You are on page 1of 8

Chapters I: Introduction (4) powers, attributes, and properties expressly authorized by law or

incident to its existence


Role of corporation in modern business
Advantages of Corporate Form
— Corporate form of business organization permits the combination
of funds from various sources to raise the big capital needed for 1. strong legal personality
large business and industrial enterprise 2. limited liability to investors
— Combination of resources+advantages of limited liability= a. limited to their shares
corporation’s popularity b. in partnerships—creditors can still go after individual
properties of the partners
Definition and attributes of a corporation 3. free transferability of units of investment
a. GR: shares of stocks can be transferred even without the
Section 2. Corporation defined. - A corporation is an artificial being created consent of other SHs
by operation of law, having the right of succession and the powers, attributes 4. Centralized management
and properties expressly authorized by law or incident to its existence. (2) a. Centralized in the Board
b. SHs are not agents and cannot bind the corporation
c. SHs are bound by management decisions and transactions
Four attributes: of the board, generally

(1) artificial being— Advantages Disadvantages


— By operation of law, becomes a being with the attributes of an
individual with full capacity to enter into contractual relations 1 Strong legal personality Complicated and costly formation
— a juridical person capable of having rights and obligations; 2 Limited liability Lack of personal element
— with a personality separate and distinct from its members or SHs 3 Free transferability Abuse of corporate management
— fundamental principle in corporate law: SHs are not personally 4 Centralized management Limited liability hits innocent
liable for corporate obligations, and cannot be liable beyond victims
their contribution to the corporate capital 5 Double taxation
— corporation not liable for personal obligations of its SHs
(2) created by operation of law
— from a strict legal point of view, a corporation cannot come into
Laws governing Philippine corporations
being by mere consent of the parties
o there must be a law granting it
Choice of Business organizations
o once granted, form the primary franchise of the corporation
o mere consent insufficient (1) The Individual Proprietorship
— State must have given its consent either through a special law or — works well for carrying simple or small businesses
general enabling law — owner’s unlimited personal liability
o General law: The Corporation Code — difficulties in expansion
o Compliance with the Code=acquisition of juridical — upon death business will have to stop and be liquidated
personality
— There must be an underlying contract among the individuals (2) The Partnership
forming the corporation — 1767: two or more persons bind themselves to contribute money
o Interplay of State grant and contractual relations or industry to a common fund, with the intention of dividing the
(3) right of succession profits among themselves
— Continued existence cannot be affected by any change in the — partners are personally liable for debts of the partnership; while
members or SHs SHs cannot be made to personally answer to corporate creditors
beyond the amount contributed

1
— much simpler to form a partnership: 5 incorporators vs. at least — “De facto partnership with a corporate shell”
2 for partners o AOI of close corp can do away with a BOD
— Personal relationship between and among partners based on o Can vest management exclusively with the SHs
mutual trust and confidence o SHs active in management are made liable for personal torts
o Death or insolvency of partner will result in dissolution o Business/industry imbued with public interest cannot be by a
o Corporations cannot be voluntarily dissolved except by 2/3 close corporation
vote of stock + some State act, whether judicial or
administrative (SEC) (4) The Joint Venture—a form of partnership and should be
— Mere agreement is sufficient to give rise to a partnership v. governed by the law on partnerships
substantial compliance with the Corpo Code for corporations — Common defn: organization formed for some temporary purpose
— Management—every partner is an agent of the partnership, with — Community of interests, sharing of profits and losses, mutual
capacity to bind vs. centralized management in the BoD for agency
corporations — Formed for the execution of a single transaction, and is thus of a
o SH has no voice in the management except to elect directors temporary nature
— Form of partnership and should be governed by the law on
partnerships
(3) The Close Corporation
— SC has ruled that a corporation can enter into a JV, but not a
partnership
Section 96. Definition and applicability of Title. - A close corporation, within — Separate juridical personality
the meaning of this Code, is one whose articles of incorporation provide that: — Mutual agency
(1) All the corporation's issued stock of all classes, exclusive of treasury — Unlimited liability
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 The Business Trust—a vesting of title to the assets of a business
shall be subject to one or more specified restrictions on transfer permitted by enterprise in trustees who act as representative thereof, for the benefit of
this Title; and (3) The corporation shall not list in any stock exchange or others called the cestui que trust
make any public offering of any of its stock of any class. Notwithstanding the — deed of trust which is easier and less expensive to constitute for
foregoing, a corporation shall not be deemed a close corporation when at it is not bound by any legal requirements
least two-thirds (2/3) of its voting stock or voting rights is owned or — No separate juridical personality
controlled by another corporation which is not a close corporation within the
— Governed by contract law and common law principles on trusts
meaning of this Code.
Government regulation of corporations
Any corporation may be incorporated as a close corporation, except mining
or oil companies, stock exchanges, banks, insurance companies, public By the Legislature
utilities, educational institutions and corporations declared to be vested with By the SEC
public interest in accordance with the provisions of this Code.
Union Glass v SEC. F: The complainant Carolina Hofileña is a stockholder of
The provisions of this Title shall primarily govern close corporations: Pioneer Glass Manufacturing Corporation, engaged in the operation of silica mines and
Provided, That the provisions of other Titles of this Code shall apply the manufacture of glass and glassware. Since 1967, Pioneer Glass had obtained various
suppletorily except insofar as this Title otherwise provides. loan accommodations from the Development Bank of the Philippines [DBP], and also
from other local and foreign sources which DBP guaranteed. As security for said loan
accommodations, Pioneer Glass mortgaged and/or assigned its assets, real and
— Small closely-knit group like a family
personal, to the DBP, in addition to the mortgages executed by some of its corporate
— They act and feel as partners but wishing to avail of limited
officers over their personal assets. The proceeds of said financial exposure of the DBP
liability
were used in the construction of a glass plant in Rosario, Cavite, and the operation of
— Most distinct characteristic: all or most SHs are active in the
seven silica mining claims owned by the corporation. Through the conversion into
corporate business either as directors or officers
equity of the accumulated unpaid interests on the various loans amounting to P5.4

2
million as of January 1975, and subsequently increased by another P2.2 million in 1976, the court of general jurisdiction, the Regional Trial Court. Since petitioner has no intra-
the DBP was able to gain control of the outstanding shares of common stocks of Pioneer corporate relationship with the complainant, it cannot be joined as party-defendant in
Glass, and to get two, later three, regular seats in the corporation's board of directors. said case as to do so would violate the rule or jurisdiction. Hofileñas complaint against
When Pioneer Glass suffered serious liquidity problems such that it could no longer petitioner for cancellation of the sale of the glass plant should therefore be brought
meet its financial obligations with DBP, it entered into a dacion en pago agreement with separately before the regular court. The SC added however that for Hofileñas complaint
the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full against Union Glass to prosper, final judgment must first be rendered in the issue of the
satisfaction of the corporation's obligations in the total amount of P59,000,000.00. validity of the dacion en pago, which is a prejudicial question, the resolution of which is
Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which a logical antecedent of the issue involved in the action against petitioner Union Glass.
DBP leased and subsequently sold to herein petitioner Union Glass and Container But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp.,
Corporation, hereinafter referred to as Union Glass. Hofileña filed a complaint before impleaded as third party purchaser of the plant from DBP in the action to annul the
the respondent SEC against the DBP, Union Glass and Pioneer Glass, asserting the dacion en pago. The Court held that such action for recovery of the glass plant could be
alleged illegality of the aforesaid dacion en pago resulting from: [1] the supposed brought by the dissenting stockholder to the regular courts only if and when the SEC
unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the rendered final judgment annulling the dacion en pago and furthermore subject to
agreement; [2] the self-dealing indulged in by DBP, having acted both as Union Glass' defenses as a third party buyer in good faith.
stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful
inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when Abejo v dela Cruz. F: Case involves a dispute between the principal stockholders
the same had already been converted into equity. Union Glass moved for dismissal of of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging
the case on the ground that the SEC had no jurisdiction over the subject matter or corporation," namely, the spouses Jose Abejo and Aurora Abejo vs. De la Cruz Abejo
nature of the suit. (hereinafter referred to as the Abejos) and the purchaser, Telectronic Systems, Inc.
I: W/N the SEC or the TC has jurisdiction over the suit of Hofilena (hereinafter referred to as Telectronics) of their 133,000 minority shareholdings (for P6
H: In the ordinary course of things, petitioner Union Glass, as transferee and possessor million) and of 63,000 shares registered in the name of Virginia Braga and covered by
of the glass plant covered by the dacion en pago agreement, should be joined as party- five stock certificates endorsed in blank by her (for P1,674,450.00), and the spouses
defendant under the general rule which requires the joinder of every party who has an Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile
interest in or lien on the property subject matter of the dispute. But since petitioner majority stockholders. With the said purchases, Telectronics would become the
Union Glass has no intra-corporate relation with either the complainant or the DBP, its majority stockholder, holding 56% of the outstanding stock and voting power of the
joinder as party-defendant in SEC Case No. 2035 brings the cause of action asserted corporation Pocket Bell. Telectronics requested the corporate secretary of the
against it outside the jurisdiction of the respondent SEC, as delineated by Section 5 of corporation, Norberto Braga, to register and transfer to its name, and those of its
PD No. 902-A. This grant of jurisdiction must be viewed in the light of the nature and nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel
function of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter the surrendered certificates of stock and issue the corresponding new certificates of
(SEC) "absolute jurisdiction, supervision, and control over all corporations, stock in its name and those of its nominees. Norberto Braga, the corporate secretary
partnerships or associations, who are grantees of primary franchise and/or license or and son of the Bragas, refused to register the aforesaid transfer of shares in the
permit issued by the government to operate in the Philippines ... " The principal corporate books, asserting that the Bragas claim preemptive rights over the 133,000
function of the SEC is the supervision and control over corporations, partnerships and Abejo shares and that Virginia Byaga never transferred her 63,000 shares to
associations with the end in view that investment in these entities may be encouraged Telectronics but had lost the five stock certificates representing those shares. This
and protected, and their activities pursued for the promotion of economic development. triggered off the series of intertwined actions between the protagonists, all centered on
Otherwise stated, in order that the SEC can take cognizance of a case, the controversy the question of jurisdiction over the dispute. The Bragas assert that the regular civil
must pertain to any of the following relationships: court has original and exclusive jurisdiction as against the Securities and Exchange
[a] between the corporation, partnership or association and the public; Commission, while the Abejos and Telectronics, as new majority shareholders, claim
[b] between the corporation, partnership or association and its stockholders, the contrary. Respondent Judge de la Cruz issued an order rescinding the order which
partners, members, or officers; dismissed the complaint of the Bragas in the RTC, thus holding that the RTC and not
[c] between the corporation, partnership or association and the state in so far as its the SEC had jurisdiction. Respondent judge also revived the temporary restraining
franchise, permit or license to operate is concerned; and order previously issued restraining Telectronics' agents or representatives from
[d] among the stockholders, partners or associates themselves. enforcing their resolution constituting themselves as the new set of officers of Pocket
Bell and from assuming control of the corporation and discharging their functions.
The fact that the controversy at bar involves the rights of petitioner Union Glass who The Abejos filed a MR, which motion was duly opposed by the Bragas, which was
has no intra-corporate relation either with complainant or the DBP, places the suit denied by respondent Judge.
beyond the jurisdiction of the respondent SEC. The case should be tried and decided by

3
I: W/N the RTC, as claimed by the Bragas, has jurisdiction over the case or the SEC, as Abejos, Pocketbell is not a close corporation, and no restriction over the free
claimed by the Abejos transferability of the shares appears in the Articles of Incorporation, as well as in the
H: The Court ruled that the SEC has original and exclusive jurisdiction over the dispute bylaws 10 and the certificates of stock themselves, as required by law for the
between the principal stockholders of the corporation Pocket Bell, namely, the Abejos enforcement of such restriction. As the SEC maintains, "There is no requirement that a
and Telectronics, the purchasers of the 56% majority stock on the one hand, and the stockholder of a corporation must be a registered one in order that the Securities and
Bragas, erstwhile majority stockholders, on the other, and that the SEC, through its en Exchange Commission may take cognizance of a suit seeking to enforce his rights as
banc Resolution of May 15, 1984 correctly ruled in dismissing the Bragas' petition such stockholder." This is because the SEC by express mandate has "absolute
questioning its jurisdiction, that "the issue is not the ownership of shares but rather the jurisdiction, supervision and control over all corporations" and is called upon to enforce
nonperformance by the Corporate Secretary of the ministerial duty of recording the provisions of the Corporation Code, among which is the stock purchaser's right to
transfers of shares of stock of the Corporation of which he is secretary." The SEC ruling secure the corresponding certificate in his name under the provisions of Section 63 of
upholding its primary and exclusive jurisdiction over the dispute is correctly premised the Code.
on, and fully supported by, the applicable provisions of P.D. No. 902-A which
reorganized the SEC with additional powers "in line with the government's policy of An intra-corporate controversy is one which arises between a stockholder and the
encouraging investments, both domestic and foreign, and more active public corporation. There is no distinction, qualification, nor any exemption whatsoever. The
participation in the affairs of private corporations and enterprises through which provision is broad and covers all kinds of controversies between stockholders and
desirable activities may be pursued for the promotion of economic development and, to corporations.
promote a wider and more meaningful equitable distribution of wealth.” The dispute at
bar, as held by the SEC, is an intracorporate dispute that has arisen between and among
the principal stockholders of the corporation Pocket Bell due to the refusal of the Effect of Corporation Code on Existing Corporations
corporate secretary, backed up by his parents as erstwhile majority shareholders, to
perform his "ministerial duty" to record the transfers of the corporation's controlling Section 148. Applicability to existing corporations. - All corporations lawfully
(56%) shares of stock, covered by duly endorsed certificates of stock, in favor of existing and doing business in the Philippines on the date of the effectivity of
Telectronics as the purchaser thereof. Mandamus in the SEC to compel the corporate this Code and heretofore authorized, licensed or registered by the Securities
secretary to register the transfers and issue new certificates in favor of Telectronics and and Exchange Commission, shall be deemed to have been authorized,
its nominees was properly resorted to therefore. licensed or registered under the provisions of this Code, subject to the terms
and conditions of its license, and shall be governed by the provisions hereof:
The very complaint of the Bragas for annulment of the sales and transfers as filed by Provided, That if any such corporation is affected by the new requirements of
them in the regular court questions the validity of the transfer and endorsement of the this Code, said corporation shall, unless otherwise herein provided, be given
certificates of stock, claiming alleged preemptive rights in the case of the Abejos' shares a period of not more than two (2) years from the effectivity of this Code
and alleged loss of the certificates and lack of consent and consideration in the case of within which to comply with the same. (n)
Virginia Braga's shares. Such dispute clearly involves controversies "between and
among stockholders," as to the Abejos' right to sell and dispose of their shares to
Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who — Must be understood to be subject to the accrued or vested rights of the
between the Bragas and the Abejos' transferee should be recognized as the controlling existing corporation, its SHs and 3rd parties
shareholders of the corporation, with the right to elect the corporate officers and the — Any rights accrued or liabilities incurred prior to the effectivity of the
management and control of its operations. Such a dispute and case clearly fall within latter in favor of or against such corporation, its SHs must be respected
the jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A. — Any additional requirements imposed by the Code must be complied
with within 2 years from its effectivity
Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation
Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be Magalad v Premiere Financing Corporation (209 SCRA 261). F:
deemed a device or scheme amounting to fraud and misrepresentation employed by Premiere is a financing company engaged in soliciting and accepting money market
them to keep themselves in control of the corporation to the detriment of Telectronics placements or deposits. On September 12, 1983 with expired permit to issue
(as buyer and substantial investor in the corporate stock) and the Abejos (as substantial commercial papers and with intention not to pay or defraud its creditors, Premiere
stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an induced and misled Magalad into making a money market placement of P50,000.00 at
intra-corporate controversy between and among the majority and minority 22% interest per annum for which it issued a receipt as well as two (2) post-dated
stockholders as to the transfer and disposition of the controlling shares of the checks in the total sum of P51,079.00 and assigned to Magalad its receivable from a
corporation, falling under paragraph (b) of Sec 5 PD 902-A. As pointed out by the certain David Saman for the same amount. Drawee bank dishonored the checks for lack

4
of sufficient funds to cover the amount. Despite demands by Magalad for the
replacement of said checks with cash, Premiere, for no valid reason, failed and refused
to honor such demands and due to fraudulent acts of Premiere. The TC found that Chapter II: Classification of Private Corporations
Magalad has fully established her claim that defendant had indeed acted fraudulently in
incurring the obligation and considering that no evidence has been adduced by the Stock and Non-stock Corporations
defendant to contradict the same, judgment is hereby rendered ordering the defendant
to pay Magalad. Premiere contends that the Securities and Exchange Commission Section 3. Classes of corporations. - Corporations formed or organized
(SEC) has exclusive and original jurisdiction over a corporation under a state of under this Code may be stock or non-stock corporations. Corporations which
suspension of payments. Magalad submits that the legal suit which she has brought have capital stock divided into shares and are authorized to distribute to the
against Premiere is an ordinary action for damages with the preliminary attachment holders of such shares dividends or allotments of the surplus profits on the
cognizable solely by the RTC. basis of the shares held are stock corporations. All other corporations are
non-stock corporations. (3a)
H: Considering that Magalad's complaint sufficiently alleges acts amounting to fraud
and misrepresentation committed by Premiere, the SEC must be held to retain its
original and exclusive jurisdiction over the case, despite the fact that the suit involves Section 87. Definition. - For the purposes of this Code, a non-stock
collection of sums of money paid to said corporation, the recovery of which would corporation is one where no part of its income is distributable as dividends to
originally fall within the jurisdiction of regular courts. The fraud committed is its members, trustees, or officers, subject to the provisions of this Code on
detrimental to the interest of the public and, therefore, encompasses a category of dissolution: Provided, That any profit which a non-stock corporation may
relationship within the SEC jurisdiction. Otherwise stated, in order that the SEC can obtain as an incident to its operations shall, whenever necessary or proper,
take cognizance of a case, the controversy must pertain to any of the following be used for the furtherance of the purpose or purposes for which the
relationships: (a) between the corporation, partnership or association and the public; corporation was organized, subject to the provisions of this Title.
(b) between the corporation, partnership or association and its stockholders, partners,
members or officers; (c) between the corporation, partnership or association and the
The provisions governing stock corporation, when pertinent, shall be
state so far as its franchise, permit or license to operate is concerned; and (d) among the
applicable to non-stock corporations, except as may be covered by specific
stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC,
126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987). provisions of this Title. (n)

The fact that Premiere's authority to engage in financing already expired will not have Section 88. Purposes. - Non-stock corporations may be formed or organized
the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded for charitable, religious, educational, professional, cultural, fraternal, literary,
jurisdiction of the SEC was conceived primarily to protect the interest of the investing scientific, social, civic service, or similar purposes, like trade, industry,
public. That Magalad's money placements were in the nature of investments in agricultural and like chambers, or any combination thereof, subject to the
Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from special provisions of this Title governing particular classes of non-stock
moneys she had paid to Premiere. Unfortunately, however, she was the victim of alleged corporations. (n)
fraud and misrepresentation. Reliance by Magalad on the case of Union Glass &
Container Corp. v. SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts
was upheld, is misplaced for, as explicitly stated in those cases, nowhere in the — 2 elements to become a stock corporation:
complaints therein is found any averment of fraud of misrepresentation committed by o capital stock divided into shares
the respective corporations involved. The causes of action, therefore, were nothing o stock must be authorized to distribute dividends to its SHs
more than simple money claims. Further bolstering the jurisdiction of the SEC in this o because the main purpose of the corporation is to make
case is the fact that said agency already appointed a Rehabilitation Receiver for profits for its shareholders
Premiere and has directed all proceedings or claims against it be suspended. This, — GR: a business corporation should organize as a stock
pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment of a . corporation
. . rehabilitation receiver . . . all actions for claims against corporations . . . under
receivership pending before any court, tribunal, board or body shall be suspended — Non-stock corporation: special kind of corporation with needs
accordingly." By so doing, SEC has exercised its original and exclusive jurisdiction to different from those of stock corporations
hear and decide cases involving: "a) Petitions of corporations, partnerships or
associations to be declared in the state of suspension of payments.”

5
CIR v Club Filipino. The "Club Filipino, Inc. de Cebu," (Club, for short), is a civic is a familiar rule that the actual purpose is not controlled by the corporate form or by
corporation, owning and operating a club house, a bowling alley, a golf course, and a the commercial aspect of the business prosecuted, but may be shown by extrinsic
bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its evidence, including the by-laws and the method of operation.
members and their guests. The bar-restaurant was a necessary incident to the operation
of the club and -its golf-course. The club is operated mainly with funds derived from Moreover, for a stock corporation to exist, two requisites must be complied with, to wit:
membership fees and dues. Whatever profits it had, were used to defray its overhead (1) a capital stock divided into shares and (2) an authority to distribute to the holders of
expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising such shares, dividends or allotments of the surplus profits on the basis of the shares
from the re-valuation of its real properties, the value or price of which increased, the held (see. 3, Act No. 1459). In the case at bar, while the respondent Club's capital stock
Club declared stock dividends; but no actual cash dividends were distributed to the is divided into shares, nowhere in its articles of incorporation or by-laws could be found
stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage an authority for the distribution of its dividends or surplus profits. Strictly speaking, it
tax on the gross receipts of its bar and restaurant. The Collector of Internal Revenue cannot, therefore, be considered a stock corporation, within the contemplation of the
assessed against and demanded from the Club, percentage taxes on its gross receipts as corporation law. "A tax is a burden, and, as such, it should not be deemed imposed
well as fixed taxes and compromise penalty. The Club wrote the Collector, requesting upon fraternal, civic, non-profit, non-stock organizations, unless the intent to the
for the cancellation of the assessment. The request having been denied, the Club filed contrary is manifest and patent."
the instant petition for review.
I: W/N the respondent Club is liable for the payment of the sum of P12,068.84, as fixed Manual R. Dulay Ent. Inc. v. CA (225S 678). Petitioner corporation through
and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax its president, Manuel Dulay, obtained various loans for the construction of its hotel
Code, under which the assessment was made, in connection with the operation of its project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money
bar and restaurant, during the periods mentioned from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said
H: It has been held that the liability for fixed and percentage taxes, as provided by these loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject
sections, does not ipso facto attach by mere reason of the operation of a bar and property since 1973 while at the same time managing the Dulay Apartment as his
restaurant. For the liability to attach, the operator thereof must be engaged in the shareholdings in the corporation was subsequently increased by his father. Manuel
business as a barkeeper and restaurateur. The plain and ordinary of a business is Dulay by virtue of Board Resolution No. 186 of petitioner corporation sold the subject
restricted to activities or affairs where profit is the purpose or livelihood is the motive, property to private respondents spouses, Maria Theresa and Castrense Veloso in the
and the term business when used without qualification, should be construed in its plain amount of P300,000.00. The parties then executed a Memorandum to the Deed of
and ordinary meaning, restricted to activities for profit or livelihood. Having found as a Absolute, giving Manuel Dulay within two (2) years or until December 9, 1979 to
fact that the Club was organized to develop and cultivate sports of all, class and repurchase the subject property for P200,000.00 which was however, not annotated.
denomination, for the healthful recreation and entertainment of its stockholders and Thereafter private respondent Maria Veloso, without the knowledge of Manuel Dulay,
members; that upon its dissolution, its remaining assests, after paying debts, shall be mortgaged the subject property to private respondent Manuel A. Torres for a loan of
donated to a charitable Philippine Institution in Cebu; that it is operated mainly with P250,000.00 which was duly annotated. The subject property was sold on April 1, 1978
funds derived from membership fees and dues; that the Club's bar and restaurant to private respondent Torres as the highest bidder in an extrajudicial foreclosure, upon
catered only to its members and their guests; that there was in fact no cash dividend default of Veloso to pay the loan. Veloso then executed a Deed of Absolute Assignment
distribution to its stockholders and that whatever was derived on retail from its bar and of the Right to Redeem in favor of Manuel Dulay assigning her right to repurchase the
restaurant was used to defray its overall overhead expenses and to improve its golf- subject property from private respondent Torres. As neither private respondent Maria
course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in Veloso nor her assignee Manuel Dulay was able to redeem the subject property within
the business of an operator of bar and restaurant (same authorities, cited above). the one year statutory period for redemption, private respondent Torres sought to
It is conceded that the Club derived profit from the operation of its bar and restaurant, consolidate his ownership over the property. Petitioner Virgilio Dulay appeared in court
but such fact does not necessarily convert it into a profit-making enterprise. The bar to intervene in said case alleging that Manuel Dulay was never authorized by the
and restaurant are necessary adjuncts of the Club to foster its purposes and the profits petitioner corporation to sell or mortgage the subject property, and sought to cancel the
derived therefrom are necessarily incidental to the primary object of developing and sheriff sale to Torres and regain possession of the property. TC rules ifo Torres, Veloso
cultivating sports for the healthful recreation and entertainment of the stockholders et al. The corporation and Virgilio Dulay contend that the respondent court had acted
and members. That a Club makes some profit, does not make it a profit making club. with grave abuse of discretion when it applied the doctrine of piercing the veil of
corporate entity in the instant case considering that the sale of the subject property
The fact that the capital stock of the respondent Club is divided into shares, does not between private respondents spouses Veloso and Manuel Dulay has no binding effect
detract from the finding of the trial court that it is not engaged in the business of on petitioner corporation as Board Resolution No. 18 which authorized the sale of the
operator of bar and restaurant. What is determinative of whether or not the Club is subject property was resolved without the approval of all the members of the board of
engaged in such business is its object or purpose, as stated in its articles and by-laws. It

6
directors and said Board Resolution was prepared by a person not designated by the Committee for the payment of its loan credit. Agrix and NDC refused to recognize the
corporation to be its secretary. claim, invoking PD 1717 which ordered the rehabilitation of the Agrix Group of
Companies is administered by the National Development Company. Sec 4(1) thereof
H: In the instant case, petitioner corporation is classified as a close corporation and provides all mortgages and other liens attached to the assets of the dissolved
consequently a board resolution authorizing the sale or mortgage of the subject corporations are hereby extinguished. Agrix proceeded to cancel the mortgage lien in
property is not necessary to bind the corporation for the action of its president. At any light of the PD. TC annulled the entire PD 1717. NDC appeals. It claims that since
rate, a corporate action taken at a board meeting without proper call or notice in a close Veterans Bank invoked questioned PD when it filed a claim with the Agrix Claims
corporation is deemed ratified by the absent director unless the latter promptly files his committee, it is thus estopped from questioning the validity of the PD which also
written objection with the secretary of the corporation after having knowledge of the provides that all mortgages attached to properties of Agrix shall be extinguished.
meeting which, in this case, petitioner Virgilio Dulay failed to do.
H: Estoppel does not apply where Veterans Bank invoked the questioned PD when Pres
It is relevant to note that although a corporation is an entity which has a personality Marcos was still absolute ruler and his decrees were absolute law. Not a single act or
distinct and separate from its individual stockholders or members, the veil of corporate issuance of Marcos was ever declared unconstitutional as long as he was in power.
fiction may be pierced when it is used to defeat public convenience, justify wrong,
protect fraud or defend crime. The privilege of being treated as an entity distinct and In this case, Veterans Bank has not been paid a single centavo on its claim, which was
separate from. its stockholders or members is therefore confined to its legitimate uses kept pending for more than 7 years. The new corporation, New Agrix Inc, is neither
and is subject to certain limitations to prevent the commission of fraud or other illegal owned nor controlled by the government. The DC was merely required to extend a loan
or unfair act. When the corporation is used merely as an alter ego or business conduit of of not more than P10M to New Agrix Inc. it is entirely private and so should have been
a person, the law will regard the corporation as the act of that person. The Supreme organized under the Corporation Law. The Court thus declared the PD 1717 as
Court had repeatedly disregarded the separate personality of the corporation where the unconstitutional.
corporate entity was used to annul a valid contract executed by one of its members.
Does a defective incorporation result into a partnership? NO.
Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to 1. If parties intended to create a corporation, then a partnership
private respondents spouses Veloso is null and void as the alleged Board Resolution No. arrangement cannot be created in its stead since such is not
18 was passed without the knowledge and consent of the other members of the board of within their intent
directors cannot be sustained. Virgilio is very much privy to the transactions involved. 2. Important differences between the corporation and partnership,
To begin with, he is an incorporator and one of the board of directors designated at the such as limited liability, centralized management, and easy
time of the organization of Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the transferability of shares are by themselves strong factors to be
said entity is loosely referred to as a family corporation'. The nomenclature, if bound by a corporate agreement
imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Delay Pioneer Insurance v CA (175 SCRA 668). F: In 1965, Jacob S. Lim was
Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single
three (3) children and their father whose name identifies their corporation. proprietorship. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and
Lim entered into and executed a sales contract for the sale and purchase of two (2) DC-
Petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject 3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US
property to private respondents by Manuel Dulay is valid and binding. The sale between $109,000.00 to be paid in installments. The 2 planes were delivered to Lim in Manila.
Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and
Castrense C. Veloso, was a corporate act of the former and not a personal transaction of issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance
Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and price of the aircrafts and spare parts. It appears that Border Machinery and Heavy
treasurer but also the general manager of the corporation. The corporation, was a Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
closed family corporation, where the incorporators and directors belong to one single (Cervanteses) and Constancio Maglana contributed some funds used in the purchase of
family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general the above aircrafts and spare parts. The funds were supposed to be their contributions
manager almost had absolute control over the business and affairs of the corporation. to a new corporation proposed by Lim to expand his airline business. Lim had duly
received the amount of P151,000.00 from defendants Bormaheco and Maglana
NDC v Philippine Veterans Bank (192 SCRA 257). AGRIX executed ifo Phil representing the latter's participation in the ownership of the subject airplanes and
Veterans Bank a REM over 3 parcels of land. During the existence of the mortgage, spare parts. The indemnitors then executed two (2) separate indemnity agreements in
AGRIX went bankrupt. Veterans Bank than filed a claim with the AGRIX Claims favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL,

7
Bormaheco and the Cervanteses. The indemnity agreements stipulated that the
indemnitors principally bind themselves jointly and severally to indemnify and hold In this case, it was established by the evidence contrary to Lim’s postulations, that
and save harmless Pioneer from and against any/all damages, losses, costs, damages, Cervantes, Bormacheo, and Maglana contributed the amount needed by Lim to put up
taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may the corporation as he promised, which he received. It is therefore clear that the
incur in consequence of having become surety upon the bond. Lim doing business petitioner never had the intention to form a corporation with the respondents despite
under the name and style of SAL executed in favor of Pioneer as deed of chattel his representations to them. This gives credence to the cross-claims of the respondents
mortgage as security for Pioneer’s suretyship. Lim defaulted on his subsequent to the effect that they were induced and lured by the petitioner to make contributions to
installment payments prompting JDA to request payments from the surety. Pioneer a proposed corporation which was never formed because the petitioner reneged on their
paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial agreement. Necessarily, no de facto partnership was created among the parties which
foreclosure of the said chattel mortgage. The Cervanteses and Maglana, however, filed a would entitle the petitioner to a reimbursement of the supposed losses of the proposed
third party claim alleging that they are co-owners of the aircrafts. Pioneer also filed an corporation. The record shows that the petitioner was acting on his own and not in
action for judicial foreclosure with an application for a writ of preliminary attachment behalf of his other would-be incorporators in transacting the sale of the airplanes and
against Lim and respondents, the Cervanteses, Bormaheco and Maglana. After trial on spare parts.
the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants. CA modified the trial court's decision (When parties come together intending to form a corporation, but no
in that the plaintiff’s complaint against all the defendants was dismissed. In all other corporation is formed due to some legal cause:
respect the trial court's decision was affirmed. Lim asserted that as a result of the failure (1) parties who intended to participate or actually participated in the
of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim business affairs of the proposed corporation would be considered as
to incorporate, a de facto partnership among them was created, and that as a
partners under a de facto corporation
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. (2) parties who took no part except to subscribe for stock in a proposed
corporation, do not become partners with the subscribers engaged
I: What legal rules govern the relationship among co-investors whose agreement was to in the business of the corporation)
do business through the corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be treated in situations where Corporation Sole
their contributions to the intended 'corporation' were invested not through the — only a religious corporation can become a corporation sole
corporate form?
Parent and Subsidiary corporations; holding companies; affiliate
H: it is ordinarily held that persons who attempt, but fail, to form a corporation and corporations
who carry on business under the corporate name occupy the position of partners inter
se. Where persons associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come short of creating a — subsidiary corporation: one where the control, in the form
corporation within the statute, they become in legal effect partners inter se, and their of ownership of majority shares, is in another corporation
rights as members of the company to the property acquired by the company will be called the parent corporation
recognized. — parent has the power to elect the subsidiary’s directors,
thus controlling management properties
However, such a relation does not necessarily exist, for ordinarily persons cannot be — holding company: a parent company where the sole
made to assume the relation of partners, as between themselves, when their purpose is
function is to hold the shares of other corporations which it
that no partnership shall exist, and it should be implied only when necessary to do
controls
justice between the parties; thus, one who takes no part except to subscribe for stock in
i. no other business other than holding of shares
a proposed corporation which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the pretended corporation, — investment company: a corporation which holds shares
so as to be liable as such in an action for settlement of the alleged partnership and not for control but for investment
contribution. A partnership relation between certain stockholders and other — affiliates: corporations subject to common control and
stockholders, who were also directors, will not be implied in the absence of an operated as part of a system
agreement, so as to make the former liable to contribute for payment of debts illegally i. also called sister corporations
contracted by the latter.