged in the
business of processing and distributing bunker fuel. This corp. issued postdated checks to ET
Henry. Insular Bank granted ET Henry a credit facility known as "Purchase of Short Term
Receivables"1 i.e. ET Henry and bank were into rediscounting of checks. E.T. Henry was able
to re-discount its clients' checks (with deeds of assignment) with Insular. However, eventually,
20 checks of Hi-Cement (which were crossed. Through this arrangement, E.T. Henry was
able to encash, with pre-deducted interest, the postdated checks of its clients and which bore
the restriction “deposit to payee's account only”) were dishonored.

CFI rendered judgment in favor of Insular Bank ordering ET Henry, spouses Tan, Hi-Cement,
Riverside and Kanebo, jointly and severally, to pay Insular the value if the checks. Further, ET
Henry and/or spouses Tan were made to pay the accrued interests, charges, and penalties.
Spouses Tan contend that the lower courts erred in applying the doctrine of piercing the veil of
the corporate entity to make the spouses Tan solidarily liable with E.T. Henry.

Issue: WON the lower court erred in piercing the corporate veil by making spouses Tan
solidarily liable with ET Henry

Held/Ratio:
1. YES. E.T. Henry's corporate veil should not have been pierced at all. If any general rule can
be laid down, it is that the corporation will be looked upon as a legal entity until sufficient
reasons to the contrary appear. It is only when the fiction or notion of legal entity is used to
defeat public convenience, justify wrong, perpetuate fraud or defend crime that the law will
shred the corporate legal veil and regard it as a mere association of persons. This is referred
to as the doctrine of piercing the veil of corporate entity.

The mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality.

For this ground to stand in this case, there must be proof that the spouses Tan:

a. had control or complete domination of E.T. Henry's finances and that the latter had no
separate existence with respect to the act complained of;
b. used such control to commit fraud or wrong; and
c. the control was the proximate cause of the loss or injury complained of by respondent.

The records of this case do not show that these elements were present.

LIPAT vs. PACIFIC BANKING CORP. – Antonio and Estelita Lipat owned a single
proprietorship known as “Bela's Export Trading” (BET) for the manufacture of garments for
foreign and domestic consumption. Their daughter, Teresita Lipat, was appointed as an
attorney-in-fact by virtue of a Special Power of Attorney by Estelita. As such, she was able to
secure a loan from the Bank (P 583, 854) to buy fabrics to be manufactured by BET and as a
security for the loan, executed a Real Estate Mortgage over her parents' properties located in
Cubao, Quezon City for and behalf her mother. BET was later incorporated into Bela's Export
Corporation (BEC) wherein the spouses owned majority of the shares subscribed. The loan
from the bank was restructured in BEC's name as well as other subsequent loans were also
executed by Teresita in behalf of the corporation. All of these transactions were secured by
the real estate mortgage over the Lipats' property. BEC defaulted on the payments when they
became due and demandable. Estelita asked for an extension, but she still failed to fulfill her
promise. Thus, the real estate mortgage was foreclosed and the property was sold to a public
auction. Eugenio Trinidad was the highest bidder.

The spouses Lipat filed a complaint before the QC RTC for the annulment of the real estate
mortgage, extrajudicial foreclosure and certificate of sale issued over the property. They
argued that since the loans were under BEC's name (and not the single proprietorship,BET)
then one may not proceed against the property of the Lipat spouses as what happened in this
case. The TC

Issue: WON the doctrine of piercing the corporate veil applies in this case

Held/Ratio: YES. The petitioners aver that the doctrine does not apply because there is no
fraud in their part. However, the Supreme Court ruled that the presence of fraud is only one of
the instances wherein the doctrine may be applied. In addition, the alter ego doctrine or the
instrumentality rule may also be applied to pierce the veil of corporate fiction as in this case.
This doctrine states that “when the corporation is the mere alter ego or business conduit of a
person, its separate personality may be disregarded”. Evidence shows that BET and BEC are
one and the same and the latter is a mere conduit of the former:

1. Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC,
respectively;
2. both firms were managed by their daughter, Teresita;
3. both firms were engaged in the garment business, supplying products to “Mystical
Fashion,” a U.S. firm established by Estelita Lipat;
4. both firms held office in the same building owned by the Lipats;
5. BEC is a family corporation with the Lipats as its majority stockholders;
6. the business operations of the BEC were so merged with those of Mrs. Lipat such that they
were practically indistinguishable;
7. the corporate funds were held by Estelita Lipat and the corporation itself had no visible
assets;
8. the board of directors of BEC was composed of the Burgos and Lipat family members;
9. Estelita had full control over the activities of and decided business matters of the
corporation; and that
10. Estelita Lipat had benefited from the loans secured from Pacific Bank to finance her
business abroad and from the export bills secured by BEC for the account of “Mystical
Fashion.

Petitioners' attempt to isolate themselves from and hide behind the corporate personality of
BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In the Court's view, BEC is a
mere continuation and successor of BET, and petitioners cannot evade their obligations in the
mortgage contract secured under the name of BEC on the pretext that it was signed for the
benefit and under the name of BET.

Doctrine: The alter ego doctrine or the instrumentality rule may be applied to pierce the veil of
corporate fiction. This rule states that “when the corporation is the mere alter ego or business
conduit of a person, its separate personality may be disregarded”.

SHOEMART vs. NLRC – Fifty six out of 73 workers of MORIS Industries were members of
the UNION (Moris Industries Workers' Union). UNION sent a letter to MORIS informing it of
the UNION's existence and inviting MORiS to enter into negotiations for a collective
bargaining agreement (CBA). Within 2 days, MORIS closed shop and ceased operations,
claiming that it was due to business reverses. UNION filed a complaint for unfair labor
practice against MORIS and recovery of wage differentials and other monetary benefits. The
Labor Arbiter rendered a decision holding MORIS and SHOEMART equally liable to the
UNION which was upheld by the NLRC on the premise that MORIS was merely a conduit of
SM Shoemart.

Issue: WON the doctrine of “piercing the veil of corporate fiction” applies in this case

Held/Ratio: Yes. As a general rule, a corporation's juridical personality is distinct and separate
from its shareholders, members and officers. The rule applies as to other corporations. That
being the case, MORIS being registered as a separate entity would appear to be held solely
liable to the UNION. This is Shoemart's argument. However, an exception to this rule is when
the veil of corporate fiction doctrine is applied such as in the situation when a company
appears to be a mere alter ego or conduit ofanother company as clearly shown by evidence in
MORIS's case:
a. An examination of the Incorporation papers of SM Shoe Mart and Moris Manufacturing
show (sic) that except for Elizabeth Sy—all other five (5)
incorporators and directors of Morris Industries are major stockholders of SM Shoe Mart as of
July 20, 1985;
b. The SM Shoe Mart is the exclusive buyer of all of Moris' products;
c. Both are housed in one building and Moris for many years has been using the payrolls of
SM Shoe Mart. SM glibly excuses this fact by alleging that this was done without its
knowledge. We, however, considering the close relationship of parties, find this incredible. As
such, MORIS' separate juridical personality is not recognized and may not be used by SM to
escape liability. They are treated as one and the same company. Hence, SM is to be held
equally liable with MORIS, for MORIS' acts.

Doctrine: The alter ego doctrine or the instrumentality rule may be applied to pierce the veil of
corporate fiction. This rule states that “when the corporation is the mere alter ego or business
conduit of a person, its separate personality may be disregarded”.

YUTIVO SONS vs. CA – Yutivo Sons Hardware Co. (YUTIVO) bought a number of cars and
trucks from General Motors (GM). GM paid sales tax prescribed by the Tax Code. Since that
was already paid and tax was only collected once on original sales, Yutivo did not pay further
sales tax on its sales to the public. Southern Motors (SM) purchased the aforementioned cars
and trucks from Yutivo that were subsequently sold to the public in Visayas and Mindanao.
GM withdrew its business from the Philippines, thus, YUTIVO was appointed by GM (US
Office) as importer for the Visayas and Mindanao region (in short, YUTIVO directly dealt with
GM's office in the US and not with a Philippine-based GM office). YUTIVO continued its
previous arrangement of selling exclusively to SM.

In the same way that GM used to pay sales taxes based on its sales to YUTIVO, YUTIVO as
an importer paid sales tax on the basis of its sales tax to SM. And since such sales tax is only
collected once on original sales, SM paid no sales tax on its sales to the public.

The Collector of Internal Revenue made an assessment on YUTIVO and demanded

deficiency sales tax surcharge. Retail sales by SM to the public and SM and Yutivo were one
and the same corporation, SM being a subsidiary of YUTIVO ( in short: the CIR said that SM
was constituted for YUTIVO to evade the payment of taxes).

Issue: WON the doctrine of “piercing the veil of corporate fiction” applies in this case

Held/Ratio: No. It is an elementary and fundamental principle of corporation law that a

corporation is an entity separate and distinct from its stockholders and from other corporation
petitions to which it may be connected. However, "when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard
the corporation as an association of persons, or in the case of two corporations merge them
into one (piercing the veil of corporate fiction). Evidence shows an absence of fraud in the
organization of SM. It was organized in 1946 at a time which could not have caused Yutivo
any tax savings. During that period, it is not disputed that GM as importer, was the one solely
liable for sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of
cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became
the importer and simply continued its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact
that there was no tax to evade.

Doctrine: When there is NO clear showing of fraud, the veil of corporate fiction may not be
pierced

MARVEL BUILDING CORP. vs. DAVID – Plaintiffs, stockholders of Marvel seeks to enjoin the
defendant, Collector of Internal Revenue from selling properties in the name of the
corporation seized by the CIR to collect war profits taxes assessed against Maria Castro.
Plaintiffs Marvel and Castro allege that the three properties belong to Marvel and not to
Castro. Defendant says that Castro is the true and sole owner of the subscribed stocks of
Marvel including those subscribed by other members. Therefore, she is the exclusive owner
of all the properties seized.

Issue: WON Castro is the owner of all the shares of stock of Marvel (Are the other members
merely her dummies? Is Marvel a one-man corporation?)

Held/Ratio: Yes. The circumstantial evidence is conclusive of the existence of a one-man

corporation:
1. The existence of endorsed certificates, discovered by the internal revenue agents between
1948 and 1949 in the possession of the Secretary-Treasurer;
2. The fact that twenty-five certificates were signed by the president of the corporation, for no
justifiable reason;
3. The fact that two sets of certificates were issued;
4. Castro had made enormous profits and, therefore, had a motive to hide them to evade the
payment of taxes;
5. The fact that the other subscribers had no incomes of sufficient magnitude to justify their
big subscriptions;
6. The fact that the subscriptions were not receipted for and deposited by the treasurer in the
name of the corporation but were kept by Maria B. Castro herself;
7. The fact that the stockholders or the directors never appeared to have ever met to discuss
the business of the corporation;
8. The fact that Maria B. Castro advanced big sums of money to the corporation without any
previous arrangement or accounting; and
9. The fact that the books of accounts were kept as if they belonged to Maria B. Castro alone
Castro would not have asked them to endorse their stock certificates, or be keeping these in
her possession, if the other members were really the owners. They never would have
consented that Castro keep the funds without receipts or accounting, nor that she manages
the business without their knowledge or concurrence, were they owners of the stocks in their
own rights. Each and every one of the facts all set forth above, in the same manner, is
inconsistent with the claim that the stockholders, other than Maria B. Castro, own their shares
in their own right. On the other hand, each and every one of them, and all of them, can point
to no other conclusion than that Maria B. Castro was the sole and exclusive owner of the
shares and that they were only her dummies.

Doctrine: In this case, circumstantial evidence is used to “pierce the corporate veil” although
there is no mention of the doctrine anywhere in the case.

UMALI vs. CA – A Memorandum of Agreement was executed by and between Slobec Realty
and Development, Inc., represented by its President Santiago Rivera and the Castillo family,
the petitioners, to convert four parcels of land they inherited into a subdivision to raise funds
necessary to pay off their loans. Thus, Rivera, armed with the agreement approached the
president of defendant Bormaheco to purchase two (2) tractors. On the same date, Slobec,
through Rivera, executed in favor of Bormaheco a Chattel Mortgage over the said equipment.
For additional security Slobec obtained from Insurance Corporation of the Phil. a Surety
Bond, with ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in favor
of Bormaheco. The aforesaid surety bond was in turn secured by a Real Estate Mortgage
executed by Rivera as president of Slobec and petitioners as mortgagors and Insurance
Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the
obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP
required that the Castillos mortgage to them the four parcels of land. Subsequently, for
violation of the terms and conditions of the mortgage agreement the properties of the Castillos
were foreclosed by ICP. As the highest bidder, ICP acquired title over the parcels of land.
Castillos failed to redeem the properties within 1 year. Consequently, ICP consolidated its
ownership over the subject parcels of land. ICP then sold these to Phil. Machinery (PM). PM
now demands that the Castillos vacate the property. They countered with an action for
annulment of title because the transactions (agreement, real estate mortgage, deeds of
authority to sell) from the very start were void because the same were either simulated or
obtained through fraud Essentially, the petitioners seek to annul the foreclosure proceedings
because they believe that PM Parts, Bormaheco, and ICP employed fraud in the foreclosure
proceedings inasmuch as these business entities were interrelated thus the veil of corporate
fiction should be lifted. Corollary, PM claims to be a buyer in good faith by denying actual or
constructive knowledge of the transactions incident to the foreclosure, thus regardless of the
fact that the proceeding was null, valid title was vested to him.

Issues:
1. WON piercing the veil of corporate fiction is the proper remedy to annul foreclosure
proceedings as in the CAB
2. WON PM is a buyer in good faith

Held/Ratio:
1. NO. The legal corporate entity is disregarded only if it is sought to hold the officers and
stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners
do not seek to impose a claim against the individual members of the three corporations
involved; on the contrary, it is these corporations which desire to enforce an alleged right
against petitioners. Assuming that petitioners were indeed defrauded by private respondents
in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances,
sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold
the officers and/or members of respondent corporations personally liable.

Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which
relief may be obtained without having to disregard the aforesaid corporate fiction attaching to
respondent corporations. Secondly, petitioners failed to establish by clear and convincing
evidence that private respondents were purposely formed and operated, and thereafter
transacted with petitioners, with the sole intention of defrauding the latter. The mere fact,
therefore, that the businesses of two or more corporations are interrelated is not a justification
for disregarding their separate personalities, absent sufficient showing that the corporate
entity was purposely used as a shield to defraud creditors and third persons of their rights.

2. NO. (N.B.: Foreclosure proceeding was void since ICP had no right over the property since
the obligation continued even after the suretyship agreement has terminated as stipulated in
the contract. More importantly, ICP did not as surety pay off the obligation of the petitioners. In
other words, ICP cannot take title to or exercise rights over the mortgaged property since it
never incurred or suffered any liability under the surety). While the doctrine of piercing the veil
of corporate fiction is not applicable in this case, its inapplicability has no bearing on the good
faith or bad faith of private respondent PM Parts. It must be noted that Cervantes served as
Vice-President of Bormaheco and, later, as President of PM Parts. On this fact alone, it
cannot be said that PM Parts had no knowledge of the aforesaid several transactions
executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the
Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts.
These facts were admitted without qualification in the stipulation of facts submitted by the
parties before the trial court. Hence, the defense of good faith may not be resorted to by
private respondent PM Parts which is charged with knowledge of the true relations existing
between Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title
issued in its name, as well as the certificate of sale, must be declared null and void since they
cannot be considered altogether free of the taint of bad faith.

Doctrine: Where the action is to enforce a right against the corporation itself but not to hold
the individuals who compose it personally liable, the doctrine of PVOCF has no application.
Nevertheless, even when the doctrine is inapplicable, the question whether the officers of the
corporation or its agents had knowledge of matters imputable to any or all of the interrelated
corporations, which they at one time represented in dealing with third persons, is another
matter.

PNB vs. RITRATTO GROUP, INC. – PNB International Finance Ltd. (PNB-IFL), a subsidiary
company of PNB, organized and doing business in Hong Kong, extended a letter of credit in
favor of Ritratto Group in the amount of US$300,000.00 secured by real estate mortgages
constituted over four (4) parcels of land. However, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL, through its
attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate
mortgages and that the properties subject thereof were to be sold at a public auction.
Respondents filed a complaint. Despite the recognition that petitioner is a mere agent, the
respondents in their complaint prayed that the petitioner PNB be ordered to re-compute the
rescheduling of the interest to be paid by them in accordance with the terms and conditions in
the documents evidencing the credit facilities, and crediting the amount previously paid to
PNB by herein respondents. Petitioner filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between the petitioner and
respondents. The trial court ruled that since PNB-IFL, is a wholly owned subsidiary of
defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-
IFL. Denial upheld by CA.

Issues:
1. WON a Cause of Action exists against petitioner PNB which is not a real party in interest
being a mere Attorney-in-fact authorized to enforce the contract.
2. WON piercing the veil of corporate fiction warranted.
3. What are the indicia that the subsidiary is merely an instrumentality to justify #2?
4. When should the court pierce the veil of corporate fiction in cases like this?

Held/Ratio:
1. No. Petitioner is not the real party in interest, thus no cause of action. The contract
questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint,
respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power
and authority to, inter alia, foreclose on the properties mortgaged to secure their loan
obligations with PNB- IFL. Petitioner is an agent with limited authority and specific duties
under a special power of attorney incorporated in the real estate mortgage. It is not privy to
the loan contracts entered into by respondents and PNB-IFL.
2. No. 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 subsidiary's separate existence may be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to those arising in their respective
business. The courts may in the exercise of judicial discretion step in to prevent the abuses of
separate entity privilege and pierce the veil of corporate entity.
3. The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to
catalogue the infinite variations of fact that can arise but there are certain common
circumstances which are important and which, if present in the proper combination, are
controlling.

These are as follows:

a. The parent corporation owns all or most of the capital stock of the subsidiary.
b. The parent and subsidiary corporations have common directors or officers.
c. The parent corporation finances the subsidiary.
d. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
e. The subsidiary has grossly inadequate capital.
f. The parent corporation pays the salaries and other expenses or losses of the subsidiary.
g. The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
h. In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.
i. The parent corporation uses the property of the subsidiary as its own.
j. 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.
k. The formal legal requirements of the subsidiary are not observed. (US case: GARRET vs.
SOUTHERN RAILWAY)

Doctrine: If used to perform legitimate functions, a subsidiary's separate existence may be

respected, and the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business. The courts may in the exercise of judicial
discretion step in to prevent the abuses of separate entity privilege and pierce the veil of
corporate entity but only if it is justified by the evidence on record regarding the indicia of
subsidiary as instrumentality.

REYNOSO IV vs. CA – In the early 60's, Commercial Credit Corporation (CCC) a financing
and investment firm, decided to organize franchise companies around the country wherein it
will hold 30% equity. These franchise companies accepts funds from depositors who are in
turn, issued interest bearing promissory notes. Bibiano Reynoso IV, was designated as
resident manager of Commercial Credit Corporation of Quezon City (CCCQC) one of CCC
franchise companies. CCC-QC entered into an exclusive management contract with CCC
whereby the latter was given the management and full control of CCC-QC's business, i.e.,
CCC-QC will sell, discount, and/or assign its receivables to CCC but the agreement was later
set aside due to CB DOSRI Rules which prohibits the lending of funds by corporation to its
directors, officers, stockholders and other persons with related interests. Thereafter, CCC
organized a subsidiary named CCC Equity to which the former transferred its 30% equity in
CCC-QC. Reynoso became an employee of CCC-Equity to which he receives his salaries
and emoluments although still performing his job as CCC-QC resident manager. He is also a
member of CCC Employee Pension Plan. In order to boost the business activities of CCC-
QC, Reynoso deposited his personal funds in the company. In return, CCC-QC issued to him
its interest-bearing promissory notes. Collection suit was filed by CCC-QC against Reynoso
and later on against his wife. It was alleged Reynoso embezzled CCC-QC's funds. Reynoso
denied and filed counterclaim. CCC became known as General Credit Corporation (GCC).
GCC entered an opposition by way of special appearance and argued that it was not a party
to the civil case thus Reynoso's claim shall not be directed against them. GCC filed a
complaint. In this petition, GCC was of the position that the levy of its properties was wrong
because it has personality separate and distinct from that of CCC-QC which is the party to the
civil case. On the other hand, Reynoso argued that CCC-QC is just an alter ego of CCC and
its successor GCC.

Issue: WON the judgment in favor of Reynoso may be executed against GCC

Held/Ratio: Yes. CCC-QC is an alter ego, instrumentality or conduit of CCC and/or GCC.
When the mother corporation and its subsidiary cease to act in good faith and honest
business judgment, when the corporate device is used by the parent to avoid its liability for
legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate
fraud or promote injustice, the law steps in to remedy the problem. When that happens, the
corporate character is not necessarily abrogated. It continues for legitimate objectives.
However, it is pierced in order to remedy injustice.

Factual Circumstances that Justify Piercing of Veil of Corporate Fiction

1. The CCC had dominant control of the business operations of CCC-QC. The exclusive
management contract insured that CCC-QC would be managed and controlled by CCC and
would not deviate from the commands of the mother corporation. In addition to the exclusive
management contract, CCC appointed its own employee, petitioner, as the resident manager
of CCC-QC.

Reynoso's designation as “resident manager” implies that he was placed in CCC-QC by a

superior authority. In fact, even after his assignment to the subsidiary corporation, petitioner
continued to receive his salaries, allowances, and benefits from CCC, which later became
respondent General Credit Corporation. Reynoso and the other permanent employees of
CCC-QC were qualified members and participants of the Employees Pension Plan of CCC.

Doctrine: When the mother corporation and its subsidiary cease to act in good faith and
honest business judgment, when the corporate device is used by the parent to avoid its
liability for legitimate obligations of the subsidiary, and when the corporate fiction is used to
perpetrate fraud or promote injustice, the law steps in to remedy the problem. When that
happens, the corporate character is not necessarily abrogated. It continues for legitimate
objectives. However, it is pierced in order to remedy injustice.

PNB vs. ANDRADA ELECTRIC – Philippine National Bank (PNB) acquired the assets of the
Pampanga Sugar Mills (PASUMIL) that were earlier foreclosed by the Development Bank of
the Philippines (DBP). PNB organized the National Sugar Development Corporation
(NASUDECO) in September 1975, to take ownership and possession of the assets and
ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills.
Andrada Electric is a partnership organized under Philippine law to engage in the business of
constructing and repairing machineries and buildings. Pampanga Sugar Mills (PASUMIL)
engaged the services of the Andrada Electric & Engineering Company (AEEC) for electrical
rewinding and repair, most of which were partially paid by PASUMIL, leaving several unpaid
accounts with AEEC.

Thereafter PASUMIL and PNB, and now NASUDECO, allegedly failed and refused to pay
AEEC their just, valid and demandable obligation (The President of the NASUDECO is also
the Vice-President of the PNB. AEEC sought said official to pay the outstanding obligation of
PASUMIL, inasmuch as PNB and NASUDECO now owned and possessed the assets of
PASUMIL, and these defendants all benefited from the works, and the electrical, as well as
the engineering and repairs, performed by AEEC). PNB/NASUDECO filed a Motion to
Dismiss on the ground of failure to state a cause of action since there is no privity of contract
between them. PNB and/or NASUDECO now maintains that their takeover of PASUMIL's
assets did not make them as assignees while AEEC argues that PNB, NASUDECO and
PASUMIL shall be treated as a single entity for the purpose of paying the corporate debt of
PASUMIL as to them.

Issue: WON PNB and/or NASUDECO can be held liable for the corporate debts of PASUMIL

Held/Ratio: No. As a rule, a corporation that purchases the assets of another will not be liable
for the debts of the selling corporation, provided the former acted in good faith and paid
adequate consideration for such assets, except when any of the following circumstances is
present:

1. Where the purchaser expressly or impliedly agrees to assume the debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is fraudulently entered into in order to escape liability for those
debts.

A corporation 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. The corporate veil may be lifted only
if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice. Thus, the mere fact that the PNB acquired
ownership or management of some assets of the PASUMIL, which had earlier been
foreclosed and purchased at the resulting public auction by the DBP, will not make PNB liable
for the PASUMIL's contractual debts to AEEC. None of the elements in piercing the veil of
corporate fiction are present in the case at bar.

First, other than the fact that PNB and NASUDECO acquired the assets of PASUMIL, there is
no showing that their control over it warrants the disregard of corporate personalities.

Second, there is no evidence that their juridical personality was used to commit a fraud or to
do a wrong; or that the separate corporate entity was farcically used as a mere alter ego,
business conduit or instrumentality of another entity or person.

Third, AEEC was not defrauded or injured when PNB and NASUDECO acquired the assets of
PASUMIL. Hence, although the assets of NASUDECO can be easily traced to PASUMIL, the
transfer of the latter's assets to PNB and NASUDECO was not fraudulently entered into in
order to escape liability for its debt to AEEC.

Doctrine: PIERCING THE VEIL OF CORPORATE FICTION ELEMENTS

1. Control—not mere stock control, but complete domination —not only of finances, but of
policy and business practice in respect to the transaction attacked, must have been such 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 a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an
unjust act in contravention of plaintiff's legal right; and
3. The said control and breach of duty must have proximately caused the injury or unjust loss
complained of.

FIRST PHILIPPINE INTERNATIONAL BANK vs. CA – First Philippine International Bank

(FPIB) is a domestic bank organized under Philippine law (which was under conservatorship)
while Mercurio Rivera is the bank's Head-Manager of its Property Management Dept. Carlos
Ejercito is the assignee of Demetrio Demetria and Jonolo. In the course of its banking
operations, FPIB acquired 6 parcels of land located in Sta. Rosa, Laguna. The said parcels of
land were originally owned by BYME Investment and Dev't. Corporation which they used as
collateral for the loan they obtained from FPIB. Demetria and Janolo were interested in buying
the above parcels of land from FPIB.Demetria and Janolo negotiated with Rivera for the
purchase of such properties as evidenced by exchange of letters between the parties. The
negotiations culminated when Demetria and Janolo had a meeting with Luis Co, the Senior
VP of FPIB. Two days after the meeting, Janolo sent a letter to FPIB thru Rivera a letter to the
effect that they are accepting he bank's offer of 5.5 million pesos as purchase price for for the
subject properties. Subsequently, the conservator of FPIB was replaced. Rivera then sent a
letter to Demetria and Janolo informing them that their offer of purchase was under study of
the newly designated bank conservator. Thereafter, Demetria and Janolo made a series of
demands as against FPIB for the latter to honor and execute the perfected contract of sale of
the realties involved. FPIB refused to heed the demands. Demetria. Demetria and Janolo filed
an action for specific performance with damages against FPIB, Rivera and conservator. They
argued that there was already a perfected sales agreement between them took place and that
Rivera has no authority to bind FPIB re: the transaction involved. Meanwhile, during the
pendency of the above case in the CA, Henry Co (owner of 80% of the bank's equity) and
several other stockholders, instituted a “derivative suit” with the RTC of Makati against the
conservator Encarnacion as well as Demetria and Janolo. This suit seeks to declare as
unenforceable the perfected sale of the parcels of land, if any and to stop Ejercito from
enforcing and implementing the sales agreement.

Issue: WON FPIB guilty of forum shopping

Held/Ratio: Yes. For forum shopping to exists, the following requisites must be present: There
must be identity of parties, or at least such parties as represent the same interests in both
actions, as well as identity of rights asserted and reliefs prayed for, the relief being founded on
the same facts, and the identity on the two preceding particulars is such that any judgment
rendered in the other action will, regardless of which party is successful, will amount to res
judicata in the action under consideration. In the case at bar, all these requisites are present.
There is identity of rights asserted and reliefs sought in the two cases under consideration
because the FIRST CASE was clearly filed in order to enforce the alleged perfected sale of
real state while the SECOND CASE was filed in order to declare as “unenforceable” the
purported sale of the 6 parcels of land. There is also identity of parties in the two cases or at
least, identity of interests represented. (NOTE: this is
particularly the relevant portion of this case) Although the plaintiffs in the Second Case (Henry
L. Co. et al.) are not name parties in the First Case, they represent the same interest and
entity, namely, FPIB because:

First, they are not suing in their personal capacities, for they have no direct personal interest
in the matter in controversy. They are not principally or even subsidiarily liable; much less are
they direct parties in the assailed contract of sale; and

Second, the allegations of the complaint in the Second Case show that the stockholders are
bringing a “derivative suit.” In the caption itself, petitioners claim to have brought suit “for and
in behalf of the Producers Bank of the Philippines.” This is the very essence of a derivative
suit. FPIB et. al., in denying the identity of parties in the two cases argued that FPIB has a
legal personality separate and distinct from Henry Co et. al. This is untenable. The Court held
that when the fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or crime,
the veil with which the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals. The Court, in effect, pierced the veil of corporate personality of
FPIB in the case at bar.

Doctrine: The corporate veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the majority in direct
actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes,
particularly where, as in this case, the corporation itself has not been remiss in vigorously
prosecuting or defending corporate causes and in using and applying remedies available to it.
To rule otherwise would be to encourage corporate litigants to use their shareholders as fronts
to circumvent the stringent rules against forum shopping.

MCCONNEL vs. CA – Spouses Paredes and Tolentino controlled 1,496 of 1,500 shares of
Park Rite, Co., Inc. which operated a parking lot on San Juan st. in Mla. While they leased the
main lot belonging to Samanillo, they also encroached upon the adjacent lot of respondents-
appellees Padilla who demanded payment upon discovery, and remaining unpaid, filed a case
of forcible entry. Judgment was rendered ordering Park Rite to pay. Upon execution, Park Rite
was found without any assets other than P550 deposited in Court. Padilla then filed suit in CFI
Mla against Park Rite and its past & present stockholders, to recover jointly and severally. CFI
denied recovery; CA reversed, finding the corporation a mere alter ego or business conduit of
the principal stockholders that controlled it for their own benefit, and adjudged them
responsible for the amounts demanded by the lot owners.

Issue: WON CA is correct & justified in piercing the corporate veil of Park Rite & holding its
controlling stockholders personally responsible for a judgment against the corporation

Held/Ratio: Yes. Individual stockholders may be held liable for obligations contracted by the
corporation wherever circumstances have shown that the corporate entity is being used as an
alter ego or business conduit for the sole benefit of the stockholders, or else to defeat public
convenience, justify wrong, protect fraud, or defend crime. There is no question that a wrong
has been committed by Park Rite in occupying plaintiff's lot without prior knowledge and
consent and without paying reasonable rentals. There is no doubt that the corporation was a
mere alter ego or business conduit of defendants Paredes and Tolentino, and before
them—defendants M. McConnel, W. P. Cochrane, and Ricardo Rodriguez. Evidence clearly
shows that these persons completely dominated and controlled the corporation and that the
functions of the corporation were solely for their benefits. It is obvious that the last four shares
being owned by four other persons are merely qualifying shares and that the spouses
Paredes and Tolentino now compose the so-called Park Rite Co., Inc. That the corporation is
a mere extension of their personality is shown by the fact that the office of Cirilo Paredes and
that of Park Rite Co., Inc. are in the same building, in the same floor and in the same room.
This is further shown by the fact that the funds of the corporation are kept by Cirilo Paredes in
his own name. The corporation itself had no visible assets, as correctly found by the trial
court, except perhaps the toll house, wire fence around the lot and the signs thereon. It was
for this reason that the judgment against it could not be fully satisfied.

1. When piercing the veil not justified

DEL ROSARIO vs. NLRC – POEA dismissed (lack of merit) a complaint for money claims vs.
Del Rosario, Pres & Gen Mgr of Philsa Construction & Trading Co. Decision was appealed to
NLRC which reversed POEA decision and ordered Philsa (recruiter) and Arieb Enterprises
(foreign employer) to jointly & severally pay private respondent. Writ of execution issued by
POEA was returned, as Philsa was no longer operating and was financially incapable. Private
respondent moved for issuance of an alias writ vs officers of Philsa.

Issues:
1. WON NLRC gravely abused discretion (YES); and consequently
2. WON the corporate veil may be pierced allowing execution on del Rosario's property (NO)

Held: The NLRC affirmed alias writ of execution vs petitioner, on theory that corporate veil
could be pierced, founded primarily on the following:
1. Del Rosario was the listed Pres and Gen Mgr of Philsa albeit delisted from the list of
agencies/entities on 15 August 1986 for inactivity and presumably for the purpose of evading
payment;
2. He and other officers likewise held the same positions in a similarly named corp (Philsa Int'l
Placement); and
3. Integrating the ruling of AC Ransom.

However:
1. A corporation is bestowed juridical personality, separate and distinct from stockholders.
When juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, veil may be peirced. But for such, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. NLRC's theory that Philsa allowed its
license to expire so as to evade payment of private respondent's claim is unsupported.
Philsa's corporate personality therefore remains inviolable.

When Philsa allowed its license to lapse in '85 and when it was delisted in '86, there was yet
no judgment in favor of private respondent. An intent to evade payment of his claims cannot
be implied from the expiration of Philsa's license and its delisting.

YU vs. NLRC – Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque

Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay Distillery,
Inc. (TDI). 22 employees of TDI, including private respondent-employees, received a
memorandum from TDI terminating their services, for reason of retrenchment, effective 30
days from receipt thereof or not later than the close of business hours on April 28, 1988. On
April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary
restraining order against their retrenchment. The labor arbiter issued the restraining order the
following day. However, due to the 20-day lifetime of the temporary restraining order, and
because of the on-going negotiations for the sale of TDI to the First Pacific Metro Corporation,
the retrenchment pushed through. The instant petition involves only the 4 individual
respondents herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo
Santos. On June 1, 1988, or after respondents-employees had ceased as such employees, a
new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed
the business name Tanduay Distillers.

The employees filed a motion to implead herein petitioners James Yu and Wilson Young,
doing business under the name and style of Tanduay Distillers, as party respondents in said
cases. Petitioners filed an opposition thereto, asserting that they are representatives of
Tanduay Distillers an entity distinct and separate from DTI, the previous owner, and that there
is no employer-employee relationship between Tanduay Distillers and private respondents.
Respondents-employees filed a reply to the opposition stating that petitioner of TDI labor
union of Tanduay Distillers' decision to hire everybody with a clean slate on a probation basis.

Held: The order of execution and the writ of execution ordering petitioners and Tanduay
Distillers to reinstate private respondent-employees are, therefore, null and void. Neither may
be said that petitioners and Tanduay Distillers are one and the same as TDI, as seems to be
the impression of respondents when they impleaded petitioners as party respondents in their
complaint for unfair labor practice, illegal lay off, and separation benefits.

Such a stance is not supported by the facts. The name of the company for whom the
petitioners are working is Twin Ace Holdings Corporation. As stated by the Solicitor General,
Twin Ace is part of the Allied Bank Group although it conducts the rum business under the
name of Tanduay Distillers. The use of a similar sounding or almost identical name is an
obvious device to capitalize on the goodwill which Tanduay Rum has built over the years.
Twin Ace or Tanduay Distillers, on one hand, and Tanduay Distillery, Inc. (TDI), on the other,
are distinct and separate corporations. There is nothing to suggest that the owners of DTI,
have any common relationship as to identify it with Allied Bank Group which runs Tanduay
Distillers.

We hold that the director of Labor relations acted with grave abuse of discretion in treating the
two companies as a single bargaining unit. That ruling is arbitrary and untenable because the
two companies are indubitably distinct with separate juridical personalities.

The fact that their businesses are related and that the 236 employees of Georgia Pacific
International Corporation were originally employees of Lianga Bay Logging Co., Inc. is not a
justification for disregarding their separate personalities. Hence, the 236 employees, who are
now attached to Georgia Pacific International Corporation, should not be allowed to vote in
the certification election at the Lianga Bay Logging Co. ,Inc. They should vote at a separate
certification election to determine the collective bargaining representative of the employees of
Georgia Pacific International Corporation.

It is basic that a corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity to which it may
be related (Palay, Inc vs. Clave)

The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a
subsequent interested buyer. At the time when termination notices were sent to its
employees, TDI was negotiating with the First Pacific Metro Corporations for the sale of its
assets. Only after First Pacific gave up its efforts to acquire the assets did Twin Ace or
Tanduay Distillers come into the picture. Respondents-employees have not presented any
proof as to communality of ownership and management to support their contention that the
two companies are one firm or closely related. The doctrine of piercing the veil of corporate
entity applies when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime or where a corporation is the mere alter ego or business
conduit of a person (Indophil Textile Mill Workers Union vs. Calica) To disregard the separate
juridical personality of a corporation, the wrong-doing must be clearly and convincingly
established. It cannot be presumed.

The complaint for unfair labor practice, illegal lay off, and separation benefits was filed against
TDI. Only later when the manufacture and sale of Tanduay products was taken over by Twin
Ace or Tanduay Distillers were James Yu and Wilson young impleaded. The corporation itself
— Twin Ace or Tanduay Distillers — was never made a party to the case.

Another factor to consider is that TDI as a corporation or its shares of stock were not
purchased by Twin Ace. The buyer limited itself to purchasing most of the assets, equipment,
and machinery of TDI. Thus, Twin Ace or Tanduay Distillers did not take over the corporate
personality of TDI although they manufacture the same product at the same plant with the
same equipment and machinery. Obviously, the trade name "Tanduay" went with the sale
because the new firm does business as Tanduay Distillers and its main product of rum is sold
as Tanduay Rum. There is no showing, however, that TDI itself was absorbed by Twin Ace or
that it ceased to exist as a separate corporation. In point of fact TDI is now herein a party
respondent represented by its own counsel.

Significantly, TDI in the petition at hand has taken the side of its former employees and
argues against Tanduay Distillers. In its memorandum filed on January 9, 1995, TDI argues
that it was not alone its liability which the arbiter recognized "but also of James Yu and
Wilson Young, representatives of Twin Ace and/or the Allied Bank Group doing business
under the name 'TANDUAY DISTILLERS,' to whom the business and assets of DTI were
sold." If DTI and Tanduay Distillers are one and the same group or one is a continuation of the
other, the two would not be fighting each other in this case. TDI would not argue strongly "that
the petition for certiorari filed by James Yu and Wilson Young be dismissed for lack for merit."
It is thus obvious that the second corporation, Twin Ace or Tanduay Distillers, is an entity
separate and distinct, from the first corporation, TDI. The circumstances of this case are
different from the earlier decisions of the Court in Labor cases where the veil of corporate
fiction was pierced.

In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana (KKM),

(93 Phil. 160 [1953], La Campana Coffee Factory, Inc. and La Campana Gaugau Packing
were substantially owned by the same person. They had one office, one management, and a
single payroll for both businesses. The laborers of the gaugau factory and the coffee factory
were also interchangeable – the workers in one factory worked also in the other factory.

In Claparols vs. Court of Industrial Relations (65 SCRA 613 [1975], the Claparols Steel and
Nail Plant, which was ordered to pay its workers backwages, ceased operations on June 30,
1956 and was succeeded on the very next day, July 1, 1957, by the Clarapols Steel
Corporation. Both corporations were substantially owned and controlled by the same person
and there was no break or cessation in operations. Moreover, all the assets of the steel and
nail plant were transferred to the new corporation.

In fine, the fiction of separate and distinct corporate entities cannot, in the instant case, be
disregarded and brushed aside, there being not the least indication that the second
corporation is a dummy or serves as a client of the first corporate entity. In the case at bench,
since TDI and Twin Ace or Tanduay Distillers are two separate and distinct entities, the order
for Tanduay Distillers (and petitioners) to reinstate respondents-employees is obviously
without legal and factual basis.

 Yu: when a transferee purchases only the assets of the transferor, the transferee
cannot be held liable for the labor claims and obligation for reinstatement adjudged
against the transferor
 there must be continuity of the identity of the owners in the business;
 the doctrine of business-enterprise transfer as to make the transferee liable for the
business obligations of the transferor is really a species of piercing doctrine and
would require a certain degree of continuity of the same business by the same
owners using the corporate fiction as a shield

Doctrine:
1. It is fundamental that a final and executory decision cannot be amended or corrected (First
Integrated Bonding and Insurance Co. vs. Hernando) except for clerical errors or mistakes
BOYER–ROXAS vs. CA – The corporation, Heirs of Eugenia Roxas Inc, was established to
engage in agriculture to develop the properties inherited from Eugenia Roxas and Eufroncio
Roxas, which includes the land upon which the Hidden Valley Springs Resort was put up,
including various improvements thereon, using corporate funds (used as site for filming
Apocalypse Now). The AOI of Heirs Inc was amended for this purpose. Heirs Inc claims that
Boyer-Roxas and Guillermo Roxas had been in possession of the various properties and
improvements in the resort and only upon the tolerance of the corporation. It was alleged that
they committed acts that impeded the corporation's expansion and normal operation of the
resort. They also did not comply with court and regulatory orders, and thus the corporation
adopted a resolution authorizing the ejectment of the defendants. TC grants. CA affirms.
Boyer and Roxas contend that, being SHs, their possession of the properties of the
corporation must be respected in view of their ownership of an aliquot portion of all properties
of the corporation.

Held: Regarding properties owned by the corporation, the SH of Guanzon case says that
“properties registered in the name of the corporation are owned by it as an entity separate
and distinct from its members. While shares of stock constitute personal property, they do not
represent property of the corporation. A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of the
corporation, nor is he entitled to the possession of any definite portion of its property or
assets. The SH is not a co-owner or tenant in common of the corporate property.

The corporation has a personality distinct and separate from its members and transacts
business only through its officers or agents. Whatever authority these officers or agents may
have, have been derived from the board or other governing body, unless conferred by the
charter of the corporation itself. In this case the elder Roxas who then controlled the
management of the corporation, being the majority SH, consented to the petitioner's use and
stay within the properties. The Board did not object and were allowed to stay until it adopted a
resolution to the effect of authorizing moves to eject them. Since their stay was merely by
tolerance, in deference to the wishes of the majority SH who controlled the corporation, when
Roxas died his actions cannot bind the company forever. There is no provision in the by-laws
or any other resolution authorizing their continued stay.

PADILLA vs. CA – Susana Realty, Inc. (SRI) sold to the Light Rail Transit Authority (LRTA)
several parcels of land located in Taft. Under paragraph 7 of the deed of sale, SRI reserved to
itself the right of first refusal to develop and/or improve the property sold should the LRTA
decide to lease and/or assign to any person the right to develop and/or improve the property.
Later, the LRTA and Phoenix Omega Development and Management Corporation (Phoenix
Omega) entered into a Commercial Stall Concession Contract authorizing the latter to
construct and develop commercial stalls on a 90 sq. m. portion of the property bought from
SRI. SRI opposed, claiming that it violated paragraph 7 of the deed of sale. A tripartite
agreement was later concluded by the parties, however, whereby SRI agreed to honor the
terms of the concession contract and to lease to Phoenix Omega its (SRI's) property
(remaining property) adjacent to the 90 sq. m. portion subject of the concession contract. A
contract was thus entered into on July 28, 1988 between Phoenix Omega and SRI with LRTA
whereby Phoenix Omega undertook to construct commercial stalls on the 90-sq. m. property
in accordance with plans and specifications prepared by the latter, the construction to begin,
however, only upon SRI's approval of such plans and specifications. Phoenix Omega, by a
deed of assignment, assigned its right and interests over the remaining property unto its sister
company, PKA Development and Management Corporation (PKA). Signatories to the deed of
assignment were Eduardo Gatchalian in his capacity as President of Phoenix Omega, and
Luisito B. Padilla (Padilla), one of the petitioners herein, in his capacity as President and
General Manager of PKA. The development of the remaining property having been assigned
to PKA, it entered into a contract of lease with SRI likewise on 28 July 1988. PKA sued for
rescission of contract of lease because SRI allegedly refused to approve the amended plans
of PKA. It contended that such refusal was tantamount to a deprivation of the use of the
commercial stalls. SRI, upon the other hand, claimed that it was PKA which violated the terms
of their contract, alleging that PKA failed to complete within six months the construction of the
commercial stalls during which period it was not paying any rentals and that PKA undertook
the construction without first having its plans approved."

RTC ruled in favor of SRI. It also ruled that Phoenix-Omega and PKA were one and the same.
CA affirmed. The sheriff executed upon the properties of PKA. However, when the monetary
judgment was left unsatisfied, the RTC issued an alias writ of execution and included the
properties of Phoenix-Omega and Padilla. This is the reason why Phoenix-Omega and Padilla
are questioning the application of the doctrine of piercing the veil of corporate fiction.

Issue: WON the CA erred in applying the doctrine of piercing the veil of corporate

Held/Ratio:
1. Yes, the ca erred. The general rule is that a corporation is clothed with a personality
separate and distinct from the persons composing it. It may not be held liable for the
obligations of the persons composing it, and neither can its stockholders be held liable for its
obligations.
2. This veil of corporate fiction may only be disregarded in cases where the corporate vehicle
is being used to defeat public convenience, justify wrong, protect fraud, or defend crime.
3. PKA and Phoenix-Omega are admittedly sister companies and may be sharing personnel
and resources, but we find in the present case no allegation, much less positive proof, that
their separate corporate personalities are being used to defeat public convenience, justify
wrong, protect fraud, or defend crime. "For the separate juridical personality of a corporation
to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be
presumed." We find no reason to justify piercing the corporate veil in this instance.

2. The corporation as an alter-ego of the stockholders

LA CAMPANA FACTORY vs. KAISAHAN NG MANGGAGAWA – Tan Tong and family owned
and controlled 2 corporations: one engaged in the sale of coffee and the other in starch. Both
corporations had one office, one management, and one payroll, and the laborers of both
corporations were interchangeable. The 60 members of the labor association in the coffee
and starch factories demanded higher wages addressed to La Campania Starch and Coffee
Factory. La Campania Coffee sought dismissal on the ground that the starch and coffee
factory are two distinct juridical persons.

Issue: WON the CIR had jurisdiction over the petitioner La Campana Coffee Factory, Inc.
when it only has 14 employees while the law requires that for the CIR to have jurisdiction,
there must be at least 30 employees

Held/Ratio:
1. The CIR had jurisdiction. The contention with regard to the 14 employees loses force when
it is noted that, as found by the industrial court, La Campana Gaugau Packing and La
Campana Coffee Factory Co. Inc., are operating under one single management, that is, as
one business though with two trade names. True, the coffee factory is a corporation and, by
legal fiction, an entity existing separate and apart from the persons composing it, that is, Tan
Tong and his family.
2. It is settled that this fiction of law, which has been introduced as a matter of convenience
and to subserve the ends of justice cannot be invoked to further an end subversive of that
purpose.
3. The doctrine that a corporation is a legal entity existing separate and apart from the person
composing it is a legal theory introduced for purposes of convenience and to subserve the
ends of justice. The concept cannot, therefore, be extended to a point beyond its reason and
policy, and when invoked in support of an end subversive of this policy, will be disregarded by
the courts. Thus, in an appropriate case and in furtherance of the ends of justice, a
corporation and the individual or individuals owning all its stocks and assets will be treated as
identical, the corporate entity being disregarded where used as a cloak or cover for fraud or
illegality.
4. A subsidiary or auxiliary corporation which is created by a parent corporation merely as an
agency for the latter may sometimes be regarded as identical with the parent corporation,
especially if the stockholders or officers of the two corporations are substantially the same or
their system of operation unified.

MCCONNEL vs. CA-supra

Doctrine: When the corporation is a mere instrumentality of the individual stockholders, the
latter must individually answer for the corporate obligations.

NAFLU vs. OPLE – NAFLU (National Federation of Labor Union) filed a request for
conciliation before the Bureau of Labor Relations involving money claim and refusal to
conclude a collective agreement after such has been negotiated against LAWMAN
INDUSTRIAL. There were no agreements undertaken so the UNION filed its notice of strike.
The firm offered 200k as settlement of all claims which the union rejected. Efforts of
conciliation proved futile. The company failed to resume operations alleging poor business
conditions. The UNION filed a complaint for unfair labor practice against LAWMAN at the
NLRC. Although the NLRC found that LAWMAN was guilty of unfair labor practice, it did not
order the employees' reinstatement, thus the appeal to the SC.

Issue: WON the employees must be reinstated by the respondents

Held/Ratio Yes. The company bargained in bad faith with the EEs when pending the
negotiation of their collective agreement, the company declared a temporary cessation of its
operations which in reality was a lock-out. Furthermore, evidence shows that after the alleged
'shutdown' the company was still operating in the name of LAWMAN Industrial although
production was being carried out by another firm called Libra Garments (now known as
DolphinGarments). Lawman then merely used the two firms for an illegal purpose-to evade
their responsibilities from the EEs. It is an established principle that when the veil of corporate
fiction is made as a shield to perpetrate a fraud or to confuse legitimate issues, the same
should be pierced

Doctrine: As Libra/Dolphin Garments is but an alter-ego of the old employer, Lawman

Industrial, the former must bear the consequences of the latter's unfair acts by reinstating the
petitioners to their former positions without loss of seniorityrights

MARUBENI CORP vs. LIRAG – Respondent Lirag filed with the RTC a complaint for specific
performance and damages against petitioners MARUBENI Corp (a foreign corporation doing
business in the Philippines), Ryoichi Tanaka, Shoichi One and Ryohei Kimura, its officers
assigned in the Philippine Branch. Lirag alleged that the petitioners failed to pay him for
consultancy services (commissions) with respect to obtaining government contracts for
various projects of MARUBENI. The agreement to such was unfortunately not reduced to
writing due to the mutual trust between MARUBENI and the LIRAG family that dates almost
39 years. Lirag was dismayed because he received nothing. Petitioner's Defense: there is no
agreement. Kimura did not have authority to enter into an agreement in behalf of the
corporation, for it was only Maruyama, the General Manager of Marubeni who may do so.

Issue: WON Lirag is entitled to commissions from the petitioners

Held/Ratio: No. Lirag tried to justify his commission of roughly about P6,000,000.00 in the
guise that Marubeni and Sanritsu are sister corporations, thereby implying the need to pierce
the veil of corporate fiction. He claimed that Marubeni as the supplier and real contractor of
the project hired and subcontracted the project to Sanritsu. The SC disagrees with his
contention, saying it is too far-fetched. Not because two foreign companies came from the
same country and closely worked together on certain projects would the conclusion arise that
one was the conduit of the other, thus piercing the veil of corporate fiction. To disregard the
separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. The separate personality of the corporation
may be disregarded only when the corporation is used as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary for the protection of creditors. Lirag's
testimony regarding the existence of the "Marubeni-Sanritsu tandem" to justify his claim for
payment of commission is just too conjectural to be believed.
Doctrine: Not because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the conduit of the
other, thus piercing the veil of corporate fiction.

CONCEPT BUILDERS, INC. vs. NLRC – Petitioner Concept Builders, Inc., a domestic
corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged
in the construction business. Private respondents were employed by said company as
laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination
of employment by petitioner, effective on November 30, 1981. It was stated in the individual
notices that their contracts of employment had expired and the project in which they were
hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of
private respondent's employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and
non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
petitioner.

Held: SC summarized the probative factors considered when the corporate mask may be
lifted and the corporate veil may be pierced, when a corporation is but the alter ego of a
person or of another corporation:

1. stock ownership by one or common ownership of both corporations

2. identity of directors and officers
3. manner of keeping corporate books and records
4. methods of conducting the business.

The Court held that the conditions under which the juridical entity may be disregarded very
according to the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly there are some probative factors of identity that will justify
the application of the piercing doctrine.

The Court also applied the following tests in determining the applicability of the piercing
doctrine:

1. control, not mere majority of complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked
2. such control must have been used to commit fraud or wrong, to perpetuate the
violation of statutory or other positive legal duty, or dishonest and unjust act in
contravention of legal rights
3. the aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of

The absence of any of these elements prevents the piercing doctrine. 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 defendant's relationship to that operation. In
this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission
on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a
similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela,
Metro Manila. Furthermore, the NLRC stated that: "Both information sheets were filed by the
same Virgilio 0. Casiño as the Corporate Secretary of both corporations. It would also not be
amiss to note that both corporations had the same president, the same board of directors, the
same corporate officers, and substantially the same subscribers. From the foregoing, it
appears that, among other things, the respondent (herein petitioner-) and the third-party
claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot
be said that the property levied upon by the sheriff were not of respondents." Clearly,
petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of Petitioner Corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to Petitioner Corporation.

GENERAL CREDIT CORP. vs. ALSONS DEV'T. AND INVESTMENT CORP. - Petitioner
General Credit Corporation (GCC, for short), then known as Commercial Credit Corporation
(CCC), established CCC franchise companies in different urban centers of the country. On the
other hand, respondent CCC Equity Corporation (EQUITY, for brevity) was organized in
November 1994 by GCC for the purpose of, among other things, taking over the operations
and management of the various franchise companies. At a time material hereto, respondent
Alsons Development and Investment Corporation (owned, just like GCC, shares in the
aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.

In December 1980, ALSONS and the Alcantara family, for a consideration of Two Million
(P2,000,000.00) Pesos, sold their shareholdings – a total of 101,953 shares, more or less – in
the CCC franchise companies to EQUITY.
Some four years later, the Alcantara family assigned its rights and interests over the bearer
note to ALSONS which thenceforth became the holder thereof.7 But even before the
execution of the assignment deal aforestated, letters of demand for interest payment were
already sent to EQUITY, through its President, Wilfredo Labayen, who pleaded inability to pay
the stipulated interest, EQUITY no longer then having assets or property to settle its
obligation nor being extended financial support by GCC.

ALSONS, having failed to collect on the bearer note aforementioned, filed a complaint for a
sum of money against EQUITY and GCC.
GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from
EQUITY and alleging, in essence that the business relationships with each other were always
at arm's length. And following the denial of its motion to dismiss ALSONS' complaint, on the
ground of lack of jurisdiction and want of cause of action, GCC filed its Answer thereto and set
up affirmative defenses with counterclaim for exemplary damages and attorney's fees.
Issue: WON GCC should be liable? Yes
Held: There is absolutely no basis for piercing GCC's veil of corporate identity. A corporation
is an artificial being vested by law with a personality distinct and separate from those of the
persons composing it as well as from that of any other entity to which it may be related. The
first consequence of the doctrine of legal entity of the separate personality of the corporation
is that a corporation may not be made to answer for acts and liabilities of its stockholders or
those of legal entities to which it may be connected or vice versa. The notion of separate
personality, however, may be disregarded under the doctrine – "piercing the veil of corporate
fiction" – as in fact the court will often look 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 (2) 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.
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. Authorities are agreed on at least three (3) basic
areas where piercing the veil, with which the law covers and isolates the corporation from any
other legal entity to which it may be related, is allowed. These are: 1) defeat of public
convenience, as when the corporate fiction is used as 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.
The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being
justifiable basis for such action. When the appellate court spoke of a justifying factor, the
reference was to what the trial court said in its decision, namely: the existence of "certain
circumstances [which], taken together, gave rise to the ineluctable conclusion that …
[respondent] EQUITY is but an instrumentality or adjunct of [petitioner] GCC." The Court
agrees with the disposition of the appellate court on the application of the piercing doctrine to
the transaction subject of this case. Per the Court's count, the trial court enumerated no less
than 20 documented circumstances and transactions, which, taken as a package, indeed
strongly supported the conclusion that respondent EQUITY was but an adjunct, an
instrumentality or business conduit of petitioner GCC. This relation, in turn, provides a
justifying ground to pierce petitioner's corporate existence as to ALSONS' claim in question.
Foremost of what the trial court referred to as "certain circumstances" are the commonality of
directors, officers and stockholders and even sharing of office between petitioner GCC and
respondent EQUITY; certain financing and management arrangements between the two,
allowing the petitioner to handle the funds of the latter; the virtual domination if not control
wielded by the petitioner over the finances, business policies and practices of respondent
EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB
rules.
3. Parent-subsidiary relationship

NISCE V PCI EQUITABLE – PCI Equitable foreclosed the property of Nisce spouses. Nisce
spouses proposed to offset their debts by offering their bank account in PCI Capital HK
(subsidiary of PCI equitable). PCI refused arguing that PCI Equitable and PCI Capital are two
different entities.

Issue: WON the court should pierce the corporate veil? No

Held: Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI
Express Padala (HK) Ltd.] has an independent and separate juridical personality from that of
the respondent Bank, its parent company; hence, any claim against the subsidiary is not a
claim against the parent company and vice versa. The evidence on record shows that PCIB,
which had been merged with Equitable Bank, owns almost all of the stocks of PCI Capital.
However, the 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 subsidiary's separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to those arising in their respective
business. A corporation has a separate personality distinct from its stockholders and from
other corporations to which it may be conducted. This separate and distinct personality of a
corporation is a fiction created by law for convenience and to prevent injustice.

The Court likewise declared in the same case that the test in determining the application of
the instrumentality or alter ego doctrine is as follows:
1. Control, not mere majority or complete stock control, but complete dominion, 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 plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complaint of.
The Court emphasized that 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
defendant's relationship to that operation.

MARTINEZ vs. CA – CLL imports molasses from Mar Tierra, the latter being represented by
Wilfredo Marines. Mar tierra's SH is 42 % owned by RJL (tuna company), a comp managed
by Ruben Martinez. CLL and Mar tierra had a business misunderstanding. Mar tierra did not
remit the money to CCL. The latter filed a complaint.

Issue: WON RJL and Ruben is solidarity liable with mt?

Held: No. Ruben has no knowledge of CLL-Wilfredo transaction. He is not involved in the
management of the company. Mere ownership of the majority of the stock is not a sole group
to pierce corporate veil.

This case also presented the alter ego doctrine:

1. Control, not mere majority or complete stock control, but complete dominion, 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 plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complaint of.
The close business relationship of MT and RJL does not in itself warrant POCV.

IV. POWERS OF CORPORATIONS

A. General

Sec 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 of incorporation;
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
and 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 as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation

B. Specific

Sec. 37. Power to extend or shorten corporate term - A private corporation may extend
or shorten its term as stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code. (n)

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness - No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a majority vote of the
board of directors and, at a stockholder's meeting duly called for the purpose, two-
thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and
place of the stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the

corporation and countersigned by the chairman and the secretary of the stockholders'
meeting, setting forth:

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock allotted
to each stock-holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of
any bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and
the other shall be filed with the Securities and Exchange Commission and attached to
the original articles of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent
of the amount subscribed has been paid either in actual cash to the corporation or that
there has been transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the

same, with the approval by a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof. (17a)

Sec. 39. Power to deny pre-emptive right - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class,
in proportion to their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate purposes or
in payment of a previously contracted debt.

Sec. 40. Sale or other disposition of assets - Subject to the provisions of existing laws
on illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill,
upon such terms and conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this
Code.

A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of

directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of said corporation or if the proceeds of
the sale or other disposition of such property and assets be appropriated for the
conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this section. (28 1/2a)

Sec. 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)

Sec. 42. Power to invest corporate funds in another corporation or business or for any
other purpose - Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any purpose other than the
primary purpose for which it was organized when approved by a majority of the board
of directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval
of the stockholders or members shall not be necessary. (17 1/2a)

Sec. 43. Power to declare dividends - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of outstanding stock held
by them: Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose.
(16a)

Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of directors;
or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or (3) when it can be clearly
shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies. (n)

Sec. 44. Power to enter into management contract - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members in the case of a
non-stock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-
stock corporation. No management contract shall be entered into for a period longer
than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)

1. Extend or shorten corporate term

Sec. 37. Power to extend or shorten corporate term - A private corporation may extend
or shorten its term as stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code. (n)

Sec. 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;

1. Increase or decrease authorized capital stock

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness

1. Incur, create or increase bonded indebtedness

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness

1. Sell or dispose of assets

Sec. 40. Sale or other disposition of assets

RA 3952 – BULK SALES LAW

Section 1. This Act shall be known as "The Bulk Sales Law."

Sec. 2. Sale and transfer in bulk. — Any sale, transfer, mortgage or assignment of a
stock of goods, wares, merchandise, provisions, or materials otherwise than in the
ordinary course of trade and the regular prosecution of the business of the vendor,
mortgagor, transferor, or assignor, or sale, transfer, mortgage or assignment of all, or
substantially all, of the business or trade theretofore conducted by the vendor,
mortgagor, transferor, or assignor, or of all, or substantially all, of the fixtures and
equipment used in and about the business of the vendor, mortgagor, transferor, or
assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this
Act: Provided, however, That if such vendor, mortgagor, transferor or assignor,
produces and delivers a written waiver of the provisions of this Act from his creditors
as shown by verified statements, then, and in that case, the provisions of this section
shall not apply..

Sec. 3. Statement of creditors. — It shall be the duty of every person who shall sell,
mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or
materials in bulk, for cash or on credit, before receiving from the vendee, mortgagee,
or his, or its agent or representative any part of the purchase price thereof, or any
promissory note, memorandum, or other evidence therefor, to deliver to such vendee,
mortgagee, or agent, or if the vendee, mortgagee, or agent be a corporation, then to the
president, vice-president, treasurer, secretary or manager of said corporation, or, if
such vendee or mortgagee be a partnership firm, then to a member thereof, a written
statement, sworn to substantially as hereinafter provided, of the names and addresses
of all creditors to whom said vendor or mortgagor may be indebted, together with the
amount of indebtedness due or owing, or to become due or owing by said vendor or
mortgagor to each of said creditors, which statement shall be verified by an oath to the
following effect:

PHILIPPINE ISLANDS.

PROVINCE OR CITY OF _________________}.

Before me, the undersigned authority, personally appeared __________________

(vendor, mortgagor, agent or representative, as the case may be), bearing cedula No.
____________ issued at ___________ on the day of _____________ who, by me being
first duly sworn, upon his oath, deposes and states that the foregoing statement
contains the names of all of the creditors of ________________ (vendor, or mortgagor)
together with their addresses, and that the amount set opposite each of said respective
names, is the amount now due and owing, and which shall become due and owing by
_____________ (vendor or mortgagor) to such creditors, and that there are no creditors
holding claims due or which shall become due, for or on account of goods, wares,
merchandise, provisions or materials purchased upon credit or on account of money
borrowed, to carry on the business of which said goods, wares, merchandise,
provisions or materials are a part, other than as set forth in said statement..

______________________.

Subscribed and sworn to before me this __________ day of _________, 19____, at

_____________.
Sec. 4. Fraudulent and void sale, transfer or mortgage. — Whenever any person shall
sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions
or materials, in bulk, for cash or on credit, and shall receive any part of the purchase
price, or any promissory note, or other evidence of indebtedness for said purchase
price or advance upon mortgage, without having first delivered to the vendee or
mortgagee or to his or its agent or representative, the sworn statement provided for in
section three hereof, and without applying the purchase or mortgage money of the said
property to the pro rata payment of the bona fide claim or claims of the creditors of the
vendor or mortgagor, as shown upon such sworn statement, he shall be deemed to
have violated this Act, and any such sale, transfer or mortgage shall be fraudulent and
void..

Sec. 5. Inventory. — It shall be the duty of every vendor, transferor, mortgagor, or

assignor, at least ten days before the sale, transfer or execution of a mortgage upon
any stock of goods, wares, merchandise, provisions or materials, in bulk, to make a full
detailed inventory thereof and to preserve the same showing the quantity and, so far
as is possible with the exercise of reasonable diligence, the cost price to the vendor,
transferor, mortgagor or assignor of each article to be included in the sale, transfer or
mortgage, and notify every creditor whose name and address is set forth in the verified
statement of the vendor, transferor, mortgagor, or assignor, at least ten days before
transferring possession thereof, personally or by registered mail, of the price, terms
conditions of the sale, transfer, mortgage, or assignment.

Sec. 6. Any vendor, transferor, mortgagor or assignor of any stock of goods, wares,
merchandise, provisions or materials, in bulk, or any person acting for, or on behalf of
any such vendor, transferor, mortgagor, or assignor, who shall knowingly or willfully
make, or deliver or cause to be made or delivered, a statement, as provided for in
section three hereof, which shall not include the names of all such creditors, with the
correct amount due and to become due to each of them, or shall contain any false or
untrue statement, shall be deemed to have violated the provisions of this Act.

Sec. 7. It shall be unlawful for any person, firm or corporation, as owner of any stock
of goods, wares, merchandise, provisions or materials, in bulk, to transfer title to the
same without consideration or for a nominal consideration only.

Sec. 8. Nothing in this Act contained shall apply to executors, administrators,

receivers, assignees in insolvency, or public officers, acting under judicial process.

Sec. 9. The sworn statement containing the names and addresses of all creditors of
the vendor or mortgagor provided for in section three of this Act, shall be registered in
the Bureau of Commerce. For the registration of each such sworn statement a fee of
five pesos shall be charged to the vendor or mortgagor of the stock of goods, wares,
merchandise, provisions or materials, in bulk.

Sec. 10. The provisions of this Act shall be administered by the Director of the Bureau
of Commerce and Industry, who is hereby empowered, with the approval of the
Department Head, to prescribe and adopt from time to time such rules and regulations
as may be deemed necessary for the proper and efficient enforcement of the
provisions of this Act.

Sec. 11. Any person violating any provision of this Act shall, upon conviction thereof,
be punished by imprisonment not less than six months, nor more than five years, or
fined in sum not exceeding five thousand pesos, or both such imprisonment and fine,
in the discretion of the court.

Sec. 12. This Act shall take effect on its approval.

CALTEX (PHILS), INC. v PNOC SHIPPING AND TRANSPORT CORPORATION – PSTC and
LUSTEVECO entered into an Agreement where PSTC would assume all the obligations of
LUSTEVECO with respect to the claims enumerated in the Agreement and would control the
conduct of any litigation pending or which may be filed with respect to such claims.
LUSTEVECO is also obligated to deliver to PSTC all papers and records of the claims.
LUSTEVECO thus constituted PSTC as its attorney-in-fact. Among the actions enumerated in
the Agreement is Caltex Philippines v LUSTEVECO where ultimately, the CFI and IAC
ordered LUSTEVECO to pay Caltex. A writ of execution, thereupon, was issued against
LUSTEVECO which was not satisfied in view of a prior foreclosure of the latter's properties.
When Caltex learned of the Agreement, it made demands against PSTC for the satisfaction of
the judgment.

Held: Caltex may recover the judgment debt from PSTC not because of the stipulation in
Caltex's favor in the Agreement but because the Agreement provides that PSTC shall assume
all the obligations of LUSTEVECO. PSTC assumed all the properties, business and assets of
LUSTEVECO and PTSC also assumed all the obligations pertaining to such business. The
disposition of all or substantially all of the assets of a corporation is allowed under the
Corporation Code. But while this is allowed, the transfer should not prejudice the creditors of
the assignor. The result is to hold the assignee liable for the obligations of the assignor. The
transfer which leaves the claims of the creditors unenforceable against the debtor is
fraudulent and rescissible at the option of the creditor.

1. Investment of corporate funds

Sec. 42. Power to invest corporate funds in another corporation or business or for any
other purpose

DELA RAMA v MA-AO SUGAR CENTRAL CO. – A derivative suit was commenced by four
minority stockholders of Ma-ao Company against the Corporation, Araneta and three other
directors for alleged illegal and ultra vires acts consisting of self-dealing, irregular loans and
unauthorized investments. They prayed for the rendition of accounting, that the defendants be
ordered to pay the corporation, that the corporation be dissolved and that the provisional
remedy of receivership be granted to them. The defendants admitted to having invested in the
Philippine Fiber but contends that since the said company was engaged in the manufacture of
sugar bags, it was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or
invest in another corporation already engaged in the venture.

Held: We agree with the lower court that the investment in question does not fall within the
purview of Sec 17-1/2 of the Corporation Law which provides that no corporation shall invest
its funds in any other corporation or business, or for any purpose other than the main purpose
for which it was organized, unless its board of directors has been so authorized in a resolution
by the affirmative vote of stockholders representing 2/3 of the interest. When the investment
is necessary to accomplish the purpose of the corporation as stated in its articles of
incorporation, the approval of the stockholders is not required.

1. Declare dividends

NIELSON & CO v LEPANTO CONSOLIDATED MINING CO – Lepanto and Nielson entered

into a management contract. Lepanto terminated the contract and as a result Nielson asked
for damages. According to the contract, Nielson was to explore, develop and operate the
mining claims of Lepanto. Nielson was to take complete charge, subject at all times to the
general control of the Board of Directors of Lepanto, of the exploration and development of
the mining claims, of the hiring of a sufficient and competent staff and of sufficient and
capable laborers, of the prospecting and development of the mine, of the erection and
operation of the mill, and of the beneficiation and marketing of the minerals found on the
mining properties. Nielson was to submit reports, maps, plans and recommendations to
Lepanto.

Held: Nielson was not acting as agent of Lepanto. While it is true that the contract provides
that Nielson would also act as purchasing agent of supplies and enter into contracts regarding
the sale of mineral, the contract also provides that Nielson could not make any purchase, or
sell the minerals without the prior approval of Lepanto. The employment by Lepanto of
Nielson was principally in consideration of the know-how and technical services that Nielson
offered Lepanto. It was a “detailed operating” contract, not a contract of agency. Thus, in
terminating the contract, Lepanto had violated the express terms of the management contract
which is not revocable at the will of Lepanto.

There is, however, merit in the contention of Lepanto that payment to Nielson of stock
dividends as compensation is a violation of the Corporation Law. No corporation shall make or
declare any dividend except from the surplus profits arising from its business and only to the
shareholders shall the corporation declare the dividends. The consideration for which shares
of stock may be issued are: (1) cash; (2) property; and, (3) undistributed profits. Shares of
stocks are given the special name “stock dividends” only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or property then those
shares do not fall under the category of “stock dividends”. A corporation may legally issue
shares of stock in consideration of services rendered by a person not a stockholder. This
share so issued is equivalent to a stock issued in exchange for property because services are
equivalent to property. But the share should be part of the original capital stock of the
corporation upon its organization. If the corporation has original shares of stock unsold or
unsubscribed, they may be issued to a person who is not a stockholder or to a person already
a stockholder.

A stock dividend is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. They are payable only out of surplus profits. When a corporation
issues stock dividends, it shows that the corporation's accumulated profits have been
capitalized instead of distributed to stockholders or retained as surplus available for
distribution. Stock dividends cannot be issued to a person who is not a stockholder. Nielson,
therefore, cannot be paid in shares of stocks which form part of the stock dividends of
Lepanto for services it rendered under the management contract.

1. Enter into management contracts

NIELSON & CO v LEPANTO CONSOLIDATED MINING CO - supra

C. Implied and Incidental

Sec 36. Corporate powers and capacity – Every corporation incorporated under this
Code has the power and capacity:
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation

INTER-ASIA INVESTMENTS INDUSTRIES v CA – Inter-Asia, by a Stock Purchase

Agreement signed by the Presidents of both parties, sold to Asia Industries all its rights, title
and interest to all the outstanding shares of stock of FARMACOR. The seller made warranties
and representations as to the audited financial statements of FARMACOR. The Agreement
provided that pending submission by SGV of FARMACOR's audited financial statements, the
vendee may retain the sum of P7.5M out of the purchase price of P19.5M and from this
retained amount the vendee may deduct any shortfall on the guaranteed net worth of P12M.
Accordingly, when the audited F/S was released, the purchase price was adjusted which
entitled the vendee to reimbursement. Inter-Asia suggested that part of the reimbursable be
paid through the vendor's payment of the cost of the NOCOSII superstructures. However,
petitioner-vendor reneged on its promise.

Held: The contention that the proposal to reduce the claim for refund which was signed only
by petitioner's president has no binding effect is untenable. Just as a natural person may
authorize another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or agents. Apparent
authority may be derived from the acquiescence in the acts of a particular nature by the
agent, with actual or constructive knowledge thereof, within or beyond the scope of his
ordinary powers. An officer of a corporation who is authorized to purchase the stock of
another corporation has the implied power to perform all other obligations arising therefrom,
such as payment of the shares of stock. By empowering the President to sign the Agreement
in its behalf, the petitioner clothed him with apparent authority to perform all acts which are
expressly, impliedly and inherently stated therein.

LUNETA MOTOR CO v A.D. SANTOS INC – The Public Service Commission denied
petitioner's application for the approval of the sale made it its favor by the Sheriff of the City of
Manila of the certificate of public convenience granted to Nicolas Concepcion to operate a
taxicab service. The auction sale was pursuant to a judgment rendered in favor of petitioner
with regard to the loan obtained by Nicolas Concepcion and secured by a chattel mortgage
covering the said certificate. However, to secure a subsequent loan with the DBP, a second
mortgage on said certificate was constituted. Later, still, the certificate was sold to Francisco
Benitez who resold it to Rodi Taxicab Company. Both creditors filed an action to foreclose the
mortgage when Concepcion failed to pay his loans. In the suit brought by DBP, a public
auction was held and the certificate sold to Amador Santos. Santos immediately applied with
the PSC for approval of the sale subject to the mortgage lien in favor of the petitioner. Amado
later sold the certificate to AD Santos. AD Santos opposed petitioner's application with the
PSC.

Held: Although a certificate of public convenience is liable to execution, the articles of

incorporation of petitioner prevent it from obtaining the same. its corporate purposes are to
carry on a general mercantile and commercial business, etc. and that it is authorized in its
articles of incorporation to operate and otherwise deal in and concerning automobiles and
automobile accessories' business in all its multifarious ramifications, and to operate
steamship and sailing ships and other floating crafts and other chattels by water. It has no
authority at all to engage in the business of land transportation and operate a taxicab service.

TERESA ELECTRIC POWER CO, INC v PSC – Teresa Electric has a subsisting certificate of
public convenience to operate an electric plant in Teresa, Rizal. Filipinas filed an application
with the PSC for a CPC to install, maintain and operate an electric plant for the purpose of
supplying electric power and light to its cement factory and its employees living within its
compound. Filipinas averred that under its articles of incorporation it is authorized to operate
the proposed electric plant. Filipinas stated that it will not generate its own electric current but
buy the same from MERALCO.

Held: Act No. 667 provides that a municipal or legislative franchise is a condition precedent to
the granting to Filipinas of a CPC. That requirement was intended to apply exclusively to any
person or corporation who desires a franchise to construct and maintain an electric line or
power plant and line for business purposes. It does not apply to Filipinas who applied for a
CPC to operate an electric plant exclusively for its own use. It is even empowered by its
articles of incorporation to do the same. The operation of an electric light, heat and power
plant is necessarily connected with the business of manufacturing cement.

1. Act as guarantor/surety of another corporation

SEC OPINION 24 March 1982 – The question is whether or not an amendment to the articles
of incorporation of Hydro-Pipes Philippines is necessary so that it may enter into an isolated
transaction of guaranty or surety agreement to accommodate a sister corporation, Concept
Builders Inc.

Held: Nowhere in the articles of incorporation can there be found a provision authorizing the
corporation to enter into a contract of guaranty or suretyship with any individual, corporation
or entity. Thus, the corporation may not enter into such contract without amending the articles
of incorporation.

SEC OPINION 30 July 1987 – Laperal Devt Corp is organized primarily to engage in
agriculture. As one of its secondary purposes, it is authorized to guarantee the performance of
any undertaking or obligation of other firms, entities or persons pursuant thereto, to mortgage
its real estate and other properties. The stockholders of Laperal unanimously approved the
execution of the deed of mortgage covering the corporation's real estate to secure payment of
a proposed loan of Kumpulan Agro-Forest, Inc.

Held: It is not ultra vires for a corporation to enter into a contract of guarantee or suretyship
where it does so in the legitimate furtherance of its purposes or business. The contract is well
within the broad authorization of the secondary purposes and cannot thus be considered an
ultra vires act.

SEC OPINION 16 December 1991 – The legality of the proposal of the Philippine Central
Conference of the Methodist Church to elect a bishop for life without having to go through an
election and continue to be a bishop until he retires is put in issue.

Held: It is the policy of the Commission not to allow perpetual term in accordance with Section
25 of the Corporation Code. The bishop is considered an officer by the Methodist Church.

1. Enter into a partnership or joint venture

TUASON & CO v BOLANOS – This is an action for recovery of possession of a registered

land. Defendant sets up prescription in his favor after open, continuous, exclusive, public and
notorious possession under the claim of ownership. The answer further alleges that
registration of the land in dispute was obtained by the plaintiff through fraud or error. The
defendant finally avers that the case was not brought by the real party in interest since it is
Gregorio Araneta, Inc., JM Tuason & Co's managing partner, who instituted the same. (JM
Tuason Co is allegedly the real party in interest)

Held: The contention that Gregorio Araneta, Inc cannot act as managing partner for plaintiff on
the theory that it is illegal for two corporations to enter into a partnership is without merit.
Though a corporation has no power to enter into a partnership, it may nevertheless enter into
a joint venture with another where the nature of that venture is in line with the business
authorized by its charter. There is nothing in the record to indicate that the venture in which
plaintiff is represented by Gregorio Araneta, Inc as its managing partner is not in line with the
corporate business of either of them.

SEC OPINION 29 February 1980 – The question is whether or not two or more medium-sized
corporations may enter into a partnership or joint venture/consortium for the purpose of
qualifying in terms of capitalization and equipment in large-scale projects of the DPWH
through competitive bidding.

Held: While a corporation cannot ordinarily enter into a contract of partnership with another
corporation or individual, there are exceptions to this rule as long as the following conditions
are adequately met:
1. The articles of incorporation of the corporations involved must expressly authorize the
corporation to enter into contracts of partnership with others in pursuit of its business;
2. The agreement or articles of partnership must provide that all the partners will
manage the partnership; and,
3. The articles of partnership must stipulate that all the partners are and shall be jointly
and severally liable for all the obligations of the partnership.

D. Ultra Vires Doctrine

Sec. 45. Ultra vires acts of corporations - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by
its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred. (n)
MANILA METAL CONTAINER CORP v PNB – MMCC executed a real estate mortgage over
the parcel of land it owned to secure a loan from PNB. For a new credit accommodation
granted by PNB, an amendment of the real estate mortgage was executed. PNB filed a
petition for extrajudicial foreclosure due to the failure of MMCC to pay. PNB was declared the
winning bidder. Before the one-year period to redeem expired, MMCC sent a letter to PNB
requesting for an extension of time to repurchase. The Special Assets Management
Department (SAMD) of PNB recommended that the management allow the petitioner to
repurchase the land for P1,574,560. PNB management informed MMCC that it was rejecting
the recommendation and said that the repurchase price shall be P2,660,000. Petitioner did
not agree to the larger amount and claimed that it has already agreed to SAMD's offer and
thus PNB should resell the property to MMCC lest the latter shall seek judicial recourse.

Held: There was no perfected contract of sale between the parties. There is no evidence that
the SAMD was authorized by the Board of Directors of PNB to accept petitioner's offer and
sell the property at a lower amount than the fair market value. Any acceptance, therefore, by
the SAMD of petitioner's offer cannot bind PNB. A corporation can only execute its powers
and transact its business through its Board of Directors.

GOVERNMENT OF THE PHIL ISLANDS v EL HOGAR FILIPINO – The Government filed a

petition for quo warranto against the El Hogar for several alleged ultra vires acts:
1. For allegedly holding title to real property for a period in excess of 5 years after the
property had been bought by the respondent at one of its foreclosure sales. Held: The
officers exerted energetic efforts to find a purchaser upon better terms but was only
able to do so beyond the 5 year period stipulated in their articles of incorporation. The
purpose behind the law was to prevent the revival of the entail or other similar
institution by which land could be fettered and its alienation hampered over long
periods of time. A fair explanation has been given. The destruction of the corporation
would bring irreparable loss upon the thousands of innocent shareholders of the
corporation without any corresponding benefit to the public. The remedy of quo
warranto forbids so radical a use of the remedy.
2. For allegedly owning and holding a business lot and leasing some part of the building
constructed thereon. Held: every corporation has the power to purchase, hold and
lease real property. As the transaction of the lawful business of the corporation may
reasonably and necessarily require. And, inasmuch as the lot referred to was lawfully
acquired by the respondent, it is entitled to the full beneficial use thereof, including its
lease to third persons.
3. For various loans made by respondents in favor of corporations and partnerships and
where these entities have in some instances subscribed to shares in the respondent
for the sole purpose of obtaining such loans. Held: The Corporation Law provides
that “any person” may become a stockholder in a building and loan association. The
word “person” includes both natural and juridical persons. The question whether
these loans and the attendant subscription were properly made involves a
consideration of the power of the subscribing corporations and partnerships to own
the stock and take the loans. It is not alleged that they had no such powers.
4. For disposing of real property purchased by it in the collection of its loans by selling
on credit and transferring the title thereto to the purchaser. Thus the purchase price
was considered a loan to a person or entity who is not a stockholder of the
corporation. Held: Corporation requires loans to be made to stockholders only and on
the security of real estate and shares in the corporation. However, in requiring that
the real properties acquired from foreclosure be sold within 5 years therefrom, the law
does not provide what type of sale should be conduct – whether on cash basis or on
credit. The fact that the purchase price is carried as a loan in the books of the
respondent does not make it a loan in law.
5. That respondent conducts administration of offices in the El Hogar Building which
were not used by the corporation itself. Held: This practice is unauthorized by law. It is
more befitting to the business of a real estate agent or trust company than to the
business of a building and loan association. But the same does not result in the
dissolution of the corporation and it will be merely enjoined from further activities of
this sort.
ATRIUM MANAGEMENT CORP v CA – Tan of ET Henry approached Atrium for financial
assistance offering to discount 4 RCBC checks issued by Hi-Cement in favor of ET Henry.
Atrium agreed to discount the checks. Upon Atrium's inquiry, de Leon (treasurer of Hi-
Cement) confirmed the issuance of the 4 checks in favor of ET Henry in payment for
petroleum products. When Atrium tried to collect the amount from Hi-Cement, the court held
de Leon solidarily liable with the corporation. Hi-Cement raised the defense that the act of
issuing the checks to ET Henry was to secure a loan which was outside the authority of the
President and the Treasurer to perform. The representation that the checks were in payment
for petroleum products was false, according to Hi-Cement.

Held: The act of issuing the checks was well within the ambit of a valid corporate act for it was
for securing a loan to finance the activities of the corporation, thus not ultra vires. An ultra
vires act is one committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the power conferred upon it by law. The term
“ultra vires” is distinguished from an illegal act for the former is merely voidable while the latter
is void and cannot be ratified.

SAFIC ALCAN & CIE v IMPERIAL VEGETABLE OIL CO, INC – IVO entered into a contract
with Safic (1986 contracts) whereby the latter placed purchase orders for crude oil to be
delivered 6 months from execution of the contract. IVO failed to comply with the obligation so
Safic sued by virtue of the contract's provision that failure to deliver makes IVO liable to pay
Safic the difference between the contract price and the prevailing price in the international
market. IVO raised the defense that the nature of the agreement makes it a speculative
contract which was expressly prohibited by its Board of Directors despite its President's
(Monteverde) persistence. It also claimed that IVO lacked the necessary license from Central
Bank to enter into such venture and that its President Monteverde was the one who entered
into the agreement without authority. Safic claims that it has had transactions with IVO since
1985 from which IVO has benefitted so it cannot now disown the acts of the President in
entering anew in these transactions with Safic.

Held: Monteverde, as President, had no blanket authority to bind IVO to any contract. The
IVO Board of Directors knew nothing about the 1986 contracts. In fact, Monteverde has
earlier proposed that the company engage in similar transactions but the IVO Board rejected
the proposal. Safic should have obtained from Moteverde the prior authorization of the IVO
Board. Safic cannot rely on the doctrine of implied agency because the alleged 1985
contracts were not identical to the 1986 contracts – the former provided for delivery within 2
months or just shortly after the purchase (physical trading) while the latter provided for
delayed delivery (trading futures). A person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent. Acts of an agent beyond the scope of his
authority do not bind the principal unless the latter ratifies the same expressly or impliedly.
There was no such ratification in this case. The contracts were not reported in IVO's export
sales book and turn-out books. They were not submitted to the Board for ratification after their
consummation. Safic, therefore, cannot enforce those contracts against IVO. These wash out
agreements are ultra vires and are not binding on IVO.

PIROVANO v DE LA RAMA STEAMSHIP CO, INC – The life insurance proceeds were
donated to the minor children of the decease President of the corporation Enrico Pirovano. In
the first Board Resolution, the option was to give P400,000 or shares of stock corresponding
to the same amount. However, after one director consulted with her husband and learned of
the gravity of the second option, the Board reconvened and agreed that the proceeds to the
insurance policy would just be renounced in favor of the minor children with express provision
that the proceeds would be retained by the corporation as a loan; the stockholders ratified the
2nd resolution. Their mother formally accepted the donation and had since used part of the
money. Years later, the new President of the corporation addressed an inquiry to the SEC and
asked whether the donation was valid. According to the SEC, the corporation could not
dispose of its assets by gift. The corporation had acted beyond its scope of authority when it
made the said donation which is therefore void. The President then proposed to revoke the
resolution granting the donation and make a new one declaring a cash dividend in favor of the
stockholders and then the stockholders would donate the proceeds to the minor children.
Meanwhile, the mother of the minor children representing them demanded the payment of the
rest of the proceeds of the donation

Held: The articles of incorporation provided that among the corporation's purposes was to
invest and deal with the moneys of the company not immediately required, in such manner as
from time to time may be determined. It also provided as purpose to aid in any other manner
any person, association or corporation of which any obligation or in which any interest is held
by this corporation or in the affairs or prosperity of which this corporation has a lawful interest.
Both purposes are broad enough to include the donation herein made. Assuming that the
donation was outside the power of the corporation to make, it cannot be immediately
invalidated by the mere fact that it was ultra vires. An ultra vires act may either be an act
performed just outside the scope of the powers granted by the articles of incorporation or one
which is contrary to law or violative of any principle which would void any contract whether
done individually or collectively. A merely ultra vires act (not illegal) is voidable and may
become binding and enforceable when ratified by the stockholders as what occurred in this
case. It is not contended that the donation was illegal.

HARDEN v BENGUET CONSOLIDATED MINING CO – Balatoc Mining entered into an

Agreement with Benguet Mining whereby the latter would develop the former's mining site
with payment in the form of 600,000 shares in the former corporation plus cash. The
petitioners aim to prevent the transfer of the shares and thus sued Benguet Mining claiming
that it is unlawful for Benguet to hold any interest in a mining corporation so therefore the
contract is void.

Held: An Act of Congress provided that it shall be unlawful for any member of a corporation
engaged in agriculture or mining and for any corporation organized for any purpose except
irrigation to be in any wise interested in any other corporation engaged in agriculture or
mining. When the Corporation Law was, however, enacted, the trend was towards
liberalization and thus the prohibition was so modified as merely to prohibit any member from
holding more than 15% of the outstanding capital stock of another corporation. For violation of
this limitation, the Corporation Law punished by a fine of not more than P5,000 and
imprisonment for not more than 5 years. Also, the corporation may be dissolved in a quo
warranto proceedings instituted by the Attorney-General or by any provincial fiscal by order of
said Attorney-General. Thus, the petitioners have no standing to institute this case. The
question in this suit are of such a nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. The defendant Benguet Mining committed no
civil wrong against the petitioners. A corporation has, until the State acts, every power and
capacity that any other individual capable of acquiring lands, possesses.

NPC v ALONZO-LEGASTO – FUCC, as extra work, conducted blasting works on an NPC

project. However, the procedure before commencing the extra work was not followed as the
approval of the Secretary or his authorized representative was not obtained. The dispute
arose during discussions of the proper price to pay for the additional work. Pending suit, the
parties entered into a Compromise Agreement to submit the determination of the proper
award to an arbiter. The amount determined was not acceptable to the NPC.

Held: Acts done in excess of corporate officer's scope of authority cannot bind the
corporation. However, a compromise agreement entered into by the parties with the
corporation represented by its President acting pursuant to a Board resolution is a
confirmatory act signifying the ratification of all prior acts of its officers.

V. Control and Management of Corporations

A. Board of Directors

1. General
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office
for one (1) year until their successors are elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. a majority of
the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.

Campos on Board of Directors:

The governing body of a corporation is the board of directors and the board of trustees in
case of non-stock corporations. It:

1. Exercises almost all corporate powers

2. Lays down all corporate business policies
3. Responsible for the efficiency of management

The Board of directors are elected by the stockholders or members, and once they have done
so, they have no right to interfere with the BOD's exercise of its powers and functions, except
when the law expressly gives them the final say, like in cases of removal of a director,
amendment of the AOD and other major changes. Hence, stockholders must abide by its
decisions. If they do not agree with the policies of the board, their remedy is to wait for the
next election. Stockholders are to have all the profits, the complete management of the
enterprise shall be with the BOD.

Sec. 23 of the Corporate Code (unless the Code grants a specific power to the
stockholders/member) the BOD has the following sole powers and responsibilities:

1. To decide whether a corporation should sue;

2. Purchase or sell property;
3. Enter into any contract;
4. Perform any act

Stockholders or members resolutions dealing with matters other than the exceptions are not
legally effective or binding on the board, and may be treated by it as merely advisory, or may
even be completely disregarded.

Campos makes a discussion on Sec. 108 of the Code which provides that the BOT of an
educational institution will have powers and authorities as defined in the By-Laws. He raised
the question of whether this provision allows the by-laws to expand or restrict the powers of
the BOT. His answer is that a restriction or expansion of powers would be inconsistent with
Sec. 23 which allows only 1 exception: “Unless otherwise provided in this Code”. A by-law
provision is not a provision of the Code.

In case the BOD fails to observe the reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose , the corporation may be held liable on a tort
and pay damages caused to third persons. It will also be liable for tortuous acts committed by
an officer/agent under the direction/authority form the BOD.
RAMIREZ V. ORIENTALIST CO. – The Orientalist Co. was in the theater business. It entered
into negotiations with J.F. Ramirez for the exclusive exhibition of Éclair Films and Milano films.
After an informal conference with the BOD, Ramon J. Fernandez in two separate letters
accepted the offer of the film supplier. Fernandez signed in his capacity as a Treasurer and in
his personal capacity. Upon the arrival of the films, Orientalist did not have the capacity to
pay so its President, B. Fernadez paid the drafts and treated the films a his property – renting
them to Orientalist for distribution. J. F. Ramirez is now suing the Orientalist and Ramon
Fernadendez for non-payment because the drafts were dishonored, save one. The issue
presented to the courts is the Orientalist's liability based on the 2 letters accepting the film
supplier's offer. The Court held that Ramon Fernandez had no authority to bind the
corporation by signing his name on the letters. The Corporation Law provided that all
corporate power shall be exercised, and all corporate business conducted by the BOD; and
this principle is recognized in the by-laws of the Orientalist which contain a provision declaring
that the power to make contracts shall be vested in the BOD. While the same by-laws also
provide that it is the President who shall have the power, and it shall be his duty, to sign
contracts, the Court held that this is only a formality of reducing to proper form the contracts
which are authorized by the BOD and is not intended to confer an independent power to
make a contract binding on the corporation.

MANILA METAL CONTAINER CORP. V. PNB – MMC executed a Real Estate Mortgage on a
piece of land to secure loans with the PNB (Php900,000 and another Php635,000 later). PNB
foreclosed on the mortgage due to MMC's default and the property was sold by public
auction. MMC requested that its period for redemption be extebded and requested that it
repurchase the land by installment. The PNB denied this request because bank policy did not
allow partial redemption. PNB failed to redeem the property so the title was transferred in the
name of PNB. PNB through its Special Assets Management Division issued a Statement of
Account containing MMC's outstanding obligation (Php1,574,560.47 million more or less).
MMC remitted Php725,000 to PNB as “deposit to repurchase” the proprety. PNB rejected the
offer to repurchase – and suggested that MMC buy the property at its minimum market value
(Php2.6 million). PNB however sent a letter informing MMC that the PNB Board of Directors
had accepted MMC's repurchase offer. This was signed by the President of PNB who did not
conform to the letter but merely acknowledged his receipt of it. MMC brought this action to
annul the Real Estate Mortgage with the PNB. The issue the courts tried to resolve here is
whether there was a perfected contract of sale (repurchase) that could bind the PNB. The
Court held that there was none. Sec. 23 of the Corporation Code expressly provides that the
corporate powers of all corporations shall be exercised by the BOD. Just as a natural person
may authorize another to do certain acts in his behalf, so may the BOD of a corporation
validly delegate some of its functions to individual offers or agents appointed by it. Thus,
contracts or acts of a corporation must be made either by the BOD or by a corporate agent
duly authorized by the board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but not in the
course of, or connected with the performance of authorized duties of such director, are held
not binding on the corporation. There was no showing in this case that the BOD authorized
the SAMD or its President to accept the offer of repurchase. The act of the President was not
held to be binding on PNB.

FILIPINAS PORT SERVICES V. GO - This is an intra-corporate dispute involving Filport, a

business engaged in stevedoring servinces. Eliodoro Cruz, Filport's former President brought
the suit, allegedly on behalf of Filport and its stockholders for mismanagement of the
incumbent board which created and Executive Committee and several new positions in the
company. The defendants are the incumbent Board members of the company.

The Court held that it was within the power of the BOD to create the new positions because
this was authorized by the By-Laws and the Corporation Code. All corporate powers allowed
by the Code is exercised by the BOD and all business conducted and all property of the
corporation shall be controlled and held by a BOD. The authority of the BOD is restricted to
the management of the regular business affairs of the corporation. Thus with the exception
only of some powers expressly granted by law to stockholders/members, the BOD/Trustees
has the sole authority to:
 a. Determine policies
b. Enter into contracts
c. Conduct the ordinary business of the corporation within the cope of
its charter (AOI, By-Laws, relevant provisions of the law)

Ratio is efficiency: the concentration in the BOD 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.

Note also that the Court held that Cruz did not have the legal capacity to bring about this
derivative suit. Where the corporation is an injured party, its power to sue is lodged within its
BOD/Trustees.

Exceptions: But an individual stockholder may be permitted to institute a derivative suit in

behalf of the corporation in order to protect of vindicate corporate rights:

i. whenever the officials of the corporation refuse to sue, or

ii. when a demand upon them to file the necessary action would be
futile because they are the ones to be sued, or
iii. when official 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. Here the action
brought upon by the Cruz is principally for damages resulting form an alleged
mismanagement of the affairs of Filport by its incumbent directors/officers, it
being alleged that the acts of mismanagement are detrimental to the interests of
Filport. Thus, the injury complained of primarily pertains to the corporation so
that the suit for relief should be by the corporation.

BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW - The National Coconut

Corporation entered into copra trading activities. Several contracts for delivery of contracts
signed by Directors Maximo Kalaw (GM), Juan Bocar and Casimiro Garcia. NACOCO was
not able to fulfill delivery because of 4 typhoons in the Philippines where coconut trees
throughout the country suffered extensive damage. When it became clear that the contracts
would be unprofitable, Kalaw submitted them to the BOD for approval – which they
unanimously did. The contracts were only partially performed and the copra buyers sued
NACOCO for the undelivered copra. NACOCO entered into settlements with the buyers.
NACOCO is now suing Kalaw et al for negligence, bad fauth, and breach of trust for
approving the contracts. The Court held that these contracts were valid and whatever vices
they had were cured by the Board's ratification.

General rule is that only corporate acts by the BOD can validly bind the corporation.

An exception to this is when the Board ratifies the acts on an officer/director. The Court
mentioned several acts/contracts made by Kalaw without prior authority from the Board. In
fact, for 60 contracts signed by kalaw, NACOCO reaped a gross profit of Php3.6 million and to
which Kalaw was granted a special bonus recognizing his special achievements.

It was practice for the corporation to allow GM Kalaw to negotiate and execute contracts in its
copra trading activities for an in NACOCO's behalf without prior Board approval. If the By-
laws were to be literally followed, the board should give its stamp of approval on all corporate
contracts. But that board itself, by its acts and through acquiescence, practically laid aside
the by-law requirement of prior approval. Settled jurisprudence has it that when similar acts
have been approved by the directors as a matter of general practice, custom, and policy, the
GM may bind the company without formal authorization from the BOD. Existence of such
authority is established by proof of:
i. The course of business,
ii. The usage and practices of the company
iii. The knowledge by which the BOD has or must be presumed to have of acts and
doings of its subordinates in and about the affairs of the corporation.

FRANCISCO V. GSIS - Trinidad Francisco procured a loan with the GSIS secured by a parcel
of land. Trindad defaults so the GSIS extrajudicially foreclosed on the real estate mortgage.
Atty. Vicente Francisco, her father, sent a letter to the GSIS General Manager proposing to
use the amount the GSIS owed him to pay the balance of his daughter's monthly installments.
GM Rodolfo Andal sent a letter to Atty Francisco stating that the BOD had approved his
proposal so Atty. Francisco remitted a check for the balance. The GSIS issued an Official
Receipt for the amount. Despite this, the GSIS sent Trinidad 3 letters regarding her
indebtedness and required her to make a proposal for payment. Atty. Francisco protested
this, that indebtedness had already been paid for. GSIS responds that the Andal's letter
cannot bind the BOD. The court held for the Franciscos, stating that Andal's letter constituted
as an acceptance on Atty Francisco's proposal-offer. There was nothing suspicious about the
letter and its terms were clear and signed by the GM. The Franciscos cannot be blamed for
relying on the letter. While Andal denies that he did not sign the letter, the Court said that
corporate transactions would speedily come to a standstill if every person dealing with a
corporation held duty-bound to disbelieve every acts of its responsible officers, no matter how
regular they should appear on their face.

Ratio for a third party's reliance on external manifestations of corporate consent is this: a
third party would naturally have little or no information as to what occurs in corporate
meetings so he must necessarily rely on the external manifestations of corporate consent.
The integrity of commercial transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by uts agents in accordance with law. It is familiar doctrine
that if a corporation knowingly permits one of its officers/agent to do acts within the scope of
an apparent authority, and thus holds him out to the public as possessing power to do those
acts, the corporation will, as against any one who has in good faith dealt with the corporation
through such agent, be estopped from denying his authority.

Note that the Court also held that the GSIS was in estoppel by accepting the check, yet it kept
silent about the true facts surrounding the letter. This silence together with the unconditional
acceptance of 3 subsequent remittances by Trinidad constitutes a binding ratification of the
original agreement.

1. Qualifications and Disqualifications

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office
for one (1) year until their successors are elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. a majority of
the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.

Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by

final judgment of an offense punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer of any
corporation.

Campos on Qualifications and Disqualifications:

i. At least one share in the corporation.

The requirement in Sec. 23 of the Code is that no one can be elected as director of a stock
corporation unless he owns at least 1 share, which should be registered in his name on the
books of the corporation. Should a director dispose of all of his shares during his term, he
ipso facto ceases to be a director and a vacancy is created.

DETECTIVE AND PROTECTIVE BUREAU INC. V. CLORIBEL - Faustino Alberto as

managing director of DPBI was sued for illegally seizing and taking control over all the assets
of the corporation. In a meeting, the stockholders removed Alberto and elected Jose dela
Rosa in his stead, but Alberto nonetheless refused to vacate his office, deliver the assets and
books of the corporation, and continued to perform unauthorized acts for and in behalf of
DPBI. The Court held that Alberto could not be validly removed because the managing
director-elect was not qualified since he did not own any stock in the corporation as required
by the Corporation Law. DBPI's By-Laws provide that “Directors shall serve until the election
and qualification of their duly qualified successor” – Alberto cannot be compelled to vacate his
office and cede the same to de la Rosa because de la Rosa was not qualified in the first
place.

The Corporation Code deleted the qualification in the old Corporation Law that a director must
own the share “in his own right”. Campos says that this formally legalizes the election on
trustees and other persons who are in fact not the beneficial owners of the shares registered
in their own names, holding them only for the benefit of the real owners.

LEE V. CA - International Corporate Bank filed a complaint for a sum of money against the
Gonzaleses who filed a third party complaint against ALFA and petitioners Lee and Lacdao.
Summons were served upon the DBP who opposed this – saying that summons had been
erroneously served to them since it had not taken over the management of ALFA. Summons
were then served to Lee and Lacdao who argue that by virtue of a voting trust agreement
between them as corporate officers of ALFA and the DBP, management and control over
ALFA was now vested with the DBP. The Court held that Lee and Ladao were improperly
summoned as corporate officers by virtue of the voting trust agreement. The Court described
a voting trust agreement as one which creates a dichotomy between beneficial ownership and
legal title of shares of stock. The most immediate effect of a voting trust agreement on the
status of a stockholder who is a party to its execution is that from legal titleholder or owner of
the shares subject of the voting agreement, he becomes the equitable of beneficial owner.
This change in status deprives the stockholder of the right to qualify as a director under Sec.
23 of the Code. Note that the new Corporation Code deleted the phrase “in his own right”
from the Corporation law. Under the old law, a person's directorship cannot be adversely
affected even if he enters into a voting trust agreement where he will retain only beneficial
ownership. Under the new law, a person may be eligible for directorship even if he only has
legal title over the shares of stock as appearing in the books of the corporation. The transfer
of the shares created a vacancy and Lee and Lacdao ceased to be directors with at least one
share of ALFA

i. Residence requirement

Ratio: for the protection of stockholders or members of the corporation against inactivity of
the board where no quorum can be mustered due to the repeated absence of directors or
trustees who reside abroad.
Code does not lay down citizenship requirement so that even an alien may be elected as
such.

Exception: Businesses totally closed to aliens: any activity, business or industry totally
closed to aliens (e.g. retail trade, educational institutions), all directors/trustees have to be
Filipino citizens.

Partly-nationalized industries (e.g. banks, mining corporations):

i. Aliens can be elected as directors or trustees but only in such
number as is proportional to alien equity in the corporation.
ii. No alien director can be appointed as officer of the corporation or
to any other position where he can in any way participate in the
management and administration of the business of the
corporation. (Anti-Dummy Law)

i. Additional qualifications:

When nature of business and affected with public interest:

1. General Banking Acts gives the Monetary Board authority to prescribe additional
qualifications of bank directors
ii. Insurance Code allows a similar authority to the Insurance
Commissioner

*Additional qualifications in the By-Laws (note that by-laws cannot do away with qualifications
expressly laid down by law)

i. Disqualifications

Corporation Code: a person convicted by final judgment of a an offense punishable by

imprisonment for a period exceeding 6 years or of a violation of the Code committed within 5
years prior to the date of his election/appointment.
By-laws: are qualifications expressed in a negative way and may be validly provided for in
the by-laws. Examples:

i. No person may be elected a director unless he owns a specified

number of shares, more than one
ii. Disqualification of a person who has substantial interest in a
competitor corporation as a reasonable means of protecting the
corporation from the possible adverse effects of conflicting
interests of a director

GOKONGWEI V. SEC – John Gokongwei sued the San Miguel Corporation and other
members of the BOD. He argues that the amendment to the by-laws of the corporation are
null and void since it and purposely provided for disqualifications which would not allow him to
be a board member. Prior to this amendment, he had all the qualifications to be a director of
SMC. He also argues that the amendment which gave the Board the prerogative of
determining whether a person is engaged in competitive or antagonistic business, and to
consider such factors as business and family relationship, was unreasonable and oppressive.
SMC et al argue that the qualifications in the amended by laws are for a legitimate purpose,
considering that Gokongwei (a competitor and engaged in several overlapping areas of
competition) cannot devote unselfish and undivided loyalty to the corporation; and that it was
a preventive measure to assure the stockholders of SMC of reasonable protection from
unrestrained self-interest.
The Court first held that corporations have the inherent power to adopt by-laws for its internal
government and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. The Code
also provides that a corporation may provide for qualifications of its directors in addition to the
one share minimum requirement in Sec. 30. A corporation also has a right to amend its AOI
provided the requirements of the Code are complied with.

Finally, they held that Gokongwei had no vested right to be elected as a director, even if the
by-law that that time qualified him to become one because the by-law contained a prescription
that it may be subject to amendment, modification, and alteration.

Neither was the disqualification in the amendment considered unreasonable by the Court,
considering the fiduciary relationship of a director with the corporation. The provision on
disqualifications was a reasonable exercise of corporate authority. (additional discussion on
Duties of Directors below).

Election, Vacancies, Removal

Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there
must be present, either in person or by representative authorized to act by written
proxy, the owners of a majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. The election must be by ballot
if requested by any voting stockholder or member. In stock corporations, every
stockholder entitled to vote shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws are silent, at the time of
the election; and said stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate said shares and give
one candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the total number of votes
cast by him shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors to be elected:
Provided, however, That no delinquent stock shall be voted. Unless otherwise provided
in the articles of incorporation or in the by-laws, members of corporations which have
no capital stock may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from time to time but
not sine die or indefinitely if, for any reason, no election is held, or if there not present
or represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member entitled to vote.

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. 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.

Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days
after the election of the directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall submit to the Securities and
Exchange Commission, the names, nationalities and residences of the directors,
trustees, and officers elected. Should a director, trustee or officer die, resign or in any
manner cease to hold office, his heirs in case of his death, the secretary, or any other
officer of the corporation, or the director, trustee or officer himself, shall immediately
report such fact to the Securities and Exchange Commission.

Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may
be removed from office by a vote of the stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees, or any of
them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should the secretary fail or refuse to call the
special meeting upon such demand or fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation signing the demand. Notice
of the time and place of such meeting, as well as of the intention to propose such
removal, must be given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That removal without cause may not
be used to deprive minority stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code.

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 or the unexpired
term of his predecessor in office.

A directorship or trusteeship to be filled by reason of an increase in the number of

directors or trustees shall be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the purpose, or in the same
meeting authorizing the increase of directors or trustees if so stated in the notice of
the meeting.

De Leon on the Corporation Code:

Methods of voting

Straight Voting: every stockholder may vote such number of shares for as many persons as
there are directors to be elected.

A owns 100 shares of stock in a corporation. If there are 5 directors to be chosen, A is

entitled to 500 votes obtained by multiplying 100 by 5. He may give to the five candidates he
wants to be elected 100 votes each. Under this method, the votes are distributed equally
among the 5 candidates.
Cumulative voting for one candidate: a stockholder is allowed to concentrate his votes and
“give one candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal. Straight voting does not benefit minority stockholders for
they would not be able to elect any director over the objection of the stockholder or
stockholders who own at least 51% of the capital stock.

A has 200 shares; 5 directors to be elected

A has 1000 votes to use for any one candidate (200x5)
A and B: 800 shares; C,D,E,F: 200 shares; 5 directors to be elected
A and B: 4000 votes to use (800x5)
C, D, E & F: 1000 votes to use

The highest number of votes that A and B can give is 1000 votes for 4 candidates
CDEF may secure representation by cumulating their 1000 votes to C

Majority: 501 shares; Minority: 499 shares; 5 directors

If straight voting used, majority can always elect all 5 candidates with 501 votes each, but the
minority can only cast a maximum of 499 votes for each candidate.

To get control over the board, the minority can distribute votes to 4 candidates:
499 shares for 5 candidates = 2495 (maximum number of votes that may be cast)
2495 votes / 4 candidates = 623.57

Vote: 624, 623, 623, 623

# of min.'s shares x # of directors in board

# of directors to gain control

Cumulative voting by distribution: a stockholder may cumulate his shares by multiplying also
the number of his shares by the number of directors to be elected and distribute the same
among as many candidates as he shall see fit. In electing directors by cumulative voting, “the
total number of votes cast by a stockholder shall not exceed the number of shares owned by
him as shown in the books of the corporation multiplied by the whole number of directors to
be elected”.
Formula:
AxB=D
C+1
DxC=E
Where:
A = Total # of outstanding shares entitled to vote (at meeting)
B = # of directors desired to be elected
C = Total # of directors to be elected
D = # of shares necessary to elect desired number of directors
E = # of votes required to elect desired number of directors
50,000 outstanding shares; 11 directors. What is the minimum number of shares necessary
to elect 6 directors? What is the minimum number of votes required to elect 6 directors?
50,000 x 6 = D
11 + 1
300,000 = D
12
D = 25,000

D+1xC=E
25,000 + 1 x 11 = E
 E = 275,011

Campos on Vacancies and Removal

Vacancies may occur in the BOD by:

1. Death
2. Resignation: orally, in writing, clear intention must be shown, absolute and
unconditional
3. Removal
1. Only the stockholders or members have the power to remove directors or trustees
elected by them. Procedure is in Section 28.
2. Removal of a director/trustee before his term is over is one way by which the
stockholders or members may protect themselves from fraud, incompetence, or
abuse of those in charge of management.
3. The Corporation Code unlike the old law allows removal even without cause.
However, if there is no cause, the power to remove defeats the right of representation
of the minority through the use of cumulative voting.
4. Directorship is a position of trust and confidence, thus the stockholders/members
should feel free to remove him at any time when they have lost such trust in him.
5. The vacancy created by removal may be filed in by the stockholders in the same
meeting where the removal is effected, without the need of further notice, or at any
other meeting called for the purpose after the required notice has been given (one
week notice requirement in Sec. 50 unless the by-laws provides otherwise). The
remaining members of the board cannot fill up the vacancy because Sec. 29 prohibits
them from doing so.
6. The difference in voting requirement in stock (2/3 outstanding capital stock) and non-
stock (2.3 of members entitled to vote) is more apparent than real because under
Sec. 6, the vote necessary to approve a particular act as provided in this Code shall
be deemed to refer only to stocks with voting rights”, except in enumerated instances,
and removal of a director is not among these exceptions.

4. Expiration of term: same time for all the seats in the board, but they made hold
over until their successors are elected and qualified.

Note that in non-stock corporations where staggering of terms is allowed, vacancies

on only 1 or a portion of the BOD is possible.

5. Abandonment of office: may be implied when director has accepted a position

outside the Philippines where his work would require his continuous presence, thus
making it incompatible with his position as director.

Allowing the remaining directors or trustees to fill up vacancies avoids the expense
and inconvenience of calling a stockholder/members meeting, specially where there
are many of them. In the following cases, however, vacancies in the BOD are to filled
by the stockholders or members in a meeting for the purpose:

a. Remaining directors/trustees do not constitute a quorum

b. Vacancy is caused by removal
c. Vacancy is caused by expiration of term
d. In case on increase in the number of directors/trustees as a result of an
amendment of the AOI authorizing such increase.

The BOD may refer the filling up of vacancies to the stockholders or members even in those
cases where the Code allows the remaining directors to do so themselves.

PREMIUM MARBLE RESOURCES V. CA - A first group of Board directors assisted by Atty.

Dumadag filed a suit against the International Corporate Bank for allowing the second group
of directors to deposit checks issued in the name of Premium Marble in another corporation's
name. The bank alleges that Group 1 does not have capacity to sue. Group 2 represented
by Siguion Reyna filed a motion to dismiss – saying that the case against IBC was filed
without authority as shown by a Resolution of the BOD. Group 1 counters that the Board
Resolution signed by Group 2 officers who were dismissed from the corporation for various
irregularities and fraudulent acts; and that these officers are not the majority stockholders in
the AOI. Group 1 presentes a copy of the Minutes of a meeting that they were the newly-
elected officers for the year 1982. The Court held that while the Minutes show that Group 1
consisted of the newly elected officers of 1982, they were unable to show proof that this
election was reported to the SEC. It is a requirement of Sec. 26 of the Corporation Code that
all corporations should submit within 30 days to the SEC the names, nationalities, and
residences of the directors elected. The ratio for this submission is to give the public
information, under sanction of oath of responsible officers, of the nature of the business,
financial condition and operational status of the company together with information on its key
officers or managers so that those dealing with it and those who intend to do business with it
may know or have the means of knowing facts concerning the corporation's financial
resources and business responsibility. The Court therefore looked at Premium Marble's most
recent General Information Sheet of 1981 – which revealed the names of the directors in
Group 2 – and used this to determine who were the duly-constituted members of the board.
Group 1's claim of directorships were not fully substantiated so in the absence of an authority
from the BOD, Group 1 cannot validly bind the corporation and have no capacity to sue.

MONFORT HERMANOS V. MONFORT III - Monfort Hermanos as represented by Ma.

Antonia Salvatierra sued the group of Monfort III for forcible entry and replevin. Monfort III
questions Salvatierra's capacity to sue and raised the defense that the Board Resolution
authorizing Salvatierra to represent the corporation is void because the purported Members of
the Board who passed it were not validly elected officers of the Corporation. The Court held
for the Monfort III group stating first that the power of the corporation to sue is lodged with the
BOD or any authorized representative. The names of the last 4 signatories of the Board
Resolution did not appear in the 1996 General Information Sheet submitted by the corporation
to the SEC.

Neither can Salvatierra raise the defense that it was an oversight of its accountant to submit
the GIS with the newly elected officers because the requirement to submit within 39 days
under Sec. 26 is mandatory. Failing to substantiate that the Resolution was signed by duly-
elected members of the Board as reflected in the company's GIS with the SEC, she had no
capacity to sue.

Term:

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office
for one (1) year until their successors are elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. a majority of
the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.

Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the
term of office of one-third (1/3) of their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period.

No person shall be elected as trustee unless he is a member of the corporation.

Unless otherwise provided in the articles of incorporation or the by-laws, officers of a
non-stock corporation may be directly elected by the members.

Sec. 108. Board of trustees. - Trustees of educational institutions organized as non-

stock 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).

Unless otherwise provided in the articles of incorporation on 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.

For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.

Campos on the Term of a director or trustee

Stock Corporations:

Under Sec. 23, the term of a director is limited to 1 year. A corporation must therefore hold an
election annually, but until such election is held and a new set of directors is duly elected and
qualified, the incumbent directors or trustees hold over as such even after their term is over.

Sec. 23 is explicit in limiting the term to 1 year.

There can be no staggering of terms.

Non-Stock Corporations and Educational Non-Stock Corporations

3-year term for trustees under Sec. 98

5-year terms for trustees in non-stock educational corporations under Sec. 108.
Terms should be staggered. The AOI or by-laws may provide a longer or shorter term and/or
preclude staggering.
Sections 98 and 108 are special provisions, and by statutory construction, should prevail over
Sec. 23. But if an educational corporation is organized as stock, the general provision of Sec.
23 applies.

Meetings:

Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members

may be regular or special. (n)
Sec. 53. Regular and special meetings of directors or trustees. - Regular meetings of
the board of directors or trustees of every corporation shall be held monthly, unless
the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon the
call of the president or as provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or outside

of the Philippines, unless the by-laws provide otherwise. Notice of regular or special
meetings stating the date, time and place of the meeting must be sent to every director
or trustee at least one (1) day prior to the scheduled meeting, unless otherwise
provided by the by-laws. A director or trustee may waive this requirement, either
expressly or impliedly. (n)

Sec. 54. Who shall preside at meetings. - The president shall preside at all meetings of
the directors or trustee as well as of the stockholders or members, unless the by-laws
provide otherwise. (n)

Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the
term of office of one-third (1/3) of their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period.

No person shall be elected as trustee unless he is a member of the corporation.

Unless otherwise provided in the articles of incorporation or the by laws, officers of a

non-stock corporation may be directly elected by the members. (n)

Campos on Director's Meetings

May be regular or special.

A board meeting must be properly called in accordance with law, otherwise it will not be valid
and any action taken therein may be questioned by an objecting director or a stockholder,
without prejudice to any right which may have been acquired by an innocent third person.

Minimum requirements under Sec. 53

1. Notice
1. By-laws may provide for different or additional requirements regarding notice, date
and place of the meeting.
2. If the by-laws are silent on the matter, the board must meet at least once a month.
3. While the by-laws may require that notice be given a day before the meeting, the
notice requirement cannot be done away with altogether.
4. There may be express or implied waiver by a director or trustee to this requirement.
5. If no notice is sent to a director he may question the validity of the meeting and of any
matter taken up therein, without prejudice to the rights of a third person who had no
notice of such irregularity.

2. Place of meeting
1. If the by-laws are silent, the board may meet anywhere it pleases, possibly in a
different place each meeting and even outside the Philippines.
2. The by-laws may also set limitation on the freedom of the board to choose a place for
meetings.

3. Quorum and vote

1. Sec. 25 fixes quorum at a majority of the number of directors/trustees as fixed in the
AOI.
 2. The vote of at least a majority of the directors/trustees present at a meeting where
there is a quorum is necessary for a valid corporate act.
3. Campos is of the opinion that the AOI or by-laws may provide for a greater majority to
qualify both the voting requirement and the quorum. However, a lesser majority in
either case is not possible.
4. Examples: if AOI provides for 7 board members, the quorum is 4. Should there be 2
vacancies, the quorum would be 4. If there are 4 present in the meeting, the vote of 3
is sufficient for a valid corporate act even if 3 does not constitute a majority of 7. If 6
are present, a vote of 4 is needed to bind the corporation.
5. Majority of all the members is required and not just of those present although they
may be a quorum is required for the election of officers.
6. Director must be personally present in order to be counted in a quorum. He cannot
be represented by a proxy because he was elected for his personal qualifications, his
business expertise and sound judgment and nobody else's. While a proxy can be
present and participate in the discussions, neither his presence nor his vote can be
counted towards a valid and binding corporate act.

4. Agenda

Notice should contain the purpose of the meeting and such other matters which are to be
taken up. Extraordinary matters not mentioned in the notice cannot be validly acted upon
against the objection of a director. “Other matters” can only mean ordinary and routinary
matters.

However if all directors are present and agree to take up alien matters, then no one can later
question the validity of any action taken thereon.

5. Presiding Officer

The President of the corporation shall preside at all directors or trustees meetings and
stockholders or members meetings, unless otherwise provided by the by-laws. So it's
possible for by-laws to provide Chairman of the Board who will preside over meetings but in
the absence of such a provision, the board or stockholders cannot elect a chairman other
than the president.

LOPEZ AND BOARD OF REGENTS V. ERICTA - Dr. Consuelo Balaco was appointed as ad
interim Dean of the UP College of Education and this was extended for 1 year unless sooner
terminated and subject to the approval by the Board of Regents. When President Lopez
presented her ad interim appointment at a meeting, the minutes revealed that there were
several objections to her appointment as found by the Personnel Committee. Dr. Blanco did
not receive the required number of votes for the deanship appointment (5 in favor of ad
interim appointment, 3 against, 4 abstain). But the Board of Regents decided to expunge the
result of the voting to give it more time to think. After her ad interim appointment expired,
Oseas del Rosario was appointed as Officer-in-Charge of the College of Education. Dr.
Blanco protested the appointment of the OIC. She argues that the legal effect of the 5-3-4
vote is that the abstentions should be construed as an affirmative vote. The Court held thatin
order to construe an abstention, one must look into the facts and circumstances which
attended the voting in order to determine what construction would govern. The Court looked
at the minutes of the meeting of the Board which showed that Dr. Blanco's nomination was
indeed rejected, but the Board found it fit to present a more diplomatic way to avoid rejection
on the part President and his nominee. It was recommended that the President speak with
Dr. Blanco to withdraw her nomination. Thus, the abstentions in this case were construed by
the Court of as a rejection of her appointment based on the understanding that there would be
a gentlemen's agreement between her and the President to avoid embarrassment.

TAN V. SYCIP - The Grace Christian High School Board of Trustees originally constituted 15
regular members. During an annual member's meeting on 1998, only 11 living members were
present, as 4 had already died. Tan et al argue that the deceased members should not be
counted in the quorum because they lost all their rights and interests in the corporation upon
their death. The meeting was convened and the 4 petitioners were voted to replace the
deceased trustees. The SEC held that the meeting was null and void for lack of quorum. The
Court first differentiated the right to vote in stock corporations and in non-stock corporations.

Stock Corporations: the right to vote is inherent and incidental to stock ownership. Only
stock actually issued and outstanding may be voted and each share of stock is entitled to
vote, unless otherwise provided in the AOI or declared delinquent.

Non-stock Corporations: the voting rights attach to membership. Members vote as persons,
in accordance with the law and by-laws of the corporation. Each member shall be entitled to
one vote unless so limited, broadened, or denied in the AOI or by-laws.

The quorum required to a Board of trustees is the majority unless the AOI or by-laws provide
otherwise. The Court held that the quorum is a member's meeting is to be reckoned as the
actual number of members of the corporation (meaning alive). The effect of death of one of
the members is as follows:

Stock Corporations: shareholders may generally transfer their shares, so upon the death of a
shareholder, the executor or administrator is vested with the legal title to the stock and is
entitled to vote, until a settlement of the estate is effected.

Non-Stock Corporations: all rights are personal and non-transferable unless the AOI or by-
laws provide otherwise. So the question on can dead members exercise voting rights
depends on the AOI or by-laws.

By GCHS's by-laws, membership is terminated by the death of the member. So the deceased
members of the Board of Trustees cannot be counted in the determining the requisite vote in
corporate matters or the requisite quorum for annual member's meetings. In this case, with
the 11 remaining members, the quorum should be 6 and this quorum was met in the meeting
replacing the deceased members.

In case of vacancies, the Board has two options:

If there is a quorum, the vacancy may be filled by the vote of at least a majority of the
remaining directors/trustees.

If there is no quorum, the vacancy must be filled by the stockholders in a regular or special
meeting called for that purpose and the elected director/trustee shall only be elected for the
unexpired term of his predecessor.
Note that the Court nonetheless did not uphold the election of the 4 new trustees, even if
majority of the members were present because it was held in an annual members meeting
instead of a trustees meeting. The by-laws of GCHS specifically prescribe that vacancies in
the board shall be filled up b the remaining trustees in a trustees meeting.

LOPEZ REALTY V. FORTENCHA - Fortencha et al were employees of Lopez Realty and are
suing the corporation for non-payment of gratuity pay and other benefits. Seems that Lopez
Realty approved 2 Resolutions for a Gratuity Fund for those laid off by the company as well
as those retained therein. Asuncion Lopez Gonzales, a Board member, filed a derivative suit
against the majority shareholder Arturo Lopez. She argued that these matters were taken up
by the BOD in her absence and therefore ultra vires. She was not notified of the special
meetings where the Resolutions; that the Resolutions were not ratified by the stockholders in
accordance with Sec. 40 of the Code, and that the gratuity pay was only to be given to retiring
employees to the exclusion of retained ones. As to the notice, the Court held that Asuncion
only raised this on appeal, thus, she is barred from questioning this lack of requirement. The
Court next held that was illegal for lack of notice may be ratified expressly or impliedly by the
directors in a subsequent meeting or by the corporation's subsequent course of conduct. It
was shown that Asuncion acquiesced to the Resolutions by signing the Cash Vouchers for the
second installment of the gratuity pay of the petitioners. She was thus estopped from
assailing the validity of the Resolutions. As to requirement of a stockholder's meeting in Sec.
40, the Court held that this superfluous and not applicable because this provision refers to the
sale, lease, exchange, or disposition of all or substantially all of the corporation's assets
including goodwill.

Compensation:

Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable pre diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year.

Campos on Compensation:

As a general rule, directors are not entitled to compensation for performing services ordinarily
attached to their office, unless the AOI or by-laws expressly provide so or a contract is
expressly made in advance. They are presumed to serve without pay. Assuming that
compensation is intended, only stockholders not the directors themselves may fix the amount
thereof. But any stockholder's resolution to grant such compensation can only refer to future
and not to past services.

Under Sec. 30, directors can received compensation other than per diems only if the by-laws
fix the same, or should there be no such provision, if the stockholders representing the
majority of the outstanding capital stock agree to give it to them.

The implication of Sec. 30 however is that directors can fix their own per diems. If they do,
then they will in effect be self-dealing, but since the law allows them so do so, this situation
becomes an exception to Sec. 32 which renders a contract by a self-dealing director voidable.

Limitation is that the per diems be reasonable – and reasonableness will be ultimately
decided by the Court.

Not even the stockholders can grant compensation where the total amount thereof exceeds
10% of the corporation's net income before taxes. The per diems must be included within this
10%.

The rules on compensation of directors are not applicable to an officer who is not a director
because he would in effect be an employee of the corporation and would be entitled a salary
for his services, unless it is otherwise agreed upon. If a director upon the request of the BOD
renders services outside his usual duties, this may imply a promise to pay compensation and
he would be entitled to the reasonable value of his services.

Compensation (e.g. salaries, bonuses, stock options, profit-sharing plans) to executives and
employees are incentives for greater efficiency to which the corporation ultimately benefits,
hence these forms of compensation are ultra vires and the fixing of their amounts are usually
within the business judgment of directors.

In case of abuses, Sec. 32 governing the self-dealing director will apply.

To prevent abuses, SEC requires widely held corporations which have granted stock option
rights to its stockholders to make full disclosure of the same before they can publicly sell their
securities. According to an SEC opinion, the stock option plan must be approved by
stockholders representing 2/3 of the subscribed capital stock and the amount of shares set
aside for that purpose should not be more than 20% of such subscribed capital stock.

The US Supreme Court in the American Tobacco Company case held that the large bonuses
given to the executives were invalid. A corporation cannot, against the protest of a
shareholder, be used to justify payments of sums as salaries so large that in substance and
effect amount to spoliation or wastage or corporate property.

CENTRAL COOPERATIVE EXCHANGE V. TIBE - Tibe was a member of the BOD of the
Central Cooperative Exchange. He was sent by the Board to attend several meetings as an
Eastern Visayas representative in the Federation of Farmer's Cooperative Marketing
Associations. He made several cash advances representing per diems and transportation
and representation expenses. Central Cooperative is now suing him for reimbursement of the
advances, arguing that the BOD had no power to issue Resolutions on the disbursement of
funds for the meetings. Note that CCE's By-laws provide that “the compensation, if any, and
the per diems for the BOD members for attendance at meetings shall be determined by the
members at an annual or special meeting called for that purpose”. In an annual stockholder's
members, it was agreed upon that the Board members attending CCE meetings are only
entitled to transportation expenses, per diems, and actual expenses while waiting. Yet, the
Board Resolutions questioned allowed directors commutable allowances, discretionary fund,
and per diems. The Court held that these resolutions are contrary to the by-laws of the
federation. Only the stockholders have the power to determine compensation of the BOD
members and such stockholders restricted this to transportation expenses, per diems, and
actual expenses.

WESTERN INSTITUTE OF TECHNOLOGY V. SALAS - The Salases were majority and

controlling members of the Board of Trustees of the WIT. In a special board meeting for
officers compensation, the BOR passed a Resolution granting monthly compensation and
applicable retroactively, for the Chairman, Vice Chairman, Corporate Treasurer, Corporate
Secretary – positions held by the Salases. A criminal suit was filed against the Salases for
estafa and falsification of public document but they were acquitted on both. They are now
being sued on the civil component of the criminal case. WIT argues that according to Sec. 30
of the Corporation Code, trustees cannot receive any compensation. The Court ruled for the
Salases. First, it stated the ratio why directors/trustees are not entitled to salary or other
compensation when they perform nothing more than the usual and ordinary duties of their
office is that there is a presumption that directors/trustees render service gratuitously and that
the return upon their shares adequately furnishes the motives for service, without
compensation. There are only 2 ways under Sec. 30 when members may be granted
compensation other than per diems:

1. By-laws provide for such and fix their compensation

1. Stockholders representing majority of the outstanding capital stock at a regular or

stockholders special meeting agree to give it to them.

Exception to the general rule is when the compensation is given to persons who render
services other than their services are directors or trustees. The Court construed the phrase
“directors shall not receive any compensation as such directors” as follows: Sec. 30 prohibits
compensation to be given to directors for services performed purely in their capacity as
directors or trustees. This means that members of the board may receive compensation in
addition to reasonable per diems when the render services in a capacity other than as
directors/trustees. The Salases were not granted compensation is directors but as the
officers named above.

Duties of Directors:
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 in him 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.

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was nor necessary for the approval of
the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the
board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.

Sec. 33. Contracts between corporations with interlocking directors. - Except in cases
of fraud, and provided the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the provisions of the preceding
section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.

Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for
all such profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director
risked his own funds in the venture.

Revised Code of Corporate Governance (SEC Memo Circular #6, s2009)

Specific Duties and Responsibilities of a Director:
1. Conduct fair business transactions with the corporation, and ensure that his
personal interest does not conflict with the interests of the corporation
 2. Devote time and attention necessary to properly and effectively perform his
duties and responsibilities
3. Act judiciously
4. Exercise independent judgment
5. Have a working knowledge of the statutory and regulatory requirements that
affect the corporation, including its articles of incorporation and by-law, the
rules and regulations of the Commission and, where applicable, the
requirements of relevant regulatory agencies
6. Observe confidentiality

Duty of Diligence; Business Judgment Rule

Those who voluntarily take the position of directors and invite confidence in that relation,
undertake that they possess at lease ordinary knowledge and skill and that they will use them
in the discharge of their functions as such. Directors are expected to manage the corporation
with reasonable diligence, care and prudence.

The degree of diligence and care requires is usually that which men prompted by self-interest,
generally exercise in their own affairs.

While they are not expected to interfere with the day-to-day business of a corporation, they
should keep themselves sufficiently informed about the general condition of the business, and
to some extent, of the manner in which it is being conducted, so that they may become aware
of the difficulties and problems that must be met and solved.

General Rule: Directors can be liable not only for willful dishonest but also negligence.
Contracts intra vires entered into by the BOD are binding on the corporation and the courts
will not interfere with such contracts unless they are unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority.

Exception: Directors are not liable for mistakes or errors in the exercise of their business
judgment, provided they have acted in good faith and with due care and prudence.

STEINBERG V. VELASCO – Velasco et al are directors of the Sibuguey Trading Company,

and they are being sued by Steinberg (as receiver of the corporation) for authorizing and
approving allegedly unlawful purchase of capital stock. This was done despite the
corporation having a large amount of accounts payable. The said directors also approved a
resolution for payment of dividends to the stockholders which was done in bad faith and in
fraud of creditors. Velasco's defense is that the purchases were made when the business
was doing week, and the distribution of dividends represented surplus profits. The Court
found that when the directors distributed the dividends, they acted on the presumption that
will have had a surplus over and above their debts because of their accounts receivable. In
the end, these accounts receivable were never collected by the directors. The Court found
peculiar that the purchase of the corporation's stock, the declaration of dividends, and the
acceptance of the resignation of directors Ganzon and Medaros were all done in the same
board meeting. By the purchase of the stock, the corporation was left with only Php4000.
These acts were considered by the Court in acts done in bad faith and in gross ignorance of
their duties.

Directors are bound to care for the property of the corporation and manage its affairs in good
faith. Violation of these duties results in the waste of its assets or injury to the property. If
they do not do so, they must account the same to the other trustees.

While directors are not liable for losses on the corporation from want of knowledge, or
mistake, provided the acts were honest and within the scope of the power and discretion
given them, their acceptance of office implies a competent knowledge of the duties assumed.
They cannot excuse imprudence on the ground of their ignorance or inexperience. If they
commit an error of judgment through mere recklessness or want of ordinary prudence or skill,
they may be held liable for the consequences.

Creditors of a corporation have a right to assume that so long as there are outstanding debts
and liabilities, the BOD will not use the assets of the corporation to purchase its own stock,
and it will not declare dividends to stockholders when the corporation is insolvent.

BATES V. DRESSER - The receiver of a national bank (Bates) charges the former president
(Dresser) and directors for loss of a great part of its assets through the thefts of its
employees. The bank hired the services of Coleman who started out as a messenger of the
bank and was promoted on several occasions, teller being his last one, was said to have
perpetrated the thefts. The issue was whether the directors neglected their duties when they
accepted Coleman's statement of liabilities and failed to inspect the depositor's ledgers. The
Court took into consideration that the fraud perpetrated was a novel one and that the
confidence of the BOD relied heavily on semi-annual examinations by the government
examiner and these proved nothing wrong. Hence, the directors were not liable. The Court
warned though that this was not a statement of general principles, but the ruling depended on
the circumstances of this novel case.

The President however, was held by the Court as liable because he was master of the
situation who was present in the bank at all times and had access to all its books. It was even
suggested to him that an investigation be made on Coleman who was spending/living above
his means, yet Dresser did not heed to these warnings. Had he exercised diligence, the fraud
would have been impossible.

MONTELIBANO V. BACOLOD MURCIA-MILLING CO. - This case involved several milling

contracts between sugar planters and the milling central. The profit sharing ratio was at 45%
for the mill and 55% for the planters. An amendment to the contract was made increasing the
planter's share to 60%. The BOD of the Bacolod Murcia Milling Co. passed a Resolution
granting further concessions to planters over and above those in the amended milling
contracts. Montelibano sued BMMC and asked for increased concessions that 3 other sugar
centrals have granted to the planters in Negros. BMMC resisted the claim and argued that
the resolution was null and void ab initio for lack of consideration, and was in effect a
donation. The Court held that the contracts were valid. So was the resolution passed by the
BOD on further concessions as the Court considered them as gratuitous, having the same
consideration that attended the milling contracts. The directors had the authority to modify
the proposed terms of the amended milling contract and this act was within the direct and
immediate furtherance of the corporation's business (test).

The resolution was passed in good faith by the BOD and was considered by the Court as
valid and binding, and whether or not it will cause losses or decrease the profits of the central
is an issue the Court declined to review.

The directors are charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation should be operated at a
loss during depression, or closed down at a smaller loss is a purely business and economic
problem to be determined by the directors of the corporation and not by the court. Questions
of policy or of management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment of the BOD; the board
is the business manager of the corporation, and so long as it acts in good faith, its orders are
not reviewable by the courts.

PSE V. CA - The Board of Governors of the Philippine Stock Exchange refused to list the
shares of Puerto Azul Land Inc. in the stock exchange. There were serious claims that
President Marcos was the legal and beneficial owner of certain properties of Puerto Azul
Resort and this was among the assets claimed by PALI. The SEC and CA ordered the public
listing of PALI since it had complied with all the requirements. PSE refused to comply, and
argued that it has the discretion to accept or reject applications in accordance with the
Business Judgment Rule. The Court agreed with the PSE, stating that notwithstanding the
regulatory power of the SEC over the PSE, the former may only exercise such power if PSE's
judgment was attended by bad faith. There was no bad faith in this case. In refusing to admit
PALI's application, the PSE considered all the facts which brought serious questions on
PALI's qualification to sell its shares to the public. When the Marcos family made a claim on
PALI's assets, the PCGG had already confirmed this and in fact sent out a sequestration
order for PALI's properties. PSE was in the right when it refused PALI's application because a
contrary ruling would not be for the benefit of the general public, considering that the
circumstances gave ruse to serious doubt as to the integrity of PALI as a stockholder.

As the primary market for securities, the PSE has established its name and goodwill, and it
has the right to protect such goodwill by maintaining a reasonable standard of propriety in the
entities who choose to transact through its facilities. It was reasonable for the PSE, therefore,
to exercise its judgment in the manner it deems appropriate for its business identity, as long
as no rights are trampled upon, and public welfare is safeguarded.

ONG YONG V. TIU - The Tius as owners of First Landlink Asia Development Corp., undertook
to construct the Masagana Citimall in Pasay City. The project was not yet finished and
FLADC was heavily indebted to the PNB, so the Tius entered into a Pre-Subscription
Agreement with the Ongs where it was agreed that both families would maintain equal
shareholdings in FLADC. The Ongs paid Php1 million for their subscription of the shares
while the Tius committed to contribute certain properties, such as a building and parcels of
land. The relations between the two parties deteriorated when the Tius rescinded the Pre-
Subscription Agreement for non-performance of certain duties. The Ongs raise the same
arguments on non-performance on some acts and prayed that the FLADC be compared to file
with the SEC a petition for the issuance of a certificate of decrease of stock. The Court held
that the FLADC cannot do so because a decrease in a corporation's authorized capital stock
requires an amendment of the AOI. This is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties thereto. In this case, the
Tius are not just asking for a review of the legality and fairness of a corporate decision – they
want the Court to make a corporate decision for the FLADC. The Court declined to intervene
and order the corporate structural changes not voluntarily agreed upon by its stockholders
and directors.

This would be a violation of the Business Judgment Rule: contracts intra vires entered into by
the BOD are binding upon the corporation and courts will not interfere unless such contracts
are so unconscionable and oppressive as to amount to wanton destruction to the rights of the
minority, as when plaintiffs aver that the board members have concluded a transaction among
themselves will resort in serious injury to the plaintiff's stockholders.

Ratio: Courts and other tribunals are wont to override the business judgment , and the
laissez faire rule or the free enterprise system prevailing in our social and economic set-up
dictates that it is better for the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business decisions. More importantly, the
social contract in the corporate family to decide the course of the corporate business has
been vested in the board and not with the courts.

Fiduciary Duty:

A director, holding a position of trust, is a fiduciary of the corporation. As such , in case of

conflict of his interests with those of the corporation, he cannot sacrifice the latter without
incurring liability for his disloyal act.

Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable pre diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year.

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 in him 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.

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following conditions are present:

a. That the presence of such director or trustee in the board

meeting in which the contract was approved was not necessary
to constitute a quorum for such meeting;
b. That the vote of such director or trustee was nor necessary for
the approval of the contract;
c. That the contract is fair and reasonable under the
circumstances; and
d. That in case of an officer, the contract has been previously
authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.

Sec. 33. Contracts between corporations with interlocking directors. - Except in cases
of fraud, and provided the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the provisions of the preceding
section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.

Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for
all such profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director
risked his own funds in the venture.

Securities Regulation Code

SEC. 23. Transactions of Directors, Officers and Principal Stockholders. - 23.1. Every
person who is directly or indirectly the beneficial owner of more than ten per centum
(10%) of any class of any equity security which satisfies the requirements of
Subsection 17.2, or who is a director or an officer of the issuer of such security, shall
file, at the time either such requirement is first satisfied or within ten days after he
becomes such a beneficial owner, director, or officer, a statement with the Commission
and, if such security is listed for trading on an Exchange, also with the Exchange, of
the amount of all equity securities of such issuer of which he is the beneficial owner,
and within ten (10) days after the close of each calendar month thereafter, if there has
been a change in such ownership during such month, shall file with the Commission,
and if such security is listed for trading on an Exchange, shall also file with the
Exchange, a statement indicating his ownership at the close of the calendar month and
such changes in his ownership as have occurred during such calendar month.

23.2. For the purpose of preventing the unfair use of information which may have been
obtained by such beneficial owner, director, or officer by reason of his relationship to
the issuer, any profit realized by him from any purchase and sale, or any sale and
purchase, of any equity security of such issuer within any period of less than six (6)
months, unless such security was acquired in good faith in connection with a debt
previously contracted, shall inure to and be recoverable by the issuer, irrespective of
any intention of holding the security purchased or of not repurchasing the security
sold for a period exceeding six (6) months. Suit to recover such profit may be
instituted before the Regional Trial Court by the issuer, or by the owner of any security
of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to
bring such suit within sixty (60) days after request or shall fail diligently to prosecute
the same thereafter, but no such suit shall be brought more than two (2) years after the
date such profit was realized. This subsection shall not be construed to cover any
transaction where such beneficial owner was not such both at the time of the purchase
and sale, or the sale and purchase, of the security involved, or any transaction or
transactions which the Commission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.

23.3. It shall be unlawful for any such beneficial owner, director, or officer, directly or
indirectly, to sell any equity security of such issuer if the person selling the security or
his principal: (a) Does not own the security sold; or (b) If owning the security, does not
deliver it against such sale within twenty (20) days thereafter, or does not within five (5)
days after such sale deposit it in the mails or other usual channels of transportation;
but no person shall be deemed to have violated this subsection if he proves that
notwithstanding the exercise of good faith he was unable to make such delivery or
deposit within such time, or that to do so would cause undue inconvenience or
expense.

23.4. The provisions of Subsection 23.2 shall not apply to any purchase and sale, or
sale and purchase, and the provisions of Subsection 23.3 shall not apply to any sale, of
an equity security not then or thereafter held by him in an investment account, by a
dealer in the ordinary course of his business and incident to the establishment or
maintenance by him of a primary or secondary market, otherwise than on an
Exchange, for such security. The Commission may, by such rules and regulations as it
deems necessary or appropriate in the public interest, define and prescribe terms and
conditions with respect to securities held in an investment account and transactions
made in the ordinary course of business and incident to the establishment or
maintenance of a primary or secondary market.
SEC. 27. Insider's Duty to Disclose When Trading. - 27.1. It shall be unlawful for an
insider to sell or buy a security of the issuer, while in possession of material
information with respect to the issuer or the security that is not generally available to
the public, unless: (a) The insider proves that the information was not gained from
such relationship; or (b) If the other party selling to or buying from the insider (or his
agent) is identified, the insider proves: (i) that he disclosed the information to the other
party, or (ii) that he had reason to believe that the other party otherwise is also in
possession of the information. A purchase or sale of a security of the issuer made by
an insider defined in Subsection 3.8, or such insider's spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-law, shall be presumed
to have been effected while in possession of material non-public information if
transacted after such information came into existence but prior to dissemination of
such information to the public and the lapse of a reasonable time for the market to
absorb such information: Provided, however, That this presumption shall be rebutted
upon a showing by the purchaser or seller that he was not aware of the material non-
public information at the time of the purchase or sale.

27.2. For purposes of this Section, information is “material non-public” if: (a) It has not
been generally disclosed to the public and would likely affect the market price of the
security after being disseminated to the public and the lapse of a reasonable time for
the market to absorb the information; or (b) would be considered by a reasonable
person important under the circumstances in determining his course of action whether
to buy, sell or hold a security.

27.3. It shall be unlawful for any insider to communicate material non-public

information about the issuer or the security to any person who, by virtue of the
communication, becomes an insider as defined in Subsection 3.8, where the insider
communicating the information knows or has reason to believe that such person will
likely buy or sell a security of the issuer while in possession of such information.

27.4. (a) It shall be unlawful where a tender offer has commenced or is about to
commence for:
(i) Any person (other than the tender offeror) who is in possession of
material non-public information relating to such tender offer, to buy or
sell the securities of the issuer that are sought or to be sought by such
tender offer if such person knows or has reason to believe that the
information is non-public and has been acquired directly or indirectly
from the tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any insider of
such issuer; and

(ii) Any tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, and any insider
of such issuer to communicate material non-public information relating
to the tender offer to any other person where such communication is
likely to result in a violation of Subsection 27.4 (a)(i).

(b) For purposes of this subsection the term “securities of the issuer sought or to be
sought by such tender offer” shall include any securities convertible or exchangeable
into such securities or any options or rights in any of the foregoing securities.
PRIME WHITE CEMENT V. IAC - Case involving a Dealership Agreement between Prime
White Cement and Alejandro Te (one of the directors) granting the latter exclusive distribution
in the Mindanao area at Php9.70 per bag. Te contracted with several third persons for the
supply of cement based on this exclusive dealership. When Te asked the corporation for
comply with the terms of the agreement, the corporation replied it would on the condition that
the price per cement bag would be increased to Php13.30. PNC thereafter appointed another
exclusive distributor and this constrained Te to cancel his contracts with third persons and sue
the corporation for damages. The Court did not award him any damages because he was a
self-dealing director. A director of a corporation holds a position of trust and as such, he owes
a duty of loyalty to his corporation. In case his interests conflict with those of the corporation,
he cannot sacrifice the latter to his own advantage and benefit. As corporate managers,
directors are committed to seek the maximum amount of profits for the corporation. This
“trust relationship” is not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and hence of the
property interests of the stockholders.
As an exception to the rule that a director's contract with his corporation is void/voidable, the
Court provided this exception:
1. The contract is fair and reasonable under the circumstances
2. The contract may be ratified by the stockholders provided a full disclosure of his
adverse interest is made
3. The conditions in Sec. 32 of the Corporation Code are present.

In this case, the contract was not considered fair and reasonable, considering that the
contract price between Te and Prime White would be below the market value of the product.
Te cannot argue that the price would forever be fixed at Ph9.70 per bag, because as a
businessman, he should know that the prices of cement are not stable. Fairness on his part
as a director of the corporation was required of him. Having failed to perform his duty to the
corporation, Te was considered by the Court found him guilty of disloyalty and made him
liable to the corporation for damages
PALTING V. SAN JOSE PETROLEUM - San Jose Petroleum (Panamanian company) filed a
sworn registration statement with the SEC for the purpose of registering and licensing for sale
in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock.
It alleged that the entire proceeds of the securities would be to exclusively finance the
operations of the San Jose Oil Company (domestic mining corporation). San Jose Oil's 90%
outstanding capital stock is owned by San Jose Petroleum (whose majority interests are
owned by Oil Investments, another Panamanian corporation. Oil Investments in turn is wholly
100% owned by Pantepec Oil Company and Pancoastal Petroleum Company, both
Venezuelan). Palting, as a prospective investor in San Jose Oil, filed an opposition to the
registration of the securities for being unconstitutional and prohibited by the Petroleum Law.
On this issue, the Court held that the tie-up between San Jose Oil and San Jose Petroleum is
illegal because San Jose Petroleum is not entitled to parity rights under the Laurel-Langley
Agreement (speaks of American citizens only).
The Court did not allow the sale of the voting trust certificates because it would work or tend
to work fraud on Philippine investors. The Court found that the provisions in the AOI of San
Jose Petroleum are in direct opposition to our Corporation Law. Its AOI provide that “no
contract or transaction between the corporation and any other association or partnership will
be affected, except in case of fraud, by the fact that any of the directors/officers of the
corporation is interested in, or is a director/officer of such other association or partnership,
and that no such contract or transaction of the corporation with any other person or persons,
firm, association or partnership, shall be affected by the fact that any director/officer of the
corporation is a party to or has an interest in, such contract or transaction, or has in anyway
connected with such other person, persons, firm, association, or partnership; and finally, that
all and any of the persons who may become director or officer of the corporation shall be
relieved form all responsibility for which they may otherwise be liable by reason of any
contract entered into with the corporation whether it be for his benefit or for the benefit of any
other p/f/a/p in which he may be interested”. The directors/stockholders of the company can
do anything, short of actual fraud, with the affairs of the corporation even to benefit
themselves directly or other persons or entities in which they are interested, and with
immunity because of the advance condonation or relief from responsibility by reason of such
acts. This completely disassociates the stockholders from the government and management
of the business in which they have invested.
GOKONGWEI , JR. V. SEC – A director stands in a fiduciary relation to the corporation and its
shareholders:
While directors are not regarded as trustees in the strict sense, their character is that of a
fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the
stockholders, they occupy a fiduciary relation, and in this sense the relation is one of trust.
The ordinary trust relationship of directors of a corporation and stockholders is not a matter of
statutory or technical law. It springs from the fact that directors have the control and guidance
of corporate affairs and property and hence of the property interests of the stockholders.
Equity recognizes that stockholders are proprietors of the corporation interests and are
ultimately the only beneficiaries thereof.
The standard of fiduciary obligation of the directors is as follows: a director is a fiduciary.
Their powers are powers in trust. He who is in such fiduciary position cannot serve himself
first and his cestuis second. He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. A person cannot serve two
hostile and adverse masters without the detriment of one of then,
Doctrine of Corporate Opportunity
The Court allowed the San Miguel Group to amend the AOI which provides for a
disqualification of a director by virtue of his being a This is based upon his being a director in
another corporation whose business in competition with the former. This is based on the
principle that where the director is so employed in the service of a rival company, he cannot
serve both, but must betray one or the other.

Directors cannot engage in business in direct competition with that of the corporation where
he is a director by utilizing information he has received as such officer. Corporate officers are
not permitted to use their position of trust and confidence to further their private interests.
The doctrine of corporate opportunity is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for 2 entities with competing
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of
an officer or director taking advantage of an opportunity for his own personal profit when the
interest of the corporation justify calls for protection.
Considering the access to highly sensitive and confidential information, as well as marketing
strategies of San Miguel's businesses, it would be impossible for Gokongwei to take
advantage of this situation to further the interests of his business involved in the same line.
CENTRAL COOPERATIVE EXCHANGE INC. V. TIBE – (see above for facts)
STRONG V. REPIDE - This case involved 800 shares of capital stock of the Philippine Sugar
Estates Development Corporation owned by Mrs. Erica Strong. Repide as director of PSEDC
was privy to several negotiations with the American Government who wished to secure title
over friar lands. Mrs. Strong alleges that Repide fraudulently concealed the facts affecting the
value of the stocks which he was obligated to reveal. Apparently, when the US Government
purchased the lands, the stock value shot up from 16,000 Mexican currency to $US 76,256.
Mrs. Strong's argues that Repide concealed the fact that he was the real buyer of the stocks
by asking an agent to purchase them from her agent, thus, the transaction was not
attributable to Repide. The CFI ruled that the agent had not authority to sell and that the
transaction was tainted with fraud and bad faith. Hence Repide was required to return the
shares to Mrs. Strong. The Philippine Supreme Court affirmed the CFI but only on the ground
of the agent's lack of authority. Mrs. Strong brought this case to the US Supreme Court and
the issue before there was: was it the duty of Repide to disclose facts which may affect the
value of the sale. The US Supreme Court held that by reason of special facts of the case
(special facts doctrine), this duty exists. There was strong evidence of fraud on the party of
Repide when he concealed his identity during the purchase of the stocks from Mrs. Strong.
He used the check of a third person. After the purchase of the stock, he continued
negotiations with the US Government for the sale of the lands. There was overwhelming
evidence of his influence in the course of the negotiations.
While the Philippine Supreme Court held that the responsibility of directors to individual
stockholders did not extend beyond the corporate property actually under the control of the
directors and that they did not owe any duty to the members in respect to their individual
stock, the US Supreme Court said that while this is generally true, it is not an accurate
statement of the case, considering the facts of the case. While the Code of Commerce and
Spanish Civil Code provisions are silent on the purchase of one stockholder of the stocks of
another, meaning there is no prohibition, under the circumstances of the case, there was a
legal obligation on the part of Repide to make these disclosures. This failure to disclosure
that made Repide guilty of fraud and therefore liable to Mrs. Strong.

MONTELIBANO V. BACOLOD MURCIA MILLING CO. INC. – (supra) Here, the Court held
that acts in good faith made by directors of the corporation are not reviewable by the courts.
Any resolution passed by the BOD in good faith is valid and bending, regardless if it will cause
losses or decrease in profits of the central. The directors who hold such office are charged
with the duty to act for the corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of such duty. Whether the
business of a corporation should be operated at a loss during depression, or close down at a
smaller loss, is a purely business and economic problem to be determined by the directors of
the corporation and not by the court. It is a well-known rule of law that questions of policy or
of management are left solely to the honest decision of officers and directors of a
corporations, and the court is without authority to substitute its judgment of the BOD.
Duty of Loyalty

General Rules of Conduct (Campos)

Self-dealing director (Sec. 32)
This is one situation where a director may gain undue advantage over his corporation by
entering into a contract himself with the latter. Since he participates in the decision as to
whether or not a contract is to be accepted by the corporation, if he has any such financial
interest in the contract, he will be subject to the temptation of putting his interests above those
of the corporation and exert his influence to obtain board approval of the contract, although it
may not be for the best interests of the corporation.

Exceptions:
When the corporation is in distress, a contract entered into with a director may be considered
valid.

Ratification by stockholders makes possible a contract beneficial to the corporation. For

ratification to be valid, the following must concur:
1. Vote of 2/3 of the outstanding capital stock
2. Disclosure of the adverse interest
3. Fair and reasonable contract.
Governing provision in Sec. 32 and all conditions must be present. This also applies to
officers who may or may not be at the same time a director or a trustee.
A contract by a self-dealing director is voidable, regardless of WON the corporation has
suffered damages.
Campos refers to an “enlightened majority” in American jurisprudence which steers away from
the traditional view that in order for a contract executed by a self-dealing director, the said
contract must be fair. The traditional view has pitfalls, such as when a minority director can
sue the corporation to annul the contract even if it were for the best interests of the
corporation. However, there is wisdom in the traditional view in that numerous business
transactions and frequency of secret understanding between directors open to doubt any
judicial finding of accuracy.
Compensation of directors/officers (Sec. 30)
(See discussion on compensation above)

Using inside information (See provision on the SRC)

As insiders, directors and officers have access to confidential information relating to the
business of the corporation. Their fiduciary position prohibits them from using any information
to benefit themselves or any competitor corporation which they may have a more substantial
interest.
The Code has not specific provision on this form of disloyalty, but liability of the director can
be based on the general provisions of Sec. 31.
The provisions on the use of information under the Securities Regulation cover a specific
situation only (i.e. purchase and sale or sale and purchase by a director or officer of any
equity security) of a corporation in which the director is connected with both transactions
which take place within 6 months. Liability here is to the corporation and no one else.
Sec. 27 of the SRC covers all acts of unfair use of unfair information, and all such acts are
considered as unlawful. The mere fact that the purchase/sale occurred within the 6-month
period will give rise to the presumption that there was unfair use of information. The director
has the burden of proving that there was no unfair use and that the information was generally
available or the other party knew it.
Under Sec. 23 of SRC, there is no presumption of disloyalty as the acts complained of
constitute the very basis of the action and the burden is on the complainant to prove such
acts.
If the purchase/sale did not take place within the 6-month period, it is still possible to hold the
director liable to the corporation if the circumstances of the case fall within the general
provisions of Sec. 31 of the Code – which imposes liability on the directors for acts of bad
faith or fore acquiring personal interest in conflict with their duty as directors.
“Inside information”: if it is not generally available to others and is acquired because of the
close relationship of the director or officer to the corporation.
“Unfair use”: of the information withheld is of materiality that a reasonable person would
consider it a factor in determining whether he should sell stocks or buy more stocks.
Effect of disloyalty under SRC is that the contract is void, but only as to the right of the guilty
director/officer, but an innocent third party may enforce the contract as to him.
Campos is of the opinion that SRC provisions only cover transactions in the stock exchange,
but the acts of the disloyal director may still fall under Sec. 30 of the Code.
Seizing corporate opportunity (sec. 34)
A director has the duty to refrain from usurping a business opportunity rightly belonging to the
corporation. If he seized it for himself, he must account for all the profits he obtains, even if
he used his personal funds.
The director is not accountable for the profits if the business opportunity does not properly
belong to the corporation, then the latter has not suffered any prejudice if the director takes
advantage of the transaction.
Ratification by stockholders representing 2/3 of the outstanding capital stock cures the effect
of disloyalty.
Sec. 34 covers only directors and not officers. Campos is of the opinion that if an officer is not
a director, he can still be liable for seizing corporate opportunity under paragraph 2 of Sec. 31.
An officer is usually a full-time corporate agent with a salary, while a director, unless he is also
an officer, only spends part of his business time and efforts for the corporation. He may
devote his time and efforts to his own business affairs and has relatively less opportunity or
authority in making decisions at the operational level. If a director may be liable for seizing
corporate opportunity, all the more should an officer be similarly liable.
Interlocking directors (Sec. 33)
Situation where a person occupies a directorship position in 2 corporations dealing with each
other.
Original attitude of American courts was to prohibit dealings between corporations with
interlocking directors, but with the tremendous growth of corporate enterprise and the greater
familiarity of the courts with the corporation, it was found that interlocking relationships often
presented very definitive advantages to the corporation. The judicial attitude now is one of
tolerance.
Sec. 33 is silent on who has the burden of proving the fairness or unfairness of the
transaction, but the prevailing view is that the burden is on the corporation which seeks to
uphold the contract.
An interlocking director may in effect be a self-dealing director where his interest in one
corporation is merely nominal, and his interest in the other corporation is greater than 20% of
the outstanding capital stock.
MEAD V. MCCOLLOUGH - This case involved the sale of an insolvent corporation's property
to its directors/stockholders which was considered by the court as valid and made in good
faith despite the fact that directors/stockholders were at the same time the creditors of the
corporation.
Mean and McCullough et al organized the Philippine Engineering Construction Co. The
incorporators contributed cash, except Mead who contributed personal property. Mead was
elected as general manager by the resigned when he was hired as an engineer of the Canton
Shanghai Railway Co. The business did not turn out to be profitable so the directors of PECC
assigned al the corporation's rights and interests to McCullough for value. The question that
the Court tried to answer was: did a majority of the stockholders/directors of the corporation
have the power under the law to sell or transfer to one of its members the assets of the
corporation?
The Court first held that all 4 directors gave their unanimous consent to the sale. Mead's
consent was not required because his having accepted the engineering job in China was
incompatible with his directorship in PECC and this constituted as abandoning or vacating his
position. Then the Court stated the following principles:
1. A private corporation, which owes no special duty to the public and which has not
been given the right of eminent domain, has the absolute right and power as against
the whole world except the state, to sell and dispose of all of its property;
2. The BOD has the power, without reference to the assent or authority of the
stockholders, when the corporation is in failing circumstances or insolvent or it can no
longer continue the business without profit, and when it is regarded as an imperative
necessity;
3. That a majority of the stockholders or directors, even against the protest of the
minority, have this power where, from any cause, the business is a failure and the
best interest of the corporation and all the stockholders require it.
As to the question on whether an insolvent may sell its property to one of its directors, the
Court answered: while a corporation remains solvent, we can see no reason why a director
or officer, by the authority of a majority of the stockholders or board of managers, may not
deal with the corporation, loan it money or buy property from it, in like manner as a stranger.
So long as a purely private corporation remains solvent, its directors are agents or trustees for
the stockholders. They owe no duties or obligations to others. But the moment such
corporation becomes insolvent, its directors are trustees of all the creditors, whether they are
members of the corporation or not, and must manage its property and assets with strict
regard to their interest and if they are themselves creditors while the insolvent corporation is
under the management, they will not be permitted to secure themselves by purchase the
corporate property or otherwise any personal advantage over the other creditors.
Nevertheless, a director or officer may in good faith and for adequate consideration purchase
from a majority of the directors/stockholders the property even of an insolvent corporation and
a sale this made to him is binding on the minority .
The directors in the case were put under the strictest scrutiny of the court and it was found
that they have acted with the utmost candor and fair dealing for the interest of the corporation
and without taint motives.
Duty of Obedience:

Executive Committee

Sec. 35. Executive committee. - The by-laws of a corporation may create an executive
committee, composed of not less than three members of the board, to be appointed by
the board. Said committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in the
by-laws or on a majority vote of the board, except with respect to: (1) approval of any
action for which shareholders' approval is also required; (2) the filing of vacancies in
the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4)
the amendment or repeal of any resolution of the board which by its express terms is
not so amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.

Meetings of Board of Directors or Trustees

Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members

may be regular or special. (n)

Sec. 53. Regular and special meetings of directors or trustees. - Regular meetings of
the board of directors or trustees of every corporation shall be held monthly, unless
the by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon the
call of the president or as provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or outside

of the Philippines, unless the by-laws provide otherwise. Notice of regular or special
meetings stating the date, time and place of the meeting must be sent to every director
or trustee at least one (1) day prior to the scheduled meeting, unless otherwise
provided by the by-laws. A director or trustee may waive this requirement, either
expressly or impliedly. (n)

Sec. 54. Who shall preside at meetings. - The president shall preside at all meetings of
the directors or trustee as well as of the stockholders or members, unless the by-laws
provide otherwise. (n)

Sec. 93. Place of meetings. - The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even outside the
place where the principal office of the corporation is located: Provided, That proper
notice is sent to all members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the Philippines. (n)

B. Officers

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. 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.

1. Definition

GURREA V LEZAMA –
WON a manager is an officer of a corporation? No
Held: He can be removed by a mere board resolution.

No provision in the Corporation Code or in the said corporation's by-laws states that a
manager is an officer. The power to appoint also authorizes the board the power to remove
any employee.

The only officers of a corporation are those given that character either by the Corporation Law
or by its by-laws. The rest can be considered merely as employees or subordinate officials. In
the case at bar; considering that plaintiff has been appointed manager by the board of
directors and as such does not have the character of an officer, the conclusion is inescapable
that he can be suspended or removed by said board of directors under such terms as it may
see fit and not as provided for in the by-laws. Evidently, the power to appoint carries with it the
power to remove, and it would be incongruous to hold that having been appointed by the
board of directors he could only be removed by the stockholders.

The fact that the "manager" of the corporation in the several statutes enacted by Congress is
held criminally liable for violation of any of the penal provisions therein prescribed does not
make him an "officer" of the corporation. This liability flows from the nature of his duties which
are delegated to him by the board of directors. He is paid for them. Hence, he has to answer
for them should he use it in violation of law.

Doctrine: Employee v Manager

"Officers Distinguished from Mere Employees.-As already stated, both officers and employees
are agents of the corporation and the difference between them is largely one of degree; the
officers are the most important employees exercising greater authority or power in the
management of the business. Ordinarily, too, the principal offices are designated by statute,
charter or by-law provisions, and specific duties are imposed upon certain officers. Thus the
state statute or a by-law may provide that stock certificates shall be signed by the president
and countersigned by the secretary or treasurer. The manager of a corporation is not
ordinarily classed as an officer, but his powers and influence may be quite as great as those
of any person in the organization."

One distinction between officers and agents of a corporation lies in the manner of their
creation. An officer is created by the charter of the corporation, and the office, is elected by
the directors or the stockholders. An agency is usually created by the officers, or one or more
of them, and the agent is appointed by the same authority. It is clear that the two terms
officers and agents are by no means interchangeable. One, deriving its existence from the
other, and being dependent upon that other for its continuation, is necessarily restricted in its
powers and duties, and such powers and duties are not necessarily the same as those
pertaining to the authority creating it. The officers, as such, are the corporation. An agent is an
employee. 'A mere employment, however liberally compensated, does not rise to the dignity
of an office.

One distinction between an officer and an agent suggested in Commonwealth vs. Christian, 9
Phila. (Pa.) 558, is that an officer of a corporation, if illegally excluded from his office, may by
mandamus compel the corporation to reinstate him; while an agent may be dismissed without
cause, and his only remedy would be compensation in damages.

DE TAVERA V TUBERCULOSIS SOCIETY- De Tavera was appointed as the Exec Sec.of the
TB society after Baklaw resign from the post. However, after a few months, the BOD decided
to replace her by appointing Romulo. DT now assails her removal. She contends that she
cannot be replaced by the board.

Issue: Won the board can replace DT?

Held: Yes. According to TB society by laws, she serves only at the pleasure of the BOD. The
board at any given time can replace her. The absence of a fixed term in the letter addressed
to petitioner informing her of her appointment as Executive Secretary is very significant. This
could have no other implication than that petitioner held an appointment at the pleasure of the
appointing power. An appointment held at the pleasure of the appointing power is in essence
temporary in nature. It is co-extensive with the desire of the Board of Directors. Hence, when
the Board opts to replace the incumbent, technically there is no removal but only an expiration
of term and in an expiration of term, there is no need of prior notice, due hearing or sufficient
grounds before the incumbent can be separated from office. The protection afforded by
Section 7.04 of the Code of By-Laws on Removal of Officers and Employees, therefore,
cannot be claimed by petitioner.

NACPIL V IBC - Petitioner states that he was Assistant General Manager for
Finance/Administration and Comptroller of private respondent Intercontinental Broadcasting
Corporation (IBC). When the new IBC president took over he removed Nacpil alleging that the
latter embezzled government funds. Nacpil filed an illegal dismissal complaint to the NLRC.
He alleged that he is not an officer and he should be considered as a mere employee.

Issue: Won Nacpil is an employee? NO. He is an officer.

Held: Petitioner's argument is untenable. Even assuming that he was in fact appointed by the
General Manager, such appointment was subsequently approved by the Board of Directors of
the IBC.11 That the position of Comptroller is not expressly mentioned among the officers of
the IBC in the By-Laws is of no moment, because the IBC's Board of Directors is empowered
under Section 25 of the Corporation Code12 and under the corporation's By-Laws to appoint
such other officers as it may deem necessary. The By-Laws of the IBC categorically provides:
OFFICERS
The officers of the corporation shall consist of a President, a Vice-President, a Secretary-
Treasurer, a General Manager, and such other officers as the Board of Directors may from
time to time does fit to provide for. Said officers shall be elected by majority vote of the Board
of Directors and shall have such powers and duties as shall hereinafter provide (Emphasis
supplied).13
The Court has held that in most cases the "by-laws may and usually do provide for such other
officers,"14 and that where a corporate office is not specifically indicated in the roster of
corporate offices in the by-laws of a corporation, the board of directors may also be
empowered under the by-laws to create additional officers as may be necessary.15
An "office" has been defined as a creation of the charter of a corporation, while an "officer" as
a person elected by the directors or stockholders. On the other hand, an "employee" occupies
no office and is generally employed not by action of the directors and stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to such
employee.16
As petitioner's appointment as comptroller required the approval and formal action of the
IBC's Board of Directors to become valid,17 it is clear therefore holds that petitioner is a
corporate officer whose dismissal may be the subject of a controversy cognizable by the SEC
under Section 5(c) of P.D. 902-A which includes controversies involving both election and
appointment of corporate directors, trustees, officers, and managers.18 Had petitioner been
an ordinary employee, such board action would not have been required.

2. General Rule

VICENTE V GERALDE - Hi Cement's Mining Project encroached on Vicente et al.'s property.

Both Parties tried to resolve the problem by entering into a compromise agreement. When the
commissioner issued the price list for the parcels of land, Hi cement did not concede.

Issue: WON HI cement lawyers have the power to bind the Corp in the said compromise
agreement? No

Held: Hi cement BOD was totally unaware of the proposed price agreement. It did not
authorize its lawyers to enter any compromise agreement. In fact, the lawyers themselves
manifested that the compromise agreement is subject to the board's approval.

Even though the assistant manager of HI Cement was part of the commission, his presence
doest not represent the board. He was not authorized to do so.

YAO KA SIN V CA - The president of the cement corporation (CC) wrote a letter to YKS
trader. It offered to sell 45T bags of cement. YKS accepted the offer. However, CC BOD
issued a board resolution revoking the offer. It sent a letter to YKS informing the later that they
will only deliver 10 T bags. YKS did not reply and accepted the delivery of the 10t bags. Now,
YKS filed a case against CC. It prayed for the delivery of 35t cement bags.

Issue: won the president CC can bind the corporation?

Held: No. According to the by-laws of CC, prior BOD approval is needed if the president will
transact any business in behalf of the corporation. Furthermore, the court scrutinized
previous CC business practice. Indeed, all of the previous prez's transaction was only done
after the BOD has approved of the same.

3. Exception
BOARD OF LIQUIDATORS V KALAW- supra

PRIME WHITE CEMENT V CA - Supra

WOODCHILD HOLDINGS V ROXAS ELECTRIC CONSTRUCTION - Roxas Electric and

Construction Company (RECCI) owned 2 parcels of land: Lots B-1 and B-2. RECCI Board of
Directors approved a resolution authorizing its President Roxas to sell B-2. Petitioner
Woodchild Holdings Inc. (WHI) wanted to buy land B-2 of RECCI, and, in addition, wanted a
right of way to Sumulong Highway and also to buy portions of land B-1 so that WHI's 45-ft
container van would be able to readily enter or leave the property. A Contract to Sell was
executed between WHI and RECCI, represented by its President Roxas, whereby RECCI
agreed to sell B-2 for a certain price, as well as give WHI a right of way and also sell to it
certain portions of B-1. Also in the Contract to Sell is the stipulation that RECCI agreed to
clear the property of squatters within two weeks from the signing thereof.

RECCO contracted with WBI construction company to construct a warehouse building in B-2.
RECCO has also executed a lease agreement with a leather goods company, whereby the
latter would lease a space in the warehouse building of the former. However, WBI failed to
construct the warehouse on time because the squatters were still not evicted by RECCI. The
squatters were later evicted, and the warehouse was constructed.

Later, WHI complained that RECCI vehicles were parked in the right of way that was
promised to WHI in their Contract to Sell. RECCI President Roxas promised to look into the
matter, but he soon after died. WHI wrote RECCI of its request to be granted a right of way
and to be granted its right to buy portions of B-1 as stated in the Contract to Sell. WHI also
complained about RECCI's failure to evict the squatters within the stipulated time. RECCI did
not respond. WHI files an action against RECCI for specific performance and damages.

RECCI's contention is that it never authorized its President Roxas to give WHI a right of way
nor to sell any portion of B-1. RECCI said that Roxas was authorized to sell only B-2.

WHI's contention is that there was an implied ratification of Roxas' actions on the part of the
Board of Directors of RECCI when the latter allowed Roxas to execute the Contract to Sell
(Deed of Absolute Sale) and received the purchase price in the said contract without any
objection to its terms and conditions.

Issue: WON RECCI is bound by its President Roxas' commitment in the Contract to Sell to
grant WHI a right of way and to sell to it portions of B-1

Held/Ratio: No. RECCI is not bound by Roxas' commitment in the Contract to Sell. Roxas
made those stipulations in the contract beyond the scope of the authority given to him by the
Board and are therefore unenforceable against RECCI.

It is clear that Roxas was not specifically authorized under the said resolution to grant a right
of way in favor of WHI nor to sell to it portions of B-1. Under the Civil Code, an SPA is
required to convey real rights over immovable property. There was no such authorization
here.

There is NO estoppel or ratification here. There is no estoppel because RECCI did not make
it appear as if Roxas had apparent authority to grant a right of way or to sell portions of B-1.
RECCI had no full knowledge of the terms and conditions of the contract. There is no
evidence to show that RECCI had knowledge of the representations of Roxas that he had
such authority. There is also no ratification here. The fact that RECCI accepted the purchase
price without any objection does not constitute ratification. RECCI had the right to retain the
purchase price given by WHI because it was the payment for the purchase of the land B-2.
RECCI, however, is obligated to pay damages to WHI because of the former's clear failure to
evict the squatters within two weeks as agreed upon which resulted in losses being incurred
by WHI.

FRANCISCO V GSIS - supra

NYCO SALES CORP V BA FINANCE - Nyco Sales Corporation whose President and
General Manager is Rufino Yao, is engaged in the business of selling construction materials
with principal office in Davao City.

Sometime in 1978, the brothers Santiago and Renato Fernandez, both acting in behalf of
Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested
Nyco, thru Yao, to grant Sanshell discounting privileges which Nyco had with BA Finance
Corporation.

Yao apparently acquiesced, hence on or about 15 November 1978, the Fernandezes went to
Yao for the purpose of discounting Sanshell's post-dated check which was a BPI-Davao
Branch Check 499648 dated 17 February 1979 for the amount of P60,000.00. The said check
was payable to Nyco.

Following the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor
of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in
favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the
exchange of checks was a Deed of Assignment executed by Nyco in favor of BA Finance with
the conformity of Sanshell. Nyco was represented by Rufino Yao, while Sanshell was
represented by the Fernandez brothers.

Under the said Deed, the subject of the discounting was the aforecited check. At the back
thereof and of every deed of assignment was the Continuing Suretyship Agreement whereby
the Fernandezes unconditionally guaranteed to BA Finance the full, faithful and prompt
payment and discharge of any and all indebtedness of Nyco.

The BPI check, however, was dishonored by the drawee bank upon presentment for payment.
BA Finance immediately reported the matter to the Fernandezes who thereupon issued a
substitute check dated 19 February 1979 for the same amount in favor of BA Finance. It was
a Security Bank and Trust Company check bearing the number 183157, which was again
dishonored when it was presented for payment. Despite repeated demands, Nyco and the
Fernandezes failed to settle the obligation with BA Finance, thus prompting the latter to
institute an action in court.

Nyco and the Fernandezes, despite having been served with summons and copies of the
complaint, failed to file their answer and were consequently declared in default. On 16 May
1980, the lower court ruled in favor of BA Finance ordering them to pay the former jointly and
severally, the sum of P65,536.67 plus 14% interest per annum from 1 July 1979 and
attorney's fees in the amount of P3,000.00 as well as the costs of suit.

Nyco, however, moved to set aside the order of default, to have its answer admitted and to be
able to implead Sanshell. The prayer was granted through an order dated 23 June 1980,
wherein the decision of the court was set aside only as regards Nyco. Trial ensued once more
until the court reached a second decision, ordering Nyco to pay BA Finance P60,000.00 as
principal obligation, plus interest thereon at the rate of 14% per annum from 1 February 1979
until fully paid; the amount of P10,000.00 as and for attorney's fees; and one-third (1/3) of the
costs of the suit.

With respect to the Fernandezes, the decision of 16 May 1980 stood. On appeal, the
appellate court also upheld BA Finance but modified the lower court's decision by ordering
that the interest should run from 19 February 1979 until paid and not from 1 February 1979.
Nyco's subsequent motion for reconsideration was denied. Nyco filed the petition for review
on certiorari.

Issue: WON Nyco was actually discharged of its liability over the SBTC check when BA
Finance failed to give it a notice of dishonor

Held/Ratio: No. Nyco's pretension that it had not been notified of the fact of dishonor is belied
not only by the formal demand letter but also by the findings of the trial court that Rufino Yao
of Nyco and the Fernandez Brothers of Sanshell had frequent contacts before, during and
after the dishonor. More importantly, it fails to realize that for as long as the credit remains
outstanding, it shall continue to be liable to BA Finance as its assignor. The dishonor of an
assigned check simply stresses its liability and the failure to give a notice of dishonor will not
discharge it from such liability. This is because the cause of action stems from the breach of
the warranties embodied in the Deed of Assignment, and not from the dishonoring of the
check alone.

4. Liabilities

VAZQUEZ V BORJA - Respondent Vazquez was the Acting Manager of the Natividad-
Vazquez Sabani Development Corp (the Corporation) at the time the said corporation entered
into a contract with Petitioner Borja, whereby the said corporation obligated itself to sell and
deliver to Petitioner Borja 4,000 cavans of palay.

The corporation, however, delivered only 2,488 cavans and failed to deliver the balance. In
addition, Borja sent 4,000 empty sacks to the corporation (where the palays were supposed
to be stored in contemplation of delivery) but only 2,490 sacks were returned to Borja. The
corporation failed to deliver the balance.

Thus, Petitioner Borja filed an action against then Acting Manager Vazquez. The defense of
Vazquez was that he entered into the contract not in his own personal capacity, but in
representation of his corporation, and that thus he should not be held personally liable for the
amount and damages. Vazquez filed a counterclaim for damages he suffered due to this
action which was filed against him.

Issue: WON Vazquez is personally liable for the obligation

Held/Ratio: No. Vazquez is not personally liable for the obligation and for damages.

The CA correctly held that Vazquez entered into the contract not in his personal capacity, but
in his capacity as the Acting Manager of his corporation. Thus, it is the corporation which must
be liable for the amount. Following the Corporation Code, a corporation has a personality that
is separate and distinct from its officers and agents. There is no reason to pierce the
corporate veil here. There is no reason to hold Vazquez liable for the contract.

Vazquez counterclaim for damages, however, cannot stand and must fail. There is no
sufficient basis for it. In fact, it was Vazquez moral duty to have seen to it that his corporation
acted pursuant to its obligation in its contract. Vazquez has no legitimate cause for
indignation.

PALAY V CLAVE - Palay, Inc., through its President, Albert Onstott, sold to Nazario Dumpit, a
parcel of land it owned. The contract provided for automatic extrajudicial rescission upon
default in payment of any instalment.

Dumpit paid the downpayment and several installments. But almost (6) years later, Dumpit
was informed that his Contract to Sell had long been rescinded because of failure to complete
installments, and that the lot had already been resold.
Dumpit filed a complaint with the NHA for reconveyance with an alternative prayer for refund.
NHA found the rescission of the contract void in the absence of either judicial or notarial
demand. It ordered Palay, Inc. and Alberto Onstott, in his capacity as President of the
corporation, jointly and severally, to refund to Nazario Dumpit the installment payments. Office
of the President affirmed the Resolution of the NHA.

SC held that the rescission of the contract was ineffective against Dumpit for lack of notice of
cancellation to him. Dumpit had not waived his right to be notified under the contract because
it was a contract of adhesion. A waiver must be certain and unequivocal. Rights to the lot
should be restored to Dumpit. However, considering that the property had already been sold
to a third person, Dumpit is entitled to the refund of installments paid plus interest.

Issue: WON the officers are solidarily liable for the refund of the installment payments.

Held/Ratio: No. A corporation is invested by law with a personality separate and distinct from
those of the persons composing it. The veil of corporate fiction may not be pierced because
there are no badges of fraud on the part of the corporation's officers. They had literally relied,
albeit mistakenly, the contract when it rescinded the contract to sell extrajudicially and had
sold it to a third person.

Onstott was made liable because he was then the President of the corporation and he
appeared to be the controlling stockholder. No sufficient proof exists on record that he used
the corporation to defraud Dumpit. He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder." Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate personality.

Doctrine
1. General Rule: An officer may not be held liable for an act by the corporation which
injured a third person.
2. Exception: When the officer acted in perpetuation of a fraud.

TRAMAT MERCANTILE V CA - Melchor de la Cuesta, doing business under the name and
style of "Farmers Machineries," sold to Tramat Mercantile, Inc. a diesel engine tractor.

In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00
(apparently replacing an earlier postdated check for P33,080.00).

Tramat, in turn, sold the tractor, together with an attached lawn mower copied by it, to the
MWSS for P67,000.00.

David Ong caused a stop payment of the check when MWSS refused to pay the tractor and
lawn mower after discovering that, aside from some stated defects of the attached lawn
mower, the engine (sold by de la Cuesta) was a reconditioned unit.

De la Cuesta filed an action against Tramat and Ong for the recovery of P33,500.00, as well
as attorney's fees, and the costs of suit.

RTC ordered Tramat and Ong, jointly and severally, to pay de la Cuesta. CA affirmed.

Issues:
1. WON TRAMAT Inc. is liable to pay de la Cuesta
2. WON Ong is solidarily liable with TRAMAT Inc as its President & Manager

Held/Ratio:
1. YES. The perfection of the sale was not dependent on the acceptance by the MWSS
of the tractor. Long after MWSS had complained about the defective tractor engine,
 Tramat still drew a replacement check to de la Cuesta for the increased amount
P33,500.00 (in lieu of the first check amounting to P33,080.00). Tramat avers that the
increase in the amount represented the freight charges but did not explain why it
failed to include the freight charges in the first check.

De la Cuesta is not liable for the tractor's alleged hidden defects. At the time of the
purchase, Tramat did not reveal to dela Cuesta the true purpose for which the tractor
would be used. To satisfy the requirements of the MWSS, Tramat borrowed a lawn mower
from the MWSS so it could copy such mower. There is no showing that Tramat had had
any previous experience in the fabrication of this Iawn mower. The mower might have
proved too much for the tractor to power, causing it to overheat and damage its gaskets.

1. No.

Ong acted, not in his personal capacity, but as an officer of a corporation; TRAMAT has a
distinct and separate personality. It should only be the corporation, not the person acting
for and on its behalf, that could be made liable thereon.

Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, only when:

1. He assents
a. To a patently unlawful act of the corporation, or
b. For bad faith gross negligence in directing its affairs, or
c. For conflict of interest, resulting in damages to the corporation, its stockholders or
other persons.
2. He consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate
action.

PEOPLE'S AIRCARGO v CA - PEOPLE'S AIRCARGO is a domestic corporation, w/c

operates a customs bonded warehouse at the old Manila International Airport. To obtain a
license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the
corporation president, solicited a proposal from STEFANI SAÑO for the preparation of a
feasibility study. SAÑO submitted a letter-proposal to Punsalan, asking for a fee of
P350,000.

Aircargo, through Punsalan, sent SAÑO a letter, confirming their agreement. No BOD
resolution authorized Punsalan to do so. SAÑO prepared a feasibility study for Aircargo
which eventually paid him the balance of the contract price.Upon Punsalan's request,
SAÑO sent Aircargo another letter-proposal. The lower right portion of the letter bore an
annotation in pencil, specifying that in exchange for P400,000, SAÑO will provide
Aircargo with an Operations Manual and conduct a seminar for Aircargo's employees.
Punsalan, again, without BOD authority, accepted the 2nd proposal.

Andy Villaceren, vice president of Aircargo, received the operations manual prepared by
SAÑO which Aircargo submitted to the Bureau of Customs; thereafter, it was issued a
license to operate. SAÑO also conducted a seminar for Aircargo's employees.SAÑO
demanded payment from Aircargo for the manual & the seminar. It refused to pay. SAÑO
filed a collection suit against it.

Aircargo argues that a single isolated agreement prior to the 2nd contract does not constitute
corporate practice, which Webster defines as "frequent or customary action." It cites Board of
Liquidators vs. Kalaw, in which the practice of NACOCO allowing its general manager to
negotiate and execute contract in its copra trading activities for and on its behalf, without prior
board approval, was inferred from sixty contracts - not one, as in the present
case—previously entered into by the corporation without such board resolution.

Issues:
1. WON the 2nd letter-agreement for services was binding on the corporation
notwithstanding the lack of any board authority/ WON the president of the petitioner-
corporation had apparent authority to bind petitioner to the 2nd Contract;

1. WON the said contract was valid and not merely simulated.

Held:
1. YES. Contracts entered into by a corporate president without express prior board
approval bind the corporation, when such officer's apparent authority is established
and when these contracts are ratified by the corporation.

Apparent authority is derived not merely from practice. Its existence may be ascertained
through:
1. the general manner in which the corporation holds out an officer or agent as having
the power to act or, in other words, the apparent authority to act in general, with
which it clothes him; or
2. the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether 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.

Aircargo, through its President Antonio Punsalan Jr., entered into the 1st Contract without
first securing board approval. Despite such lack of board approval, Aircargo did not object
to or repudiate said contract, thus "clothing" its president with the power to bind the
corporation.

The grant of apparent authority to Punsalan is evident in the testimony of Yong —SVP,
Treasurer and major stockholder of petitioner. Initially, Yong objected to SAÑO's offer, as
another company priced a similar proposal at only P15,000. However, Punsalan preferred
SAÑO 's services because of the latter's membership in the task force, supervising the
transition of the Bureau of Customs from the Marcos government to the Aquino
administration. Aircargo went ahead with Punsalan's decision and the 1st Contract was
consummated and paid without a hitch.

Hence, SAÑO should not be faulted for believing that Punsalan's conformity to the
contract in dispute was also binding on Aircargo. If a corporation knowingly permits one of
its officers, or any other agent, to act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do those acts; and thus, the corporation
will, as against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority.

Aircargo accepted the operations manual, submitted it to the Bureau of Customs and
allowed the seminar for its employees. As a result Aircargo was licensed to operate a
bonded warehouse. Granting arguendo then that the Second Contract was outside the
usual powers of the president, Aircargo's ratification of said contract and acceptance of
benefits have made it binding, nonetheless. The enforceability of contracts under Article
1403(2) is ratified "by the acceptance of benefits under them" under Article 1405.

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. 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.

The president of a corporation possesses the power to enter into a contract for the
corporation, when the "conduct on the part of both the president and the corporation
[shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized,
approved and ratified his former and similar actions." Furthermore, a party dealing with
the president of a corporation is entitled to assume that he has the authority to enter, on
behalf of the corporation, into contracts that are within the scope of the powers of said
corporation and that do not violate any statute or rule on public policy.

1. No. The alleged "badges of fraud" have not affected in any manner the perfection of
the 2nd Contract or proved the alleged simulation thereof:

1. The lack of payment even after completion of SANO's obligations, imports only a
defect in the performance of the contract on the part of petitioner.
2. The delay in the filing of action was not fatal to sanos cause. Despite the lapse of one
year after private respondent completed his services or eight months after the alleged
last demand for payment in June 1987, the action was still filed within the allowable
period, considering that an action based on a written contract prescribes only after
ten years from the time the right of action accrues.
3. A misspelling in the contract does not establish vitiation of consent, cause or object of
the contract.
4. A confirmation letter is not an essential element of a contract; neither is it necessary
to perfect one.
5. Failure to implead the corporate president does not establish collusion between
them. Aircargo could have easily filed a third-party claim against Punsalan if it
believed that it had recourse against the latter.
6. The mere fact that the contract price was six times the alleged going rate does not
invalidate it.

A corporation, by accepting benefits of a transaction entered into without authority, has ratified
the agreement and is, therefore, bound by it

Doctrine: If a corporation knowingly permits one of its officers, or any other agent, to act within
the scope of an apparent authority, it holds him out to the public as possessing the power to
do those acts; and thus, the corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agent's authority.

RURAL BANK OF MILAOR v OCFEMIA - Marife O. Nino (respondent), is the daughter of

Francisca Ocfemia, a co-[respondent] in this case, and the late Renato Ocfemia who died on
July 23, 1994. The parents of her father, Renato Ocfemia, were Juanita Arellano Ocfemia and
Felicisimo Ocfemia.

Marife O. Niño knows the five (5) parcels of land described in paragraph 6 of the petition
which are located in Bombon, Camarines Sur and that they are the ones possessing them
which [were] originally owned by her grandparents, Juanita Arellano Ocfemia and Felicisimo
Ocfemia.

During the lifetime of her grandparents, [respondents] mortgaged the said five (5) parcels of
land and two (2) others to the [petitioner] Rural Bank of Milaor as shown by the Deed of Real
Estate Mortgage (Exhs. A and A-1) and the Promissory Note (Exh. B).

For failure to pay, the mortgage was foreclosed. Out of the seven (7) parcels that were
foreclosed, five (5) of them are in the possession of the [respondents] because these five (5)
parcels of land described in paragraph 6 of the petition were sold by the [petitioner] bank to
the parents of Marife O. Niño as evidenced by a Deed of Sale executed in January 1988.

However, the title to the said 5 parcels of land could not be transferred in the name of Marife's
parents because the sale was not recorded in the Registry of Deeds.

Marife went to the Register of Deeds of Camarines Sur. She was told that for the sale to be
registered, she had to present the Board Resolution from the Bank.

She went to the Bank to ask for a Board Resolution (the Bank Manager was a certain Fe S.
Tena), but she was given a lot of alibis.

She was told that the bank had a new manager and it had no record of the sale. She was
asked and she complied with the request for a copy of the deed of sale and receipt of
payment. The president of the bank told her to get an authority from her parents and other
[respondents] and receipts evidencing payment of the consideration appearing in the deed of
sale. She complied with said requirements and after she gave all these documents, Marife O.
Niño was again told to wait for two (2) weeks because the [petitioner] bank would still study
the matter.
After several weeks, the Bank told her that the Board Resolution could not be issued because
the Bank had no records of the said sale Marife brought this action for mandamus with
damages.

Issue: May the board of directors of a rural banking corporation be compelled to confirm a
deed of absolute sale of real property owned by the corporation which deed of sale was
executed by the bank manager without prior authority of the board of directors of the rural
banking corporation?

Held: Yes. When a bank, by its acts and failure to act, has clearly clothed its manager with
apparent authority to sell an acquired asset in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board resolution to enable the buyers to
register the property in their names.

In the present case, the Bank failed to specifically deny under oath the genuineness and due
execution of the deed of sale, hence such contract is deemed admitted to be true.
In any event, the bank acknowledged, by its own acts or failure to act, the authority of Fe S.
Tena to enter into binding contracts. After the execution of the Deed of Sale, respondents
occupied the properties in dispute and paid the real estate taxes due thereon. If the bank
management believed that it had title to the property, it should have taken some measures to
prevent the infringement or invasion of its title thereto and possession thereof.
Likewise, Tena had previously transacted business on behalf of the bank, and the latter had
acknowledged her authority. A bank is liable to innocent third persons where representation is
made in the course of its normal business by an agent like Manager Tena, even though such
agent is abusing her authority. Clearly, persons dealing with her could not be blamed for
believing that she was authorized to transact business for and on behalf of the bank.

Doctrine: When a bank, by its acts and failure to act, has clearly clothed its manager with
apparent authority to sell an acquired asset in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board resolution to enable the buyers to
register the property in their names. It has a duty to perform necessary and lawful acts to
enable the other parties to enjoy all benefits of the contract which it had authorized.

C. Stockholders or Members

1. Subscription to shares
Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that the parties
refer to it as a purchase or some other contract. (n)

Nature of Subscription Contract

 Underpins the relationship between the SH and the corporation

 72: holders of subscribed shares not fully paid which are not delinquent shall have
ALL the rights of a SH
o it is the subscription to shares, and not the payment, that create the legal
relationship between the SH and the corporation (Fua Cun case infra)
o full payment of the subscription value and/or issuance of the covering certificates
are not important ingredients for transfer of ownership (72)
o registration of the subscription is also not essential to constitute subscription and
issuance of shares; it is merely meant to govern the binding effects of sale and
dispositions of shares as to third persons (63)
 two ways to become a SH:
o by subscription to shares before or after incorporation
o by acquisition of already issued shares from an existing SH
 Def'n of subscription: a contract for the acquisition of unissued stock of a
corporation whether existing or still to be formed
o subscription price need not be paid in full at the time of the contract
o once perfected, SH becomes a debtor to the corporation and may be liable to pay
any unpaid portion upon call by the board
 no interest unless by-laws provide
 SH personally liable for the financial obligations of the corporation to the
extent of his unpaid portion
 When shares deemed subscribed
o 60: any contract for the acquisition of unissued stock in an existing corporation or
one still to be formed shall be deemed a subscription agreement
 even if the parties refer to it as some other contract
o The entering into any contract for the acquisition of UNISSUED stock, which shall
be deemed as a subscription agreement, would itself constitute the tradition by
which the subscriber becomes a SH of the corporation and through which he
becomes the owner of the shares and thus exercise acts of ownership
 A subscription agreement constitutes the very mode by which shares are
thereby issued and then owned
 It exists upon the meeting of the minds of the corporation and the subscriber
as to the number and value of the subscription of shares
 The covered shares would then be deemed issued by the corporation at that
point in time
 The sale of unissued shares of stock may be treated wholly as a sale of
shares governed by the law on sales
 The entire shareholdings of a SH, even when not fully paid for, belong in
ownership to him with legal authority to sell or mortgage the same
 Is a valid subscription agreement enforceable even when it is not reduced in writing?
yes! Corporation can adduce oral evidence on a verbal agreement

Characteristics of Subscription agreements

 There can be a subscription only with reference to UNISSUED shares of stock

o Original issuance from authorized stock at the time of incorporation
o Opening of a portion of the original but unissued authorized capital stock to
subscription
o Increase of authorized capital stock through formal amendment of the AOI and
approval of the SEC
  On ISSUED shares: any transaction thereon is NOT a subscription agreement, and is
therefore governed by the Law on Sales
 60: agreements for the acquisition of unissued shares shall be deemed a subscription
agreement
o affords protection to corporate creditors so that any and all transactions relating
to the issuance of shares of stock is a subscription agreement
o in case of insolvency, corporate creditors may enforce even against one
denominated as a purchaser
 Stipulations in subscription agreements of unissued shares that the subscriber's right
to be treated as a SH and enjoy the rights thereof would commence upon full
payment of the subscription would be VOID
o Affects the ability or liability of the subscription agreement
o Agreement will not be treated as a sale of shares; falls under Sec 60
 It is only when delinquency is declared that would deprive the subscriber the rights of
a SH

Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a stockholder. (n)

1. Pre-Emptive Right

 Preemptive right: option privilege of an existing SH to subscribe to a proportionate

part of shares subsequently issued by the corporation before the same can be
disposed in favor of others
o Common-law right granted to SHs of a corporation to be granted the first option to
subscribe to any opening of the unissued capital stock, or to any increase from
the authorized capital stock
 Economic aspect: right to invest capital—the right becomes valuable when the
enterprise has demonstrated that it will earn a higher rate of return on the capital than
the SH could get were he to invest it in the open market
 Limited to shares issued in pursuance of an increase in the authorized capital stock;
does not apply to additional issues of originally authorized shares forming part of the
existing capital stock
 An original subscriber is deemed to have taken his shares knowing that they form a
definite proportionate part of the whole number of authorized shares
 When unsubscribed shares are later reoffered, the SH cannot claim that his interest
would be diluted
 Preemptive rights are not statutory rights, but common law rights
 Preemptive rights are personal rights of the SH
o Need not be stipulated in the AOI or by-laws
o May be removed, denied, or altered only through specific provisions in the AOI or
amendment thereto
o SEC: vote by majority of SHs to waive the right is NULL and VOID; such waiver
must be given individually by the SHs concerned
 But unanimous vote of all will bind them

1. Extent and limitations of preemptive right under Code

Sec 39: all SHs of a stock corporation shall enjoy pre-emptive rights to subscribe to all issues
and dispositions of shares of any class, in proportion to their respective shareholdings
 Exceptions:
o If denied by the AOI or an amendment thereto
o On shares issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public
o On shares to be issued in GF, approved by at least 2/3 OCS in exchange for
property for corporate purposes
 o On shares to be issued in GF, approved by at least 2/3 OCS, in payment of a
previously contracted debt

Coverage of preemptive right…

 All issues or disposition of shares of any class
 Includes issues from the existing unsubscribed portion of authorized capital stock
 Includes not only new shares but also previously unissued shares which form part of
the existing authorized capital stock
 Includes reissuance and sale treasury shares
 SEC: does not include subscription deposits; these are payments received for the
future issuance of stock which may or may not materialize

… except…
 When shares are issued in exchange for property needed for corporate purposes, or
for a debt previously contracted, the SH cannot demand his preemptive right
 Where all shares are issued by a corporation in exchange for shares in another
corporation (merger), the preemptive right does not exist, provided the issue is made
with approval of 2/3 SHs (Thom case)
 In widely held corporations, where future financing plans may be seriously hindered
by the existence of the preemptive right
 Code allows waiver or denial provided it is in the AOI, either as an original provision
or as an amendment

Effects of exercise and waiver of preemptive right

 Exercising SHs still retain their relative and proportionate voting strength, which will
not be affected thereby
 Waiving SHs' shares may be offered to non-SHs of record on a first-come-first-served
basis
o Not necessary that the shares will again be offered on a pro-rata basis to SHs
who availed of the right

1. In close corporations

 Balance of power in close corporations may be disturbed by an indiscriminate

issuance of new shares without regard to preemptive right of SHs
 In a close corp, exceptions in Sec 39 are not applicable

Sec 102

1. Waiver of preemptive right

 GR: Any prior waiver or denial should appear in the AOI

o Ordinary waiver agreement is not sufficient
 Exception: If all existing SHs unanimously agree to a waiver, although not in the AOI,
they will be bound by such agreement

1. Watered Stock

Sec. 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its par
or issued value or for a consideration in any form other than cash, valued in excess of
its fair value, or who, having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation and its creditors for the
difference between the fair value received at the time of issuance of the stock and the
par or issued value of the same. (n)
Liability on watered stock

 Watered Stocks: Shares issued as fully paid when in truth no consideration is paid, or
the the consideration received is known to be less than the par value or issued value
of the shares
o Includes bonus shares and discount shares issued at a discount or under an
agreement to pay less than par value in money
o Shares issued as fully paid up but no consideration is actually paid in form or
consideration is inadequate because it is not equal to the par or issued value, the
SH is liable to the corporation and its creditors for the unpaid portion
o Shares issued as fully paid up in consideration of property at an overvaluation

 Stock watering prohibited because:

o Corporation is deprived of needed capital and the opportunity to market its
securities to its own advantage
o Existing and future SHs who are also injured by the dilution of their proportionate
interests in the corporation
o Present and future creditors who are injured as the corporation is deprived of the
assets or capital and reduces the value of the corporate assets which stand as a
substitute for the SHs personal liability to them
o Persons who deal with it or purchase its securities who are deceived because
stock watering is invariable accompanied with misleading corporate accounts and
financial statements
 Code makes directors liable for watered stocks under Sec 65
o If he consents to the issuance, or…
o … having knowledge thereof, does not forthwith express his objection in writing
and file it with the corporate secretary
 directors become solidarily liable
 liability will be to ALL directors, whether they became such prior or
subsequent to the issuance of watered stock
 reliance of the creditors is immaterial and fraud is not an element of liability
 even no-par stocks can be watered stocks where they are issued for less
than their issued value
 Three theories for the liability
o Subscription contract theory—the subscription contract is the source and
measure of the duty of a subscriber to pay for his shares; if the contract releases
him from further liability, the subscriber ceases to be liable
 Prohibited in RP jurisdiction
o Fraud or misrepresentation theory—holds a SH liable for watered stock on the
basis of tort or misrepresentation. The wrong done to the creditor is fraud or
deceit in falsely representing that the par value has been paid or agreed to be
paid in full
o Trust fund doctrine—all corporate creditors would have legal basis to recover
against SHs and guilty officers
 Prevailing view in RP

1. Consideration

Sec. 62. Considering for stocks. - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
 4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.

Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.

The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or
by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly
called for the purpose. (5 and 16)

1. Trust Fund Doctrine

Trust Fund doctrine – corporate theory which seeks to protect the interest of corporate
creditors

o Capital stock of the corporation, especially its unpaid subscription, is a trust fund
for the benefit of the general creditors of the corporation
o When a corporation is solvent, the theory that its capital stock is a trust fund upon
which there is any lien for the payment of its debts has in fact, very little
foundation.
o No general creditor has any lien upon the fund under such circumstances, and
the right of the corporation to deal with its property is absolute so long as it does
not violate its charter or the applicable law.
 Proper scope of the doctrine is that capital stock of a corporation (insolvent), as well
as all its other property and assets are generally regarded in equity as a trust fund for
the payment of corporate debts
 In RP jurisdiction trust fund doctrine applies in four cases:
i. Where the corporation has distributed its capital among the SHs, without
providing for the payment of creditors
ii. Where it had released the subscribers to the capital stock from their
subscriptions
iii. Where it has transferred the corporate property in fraud of creditors
iv. Where the corporation is insolvent
 The doctrine as applied to a corporation not insolvent, would only be up to the extent
of the capital stock of the corporation
o Retained earnings not covered since it does not constitute capital stock
o Thus corporations are at liberty to declare and pay out its assets by way of
dividends up to the extent of its unrestricted retained earnings

NTC v CA - Sometime in 1988, the National Telecommunications Commission (NTC) served

on the Philippine Long Distance Telephone Company (PLDT) assessment notices and
demands for payment for: supervision and regulation fees, and permit fees for the approval of
PLDT's increase of its authorized capital stock.

In two letter-protests, PLDT challenged the said assessments, claiming that: The
assessments were being made to raise revenues and not as mere reimbursements for actual
regulatory expenses in violation of the doctrine in PLDT vs. PSC; The assessment under
Section 40 (e) of the PSA should only have been on the basis of the par values of private
respondent's outstanding capital stock; Petitioner has no authority to compel private
respondents payment of the assessed fees under Section 40 (f) for the increase of its
authorized capital stock since petitioner did not render any supervisory or regulatory activity
and incurred no expenses in relation thereto.

The NTC denied the protest of PLDT. On appeal to the CA, the CA modified the NTC's
decision with regard to the proper computation of the fees to be paid by PLDT.

NTC moved for the reconsideration, which the NTC denied.

Issue: WON the CA erred in holding that the computation of supervision and regulation fees
under section 40 (f) of the public service act should be based on the par value of the
subscribed capital stock.

*note: NTC contends that the fee under Section 40 (e) should be based on the market value
of PLDT's outstanding capital stock inclusive of stock dividends and premium, and not on the
par value of PLDT's capital stock excluding stock dividends and premium, as contended by
PLDT.
Held: Succinct and clear is the ruling of this Court in the case of Philippine Long Distance
Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for
computation of the fee to be charged by NTC on PLDT, is " the capital stock subscribed or
paid and not, alternatively, the property and equipment."
The fee in question is based on the capital stock subscribed or paid, nothing less nothing
more.
The term "capital" and other terms used to describe the capital structure of a corporation are
of universal acceptance, and their usages have long been established in jurisprudence.
Briefly, capital refers to the value of the property or assets of a corporation. The capital
subscribed is the total amount of the capital that persons (subscribers or shareholders) have
agreed to take and pay for, which need not necessarily be, and can be more than, the par
value of the shares. In fine, it is the amount that the corporation receives, inclusive of the
premiums if any, in consideration of the original issuance of the shares.

In the case of stock dividends, it is the amount that the corporation transfers from its surplus
profit account to its capital account. It is the same amount that can loosely be termed as the
"trust fund" of the corporation.
The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of
the debts of the corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be returned or released to
the stockholder (except in the redemption of redeemable shares) without violating this
principle. Thus, dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own shares
using the subscribed capital as the consideration therefor.
The SC upheld the CA's decision and ordered a re-computation.
PHILIPPINE TRUST CO v RIVERA - In 1918 the Cooperativa Naval Filipina was duly
incorporated under the laws of the Philippine Islands, with a capital of P100,000, divided into
one thousand shares of a par value of P100 each. Among the incorporators of this company
was numbered the defendant Mariano Rivera, who subscribed for 450 shares representing a
value of P45,000, the remainder of the stock being taken by other persons.

In the course of time the company became insolvent and went into the hands of the Philippine
Trust Company, as assignee in bankruptcy.

Hence, this action was instituted on November 21, 1921, in the Court of First Instance of
Manila, by the Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval
Filipina, against Marciano Rivera, for the purpose of recovering a balance of P22,500, alleged
to be due upon defendant's subscription to the capital stock of said insolvent corporation.
The reason given for the failure of the defendant to pay the entire subscription is, that not long
after the Cooperativa Naval Filipina had been incorporated, a meeting of its stockholders
occurred, at which a resolution was adopted to the effect that the capital should be reduced
by 50 per centum and the subscribers released from the obligation to pay any unpaid balance
of their subscription in excess of 50 per centum of the same.

As a result of this resolution it seems to have been supposed that the subscription of the
various shareholders had been cancelled to the extent stated; and fully paid certificate were
issued to each shareholders for one-half of his subscription. It does not appear that the
formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as amended,
relative to the reduction of capital stock in corporations were observed, and in particular it
does not appear that any certificate was at any time filed in the Bureau of Commerce and
Industry, showing such reduction.
The trial judge held that the resolution relied upon by the defendant was without effect and
that the defendant was liable for the amount sued upon.

Issue: WON the resolution reducing the capital by 50% is valid

Held: No. It is established doctrine that subscription to the capital of a corporation constitute a
find 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.

A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only in the manner an under
the conditions prescribed by the statute or the charter or the articles of incorporation.
(Doctrine)

In the case before us the resolution releasing the shareholders from their obligation to pay 50
per centum of their respective subscriptions was an attempted withdrawal of so much capital
from the fund upon which the company's creditors were entitled ultimately to rely and, having
been effected

ONG YONG v TIU – supra

In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development Corporation
(FLADC), which was owned by the Tius, encountered dire financial difficulties. It was heavily
indebted to the Philippine National Bank (PNB) for P190 million.

To stave off foreclosure of the mortgage on the two lots where the mall was being built, the
Tius invited the Ongs to invest in FLADC.

Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to
maintain equal shareholdings in FLADC: The Ongs were to subscribe to 1,000,000 shares at
a par value of P100.00 each, while the Tius were to subscribe to an additional 549,800 shares
at P100.00 each in addition to their already existing subscription of 450,200 shares.

Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of
stock while the Tius committed to contribute to FLADC a four-storey building and two parcels
of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000
shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock
subscription therein.

The Ongs paid in another P70 million3 to FLADC and P20 million to the Tius over and above
their P100 million investment, the total sum of which (P190 million) was used to settle the
P190 million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived
because the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement.

The Tius accused the Ongs of: refusing to credit to the the FLADC shares covering their real
property contributions; preventing David S. Tiu and Cely Y. Tiu from assuming the positions of
and performing their duties as Vice-President and Treasurer, respectively, and; refusing to
give them the office spaces agreed upon.

In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the
positions of Vice-President and Treasurer of FLADC but that it was they who refused to
comply with the corporate duties assigned to them. It was the contention of the Ongs that they
wanted the Tius to sign the checks of the corporation and undertake their management duties
but that the Tius shied away from helping them manage the corporation.

On the most important issue of their alleged failure to credit the Tius with the FLADC shares
commensurate to the Tius' property contributions, the Ongs asserted that, although the Tius
executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the
Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without the
payment thereof, the SEC would not approve the valuation of the Tius' property contribution
(as opposed to cash contribution). This, in turn, would make it impossible to secure a new
Transfer Certificate of Title (TCT) over the property in FLADC's name. In any event, it was
easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued in
FLADC's name, they could then be given the corresponding shares of stocks. On the 151
square-meter property, the Tius never executed a deed of assignment in favor of FLADC.

The controversy finally came to a head when this case was commenced4 by the Tius on
February 27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation
of their rescission of the Pre-Subscription Agreement.

DECISION HISTORY
1. SEC Hearing Officer ( confirmed the rescission sought by the Tius.
2. SEC En Banc ( confirmed the rescission of the Pre-Subscription Agreement but
reverted to classifying the P70 million paid by the Ongs as premium on capital and
not as a loan or advance to FLADC, hence, not entitled to earn interest.
3. CA ( affirmed SEC en banc with modifications

Issue: WON the Tius could legally rescind the Pre-Subscription Agreement

Held: NO. FLADC was originally incorporated with an authorized capital stock of 500,000
shares with the Tius owning 450,200 shares representing the paid-up capital. When the Tius
invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital
stock became necessary to give each group equal (50-50) shareholdings as agreed upon in
the Pre-Subscription Agreement. The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing
to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares
to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000
unissued shares of FLADC stock allocated to the Ongs.

Since these were unissued shares, the parties' Pre-Subscription Agreement was in fact a
subscription contract as defined under Section 60, Title VII of the Corporation Code.

Granting but not conceding that the Tius possess the legal standing to sue for rescission
based on breach of contract, said action will nevertheless still not prosper since rescission will
violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and
property under the Corporation Code.
Discussion of the Trust Fund Doctrine in the Case:
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust
Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine
is the underlying principle in the procedure for the distribution of capital assets, embodied in
the Corporation Code, which allows the distribution of corporate capital only in three
instances:
1. Amendment of the Articles of Incorporation to reduce the authorized
capital stock;
2. Purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings; and
3. Dissolution and eventual liquidation of the corporation.

Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire

its own shares and in Section 122 on the prohibition against the distribution of corporate
assets and property unless the stringent requirements therefor are complied with.

The distribution of corporate assets and property cannot be made to depend on the whims
and caprices of the stockholders, officers or directors of the corporation, or even, for that
matter, on the earnest desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for the protection of corporate
creditors are followed. Otherwise, the "corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors' turn to engage in
"squabbles and litigations" should the court order an unlawful distribution in blatant disregard
of the Trust Fund Doctrine.

In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in
the unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription
agreement is not one of the instances when distribution of capital assets and property of the
corporation is allowed.

Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature
liquidation of the corporation without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corporation Code. The Tius maintain that rescinding
the subscription contract is not synonymous to corporate liquidation because all rescission will
entail would be the simple restoration of the status quo ante and a return to the two groups of
their cash and property contributions. We wish it were that simple. Very noticeable is the fact
that the Tius do not explain why rescission in the instant case will not effectively result in
liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission (which
incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and
disastrous effect on the corporation, its creditors and the Ongs.

1. Issuance of stock certificate

Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a

subscriber until the full amount of his subscription together with interest and expenses
(in case of delinquent shares), if any is due, has been paid. (37)

Sec. 73. Lost or destroyed certificates. - The following procedure shall be followed for
the issuance by a corporation of new certificates of stock in lieu of those which have
been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how the certificate was lost, stolen or
destroyed, the number of shares represented by such certificate, the serial
number of the certificate and the name of the corporation which issued the
 same. He shall also submit such other information and evidence which he may
deem necessary;
2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the place where the corporation
has its principal office, once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of stock which has been lost,
stolen or destroyed. The notice shall state the name of said corporation, the
name of the registered owner and the serial number of said certificate, and the
number of shares represented by such certificate, and that after the expiration
of one (1) year from the date of the last publication, if no contest has been
presented to said corporation regarding said certificate of stock, the right to
make such contest shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock, unless the registered owner files a
bond or other security in lieu thereof as may be required, effective for a period
of one (1) year, for such amount and in such form and with such sureties as
may be satisfactory to the board of directors, in which case a new certificate
may be issued even before the expiration of the one (1) year period provided
herein: Provided, That if a contest has been presented to said corporation or if
an action is pending in court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the final decision by
the court regarding the ownership of said certificate of stock which has been
lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure
above-described. (R. A. 201a)

TAN v SEC – Alfonso Tan sold 50 of his 400 shares to complete the number of incorporators
of the Corporation of which he was then the President. When he lost in his following bid for
Presidency, he opted to withdraw from the corporation and sold his remaining 350 shares to
the corporation. For these transaction, the corporation cancelled his certificates of
subscription in the corporate books. However, the certificates remained with Alfonso Tan. He
then questioned the act of the corporation in cancelling his certificates claiming that he did not
assent thereto and as proof of that, the certificates remained in his possession

Held: It is obvious that petitioner devised the scheme of not returning the cancelled stock
certificates which were only returned to him for his endorsement. Delivery is not essential
where it appears that the persons sought to be held as stockholders are officers of the
corporation and have the custody of the stock book. A certificate of stock is not necessary to
render one a stockholder in a corporation. It is simply a paper representation or tangible
evidence of the stock itself and of the various interests therein. Therefore, the cancellation of
the certificates in the corporate books were valid.

DE LOS SANTOS v REPUBLIC - De los Santos and Astraquillo claim that they bought 1.6
million shares of stock of Lepanto Consolidated Mining on December 1942 from one Carl
Hess. These stocks were originally covered by stock certificates issued in favor of Vicente
Madrigal. However, after the war, the title to the stocks was given to Alien Property Custodian
of the US.

The two files their respective claims which the Property Custodian granted but the Philippine
Alien Property Administrator (PAPA) reversed, saying that the shares shall remain in the name
of the PAPA. Hence, this petition by de los Santos and Astraquillo.

The defendant herein is the Attorney General of the U. S., successor to the "Administrator".
He contends, substantially, that, prior to the outbreak of war in the Pacific, said shares of
stock were bought by Vicente Madrigal, in trust for, and for the benefit of, the Mitsui Bussan
Kaisha (hereinafter referred to as the "Mitsuis"), a corporation organized in accordance with
the laws of Japan, the true owner thereof, with branch office in the Philippines; that on or
before March, 1942, Madrigal delivered the corresponding stock certificates, with his blank
indorsement thereon, to the Mitsuis, which kept said certificates, in the files of its office in
Manila, until the liberation of the latter by the American forces early in 1945; that the Mitsuis
had never sold, or otherwise disposed of, said shares of stock; and that the stock certificates
aforementioned must have been stolen or looted, therefore, during the emergency resulting
from said liberation.

CFI rendered a decision in favor of de los Santos and Astraquillo. Hence this appeal from the
US.

Issue: WON the stocks were purchases by de los Santos and Astraquillo

Held: No. It thus appears that the only evidence on the alleged sale of the shares of stock in
question to the plaintiffs the main issue in the case at bar is the testimony of Apolinario de los
Santos, who now claims to be the sole owner thereof. Juan Campos and Carl Hess, the
alleged vendors, could not take the witness stand, for Hess was executed by the Japanese,
and Campos died during the liberation of Manila. Thus, death has sealed the lips of the only
persons who could have positively corroborated or contradicted the aforementioned
testimony of De los Santos.

Moreover, the testimony of de los Santos is weak and highly improbable. For one, Lepanto
stock had no market value during the war. Because it was owned by the US, it has an enemy
character and the purchase of such is a hostile act. Also, Hess did not have possession of the
stock certificates during the occupation and the Mitsuis could have not sold it since that would
reveal their lack of faith in the ability of Japan to achieve the final victory.

Even if Juan Campos and Carl Hess have sold the shares of stock, the result, insofar as the
claimants are concerned, will still be the same. The stocks were registered in the name of
Vicente Madrigal. And pursuant to Art. 35 of the Corp. Law, a share of stock may be
transferred by endorsement of the corresponding stock certificate, coupled with its delivery.
However, the transfer shall "not be valid, except as between the parties," until it is "entered
and noted upon the books of the corporation." No such entry in the name of the plaintiffs
herein having been made, it follows that the transfer allegedly effected by Juan Campos and
Carl Hess in their favor is "not valid, except as between" themselves. It does not bind either
Madrigal or the Mitsuis, who are not parties to said alleged transaction. What is more, the
same is "not valid," or "absolutely void" and, hence, as good as non-existent, insofar as
Madrigal and the Mitsuis are concerned.

For this reason, although a stock certificate is sometimes regarded as quasi-negotiable, in the
sense that it may be transferred by endorsement, coupled with delivery, it is well settled that
the instrument is non-negotiable, because the holder thereof takes it without prejudice to such
rights or defenses as the registered owner or creditor may have under the law, except insofar
as such rights or defenses are subject to the limitations imposed by the principles governing
estoppel.

PONCE V ALSONS CEMENT CORP - Fausto Gaid, an incorporator of Victory Cement Corp,
indorsed indorsed his fully paid and subscribed shares to Vicente Ponce. VCC was
subsequently renamed to Floro then to Alsons. Now, Ponce wanted to have certificates of
stock issued to him but the corp did not grant it. (Gaid died.)

Ponce filed a case for mandamus in SEC but the hearing officer dismissed the case because
there is no record of any assignment or transfer in the books of the corporation and there was
no instruction from Gaid for such assignment.
SEC, en banc, reversed, saying that the assignment of stocks need not be registered first
before it can take cognizance of the case to enforce Ponce's right as a stockholder.

CA reversed SEC and dismissed the case.

Issue: WON the assignment should be recorded first before the stock certificates can be
issued

Held: Yes. Following Art. 63 of the Corporation Code, a transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-existent as far as the
corporation is concerned. Without the recording, the transferee may not be regarded by the
corporation as one among its stockholders and the corporation may legally refuse the
issuance of stock certificates in the name of the transferee even when there has been
compliance with the requirements of Sec. 64.

Until and unless the recording is made, the demand for the issuance of stock certificates to
the alleged transferee has no legal basis. The stock and transfer book is the bases for
ascertaining the persons entitled to the rights and subject to the liabilities of the stockholder.

The only exception is when the person asking for the issuance had express instructions from
and specific authority given by the registered stockholder to cause the disposition of the
stocks registered in his name. In this case, however, no such authority has been alleged.
There is even no allegation that Ponce ever gave notice to the corporation about the transfer
in his favor. As such, there is no basis for his claim.

SEC OPINION No. 05-02, dated January 31, 2005 (re: bearer certificates)
Bearer certificates shall not be valid. Certificates of subscription are non-negotiable as the
rights of the bearer cannot prevail over the registered owner, as appears in the corporate
books, with respect to third parties.

==MIDTERMS COVERAGE==

1. Unpaid Subscriptions
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of subscription, if so
required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed
in the by-laws, such rate shall be deemed to be the legal rate. (37)
Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract
of subscription, the board of directors of any stock corporation may at any time
declare due and payable to the corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the
interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board. Failure to pay on such
date shall render the entire balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a different rate of interest is
provided in the by-laws, computed from such date until full payment. If within thirty
(30) days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as
hereinafter provided, unless the board of directors orders otherwise. (38)
Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due on each subscription plus
all accrued interest, and the date, time and place of the sale which shall not be less
than thirty (30) days nor more than sixty (60) days from the date the stocks become
delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his subscription, plus
accrued interest, costs of advertisement and expenses of sale, or unless the board of
directors otherwise orders, said delinquent stock shall be sold at public auction to
such bidder who shall offer to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The stock so purchased shall be
transferred to such purchaser in the books of the corporation and a certificate for such
stock shall be issued in his favor. The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the
balance on the subscription together with accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share, the
corporation may, subject to the provisions of this Code, bid for the same, and the total
amount due shall be credited as paid in full in the books of the corporation. Title to all
the shares of stock covered by the subscription shall be vested in the corporation as
treasury shares and may be disposed of by said corporation in accordance with the
provisions of this Code.
Sec. 69. When sale may be questioned. - No action to recover delinquent stock sold
can be sustained upon the ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock, unless the party seeking to maintain such action
first pays or tenders to the party holding the stock the sum for which the same was
sold, with interest from the date of sale at the legal rate; and no such action shall be
maintained unless it is commenced by the filing of a complaint within six (6) months
from the date of sale. (47a)
Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code shall
prevent the corporation from collecting by action in a court of proper jurisdiction the
amount due on any unpaid subscription, with accrued interest, costs and expenses.
(49a)
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled to
vote or to representation at any stockholder's meeting, nor shall the holder thereof be
entitled to any of the rights of a stockholder except the right to dividends in
accordance with the provisions of this Code, until and unless he pays the amount due
on his subscription with accrued interest, and the costs and expenses of
advertisement, if any. (50a)

APOCADA v NLRC - Apodaca was employed in Intrans Phils. On 28 August 1985,

respondent Jose M. Mirasol persuaded him to subscribe to 1,500 shares of respondent
corporation at PhP100 per share or a total of PhP150,000. He made an initial payment of
PhP37,500. On 01 September 1975, Apodaca was appointed President and General
Manager of the respondent corporation. However, on 02 January 1986, he resigned.

He instituted with the NLRC a complaint against private respondents for the payment of his
unpaid wages, his cost of living allowance, the balance of his gasoline and representation
expenses and his bonus compensation for 1986.

The corporation admitted that there is due to petitioner the amount of PhP17,060.07 but this
was applied to the unpaid balance of his subscription in the amount of PhP95,439.93.
Apodaca questioned the set-off alleging that there was no call or notice for the payment of the
unpaid subscription and that, accordingly, the alleged obligation is not enforceable.
The Labor Arbiter sustained the claim of petitioner for PhP17,060.07 on the ground that the
employer has no right to withhold payment of wages already earned under Article 103 of the
Labor Code.

NLRC reversed and held that a stockholder who fails to pay his unpaid subscription on call
becomes a debtor of the corporation and that the set-off of said obligation against the wages
and others due to petitioner is not contrary to law, morals and public policy.

Issue: WON the unpaid subscription can be set-off with the President's wages

Held: No. Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute
between the stockholder and the corporation as in the matter of unpaid subscriptions. This
controversy is within the exclusive jurisdiction of the Securities and Exchange Commission.

Assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter
under the circumstances of this case, the unpaid subscriptions are not due and payable until
a call is made by the corporation for payment. Private respondents have not presented a
resolution of the board of directors of respondent corporation calling for the payment of the
unpaid subscriptions. It does not even appear that a notice of such call has been sent to
petitioner by the respondent corporation. What the records show is that the respondent
corporation deducted the amount due to petitioner from the amount receivable from him for
the unpaid subscriptions. No doubt such setoff was without lawful basis, if not premature. As
there was no notice or call for the payment of unpaid subscriptions, the same is not yet due
and payable.

Lastly, assuming further that there was a call for payment of the unpaid subscription, the
NLRC cannot validly set it off against the wages and other benefits due Apodaca since it is
not one of the exceptions in Art. 113 where the corporation is allowed to retain the employee's
wages.

1. Rights

Vote
Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there
must be present, either in person or by representative authorized to act by written
proxy, the owners of a majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. The election must be by ballot
if requested by any voting stockholder or member. In stock corporations, every
stockholder entitled to vote shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws are silent, at the time of
the election; and said stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate said shares and give
one candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the total number of votes
cast by him shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors to be elected:
Provided, however, That no delinquent stock shall be voted. Unless otherwise provided
in the articles of incorporation or in the by-laws, members of corporations which have
no capital stock may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from time to time but
not sine die or indefinitely if, for any reason, no election is held, or if there not present
or represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member entitled to vote.
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a stockholder. (n)

Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged
or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the
right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee
is expressly given by the pledgor or mortgagor such right in writing which is recorded
on the appropriate corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly appointed by
the court may attend and vote in behalf of the stockholders or members without need
of any written proxy. (27a)
Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock owned
jointly by two or more persons, in order to vote the same, the consent of all the co-
owners shall be necessary, unless there is a written proxy, signed by all the co-owners,
authorizing one or some of them or any other person to vote such share or shares:
Provided, That when the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.
(n)
Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting right as
long as such shares remain in the Treasury. (n)
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in writing, signed by the
stockholder or member and filed before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be valid and effective for a period longer than
five (5) years at any one time. (n)
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period not exceeding five (5) years at
any time: Provided, That in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be filed with the corporation and with
the Securities and Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the voting trust
agreement shall be canceled and new ones shall be issued in the name of the trustee
or trustees stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same effect
as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to examination
by any stockholder of the corporation in the same manner as any other corporate book
or record: Provided, That both the transferor and the trustee or trustees may exercise
the right of inspection of all corporate books and records in accordance with the
provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the
terms and conditions stated in the voting trust agreement, and thereupon shall be
bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the
law against monopolies and illegal combinations in restraint of trade or used for
purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as
well as the certificates of stock in the name of the trustee or trustees shall thereby be
deemed canceled and new certificates of stock shall be reissued in the name of the
transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise. (36a)

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
issued for a consideration less than the value of five (P5.00) 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;
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.
Sec. 89. Right to vote. - The right of the members of any class or classes to vote may
be limited, broadened or denied to the extent specified in the articles of incorporation
or the by-laws. Unless so limited, broadened or denied, each member, regardless of
class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a member
may vote by proxy in accordance with the provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations may be
authorized by the by-laws of non-stock corporations with the approval of, and under
such conditions which may be prescribed by, the Securities and Exchange
Commission.
Sec. 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and
shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation, irrespective of
where the provisions of such agreements are contained, except those
required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any voting
rights, the shares held by them shall be voted as therein provided, or as
they may agree, or as determined in accordance with a procedure
agreed upon by them.
3. No provision in any written agreement signed by the stockholders,
relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them
partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to
the conduct of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who
are parties thereto the liabilities for managerial acts imposed by this
Code on directors.
5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.

i. Election of Directors

 examples:
o a by-law provision that only SHs with a stated minimum number of shares fully
paid up may be elected as directors is valid (Govt v El Hogar)
o a by-law that disqualify a SH who is competing with the corporation, as the
corporation has the right to protect itself from persons who may use inside
information to its prejudice (Gokongwei v SEC)
o a by-law that only holders of “founders shares” may qualify for directorship (Sec
7)
 exception to Sec 6 that non-voting shares shall be limited to preferred and
redeemable shares
 5 year period non-extendible
 SEC approval
Sec 100:
 Para 1: SH agreements in general. Pre-incorporation agreements among SHs
remains effective even after incorporation if so intended and even if not reflected in
AOI, except matters required by the Code to appear in AOI
 Para 2: refers to pooling and voting agreements in particular. There is no reason for
denying SHs other than those in close corporations the right to enter into voting or
pooling agreements to protect their interest, as long as no wrong or fraud is
committed or intended to be committed on other SHs not parties
 Para 3: gives close corps freedom to operate as a partnership between and among
the SHs, but remaining a corp with respect to 3rd persons. Note: SHs who are parties
assume liabilities of directors

TAN vs. SYCIP - supra

Issue: WON in NON-STOCK corporations, dead members should still be counted in

determination of quorum for purposes of conducting the Annual Members' Meeting

Held/Ratio:
1. No. Under the By-Laws of GCHS, membership in the corporation shall, among
others, be terminated by the death of the member. Section 91 of the Corporation
Code further provides that termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of incorporation or the bylaws.
2. Applying Section 91 to the present case, we hold that dead members who are
dropped from the membership roster in the manner and for the cause provided for in
the By-Laws of GCHS are not to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the annual members' meeting. With 11
remaining members, the quorum in the present case should be 6. Therefore, there
being a quorum, the annual members' meeting, conducted with six (6) members
present, was valid.

Doctrine:
Membership in and all rights arising from a non-stock corporation are personal and non-
transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. 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.

ANGELES V SANTOS - The plaintiff and the defendant are all stockholders and member of
the board of directors of the "Parañaque Rice Mill, Inc., "a corporation organized for the
purpose of operating a rice mill in the municipality of Parañaque, The plaintiff complained that
defendant Santos refused to show the corporation books and he also used the corporation
fund foe his own benefit.

Issue: WON Santos is liable? Yes

Held: There is ample evidence in the present case to show that the defendants have been
guilty of breach of trust as directors of the corporation and the lower court so found. The
board of directors of a corporation is a creation of the stockholders and controls and directs
the affairs of the corporation by allegation of the stockholers. But the board of directors, or the
majority thereof, in drawing to themselves the power of the corporation, occupies a position of
trusteeship in relation to the minority of the stock in the sense that the board should exercise
good faith, care and diligence in the administration of the affairs of the corporation and should
protect not only the interest of the majority but also those of the minority of the stock. Where a
majority of the board of directors wastes or dissipates the funds of the corporation or
fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of
its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain
a suit filed by the minority members of the board of directors, for and in behalf of the
corporation, to prevent waste and dissipation and the commission of illegal acts and
otherwise redress the injuries of the minority stockholders against the wrongdoing of the
majority. The action in such a case is said to be brought derivatively in behalf of the
corporation to protect the rights of the minority stockholders thereof .
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust
— not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile
or useless, a stockholder may institute a suit in behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon
the corporation and indirectly upon the stockholders. An illustration of a suit of this kind is
found in the case of Pascual vs. Del Sanz Orozco (19 Phil., 82), decided by this court as early
as 1911. In that case, the Banco Español-Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an employee of the bank, which losses, it was
contended, could have been avoided if the president and directors has been more vigilant in
the administration of the affairs of the bank. The stockholders constituting the minority brought
a suit in behalf of the bank against the directors to recover damages, and this over the
objection of the majority of the stockholers and the directors. This court held that the suit
properly be maintained.

ii. Removal of Directors

 only SHs have the power to remove directors under the procedures in 28
 removal of director before expiry of his term, even without cause, is a right granted to
the SHs for their protection against fraud, incompetence or abuse
 NOTE: no cumulative voting in the removal of directors —as fast as the minority elects
a director by exercising their right to cumulate their votes, the latter can be removed
by 2/3 vote OCS
 Vacancy can be filled in the same meeting where the removal is effected; NO need
for notice
 Vote required: 2/3 OCS in stock corps; 2/3 members entitled to vote in non-stock
corps

Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may
be removed from office by a vote of the stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees, or any of
them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should the secretary fail or refuse to call the
special meeting upon such demand or fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation signing the demand. Notice
of the time and place of such meeting, as well as of the intention to propose such
removal, must be given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That removal without cause may not
be used to deprive minority stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code.

iii. Fundamental Changes

 in the following basic changes in the corporation, although usually initiated by the
board, its decision is not final, and therefore approval of the SH would be necessary.
o Non-voting stocks or non-voting members will be entitled to vote (Sec 6)
o Vote required: 2/3 of outstanding capital stock or 2/3 of members entitled to vote
 For amendment of by-laws: simple majority
 o Unanimous vote never required
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this
Code or by special law, and for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this
Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a
non-stock corporation.
The original and amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation. Such articles, as amended shall be
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or
trustees stating the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall be submitted to
the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon
within six (6) months from the date of filing for a cause not attributable to the
corporation.
 AOI embodies the basic agreement of the SHs; thus any change requires their
consent
 Note: no requirement of SH or members meeting; “written assent” is sufficient
o Secs 37 38 39 40 42 43 and 44 however require a meeting first
 Extension (or shortening) of term and increase (or decrease) of capital stock also
involve an amendment of the AOI but are covered by Sec 37 and 38
 Amendment of “certain matters”:
Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a majority vote of the
board of directors and, at a stockholder's meeting duly called for the purpose, two-
thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and
place of the stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the stockholders'
meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock allotted
to each stock-holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
 (5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of
any bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and
the other shall be filed with the Securities and Exchange Commission and attached to
the original articles of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent
of the amount subscribed has been paid either in actual cash to the corporation or that
there has been transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the
same, with the approval by a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof. (17a)
 Treasurer must make sworn statement that minimum requirements of subscription
and payment have been complied with
o If false, AOI disapproved or certificate of registration revoked
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws
on illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill,
upon such terms and conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this
Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of said corporation or if the proceeds of
the sale or other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this section. (28 1/2a)
 Sec 40: power to sell, dispose, lease, or encumber all or substantially all assets
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Nature of transactions covered: onerous contracts
o Transactions no covered by SH vote: (does not involve the corporate purpose,
but the corporate business)
 Necessary in the usual and regular course of business, or…
 … proceeds of disposition is appropriate for the conduct of remaining
business
o “substantially all” property/assets:
 if disposition renders corporation incapable of doing business
 if disposition renders corporation incapable of accomplishing its purpose in
the AOI
 appraisal right? YES

Sec. 42. Power to invest corporate funds in another corporation or business or for any
other purpose. - Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any purpose other than the
primary purpose for which it was organized when approved by a majority of the board
of directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval
of the stockholders or members shall not be necessary. (17 1/2a)

 Sec 42: power to invest in another corporation

o Vote required: majority of the board
o Ratification: vote of at least 2/3 OCS or members
 EXCEPT: where the investment is reasonably necessary to accomplish its
PRIMARY PURPOSE
 If secondary purpose, ratificatory vote is required
o Effect of ratification: corporation can now legally invest its funds OUTSIDE of its
primary purpose, but LIMITED to its secondary purpose
o Coverage of “funds”—any corporate property to be used to further its business
o No ratificatory vote: ULTRA VIRES

Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a majority

vote thereof, and the owners of at least a majority of the outstanding capital stock, or
at least a majority of the members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-laws or adopt new
by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
(2/3) of the members in a non-stock corporation may delegate to the board of directors
or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided,
That any power delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-
laws shall be attached to the original by-laws in the office of the corporation, and a
copy thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange Commission the
same to be attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)

Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of each
of the board of directors or trustees of the constituent corporations of the plan of
merger or consolidation, the same shall be submitted for approval by the stockholders
or members of each of such corporations at separate corporate meetings duly called
for the purpose. Notice of such meetings shall be given to all stockholders or members
of the respective corporations, at least two (2) weeks prior to the date of the meeting,
either personally or by registered mail. Said notice shall state the purpose of the
meeting and shall include a copy or a summary of the plan of merger or consolidation.
The affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the case of stock corporations or at
least two-thirds (2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in accordance with the Code: Provided,
That if after the approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or
trustees of all the constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or
of two-thirds (2/3) of the members of each of the constituent corporations. Such plan,
together with any amendment, shall be considered as the agreement of merger or
consolidation. (n)
iv. Others

Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable pre diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year.

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
 4. That in case of an officer, the contract has been previously authorized
by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.

Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for
all such profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director
risked his own funds in the venture.

Sec. 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be payable
in cash, in property, or in stock to all stockholders on the basis of outstanding stock
held by them: Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of directors;
or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or (3) when it can be clearly
shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies. (n)
 Sec 43: power to declare dividends out of restricted retained earnings
o Payable in cash, property, or stock
o Cash dividends due on unpaid stock shall be applied to the unpaid balance on
the subscription plus costs and expenses
o Primary of SHs to DEMAND dividends
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members
o Cannot retain surplus profits in excess of 100% of paid up capital stock
o Exception:
 When justified by definite corporate expansion projects approved by the
board
 When prohibited under any loan agreement
 When it is clear that the retention is necessary under special circumstances
o Surplus profits in excess of 100%= distribute as dividends
Sec. 44. Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members in the case of a
non-stock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-
stock corporation. No management contract shall be entered into for a period longer
than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
 Sec 44: power to enter into a management contract
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members, but…
o Special rule: vote of SH of MANAGED corporation owning at least 2/3 of TOTAL
outstanding stock or members entitled to vote, iff:
 SH(s) representing the same interest in both managed and managing
corporations own or control more than 1/3 of TOTAL outstanding capital
stock, or…
 … majority of Board of directors of the MANAGING corporation also
constitute a MAJORITY of the board in the MANAGED
o rationale for the special rule: entering into a management contract is a deviation
from the GR that the board manages the corporation and that the board of the
managing company should devote its affairs to its own corporation
o Not covered by Sec 44:
 if managing other corporations is the primary purpose, ratificatory vote is not
required!
 If managing a partnership or individual not a corporation, not covered!
Sec. 62. Considering for stocks. - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or
by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly
called for the purpose. (5 and 16)
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation, if the
directors or stockholders are so divided respecting the management of the
corporation's business and affairs that the votes required for any corporate action
cannot be obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the stockholders
generally, the Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the exercise of such
power, the Commission shall have authority to make such order as it deems
appropriate, including an order: (1) canceling or altering any provision contained in the
articles of incorporation, by-laws, or any stockholder's agreement; (2) canceling,
altering or enjoining any resolution or act of the corporation or its board of directors,
stockholders, or officers; (3) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons party to the action; (4)
requiring the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its books,
or by the other stockholders; (5) appointing a provisional director; (6) dissolving the
corporation; or (7) granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a
creditor of the corporation or of any subsidiary or affiliate of the corporation, and
whose further qualifications, if any, may be determined by the Commission. A
provisional director is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver. A provisional director shall have all the rights and
powers of a duly elected director of the corporation, including the right to notice of and
to vote at meetings of directors, until such time as he shall be removed by order of the
Commission or by all the stockholders. His compensation shall be determined by
agreement between him and the corporation subject to approval of the Commission,
which may fix his compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation.

Deadlocks in close corporations:

 AOI of a close corporation may provide for a greater quorum and voting requirement
in board and SH meetings
 AOI of a close corporation may provide that the mgt of the corporation shall be done
by the SHs, which shall be deemed directors
 This makes chances of deadlock greater and balance of control more precarious
 SEC may intervene, even on the action of only one SH regardless of the number of
his shares, with the power to prohibit the directors or SHs from performing any
corporate act and even to dissolve the corporation
 SEC can also appoint a provisional director

LEE v CA – supra

SEC Opinion No. 26, s. 2003, dated March 22, 2003, addressed to Ms. Jaycel Sato (re: voting
by trustees through the internet)
SEC Memorandum Circular No. 4, dated March 17, 2004 (re: voting by mail and one share-
one vote policy)

1. Pre-emptive Right
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class,
in proportion to their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate purposes or
in payment of a previously contracted debt.

1. Stock Certificate

Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a

subscriber until the full amount of his subscription together with interest and expenses
(in case of delinquent shares), if any is due, has been paid. (37)

1. Transfer Shares
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 endorsed 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
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. (35)
Sec. 90. Non-transferability of membership. - Membership in a non-stock corporation
and all rights arising therefrom are personal and non-transferable, unless the articles
of incorporation or the by-laws otherwise provide. (n)
Sec. 91. Termination of membership. - Membership shall be terminated in the 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. (n)

SUNSET VIEW CONDOMINIUM CORP v CAMPOS

RAZON v IAC

RURAL BANK OF SALINAS v CA

BATANGAS LAGUNA TAYABAS BUS CO v BITANGA

RURAL BANK OF LIPA CITY v CA

REPUBLIC v ESTATE OF HANS MENZI

Forged and Unauthorized Transfers

J. SANTAMARIA v HSBC

NEUGENE MARKETING, INC v CA

 1. Dividends
Sec. 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be payable
in cash, in property, or in stock to all stockholders on the basis of outstanding stock
held by them: Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of directors;
or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or (3) when it can be clearly
shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies. (n)

1. Inspect Corporate Records

Sec. 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 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, 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. (51a and 32a; B. P. No. 268.)

AFRICA v PCGG

VERAGUTH v ISABELA SUGAR CO

GONZALES v PNB

GOKONGWEI v SEC

1. Financial Statements
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 statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of
the corporation for the preceding year, which shall include financial statements, duly
signed and certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial
statements may be certified under oath by the treasurer or any responsible officer of
the corporation. (n)

1. Appraisal Right
Sec. 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)
Sec. 82. How right is exercised. - The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the date on which the
vote was taken for payment of the fair value of his shares: Provided, That failure to
make the demand within such period shall be deemed a waiver of the appraisal right. If
the proposed corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or 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.
If within a period of sixty (60) days from the date the corporate action was approved by
the stockholders, the withdrawing stockholder and the corporation cannot agree on
the fair value of the shares, it shall be determined and appraised by three (3)
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 of the majority of the
appraisers shall be final, and their award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained earnings in its
books to cover such payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith transfer his
shares to the corporation. (n)
Sec. 83. Effect of demand and termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares until either the abandonment of the
corporate action involved or the purchase of the said shares by the corporation, all
rights accruing to such shares, including voting and dividend rights, shall be
suspended in accordance with the provisions of this Code, except the right of such
stockholder to receive payment of the fair value thereof: Provided, 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. (n)
Sec. 84. When right to payment ceases. - No demand for payment under this Title may
be withdrawn unless the corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or if the proposed corporate
action is abandoned or rescinded by the corporation or disapproved by the Securities
and Exchange Commission where such approval is necessary, or if the Securities and
Exchange Commission determines that such stockholder is not entitled to the
appraisal right, then the right of said stockholder to be paid the fair value of his shares
shall cease, his status as a stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares shall be paid to him. (n)
Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be
borne by the corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the latter. In the case of an action to
recover such fair value, all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive payment was unjustified.
(n)
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting stockholder shall submit the
certificates of stock representing his shares to the corporation for notation thereon
that such shares are dissenting shares. His failure to do so shall, at the option of the
corporation, terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates 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 which would have accrued on such shares shall be paid to the
transferee. (n)

Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition and

without prejudice to other rights and remedies available to a stockholder under this
Title, any stockholder of a close corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value, which shall not be less than their
par or issued value, when the corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock: Provided, That any stockholder of a
close corporation may, by written petition to the Securities and Exchange Commission,
compel the dissolution of such corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.

1. Derivative Suit

INTERIM RULES OF PROCEDURE FOR INTRACORPORATE CONTROVERSIES

ANGELES v SANTOS

SMC v KAHN

CHUA v CA

YU v YUKAYGUAN

1. Proportionate Share of Assets Upon Dissolution

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.
At any time during said three (3) years, the 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 the 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. (77a, 89a, 16a)

REVIEWER.CORPO under Prof. Quintos, AY 2009-2010 (2nd Sem)

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