Corporation Law

UC College of Law|2018
Xian Alden|3-JD
CORPORATION CODE OF THE PHILIPPINES

Based on De Leon 2013

INTRODUCTION

TITLE 1 – GENERAL PROVISION

Sec, 2 – CORPORATION

Corporation – 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.

Attributes of a corporation
a. Artificial being;
b. Created by operation of law;
c. Has the right of succession; and
d. Has only the powers, attributes and properties expressly authorized by law or incident to
its existence.

Doctrine of corporate entity

- A corporation is a legal or juridical person with a personality separate and apart from its
individual stockholders or members and from any other legal entity to which it may be
connected
- By legal fiction
- The stockholders or members who, as natural persons, compose the corporation but they
are not the corporation.
- The corporation and its shareholders are separate juridical entities.

As an artificial personality
Has the following consequences:
a. Liability for acts or contracts
- Obligations incurred by a corporation, acting through its authorized agents, are its sole
liabilities.
b. Liability when exceptional circumstances warrant
- Personal or solidary liability may be incurred by corporate agents acting in behalf of the
corporation only when exceptional circumstances warrant when:
1. The director/trustee or officer acted maliciously or in bad faith, or
2. With gross negligence, or
3. Agreed to hold himself personally and solidarily liable with the corporation, or
4. Made, by specific provision of law, personally liable for corporate action, or
5. Proven that the officer has used the fiction of separate corporate personality to
defraud a third party or for wrongful ends

NOTE: There is no law that prohibits a corporate officer from binding himself personally to
answer for a corporate debt.

c. Right to bring actions

- May incur obligations and bring civil and criminal actions in its own name in the same
manner as a natural person.
- A juridical person is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish, or moral shock.
 However, a corporation may have a good reputation which, if debased or
besmirched resulting in social humiliation, may be a ground for recovery of
moral damages and attorney's fees.
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 Corporation Law
UC College of Law|2018
Xian Alden|3-JD

d. Right to acquire and possess property of all kinds

- A share of stock represents a proportionate interest in the property of the corporation, it
does not vest the owner thereof with any legal right or title to any of the properties of the
corporation.
- Interest of a shareholder in corporate property is purely inchoate and does not entitle
them to intervene in a litigation involving corporate property.

e. Acquisition by court of jurisdiction

- In the absence of summons on the corporation, a judgment against it is void for lack of
jurisdiction and lack of due process.

f. Change in individual membership

- Corporation remains unchanged and unaffected in its identity

As a person, resident or citizen

A corporation is treated on the same footing as ordinary individuals within the purview of the
terms used in constitutional or statutory provisions, whenever this becomes necessary in order to
give full effect to the purpose or spirit of the Constitution or statute.
a. As a person
o It is an artificial person.
b. As a resident or nonresident
o In case of statutes defining the jurisdiction of courts, or relating to venue, taxation,
etc.
c. As a citizen
o A citizen of the State or country by or under the laws of which it was created and
exists without regard to the citizenship of its stockholders or members.
o The citizenship of a corporation is not looked into unless citizenship is an
important factor in the determination or the enjoyment of a privilege, exercise of a
right or even the legality of a contract entered into by the corporation."

As a collection of individuals
- The idea of the corporation as a legal entity or person apart from its members is a mere
fiction of the law introduced for convenience in conducting the business in this privileged
way.
- Courts, as a general rule, disregard this theory of separate entity under certain
circumstances, as when the privilege is misused by the corporation.
- To enforce and protect the rights of stockholders or members.

Doctrine of piercing the veil of corporate entity doctrine

GR: The law will not recognize separate corporate existence with reference to the
particular transaction involved.
RATIO: 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.

 Wrongdoing must be clearly and convincingly established for the corporate legal entity to be
disregarded.
 If applied, liability will attach personally or directly to the officers and stockholders
 Not sufficient that fraud be established only, there must also be sought to hold the officers
and stockholders personally liable.

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 Corporation Law
UC College of Law|2018
Xian Alden|3-JD
 Applies in three areas:
1. Defeat of public convenience
- As when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
2. Fraud cases
- 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

 Example of instances where doctrine applied:

1. Incorporators and directors belong to one single family;
2. Corporation functions for the benefit of a single person who has complete control over
the funds and the said person is the sole owner thereof;
3. Corporation is a mere instrumentality of the individual stockholders, the latter must
individually answer for corporate obligations.
4. Corporation is merely instrumentality, an adjunct, business conduit or alter ego of
another corporation, the separate personality of the corporation may be disregarded.

Application of the “instrumentality” or “alter ego” rule

 A question of fact.

Three-pronged test in determining applicability of piercing the corporate veil or fiction doctrine
1. Instrumentality test
- Complete dominion of policy and business in respect to the transaction attacked
2. Fraud test
- Such control must be used by defendant at the time the acts complained of took place
3. Harm / causal connection test
- Causal connection between the fraud committed through the instrumentality of the
corporate form and the injury or loss suffered by the plaintiff must be established.

Acquisition by court of jurisdiction over corporations or corporations involved

 Doctrine of piercing the corporate veil is only to determine established liability.
 A corporation not impleaded in a court cannot be the subject to the court’s process of piercing the
corporate veil.
 NOTE:
a. Court must first acquire jurisdiction over the corporation/s
b. Doctrine must be raised during a full-blown trial over a cause of action duly commenced
involving parties duly brought under the authority of the court

Corporation as a creation of law or by operation of law

GR: Requires special authority grant from the State exercised through the legislature either by special
incorporation law or charter.
XPN: Corporations by prescription

 Corporations can only come into existence in the manner prescribed by law.
 A corporation as a creature of the State is presumed to be incorporated for the benefit of the
public.
 There is a reserved right in the State to inquire how these privileges had been employed, and
whether they had been abused

Right of succession of a corporation

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 Corporation Law
UC College of Law|2018
Xian Alden|3-JD
- Has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or
incapacity of the individual stockholders or members and regardless of the transfer of their interest or
shares of stock.
- Immortality or perpetual succession

Powers, attributes, and properties of a corporation

 A corporation, being purely a creation of law, may exercise only such powers as are granted by the
law of its creation.
 All powers which may be implied from those expressly provided by law and those which are
incidental or essential to the corporation's existence may also be exercised.
 The test to be applied is whether the act of the corporation is in direct and immediate furtherance of
its business, fairly incidental to the express powers and reasonably necessary to their exerrise. If so,
the corporation has the power to do it; otherwise, not.
'

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