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V. CORPORATION LAW (Provisions of BP 68, not affected by RA 11232)
1. General principles
1. Nationality of corporations
1. Place of incorporation test
General Rule: the Corporation is considered a national of the country where it was
incorporated.
2. Control test
In determining the nationality of a corporation, the control test uses the nationality of
the controlling stockholders or members of the corporation.
A corporation organized/incorporated abroad and registered as doing business in the
Philippines under the Corporation Code, of which 100% of the capital stock outstanding
and entitled to vote is wholly owned by Filipinos, may be considered a Philippine
National under the Foreign Investments Act of 1991. This is the only exception to the
place of incorporation test (SEC Opinion No. 04-14, March 3, 2004; De Leon, 2010).
This test was adopted by the said law as a general guideline in determining the
nationality of corporations engaged in a nationalized activity (Sec Opinion No. 07-20,
November 20, 2007).
Under the Foreign Investment Act of 1991, it gives the definition of a PH National:
a. Corporation organized under PH Laws of which 60% of the Capital Stock outstanding
and entitled to vote is owed and held by Filipino Citizens.
b. Corporation organized abroad and registered as doing business in the PH under the
general law on Corporation of which 100% of the Capital stock entitled to vote is
Filipino.
3. Grandfather rule
To ensure compliance with the constitutional limitations of Corporation engaging in
nationalized activities, the nationality of a corporation must be determined by
ascertaining if 60% of the investing corporation’s outstanding capital stock owned by
Filipino Citizens or as interpreted by natural or individual Filipino Citizens if such
investing corporation is in turn owned to some extent by another investing Corporation,
the same process must be observed.
Rules governing the application of the Grandfather Rule:
a. To be used in determining the nationality of a Corporation engaged in a partly
nationalized activity.
b. Not apply in cases where the 60-40 Filipino-Alien equity ownership in a particular
natural resource corporation is not in doubt.
c. When there is doubt as to the extent of Filipino equity in the investee corporation,
the SEC is not precluded from using the Grandfather rule.
Under the trust fund doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors which
are preferred over the stockholders in the distribution of corporate assets. The
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2. Doctrine of separate juridical personality
A corporation is a judicial entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it.
SIGNIFICANCE OF THE DOCTRINE OF SEPARATE PERSONALITY
1. Liability for acts or contracts – As a general rule, the obligation of the corporation is
not the liability of the stockholders, officers or directors (1992, 1996, 2010 Bar). A
corporation may not, generally, be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it may be connected, and vice versa
(Cease vs. CA, G.R. No. L-33172, October 18, 1979). Note: XPN to this is the reverse
piercing of the corporate veil.
2. Right to bring actions – may bring civil and criminal actions in its own name in the
same manner as natural persons (Art. 46, Civil Code).
NOTE: Rights belonging to the corporation cannot be invoked by the stockholders (or
directors and officers) even if the latter owns substantial majority of the shares of the
shares in that corporation and rights of the stockholders, directors and officers cannot
be invoked by the corporation (Stonehill vs. Diokno, G.R. 19550, June 19, 1967).
3. Right to acquire and possess property – property conveyed to or acquired by the
corporation is in law the property of the corporation itself as a distinct legal entity and
not that of the stockholders or members (Art. 44[3], Civil Code).
NOTE: The interest of the stockholders over the properties are merely inchoate (Saw
vs. CA, G.R. No. 90580, April 8, 1991; 1996, 2000 Bar).
4. Acquisition of jurisdiction – service of summons may be made only on the president,
general manager, corporate secretary, treasurer or in- house counsel (Rules of Court,
Rule 14, Sec. 11).
5. Changes in individual membership – corporation remains unchanged and unaffected
in its identity by changes in its individual membership or ownership of its stocks.
STOCKHOLDERS ARE NOT THE OWNERS OF CORPORATE PROPERTIES AND ASSETS
The interest of the shareholder in the properties of the corporation is inchoate only.
The interest of the shareholder on a particular property becomes actual, direct and
existing only upon the liquidation of the assets of the corporation and provided that
the same property is assigned to the shareholder concerned.
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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 unless the
indispensable conditions and procedures for the protection of corporate creditors are
followed (Yamamoto v. Nishino Leather Industries, Inc., G.R. No. 150283, April 16,
2008).
3. Doctrine of piercing the corporate veil
- The doctrine that allows the State to disregard for certain justifiable reasons, the
notion that a corporation has a personality separate and distinct from the persons
comprising it.
- When it appears that business enterprises are owned, conducted and controlled by
the same parties, law and equity will disregard the legal fiction that these corporation
are distinct entities and shall treat them as one.
Elements:
a. Control: complete domination;
b. Such control have been used by the defendant to commit a fraud or wrong to
perpetuate the violation of a statutory or other positive legal breach or duty, or a
dishonesty and an unjust act in contravention of the plaintiff’s legal right; and
c. Control is the proximate cause.
2. Stock vs. non-stock corporations
A. Stock
- One has capital stock divided into shares and are authorized to distribute to the
holders of such shares dividends of allotments or the surplus profits on the basis of the
shares held.
B. Non- Stock
- Is one which does not issue shares and is created not for profit but for public good
and welfare and where no part of its income is distributable as dividends to its
members, trustees or officers.
3. De facto corporations and corporations by estoppel
A. De Facto
- A corporation where there exists a flaw in its corporation. The requisites are:
a. Existence of a valid law under which it was incorporated;
b. Attempt in good faith to incorporate;
c. Use of Corporate powers.
B. Corporation by estoppel
- Group of persons which holds itself out as a corporation and enters into a contract
with a 3rd persons on the strength of such appearance cannot be permitted to deny its
existence in an action under said contract.
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4. Board of Directors and Trustees
1. Basic principles
1. Doctrine of centralized management
GR: All corporate powers are exercised by the BOD/T.
Exception:
1. Delegation to executive committee;
2. Authorized pursuant to a contracted manager which may be an individual, a part or
another corporation; and
3. in cases of close corporations, the Shareholders may manage the business of the
Corporation instead of the BOD, if the AOI provides.
2. Business judgment rule
Questions of policy or management are left solely to the honest decision of officers and
directors of a Corporation and the courts are without authority to substitute their
judgement for the 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 or the SEC.
2. Duties, liabilities, and responsibility for unlawful acts
DUTIES
1. Duty of obedience: direct the affairs in accordance to the purpose it was organized.
2. Duty of diligence: not willfully and unknowingly vote for or assent to patently
unlawful acts of the Corporation or act in bad faith or with gross negligence in directing
the affairs of the Corporation.
3. Duty of Loyalty: not acquire any personal or pecuniary interest in conflict with their
duty as directors.
LIABILITIES
GR: Officers of a corporation are not personally liable for their official acts.
XPN:
1. When they willfully and knowingly assent to patently unlawful acts of the
Corporation;
2. When they are guilty of gross negligence or bad faith in directing the affairs of the
Corporation;
3. Whey they acquire any personal or pecuniary interest in conflict with their duty;
4. Consent to issuance of watered stocks, or who having knowledge does not file with
the Corporate Secretary his written objections;
5. When they are made liable by law;
6. When they agree to hold themselves personally and solidarily liable;
7. When Corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend a crime.
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5. Powers of corporations 4. Bound by confidentiality rules;
1. How powers are exercised 5. Requiring party represents the interest of a competitor, shall have no right to inspect
THEORY OF SPECIAL CAPACITY/ LIMITED CAPACITY DOCTRINE: or demand reproduction of Corporate records.
- No Corporation, under this Code, shall posses or exercise any corporate powers,
except those conferred by Law, its AOI, those implied from express powers and those Remedies:
as are necessary or incidental to the exercise of the powers so conferred. a. Summary investigation within 5 days from receipt of such report
b. Mandamus
2. Ultra vires doctrine c. Criminal Action
- Act of Corporation not one of those express, implied or incidental powers. Is one
committed outside the object for which a Corporation is created as defined by the law - Right to inspect is available even if the Corporation has already been dissolved and
of its organization and therefore beyond the power conferred upon it by law. pending litigation.

3. Trust fund doctrine 3. Pre-emptive right

- The Capital Stock, property and other assets of the Corporation are regarded as equity - Shareholders have the right to subscribe to all issues or disposition of shares of any
in trust for the payment of the Corporation creditors. class in proportion to their shareholdings.
- Purpose: enable the Shareholder to retain his proportionate contract in the
6. Stockholders and Members Corporation and to retain his equity in the surplus.
1. Doctrine of equality of shares
- Where the AOI do not provide for any distinction of the Shares of Stock, all shares Not available in the Following:
issued by the Corporation are presumed to be equal and enjoy the same rights and a. Shares issued to comply with laws requiring stock offering or minimum stock
privileges and are also subject to the same liabilities. ownership by the Public.
b. Shares issued in good faith with the approval of the Shareholders representing 2/3
2. Proprietary rights of the OCS, in payment of previously contracted debt.
1. Right to dividends c. Denied by the AOI.
- Shareholders are entitled to dividends pro rata based on the total number of d. Shares issued in good faith with approval of shareholders 2/3 of the OCS, in ex-
outstanding shares and not on the amount paid for the shares. change for property needed for Corporate purposes.
- Shareholders at the time of declaration are entitled to dividends. Dividends declared e. If shareholder does not want to exercise, the other shareholder cannot purchase the
before the transfer of shares belong to the transferor and those declared after the share. But if refuses, PER shall apply.
transfer belong to the transferee.
- Right to be paid accrues as soon as the declaration is made. 4. Right of first refusal
- it can be declared at premium A right that grants to the corporation or another stockholder the right to buy the shares
- Unpaid subscribers are entitled to dividends. of stock of another stockholder at a fixed price and only valid if made on reasonable
terms and consideration.
2. Right to inspect
- Requirements: Provisions in articles of incorporation requiring stockholders desiring to sell their stocks
a. Corporate books shall be open to inspection; to offer them first to the corporation or to the existing stockholders at a given
b. In person or by a representative; reasonable date before disposing of them to third persons may be considered valid and
c. written demand; enforceable.

- Conditions: Right of first refusal is not a substantive right under the Corporation Code
1. Reasonable hours on a business day GR: The right of first refusal can only arise by means of a contractual stipulation, or
2. Not improperly use any information he secured through previous examination; when it is provided for in the AOI
3. Demand must be in good faith and for a legitimate purpose;

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 KNOTES
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XPN: In the case of a close corporation, the right of first refusal is required to be found
in the AOI.
When only the by-laws provide a right of first refusal without the corresponding
provision in the AOI and not printed in the stock certificate, it is null and void. There is
no authority to create property restrictions in by-laws provisions
7. Intra-corporate disputes
a. Concept
What are the tests to determine whether a dispute constitutes an intra-corporate
controversy and dispute?
How would jurisdiction be determined?
1. Relationship Test; and
2. Nature of the Controversy Test.
Jurisdiction should be determined by considering not only the status or relationship of
the parties, but also of the nature of the question under controversy. This two-tier test
was adopted in the case of Speed Distribution, Inc. vs. Court of Appeals: “To determine
whether a case involves an intra-corporate controversy, and is to be heard and decided
by the branches of the RTC specifically designated by the Court to try and decide such
cases, two elements must concur:
1. the status or relationship of the parties (relationship test); and
2. the nature of the question that is subject of the controversy (nature of the
controversy test).
The first element requires that the controversy must arise out of intracorporate
partnership relations between any or all of the parties and the corporation, partnership,
or association of which they are stockholders, members, or associates, respectively;
and between such corporation, partnership, or association and the State insofar as it
concerns their individual franchises.
The Second element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. If the nature of the controversy
involves matters that are purely civil in character, necessarily, the case does not involve
an intra-corporate controversy. (Reyes vs. Zenith Insurance Corp., G.R. No. 165744,
August 11, 2008, [Brion, J.])
What is meant by the Relationship Test?
Initially, the main consideration in determining whether a dispute constitutes an intra-
corporate controversy was limited to a consideration of the intra-corporate relationship
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(also known as the Relationship Test) existing between or among parties. The types of
relationships embraced under Section 5(b), as declared in the case of Union Glass &
Container Corp. vs. SEC, were as follows:
1. Between the corporation, partnership, or association and the public;
2. Between the corporation, partnership, or association and its stockholders, partners,
members or officers;
3. Between the corporation, partnership, or association and the State as far as its
franchise, permit or license to operate is concerned; and
4. Among the stockholder, partners, or associates themselves. (Reyes vs. Zenith
Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])
What is meant by the Nature of the Controversy Test?
Under the nature of the controversy test, the incidents of that relationship must also
be considered for the purpose of ascertaining whether the controversy itself is intra-
corporate. The controversy must not only be rooted in the existence of an intra-
corporate relationship, but must pertain to the enforcement of the parties’ correlative
rights and obligations under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation. If the relationship and its incidents are merely
incidental to the controversy or if there will still be conflict even if the relationship does
not exist, then no intra- corporate controversy exists. (Reyes vs. Zenith Insurance
Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])
b. Individual vs. representative vs. derivative suits
DERIVATIVE SUIT:
Brought by 1 or more shareholders/members in the name and on behalf of the
Corporation to redress wrongs committed against it, or protect/vindicate corporation
rights whenever the officials of the Corporation refuse to sue, or are the ones to be
sued, or have control of the Corporation.
Requisites:
a. SH/M of the time acts or transactions subject of the action occurred and at the time
the action was filed;
b. exerted all reasonable efforts, exhausted all remedies;
c. Appraisal right is not available;
d. Suit is not a nuisance or harassment;
e. Corporation is impleaded as Plaintiff.
INDIVIDUAL ACTIONS:
- Brought by the Shareholder in his own name against the Corporation when a wrong
is directly inflicted against him.
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REPRESENTATIVE ACTIONS: Foreign corporation, right to be sued:
- Brought by the Shareholder in behalf of himself and all other shareholders similarly
situated when a wrong is committed against a group of shareholder. A foreign corporation may be sued in the Philippines:
[1] If it is transacting or doing business in the Philippines with a license;
8. Foreign Corporations
[2] If it is transacting or doing business in the Philippines without a license;
1. What constitutes “doing business”
- Continuity Test: a continuity of commercial dealings and arrangements, and However, if it is not transacting or doing business in the Philippines and does not have
contemplates to some extent the performance of acts or works or the exercise of some any license to so transact or do business in the Philippines, it cannot be sued in the
functions normally incident to and in progressive prosecution of, the purpose and object
of the organization. Philippines for lack of jurisdiction.
- Substance Test: continuing the body or substance of the enterprise of business for
which it was organized. 9. Mergers and Consolidations
1. Concept
Isolated Transactions? Merger:
- It depends. Casual and incidental is not an isolated transaction. Pag may intention, it One corporation absorbs another one or more corporation/s into a single corporation.
is considered as isolated transaction. One of the constituent corporation survives and remains in existence, while another is
dissolved.
Contract Test:
1. Actual performance of specific commercial actions within the PH Consolidation:
2. Not creating earnings or profits; not doing business New Corporation is created and the existence of all constituent Corporation shall cease.
3. Merely imports, no office: Not doing business
4. Exports without doing any commercial acts: Not doing business 2. Effects and limitations
5. Full control of a distributor: doing business. a. Constituents shall become a single corporation;
b. Separate existence shall cease except that of surviving/consolidated corporation;
Doing Business: c. Surviving/consolidated: possess all rights, privileges, immunities and franchises of
1. Soliciting orders, service contracts, opening offices;. each constituent corporation and franchises;
2. Appointing representatives, distributors, domiciled in the PH or who stays 180 d. Liabilities and obligations: pertain to the surviving or consolidated corporation
days; e. Any pending claim, action or proceeding brought by or against any constituent
3. Participating in the management, supervision or control; corporation may be prosecuted by or against the surviving or consolidated corporation
4. Continuity of commercial dealings or arrangements. f. Employees are automatically assumed in a merger. However, management may
terminate.
2. Personality to sue and suability
Foreign corporation, right to sue:
Whether a foreign corporation is possessed of the right to sue in the Philippines is
determined as follows:
[1] If the foreign corporation is transacting or doing business in the Philippines with
a license, it has the right to sue within the jurisdiction of the Philippines;
[2] If it is transacting or doing business without a license, it cannot sue;
[3] If it is not transacting or doing business in the Philippines, it can sue even if it
is not possessed of any license.

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Atty. Chico’s Lecture:
- What is a Corporation? It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider
A: an artificial being. reverse piercing occurs when a party with a claim against an individual or corporation
1. Juridical person: powers and attributes are established by law. attempts to be repaid with assets of a corporation owned or substantially controlled by
2. Right of Succession. the defendant.52 In contrast, in insider reverse piercing, the controlling members will
- Shareholders gusto lang is profit. General Rule: wala silang say sa attempt to ignore the corporate fiction in order to take advantage of a benefit available
Management. Except: election and fundamental changes to the corporation, such as an interest in a lawsuit or protection of personal assets.53

- Management is centralized Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment
- Subscription is basis of membership: 25% creditor, seeks the Court's intervention to pierce the corporate veil of I/AME in order to
make its Makati real property answer for a judgment against Santos, who formerly
Q: What is ACS? owned and still substantially controls I/AME.”
- 2 ways to acquire ACS:
a. Issue remaining stock SC: Piercing of Corporate Veil applies to both Stock Corporation and Non Stock
b. mangutang Corporation as long as it is issued to perpetuate fraud.
NOTE: ACS walang kinalaman sa laki ng Corporation.
- Remember the elements of Piercing the Corporate Veil.
- Note the General Rule and Exceptions sa URE.
GR: The corporation may only acquire its own stocks in the presence of unrestricted - Business judgement Rule: XPN: Bad faith, gross negligence.
retained earnings (URE).
XPNs: (RDC) - Pag day to day activities/operation by necessity: Board does not need to convene.
1. Redeemable shares may be acquired even Oriental Films Case!
without surplus profit for as long as it will not SC: beyond control: can ratify contract unless it is void. The 3rd person is not expected
result to the insolvency of the Corporation to dig deeper sa authority ng Corporation.
2. In cases that the corporation conveys its stocks
in payment of a Debt - Ultra vires act are voidable and can be ratified.
3. In a Close corporation, a stockholder may
demand the payment of the fair value of shares regardless of existence of Case: El Hogar: difference between Stock and Non Stock Corp
retained earnings for as long as it will not result to the insolvency of the NSC: You can engage in business without distributing profit.
corporation.
Case: BPI
- Concession Theory: State lagging mag interfere. - President acted in Bad faith, they can be deemed an employer, making him solidarily
- Piercing of Corporate Veil: liable.
2017: International Academy of Management and Economics vs Litton and Company: - officers are agents of the Corporation. Officers are ipso facto agents of Corporation
“ pag negligent, including appointment of agents, they are liable.
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership, 50 "in a
traditional veil-piercing action, a court disregards the existence of the corporate entity - Trust Fund doctrine in relation to limited liability of SH.
so a claimant can reach the assets of a corporate insider. In a reverse piercing action,
however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against - Unpaid Subscription: Creditor can sue corporation sa unpaid subscription, URE lang
a corporate insider." pwede galawin. Hindi mo pwede habulin ang properties ng Shareholder: limited liability
of Shareholder. SH ang pinapakelaman lang is yong dividends.
"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing)
and makes the corporation liable for the debt of the shareholders."51

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- Ultra vires act: Not illegal per se, outside the purpose ng corporation. It can be ratified.
However, SC considered can’t be enforced. Pag nagawa na, it can be ratified.

- Voting Requirement
- Cummulative Voting
- Elect/remove the members of the board. Pag naging member ka ng board, gratuitous
siya.
- Pre emptive right: pag nag sale tapos walang notice, may violation.
- Appraisal right

Lingayen: Stock certificate are negotiable instrument subject to the defenses available.
And are deemed personal properties.

- Publication is required sa dissolution/closure ng corporation.

- Winding and Liquidation: pag di na tungkol ditto, the Corporation can no longer do it.

Case: Picco vs Hall:

You cannot be considered as defacto corporation kasi wala ka pang certificate of
incorporation

Dilano vs CA: Receiver/trustee, appointment

Foreign Corporation:
It is not licensed?: it cannot sue but can be sued.

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