CORPORATION LAW

(Provisions of BP 68, not affected by RA 11232)

Per S.C. Syllabus

 Nationality of corporations

a. Place of Incorporation Test:

b. Control test:
c. Grandfather rule
 The more stringent Grandfather Rule provides “the combined totals in the
Investing Corporation and the Investee Corporation must be traced
(i.e.,"grandfathered") to determine the total percentage of Filipino
ownership.

 De Facto Corporations and Corporations By Estoppel

de facto –

(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

Corporation by Estoppel -

Assume to act as a corporation knowing it to be without authority.

Liable as general partners for all debts, liabilities and damages
Cannot deny lack of personality as a defense.

 Piercing the Veil of Corporate Fiction applies only in three (3) basic areas,
namely:

1) Defeat of public convenience as when the corporate fiction is used as a

vehicle for the evasion of an existing obligation;
2) Fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or

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 3) Alter Ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person. The three-pronged test to determine
the application of the alter ego theory, which is also known as the
instrumentality theory, are the instrumentality or control test, the fraud
test, and the harm test. Thus:

a. The "instrumentality" or "control" test. Control, not mere

majority or complete stock control, but complete
domination, not only of finances but of policy and business
practice;
b. The “fraud” test. Such control must have been used to
commit fraud or wrong;
c. The "harm" test aforesaid control and breach of duty must
have proximately caused the injury or unjust loss
complained of.
All elements must be present.

 Doctrine of centralized management

“all corporate powers, all corporate properties, and all corporate business
exercised by the Board”

• Board is the direct agent of the corporation;

• Management (i.e., President and the Senior Officers) are appointed
by the and thus Board’s sub-agents;
• Is a Trustee of stockholders and for properties and titles under corporate
name. (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.)

 Business judgment rule

“Generally, contracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so

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 unconscionable and oppressive as to amount to wanton destruction to the rights
of the minority. (Virata v. Ng Wee)

 Duties, liabilities, and responsibility for unlawful acts.

Bernas v. Cinco, G.R. Nos. 163356-57 &

163368-69, [July 1, 2015]

Acts which are contrary to law, morals or public policy or public duty, are illegal
acts and are void.
Mere ultra vires acts not illegal or void ab initio, but are merely not within the scope
of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.

Calubad v. Ricarcen Development Corp.,

G.R. No. 202364, August 30, 2017

When a corporation intentionally or negligently clothes its agent with apparent

authority to act in its behalf, it is estopped from denying its agent's apparent
authority as to innocent third parties who dealt with this agent in good faith.

Colegio Medico-Farmaceutico De Filipinas, Inc. v. Lim,

G.R. No. 212034, July 2, 2018

Issue: Signing by the President of verification and affidavit on non-forum shopping

and signing of a demand letter both without Board authority:

General rule: No person can validly bind a corporation without an express

authority from the board of directors. Exception: President has the power to
perform acts within the scope of his or her usual duties. - 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 by[-]law provision to the contrary, the president is presumed to have

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 the authority to act within the domain of the general objectives of its business and
within the scope of his or her usual duties.

 Liability of Directors and Officers

Lozada v. Mendoza
G.R. No. 196134, October 12, 2016

1. "Doctrine of corporate opportunity" - when directors and trustees or, in

appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate
affairs; and
(c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks
or having knowledge thereof, did not object thereto (Watered stock are
shares of a company that are issued at a much greater value than its
underlying assets);
3. When a director, trustee or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.
5. Labor termination with evident malice and bad faith.

 Doctrine of apparent authority: a corporation will be estopped from denying the

agent's authority if it knowingly permits one of its officers or any other agent to
act within the scope of an apparent authority, and it holds him out to the public as
possessing the power to do those acts.

 Powers of Corporations: Every corporation incorporated under this Code

has the power and capacity:

1. To sue and be sued in its corporate name;

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 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; (2/3 vote)
5. To adopt by-laws, not contrary to law, morals, or public policy,
and to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell 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; (2/3)
9. To make reasonable donations;
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.

Power to extend or shorten corporate term: (2/3)

Power to increase or decrease capital stock; incur, create or increase bonded

indebtedness: (2/3)

Power to deny pre-emptive right: (2/3) requirement but only if in exchange

for property needed for corporate purposes or in payment of a previously
contracted debt.

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 Sale or other disposition of assets: (2/3) for sale of all or substantially all of
its property and assets, including its goodwill.

Generally, where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:

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

2. Where the transaction amounts to a consolidation or merger of the
corporations;
3. Where the purchasing corporation is merely a continuation of the selling
corporation; (Business-Enterprise Transfer)
4. Where the transaction is entered into fraudulently in order to escape liability for
such debts.

Power to acquire own shares: Only if there is unrestricted retained:

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.

EXCEPTION: REDEMPTION OF REDEEMABLE SHARES

Power to invest corporate funds in another corporation or business or for

any other purpose: (2/3)

Power to declare dividends: Exercised by the Board but if stock dividend,

2/3 requirement.

Power to enter into management contract: Majority vote of SH.

 Ultra vires doctrine

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 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.

“Corporate powers include implied and incidental powers” – Suspension of members

rights and privileges for not paying dues, Valid. Magallanes Watercraft Association, Inc.
v. Auguis, G.R. No. 211485, [May 30, 2016]

 Trust fund doctrine: 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.”

 Doctrine of equality of shares: All stocks issued by the corporation are presumed
equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.

 Proprietary rights: The important rights of stockholders are the following:

a) the right to vote;
b) the right to receive dividends;
c) the right to receive distributions upon liquidation of the corporation;

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 d) the right to inspect the books of the corporation.

 Intra-corporate disputes:

The controversy must pertain to any of the following relationships:

a) between the corporation, partnership or association and the public;

b) between the corporation, partnership or association and its

stockholders, partners, members or officers;

c) between the corporation, partnership or association and the State as far

as its franchise, permit or license to operate is concerned; and

d) among the stockholders, partners or associates themselves.

Whether a dispute constitutes an intra-corporate controversy or not, the Court

considers two elements instead, namely:

(a) the status or relationship of the parties; and

(b) the nature of the question that is the subject of their controversy.

Note: Intra-Corporate Controversies are subject to specific rules of procedure,

namely the INTERIM RULES OF PROCEDURE GOVERNING INTRA-
CORPORATE CONTROVERSIES UNDER R. A. NO. 8799.

 DERIVATIVE SUIT CONCEPT & APPLICATION: A derivative action is a suit by

a shareholder to enforce a corporate cause of action. Under the Corporation Code,
where a corporation is an injured party, its power to sue is lodged with its board
of directors or trustees. But an individual stockholder may be permitted to
institute a derivative suit on behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue,
or are the ones to be sued, or hold control of the corporation. In such actions, the
corporation is the real party-in-interest while the suing stockholder, on behalf of
the corporation, is only a nominal party.

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Florete, Jr. v. Florete,
G.R. No. 174909 & 177275, [January 20, 2016])

“A stockholder may suffer from a wrong done to or involving a corporation, but this does
not vest in the aggrieved stockholder a sweeping license to sue in his or her own capacity.
The determination of the stockholder's appropriate remedy — whether it is an individual
suit, a class suit, or a derivative suit — hinges on the object of the wrong done. When the
object of the wrong done is the corporation itself or "the whole body of its stock and
property without any severance or distribution among individual holders," it is a
derivative suit, not an individual suit or class/representative suit, that a stockholder must
resort to.”

 Foreign Corporations: 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.

 What constitutes “doing business”: As defined by Foreign Investments Act”

• Soliciting orders, service contracts, opening offices, whether called "liaison"
offices or branches;
• Appointing representatives or distributors domiciled in the Philippines;
• In any calendar year stay in the country for a period totaling 180 days or more;
• participates in the management, supervision or control of any domestic
business;
• Any other act or acts that imply a continuity of commercial dealings or
arrangements;
Exclusions:
• mere investment as a shareholder by a foreign entity in domestic corporations;
• Having a nominee director or officer to represent its interests in such
corporation;
• Appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.

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Steelcase, Inc. v. Design International Selections, Inc.,
G.R. No. 171995, [April 18, 2012]

“The appointment of a distributor in the Philippines is not sufficient to constitute "doing

business" unless it is under the full control of the foreign corporation. On the other hand,
if the distributor is an independent entity which buys and distributes products, other
than those of the foreign corporation, for its own name and its own account, the latter
cannot be considered to be doing business in the Philippines. It should be kept in mind
that the determination of whether a foreign corporation is doing business in the
Philippines must be judged in light of the attendant circumstances.

Section 133. Doing business without a license. – No foreign corporation

transacting business in the Philippines without a license, or its successors
or assigns, shall be permitted to maintain or intervene in any action, suit
or proceeding in any court or administrative agency of the Philippines; but
such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.

Communications Materials and Design, Inc. v. Court of Appeals,

G.R. No. 102223, [August 22, 1996], 329 PHIL 487-511

A foreign corporation doing business in the Philippines may sue in Philippine Courts
although not authorized to do business here against a Philippine citizen or entity who
had contracted with and benefited by said corporation. To put it in another way, a party
is estopped to challenge the personality of a corporation after having acknowledged the
same, by entering into a contract with it. And the doctrine of estoppel to deny corporate
existence applies to a foreign as well as to domestic corporations. One who has dealt with
a corporation of foreign origin as a corporate entity is estopped to deny its corporate
existence and capacity.

 Mergers and Consolidations. Steps:

(1) The board of each corporation draws up a plan of merger or

consolidation.

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(2) Submission of plan to stockholders or members of each corporation
for approval.

(3) Execution of the formal agreement, referred to as the articles

of merger o[r] consolidation, by the corporate officers of each
constituent corporation.

(4) Submission of said articles of merger or consolidation to the SEC for

approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.

(6) Issuance of certificate of merger or consolidation.

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