1

CORPORATION LAW
REVIEWER
I. GOVERNING LAW
Revised Corporation Code (RA 11232)

A. Historical Background
1.Corporation Code (Act 1459, April 1, 1906)
2.Corporation Code of the Philippines (BP 68, May 1 1980)
3.Revised Corporation Code (RA 11232, February 23, 2019)

B. Rationale for Enactment

1.It is the doing business in the Philippines (Luma na yung BP 68)
2. There are added rules for the protection of the corporation
and stockholders (ex. Creation of the emergency board)
3.Instill corporate and civil personality
4.It strengthens the regulatory agency.

C. Applicability
1. Nothing in this law shall be construed as amending existing provisions
of special laws governing the registration, regulation, monitoring and
supervision of special corporations such as banks, nonbank financial
institutions and insurance companies.

Notwithstanding any provision to the contrary, regulators such as the

Bangko Sentral ng Pilipinas and the Insurance Commission shall exercise
primary authority over special corporations such as banks, nonbank financial
institutions, and insurance companies under their supervision and
regulation
. (Sec 183)

2. A corporation lawfully existing and doing business in the Philippines

affected by the new requirements of this Code shall be given a period of
not more than two (2) years from the effectivity of this Act within which to
comply.(Sec 185)

D. Effects of Amendment or Repeal

No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.( Sec 184)

E. Effectivity
This Act shall take effect upon completion of its publication in the Official
Gazette or in at least two (2) newspapers of general circulation (February
23, 2019).(Sec 188)

What are the effects of RCC to BP 68? Did it abrogate or affect

personalities?
-No, right, remedies, and liabilities are not affected.

What are the effects of RCC to existing corporation if additional requirements

are stated?
-Corporations existing before the effectivity of RCC must comply with such
requirements two (2) years from effectivity. Non-compliance would be a
ground for the revocation of the corporation.

II. NATURE OF CORPORATION

A. Definition
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 incidental to its existence.

B. Four (4) attributes

1.It is an artificial being
- It has a juridical personality distinct or different
from its stockholders.
2.It is created by operation of law
-The consent of the state is necessary for a corporation
to be created.
3.It enjoys the right of succession
-The death of a stockholder does not terminate the
corporation.
Not synonymous corporate immortality
4. It has the powers, attributes, and properties expressly authorized
by law or incident to its existence.
- The doctrine of limited capacity.

Reynoso IV vs. CA, GR Nos. 116124-25

The Commercial Credit Corporation (CCC), a financing company and
investment firm, decided to organize franchise companies indifferent parts
of the country, wherein it shall hold 30% equity. Employees of the CCC
were designated as resident managers of the franchise companies. Petitioner
Bibiano O. Reynoso IV was designated as the resident manager of the
franchise in Quezon City, known as the Commercial Credit Corporation of
Quezon City. CCC-QC entered into an exclusive agreement management
contract with CCC whereby the latter was granted the management and full
control of the business activities of the former. Under the contract, CCC-QC
shall sell, discount and/or assign its receivables to CCC.

Subsequently, however, this discounting arrangement was discontinued

pursuant to the so called DOSRI rule, prohibiting the lending of funds
by corporations to its directors, officers, stockholders and other persons
with related interest therein. On account of the new restrictions imposed
by the Central Bank policy by virtue of the DOSRI rule, CCC decided to form
CCC Equity Corporation, a wholly-owned subsidiary, to which CCC
transferred its 30% equity in CCC-QC, together with 2 seats in the latter’s
Board of Directors. A complaint for sum of money with preliminary
attachment was filed by CCC- equity against petitioner and the latter was
also dismissed from employment to which the lower court’s decision was
rendered in favor of the petitioner and the
same has become final and executory. CCC changed its name to General
Credit Corporation (GCC).

Ruling
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. It is an artificial being
invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to
which it may be related.

Tayag vs. Benguet Consolidated Inc., GR No. L-23145 –

Idonah Slade Perkins died in New York City. Prospero Sanidad
instituted ancillary administration proceedings appointing ancillary
administrator Lazaro
A. Marquez later on substituted by Renato D. Tayag.

CFI ordered domiciliary administrator County Trust Company of New York

to surrender to the ancillary administrator in the Philippines 33,002 shares of
stock certificates owned by her in a Philippine corporation, Benguet
Consolidated, Inc., to satisfy the legitimate claims of local creditors When
County Trust Company of New York refused the court ordered Benguet
Consolidated, Inc. to declare the stocks lost and required it to issue new
certificates in lieu thereof Appeal was taken by Benguet Consolidated, Inc.
alleging the failure to comply with its by- laws setting forth the
procedure to be followed in case of a lost, stolen or destroyed so it
cannot issue new stock certs.

Ruling:
A corporation is an artificial being created by operation of law "It owes its
life
to the state, its birth being purely dependent on its will. It cannot
ignore the source of its very existence.

C. Limitations of the creation of a Corporation.

1. Private Corporation
The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and
subject to the test of economic viability.(Sec 16, Art. 12, 1987 Constitution)

2. Government and Owned and Controlled Corporation (GOCC)

A government and controlled corporation refers to any agency organized
as a stock or non-stock corporation, vested with functions relating to
public needs weather governmental or proprietary in nature, and owned by
the government direct or indirect through its instrumentalities wholly or in
part owning at least 51% of its capital stock. (MIAA vs. CA GR No.
155650)

What are the two requisite for the creation of a GOCC?

1.It must be created for the common good or purpose.
2.It must pass the test of viability (It could sustain itself). (Candang vs.
Disierto, GR. No. 148076)
MIAA vs. CA, 495 SCRA 591
The Office of the Government Corporate Counsel issued an Opinion, stating
that the Local Government Code (1991) had withdrawn the exemption from
real estate tax granted under the MIAA Charter. MIAA paid some of the real
estate tax already due. But in 2001, it received final notices of real estate
tax delinquency from the City of Paranaque for the years 1992-2001.The
City then issued notices of levy on the airport lands and buildings, and
threatened a public auction.

MIAA filed a petition for prohibition and injunction, seeking to restrain the
City’s imposition of the real estate tax. But this was dismissed for being
filed late.

MIAA’s contention: It shouldn’t be taxed because although its charter placed

the title of the airport lands in MIAA’s name, it cannot claim ownership
over them. The charter mandated that they be devoted for the benefit of
the general public. Thus, their ownership remains with the State, and as
such, the lands cannot be the subject of real estate tax by the local
governments, because of the principle that the government cannot tax
itself.

The City’s contention: The Local Govt Code expressly withdrew the tax
exemption privileges of GOCCs. The MIAA is a GOCC.

Ruling
MIAA is not a GOCC. The airport lands and buildings cannot be taxed by
the City of Paranaque. MIAA is not a GOCC. It is an instrumentality of
the national government and is thus exempt from local taxation. A
GOCC is an agency organized as a stock or non-stock corporation, vested
with functions relating to public needs whether governmental or
proprietary in nature, and owned by the government directly or through its
instrumentalities, either wholly or in case of a stock corporation, to the extent
of at least 51% of its capital stock. MIAA cannot be considered a GOCC
because it is neither a stock nor a non-stock corporation.

MIAA is not a stock corporation because although it has capital, such

capital is not divided into shares of stock. MIAA is not a non-stock
corporation because it has no members. Moreover, non-stock corporations are
organized for charitable, religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social, civil service, or similar
purposes like trade, industry, etc. (Section 87, RCC) MIAA is not organized
for any of these purposes. It is a public utility organized to operate an
airport for public use. What MIAA is a government instrumentality vested
with corporate powers to perform governmental function efficiently. Just
because it has corporate powers doesn’t make it a corporation.

Carandang vs. Disierto, GR No. 148076

Antonio Carandang was the general manager and chief operating officer of
Radio Philippines Network (RPN) in 1998.

Before Carandang joined the company, RPN’s assets were sequestered by

the government in 1986, when the Cory Administration created the PCGG,
tasked with the seizing of ill-gotten wealth of Marcos’ cronies. Among the
unfortunate
crooks stripped of wealth was Roberto Benedicto, stockholder of RPN.
He entered into a compromise agreement with PCGG and ceded all of his
shares in RPN. The court issued an order for the transfer of Benedicto’s shares
amounting to 72.4% of RPN’s total shares. However, Benedicto filed a
motion for reconsideration, alleging that his shares only comprise 32.4%
of RPN’s total shares. This motion was still pending at the time
Carandang’s case reached the SC.

Bottomline: 40% of the government’s claim over RPN’s shares (72.4 minus
32.4) was still being contested. Only 32.4% was conclusive.In 1999,
Carandang and other RPN officials were charged with grave misconduct by
the Ombudsman, on account of having entered into a contract with a
corporation (AF Broadcasting Inc.) where he was an incorporator, director,
and stockholder, contrary to the Code of Conduct and Ethical Standards
for Public Officials and Employees.

Carandang argues that the Office of the Ombudsman had no jurisdiction over
him because RPN was not a government corporation, and thus, he was not
a public official.

Ruling
In this case, the government’s 72.4% claim over RPN was still under
contest. In order to qualify as a GOCC, the government’s stake must at
least be 51%. Here, only 32.4% of the government’s stake on RPN was
conclusive. Hence, RN cannot be considered a GOCC.

Cervantes vs. Auditor General, GR No. L-4043

The National Abaca and other Fibers Corp NAFCO was created by the
Commonwealth Act No. 332, approved on June 18, 1939, with a capital
stock of P20,000,000, 51 per cent of which was to be able to be subscribed
by the National Government and the remainder to be offered to provincial,
municipal, and the city governments and to the general public. The
management the corporation was vested in a board of directors of not
more than 5 members appointed by the president of the Philippines with
the consent of the Commission on Appointments.

With its controlling stock owned by the Government and the power of
appointing its directors vested in the President of the Philippines, there
can be no question that the NAFCO is Government controlled corporation
subject to the provisions of Republic Act No. 51 and the executive order
(No. 93) promulgated in accordance therewith. BCDA vs. CIR, GR No.
205925 - At the crux of the present petition is the issue of whether or
not BCDA is a government instrumentality or a government-owned and –
controlled corporation (GOCC). [if it is an instrumentality, it is exempt
from the payment of docket fees. lf it is a GOCC, it is not exempt and as
such non-payment thereof would mean that the tax court did not acquire
jurisdiction over the case and properly dismissed it for BCDA's failure to
settle the fees on time. The Court ruled that BCDA is a government
instrumentality vested with corporate powers. As such, it is exempt from the
payment of docket fees required under Section 21, Rule 141 of the
Rules or Court.
Note: Private Corporation is created by general law (RCC), while;
Public Corporation is created by special law.

How does the state give its consent in the formation of a corporation?
-Through the enactment of a law.
Congress?
-No, the legislative branch of the government shall provide a general
law.

What is the basis for the creation of a private or public corporation?

-The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and
subject to the test of economic viability.
(Sec. 16, Art. XII of the 1987 Constitution.)

Two reasons why it is created in a general law.

1.Uniformity in its creation.
2.To avoid or prevent corruption.

D.Primary vs. Secondary Franchise

What is a franchise?
-Is the special privilege given or granted to an entity.

1. Primary Corporate or (General) Franchise)

-The right to exist.
-Given to individuals who compose the corporation.
-Not transferable without the consent of the state.
-Not subject to conveyance (Transfer of ownership)

2. Secondary or special Franchise

-Franchise that is given to the corporation to exercise corporate powers.
-It may be conveyed to a corporation to dispose its property.

Primary (General) Franchise Secondary Franchise

Franchise to exist as a corporation. Certain rights and privileges conferred
(The right to exist) upon existing corporation.

The right to exist as such is vested It is vested to the corporation.

in the individuals who compose (Rights and privileges)
the corporation.

It could not be conveyed. Maybe be subject to conveyance.

E. Theories on the creation of Corporation

1. Concession Theory
-Corporation as an artificial being created by operation of law. It owes its
life to the state, its birth being purely dependent on its will.
2. Genossenchaft Theory
-Grouping of individuals without the consent of the state. (This is not
applicable to the Philippines)
Enterprise theory
Symbol theory

F. Doctrine of Limited Capacity

No corporation shall possess or exercise corporate powers other than
those conferred by this Code or by its articles of incorporation and except
as necessary or incidental to the exercise of the powers conferred.(Sec 44)
( No discretionary power)

G. Corporations vs. Other Business Organization

1. Sole Proprietorship
This is a form of business organization with only one proprietary owner; a single
individual conducts business under his own name or under a business name. The
sole proprietor manages and exercises complete control over the conduct of his
business.

2 Partnerships
Under the Civil Code, there is partnership when two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.

3. Joint Ventures
It is an association of persons or companies jointly undertaking some commercial
enterprise; generally all contribute assets and share risks. It requires a community
interest in the performance of the subject, a right to direct and govern the policy
connected therewith, and duty, which may be altered by agreement to share both in
profit and losses.

4. Cooperatives
It is an autonomous and duly registered association of persons, with a common bond
of interest, who have voluntarily joined together to achieve their social, economic,
cultural, needs and aspirations by making equitable contributions to the capital
required, patronizing their products and services and accepting a fair share of the
risks and benefits of the undertaking in accordance with universally accepted
cooperative principles.

Advantages of a Corporation:
1. Has a strong legal personality
2. Professional management;
3. Limitation of or exception from, individual liability of shareholders;
4. Transferability of shares;
5. Continuity of existence;
6. Centralized management of BOD;
7. Professional management
8. The capacity to act as a legal unit;
9. Standardized method of organization, and finance; and
10. Easy capital generation.
 Disadvantages of Corporation:
1. Greater government control
2. More complicated to control
3. Limited ability to raise creditor capital;
4. It may be burdened with an inefficient management if stockholders cannot
organize to oppose management;
5. Subject to greater governmental regulation;
6. Prone to double taxation;
7. Harder to organize compared to other business organizations;
8. It is harder or more complicated to maintain; and
9. The owners or stockholders do not participate in the day-to-day
management.

3-5

III. CLASSES OF CORPORATION

A. As to share of stock
1.Stock Corporation
- Stock corporations are those which have capital stock divided into shares
and are authorized to distribute to the holders of such shares,
dividends, or allotments of the surplus profits on the basis of the
shares held. (Sec 3)

2.Nonstock Corporation
- a nonstock corporation is one where no part of its income is distributable
as dividends to its members, trustees, or officers. (Sec 86)
-It may be profitable or proprietary in nature.

B. As to function
1. Public Corporation
-Assist the state in the administration of justice.
Examples:
1. Province
2. City
3. Barangay
4. Municipality
5. Autonomous region.

2. Private Corporation
-Organized for profit making purposes. It may also for benevolent purposes.

Note: The true test to determine whether a corporation is public or private

is found in totality of relation of the corporation to the state. (Philippine
Society for the Prevention of Animal Cruelty vs. C.O.A., GR. No.
169752)

Philippine Society for the Prevention of Cruelty to Animals vs. COA, GR No.
169752
The petitioner was incorporated as a juridical entity over one hundred
years ago by virtue of Act No. 1285, enacted on January 19, 1905, by
the Philippine Commission. The petitioner, at the time it was created, was
composed of animal aficionados and animal propagandists. The objects of
the petitioner, as stated in
For the purpose of enhancing its powers in promoting animal welfare
and enforcing laws for the protection of animals, the petitioner was
initially imbued under its charter with the power to apprehend violators of
animal welfare laws. In addition, the petitioner was to share 1/2 of the
fines imposed and collected through its efforts for violations of the laws
related thereto. Subsequently, however, the power to make arrests as well
as the privilege to retain a portion of the fines collected for violation of
animal-related laws were recalled by virtue of
C.A. No. 148. Whereas, the cruel treatment of animals is now an offense
against the State, penalized under our statutes, which the Government is
duty bound to enforce; When the COA was to perform an audit on them
they refuse to do so, by the reason that they are a private entity and not
under the said commission. It argued that COA covers only government
entities. On the other hand the COA decided that it is a government
entity.

Ruling
Essentially, the “charter test” provides that the test to determine whether
a corporation is government owned or controlled, or private in nature is
simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those
with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the CSC, and
are compulsory members of the GSIS.

And since the “charter test” had been introduced by the 1935 Constitution
and not earlier, it follows that the test cannot apply to the petitioner,
which was incorporated by virtue of Act No. 1285, enacted on January 19,
1905. Settled is the rule that laws in general have no retroactive effect,
unless the contrary is provided. All statutes are to be construed as
having only a prospective operation, unless the purpose and intention of
the legislature to give them a retrospective effect is expressly declared or
is necessarily implied from the language used. In case of doubt, the
doubt must be resolved against the retrospective effect.

Second, a reading of petitioner’s charter shows that it is not subject to

control or supervision by any agency of the State, unlike GOCCs. No
government representative sits on the board of trustees of the petitioner.
Like all private corporations, the successors of its members are
determined voluntarily and solely by the petitioner in accordance with its
by-laws, and may exercise those powers generally accorded to private
corporations, such as the powers to hold property, to sue and be sued, to
use a common seal, and so forth. It may adopt by-laws for its internal
operations: the petitioner shall be managed or operated by its officers “in
accordance with its by-laws in force.”

National Coal Co. vs. CIR, GR L-22619

The National Coal Company was created by Act No. 2705 and was granted
the general powers of a corporation “and such other powers as may be
necessary to enable it to prosecute the business of developing coal
deposits in the Philippine Island and of mining, extracting, transporting
and selling the coal contained in said deposits.” Two months later, the
Philippine Legislature passed Act No. 2719
to provide for the leasing and development of coal lands in the
Philippine Islands. Seven months after the company’s creation, the National
Coal Company took possession of coal lands within a reservation in the
Zambaonaga Peninsula.

Plaintiff harvested coal on public lands between 1920 and 1922 collecting a
total of 24,089.3 tons of coal. Appellant CIR then subjected the mined coal to a
specific tax of P0.50 per metric ton under Act 1496 which subjected coal
collected by non-owners of land for P12,044.68. Plaintiff claimed a
refund from the CIR arguing exemption from taxes under the provision of
sections 14 and 15 of Act No. 2719, and prayed for a judgment ordering
the defendant to refund to the plaintiff said sum of P12, 044.68, with
legal interest from the date of the presentation of the complaint, and
costs against the defendant. The trial court decided in favor of Plaintiff
extending the definition of ownership and should be understood to mean
“lands held in lease or usufruct” and should be taxed only P0.04 per ton of
coal under Section 15 of Act No. 2719.

Ruling
The plaintiff is a private corporation. The mere fact that the
Government happens to the majority stockholder does not make it a public
corporation. Act No. 2705, as amended by Act No. 2822, makes it subject
to all of the provisions of the Corporation Law, in so far as they are not
inconsistent with said Act (No. 2705). As a private corporation, it has no
greater rights, powers or privileges than any other corporation which
might be organized for the same purpose under the Corporation Law, and
certainly it was not the intention of the Legislature to give it a
preference or right or privilege over other legitimate private corporations
in the mining of coal.

C. As to the place of creation

1. Domestic
-It is created under the Philippine law.

2. Foreign Corporation
-A foreign corporation is one formed, organized or existing under laws other
than those of the
Philippines’ and whose laws allow Filipino citizens and corporations to
do business in its own
country or State. (Sec 140)

D. As to its legal status

1. De jure Corporation
-Incorporated strictly in accordance with the law.
-There is full or substantial compliance with the requirements of an existing
law.

2. De facto Corporation
- The due incorporation of any corporation claiming in good faith to be
a corporation under this Code, and its right to exercise corporate powers, shall
not be inquired into collaterally in any private suit to which such
corporation may be
a party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding. (Sec 19)

Requisites of a de facto corporation:

a. The existence of a valid law under which it may be incorporated.
b. An attempt in good faith to incorporate.
c. Assumption of corporate powers. (Seventh day Adventist conference
church of southern Philippines vs. Northeastern Mindanao Mission
of Seventh day Adventist, GR No. 150416)

Note: The filing of the articles of incorporation and the issuance of the
certificate of incorporation is essential to its existence as a de facto
corporation. (Seventh day Adventist conference church of southern
Philippines vs. Northeastern Mindanao Mission of Seventh day
Adventist, GR No. 150416)

What if the corporation fails to comply with the directory laws? Will it
affect the status of the corporation?
-No, it will not affect the status of the corporation.

What if it fails to comply with the requirements subsequent to its

incorporation? It will not affect the status of the corporation. It will
remain as a de jure corporation. However, it is a ground for its
revocation.

What if it did not comply with the condition precedent such as the
certification of incorporation has not been issued?
-It will affect the legal status of the corporation.

What if the law which it was incorporated was subsequently declared

unconstitutional?
-There is no corporation because there is no valid law creating it.

Hall vs. Piccio 86 Phil 603 (1950)

The petitioners C. Arnold Hall and Bradley P. Hall, and the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella,
signed and acknowledged in Leyte, the articles of incorporation of the Far
Eastern Lumber and Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general contractors, operators and
managers, etc. Attached to the articles was an affidavit of the treasurer
stating that 23,428 shares of stock had been subscribed and fully paid
with certain properties transferred to the corporation described in a
list appended thereto.

Immediately after the execution of said articles of incorporation, the

corporation proceeded to do business with the adoption of by-laws and the
election of its officers. On December 2, 1947, the said articles of incorporation
were filed in the office of the Securities and Exchange Commission for
the issuance of the corresponding certificate of incorporation.

On March 22, 1948, pending action on the articles of incorporation by the

SEC, respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S.
Abella filed a suit against petitioners before the Court of First Instance of
Leyte alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wished to have
it dissolved because of bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial losses.
The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall,
filed a motion to dismiss, contesting the court’s jurisdiction and the
sufficiency of the cause of action. After hearing the parties, the Hon.
Edmundo S. Piccio ordered the dissolution of the company; and at the
request of plaintiffs, appointed the respondent Pedro A. Capuciong as receiver
of the properties thereof, upon the filing of a P20,000 bond.

The defendants therein (petitioners herein) offered to file a counter-bond for

the discharge of the receiver, but the respondent judge refused to accept
the offer and to discharge the receiver. Hence, this petition.

Ruling
The court had no jurisdiction in civil case No. 381 to decree the dissolution
of the company, because it being a de facto corporation, dissolution
thereof may only be ordered in a quo warranto proceeding instituted in
accordance with section 19 of the Corporation Law.

Under our statute it is to be noted that it is the issuance of a certificate

of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity of collateral attack is
granted to corporations ‘claiming in good faith to be a corporation
under this act.’

Further, this is not a suit in which the corporation is a party. This is a

litigation between stockholders of the alleged corporation, for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders, without
the intervention of the state.

E. Other classes of corporation

1. Close Corporation
-A close corporation, within the meaning of this Code, is one whose articles
of incorporation provides that: (a) all the corporation’s issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding twenty (20); (b) all
the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (c) the corporation
shall not list in any stock exchange or make any public offering of its
stocks of any class. Notwithstanding the foregoing, a corporation shall not
be deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which
is not a close corporation within the meaning of this Code.( Sec 95)

2. Holding Corporation
-A corporation organized to hold the stock of another or other corporation.(
SEC opinion 15-15)

3. Subsidiary
- A corporation owned and controlled by another corporation.

4. Affiliate
-Only minority of its shares is controlled by a parent corporation

5. Corporation by Estoppel
-All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof. (Sec 20)

What is estoppel in general?

-A principle which precludes a person from asserting something contrary
to what such person claimed before

What is the basis of corporation by estoppel?

-Admission, agreement, and conduct by a person.
-All person who acts as a corporation knowing it to be without authority to
do so.

Is there a corporation classified as corporation by estoppel?

-No, corporation by estoppel exist only for the enforcement of liability

Note: Corporation by estoppel may exist only when there is enforcement of

liability. Its existence is only limited to the transaction.

Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., GR No. 136448
On behalf of "Ocean Quest Fishing Corporation” (OQFC), Antonio Chua and
Peter Yao entered into a Contract for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear Industries, Inc. (PFG). Chua
and Yao claimed that they were in a business venture with Lim Tong Lim,
who was not a signatory to the agreement.

The buyers failed to pay for the fishing nets and floats; hence, PFG
filed a collection suit against Chua, Yao and Lim. PFG brought this suit
against the 3 in their capacities as general partners. PFG alleged that
OQFC was a nonexistent corporation as shown by a Certification from
the SEC.

The trial court ruled against Chua, Yao, and Lim, and declared that
they, as general partners, were jointly liable to pay PFG. This finding was
based on a Compromise Agreement (in another case) where it could be
presumed from the equal distribution of the profit and loss that they
had joint liability.

The CA affirmed, agreeing that the 3 undertook a partnership for a specific

undertaking (that is, commercial fishing) and had the goal of dividing
profits which is an essential feature of a partnership. Hence this petition
by Lim. He
contends that he had no direct participation in the purchase, that only
Chua and Yao took part in the negotiations, and that he has not met any
of PFG’s representatives. Thus, he shouldn’t be liable for the unpaid
purchase. He also invokes the doctrine of corporation by estoppel, arguing
that only Chua and Yao should be liable for this contract, because his name
does not appear on any of the contracts and he never directly transacted
with PFG.

Ruling
An unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to
act as its representatives or agents do so without authority and at their
own risk.

A person acting or purporting to act on behalf of a corporation which

has no valid existence becomes personally liable for contracts entered into
or for other acts performed as such agent. This doctrine also extends to a
third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it.

In this case, Lim might not have entered into the contract with PFG
personally, but he benefited from the use of the nets that were purchased.
Under the law on estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held
liable as general partners.

International Expert Travel & Tour Services Inc. vs. CA, GR No. 118020
Petitioner International Express Travel and Tours Services Inc., through its
managing director, wrote a letter to the Philippine Football Federation through
its President Henri Kahn, wherein the former offered its services as a
travel agency to the latter. The offer was accepted. Petitioner secured the
airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips
to the People’s Republic of China and Brisbane. The total cost of the tickets
amounted to Php449,654.83. For the tickets received, the Federation
made two partial payments, both in September of 1989 in the total
amount of Php176,467.50.

Petitioner wrote the Federation, through the private respondent a demand

letter requesting for the amount of Php265,844.33. On October 30,
1989, the Federation, through the project gintong alay, paid the amount of
Php31,603. On December 27, 1989, Henri Kahn issued a personal check
in the amount of Php50,000 as partial payment for the outstanding
balance of the Federation. Thereafter, no further payments were made
despite repeated demands. Hence, this petition.

Ruling
A voluntary unincorporated association, like defendant Federation has no
power to enter into, or to ratify a contract. The contract entered into by its
officers or
agents on behalf of such association is binding or, as enforceable against
it. The officers or agents are themselves personally liable.

In attempting to prove the juridical existence of the Federation, Henri

Kahn attached to his motion for reconsideration before the trial court a
copy of the constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has indeed
been recognized and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and Sports Development.
Accordingly, we rule that the Philippine Football Federation is not a
national sports association within the purview of the aforementioned laws
and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henri Kahn should be
liable for the unpaid obligations of the unincorporated Philippine Football
Federation. It is a settled principle in corporation law that any person
acting or purporting to act on behalf of the corporation which has no
valid existence assumed such privileges and becomes personally liable
for contract entered into or for other acts performed as such agent.

Asia Banking Corporation vs. Standard Products Company, 46 Phil 144

(1924)
Standard Products, Co., Inc., was indebted to Asia Banking Corporation for
the amount of P37,757.22. To secure its indebtedness, it executed a promissory
note in favor of plaintiff-appellee. Upon demand for the balance due, the
respondent- appellant failed to pay. Hence an action was brought by
plaintiff-appellee to recover the sum of P24,736.47. The court rendered
judgment in favor of the plaintiff-appellee for the sum demanded in the
complaint, with interest on the sum of P24,147.34 from November 1, 1923,
at the rate of 10 per cent per annum, and the costs. Hence this appeal by
the respondent-appellant. At the trial of the case the plaintiff failed to
prove affirmatively the corporate existence of the parties and the appellant
insists that under these circumstances the court erred in finding that the
parties were corporations with juridical personality and assigns same as
reversible error.

Ruling
The general rule is that in the absence of fraud a person who has
contracted or otherwise dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is
thereby estopped to deny its corporate existence in any action leading
out of or involving such contract or dealing, unless its existence is attacked
for cause which have arisen since making the contract or other dealing relied
on as an estoppel and this applies to foreign as well as to domestic
corporations. The defendant having recognized the corporate existence
of the plaintiff by making a promissory note in its favor and making partial
payments on the same is therefore estopped to deny said plaintiff's
corporate existence. It is, of course, also estopped from denying its own
corporate existence. Under these circumstances it was unnecessary for the
plaintiff to present other evidence of the corporate existence of either of
the
parties. It may be noted that there is no evidence showing circumstances
taking the case out of the rules stated.

4. Corporation by prescription
A corporation that was not formally organized as such but has been
duly recognized by immemorial usage as a corporation, with rights and
duties under the law.

Barlin vs. Ramirez, GR No. L-2832

The defendant Ramirez, having been appointed by the plaintiff parish
priest, took possession of the church on 7/5/01. He administered if as such
under the orders of his superiors until 11/14/02. His successor having
been then appointed, the latter made a demand on this def. for the
delivery to him of the church, convent, and cemetery, and the sacred
ornaments, books, jewels, money, and other properties of the church. The
defendant by a written document of that date, refused to make such
delivery, stating that "the town of Lagonoy, in conjunction with the
parish priest of thereof, has seen fit to sever connection w/ the Pope at
Rome and his representatives in these Islands, and to join the Filipino
Church, the head of which is at Mla. In 1/4, the plaintiff brought this action
against defendant alleging in his amended complaint that the Roman
Catholic Church was the owner of the church building, the convent, cemetery,
the books, money, and other properties belonging thereto, and asking that
it be restored to the possession thereof and that the def. render an account
of the properties which he had received and w/c was retained by him, and
for other relief. The CFI-Ambos Camarines ruled in favor of the
plaintiff.

Ruling
The truth is that, from the earliest times down to the cession of the
Philippines to the United States, churches and other consecrated objects
were considered outside of the commerce of man. They were not public
property, nor could they be subjects of private property in the sense that
any private person could the owner thereof. They constituted a kind of
property distinctive characteristic of which was that it was
devoted to the worship of God.

But, being material things was necessary that some one should have the care
and custody of them and the administration thereof, and the question
occurs, To whom, under the Spanish law, was intrusted that possession and
administration? For the purposes of the Spanish law there was only one
religion. That was the religion professed by the Roman Catholic Church. It
was for the purposes of that religion and for the observance of its rites that
this church and all other churches in the Philippines were erected. The
possession of the churches, their care and custody, and the maintenance of
religious worship therein were necessarily, therefore, intrusted to that
body. It was, by virtue of the laws of Spain, the only body which could
under any circumstances have possession of, or any control over, any
church dedicated to the worship of God. By virtue of those laws this
possession and right of control were necessarily exclusive. It is not
necessary or important to give any name to this right of possession and
control exercised by the Roman Catholic Church in the church buildings of
the Philippines prior to
1898. It is not necessary to show that the church as a juridical person was
the owner of the buildings. It is sufficient to say that this right to the
exclusive possession and control of the same, for the purposes of its
creation, existed.(Barlin vs Ramirez, GR. No. L-2832)

6. Corporation as partners in a partnership

Aurbach vs. Sanitary Wares Manufacturing, GR No. 75875

ASI, a foreign corporation domiciled in Delaware, United States entered
into an Agreement with Saniwares and some Filipino investors whereby
ASI and the Filipino investors agreed to participate in the ownership of an
enterprise which would engage primarily in the business of manufacturing
in the Philippines and selling here and abroad vitreous china and sanitary
wares. The parties agreed that the business operations in the
Philippines shall be carried on by an incorporated enterprise and that
the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation." The management of the Corporation shall
be vested in a Board of Directors, which shall consist of nine individuals.
As long as American-Standard shall own at least 30% of the outstanding
stock of the Corporation, three of the nine directors... shall be designated
by American-Standard, and the other six shall be designated by the other
stockholders of the Corporation. Later, the 30% capital stock of ASI was
increased to 40%.

The corporation was also registered with the Board of Investments for
availment of incentives with the condition that at least 60% of the
capital stock of the corporation shall be owned... by Philippine nationals.
Unfortunately, with the business successes, there came a deterioration of
the initially harmonious relations between the two groups. According to
the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it
apparently had other subsidiaries or joint venture groups in the countries
where Philippine exports were... contemplated. On March 8, 1983, the annual
stockholders' meeting was held. There were protests against the action of
the Chairman and heated arguments ensued. These incidents triggered off the
filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by
Saniwares, Ernesto V. Lagdameo, Baldwin Young, Raul
A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee
against Luciano Salazar and Charles Chamsay.

The second petition was for quo warranto and application for receivership
by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar
and Charles Chamsay... against the group of Young and Lagdameo (petitioners
in SEC Case No. 2417) and Avelino F. Cruz. The two petitions were
consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo
warranto petition of Salazar and Chamsay. The ASI Group and Salazar
appealed the decision to the SEC en banc which affirmed the hearing
officer's decision.
Ruling
The legal concept of a joint venture is of common law origin. It has no
precise legal definition but it has been generally understood to mean an
organization formed for some temporary purpose. (Gates v. Megargel, 266
Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership,
since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. Blackner v.
Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d.,
1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P.
2d. 242 [1955]).

The main distinction cited by most opinions in common law jurisdictions is

that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal.
App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74
[1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership
may have for its object a specific undertaking. (Art. 1783, Civil Code). It would
seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships.

The Supreme Court has however recognized a distinction between these

two business forms, and has held that although a corporation cannot enter
into a partnership contract, it may however engage in a joint venture with
others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and
Lopez-Campos Comments, Notes and Selected Cases, Corporation
Code 1981)

Pioneer Insurance vs. CA, GR. No. 84197

It is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy
the position of partners inter se. Thus, where persons associate themselves
together under articles to purchase property to carry on a business, and
their organization is defective as to come short of creating a corporation
within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the
company will be recognized.

However, such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between themselves,
when their purpose is that no partnership shall exist. and it should be
implied only when necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in 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, so as to be liable as such in an action for settlement of the
alleged partnership and contribution.

lV. DOCTRINE OF CORPORATE ENTITY/SEPARATE PERSONALITY

1. Doctrine of corporate entity
A corporation comes into existence upon the issuance of the certificate
of incorporation. Then and only then will it acquire a juridical personality
to sue and be sued, enter into contracts, hold or convey property or
perform any legal act, in its own name (Corporation Code of the
Philippines, Ruben C. Ladia, 2001 Ed.).

2. Doctrine of separate personality

A corporation has a personality separate and distinct from its members.

Note: Properties, cause of action, liabilities, rights, and defenses of the

corporation are not Properties, cause of action, liabilities, rights, and defenses
of the stockholders or members of the corporation.

A stockholder has an inchoate right over corporate property. Such right is a

mere expectancy. A stockholder needs to wait for the liquidation of the
corporation before it may have a claim over the properties.

Sulo ng Bayan, lnc. vs. Araneta, GR No. L-31061

Sulo Ng Bayan Inc (SNB) is a non-stock corporation whose
membership is composed of natural persons. They pioneered in the
clearing of the subject land, cultivated it since the Spanish regime and
continuously possessed it openly and public under concept of ownership
adverse against the whole world.

SNB alleged that in 1958, Gregorio Araneta Inc. (GA) ejected the members of
SNB from a land in Bulacan, through force and intimidation; and that in
1961, they found out that their land had been fraudulently included in
an Original Certificate of Title.

They claimed that this OCT is void because no survey or plan was
submitted as its basis and that the CFI that issued its Decree of
Registration did not validly acquire jurisdiction for failing to give notice of the
proceeding to SNB’s members who were the actual possessors of the land.
They claimed that because the OCT is void, all subsequent TCTs (including
the one issued in the name of GA), should also be declared void. SNB filed
an accion de revindicacion against GA, et al., to recover the ownership and
possession of the land. The trial court ruled against SNB and dismissed
the case for lack of cause of action.

Ruling
The corporation has a separate. and distinct personality from its members,
and this is not a mere technicality but a matter of substantive law.
There is no allegation that the members have assigned their rights to the
corporation or any showing that the corporation has in any way or manner
succeeded to such rights. The corporation evidently did not have any rights
violated by the defendants for which it could seek redress.

Even if the Court should find against the defendants, therefore, the
plaintiff corporation would not be entitled to the reliefs prayed for, which
are recoveries of ownership and possession of the land, issuance of the
corresponding title in its name, and payment of damages. Neither can such
reliefs be awarded to the
members allegedly deprived of their land, since they are not parties to the
suit. It appearing clearly that the action has not been filed in the names
of the real parties in interest, the complaint must be dismissed on the
ground of lack of cause of action.

Magsaysay-Labrador vs. Court of Appeals, GR No. 58168

Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate
of the late Senator Genaro Magsaysay, brought before the then Court of
First Instance of Olongapo an action against Artemio Panganiban,
Subic Land Corporation (SUBIC), Filipinas Manufacturer's
Bank(FILMANBANK)and the Register of Deeds of Zambales, for the
annulment of the Deed of Assignment executed by the late Senator in favor
of SUBIC (as a result of which TCT 3258 was cancelled and TCT22431
issued in the name of SUBIC), for the annulment of the Deed of Mortgage
executed by SUBIC in favor of FILMANBANK (dated 28April 1977 in the
amount of P 2,700,000.00), and cancellation of TCT22431 by the Register
of Deeds, and for the latter to issue a new title in her favor.

Concepcion Magsaysay-Labrador, Soledad Magsaysay-Cabrera, Luisa

Magsaysay-Corpuz, Felicidad Magsaysay, and Mercedes Magsaysay-Diaz,
sisters of the late senator, filed a motion for intervention on the ground
that on 20 June 1978, their brother conveyed to them 1/2 of his
shareholdings in SUBIC or a total of 416,566.6 shares and as assignees
of around 41 % of the total outstanding shares of such stocks of SUBIC,
they have a substantial and legal interest in the subject matter of litigation
and that they have a legal interest in the success of the suit with respect to
SUBIC. On 26July 1979, the trial court denied the motion for intervention,
and ruled that petitioners have no legal interest whatsoever in the matter
in litigation and their being alleged assignees or transferees of certain
shares in SUBIC cannot legally entitle them to intervene because SUBIC
has a personality separate and distinct from its stockholders. On
appeal, the Court of Appeals found no factual or legal justification to
disturb the findings of the lower court.

The appellate court further stated that whatever claims the Magsaysay
sisters have against the late Senator or against SUBIC for that matter can
be ventilated in a separate proceeding. The motion for reconsideration of
the Magsaysay sisters was denied. Hence, the petition for review on
certiorari.

Ruling
Shareholders are not owners of corporate properties.
While a share of stock represents a proportionate or aliquot interest in
the property of the corporation, it does not vest the owner thereof with any
legal right or title to any of the property, his interest in the corporate
property being equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person.

Here, the interest, if it exists at all, of petitioners-movants is indirect,

contingent, remote, conjectural, consequential and collateral. At the very least,
their interest is purely inchoate, or in sheer expectancy of a right in the
management of the
corporation and to share in the profits thereof and in the properties and
assets thereof on dissolution, after payment of the corporate debts and
obligations.

Stronghold lnsurance Company, lnc. vs. Cuenca, GR No. 173297

The properties subject to the levy on attachment belonged to Arc Cuisine,
Inc. alone, not to the Cuencas and Tayactac in their own right. They
were only stockholders of Arc Cuisine, Inc., which had a personality
distinct and separate from that of any or all of them. The damages
occasioned to the properties by the levy on attachment, wrongful or not,
prejudiced Arc Cuisine, Inc., not them.

As such, only Arc Cuisine, Inc. had the right under the substantive law to
claim and recover such damages. This right could not also be asserted by
the Cuencas and Tayactac unless they did so in the name of the
corporation itself. But that did not happen herein, because Arc Cuisine,
Inc. was not even joined in the action either as an original party or as an
intervenor.

Francisco Motor Corporation vs. CA, GR No. 100812

The personality of the corporation and those of its incorporators, directors
and officers in their personal capacities ought to be kept separate in this
case. The claim for legal fees against the concerned individual incorporators,
officers and directors could not be properly directed against the
corporation without violating basic principles governing corporations.

V. RIGHTS AND LIABILITIES OF A CORPORATION

A. Right Against Unreasonable Searches and Seizure

It is a right available to a corporation. It is a personal right and cannot
be exercised by other person except the corporation

Stonehill vs. Diokno, GR. No. L-19550

Petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the
simple reason that corporations have their respective personalities, separate
and distinct from the personality of herein petitioners, regardless of the
amount of shares of stock or of the interest of each of them in said
corporations, and whatever the offices they hold therein may be.

Indeed, it is well settled that the legality of a seizure can be contested only
by the party whose rights have been impaired thereby, and that the
objection to an unlawful search and seizure is purely personal and cannot
be availed of by third parties.

Consequently, petitioners herein may not validly object to the use in

evidence against them of the documents, papers and things seized from
the offices and premises of the corporations, since the right to object to the
admission of said papers in evidence belongs exclusively to the
corporations, to whom the seized
effects belong, and may not be invoked by the corporate officers in
proceedings against them in their individual capacity.

B. Right to Due Process and Equal Protection

A corporation is entitled to due process for the protection of its properties,
life and existence

Smith Bell & Co. vs. Natividad, GR No. 15574

Smith, Bell & Co. Ltd., a corporation having alien stockholders, is entitled
to the protection afforded by the due-process of law and equal protection
of the laws clause of the Philippine Bill of Rights, nevertheless, Act No.
2761 of the Philippine Legislature, in denying to corporations such as Smith,
Bell &. Co. Ltd., the right to register vessels in the Philippines coastwise trade,
does not belong to that vicious species of class legislation which must
always be condemned, but does fall within authorized exceptions, notably,
within the purview of the police power, and so does not offend against
the constitutional provision.

Bache & Co. (Phil.) vs. Ruiz, GR No. L-32409

An officer of a corporation cannot refuse to produce the books and papers
of such corporation, we do not wish to be understood as holding that a
corporation is not entitled to immunity, under the 4th Amendment, against
unreasonable searches and seizures. A corporation is, after all, but an
association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law, and
is protected, under the 14th Amendment, against unlawful discrimination
."

C. Right Against Self-incrimination

Does a corporation have a right against self-incrimination?
-No, the right only applies to testimonial evidence which is available to
natural persons only.

Bataan Shipyard & Engineering Co., lnc. vs. Presidential Commission on

Good Government, GR. No. L-75885
Challenged in this special civil action of certiorari and prohibition by a
private corporation known as the Bataan Shipyard and Engineering Co.,
Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by
President Corazon C. Aquino on February 28, 1986 and March 12, 1986,
respectively, and (2) the sequestration, takeover, and other orders issued,
and acts done, in accordance with said executive orders by the Presidential
Commission on Good Government and/or its Commissioners and agents,
affecting said corporation. The sequestration order which, in the view of
the petitioner corporation, initiated all its misery was issued on April 14,
1986 by Commissioner Mary Concepcion Bautista.
On the strength of the above sequestration order, Mr. Jose M. Balde,
acting for the PCGG, addressed a letter dated April 18, 1986 to the
President and other officers of petitioner firm, reiterating an earlier
request for the production of certain documents such as Stock Transfer
Book and other Legal documents (Articles of Incorporation, By-Laws, etc.)
Orders were also issued in connection with the sequestration and takeover,
such as termination of Contract for Security Services and abortion of contract
for Improvement of Wharf at Engineer Island; Change of Mode of
Payment of Entry Charges; Operation of Sesiman Rock Quarry,
Mariveles, Bataan; disposal of scrap, etc.; and the provisional takeover by the
PCGG of BASECO, “the Philippine Dockyard Corporation and all their
affiliated companies.” While BASECO concedes that “sequestration without
resorting to judicial action, might be made within the context of
Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom
Constitution was promulgated, under the principle that the law
promulgated by the ruler under a revolutionary regime is the law of the
land, it ceased to be acceptable when the same ruler opted to promulgate
the Freedom Constitution on March 25, 1986 wherein under Section I of
the same, Article IV (Bill of Rights) of the 1973 Constitution was
adopted providing, among others, that “No person shall be deprived of life,
liberty and property without due process of law.” (Const., Art. I V, Sec. 1).”
It declares that its objection to the constitutionality of the Executive
Orders “as well as the Sequestration Order * * and Takeover Order * *
issued purportedly under the authority of said Executive Orders, rests
on four fundamental considerations:

First, no notice and hearing was accorded * * (it) before its properties
and business were taken over;

Second, the PCGG is not a court, but a purely investigative agency and
therefore not competent to act as prosecutor and judge in the same
cause;

Third, there is nothing in the issuances which envisions any proceeding,

process or remedy by which petitioner may expeditiously challenge the
validity of the takeover after the same has been effected; and Fourthly,
being directed against specified persons, and in disregard of the
constitutional presumption of innocence and general rules and procedures,
they constitute a Bill of Attainder.” It argues that the order to produce
corporate records from 1973 to 1986, which it has apparently already
complied with, was issued without court authority and infringed its
constitutional right against self-incrimination, and unreasonable search
and seizure. 14 BASECO further contends that the PCGG had unduly
interfered with its right of dominion and management of its business
affairs.

Ruling
The right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises, may refuse to
show its hand when charged with an abuse of such privileges.
The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain special privileges
and franchises, and
holds them subject to the laws of the state and the limitations of its
charter. Its powers are limited by law. It can make no contract not
authorized by its charter. Its rights to act as a corporation are only
preserved to it so long as it obeys the laws of its creation. There is a
reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers.

D. Criminal Liability

May a corporation be held criminally liable?

-As a general rule, a corporation is not capable of intent. A corporation
cannot be arrested or imprisoned. Since it is not a natural person who may
be put behind bars. Hence, it may not be penalized by a crime punishable
by imprisonment. However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is a fine or
imprisonment and fine.

Sia vs. People, GR. No. L-30896

This is a petition for review of the decision of the CA affirming the decision
of the CFI of Manila convicting the appellant of estafa. Based on the
information filed, the accused allegedly defraud the Continental Bank, under
the obligation on the part of said accused of holding the said steel sheets in
trust receipt agreement, which cold rolled steel sheets were consigned
to the continental bank. In reviewing the evidence, the CA came up with
the following findings of facts which the solicitor general alleges should be
conclusive upon this court: Sia was general manager of the Metal
Manufacturing Company of the Philippines, Inc. engaged in the
manufacture of steel office equipment. He applied for a letter of credit to
import steel sheets from Mitsui Bussan Kaisha, Ltd. of Japan, the
application being directed to the Continental Bank.

Ruling
The Supreme Court acquitted the president who signed the trust receipt in
question, explaining that; “in the absence of an express provision of law
making the petitioner liable for the criminal offense committed by the
corporation of which he is a president as in fact there is no such provisions
in the Revised Penal Code under which petitioner is being prosecuted, the
existence of a criminal liability on his part may not be said to be beyond
any doubt”.

Ching vs. Secretary of Justice, GR No. 164317

The principle of making corporate officers and employees criminally liable
applies whether or not the crime requires the consciousness of
wrongdoing. It applies to those corporate agents who themselves commit
the crime and to those, who, by virtue of their managerial positions or
other similar relation to the corporation, could be deemed responsible for
its commission, if by virtue of their relationship to the corporation, they
had the power to prevent the act.

Moreover, all parties active in promoting a crime, whether agents or not,

are principals. Whether such officers or employees are benefited by their
delictual acts is not a touchstone of their criminal liability. Benefit is not an
operative fact. A corporate officer cannot protect himself behind a
corporation where he is the actual, present and efficient actor.
E. Tort Liability

May a corporation be liable for tort (quasi-delict)?

- Yes, a corporation may be held liable solidarily for tortious acts
committed by its officers or employees who were performing acts related to
their employment, and where the corporation did not exercise due diligence
in their selection and supervision.

What is a quasi-delict?
Whoever by act or omission causes damage to another, there being
fault or negligence is obliged to pay for the damages caused. Such fault or
negligence if there is no pre-existing contractual relationship between the
parties, is called a quasi-delict.

Philippine National Bank vs. Court of Appeals, GR. No. L-27155

PNB executed its bond w/ Rita Gueco Tapnio as principal, in favor of the
PNB to guarantee the payment of Tapnio's account with PNB. Indemnity
Agreement w/ 12% int. and 15% atty. fees Sept 18 1957: PNB sent a
letter of demand for Tapnio to pay the reduced amount of 2,379.91 PNB
demanded both oral and written but to no avail Tapnio mortgaged to the
bank her lease agreement w/ Jacobo Tuazon for her unused export sugar
quota at P2.80 per picular or a total of P2,800 which was more than the
value of the bond PNB insisted on raising it to P3.00 per picular so
Tuazon rejected the offer

Ruling
A corporation is civilly liable in the same manner as natural persons for
torts, because "generally speaking, the rules governing the liability of a
principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for
every tort which he expressly directs or authorizes, and this is just as
true of a corporation as of a natural person, A corporation is liable,
therefore, whenever a tortious act is committed by an officer or agent
under express direction or authority from the stockholders or members
acting as a body, or, generally, from the directors as the governing body."

F. Recovery of Moral Damages

May a corporation be entitled for moral damages?

-As a general rule a corporation may not claim for moral damages except
when the image of such corporation is slandered or defamed.

Coastal Pacific Trading lnc. vs. Southern Rolling Mills, lnc., GR No. 118692
Corporation is not entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or sentiments like
wounded feelings, serious anxiety, mental anguish and moral shock.
The only exception to this rule is when the corporation has a good
reputation that is debased, resulting in its humiliation in the business
realm.
In the present case, the records do not show any evidence that the
name or reputation of petitioner has been sullied as a result of the
Consortium's fraudulent acts. Accordingly, moral damages are not
warranted.

Filipinas Broadcasting Network, lnc. vs. Ago Medical and Educational

Center - Bicol Christian College of Medicine, GR No. 141994
Filipinas Broadcasting Network Inc. (FBNI) owns radio station DZRC-AM which
airs the radio documentary “Expose” every morning, hosted by Mel Rima and
Jun Alegre, and heard by Albay municipalities, and other Bicol areas. In 1989,
Expose covered various complaints from students, teachers, and parents
against Ago Medical and Educational Center-Bicol Christian College of
Medicine (AMEC) and its administrators.

Claiming that the broadcasts were defamatory and injurious to their

institution’s reputation, AMEC and Angelita Ago, as Dean of AMEC's College of
Medicine, filed a complaint for damages against FBNI, Rima, and Alegre. FBNI,
Rima, and Alegre argued that the exposes were fair and true. They claimed
that they were plainly impelled by a sense of public duty to report the
goings-on in AMEC, an institution imbued with public interest.

The trial court ruled against Alegre, finding that his reports were libeous
per se due to them having no factual basis. It also held FBNI liable for
failing to exercise diligence in the selection and supervision of its
employees. As for Rima, the trial court absolved him because his only
participation was that he agreed with Alegre. His statements were within
the bounds of freedom of speech, expression, and of the press.

Alegre and FBNI were ordered to pay, jointly and severally, P300k
moral damages to AMEC; P30,000 reimbursement of attorney's fees; and
the costs of suit.

On appeal, the CA made Rima solidarily liable with FBNI and Alegre. The
CA also denied Dean Ago's claim for damages and attorney's fees because the
broadcasts were directed against AMEC, and not against her. FBNI brings the
petition to the SC, contending that, among others, AMEC is not entitled to
moral damages because it is not a natural person.

Ruling
A juridical person is generally not entitled to moral damages because,
unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or
moral shock.
However, "a corporation may have a good reputation which, if besmirched,
may also be a ground for the award of moral damages" is an obiter
dictum.

Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article
2219 of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of
defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral
damages.

Moreover, where the broadcast is libelous per se, the law implies damages.
In such a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages. Neither
in such a case is the plaintiff required to introduce evidence of actual
damages as a condition precedent to the recovery of some damages. In this
case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral
damages.

VI. DOCTRINE OF PIERCING THE CORPORATE VEIL

Note: As a general rule, shareholders has separate personality from
the corporation. The exception to this rule is the doctrine of piercing
the veil of corporate fiction

A. Classifications
PNB vs. Hydro Resources Contractors Corp, GR No. 167530
The doctrine of piercing the corporate veil 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
3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.

The case lays down a three-pronged test to determine the application of

the alter ego theory, which is also known as the instrumentality theory,
namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;

(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff’s
legal right; and
(3) The aforesaid control and breach of duty must have proximately caused
the injury or unjust loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires
that the subsidiary be completely under the control and domination of the
parent. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation such that its separate
existence as a distinct corporate entity
will be ignored. It seeks to establish whether the subsidiary corporation
has no autonomy and the parent corporation, is operating the business
directly for itself.

The second prong is the "fraud" test. This test requires that the parent
corporation’s conduct in using the subsidiary corporation be unjust, fraudulent
or wrongful. It examines the relationship of the plaintiff to the corporation.
It recognizes that piercing is appropriate only if the parent corporation
uses the subsidiary in a way that harms the plaintiff creditor. As such,
it requires a showing of "an element of injustice or fundamental
unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show
that the defendant’s control, exerted in a fraudulent, illegal or otherwise
unfair manner toward it, caused the harm suffered. A causal connection
between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate
veil is pierced, it will have been treated unjustly by the defendant’s
exercise of control and improper use of the corporate form and, thereby,
suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory
requires the concurrence of three elements: control of the corporation by the
stockholder or parent corporation, fraud or fundamental unfairness imposed on
the plaintiff, and harm or damage caused to the plaintiff by the fraudulent
or unfair act of the corporation. The absence of any of these elements
prevents piercing the corporate veil.

This Court finds that none of the tests has been satisfactorily met in this
case.

Claparols vs. ClR, GR L-30822

Claparols Steel and Nail Plant, which ceased operation of June 30, 1957,
was SUCCEEDED by the Claparols Steel Corporation effective the next
day, July 1, 1957 up to December 7, 1962, when the latter finally ceased to
operate. It is very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skillfully timed to avoid
the financial liability that already attached to its predecessor, the Claparols
Steel and Nail Plant. Both predecessors and successor were owned and
controlled by the petitioner Eduardo Claparols and there was no break in
the succession and continuity of the same business.

This "avoiding-the-liability" scheme is very patent, considering that 90% of

the subscribed shares of stocks of the Claparols Steel Corporation (the
second corporation) was owned by respondent (herein petitioner)
Claparols himself, and all the assets of the dissolved Claparols Steel and
Nail Plant were turned over to the emerging Claparols Steel
Corporation.

It is very obvious that the second corporation seeks the protective shield of
a corporate fiction whose veil in the present case could, and should, be
pierced as
it was deliberately and maliciously designed to evade its financial
obligation to its employees.

CIR vs. Norton Harrison Co., GR No. L-17618

Norton and Harrison is a corporation organized to buy and sell at
wholesale and retail all kinds of goods and merchandise. Jackbilt is also a
corporation organized on for producing concrete blocks. On 1948, the
corporations entered into an agreement whereby Norton was made the
sole and exclusive distributor of concrete blocks manufactured by Jackbilt.
On 1949, Norton purchased all the outstanding shares of stock of Jackbilt.
This prompted the CIR to investigate and eventually asses Norton and
Harrison for deficiency sales tax and surcharges.

Ruling
The Jackbilt is merely an adjunct, business conduit or alter ego, of Norton
and Harrison and that the fiction of corporate entities, separate and
distinct from each, should be disregarded. This is a case where the doctrine of
piercing the veil of corporate fiction, should be made to apply.

It has been settled that the ownership of all the stocks of a corporation
by another corporation does not necessarily breed an identity of corporate
interest between the two companies and be considered as a sufficient
ground for disregarding the distinct personalities (Liddell & Co., Inc. v.
Coll. of Int. Rev. L- 9687, June 30, 1961).

However, there are sufficient grounds to support the theory that the
separate identities of the two companies should be disregarded. Among
these circumstances, are: (a) Norton and Harrison owned all the outstanding
stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt, 14,993 shares
belonged to Norton and Harrison; (b) Norton constituted Jackbilt's board of
directors in such a way as to enable it to actually direct and manage the
other's affairs by making the same officers of the board for both
companies; (c) Norton financed the operations of the Jackbilt; (d)
Norton treats Jackbilt employees as its own. Evidence shows that Norton
paid the salaries of Jackbilt employees and gave the same privileges as Norton
employees, an indication that Jackbilt employees were also Norton's
employees; (e) Compensation given to board members of Jackbilt, indicate
that Jackbilt is merely a department of Norton. The offices of Norton and
Jackbilt are located in the same compound. Payments were effected by Norton
of accounts for Jackbilt and vice versa. Payments were also made to Norton
of accounts due or payable to Jackbilt and vice versa.

First Philippine lnternational Bank vs. CA, GR No. 115849

"When the fiction is urged as a means of perpetrating a fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the
law covers and isolates the corporation from the members or stockholders
who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals."
The corporate veil cannot be used to shield an otherwise blatant violation
of the prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be
allowed to trifle with court processes, particularly where, as in this case,
the corporation itself has not been remiss in vigorously prosecuting or
defending corporate causes and in using and applying remedies available to
it. To rule otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against forum
shopping.

Uy vs. Villanueva, GR No. 157851

The doctrine of piercing the veil of corporate fiction finds no application in
the case. Piercing the veil of corporate fiction may only be done when "the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime."

The general rule is that a corporation will be looked upon as a separate

legal entity, unless and until sufficient reason to the contrary appears.
For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be
presumed.

Mere ownership by a single stockholder or by another corporation of

all or nearly all of the capital stock of a corporation is not in itself
sufficient ground for disregarding the separate corporate personality.

Petitioners are not even stockholders of the bank but mere depositors.
That they assumed temporary control of the bank’s administration did not
change the character of their relationship with the bank. In fact, their bid
to convert their interest in the bank to that of stockholders failed as the
BSP denied their plan to rehabilitate the bank.

Concept Builders, lnc. vs. NLRC, GR No. 108734

It is a fundamental principle of corporation law that a corporation is an
entity separate and distinct from its stockholders and from other corporations
to which it may be connected. But, this separate and distinct personality of
a corporation is merely a fiction created by law for convenience and to
promote justice. So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws, this separate
personality of the corporation may be disregarded or the veil of corporate
fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.

The conditions under which the juridical entity may be disregarded

vary according to the peculiar facts and circumstances of each case. No
hard and fast rule can be accurately laid down, but certainly, there are
some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:
 1. Stock ownership by one or common ownership of both
corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.

The SEC en banc explained the “instrumentality rule” which the courts
have applied in disregarding the separate juridical personality of
corporations as follows:
Where one corporation is so organized and controlled and its affairs
are conducted so that it is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the “instrumentality” may be
disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of instances, policies
and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control must be shown to
have been exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately cause the injury or
unjust loss for which the complaint is made.

Kukan lnt'l vs. Reyes, GR No. 182729

To justify the piercing of the veil of corporate fiction, it must be shown by
clear and convincing proof that the separate and distinct personality of
the corporation was purposely employed to evade a legitimate and
binding commitment and perpetuate a fraud or like a wrongdoing.

In those instances when the Court pierced the veil of corporate fiction of
two corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2.The assets of the first corporation is transferred to a second
corporation to avoid a financial liability of the first corporation;
and
3.Both corporations are owned and controlled by the same persons
such that the second corporation should be considered as a
continuation and successor of the first corporation.

In this case, the second and third factors are conspicuously absent. There
is, therefore, no compelling justification for disregarding the fiction of
corporate entity separating Kukan, Inc. from KIC. In applying the principle,
both the RTC and the CA miserably failed to identify the presence of the
abovementioned factors.

The High Court stated that neither should the level of paid-up capital of
Kukan, Inc. upon its incorporation be viewed as a badge of fraud, for it is
in compliance with Sec. 13 of the Corporation Code, which only requires a
minimum paid-up capital of PhP 5,000.

The suggestion that KIC is but a continuation and successor of Kukan, Inc.,
owned and controlled as they are by the same stockholders, stands without
factual basis. The fact that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of
the
outstanding capital stock of both corporations standing alone, is
insufficient to establish identity. There must be at least a substantial
identity of stockholders for both corporations in order to consider this
factor to be constitutive of corporate identity.

Umali vs. CA, GR No.89561

Under the doctrine of piercing the veil of corporate entity, when valid
grounds therefore exist, the legal fiction that a corporation is an entity
with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or
stockholders of the corporation will be considered as the corporation, that
is, liability will attach directly to the officers and stockholders. The
doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is
made as a shield to confuse the legitimate issues or where a
corporation is the 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.

Piercing the veil of corporate entity is not the proper remedy in order that
the foreclosure proceeding may be declared a nullity under the
circumstances obtaining in the legal case at bar.

In the first place, the legal corporate entity is disregarded only if it is

sought to hold the officers and stockholders directly liable for a
corporate debt or obligation. In the instant case, petitioners do not seek
to impose a claim against the individual members of the three corporations
involved; on the contrary, it is these corporations which desire to enforce
an alleged right against petitioners. Assuming that petitioners were indeed
defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to
justify the piercing of the corporate fiction, since petitioners do not intend
to hold the officers and/or members of respondent corporations personally
liable therefor. Petitioners are merely seeking the declaration of the nullity
of the foreclosure sale, which relief may be obtained without having to
disregard the aforesaid corporate fiction attaching to respondent
corporations.

Secondly, petitioners failed to establish by clear and convincing evidence

that private respondents were purposely formed and operated, and
thereafter transacted with petitioners, with the sole intention of
defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations
are interrelated is not a justification for disregarding their separate
personalities, absent sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors and third persons of
their rights.

Remo vs. lAC, GR No. L-67626

No cogent basis to pierce the corporate veil of Akron and hold
petitioner personally liable for its obligation to private respondent. While
it is true that in
December, 1977 petitioner was still a member of the board of directors of
Akron and that he participated in the adoption of a resolution authorizing
the purchase of 13 trucks for the use in the brokerage business of
Akron to be paid out of a loan to be secured from a lending institution,
it does not appear that said resolution was intended to defraud anyone
and more particularly private respondent. Fraud must be established by
clear and convincing evidence.

Indeed, the new corporation confirmed and assumed the obligation of the
old corporation. There is no indication of an attempt on the part of Akron
to evade payment of its obligation to private respondent.

Laguio vs. NLRC, GR No. 108936

A corporation is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any other
legal entity to which it may be related. Mere substantial identity of the
incorporators of the two corporations does not necessarily imply fraud nor
warrant the piercing of the veil of corporation fiction.

In the absence of clear and convincing evidence that April and Well
World’s corporate personalities were used to perpetuate fraud, or
circumvent the law said corporations were rightly treated as distinct and
separate from each other.

B. Judicial Function
Only the courts (or administrative tribunals like the NLRC) can pierce the
veil of corporate fiction. To pierce the veil of corporate fiction is a power
belonging only to the courts. Hence, a sheriff who has a ministerial duty to
enforce a final and executor decision cannot “pierce the veil of corporate
fiction” by enforcing the decision against stockholders who are not
parties to the action.

Cruz vs. Dalisay, AM No. R-181-P

A sworn complaint dated July 23, 1984 was filed by Adelio Cruz
charging Quiterio Dalisay, Senior Deputy Sheriff of Manila, with
malfeasance in office, corrupt practices and serious irregularities allegedly
committed as follows: a. Respondent attached and/or levied the money
belonging to complainant Cruz when he was not himself the judgment
debtor in the final judgment of an NLRC case sought to be enforced but
rather the company known as “Qualitrans Limousine Service, Inc.”; and
b. Respondent also caused the service of the alias writ of execution upon
complainant who is a resident of Pasay City, despite knowledge that his
territorial jurisdiction covers Manila only and does not extend to Pasay
City.

Respondent in his reply explained that when he garnished complainant’s

cash deposit at the Philtrust bank he was merely performing a ministerial
duty. And that while it is true that said writ was addressed to Qualitrans
Limousine Service, Inc., it is also a fact that complainant had executed an
affidavit before the Pasay City assistant fiscal stating that he is the owner/
president of Qualitrans. Because of that declaration, the counsel for the
plaintiff in the labor case advised him to serve notice of garnishment on
the Philtrust bank.
Ruling
It is a well-settled doctrine both in law and in equity that as a legal
entity, a corporation has a personality distinct and separate from its
individual stockholders or members. The mere fact that one is president of
a corporation does not render the property he owns or possesses the
property of the corporation, since the president, as individual, and the
corporation are separate entities.

The respondent's actuation in enforcing a judgment against complainant

who is not the judgment debtor in the case calls for disciplinary action.
Considering the ministerial nature of his duty in enforcing writs of
execution, what is incumbent upon him is to ensure that only that portion
of a decision ordained or decreed in the dispositive part should be the
subject of execution.

C. Effects
What are the effects of piercing the veil of corporate fiction?
1. The corporation will be treated as a mere aggrupation of
persons. The separate juridical personality of the corporation will
be disregarded.
2. The corporation still exist for all legal purposes
3. The personality of the corporation is only disregarded in so far
the cases where the doctrine applies.

Note: It requires a full blown trial and evidence must be convincing and
must be established and cannot be presumed.

Lanuza vs. BF Corporation, GR NO. 174938

Gerardo Lanuza, Jr. and Antonio Olbes are members of the Board of
Directors of Shangri-La Properties, Inc. BF Corporation entered into
agreements with Shangri-La wherein it undertook to construct a mall and a
multilevel parking structure along EDSA.Shangri-La had been consistent in
paying BF Corp in accordance with its progress billing statements.
However, Shangri-La started defaulting in payment.BF Corp filed a complaint
against Shangri-La and its board of directors. BF Corp alleged that Shangri-La
misrepresented that it had funds to pay and that it was simply a matter of
delayed processing of BF’s progress billing statements.Construction
eventually was completed but despite demands, Shangri-La refused to pay
the balance. BF also alleged that Shangri-La’s directors were in bad faith so
they should be held jointly and severally liable with Shangri- La.

Shangri-La and respondent board members filed a motion to suspend

the proceedings in view of BF’s failure to submit its dispute to arbitration.
RTC denied the motion. Petitioners filed an answer saying they are resigned
members of the board since July 15, 1991.Shangri-La and respondents then
filed certiorari with CA which granted their petition and ordered submission
of the directors to arbitration.
Ruling
When the courts disregard the corporation’s distinct and separate
personality from its directors or officers, the courts do not say that the
corporation, in all instances and for all purposes, is the same as its directors,
stockholders, officers, and agents. It does not result in an absolute
confusion of personalities of the corporation and the persons composing
or representing it. Courts merely discount the distinction and treat them
as one, in relation to a specific act, in order to extend the terms of the
contract and the liabilities for all damages to erring corporate officials who
participated in the corporation’s illegal acts. This is done so that the legal
fiction cannot be used to perpetrate illegalities and injustices.

Kukan lnternational Corporation vs. Reyes, GR No. 182729

The principle of piercing the veil of corporate fiction, and the resulting
treatment of two related corporations as one and the same juridical person
with respect to a given transaction, is basically applied only to determine
established liability; it is not available to confer on the court a jurisdiction it
has not acquired, in the first place, over a party not impleaded in a case.
Elsewise put, a corporation not impleaded in a suit cannot be subject to the
court’s process of piercing the veil of its corporate fiction. In that situation,
the court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property would infringe
on its right to due process.

The court requires that the corporation or person who is sought to be

made liable must be impleaded stating that the implication is twofold: (1)
the court must first acquire jurisdiction over the corporation or
corporations involved before its or their separate personalities are
disregarded; and (2) the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the
court by way of service of summons or what passes as such service.

Pamplona Plantation Co. lnc. vs. Tinghil, GR No. 159121

Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation
Leisure Corporation appear to be separate corporate entities. But it is
settled that this fiction of law cannot be invoked to further an end
subversive of justice.

The principle requiring the piercing of the corporate veil mandates courts
to see through the protective shroud that distinguishes one corporation
from a seemingly separate one. The corporate mask may be removed and the
corporate veil pierced when a corporation is the mere alter ego of another.
Where badges of fraud exist, where public convenience is defeated, where
a wrong is sought to be justified thereby, or where a separate corporate
identity is used to evade financial obligations to employees or to third parties,
the notion of separate legal entity should be set aside and the factual truth
upheld. When that happens, the corporate character is not necessarily
abrogated. It continues for other legitimate objectives.
In the present case, the corporations have basically the same incorporators
and directors and are headed by the same official. Both use only one office
and one payroll and are under one management. In their individual
Affidavits, respondents allege that they worked under the supervision
and control of Petitioner Bondoc -- the common managing director of both
the petitioner- company and the leisure corporation. Some of the laborers
of the plantation also work in the golf course. Thus, the attempt to make
the two corporations appear as two separate entities, insofar as the workers
are concerned, should be viewed as a devious but obvious means to defeat
the ends of the law. Such a ploy should not be permitted to cloud the
truth and perpetrate an injustice.

VII. INCORPORATION AND ORGANIZATION

A. Concept
It is a process of drafting the articles of incorporation. Its submission th
the SEC and the subsequent approval of the SEC.

A person or group of persons desiring to incorporate shall submit the

intended corporate name to the Commission for verification.

If the Commission finds that the name is distinguishable from a name

already reserved or registered for the use of another corporation, not
protected by law and is not contrary to law, rules and regulations, the
name shall be reserved in favor of the incorporators.

The incorporators shall then submit their articles of incorporation and

bylaws to the Commission.(Sec 18)

SEC MC NO. 16-2020

SEC. 2. Authentication by Incorporators. – The Commission will accept for
registration Articles of Incorporation that are accompanied by a Certificate
of Authentication signed by all incorporators in the form prescribed by
the Commission both the Articles of Incorporation and the Certificate
of Authentication need not be notarized nor consularized.(Sec 2, SEC MC
NO. 16- 2020).

B. Contents and Form of Articles of lncorporation

1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is
being formed. Where acorporation has more than one stated
purpose, the articles of incorporation shall indicate theprimary
purpose and the secondary purpose or purposes: Provided, That
a nonstock corporation may not include a purpose which would
change or contradict its nature as such;
3. The place where the principal office of the corporation is to be
located, which must bewithin the Philippines;
4. The term for which the corporation is to exist, if the corporation
has not elected perpetual existence;
 5. The names, nationalities, and residence addresses of the
incorporators;
6. The number of directors, which shall not be more than fifteen (15)
or the number of trustees which may be more than fifteen (15);
7. The names, nationalities, and residence addresses of persons who
shall act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this
Code;
8. If it be a stock corporation, the amount of its authorized capital
stock, number of shares into which it is divided, the par value of
each, names, nationalities, and residence addresses of the original
subscribers, amount subscribed and paid by each on the subscription,
and a statement that some or all of the shares are without par
value, if applicable;
9. If it be a nonstock corporation, the amount of its capital, the
names, nationalities, and residence addresses of the contributors,
and amount contributed by each; and
10. Such other matters consistent with law and which the
incorporators may deem necessaryand convenient.

Note: An arbitration agreement may be provided in the articles of

incorporation. Articles of incorporation and applications for amendments
thereto may be filed with the Commission in the form of an electronic
document. (Sec. 13 & 14)

1. Corporate Name

No corporate name shall be allowed by the Commission if:

1.it is not distinguishable from that already reserved or registered
for the use of another corporation
2.if such name is already protected by law
3.when its use is contrary to existing law, rules and regulations.

A name is not distinguishable even if it contains one or more of the

following:
(a) The word “corporation”, “company”, “incorporated”, “limited”,
“limited liability”, or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word or
phrase. (Sec 13(a) in relation with Sec 17, RCC)

What happens if the corporation does not follow the rules on corporate
name?
-The SEC will first conduct a summary investigation. If it finds that the
corporation violated the limitations, it will issue a cease and desist order.
It may also cause the removal of visible signage, advertisements, labels,
prints, and other effects bearing the corporate name.
-If the corporation fails to comply with the order of the SEC, the SEC
may
1.Hold the responsible officers for contempt
2.Hold them administratively. Civilly, and criminally liable.
 3.Revoke the registration of the corporation.

Using of corporate name contrary to the guidelines:

The Commission may summarily order the corporation to immediately cease
and desist from using such name and require the corporation to register a
new one.

The Commission shall also cause the removal of all visible signages, marks,
advertisements, labels, prints and other effects bearing such corporate
name.
Upon the approval of the new corporate name, the Commission shall issue
a certificate of incorporation under the amended name.

If the corporation fails to comply with the Commission’s order, the

Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or
criminally liable and/or revoke the registration of the corporation.

The incorporators shall undertake to change the name of the

corporation immediately upon receipt of notice from the Commission
that another corporation, partnership or person has acquired a prior right
to the use of such name, that the name has been declared not
distinguishable from a name already registered or reserved for the use of
another corporation, or that it is contrary to law, public morals, good
customs or public policy. (See also Sec 14 (10th Par)

lndustrial Refractories Corporation of the Phils. vs. CA, GR No. 122174

Respondent Refractories Corporation of the Philippines (RCP) is a
corporation duly organized on October 13, 1976 for the purpose of
engaging in the business of manufacturing, producing, selling, exporting and
otherwise dealing in any and all refractory bricks, its by-products and
derivatives. On June 22, 1977,
it registered its corporate and business name with the Bureau of Domestic
Trade. Petitioner IRCP on the other hand, was incorporated on August
23, 1979 originally under the name “Synclaire Manufacturing Corporation”. It
amended its Articles of Incorporation on August 23, 1985 to change its
corporate name to “Industrial Refractories Corp. of the Philippines”. It is
engaged in the business of manufacturing all kinds of ceramics and other
products, except paints and zincs. Both companies are the only local
suppliers of monolithic gunning mix.

Discovering that petitioner was using such corporate name, respondent RCP
filed on April 14, 1988 with the Securities and Exchange Commission (SEC) a
petition to compel petitioner to change its corporate name on the
ground that its corporate name is confusingly similar with that of
petitioner’s such that the public may be confused or deceived into
believing that they are one and the same corporatio. The SEC decided in
favor of respondent RCP and rendered judgment declaring the latter’s
corporate name ‘Industrial Refractories Corporation of the Philippines’ as
deceptively and confusingly similar to that of petitioner’s corporate
name ‘Refractories Corporation of the Philippines’.

Accordingly, respondent is hereby directed to amend its Articles of

Incorporation by deleting the name ‘Refractories Corporation of the
Philippines’ in its corporate name within thirty (30) days from finality of
this Decision. Likewise, respondent is hereby ordered to pay the
petitioner the sum of P50,000.00 as attorney’s fees.” Petitioner appealed to
the SEC En Banc, arguing
that it does not have any jurisdiction over the case, and that respondent
RCP has no right to the exclusive use of its corporate name as it is
composed of generic or common words. In its Decision dated July 23, 1993,
the SEC En Banc modified the appealed decision in that petitioner was
ordered to delete or drop from its corporate name only the word
“Refractories”.

Ruling
Section 18 of the Corporation Code expressly prohibits the use of a
corporate name which is "identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already protected
by law or is patently deceptive, confusing or contrary to existing laws".

The policy behind the foregoing prohibition is to avoid fraud upon the
public that will have occasion to deal with the entity concerned, the
evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporation.

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and

Partnership Names specifically requires that:
1. A corporate name shall not be identical, misleading or
confusingly similar to one already registered by another
corporation with the Commission; and
2. If the proposed name is similar to the name of a registered firm,
the proposed name must contain at least one distinctive word
different from the name of the company already registered.

To fall within the prohibition of the law, two requisites must be proven,
to wit:
1.That the complainant corporation acquired a prior right over the
use of such corporate name;
2. The proposed name is either: (a) identical, or (b) deceptively
or confusingly similar to that of any existing corporation or to any
other name already protected by law; or (c) patently deceptive,
confusing or contrary to existing law.

As regards the first requisite, it has been held that the right to the
exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption.

Anent the second requisite, in determining the existence of confusing similarity

in corporate names, the test is whether the similarity is such as to
mislead a person using ordinary care and discrimination and the Court
must look to the record as well as the names themselves.

Ang Mga Kaanib sa lglesia ng Dios Kay Kristo Hesus, H.S.K sa Bansang
Pilipinas, lnc. vs. lglesia ng Dios Kay Cristo Jesus, GR No. 137592
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc.
in petitioners name are, as correctly observed by the SEC, merely descriptive
of and also referring to the members, or kaanib, of respondent who are
likewise residing in the Philippines.
 These words can hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing petitioner from
respondent. This is especially so, since both petitioner and respondent
corporations are using the same acronym --- H.S.K.; not to mention the fact
that both are espousing religious beliefs and operating in the same
place.

Parenthetically, it is well to mention that the acronym H.S.K. used by

petitioner stands for Haligi at Saligan ng Katotohanan. Then, too, the records
reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG
KATOTOHANAN, which is strikingly similar to respondent's corporate
name, thus making it even more evident that the additional words Ang
Mga Kaanib and Sa Bansang Pilipinas, Inc., are merely descriptive of and
pertaining to the members of respondent corporation.

Significantly, the only difference between the corporate names of petitioner

and respondent are the words SALIGAN and SUHAY. These words are
synonymous --
- both mean ground, foundation or support. Hence, the names are
undisputably so similar that even under the test of reasonable care and
observation confusion may arise.

Laureano lnvestment & Development Corp. vs. CA, GR No. 100468

Under the Civil Code, a corporation has a legal personality of its own
(Article 44), and may sue or be sued in its name, in conformity with the
laws and regulations of its organization.

Additionally, Article 36 of the Corporation Code similarly provides:

Every corporation incorporated under this Code has the power and
capacity: (1) To sue and be sued in its corporate name.

"Lideco Corporation" had no personality to intervene since it had not been

duly registered as a corporation. If petitioner legally and truly wanted to
intervene, it should have used its corporate name as the law requires and
not another name which it had not registered. Indeed, as the Respondent
Court found, nowhere in the motion for intervention and complaint in
intervention does it appear that "Lideco Corporation" stands for
Laureano Investment and Development Corporation.

lndian Chamber of Commerce Phils. lnc. vs. Filipino lndian Chamber of

Commerce in the PHlippines, lnc., GR No. 184008

FICCPI was incorporated on March 14, 2006. On the other hand, ICCPI
was incorporated only on April 5, 2006, or a month after FICCPI
registered its corporate name.
Thus, applying the principle in the Refractories case, we hold that FICCPI,
which was incorporated earlier, acquired a prior right over the use of the
corporate name.

It is settled that a corporation is ipso facto dissolved as soon as its

term of existence expires.However, the name of a dissolved firm shall not
be allowed to be used by other firms within three (3) years after the
approval of the dissolution of the corporation by the Commission, unless
allowed by the last stockholders representing at least majority of the
outstanding capital stock of the dissolved firm.

ICCPI's name is identical to that of FICCPI. ICCPFs and FICCPFs corporate

names both contain the same words "Indian Chamber of Commerce."
The confusion and deception are effectively precluded by appending the
word "Filipino" to the phrase "Indian Chamber of Commerce."

The word 'Filipino' in the corporate name of the respondent [FICCPI] is

merely descriptive and can hardly serve as an effective differentiating
medium necessary to avoid confusion. The other two words alluded to
by petitioner [ICCPI] that allegedly distinguishes its corporate name
from that of the respondent are the words 'in' and 'the' in the respondent's
corporate name. The presence of the words 'in' and 'the' in respondent's
corporate name does not, in any way, make an effective distinction to
that of petitioner."

SEC MC No. 13-2019

The Commission is adopting the following guidelines and procedures in the
registration of corporate, one person corporate and partnership
names:
I
1.Corporate name shall contain the word “Corporation” or
“Incorporated” or the abbreviations “Corp.” or “Inc.” respectively.
In One Person
2.Corporation, the corporate name shall contain “OPC”.
3.The partnership name shall bear the word “Company” or “Co.”
and if it is a limited partnership, the word “Limited” or “Ltd.”. A
professional partnership may bear the word “Company”, “Associates”,
or “Partners”.
4.The corporate name of a foundation shall use the word
“Foundation”.
5. The corporate name of all non-stock, non-profit corporations,
including non-governmental organizations and foundations,
engaging in microfinance activities shall use the word
“Microfinance” or “Microfinancing”
II.
1.The name shall be distinguishable from other corporate or
partnership name registered with the Commission or with the
Department of Trade and Industry.
2.If the name applied for is similar to that of a registered
corporation or partnership, the applicant shall add one or more
distinctive words to the proposed name to remove the similarity
or differentiate it from the registered name
3. Punctuation marks, spaces, signs, symbols, and other similar
characters, regardless of their form or arrangement, shall not be
 acceptable as distinguishing words for purposes of differentiating a
proposed name from a registered name.
4. A name that consist solely of special symbols, punctuation marks
or specially designed characters shall not be registered.
III.
1. The full name or surname of a person may be used in a
corporate or partnership name if he or she is a stockholder,
member or partner and consented to such use, if the person is already
deceased, the consent shall be given by his estate.
2. A single stockholder of OPC may use his name, or may also
use the name of another provided with consent of such use, and
further provided it be accompanied with descriptive words aside
from the suffix OPC.
3. Commission may require a registrant to explain to its satisfaction
the reason for the use of a person’s name.
4. The meaning of the initials used in the name shall be stated by
the registrant in the AOI.

IV. The name of an internationally known foreign corporation, or

something similar to it, cannot be used by a domestic corporation unless it
is its subsidiary and the parent corporation has consented. However, a
name cannot be registered when such violates good morals, public order
or public policy, or has an offensive or indecorous meaning in any of the
country’s official languages or major dialects.

a. Doctrine of Secondary Meaning

-a word or phrase originally incapable of exclusive appropriation with reference
to an article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that group
of the purchasing public, the word or phrase has come to mean that the
article was his produce.

Lyceum of the Philippines, lnc. vs. CA, GR No. 101897

Petitioner Lyceum of the Philippines had commenced before the SEC a
proceeding against the Lyceum of Baguio to change its corporate name
alleging that the 2 names are substantially identical because of the word
‘Lyceum’. SEC found for petitioner and the SC denied the consequent
appeal of Lyceum of Baguio in a resolution. Petitioner then basing its ground
on the resolution, wrote to all educational institutions which made use of the
word ‘Lyceum’ as part of their corporate name to discontinue their use.
When this recourse failed, petitioner moved before the SEC to enforce
its exclusive use of the word ‘Lyceum.’ Petitioner further claimed that the
word ‘Lyceum’ has acquired a secondary meaning in its favor. The SEC
Hearing Officer found for petitioner. Both SEC En Banc and CA ruled
otherwise.

Ruling
“Lyceum” is in fact as generic in character as the word “university.” In the
name of the petitioner, “Lyceum” appears to be a substitute for
“university;” in other places, however, “Lyceum,” or “Liceo” or “Lycee”
frequently denotes a secondary school or a college. It may be that the use of
the word “Lyceum” may not yet be as
widespread as the use of “university,” but it is clear that a not
inconsiderable number of educational institutions have adopted “Lyceum”
or “Liceo” as part of their corporate names. Since “Lyceum” or “Liceo”
denotes a school or institution of learning, it is not unnatural to use this
word to designate an entity which is organized and operating as an
educational institution.

Appellant failed to satisfy the requisites of doctrine of secondary meaning.

While the appellant may have proved that it had been using the word
‘Lyceum’ for a long period of time, this fact alone did not amount to mean
that the said word had acquired secondary meaning in its favor because
the appellant failed to prove that it had been using the same word all by
itself to the exclusion of others. More so, there was no evidence presented
to prove that confusion will surely arise if the same word were to be
used by other educational institutions.

We do not consider that the corporate names of private respondent

institutions are “identical with, or deceptively or confusingly similar” to that of
the petitioner institution. True enough, the corporate names of private
respondent entities all carry the word “Lyceum” but confusion and deception
are effectively precluded by the appending of geographic names to the
word “Lyceum.”

b. Change of Name and it’s Effects

Change of corporate name does not dissolve a corporation. It is not a
creation of a new corporation.

Zuellig Freight and Cargo Systems vs. NLRC, GR No. 157900

There was no valid cause for termination because Zeta did not really cease
its operations. It merely changes itsbusiness name and primary
purpose and upgrading of stocks of the corporation. Zuellig and Zeta are
legally the same person and entity.

The NLRC affirmed the LA’s decision. Zuellig elevated the case to the CA,
which also ruled against it.CA: The closure of business operation was not
validly made. The amendment of the articles of incorporation merely
changed its corporate name, broadened its primary purpose and increased
its authorized capital stocks. There being no valid closure of business
operations, the dismissal of San Miguel on alleged authorized cause of
cessation of business was illegal. Hence this appeal to the SC.

Ruling
The amendments of the articles of incorporation of Zeta to change the
corporate name to Zuellig Freight and Cargo Systems, Inc. did not produce
the dissolution of the former as a corporation.

For sure, the Corporation Code defined and delineated the different modes
of dissolving a corporation, and amendment of the articles of incorporation was
not one of such modes.

The effect of the change of name was not a change of the corporate being,
for, as well stated in Philippine First Insurance Co., Inc. v. Hartigan: “The
changing of
the name of a corporation is no more the creation of a corporation than
the changing of the name of a natural person is begetting of a natural
person. The act, in both cases, would seem to be what the language which
we use to designate it imports – a change of name, and not a change of
being.”

Philippine First lnsurance Co. vs. Hartigan – GR No. L-26370

The general rule as to corporations is that each corporation shall have a
name by which it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same manner
as the name of an individual designates the person." Since an individual has
the right to change his name under certain conditions, there is no
compelling reason why a corporation may not enjoy the same right. By the
corporation's own act, it has to follow the procedure prescribed by law for
the purpose; and this is what is important and indispensably prescribed
— strict adherence to such procedure.

A mere change in the name of a corporation, either by the legislature or by

the corporators or stockholders under legislative authority, does not,
generally speaking, affect the identity of the corporation, nor in any way
affect the rights, privileges, or obligations previously acquired or incurred
by it. Indeed, it has been said that a change of name by a corporation has
no more effect upon the identity of the corporation than a change of name
by a natural person has upon the identity of such person. The corporation,
upon such change in its name, is in no sense a new corporation, nor the
successor of the original one, but remains and continues to be the original
corporation. It is the same corporation with a different name, and its
character is in no respect changed.

Laureano lnvestment & Development Corp. vs. CA, GR NO. 100468

Under the Civil Code, a corporation has a legal personality of its own
(Article 44), and may sue or be sued in its name, in conformity with the
laws and regulations of its organization (Article 46). Additionally, Article
36 of the Corporation Code similarly provides: Every corporation
incorporated has the power and capacity: To sue and be sued in its
corporate name.

"Lideco Corporation" had no personality to intervene since it had not been

duly registered as a corporation. If petitioner legally and truly wanted to
intervene, it should have used its corporate name as the law requires and
not another name which it had not registered.

Pison-Arceo Agricultural Development Corp. vs. NLRC, GR NO. 117890

Hacienda Lanutan is an arm of petitioner, the organism of which it is an
integral part. Ineluctably, the real party in interest in this case is petitioner,
not Hacienda Lanutan which is merely its non-juridical arm. In dealing
with private respondents, petitioner represented itself to be Hacienda
Lanutan. Hacienda Lanutan is roughly equivalent to its trade name or even
nickname or alias. The names may have been different, but the IDENTITY
of the petitioner is not in dispute. Thus, it may be sued under the name by
which it made itself known to the workers.

c. Penalty for Unauthorized Use

Unauthorized Use of Corporate Name; Penalties
- The unauthorized use of a corporate name shall be punished with a fine
ranging from Ten thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00). (Sec. 159, RCC)

2. Purpose Clause
Clause in the articles of incorporation which states the specific purpose or
purposes for which the corporation is being incorporated.

Purpose clause is important in order to assure that persons who invest

in corporate entities would be aware of the business the corporation is
designed to engage in.

The specific purpose or purposes for which the corporation is being

formed. Where a corporation has more than one stated purpose, the
articles of incorporation shall indicate the primary purpose and the
secondary purpose or purposes: Provided, that a nonstock corporation may
not include a purpose which would change or contradict its nature as
such. (Sec 13(b), RCC)

a. Primary vs. Secondary

1. Primary Purpose
- must be only one
- main purpose of the corporation

2. Secondary Purpose
- may be several
- other purposes not allied or incidental to the primary purpose.

3. Principal Office
The place where the principal office of the corporation is to be located,
which must be within the Philippines. (Sec 13)

What should the corporation do if it has moved to another location?

-If within the same city or municipality as what was stated in the AOI,
the corporation must declare its new address in the General Information Sheet
(GIS) within 15 days from the transfer. However, the corporation must
submit an amended AOI if the new address is another city or
municipality.

What is the importance of Principal Office?

1. The principal place of business may determine the venue of
court cases involving corporations.
2.It may also determine if service of summons and notices was
properly made.
3. The principal place of business is likewise the place where chattel
mortgage should be registered.
 4. Additionally, unless otherwise provided for, the meetings of
stockholders or members shall be conducted in the city or
municipality where the principal place of business is located.

Hyatt Elevators and Escalators Corp. vs. Goldstar Elevators, Phils., Inc., GR
No. 161026
Goldstar Elevator Philippines Inc. and on the other hand the private
respondent, Hyatt Elevators and Escalators Company. Both engaged in
installing, maintaining/servicing of elavators and escalators Hyatt (herein
petitioner) filed an unfair trade practices and damages against LG industrial
systems Co. Ltd, and LG International Corporation alleging that it was
appointed as the exclusive distributor of LG elevators and escalators in
the Philippines under Distributorship Agreement LG filed a motion to
dismiss alleging that lack of jurisdiction over the persons of defendant,
improper venue and failure to state a cause of action. Hyatt filed a motion
for leave of court to amend the complaint, alleging that LG transferred all
assets to a joint venue agreement with Otis elevator Company of the USA
to LG Otis Elevator Company Goldstar filed a Motion to dismiss the
amended complaint alleging that venue was improperly laid as neither the
Hyatt, LG or Goldstar itself resided in Mandaluyong city where the case was
originally filed. The RTC denied the motion The CA dismissed the case and
held that Makati was the principal place of business of both respondent
and petitioner, as stated in the latter’s Articles of Incorporation, that place
was controlling for purposes of determining the proper venue.

Ruling
Well established in our jurisprudence is the rule that the residence of a
corporation is the place where its principal office is located, as stated
in its Articles of Incorporation.

"For practical purposes, a corporation is in a metaphysical sense a resident of

the place where its principal office is located as stated in the articles of
incorporation."

Jurisprudence has, settled that the place where the principal office of a
corporation is located, as stated in the articles, indeed establishes its
residence. This ruling is important in determining the venue of an action by
or against a corporation.

Sec. 1, SEC MC No. 6, Series of 2020

Section 1. Objectives
-These guidelines provide corporations guidance in formulating their
internal procedures and bylaws which will allow their directors, trustees,
stockholders, members and other persons to participate and vote in
meetings in absentia or through remote modes of communication as
defined in these guidelines, pursuant to the Revised Corporation Code.
These guidelines also operationalize the objectives of Republic Act No.
8792, otherwise known as the Electronic Commerce Act, to facilitate
domestic and international dealings, transactions, arrangements,
agreements through the
utilization of electronic, optical and similar medium, mode, instrumentality and
technology and to promote the universal use of electronic transaction.

4. Term of Existence
The term for which the corporation is to exist, if the corporation has not
elected perpetual existence.

Corporate Term
-A corporation shall have perpetual existence unless its articles of
incorporation provides otherwise.

Corporations with certificates of incorporation issued prior to the

effectivity of this Code, and which continue to exist, shall have perpetual
existence, unless the corporation, upon a vote of its stockholders
representing a majority of its outstanding capital stock, notifies the
Commission that it elects to retain its specific corporate term pursuant
to its articles of incorporation.

a. Extending or Shortening
A corporate term for a specific period may be extended or shortened
by amending the articles of incorporation: Provided, That no extension
may be made earlier than three (3) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Commission: Provided,
further, That such extension of the corporate term shall take effect only
on the day following the original or subsequent expiry date(s). (Sec.
11)

Philippine National Bank vs. CFI of Rizal, GR No. 63201

Section 11 of Corporation Code provides that a corporation shall exist for a
period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. Upon the
expiration of the period fixed in the articles of incorporation in the absence
of compliance with the legal requisites for the extension of the period, the
corporation ceases to exist and is dissolved ipso facto (16 Fletcher 671
cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3,
1988 Edition p. 617).

When the period of corporate life expires, the corporation ceases to be a

body corporate for the purpose of continuing the business for which it was
organized. But it shall nevertheless be continued as a body corporate for
three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its assets (Sec. 122, Corporation Code).

There is no need for the institution of a proceeding for quo warranto to

determine the time or date of the dissolution of a corporation because the
period of corporate existence is provided in the articles of incorporation.
When such period expires and without any extension having been made
pursuant to law, the
corporation is dissolved automatically insofar as the continuation of its business
is concerned.

The quo warranto proceeding under Rule 66 of the Rules of Court, as

amended, may be instituted by the Solicitor General only for the
involuntary dissolution of a corporation on the following grounds:
1.When the corporation has offended against a provision of an Act
for its creation or renewal;
2.When it has forfeited its privileges and franchises by non-user;
3.When it has committed or omitted an act which amounts to a
surrender of its corporate rights, privileges or franchises;
4. When it has mis-used a right, privilege or franchise conferred
upon it by law, or when it has exercised a right, privilege or
franchise in c ontravention of law.
Hence, there is no need for the SEC to make an involuntary dissolution
of a corporation whose corporate term had ended because its articles
of incorporation had in effect expired by its own limitation.

Considering the foregoing in relation to the contract of lease between the

parties herein, when PBM's corporate life ended on January 19, 1977 and
its 3-year period for winding up and liquidation expired on January 19,
1980, the option of extending the lease was likewise terminated on January
19, 1977 because PBM failed to renew or extend its corporate life in
accordance with law. From then on, the respondents can exercise their
right to terminate the lease pursuant to the stipulations in the contract.

b. Revival of Expired Term

A corporation whose term has expired may apply for a revival of its
corporate existence, together with all the rights and privileges under its
certificate of incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival. Upon approval by the Commission,
the corporation shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.
No application for revival of certificate of incorporation of banks, banking
and quasi-banking institutions, preneed, insurance and trust companies, non-
stock savings and loan associations (NSSLAs), pawnshops, corporations
engaged in money service business, and other financial intermediaries shall be
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency. (Sec. 11)

SEC MC 23-2019
Section 1. Applicability
The following corporations may file a Petition for Revival of Corporate
Existence:
1.Generally, a corporation whose term has expired;
2. An Expired Corporation whose Certificate of Registration has
been revoked for non-filing of reports (e.g. General Information
Sheet, and Audited Financial Statements), provided that it shall
file the proper
 Petition to Lift its Revoked Status, which may be incorporated in
its Petition to Revive, and must settle the corresponding penalties
thereof;
3. An Expired Corporation whose Certificate of Registration has
been suspended, provided that it shall file the proper Petition to
Lift its Suspended Status, which may be incorporated in its Petition
to Revive, and must settle the corresponding penalties thereof; or
4. An Expired Corporation whose corporate name has already been
validly re-used, and is currently being used, by another existing
corporation duly registered with the Commission, provided that the
former shall change its corporate name within thirty (30) days from
the issuance of its Certificate of Revival of Corporate Existence.

Who May Not Apply for Revival?

The following are not allowed to file a Petition for Revival of Corporate
Existence:
1. An Expired Corporation which has completed the liquidation of its
assets;
2. A corporation whose Certificate of Registration has been revoked
for reasons other than non-filing of reports (e.g. General Information
Sheet, and Audited Financial Statements);
3. A corporation dissolved by virtue of Sections 6(c) and 6(d) of
Presidential Decree No. 902-A, as amended by Presidential Decree
No. 1799; or
4. An Expired Corporation which already availed of re-registration,
in accordance with Memorandum Circular No. 13, series of 2019
(Amended Guidelines and Procedures on the Use of Corporate and
Partnership Names), or other memorandum circulars issued by the
Commission pertaining to re-registration, except when:
The re-registered corporation has given its consent to the Petitioner to use
its corporate name, and has undertaken to undergo voluntary
dissolution immediately after the issuance of the Petitioner's Certificate of
Revival; or
ii. The re-registered corporation has given its consent to the Petitioner to
use its corporate name, and has undertaken to change its corporate name
immediately after the issuance of the Petitioner's Certificate of Revival.

Required Vote to Initiate Revival

The required number of votes for the Revival of an Expired Stock
Corporation is at least a majority vote of the board of directors, and the
vote of at least majority of the outstanding capital stock. For nonstock
corporations, at least a majority vote of the board of trustees, and the vote
of at least majority of the members.( Sec 3)

5. Incorporators
Those stockholders or members mentioned in the AOI as originally forming
and composing the corporation, and who are signatories thereof.

Number and Qualifications of Incorporators:

Any person, partnership, association or corporation, singly or jointly with
others but not more than fifteen (15) in number, may organize a
corporation for any lawful purpose or purposes:

Provided, that natural persons who are licensed to practice a profession,

and partnerships or associations organized for the purpose of
practicing a profession, shall not be allowed to organize as a corporation
unless otherwise provided under special laws.

Incorporators who are natural persons must be of legal age.

Each incorporator of a stock corporation must own or be a subscriber to at
least one (1) share of the capital stock.

A corporation with a single stockholder is considered a One Person

Corporation. (Sec. 10)

SEC Memorandum Circular No. 16,

Series of 2019
Sec. 1. Number of Incorporators
Two or more persons, but not more than 15, may organize themselves and
form a corporation.

Only OPC may have a single stockholder, as well as a sole director.

Qualifications of an Incorporator:

Stock Corporation
Must own or be a subscriber to, at least one share of the capital stock.

Non-stock Corporation
Must be a member of the corporation.

Incorporators may be composed of any combination of natural persons (of

legal age, must sign the AOI or by-laws), partnerships, domestic
corporations, as well as foreign corporations.

Promoters
Is a person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives
consideration therefor. (Sec. 3.10, RA 8799)

Liability of a Promoter
Caram, Jr. vs. CA, GR No. L-48627
Petitioners were not really involved in the initial steps that finally led
to the incorporation of the Filipinas Orient Airways. Barretto was
described as "the moving spirit." The project study was undertaken by the
private respondent at
the request of Barretto and Garcia who, upon its completion, presented it
to the petitioners to induce them to invest in the proposed airline.

Petitioners were not involved in the initial stages of the organization of

the airline, which were being directed by Barretto as the main promoter. It
was he who was putting all the pieces together, so to speak. The
petitioners were merely among the financiers whose interest was to be
invited and who were in fact persuaded, on the strength of the project
study, to invest in the proposed airline.

Liability of a Corporation for Promoter’s Contract

Cagayan Fishing Development Co. vs. Teodoro Sandiko, GR No. L-43350

A corporation should have a full and complete organization and existence
as an entity before it can enter into any kind of a contract or transact any
business.

A corporation, until organized, has no being, franchises or faculties. Nor do

those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation nor
does it possess franchise or faculties for it or others to exercise, until it
acquires a complete existence.

The contract here was entered into not between Manuel Tabora and a
non- existent corporation but between the Manuel Tabora as owner of
the four parcels of lands on the one hand and the same Manuel Tabora,
his wife and others, as mere promoters of a corporations on the other
hand.

These promoters could not have acted as agent for a projected corporation
since that which no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were, a child in
ventre sa mere (in the mother's womb). This is not saying that under no
circumstances may the acts of promoters of a corporation be ratified by
the corporation if and when subsequently organized. There are with
exceptions under the doctrine of ratification.

Rizal Light vs. Morong, GR No. L-20993

A corporation should have a full and complete organization and existence
as an entity before it can enter into any kind of a contract or transact any
business.

It should be pointed out, however, that the Court did not say that the
rule is absolute or that under no circumstances may the acts of
promoters of a corporation be ratified or accepted by the corporation if
and when subsequently organized. Of course, there are exceptions.

American courts generally hold that a contract made by the promoters

of a corporation on its behalf may be adopted, accepted or ratified by the
corporation when organized.
6. Directors and Trustees
The number of directors, which shall not be more than fifteen (15) or
the number of trustees which may be more than fifteen (15).The
names, nationalities, and residence addresses of persons who shall act as
directors or trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code

Sec. 91, RCC

Election and Term of Trustees

The number of trustees shall be fixed in the articles of incorporation or
bylaws which may or may not be more than fifteen (15). They shall hold
office for not more than three (3) years until their successors are
elected and qualified. Trustees elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired
period.

Except with respect to independent trustees of nonstock corporations

vested with public interest, only a member of the corporation shall be
elected as trustee.

Unless otherwise provided in the articles of incorporation or the bylaws,

the members may directly elect officers of a nonstock corporation.

See also Sec. 174, RCC

Designation of Governing Boards

The provisions of specific provisions of this Code to the contrary

notwithstanding, nonstock or special corporations may, through their articles
of incorporation or their bylaws, designate their governing boards by any
name other than as board of trustees.

7. Capitalization
If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names,
nationalities, and residence addresses of the original subscribers, amount
subscribed and paid by each on the subscription, and a statement that
some or all of the shares are without par value, if applicable

If it be a nonstock corporation, the amount of its capital, the names,

nationalities, and residence addresses of the contributors, and amount
contributed by each. (Sec 13 (h) and (i))

Sec. 12, RCC

Minimum Capital Stock Not Required of Stock Corporations
- Stock corporations shall not be required to have a minimum capital
stock, except as otherwise specifically provided by special law.
-
Meaning of Capital Reserved to Filipinos
No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws
of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall
any such franchise or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must
be citizens of the Philippines. (Sec. 11, Art 12, 1987 Constitution)

Gamboa vs. Teves, GR No. 176579

In 1928, Act No. 3236 was enacted, granting PLDT a franchise and the
right to engage in the telecommunications business. In 1969, General
Telephone and Electric Corporation (GTE), an American company and a
major stockholder of PLDT, sold 26% of the outstanding capital stock
(OCS) of PLDT to Philippine Telecommunications Investment Corporation
(PTIC).In 1977, Prime Holdings Inc. (PHI) was incorporated. It later
became the owner of 111,415 shares of PTIC thru 3 Deeds of
Assignment executed by PTIC’s stockholders.

In 1986, those 111, 415 shares were sequestered by the PCGG. This
represented 46.125% of PTIC’s OCS.

In 1999, First Pacific, a company registered in Bermuda and based in

Hong Kong, acquired the remaining 54% of PTIC.In 2006, the
government, thru the Inter-Agency Privatization Council (IPC), caused a
public bidding for the sequestered shares. Parallax Venture Fund won the
bid. However, First Pacific announced that it would exercise its right of
first refusal and buy the sequestered shares by matching Parallax’s
bid. It later entered into a conditional sale and purchase agreement with
the government. The sale to First Pacific was completed in 2007.

Since PTIC is a stockholder of PLDT, the sale by the government is

actually an indirect sale of PLDT’s shares (specifically, 12 million shares
representing 6.3% of its OCS).This sale increased First Pacific’s common
shareholdings in PLDT from 30.7% to 37%, thereby increasing the
common shareholdings of foreigners in PLDT to 81.41%. This violates
Section 11, Article XII of the Constitution. Section 11, Article XII,
Constitution states: “No franchise, certification, or any other form of
authority for the operation of a public utility shall be granted except to
citizens of the Philippines, or to corporations or associations organized
under Philippine laws, at least 60% of whose capital is owned by such
citizens.” —This means that foreign ownership of a public utility is
limited to not more than 40%. 60% must be Filipinos. This provision
was included in the Constitution as a recognition the sensitive and vital
position of
public utilities both in the national economy and for national security.
This ensures that the Filipinos will have “effective control” over public
utility companies. Later, the House of Representatives Commission on
Good Governance conducted a public hearing regarding the sale and
concluded that it followed due diligence and conformed to the legal
procedures. It also concluded that First Pacific’s acquisition will not violate
the constitutional limitation since PTIC only holds 13.847% of PLDT’s OCS.
Pablito and Arno Sanidad joined themselves as petitioners-in-intervention,
claiming that as PLDT subscribers, they have a stake in the outcome of
the controversy.

Ruling
The term "capital" in Section 11, Article XII of the Constitution refers only
to shares of stock that can vote in the election of directors.

Mere legal title is insufficient to meet the 60 percent Filipino-owned

"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non- Philippine national[s]."

Filipinos hold less than 60 percent of the voting stock, and earn less than
60 percent of the dividends, of PLDT. This directly contravenes the
express command in Section 11, Article XII of the Constitution that "[n]o
franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to x x x corporations
x x x organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens

Roy vs. Herbosa, GR No. 207246 (November 22, 2016 and April 18, 2016)
Before the Court is the Motion for Reconsideration dated January 19,
2017 (the Motion) filed by petitioner Jose M. Roy III (movant) seeking the
reversal and setting aside of the Decision dated November 22, 2016 (the
Decision) which denied the movant's petition, and declared that the
Securities and Exchange Commission (SEC) did not commit grave
abuse of discretion in issuing Memorandum Circular No. 8, Series of 2013
(SEC-MC No. 8) as the same was in compliance with, and in fealty to, the
decision of the Court in Gamboa v. Finance Secretary Teves (Gamboa
Decision) and the resolution denying the Motion for Reconsideration
therein (Gamboa Resolution). The Motion presents no compelling and
new arguments to justify the reconsideration of the Decision. The Decision
has already exhaustively discussed and directly passed upon these grounds.
Movant's petition was dismissed based on both procedural and
substantive grounds.

Ruling
 SEC did not commit grave abuse of discretion amounting to lack or excess
of jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court finds
SEC- MC No. 8 to have been issued in fealty to the Gamboa Decision and
Resolution.
Gamboa Decision "capital" in Section II, Article XII of the I987
Constitution refers only to shares of stock entitled to vote in the election
of directors, and thus in the present case only to common shares, and
not to the total outstanding capital stock (common and non-voting
preferred shares).

Gamboa Resolution
Foreign Investments Act of 1991 ("FIA")
Gamboa Resolution put to rest the Court's interpretation of the term
"capital" Full beneficial ownership of stocks, coupled with appropriate
voting rights is essential... reiterates and confirms the interpretation that the
term "capital" in Section 11, Article XII of the 1987 Constitution refers to
shares with voting rights, as well as with full beneficial ownership.

Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or

the controlling interest requirement. In fact, Section 2 goes beyond requiring
a 60- 40 ratio in favor of Filipino nationals in the voting stocks; it
moreover requires the 60-40 percentage ownership in the total number of
outstanding shares of stock, whether voting or not.

The SEC formulated SEC-MC No. 8 to adhere to the Court's unambiguous

pronouncement that "[f]ull beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights
is required." Clearly, SEC-MC No. 8 cannot be said to have been issued with
grave abuse of discretion

SEC MC No. 8, Series of 2013

The required percentage of Filipino ownership shall be applied to BOTH
a the total number of outstanding shares of stock entitled to vote in
the election of directors; AND
b the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.
Corporations covered by special laws which provide specific
citizenship requirements shall comply with the provisions of said law.

b. Authorized Capital Stock, Outstanding Capital Stock, Subscribed Capital

Stock, Pai-Up Capital Stock

Outstanding Capital Stock

The total shares of stock issued under binding subscription contracts
to subscribers or stockholders, whether fully or partially paid, except
treasury shares.

Authorized Capital Stock

The capital stock divided into shares.

Subscribed Capital Stock

The total amount of the capital stock subscribed whether fully paid or
not.

Paid-Up Capital Stock

Portion of the authorized capital stock that has been subscribed and
paid.

8. Shares of Stock
A share of corporate stock has been defined as the unit into which the
proprietary interests in a corporation are divided.

The intangible interest or right which an owner has in the management,

profit and assets of the corporation.

a. Classes of Shares
Par Value vs. No Par Value
1. Par Value Shares
Are those with fixed value stated in the AOI and the share certificate.

2. No Par Value Shares

Shares without an arbitrary amount

Voting vs. Non-Voting

1. Voting
-Are shares that give the stockholder the right to vote on matters of
corporate policy making. Owning voting shares also allows a vote who
should be on the company’s board of directors or trustees.

2. Non-voting
Are shares that provide that shareholders have no right to vote on
corporate matters, such as election of the board of directors or mergers.
This type of share is usually implemented for individuals who want to
invest in the company’s profitability and success at the expense of voting
rights in the direction of the company.

Common vs. Preferred

1. Common Shares
Common shares or stocks represent the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to a
pro rata division of profits.

2. Preferred Shares
- Shares with a stated par value which entitle the holder thereof to
certain preferences over the holders of common stock. The preference
may be (a) as to asset; or (b) as to dividends; or (c) as may be
determined by the board of directors when so authorized to do so.

Limitations:
1. If deprived of voting rights, it shall still be entitled to vote on
matters enumerated in Section 6, par. 6.
 2.Preference must not be violative of the Code.
3.May be issued only with a stated par value.
4. The board of directors may fix the terms and conditions only when
so authorized by the articles of incorporation and such terms and
conditions shall be effective upon filing a certificate thereof with
the SEC.

Kinds:
a. Cumulative
One which entitles he owner thereof to payment not only of current
dividends but also back dividends not previously paid whether or not
during the past years dividends were declared or paid.

b. Non-cumulative
One which grants the holders of such shares only to the payment of
current dividends but not back dividends when and if dividends are paid to
the extent agreed upon before any other stockholders are paid the
same.

c. Participating
One which entitles the shareholder to participate with the common shares
in excess distribution at some predetermined or at a fixed ratio as may
be determined.

d. Non-participating
One which entitles the shareholder thereof to receive the stipulated
preferred dividends and no more.

e. Cumulative participating
Share which is a combination of the cumulative share and participating
share.

b.Non-voting shares allowed to vote

Holders of nonvoting shares shall nevertheless be entitled to vote on

the following matters:
1.Amendment of the articles of incorporation;
2.Adoption and amendment of bylaws;
c3 Sale, lease, exchange, mortgage, pledge, or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating, or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.(Sec 6)

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

d. Redeemable Shares
Redeemable shares may be issued by the corporation when expressly
provided in the articles of incorporation. They are shares which may be
purchased by the corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other
terms and conditions stated in the articles of incorporation and the
certificate of stock representing the shares, subject to rules and
regulations issued by the Commission.(Sec 8)

Republic Planters Bank vs. Hon. Enrique Agana, G.R. No. 51765
Redeemable shares, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation,
or the stockholder, or both at a certain redemption price. A redemption
by the corporation of its stock is, in a sense, a repurchase of it for
cancellation. The present Code allows redemption of shares even if there
are no unrestricted retained earnings on the books of the corporation. This
is a new provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current
retained earnings.

However, while redeemable shares may be redeemed regardless of the

existence of unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet
its debts as they mature.

While the stock certificate does allow redemption, the option to do so was
clearly vested in the petitioner bank. The redemption therefore is
clearly the type known as "optional". Thus, except as otherwise provided in
the stock certificate, the redemption rests entirely with the corporation
and the stockholder is without right to either compel or refuse the
redemption of its stock.

e. Founder’s Shares
Founders’ shares may be given certain rights and privileges not enjoyed by
the owners of other stocks. Where the exclusive right to vote and be voted
for in the election of directors is granted, it must be for a limited period
not to exceed five
(5) years from the date of incorporation: Provided, That such exclusive
right shall not be allowed if its exercise will violate Commonwealth Act
No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No.
7042, otherwise known as the “Foreign Investments Act of 1991”; and
other pertinent laws.(Sec 7)

9. Other Matters
Such other matters consistent with law and which the incorporators may
deem necessary and convenient.(Sec 13)
Arbitration for Corporations.
An arbitration agreement may be provided in the articles of incorporation
or bylaws of an unlisted corporation. When such an agreement is in place,
disputes between the corporation, its stockholders or members, which
arise from the implementation of the articles of incorporation or bylaws,
or from intra- corporate relations, shall be referred to arbitration. A
dispute shall be nonarbitrable when it involves criminal offenses and
interests of third parties.(Sec 181)

10. Undertaking to Change Corporate Name

That the incorporators undertake to change the name of the
corporation immediately upon receipt of notice from the Commission
that another corporation, partnership or person has acquired a prior right
to the use of such name, that the name has been declared not
distinguishable from a name already registered or reserved for the use of
another corporation, or that it is contrary to law, public morals, good
customs or public policy.(Sec 14)

11. Non-Transferability clause (Partly-Nationalized Industries)

-Corporations which will engage in any business or activity reserved for
Filipino citizens shall provide the following):
“No transfer of stock or interest which shall reduce the ownership of
Filipino citizens to less than the required percentage of capital stock as
provided by existing laws shall be allowed or permitted to be recorded in
the proper books of the corporation, and this restriction shall be indicated
in all stock certificates issued by the corporation.”

C.Grounds for Rejection of AOI - Sec. 16, RCC; See also Sec. 162,
RCC Sec. 16, RCC
The Commission may disapprove the articles of incorporation or any
amendment thereto if the same is not compliant with the requirements of
this Code: Provided, That the Commission shall give the incorporators,
directors, trustees, or officers a reasonable time from receipt of the
disapproval within which to modify the objectionable portions of the
articles or amendment. The following are grounds for such disapproval:
a. The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
b. The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules
and regulations;
c. The certification concerning the amount of capital stock
subscribed and/or paid is false; and
d. The required percentage of Filipino ownership of the capital stock
under existing laws or the Constitution has not been complied
with.

D. Dual Franchise Requirement

No articles of incorporation or amendment to articles of incorporation of
banks, banking and quasi-banking institutions, preneed, insurance and trust
companies, NSSLAS, pawnshops, and other financial intermediaries shall be
approved by the Commission unless accompanied by a favorable
recommendation of the
appropriate government agency to the effect that such articles or amendment
is in accordance with law.(Sec 16)

E.Commencement of Corporate Existence

If the Commission finds that the submitted documents and information are
fully compliant with the requirements of this Code, other relevant laws,
rules and regulations, the Commission shall issue the certificate of
incorporation.

A private corporation organized under this Code commences its corporate

existence and juridical personality from the date the Commission issues the
certificate of incorporation under its official seal and thereupon the
incorporators, stockholders/members and their successors shall constitute
a body corporate under the name stated in the articles of incorporation for
the period of time mentioned therein, unless said period is extended or
the corporation is sooner dissolved in accordance with law.(Sec 18)

F.Amendment of AOI
1.Manner

Stock Corporation
Any provision or matter stated in the articles of incorporation may be
amended by:
A majority vote of the board of directors and the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right
of dissenting stockholder.

Nonstock Corporation
The articles of incorporation of a nonstock corporation may be amended by
the vote or written assent of majority of the trustees and at least two-thirds
(2/3) of the members.(Sec 15)

Note: The original and amended articles together shall contain all
provisions required by law to be set out in the articles of incorporation.
Amendments to the articles shall be indicated by underscoring the change
or changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees, with a
statement that the amendments have been duly approved by the required
vote of the stockholders or members, shall be submitted to the
Commission.

2. Effectivity
Amendments shall take effect:
1.Upon approval by the Commission or
2. From the date of filing with the said Commission if not acted
upon within six (6) months from the date of filing for a cause not
attributable to the corporation.(Sec 15)

G. Effect of Non-Use of Corporate Charter

1.Concept of Delinquency and Lifting of Delinquency Status

a. Failure to organize within 5 years from incorporation

If a corporation does not formally organize and commence its business
within five (5) years from the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the day following the end
of the five (5)-year period.

b. Failure to operate for at least 5 consecutive years

If a corporation has commenced its business but subsequently
becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation under
delinquent status.

A delinquent corporation shall have a period of two (2) years to resume

operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall issue
an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation’s certificate of
incorporation.

The Commission shall give reasonable notice to, and coordinate with
the appropriate regulatory agency prior to the suspension or revocation of
the certificate of incorporation of companies under their special
regulatory jurisdiction.(Sec 21)

H. By-Laws
Relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of individuals composing it
and those having the direction, management and control, in whole or in
part, of its affairs and activities.

1. Concept
It is the internal rules of a corporation to regulate and control the
corporation

Loyola Grand Villas Homeowners Association vs. CA, GR No. 117188

By-laws are "rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it,".

By-laws are indispensable to corporations in this jurisdiction. These may

not be essential to corporate birth but certainly, these are required by
law for an orderly governance and management of corporations.

Nonetheless, failure to file them within the period required by law by no

means tolls the automatic dissolution of a corporation.

Rural Bank of Salinas vs. CA, GR No. 96674

A corporation, either by its board, its by-laws, or the act of its officers,
cannot create restrictions in stock transfers, because:

Restrictions in the traffic of stock must have their source in legislative

enactment, as the corporation itself cannot create such impediment. By-laws
are intended merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such power, cannot
ordinarily inquire into or pass upon the legality of the transactions by
which its stock passes from one person to another, nor can it question
the consideration upon which a sale is based.

2. Adoption
The By-laws may be adopted before or after the incorporation. In all cases,
the By-laws shall be effective only upon the issuance by the SEC of a
certification that the By-laws are not inconsistent with the Corporation
Code. (Sec 45)

1. Pre-Incorporation
Approved and signed by all the incorporators and submitted to the
Commission, together with the articles of incorporation.

2. Post-Incorporation
a. Stock
- Affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock
- Duly certified by a majority of the directors

b. Non-stock
- Affirmative vote of at least majority of the members
- Duly certified by a majority of the trustees

Note: The certified copy be countersigned by the secretary of the

corporation, and shall be filed with the Commission attached to the
original articles of incorporation.

3.Contents
Contents of Bylaws.
A private corporation may provide the following in its bylaws:
1.The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders or
members thereof;
3.The required quorum in meetings of stockholders or members and
the manner of voting therein;
4. The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes;
5. The form for proxies of stockholders and members and the
manner of voting them;
6.The directors’ or trustees’ qualifications, duties and responsibilities,
the guidelines for setting the compensation of directors or
trustees and
 officers, and the maximum number of other board representations that
an independent director or trustee may have which shall, in no case,
be more than the number prescribed by the Commission;
7.The time for holding the annual election of directors or trustees
and the mode or manner of giving notice thereof;
8. The manner of election or appointment and the term of office
of all officers other than directors or trustees;
9.The penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of issuing stock
c ertificates; and
11. Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the promotion of
good governance and anti-graft and corruption measures.
An arbitration agreement may be provided in the bylaws pursuant to
Section 181 of this Code.(Sec 45)

4. Requisites
1.It must be consistent with the corporation code, other laws, morals,
and public policy.
2.It must be in harmony with the AOI
3.It must be general and uniform
4.It must not impair obligations and contracts or vested rights
5.It must be reasonable.

Government of Philippine Islands vs. El Hogar Filipino, 50 Phil 399 (1927)

Court sustained the validity of a provision in the corporate by-law
requiring that persons elected to the Board of Directors must be holders of
shares of the paid up value of P5,000.00, which shall be held as security for
their action, on the ground that section 21 of the Corporation Law
expressly gives the power to the corporation to provide in its by-laws for
the qualifications of directors and is "highly prudent and in conformity
with good practice".

Gocongwei vs. SEC 89 SCRA 336 (1979)

This is a petition for “declaration of nullity of amended by -laws,
cancellation of certificate of filing of amended by- laws and damages” filed
by petitioner John Gokongwei against the majority of the members of the
Board of Directors. He has the following causes of action:

1. that the Board in amending the by-laws, had no authority to

do so because it was based on the a 1961authorization and the
amendment being contested was in 1976, and the authorization
should have been based on votes made according to the 1976
shares, not the 1961 shares,
2.the authority granted in 1961 had already been exercised in 1962
and 1963, after which the authority of the Board ceased to exist,
3. membership of the Board changed since 1961, there are 6
new directors,
4. that prior to the amendment of the by-laws 1 , he had all the
qualifications to be a director (he was a substantial stockholder) and
the amended by-laws disqualified him and deprived him of a vested
right to
 be voted,5. that the corporation has no inherent power to disqualify
a stockholder from being elected and therefore it is an ultra vires
and void act

Petitioner also wanted to inspect records and documents of San Miguel

Corporation but the request was denied because the request was said to
have been made in bad faith. Respondents filed their answer to the
petition, denying the substantial allegations therein and stating, by way of
affirmative defenses that "the action taken by the Board of Directors on
September 18, 1976 resulting in the . . . amendments is valid and legal
because the power to 'amend, modify, repeal or adopt new By-laws'
delegated to said Board on March 13, 1961and long prior thereto has
never been revoked, withdrawn or otherwise nullified by the stockholders
of SMC". Also said that the power of the Board to amend the by- laws are
broad, subject only to existing laws. August 1972, the Universal Robina
Corporation (URC), a corporation engaged in business competitive to that
of respondent corporation, began acquiring shares amounting to 622,987
shares. In October 1972, the Consolidated Foods Corporation (CFC)
likewise began acquiring shares in respondent corporation that amounted
to P543,959.00.

On January 12,1976, petitioner, who is president and controlling shareholder of

URC and CFC (both closed corporations) purchased 5,000shares of stock
of respondent corporation, and thereafter, in behalf of himself, CFC and
URC, "conducted malevolent and malicious publicity campaign against
SMC" to generate support from the stockholder "in his effort to secure for
himself and in representation of URC and CFC interests, a seat in the Board of
Directors of SMC". Petitioner was rejected by the stockholders in his bid
to secure a seat in the Board of Directors on the basic issue that
petitioner was engaged in a competitive business and his securing a seat
would have subjected respondent corporation to grave disadvantages
.On May 6, 1977, this Court issued a temporary restraining order
restraining private respondents from disqualifying or preventing petitioner
from running or from being voted as director of respondent corporation
and from submitting for ratification or confirmation or from causing the
ratification or confirmation of the amendment. SEC held that petitioner
should be allowed to run as a director but that he should not sit as
such until SEC has decided on the validity of the by-laws in dispute.

Respondents reason out that petitioner is engaged in businesses competitive

and antagonistic to that of respondent SMC and that the Board realized the
clear and present danger in competitors being directors because they would
have easy and direct access to SMC’s business and trade secrets.

Ruling
It is recognized that 'every corporation has the inherent power to adopt by-
laws 'for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves
in reference to the management of its affairs.

The by-laws may be necessary for the government of the corporation.In

this jurisdiction, under section 21 of the Corporation Law, a
corporation may
prescribe in its by-laws "the qualifications, duties and compensation of
directors, officers and employees" This must necessarily refer to a qualification
in addition to that specified by section 30 of the Corporation Law, which
provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director "

Grace Christian High School vs. CA, GR No. 108905

The board of directors of corporations must be elected from among
the stockholders or members.
But in the case of petitioner, there is no reason at all for its representative
to be given a seat in the board. Nor does petitioner claim a right to such
seat by virtue of an office held. In fact it was not given such seat in the
beginning. The seat was only given in 1975 when a proposed amendment
to the by-laws was sought. The amendment contains a provision giving the
petitioner a permanent board seat.

Such provision is contrary to law, the fact that for fifteen years it has not
been questioned or challenged but, on the contrary, appears to have
been implemented by the members of the association cannot forestall a later
challenge to its validity. Neither can it attain validity through acquiescence
because, if it is contrary to law, it is beyond the power of the members
of the association to waive its invalidity.

The members of the association may have formally adopted the provision in
question, but their action would be of no avail because no provision of the
by- laws can be adopted if it is contrary to law.

Salafranca vs. Philamlife (Pamplona) Village Homeowners Association, GR

NO. 121791
Private respondent, in an effort to validate the dismissal of the petitioner,
posits the theory that the latter's position is coterminous with that of
the Village's Board of Directors, as provided for in its amended by-
laws.

VIII. CONTROL AND MANAGEMENT OF CORPORATION

A. General Powers of the Board
A corporation can act only through its directors and officers. The board is
the central power that authorizes the executive agents to enter into
contracts and to embark on a business.

Note: Board Resolutions are the express acts of the Board. The
directors/trustees don’t act individually. The act of one director does not
bind the corporation. Every act must be passed upon by the members of
the Board, unlike in a partnership where there is mutual agency, which
means the act of one agent will bind the partners and the partnership.

Paragraph 1 of Section 22 of the Revised Corporation Code provides for the

General Powers of the Board.
1.To exercise all powers provided for under the RCC;
2.To conduct all business affairs of the corporation; and
 3.To control and hold the properties of the corporation.

Note: The concentration of powers in the board is necessary for efficiency

in any large organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its business
directly.

CASES:

Fillipinas Port Services, Inc. vs. Go, GR No. 161886

The governing body of a corporation is its board of directors. Section 23
(Now Sec. 22) of the Corporation Code explicitly provides that unless
otherwise provided therein, the corporate powers of all corporations
formed under the Code shall be exercised, all business conducted and
all property of the corporation shall be controlled and held by a board of
directors. Thus, with the exception only of some powers expressly granted
by law to stockholders (or members, in case of non-stock corporations), the
board of directors (or trustees, in case of non-stock corporations) has the
sole authority to determine policies, enter into contracts, and conduct the
ordinary business of the corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant provisions of law. Verily, the
authority of the board of directors is restricted to the management of the
regular business affairs of the corporation, unless more extensive power
is expressly conferred.

The raison d’etre behind the conferment of corporate powers on the board
of directors is not lost on the Court. Indeed, the concentration in the board
of the powers of control of corporate business and of appointment of corporate
officers and managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with the business
of a corporation to conduct its business directly. And so the plan of
corporate organization is for the stockholders to choose the directors who
shall control and supervise the conduct of corporate business.

In the present case, the board’s creation of the positions of Assistant

Vice Presidents for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President and the
Board Chairman, was in accordance with the regular business operations
of Filport as it is authorized to do so by the corporation’s by-laws,
pursuant to the Corporation Code.

Tom vs. Rodriguez, GR No. 215764

The Court finds that the CA committed grave abuse of discretion
amounting to lack or excess of jurisdiction in denying Tom’s prayer for the
issuance of a TRO and/or writ of preliminary injunction. The issuance of
an injunctive writ is warranted to enjoin the RTC-Nabunturan from
implementing its November 13, 2013 and December 11, 2013 Orders in the
specific performance case placing the management and control of GDITI to
Rodriguez, among other directives. This pronouncement follows the well-
entrenched rule that a corporation exercises its powers through its board of
directors and/or its duly authorized officers and
agents, except in instances where the Corporation Code requires stockholders’
approval for certain specific acts.

B.Business Judgment Rule

Under the Business Judgment Rule, the will of the majority of the
Board members controls in corporate affairs, and contracts intra vires
entered into by the Board of Directors are binding on the corporation
and courts will not interfere unless such contract are so
unconscionable and oppressive as to amount to a wanton destruction
of rights of the minority.

Rational for the Business Judgment Rule:

1. It acts as a presumption in favor of corporate management’s actions;
2. It provides a safe harbor that makes both directors and their
actions unassailable if certain pre-requisites have been met;
3. It is a means of conserving judicial resources thereby permitting
courts to avoid being mired down in rehashing judgments that are
inherently subjective;
4. The rule is the law’s implementation of board economic policy
built upon economic freedom and encouragement of informed risk
taking;
5. It is a means by which BOD adopt take-over defenses and by which
the courts review the adoption of those defenses; and
6. It is a means by which a corporation and their lawyers evaluate
and, based upon that evaluation, recommend the dismissal of
derivative suits.

Saber vs. CA, Gr No. 132981

Bad faith does not simply connote bad judgment to simple negligence,
dishonest purpose or some moral obloquy and conscious doing of a
wrong, a breach of known duty due to some motives or interest or ill-
will that partakes of the nature of fraud. Malice connotes ill-will or spite
and speaks not in response to duty. It implies an intention to do ulterior
and unjustifiable harm.

The BOD of PAB (Philippine Amanah Bank) did not act in bad faith or with
malice in designating Aradji as chairman. There were 4 other members
of the Investigating Committee, all of whom could’ve ruled in favor of
Saber based on the evidence on record. Moreover, the report and
recommendations of the committee were still subject to the review of the
BOD, who could’ve also ruled in his favor.

Even though the Sandiganbayan ruled that Saber had the implied authority to
do those acts and thus he cannot be held criminally liable, it cannot be
concluded that the PAB BOD acted in bad faith or with malice when it
initiated the criminal case. To constitute malicious prosecution, there
must be proof that the prosecutor was prompted by a sinister or devious
design to vex and humiliate a person, and that it was initiated deliberately,
knowing that the charges are false and groundless.
One cannot be held liable for damages for malicious prosecution where he
acted with probable cause. Probable cause is that which engenders a well-
founded belief that a crime has been committed and that the respondent is
probably guilty thereof and should be held for trial. A finding for probable
cause needs only to rest on evidence showing that in all probability, a
crime has been committed by the respondent. In this case, there was
probable cause to initiate a case against Saber.

The Tanodbayan found probable cause based on the evidence, particularly

the following: (1) Saber allowed Basman of AGEAC to buy tickets worth
P756,000 payable on credit via postdated checks that were blank as to the
amounts; and
(2) Saber allowed the AGEAC to pay freight charges of P178K via post-
dated checks although the balance of the account of Basman was only
P1,834.55. That the Sandiganbayan later on acquitted him does not
automatically mean that the prosecution against him had no probable
cause. Saber failed to prove that the criminal complaints against him were
filed with malice on the part of PAB and despite lack of probable cause.
Hence, he (through his heirs) is not entitled to damages.

C. Qualifications and Disqualifications of Board Members

The only requirement needed for one to qualify as a director/trustee is
that he/she must own at least one share (stock corporation), or be a
member (non- stock corporation). This is a continuing requirement,
which means that a director/trustee will cease to be such when he/she
ceases to own a share or be a member.(Sec 22)

Note: There is no residency requirement. The requirement that majority of

the directors/trustees must be residents of the Philippines under Section
23 of BP 68 was deleted by RA11232, otherwise known as the Revised
Corporation Code.

Disqualification
A person cannot be a director, trustee, or officer if, within 5 years prior to
the election, he/she was:
1.Convicted by final judgment of:
a.an offense punishable by imprisonment exceeding 6 years;
b.a violation of the Corporate Code; or
c. a violation of the Securities Regulation Code (RA no.
8799);
2. Found administratively liable for any offense involving fraudulent
acts; or
3. Found liable by a foreign court or equivalent foreign
regulatory authority for acts, violations, or misconduct similar to (1)
or (2). (Sec 46)

If a director/trustee is elected despite having a disqualification, or if

the disqualification arose or is discovered subsequent to election, the SEC may
motu proprio or upon verified complaint, and after due notice and hearing,
order the removal of such director/trustee.(Sec 27)

Violation of Disqualification Provision; Penalties.

When, despite the knowledge of the existence of a ground for
disqualification as provided in Section 26 of this Code, a director, trustee
or officer willfully holds office, or willfully conceals such disqualification, such
director, trustee or officer shall be punished with a fine ranging from Ten
thousand pesos (₱10,000.00) to Two hundred thousand pesos
(₱200,000.00) at the discretion of the court, and shall be permanently
disqualified from being a director, trustee or officer of any corporation.
When the violation of this provision is injurious or detrimental to the
public, the penalty shall be a fine ranging from Twenty thousand pesos
(₱20,000.00) to Four hundred thousand pesos (₱400,000.00).(Sec 160)

Lee vs. CA, GR No. 93695

By its very nature, a voting trust agreement results in the separation of
the voting rights of a stockholder from his other rights. The execution of a
voting trust agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of stockholders,
on the one hand, and the legal title thereto on the other hand.

In the instant case, the petitioners maintain that with the execution of the
voting trust agreement between them and the other stockholders of ALFA, as
one party, and the DBP, as the other party, the former assigned and
transferred all their shares in ALFA to DBP, as trustee and thus, they can
no longer be considered directors of ALFA. Under the old Corporation
Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust
agreement inasmuch as he remains owner (although beneficial or
equitable only) of the shares subject of the voting trust agreement
pursuant to which a transfer of the stockholder's shares in favor of the
trustee is required.

No disqualification arises by virtue of the phrase "in his own right"

provided under the old Corporation Code. With the omission of the phrase
"in his own right" the election of trustees and other persons who in fact are
not beneficial owners of the shares registered in their names on the books
of the corporation becomes formally legalized. Hence, this is a clear
indication that in order to be eligible as a director, what is material is
the legal title to, not beneficial ownership of, the stock as appearing on
the books of the corporation. The facts of this case show that the
petitioners, by virtue of the voting trust agreement executed in 1981
disposed of all their shares through assignment and delivery in favor of the
DBP, as trustee. Consequently, the petitioners ceased to own at least one
share standing in their names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners
ceased to be directors. Hence, the transfer of the petitioners' shares to the
DBP created vacancies in their respective positions as directors of ALFA.
Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the
DBP as trustee, the latter became the stockholder of record with
respect to the said shares of stocks.
D. Election of Board Members
Each stockholder/member has the right to nominate any qualified
director/trustee, except when the exclusive right is reserved for holders of
founder’s shares.

Required attendees
At all elections, the owners of majority of the outstanding capital
stock, or majority of the members, must be present, either:
1.In person;
2.Through a representative authorize to act by written proxy; or
3. Through remote communication or in absentia—but only when so
authorized by the by-laws or by a majority of the Board, or when
it is a corporation vested with public interest.

Note: Majority shall mean 50% plus 1.

Methods of Voting (Sec 23)

Stockholders are entitled to vote the number of shares they own as per the
books at the time fixed in the bylaws, or if the bylaws are silent, at the
time of the election.

The total votes of one stockholder cannot be greater than the shares
he/she owns multiplied by the number of directors to be elected.

Illustrative Example:
SH’s total votes = (No. of shares owned) x (No. of directors to be
elected) SH owns 1,000 shares. There are 5 directors to be
elected.
SH’s total votes = 1,000 x 5 = 5,000

There are 3 modes by which a stockholder may vote, namely:

1. Straight voting - A stockholder may vote his/her number of
shares for as many persons as there are directors to be
elected.

Same illustration: SH can vote for A, B, C, D, and E in the

following manner:
A - 1,000
votes B -
1,000 votes C
- 1,000 votes
D - 1,000
votes E -
1,000 votes

2. Cumulative voting - A stockholder may cumulate his/her shares

and give 1 candidate as many votes as the number of
directors to be elected multiplied by the number of shares
owned.

Same illustration: SH can use all 5,000 votes for A alone.

 Rationale: To increase the chances of the minority stockholders
to elect a director; cumulative voting ensures minority
representation in the board.

The advantages of Cumulative voting are:

a. It is democratic in that persons with large (but

minority) holdings would have a voice in the conduct of
the corporation;
b. It is desirable to have as many viewpoints as possible
represented on the BOD; and
c. The presence of minority director may discourage conflicts
of interest by management since discovery is considerably
more likely.

3. Distributed cumulative voting - A stockholder may distribute

his/her total votes among as many candidates he/she sees fit.

Same illustration: SH can vote in the following

manner: A – 1,500 votes
B - 2,000
votes C - 500
votes D -
1,000 votes E
- 0 vote

E. Independent Director
An independent director is a person who is independent of management
and free from any business or other relationship which could, or could
reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out his/her responsibilities as director
(Sec 22)

Corporations vested with public interest shall have independent directors

that comprise at least 20% of the Board.

These corporations include:

1. Those covered by the Securities Regulation Code (RA no. 8799),
with securities registered with the SEC, listed with an exchange or with
assets of at least 50M and having at least 200 holders with at least
100 shares each
2. Banks, quasi-banks, NSSLAs, pawnshops, corporations engaged inn
money service business, trust and insurance companies, and
other financial intermediaries
3. Other corporations engaged in businesses vested with public
interest as may be determined by the SEC - SEC’s criteria in
determining whether an entity is vested with public interest: (a)
extent of minority ownership;
(b) type of financial products or securities issued or offered to
investors;
(c) nature of business operations; and other relevant factors
germane to the objective and purpose of requiring independent
directors.
F.Report of Election
Section 25 of the Revised Corporation Code now requires reports to be
submitted to the SEC. Section 25 provides:

Section 25. Report of Election of Directors, Trustees and Officers, Non-holding

of Election and Cessation from Office.
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, the secretary, or any other officer of the corporation, shall
submit to the Commission, the names, nationalities, shareholdings, and
residence addresses of the directors, trustees and officers elected.

The non-holding of elections and the reasons therefor shall be reported to

the Commission within thirty (30) days from the date of the scheduled
election. The report shall specify a new date for the election, which shall
not be later than sixty
(60) days from the scheduled date.

If no new date has been designated, or if the rescheduled election is

likewise not held, the Commission may, upon the application of a
stockholder, member, director or trustee, and after verification of the
unjustifiable non-holding of the election, summarily order that an election
be held. The Commission shall have the power to issue such orders as may
be appropriate, including other directing the issuance of a notice stating
the time and place of the election, designated presiding officer, and the
record date or dates for the determination of stockholders or members
entitled to vote.

Notwithstanding any provision of the articles of incorporation or by laws to

the contrary, the shares of stock or membership represented at such
meeting and entitled to vote shall constitute a quorum for purposes of
conducting an election under this section.

Should a director, trustee or officer die, resign or in any manner case to

hold office, the secretary or the director, trustee or officer of the
corporation, shall, within seven (7) days form knowledge thereof, report in
writing such fact to the Commission.

In summary, the following reports should be submitted to the SEC:

1.Report on the names, nationalities, shareholdings, and residence addresses
of directors, trustees and officers elected – within 30 days after the
election, the corporate secretary or other officer of the corporation shall
submit the report;
2.Report on the non-holding of elections, the reasons therefor and the new
date for the election – to be submitted within 30 days from the date of the
scheduled election; and
3. Report that a director, trustee, or officer died, resigned or in any
manner ceased to hold office – the corporate secretary, or the director,
trustee, or officer shall submit a written report within seven (7) days from
knowledge thereof.

Premium Marble Resources vs. CA, GR No. 96551

Premium Marble Resources, Inc. (Premium for brevity), assisted by Atty.
Arnulfo Dumadag as counsel, filed an action for damages against International
Corporate Bank.A few days after Premium filed the said case, Printline
Corporation, a sister company of Premium also filed an action for damages
against International Corporate Bank.

Meantime, the same corporation, i.e., Premium, but this time represented
by Siguion Reyna, Montecillio and Ongsiako Law Office as counsel, filed a
motion to dismiss on the ground that the filing of the case was without
authority from its duly constituted board of directors as shown by the
excerpt of the minutes of the Premium’s board of directors’ meeting.

In its opposition to the motion to dismiss, Premium thru Atty. Dumadag

contended that the persons who signed the board resolution namely Belen,
Jr., Nograles & Reyes, are not directors of the corporation and were allegedly
former officers and stockholders of Premium; that Siguion Reyna Law
office is the lawyer of Belen and Nograles and not of Premium and that
the Articles of Incorporation of Premium shows that Belen, Nograles
and Reyes are not majority stockholders.
The issue in this case is whether or not the filing of the case for damages
against private respondent was authorized by a duly constituted Board of
Directors of the petitioner corporation.

The Court held that the filing of the case was not duly authorized. In the
absence of /any board resolution from its board of directors the authority
to act for and in behalf of the corporation, the present action must
necessarily fail. The power of the corporation to sue and be sued in any
court is lodged with the board of directors that exercises its corporate
powers.

It appears from the general information sheet and the Certification issued by
the SEC on August 19, 1986 that as of March 4, 1981, the officers and
members of the board of directors of the Premium Marble Resources,
Inc. were:
Alberto C. Nograles — President/Director
Fernando D. Hilario — Vice President/Director
Augusto I. Galace — Treasurer
Jose L.R. Reyes — Secretary/Director
Pido E. Aquilar — Director
Saturnino G. Belen, Jr. — Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that
the newly elected officers for the year 1982 were Oscar Gan, Mario
Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof
that this election was reported to the SEC. In fact, the last entry in their
General Information Sheet with the SEC, as of 1986 appears to be the set
of officers elected in March 1981.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that

Zaballa, et al., are the incumbent officers of Premium has not been
fully substantiated. In the absence of an authority from the board of
directors, no person, not even the officers of the corporation, can validly bind
the corporation.
G.Quorum in Board Meetings
A quorum shall consist of the stockholders representing a majority of
the outstanding capital stock (stock corporation) or a majority of the
members (non- stock), unless otherwise provided in the RCC or in the
bylaws.(Sec 51)

Thus, for instance, the quorum for a stockholders’/members’ meeting for the
election of directors/trustees upon order by the SEC (after verification of
the unjustified non-holding of such election) under Sec. 25 of the RCC may
be less than a majority of the outstanding capital stock or members (4th par
of Sec. 25, RCC). Moreover, under Sec. 96 of the RCC, the AOI of a close
corporation may provide for a greater quorum and voting requirements
in stockholders’ meetings.

Note: Regarding quorum/required attendees in elections, “majority of the

outstanding capital stock” does not pertain to the nominal stockholders. It
pertains to the capital stock. Hence, if there are 6 stockholders: A with 5
shares, B with 1 share, C with 1 share, D with 2 shares, and E with 1 share,
majority of the OCS does not mean 4 stockholders. Majority could be A
and B only (5+1 shares = 6 shares) because they already represent the
majority of the 10 outstanding total shares. There is no quorum even if B,
C, D, and E are present (1+1+2+1) because 5 shares doesn’t represent
the majority of the total outstanding shares.

Pena vs. CA, GR No. 91478

The by-laws of a corporation are its own private laws which substantially
have the same effect as the laws of the corporation. They are in effect,
written, into the charter. In this sense they become part of the fundamental
law of the corporation with which the corporation and its directors and
officers must comply.

Apparently, only three (3) out of five (5) members of the board of directors
of respondent PAMBUSCO convened by virtue of a prior notice of a special
meeting. There was no quorum to validly transact business since it is
required under its by-laws that at least four (4) members must be present
to constitute a quorum in a special meeting of the board of directors.

Under Section 25 of the Corporation Code of the Philippines, the articles of

incorporation or by-laws of the corporation may fix a greater number than
the majority of the number of board members to constitute the quorum
necessary for the valid transaction of business. Any number less than the
number provided in the articles or by-laws therein cannot constitute a
quorum and any act therein would not bind the corporation; all that the
attending directors could do is to adjourn.

H. Minutes of Board Meetings

Important Notes on Minutes:
1.It is a brief statement of what transpired at a
meeting. 2.Signing of all the Board members isn’t
required.
 3. Signature of the Corporate Secretary gives it probative value and
credibility.
4. Entries in the minutes are prima facie evidence of what actually
took place during the meeting.
5. The Minutes is different from a Resolution. A Resolution is a
formal action by a Board or a corporate body, authorizing an act,
appointment, or transaction.

Lopez Realty, Inc. vs. Tanjangco, GR No. 154291

In Dumlao, the Court ruled that the signing of the minutes by all the is
not a requisite and that the lack of signatures on the minutes does not
mean that the resolution was not passed by the board. However, there is a
notable disparity between the facts in Dumlaoand the instant case. In
Dumlao, the corporate secretary therein recorded, prepared and
certified the correctness of the minutes of the meeting despite the fact
that not all directors signed the minutes. In this case, it could not even be
established who recorded the minutes in view of Asuncion’s refusal to do
so.

The proper custodian of the books, minutes and official records of a

corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record and
prepare the minutes of the meeting. The signature of the corporate
secretary gives the minutes of the meeting probative value and
credibility. In this case, Antonio Eduardo B. Nachura, Deputy Corporate
Secretary, recorded, prepared and certified the correctness of the minutes
of the meeting of 23 April 1982; and the same was confirmed by Leonilo M.
Ocampo, Chairman of the GSIS Board of Trustees. Said minutes contained
the statement that the board approved the sale of the properties,
subject matter of this case, to respondent La’o

Thus, without the certification of the corporate secretary, it is incumbent

upon the other directors or stockholders as the case may be, to submit
proof that the minutes of the meeting is accurate and reflective of what
transpired during the meeting. Conformably to the foregoing, in the absence
of Asuncion’s certification, only Juanito, Benjamin and Rosendo, whose
signatures appeared on the minutes, could be considered as to have
ratified the sale to the spouses Tanjangco.

I. Removal of Board Members

Removal of a director/trustee may be done:
1. By a vote of stockholders holding or representing at least ⅔ of
the outstanding capital stock or ⅔ of the members at regular
meeting or a special one called for the purpose, and always after
previous notice to stockholders/members; and
2. By the SEC motu proprio or upon verified, after due notice
and hearing.(Sec 27)

Note: The removal of a disqualified director shall be without prejudice to

other sanctions that the Commission may impose on the board of directors
or trustees who, with knowledge of the disqualification, failed to remove
such director or trustee.
J. Vacancies in the Board
General rule
Vacancy in the Board may be filled by the vote of at least a majority of
the remaining directors/trustees, provided that they still constitute a quorum.

Exceptions
Vacancy can’t be filled by a majority vote of the remaining directors or
trustees when the vacancy was because of:
1.Removal from office;
2.Expiration of term; and
3. Increase in the number of directors/trustees. In these cases, vacancy
will instead be filed by an election at a regular or at a special
meeting of stockholders/members.(Sec 28)

Bernas vs. Cinco, GR Nos. 163356-57/163368-69

The removal of a director in a meeting called for that purpose shall have no
legal effect if the meeting where the removal was made is improperly
called.

Consequently, such Special Stockholders' Meeting called by the Oversight

Committee cannot have any legal effect. The removal of the Bernas Group, as
well as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void, and since the Cinco Group has no legal
right to sit in the board, their subsequent acts of expelling Bernas from the
club and the selling of his shares. at the public auction, are likewise
invalid.

Tan vs. Sycip, GR No. 153468

The filling of vacancies in the board by the remaining directors or
trustees constituting a quorum is merely permissive, not mandatory. The
by-Laws of GCHS prescribed the specific mode of filling up existing
vacancies in its board of directors; that is, by a majority vote of the
remaining members of the board, thus, remaining member-trustees must
sit as a board (as a body in a lawful meeting) in order to validly elect the
new ones.

1. Emergency Board
When the remaining directors cannot constitute a quorum and there is
an emergency event that requires immediate action to prevent grave,
substantial, and irreparable loss or damage to the corporation, the
vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees
(called an emergency board).

The action by the designated director or trustee shall be limited to the

emergency action necessary, and his/her term shall cease within a
reasonable time from the termination of the emergency or upon election of
the replacement director or trustee, whichever comes earlier.

Requisites for the Creation of Emergency Board:

1.The remaining directors or trustees do not constitute a quorum;
2.There is a need for emergency action;
 3. The action is necessary to prevent grave, substantial, and
irreparable loss or damage to the corporation;
4. The temporary replacement must be elected by a unanimous vote
of the remaining directors or trustees;
5. The temporary replacement must come from the officers of
the corporation; and
6.Notice must be given to the SEC within three (3) days from the
creation of an emergency board.

Note: The action by the designated director or trustee shall be limited to

the emergency action necessary. In addition, the term of the
designated director/trustee shall cease within a reasonable time from the
termination of the emergency or upon election of the replacement director
or trustee, whichever comes earlier (this are limitations imposed on
emergency board).

K.Compensation of Board Members

Compensation of Directors or Trustees.

In the absence of any provision in the bylaws fixing their compensation, the
directors or trustees shall not received any compensation in their capacity
as such, except for reasonable per diems: Provided, however, That the
stockholders representing at least a majority of the outstanding capital
stock or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or special
meeting. (Sec 29)

In no case shall the total yearly compensation of directors exceed ten

percent (10%) of the net income before income tax of the corporation
during the preceding year.

Directors or trustees shall not participate in the determination of their own

per diems or compensation. Corporations vested with public interest shall
submit to their shareholders and the Commission, an annual report of
the total compensation of each of their directors or trustees.

Section 29 of the RCC, which prohibits the fixing of compensation for directors
in their capacity as such in the absence of provisions in By-laws, now
expressly applies to trustees of non-stock corporations. Trustees were not
mentioned in Section 30 of BP 68. Additional new rules under Section
29 are as follows:
1.Directors or trustees shall not participate in the determination of
their own per diems or compensation.
2. Corporations vested with public interest shall submit to their
shareholders and the SEC, an annual report of total compensation of
each directors or trustees.

Western Institute of Technology, Inc. vs. Salas, GR No. 113032

There is no argument that directors or trustees, as the case may be,
are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office. This
rule is founded upon a
presumption that directors/trustees render service gratuitously, and that
the return upon their shares adequately furnishes the motives for service,
without compensation.

Under the foregoing section, there are only two (2) ways by which
members of the board can be granted compensation apart from reasonable
per diems: (1) when there is a provision in the by-laws fixing their
compensation; and (2) when the stockholders representing a majority of
the outstanding capital stock at a regular or special stockholders’
meeting agree to give it to them.

In the case at bench, Resolution No. 48, s. 1986 granted monthly

compensation to private respondents not in their capacity as members of
the board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of
Technology. Clearly, therefore, the prohibition with respect to granting
compensation to corporate directors/trustees as such under Section 30 is
not violated in this particular case.

L. Hold-Over Principle
The Hold-Over principle is derived from Section 22 of the RCC, providing that
the Board of Directors or Trustees shall hold office for one (1)/three (3)
year/s and until their successors are elected and qualified.

If a director resigns after the expiration of the term of the directors, and
while the latter (directors) continue to function in a hold-over capacity, the
position of the resigning director cannot be filled by the remaining hold-
over directors. A vacancy is created the moment the term of the directors
expires. Hence, only the stockholders can fill the vacancy.

Valle Verde Country Club vs. Africa, GR No. 151969

Any vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must
be filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected
only for the unexpired term of his predecessor in office

When Section 23 of the Corporation Code declares that “the board of

directors shall hold office for one (1) year until their successors are elected
and qualified,” the Court construe the provision to mean that the term of
the members of the board of directors shall be only for one year; their term
expires one year after election to the office. The holdover period – that
time from the lapse of one year from a member’s election to the Board and
until his successor’s election and qualification – is not part of the director’s
original term of office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent member of
the board of directors continues to serve in a holdover capacity, it implies
that the office has a fixed term, which has expired, and the incumbent is
holding the succeeding term.
In this case, when remaining members of the VVCC Board elected Ramirez
to replace Makalintal, there was no more unexpired term to speak of,
as Makalintal’s one-year term had already expired. Pursuant to law, the
authority to fill in the vacancy caused by Makalintal’s leaving lies with
the VVCC’s stockholders, not the remaining members of its board of
directors. To assume – as VVCC does – that the vacancy is caused by
Makalintal’s resignation in 1998, not by the expiration of his term in 1997,
is both illogical and unreasonable. His resignation as a holdover director
did not change the nature of the vacancy; the vacancy due to the
expiration of Makalintal’s term had been created long before his
resignation.

M. Corporate Officers

Corporate Officers.
Immediately after their election, the directors of a corporation must formally
organize an elect: (a) a president, who must be a director; (b) a treasurer,
who must be a resident of the Philippines; and (d) such other officers
as may be provided in the bylaws. If the corporation is vested with public
interest, the board shall also elect compliance officer. The same person
may hold two (2) or more positions concurrently, except that no one
shall act as president and secretary or as president and treasurer at the
same time, unless otherwise allowed in this Code. (Sec 24)

The officers shall manage the corporation and perform such duties as may
be provided in the bylaws and/or as resolved by the board of directors.

Who are the corporate officers?

-They are persons designated as corporate officers in the RCC or in the By-
Laws. The RCC mentions the following:
1.President who must be a director
2.Treasurer who must be a resident
3.Secretary who must be a citizen and resident of the Philippines
4.Such other officers as may be provided in the bylaws.
5. If the corporation is vested with public interest, there must also
be a compliance officer.

Marc II Marketing, Inc. vs. Joson, GR No. 171993

Before petitioner corporation was officially incorporated, respondent has
already been engaged by petitioner Lucila, in her capacity as President of
Marc Marketing, Inc., to work as the General Manager of petitioner
corporation. Petitioner corporation was officially incorporated and registered
with the SEC. Accordingly, Marc Marketing, Inc. was made non-operational.
Respondent continued to discharge his duties as General Manager but
this time under petitioner corporation.

Petitioner corporations Board of Directors conducted a meeting where

respondent was appointed as one of its corporate officers with the
designation or title of General Manager to function as a managing director
with other duties and responsibilities that the Board of Directors may
provide and authorized.
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and
cease its operations due to poor sales collection aggravated by the
inefficient management of its affairs. On the same date, it formally
informed respondent of the cessation of its business operation.

Concomitantly, respondent was apprised of the termination of his services

as General Manager since his services as such would no longer be necessary
for the winding up of its affairs.

Feeling aggrieved, respondent filed a Complaint for Reinstatement and

Money Claim against petitioners before the Labor Arbiter. Labor Arbiter
rendered his Decision in favor of respondent. Aggrieved, petitioners
appealed the aforesaid Labor Arbiters Decision to the NLRC. NLRC ruled in
favor of petitioners by giving credence to the Secretarys Certificate, which
evidenced petitioner corporations Board of Directors meeting in which a
resolution was approved appointing respondent as its corporate officer
with designation as General Manager. Therefrom, the NLRC reversed and
set aside the Labor Arbiters Decision and dismissed respondents
Complaint for want of jurisdiction.

When respondents Motion for Reconsideration was denied, he filed a Petition

for Certiorari with the Court of Appeals ascribing grave abuse of discretion
on the part of the NLRC. Court of Appeals rendered its now assailed Decision
declaring that the Labor Arbiter has jurisdiction over the present
controversy. It upheld the finding of the Labor Arbiter that respondent
was a mere employee of petitioner corporation, who has been illegally
dismissed from employment without valid cause and without due
process.

Ruling
The Court rules that respondent was not a corporate officer of
petitioner- corporation because his position as General Manager was not
specifically mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in petitioner corporations by-laws
empowering its Board of Directors to create additional officers, i.e.,
General Manager, and the alleged subsequent passage of a board
resolution to that effect cannot make such position a corporate office.
Matling clearly enunciated that the board of directors has no power to
create other corporate offices without first amending the corporate by-
laws so as to include therein the newly created corporate office. Though
the board of directors may create appointive positions other than the
positions of corporate officers, the persons occupying such positions
cannot be viewed as corporate officers under Section 25 of the
Corporation Code.

In view thereof, this Court holds that unless and until petitioner
corporations by- laws is amended for the inclusion of General Manager in
the list of its corporate officers, such position cannot be considered as a
corporate office within the realm of Section 25 of the Corporation Code.

Nacpil vs. Intercontinental Broadcasting Corp., GR No. 144767

Nacpil was a corporate officer even if he was appointed by the general
manager, because his appointment was subsequently approved by the
Board. It also
doesn't matter that the comptroller position was not expressly mentioned
in the bylaws, because under the bylaws, the Board Is empowered to
appoint such other officers as it may deem necessary. Nacpil’s
appointment required the approval and formal action of IBC’s Board. Thus,
he was a corporate officer.

Tabang vs. NLRC, GR No. 121143

It has been held that an "office" is created by the charter of the
corporation and the officer is elected by the directors or stockholders. On
the other hand, an "employee" usually occupies no office and generally is
employed not by action of the directors or stockholders but by the
managing officer of the corporation who also determines the
compensation to be paid to such employee.

Binding Effects of Acts

“The officers shall manage the corporation and perform such duties as may
be provided in the bylaws and/or as resolved by the board of directors.”So,
officers may perform the acts stated in the (a) bylaws; or (b) Board
Resolutions. They are considered the acts of the corporation.

General rule
Absent the authority from the bylaws or Board Resolutions, the
corporate officer’s acts will not bind the corporation.

Exceptions
The act of the officer will bind the corporation despite the absence of
authority when
a.The act was ratified or confirmed by the corporation. Here, it will
be as If there was a prior authority for that act.
b. The doctrine of apparent authority (also called the holding out
theory or the doctrine of ostensible authority) applies. This is
based on the principle of estoppel. It imposes liability not because
of a contract but because because of a principal’s act. This is
evidentiary and applies on a c ase-to-case basis.

Litonjua Jr. vs. Eternit Corp., GR No. 144805

A corporation is a juridical person separate and distinct from its members
or stockholders and is not affected by the personal rights, obligations
and transactions of the latter. It may act only through its board of
directors or, when authorized either by its by-laws or by its board
resolution, through its officers or agents in the normal course of business.
The general principles of agency govern the relation between the corporation
and its officers or agents, subject to the articles of incorporation, by-
laws, or relevant provisions of law.

The property of a corporation, however, is not the property of the

stockholders or members, and as such, may not be sold without express
authority from the board of directors. Physical acts, like the offering of
the properties of the corporation for sale, or the acceptance of a counter-
offer of prospective buyers of such properties and the execution of the deed of
sale covering such property, can be performed by the corporation only by
officers or agents duly authorized for
the purpose by corporate by-laws or by specific acts of the board of
directors. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with, the performance
of authorized duties of such director, are not binding on the corporation.

People’s Aircargo and Warehousing, Co., Inc. vs. CA, GR No. 117847
Apparent authority is derived not merely from practice. Its existence may
be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other words,
the apparent authority to act in general, with which it clothes him; or (2)
the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of
his ordinary powers.

It requires presentation of evidence of similar act(s) executed either in its

favor or in favor of other parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with
the power to bind the corporation.

Doctrine of Apparent Authority

The Doctrine of Apparent Authority is a species of the doctrine estoppel.
The doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice, and its purpose is to forbid one to speak
against his own act, representations, or commitments to the injury of
one to whom they were directed and who reasonably relied thereon

An officer may be clothed with apparent authority for specific acts. It is a

familiar doctrine that if a corporation knowingly permits its officers or any
other agent, to do acts within the scope of an apparent authority, and
holds the officer or agent out to the public as possessing power to do
those acts, the corporation will, as against anyone who has in good faith
dealt with the corporation through such agent, be estopped from denying
this authority.

Lapulapu Foundation, Inc. vs. CA, GR No. 126006

Corporate fiction on the part of LLF must be pierced in this case. Tan
represented himself as the President of LLF, opened accounts in the name of
LLP. He submitted a Secretary’s Certificate attesting that he is authorized
to sign for and on behalf of LLF any check, and to transact business with
the bank. All the while, LLF never questioned Tan’s acts except no when
court action has been initiated.

LLF is liable for the transactions entered into by Tan on its behalf. Per
the Secretary’s Certificate, LLF gave Tan ostensible and apparent authority to
deal with the bank. The corporation is estopped from questioning Tan’s
authority to obtain the loans.

If a corporation knowingly permits one of its officers or any other agent, to

act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts, and thus, the corporation
will, as against
anyone who has in good faith dealt with it through such agent, be estopped
from denying the agent’s authority.

Advance Paper Corporation vs. Arma Traders Corporation

The doctrine of apparent authority provides that 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. The doctrine of apparent authority does not apply if the
principal did not commit any acts or conduct which a third party knew and
relied upon in good faith as a result of the exercise of reasonable
prudence. Moreover, the agent’s acts or conduct must have produced a
change of position to the third party’s detriment

GR No. 176897; Megan Sugar Corporation vs. RTC of IIoiIo, Branch 68, GR
No. 170352
The doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice, and its purpose is to forbid one to speak
against his own act, representations, or commitments to the injury of one
to whom they were directed and who reasonably relied thereon. The
doctrine of estoppel springs from equitable principles and the equities in
the case. It is designed to aid the law in the administration of justice where
without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.

Based on the events and circumstances surrounding the issuance of the

assailed orders, this Court rules that MEGAN is estopped from assailing
both the authority of Atty. Sabig and the jurisdiction of the RTC. While
it is true, as claimed by MEGAN, that Atty. Sabig said in court that he was
only appearing for the hearing of Passi Sugar motion for intervention and
not for the case itself, his subsequent acts, coupled with MEGAN inaction and
negligence to repudiate his authority, effectively bars MEGAN from
assailing the validity of the RTC proceedings under the principle of
estoppel.

MEGAN can no longer deny the authority of Atty. Sabig as they have
already clothed him with apparent authority to act in their behalf.

IX. LIABILITY OF DIRECTORS, TRUSTEES AND OFFICERS

A.Three-Fold Duties
In a broad sense, management has three paramount duties, namely, (1)
obedience, (2) diligence, and (3) loyalty.

Obedience
Obedience requires compliance with law and rules. In relation to this duty,
directors, trustees, and officers have the duty to act intra vires and
within authority. Additionally, the duty of obedience requires directors and
officers to comply with the provisions of the corporation’s AOI and By-
laws.
Diligence
The directors and officers are required to exercise due care in the
performance of their functions. Negligence on their part proximately
causing damage to the corporation will make them liable. Broadly speaking,
the directors, in drawing to themselves the power of the corporation,
occupy a position of trusteeship (fiduciary) in relation to the
stockholders in the same that the board should exercise not only care
and diligence but also utmost good faith in the management of
corporate affairs.

Loyalty
The director or officer owes loyalty and allegiance to the corporation – a
loyalty that is undivided and an allegiance that is influenced by no
consideration other than the welfare of the corporation. Any adverse
interest of a director will be subject to a rigid and uncompromising
scrutiny. The directors are bound by all those rules of conscientious,
fairness, morality, and honesty in purpose that the law imposes as the
guides for those who are under the fiduciary obligations and
responsibilities. They are held, in official action, to the extreme measure of
candor, unselfishness and good faith. Those principles are rigid, essential
and salutary.

B. Personal/ Solidary Liability of Board Members and Officers

General rule
A corporate officer cannot be held liable for acts done in his official
capacity because a corporation has a separate and distinct personality
from that of its officers and members/stockholders.

Exception
Directors or trustees will be jointly and severally liable for damages
when:
1. They willfully and knowingly vote for or assent to patently
unlawful acts of the corporation;
2.They are guilty of gross negligence or bad faith in directing the affairs
of the corporation; or
3.They acquired any personal or pecuniary interest in conflict with
their duty as such directors or trustees.(Sec 30)

They shall also not attempt to acquire, or acquire any interest adverse to
the corporation in respect of any matter which has been reposed in
them in confidence. If they do, they shall be liable as a trustee for the
corporation and must account for the profits which otherwise would
have accrued to the corporation.

Other instances where a director/trustee will be solidarily liable with

the corporation (not under Section 30; jurisprudential):
4.When he/she consents to the issuance of watered stocks or does
not object thereto;
5. He/she agrees to hold himself/herself personally and
solidarily liable with the corporation; or
6. A provision of law makes him/her personally answerable for
the action.
Requisites to hold a director personally liable for corporate obligations:
1. It must be specifically alleged in the complaint that the
director or officer assented to patently unlawful acts of the
corporation or that the officer was guilty of gross negligence or
bad faith.
2. There must be clear and convincing proof that the officer acted in
bad faith.

Note: Bad faith does not connote bad judgment or negligence. It

imports a dishonest purpose or some moral obliquity and conscious
wrongdoing. It means breach of a known duty through some ill motive
or interest.

Carag vs. NLRC, GR No. 147590

The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own

Section 31 of the Corporation Code lays down the exceptions to the

rule, as follows: ―Liability of directors, trustees or officers. – Directors or
trustees who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons.

Section 31 makes a director personally liable for corporate debts if he

willfully and knowingly votes for or assents to patently unlawful acts of the
corporation. Section 31 also makes a director personally liable if he is
guilty of gross negligence or bad faith in directing the affairs of the
corporation.

Neither did Arbiter Ortiguerra make any finding to this effect in her
Decision. Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC. To hold a director
personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed. Bad faith
does not connote bad judgment or negligence. Bad faith imports a dishonest
purpose. Bad faith means breach of a known duty through some ill motive
or interest. Bad faith partakes of the nature of fraud. Neither does bad
faith arise automatically just because a corporation fails to comply with
the notice requirement of labor laws on company closure or dismissal of
employees. The failure to give notice is not an unlawful act because the
law does not define such failure as unlawful. Such failure to give notice is a
violation of procedural due process but does not amount to an unlawful
or criminal act.

For a wrongdoing to make a director personally liable for debts of the

corporation, the wrongdoing approved or assented to by the director must
be a patently unlawful act. Mere failure to comply with the notice
requirement of labor laws on company closure or dismissal of employees
does not amount to a
patently unlawful act. Patently unlawful acts are those declared unlawful by
law which imposes penalties for commission of such unlawful acts. There
must be a law declaring the act unlawful and penalizing the act.

Bank of Commerce vs. Nite, GR No. 211535

It is settled that the transaction between Bancom and Bancap is an ordinary
sale. We give weight to the finding of both the trial court and the Court of
Appeals that Bancap’s liability arose from its contractual obligation to
Bancom. The trial court and the Court of Appeals found that Bancom and
Bancap had been dealing with each other as seller and buyer of treasury
bills from December 1992 until the transaction subject of this case on 25
April 1994, which was no different from their previous transactions. Nite,
as Bancap’s President, cannot be held personally liable for Bancap’s
obligation unless it can be shown that she acted fraudulently. However, the
issue of fraud had been resolved with finality when the trial court acquitted
Nite of estafa on the ground that the element of deceit is non-existent in
the case. The acquittal had long become final and the finding is conclusive
on this Court. The prosecution failed to show that Nite acted in bad faith.
It is no longer open for review. Nite’s act of signing the Confirmation of
Sale, by itself, does not make the corporate liability her personal
liability.

To hold a director personally liable for debts of the corporation, and thus
pierce the veil of corporate fiction, the bad faith or wrongdoing of the
director must be established clearly and convincingly. Bad faith is never
presumed. Bad faith does not connote bad judgment or negligence. Bad faith
imports a dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the nature of
fraud.

Gagui vs. Dejero, GR No. 196036

The pertinent portion of Section 10, R.A. 8042 reads as follows: The
liability of the principal/employer and the recruitment/placement agency
for any and all claims under this section shall be joint and several. This
provision shall be incorporated in the contract for overseas employment
and shall be a condition precedent for its approval.

In Sto. Tomas v. Salac, we had the opportunity to pass upon the

constitutionality of this provision. We have thus maintained: the Court has
already held, pending adjudication of this case, that the liability of
corporate directors and officers is not automatic. To make them jointly and
solidarily liable with their company, there must be a finding that they
were remiss in directing the affairs of that company, such as sponsoring
or tolerating the conduct of illegal activities.

Hence, for petitioner to be found jointly and solidarily liable, there must be
a separate finding that she was remiss in directing the affairs of the
agency, resulting in the illegal dismissal of respondents. Examination of
the records would reveal that there was no finding of neglect on the part of
the petitioner in directing the affairs of the agency. In fact, respondents
made no mention of any instance when petitioner allegedly failed to
manage the agency in accordance with law, thereby contributing to their
illegal dismissal.
Lozada vs. Mendoza, GR No. 196134
A corporation, as a juridical entity, may act only through its directors,
officers and employees. Obligations incurred as a result of the acts of the
directors and officers as the corporate agents are not their personal
liability but the direct responsibility of the corporation they represent. As a
general rule, corporate officers are not held solidarily liable with the
corporation for separation pay because the corporation is invested by
law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may
be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate
personality.

To hold a director or officer personally liable for corporate obligations, two

requisites must concur, to wit: (1) the complaint must allege that the
director or officer assented to the patently unlawful acts of the
corporation, or that the director or officer was guilty of gross negligence or
bad faith; and (2) there must be proof that the director or officer acted
in bad faith.

Clearly, what can be inferred from the earlier cases is that the doctrine
of piercing the corporate veil 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 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. In the absence of malice, bad faith, or a specific
provision of law making a corporate officer liable, such corporate officer
cannot be made personally liable for corporate liabilities.

The records of this case do not warrant the application of the exception.
The rule, which requires malice or bad faith on the part of the directors or
officers of the corporation, must still prevail. The petitioner might have acted
in behalf of LB&C Services Corporation but the corporation’s failure to operate
could not be hastily equated to bad faith on his part. Verily, the closure of a
business can be caused by a host of reasons, including mismanagement,
bankruptcy, lack of demand, negligence, or lack of business foresight.
Unless the closure is clearly demonstrated to be deliberate, malicious
and in bad faith, the general rule that a corporation has, by law, a
personality separate and distinct from that of its owners should hold
sway. In view of the dearth of evidence indicating that the petitioner had
acted deliberately, maliciously or in bad faith in handling the affairs of
LB&C Services Corporation, and such acts had eventually resulted in the
closure of its business, he could not be validly held to be jointly and
solidarily liable with LB&C Services Corporation.

Jose Manuel P. Guillermo vs. Crisanta Uson, GR No. 198967

In earlier labor cases, the Court held that persons who were not
originally impleaded in the case were, even during execution, held to be
solidarity liable
with the employer corporation for the latter's unpaid obligations to
complainant-employees. Personal liability attaches only when, as enumerated
by the said Section 31 of the Corporation Code, there is a wilfull and
knowing assent to patently unlawful acts of the corporation, there is gross
negligence or bad faith in directing the affairs of the corporation, or
there is a conflict of interest resulting in damages to the corporation. The
conferment of liability on officers for a corporation's obligations to labor is
held to be an exception to the general doctrine of separate personality of
a corporation.

It also bears emphasis that in cases where personal liability attaches, not even
all officers are made accountable. Rather, only the "responsible officer,"
i.e., the person directly responsible for and who "acted in bad faith" in
committing the illegal dismissal or any act violative of the Labor Code, is
held solidarily liable, in cases wherein the corporate veil is pierced

David vs. Construction Industry and Arbitration Commission, GR No.

159795
As a general rule, the officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. However, the personal liability of a corporate director,
trustee or officer, along with corporation, may so validly attach when he
assents to a patently unlawful act of the corporation or for bad faith or
gross negligence in directing its affairs.

The following findings of public respondent (CIAC) would support its ruling
in holding petitioners severally and jointly liable with the Corporation:
When asked whether the Building was underdesigned considering the poor
quality of the soil, Engr. Villasenor defended his structural design as
adequate. He admitted that the revision of the plans which resulted in the
construction of additional columns was in pursuance of the request of
Engr. David to revise the structural plans to provide for a significant
reduction of the cost of construction. When Engr. David was asked for the
justification for the revision of the plans, he confirmed that he wanted to
reduce the cost of construction.

C. Self-Dealing Board Member and Officers

A self-dealing director is a director (or his spouse/relative within the 4th
civil degree) who contracts with the corporation where he is a director.
(Sec 31)

Section 31, RCC: A contract between the corporation and its (a)
director/trustee; or (b) a director/trustee’s spouse and relatives within the
4th civil degree of consanguinity or affinity is voidable1 , at the option
of the corporation, unless the following conditions are present:
1. The presence of such director/trustee in the meeting in
which the contract was approved wasn’t necessary to constitute
a quorum;
2. The vote of such director/trustee was not necessary for the
approval of the contract;
3.The contract is fair and reasonable.
If all 3 are present, the contract is valid. If any of 1, 2, or 3 is absent, the
contract may be ratified by ⅔ vote of the outstanding capital stock or ⅔ of
the members, provided that: (a) there is a full disclosure of adverse
interest; and (b) the contract is fair and reasonable.
1. In case of a corporation vested with public interest, material
contracts are approved by at least ⅔ of the entire membership of
the board, with at least a majority of the independent directors
voting to approve such material contracts.
2. In case of a corporate officer, the contract has been
previously authorized by the Board of Directors/Trustees.

D. Contracts Involving inter-Locking Directors

An interlocking director is a director of one, some, or all corporations
entering into a contract.(Sec 32)

Section 32, RCC: A contract between 2 or more corporations having interlocking

directors shall not be invalidated on that ground alone, provided that:
1.The contract is not fraudulent; and
2.The contract is fair and reasonable.

Note: The status of contracts involving interlocking directors is valid,

provided that the contract is not fraudulent and it is fair and
reasonable. If the two requisites are not present, the contract cannot
be ratified.

But if the interest of the interlocking director in one corporation is

substantial and the interest in the other is merely nominal, the rule on self-
dealing directors (Section 31) will apply. This means that ratification
becomes niecessary for the contract to be valid.

Which corporation will ratify the

contract? The nominal corporation
will ratify.
The purpose of this rule is to prevent officers from taking advantage of
information on the different corporations or trade secrets in order to
promote individual interests. Officers are not permitted to use their
position of trust and confidence to further private interests.

E. Doctrine of Corporate Opportunity

Disloyalty of a Director.
Where a director, by virtue of such office, acquires a business opportunity
which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and refund to
the latter all such profits, unless the act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
nothwithstanding the fact that the director risked one's own funds in the
venture.(Sec 33)

Requisites of Doctrine of Corporate Opportunity

1.A director, by virtue of his/her office;
 2. Acquires a business opportunity which should belong to the
corporation;
3.Thereby obtaining profits to the prejudice of such corporation.

Note: This rule applies even if the director risked his/her own funds in
the venture.

When is there corporate opportunity?

There is one when the following requisites are present
1. When the corporation is financially able to undertake an
opportunity;
2. The opportunity is consistent with the nature of business of
the corporation; and
3. There is an expectation of profits from undertaking that
opportunity.

What’s the consequence?

He/she must account for, and refund to the corporation all profits made in
that business opportunity.

Exception
When the act is ratified by a vote of ⅔ of the outstanding capital stock.

Gocongwei, Jr. vs. SEC, GR No. L-45911

The doctrine of "corporate opportunity" is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the fiduciary
was acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer
or director taking advantage of an opportunity for his own personal profit
when the interest of the corporation justly calls for protection.

It is not denied that a member of the Board of Directors of the San

Miguel Corporation has access to sensitive and highly confidential information,
such as:
(a) marketing strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with
other firms.

It is obviously to prevent the creation of an opportunity for an officer or

director of San Miguel Corporation, who is also the officer or owner of
a competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two
corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.

F. Executive, Management, and Other Special Committees

If the bylaws so provide, the Board may create an Executive Committee
composed of at least 3 directors.(Sec 34)
Note: This is like a “Mini Board”. It is not inferior to the Board. It is as
powerful as the Board, except when it comes to the 5 acts that the RCC
states the Committee cannot act on.

This Committee may act, by a majority vote, on specific matters within

the competence of the Board as may be delegated to it in the bylaws or by
majority vote of the Board, except on the following matters:
1. Approval of any option for which the shareholders’ approval is
also required;
2.Filling of vacancies in the Board;
3.Amendment or repeal of bylaws or the adoption of a new one;
4. Amendment or repeal of any Board Resolution which by its
express terms is not amenable or appealable; and
5.Distribution of cash dividends.(Sec 34)

Filipinas Port Services, Inc. vs. Go, GR No. 161886

The Board, in the exercise of its business judgment can create committees
that can give its assistance in the performance of their functions. They are
not the executive committees contemplated under Section 35 of BP 68. The
executive committee referred to in Sec. 35 that is as powerful as the board
of directors and in effect acting for the board itself, should be
distinguished from other committees that the board may create at any
time under the business judgment rule; the actions of these committees
require ratification and confirmation by the board

X. Corporate Powers
A. Doctrine of Limited Capacity:
1. The corporation has limited power to invest in other
corporations
2. It has only such powers as are expressly and impliedly granted
and incidental to its existence
3. It may perform only those acts provided by its by-laws

Limitation: acts which are unlawful and acts beyond its powers to
perform.
Ex: A corporation engaged in leasing of real properties cannot engage in
school operations.

Concept of Ultra Vires Act

Ultra vires acts are those powers that are not conferred to the corporation,
by- laws, by its Articles of Incorporation and those that are not implied or
necessary or incidental to the exercise of the powers so conferred.

Manila Metal Container Corp. v PNB, Gr No. 166862 (2006)

The Special Assets Management Department (SAMD) had prepared a
recommendation for PNB to accept MMCC's offer to repurchase the
property even beyond the one-year period; it recommended that MMCC be
allowed to redeem the property and pay P1,574,560.00 as the purchase
price. PNB later approved the recommendation that the property be
sold to petitioner. But
instead of the P1,574,560.47, respondent set the purchase price at
P2,660,000.00.

Ruling:
No evidence that the SAMD was authorized by PNB's Board of Directors to
accept petitioner's offer and sell the property for P1,574,560.47. Any
acceptance by the SAMD of petitioner's offer would not bind respondent.

A corporation can only execute its powers and transact its business
through its Board of Directors and through its officers and agents when
authorized by a board resolution or its by-laws.

University of Mindanao, Inc v BSP, Gr No. 194964-65 (2016)

University of Mindanao’s Vice President for Finance executed a deed of
real estate mortgage over University of Mindanao’s property in Cagayan de
Oro City in favor of Bangko Sentral ng Pilipinas.The mortgage served as
security for First Iligan Savings & Loan Association, Inc. (FISLAI) P1.9
Million loan. It was allegedly executed on University of Mindanao’s
behalf.

Ruling:
Petitioner does not have the power to mortgage its properties in order to
secure loans of other persons. As an educational institution, it is limited to
developing human capital through formal instruction. It is not a
corporation engaged in the business of securing loans of others. It does not
appear that securing third-party loans was necessary to maintain petitioner’s
business of providing instruction to individuals.

Corporate acts that are outside those express definitions under the law
or articles of incorporation or those "committed outside the object for
which a corporation is created" are ultra vires.

XPN: those acts necessary and incidental to carry out a corporation’s

purposes, and to the exercise of powers conferred by the Corporation Code
and under a corporation’s articles of incorporation. (see Sec. 35,RCC )

Test: Whether the act in question is in direct and immediate furtherance of

the corporation’s business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not.

Yasuma v Heirs of Cecilio De Villa, Gr. No 150350 (2006)

De Villa obtained loans from Yasuma as evidenced by three promissory
notes signed by de Villa as borrower. The loans were initially secured
by three separate real estate mortgages on a parcel of land in the name of
respondent East Cordillera Mining Corporation. The deeds of mortgage were
executed on the dates the loans were obtained, signed by de Villa as
president of respondent corporation. The third real estate mortgage
later cancelled the first two.
Ruling:
Being a juridical entity, a corporation may act through its board of
directors. The corporation can also act through its corporate officers who
may be authorized either expressly by the by-laws or board resolutions
or impliedly such as by general practice or policy or as are implied from
express powers. The general principles of agency govern the relation
between the corporation and its officers or agents. When authorized, their
acts can bind the corporation. Conversely, when unauthorized, their acts
cannot bind it.

However, the corporation may ratify the unauthorized act of its corporate
officer. Ratification means that the principal voluntarily adopts, confirms
and gives sanction to some unauthorized act of its agent on its behalf.
Ratification can be made either expressly or impliedly. Implied ratification
may take various forms
— like silence or acquiescence, acts showing approval or adoption of the
act, or acceptance and retention of benefits flowing therefrom.

The power to borrow money is one of those cases where corporate officers
as agents of the corporation need a special power of attorney. In the case
at bar, no special power of attorney conferring authority on de Villa was
ever presented. The promissory notes evidencing the loans were signed by
de Villa (who was the president of respondent corporation) as borrower
without indicating in what capacity he was signing them. In fact, there was
no mention at all of respondent corporation. On their face, they
appeared to be personal loans of de Villa.

Ultra Vires Acts Unlawful Acts

Not illegal but merely beyond the Against the law, morals, or public
powers of the corporation to perform order, public policy

Voidable Void and unenforceable

Produces effects Cannot produce legal effects

Can be ratified or express or implied Not susceptible of ratification

assent by the stockholders or by
reason of estoppel of the
corporation or the other party to the
transaction to raise objection,
particularly where the
benefits are retained

B. Classes of Corporate Powers

1. Express Powers
Those powers expressly provided by the RCC, applicable special laws,
administrative regulations, and the Articles of Incorporation.
General Powers (Sec 36)
1. To sue and be sued in its corporate name
2. To have perpetual existence unless the certificate of
incorporation provides otherwise
 3. To adopt and use a corporate seal
4. To amend its articles of incorporation
5. To adopt by laws, not contrary to law morals or public policy, and
to amend or repeal the same
6. In case of a stock corporation, to issue or sell stocks to
subscribers and to sell treasury stocks; and to admit members to
the corporation if it be a nonstock 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 a partnership, joint venture, merger, consolidation,
or any other commercial agreement with natural and juridical
persons
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no foreign corporation shall
give donations in aid of any political party or candidate or for
purpose s of partisan political activity
Note:
1.Domestic Corporations may now donate to political parties or candidates.
2.Foreign Corporation is still prohibited
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers, and employees.

2. Specific Express Powers

1. To have perpetual existence unless its articles of incorporation
provides otherwise (Sec 11)
2. To amend the articles of incorporation (Sec 15)
3. To extend or shorten corporate term (Sec 36)
4. To increase or decrease capital stock (Sec 37)
5. To incur, create , or increase bonded indebtedness (Sec 37)
6. To deny preemptive right (Sec 38)
7. To sell or dispose assets (Sec 39)
8. To acquire own shares (Sec 40)
9. To invest corporate funds in another corporation or business or any
other purpose (Sec 41)
10. To declare dividends (Sec 42)
11. To enter into management contract (Sec 43)

3. Implied Powers
Corporations are empowered 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 (Sec35(k) ).

Doctrine of Necessary Implication:

Every statute is understood, by implication, to contain all such provisions
as may be necessary to effectuate its object and purpose, or to make
effective rights, powers, privileges or jurisdiction which it grants, including
all such collateral and subsidiary consequences as may be fairly and
logically inferred from its terms. Ex necessitate legis. And every statutory
grant of power, right or privilege is deemed to include all incidental power,
right or privilege. (Chua v CSC, 1992 )

4. Incidental Powers
Those powers that are deemed conferred on the corporation because they
are incidental to the existence of the corporation.
Rationale: Corporations exist as juridical persons.
1. Right to succession
2. Right to have a corporate name
3. Right to make by-laws for its government
4. Right to sue and be sued
5. Right to acquire and hold properties for the purposes authorized by
the charter

C. Statutory Powers and Limitations on their Exercise

A corporation is a juridical entity created by law and, therefore, possesses
no power or authority other than what is vested by law. Corporations can
only do that which the law authorizes it to perform.
As a creature of law, the power and attributes of a corporation are those
set out, expressly or impliedly, in the law.

1. General Powers
General rule
the Board exercises general powers of the

corporation Note: Approval of a resolution by the

board is enough.

2. Specific Powers
Those provided for in the Revised Corporation Code including the
specific requirements and/or procedure for their exercise.
a. Amendment of Articles of Incorporation
(See previous notes)

b. Extending or Shortening of Corporate Term

Alhambra Cigar v SEC Gr NO.L-23606 (1968)

May a corporation extend its life by amendment of its articles of
incorporation
effected during the three-year statutory period for liquidation when its
original term of existence had already expired?

Ruling:
The common law rule, at the beginning, was rigid and inflexible in that
upon its dissolution, a corporation became legally dead for all
purposes. Statutory authorizations had to be provided for its continuance
after dissolution "for limited and specified purposes incident to complete
liquidation of its affairs”.
Thus, the moment a corporation's right to exist as an "artificial person"
ceases, its corporate powers are terminated "just as the powers of a
natural person to take part in mundane affairs cease to exist upon his
death”. There is nothing left but to conduct, as it were, the settlement of
the estate of a deceased juridical person.

c. Increase or Decrease of Capital Stock

How to increase capital stock?

1. By increasing the number of shares and retaining the par value
or
2. By increasing the par value of existing shares without changing
the number of shares or
3. By increasing the number of shares and increasing the par
value

How to decrease capital stock?

1. By decreasing the number of shares and retaining the par value
or
2. By decreasing the par value of existing shares without changing
the number of shares or
3. By decreasing the number of shares and increasing the par value

Requirements:
1. majority vote of the board of directors and by two-thirds (2/3) of
the outstanding capital stock at a stockholders' meeting duly called
for the purpose
2. Written notice of the time and place of the stockholders' meeting
and the purpose for said meeting must be sent to the
stockholders at their places of residence as shown in the books of
the corporation served on the stockholders personally, or
through electronic means recognized in the corporation's bylaws
and/or the Commission's rules as a valid mode for service of
notices.
3. certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary
of the stockholders' meeting
4. Must be approved by SEC and Philippine Competition Commission
Note: approval and Issuance by the Commission of its certificate,
the capital stock shall be deemed increased or decreased.
5. Sworn Statement of Treasure showing
a.at least 25% of the increase in capital stock has been
subscribed
b.at least 25% of the amount subscribed has been pain in
actual cash or property (based on the amount by which the
capital stock is increased and not on the capital stock as
increased )

Note: 25-25 is applicable only in case of increase in capital stock made

after incorporation (Minimum capital stock not required, S12. )

Limitation:
No decrease in capital stock shall be approved by the SEC if it will
prejudice the rights of corporate creditors.
Remedy: Secure consent of creditors.
d. Incurrence, Creation or Increase of Bonded Indebtedness (S37)
Bonded indebtedness refers to secured indebtedness or those secured by real
or personal property that are covered by certificates. They refer to
negotiable corporate bonds secured by mortgage on property

Note:Bonds issued must be registered with the Commission.

Same as the requirements for the increase and decrease of capital stock.

e. Deny Preemptive Right (S38)

Preemptive right is the right of shareholders to purchase or subscribe to
all issuances or disposition of shares of any class, in proportion to their
respective shareholdings, before such shares are offered to the publc.

Reason: to maintain the relative and proportionate voting strength and

control of existing shareholders

Note: Pre-emptive right is not available when shares are issued in exchange
for shares in another corporation if the same is the result of a merger to
which the corporations are parties

General Rule: Stockholders are entitled to preemptive right

Exceptions:
1. When denied in the Articles of Incorporation
2. Shares are issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public
3. Shares are to be issued in good faith with the approval of
stockholders representing 2/3 of the OCS in exchange of property
needed for corporate purposes or in payment of previously
contracted debt

Dee v SEC Gr. No 60502 (1991)

While the group of Maggay was in control of Natelco by virtue of the
restraining order issued in G.R. No. 50885, the Maggay Board issued 113,800
shares of stock to CSI Petitioner said that the Maggay Board, in issuing said
shares without notifying Natelco stockholders, violated their right of
pre-emption to the unissued shares.

Ruling:
The questioned issuance of the 113,800 stocks is not invalid even assuming
that it was made without notice to the stockholders as claimed by the
petitioner. The power to issue shares of stocks in a corporation is
lodged in the board of directors and no stockholders meeting is
required to consider it because additional issuance of shares of stocks
does not need approval of the stockholders. Consequently, no pre-
emptive right of Natelco stockholders was violated by the issuance of the
113,800 shares to CSI.

Waiver
A stockholder who neither desires nor intends to buy any of the stocks
being offered may waive such right. It is a personal right.

Note: The right to subscribe to new issues and disposition may be

transferred by the shareholder unless there is an express restriction in
the Articles of Incorporation.

f. Sale or Other Disposition of Assets

A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose of which it was incorporated.(Sec 39)

SEC MC 12-2020
The sale or disposal of corporate property and assets amounting to at least
51% of the corporation’s total assets shall be considered as a sale of all
or substantially all of corporate property and assets, whether such sale
accrued in a single transaction or in several transactions taking place
within 1 yr from the date of the first transaction (aggregate sale
transactions) which must be computed based on its total assets as
shown in its latest audited financial statements.

Sale of all or substantially all of the corporation’s properties and assets

Requisites:
1. Approval of the majority of the directors or trustees
2. Assent of stockholders representing 2/3 of OCS or 2/3 of
members in a meeting duly called for the purpose after
written notice

What if it does not cover all or substantially all of the

assets? Decision of the board is sufficient.

Reason for the requirements

There is an implied contract among the stockholders to pursue the
business for which the corporation was created and therefore, as a general
rule, there should be no disposition of the property used by the corporation
in its business until dissolution

Note: Sec 39 does not apply in these cases :

1. Sale of the entire property and assets is necessary in the usual
and regular course of business of the corporation
2. Proceeds of the sale will be appropriated for the conduct of
its remaining business

Nell Doctrine

Nell Co. v Pacific Farms,Inc Gr no.l-20850 (1965)

Nell filed an action for the collection of the judgment against Pacific Farms,
upon the theory that Pacific Farms is the alter ego of Insular Farms. Pacific
Farms had
purchased all or substantially all of the shares of stock, as well as the real
and personal properties of the Insular Farms, including the pumping
equipment sold by Nell to Insular Farms. The record shows that appellee
purchased 1,000 shares of stock of Insular Farms for P285,126.99; that,
thereupon, appellee sold said shares of stock to certain individuals, who
forthwith reorganized said corporation; and that the board of directors
thereof, as reorganized, then caused its assets, including its leasehold rights
over a public land in Bolinao, Pangasinan, to be sold to herein appellee for
P10,000.00.

Ruling:
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; and
(4) where the transaction is entered into fraudulently in order to
escape liability for such debts.

There is neither proof nor allegation that Pacific Farms had expressly
or impliedly agreed to assume the debt of Insular Farms in favor of Nell
Co. herein, or that the appellee is a continuation of Insular Farms. Pacific
purchased the shares of stock of Insular Farms as the highest bidder at an
auction sale held at the instance of a bank to which said shares had been
pledged as security for an obligation of Insular Farms in favor of said bank.
Neither is it claimed that these transactions have resulted in the
consolidation or merger of the Insular Farms and appellee herein. On the
contrary, appellant's theory to the effect that appellee is an alter ego of
the Insular Farms negates such consolidation or merger, for a
corporation cannot be its own alter ego.

Y-1Leisure Philippines Inc. v Yu Gr No. 207161 (2015)

Legal bases of the Nell Doctrine: where the transaction is entered
into fraudulently in order to escape liability for such
business-enterprise transfer

In such transfer, the transferee corporation's interest goes beyond the assets of
the transferor's assets and its desires to acquire the latter's business
enterprise, including its goodwill.

Sec 39 of the RCC suitably reflects the business-enterprise transfer under

the exception of the Nell Doctrine because the purchasing or transferee
corporation necessarily continued the business of the selling or transferor
corporation. Given that the transferee corporation acquired not only the assets
but also the business of the transferor corporation, then the liabilities of the
latter are inevitably assigned to the former.
Exceptions:
1.if the sale of the entire property and assets is necessary in the
usual and regular course of business of corporation, or
2.if the proceeds of the sale or other disposition of such
property and assets will be appropriated for the conduct of its
remaining business.

The litmus test to determine the applicability of Section 39 would

be the capacity of the corporation to continue its business after the
sale of all or substantially all its assets.

g. Acquisition of Corporate shares (S40)

General Rule: Corporation cannot acquire its own shares if there is no funds
from the unrestricted retained earnings
Corporation cannot declare dividends in the absence of unrestricted retained
earnings
Exceptions:
1. To purchase of take up redeemable shares (S8)
2. When SEC orders a close corporation to purchase the
shares of stockholders in case of deadlock in its management
(S104)(even without unrestricted retained earnings)
Requirements:
1.The corporation has unrestricted retained earnings
2.For legitimate corporate purposes
a.To eliminate fractional shares arising out of stock
dividends
b.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
c. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code
d.To acquire treasury shares (Sec 9)
e.To effect a decrease in capital stock (Sec 37)
f.To purchase of take up redeemable shares (Sec 8)
g. When SEC orders a close corporation to purchase the
shares of stockholders in case of deadlock in its
management (Sec 104)

Conditions:
1.The capital of the corporation must not be impaired
2.A legitimate and proper corporate objective is advanced
3.The condition of corporate affairs warrants it
4.The transaction is designed and carried out in good faith

h. Trust Fund Doctrine

The capital stock and assets of the corporation are held in trust for
creditors. Accordingly, there shall be no distribution of assets to
shareholders until the claims of creditors have been paid or an
appropriation of such assets has been made for the payment of such
claims.
Halley v Printwell Gr No.157549 (2011)
We clarify that the trust fund doctrine is not limited to reaching the
stockholder’s unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but also
other property and assets generally regarded in equity as a trust fund for
the payment of corporate debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full
payment of their subscriptions, may be reached by the creditor in
satisfaction of its claim.

Also, under the trust fund doctrine, a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of
paying for his shares, in whole or in part, without a valuable consideration,
or fraudulently, to the prejudice of creditors.3The creditor is allowed to
maintain an action upon any unpaid subscriptions and thereby steps into
the shoes of the corporation for the satisfaction of its debt. To make out
a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by
making good unpaid balances upon their subscriptions, it is only necessary to
establish that the stockholders have not in good faith paid the par value of
the stocks of the corporation.

Note: Payment must be in legal tender. If check, the check must be

encashed.

Mere submission of the receipt issued in exchange of the check did not
satisfactorily establish her allegation of full payment of her
subscription.

(ITR) and statement of assets and liabilities has no bearing on the issue
of payment of the subscription because they did not by themselves prove
payment. ITRs establish a taxpayer’s liability for taxes or a taxpayer’s
claim for refund. In the same manner, the deposit slips and entries in the
passbook issued in the name of corporation were hardly relevant due to
their not reflecting the alleged payments.

books and records of a corporation (including the stock and transfer book)
are admissible in evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and other matters
(like the status of the stockholders), and are ordinarily the best evidence of
corporate acts and proceedings.

Certificate of stock issued by corporations. Such a certificate covering her

subscription might have been a reliable evidence of full payment of the
subscriptions.

Philippine Trust Corp. v Rivera G.R. No. L-19761 (1923)

A resolution was adopted to the effect that the capital should be reduced
by 50 per centum and the subscribers released from the obligation to pay
any unpaid balance of their subscription in excess of 50 per centum of the
same. As a result of this resolution it seems to have been supposed that the
subscription of the various shareholders had been cancelled to the extent
stated; and fully paid certificate were issued to each shareholders for one-
half of his subscription. It
does not appear that the formalities prescribed in section 17 of the
Corporation Law (Act No. 1459), as amended, relative to the reduction of
capital stock in corporations were observed, and in particular it does
not appear that any certificate was at any time filed in the Bureau of
Commerce and Industry, showing such reduction.

Ruling:
It is established doctrine that subscription to the capital of a
corporation constitute a find to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A
corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner an under
the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations
is necessary (14 C. J., 498, 620).

i.Investment of Corporate Funds (S41)

1.Pursuing Secondary Purpose

a.Approval by a majority of the board of directors or trustees
b.Such approval must be ratified by the stockholders representing
at least 2/3 of the OCS, or by at least 2/3 of the members at a
meeting duly called for the purpose
c. Notice

Note: Dissenting stockholders is given the right of appraisal whenever the

corporation decides to pursue its secondary corporate business

Reason: Stockholder will be exposed to a line of business that is not

being pursued when the invested in the company

2. Pursuing Primary Purpose

-Only approval of the Board

De La Rama v Ma-ao Sugar Central , Gr No. L-17504 (1969)

Ma-ao Sugar Central Co., Inc., through its President, subscribed for
P300,000.00 worth of capital stock of the Philippine Fiber Processing Co.
Inc., that payments on the subscription were made; that at the time the
first two payments were made there was no board resolution authorizing
the investment; and that it was only on November 26, 1951, that the
President of Ma-ao Sugar Central Co., Inc., was so authorized by the
Board of Directors.

Plaintiffs-appellants contend that even assuming, arguendo, that the said Board
Resolutions are valid, the transaction, is still wanting in legality, no
resolution
having been approved by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the
voting power, as required in Sec. 17-½ of the Corporation Law.

Power to acquire or dispose of shares Power to invest corporate funds

or securities
Private corporation has the power When the investment is necessary
to acquire, hold, mortgage, pledge to accomplish its purpose or
or dispose of shares, bonds, securities, purposes as stated in it articles of
and other evidences of indebtedness incorporation, the approval of the
of any domestic or foreign stockholders is not necessary
corporation. Such an act, if done in
pursuance of the corporate
purpose, does not need the approval
of the stockholders; but when the
purchase of shares of another
corporation is done solely for
investment and not to accomplish
the purpose of its incorporation, the
vote of approval of the
stockholders is
necessary.

j.Declaration of Dividends
Dividends refers to corporate profits allocated, lawfully declared and ordered by
the directors to be paid to the stockholders on demand or at a fixed time.

Note: Stock corporations are prohibited from restraining surplus profits

in excess of one hundred percent (100%} of their paid-in capital
stock.

Exceptions:
1. When justified by the definite corporate expansion projects
or programs approved by the board of directors
2. When the corporation is prohibited under any loan agreement
with financial institutions or creditors, whether local or
foreign, from declaring dividends without their consent, and such
consent has not yet been secured
3. When it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such
as when there is need for special reserve for probable
contingencies.

Unrestricted retained earnings the amount of accumulated profits and

gains realized out of the normal and continuous operations of the company
after deducting therefrom distributions of stockholders and transfers to capital
stock or others accounts and which is:
1. Not appropriated by its board for corporate expansion projects
or programs
2. Not covered by a restriction for dividend declaration undera
loan agreement
 3. Not required to be retained under special circumstances obtaining
in the corporations such as when there is a need for special
reserve for probable contingencies

General Rule- The Board of Directors has the discretion to declare

dividends

Requirements:
1.Unrestricted retained earnings
2.Resolution of the board

Exception- Stock dividends (with concurrence of 2/3 of OCS), but still up to

the board to declare it

Note: When stock dividends are declared, the earnings are distributed to
the stockholders in the form of shares of stock. It involves conversion of
surplus or undivided profits into capital.

Cash Dividend Stock Dividend

The declaration requires only majority
vote of the directors in a meeting
constituting a quorum
any cash dividends due on
delinquent stock shall be first be
applied to the unpaid balance on
the subscription plus costs and
expenses, while stock holders until
their unpaid subscription
is fully paid
No revocation as to the legally
declared dividends unless with the
consent of
the stockholders (apply to
property dividends as well)
The amount to be distributed is
severed from the general fund and
becomes the property of the SHs
pro rata as soon as the dividend is
voted
Majority vote of the directors +
approval of stockholders representing
at least two-thirds (2/3) of the
outstanding capital stock at a
regular or special meeting duly
called for the
purpose.
Any stock dividend shall be withheld
from the delinquent stockholder
until his unpaid subscription is
fully paid
Can be revoked before the issuance
of the dividend declaration
All formalities and necessary to a
valid increase of stock must be
complied with before SHs are
entitled to anything ,mere
declaration does not
give them vested right

General Rule: Dividends cannot be declared out of capital.

Reason: The Trust Fund Doctrine will be violated. TFD considers the
subscribed capital as a trust fund for the payment of the debts of the
corporation to which the corporation may look for satisfaction.

Exceptions:
1.Liquidating dividends
2.Dividends from investments in wasting assets corporation
Note:
Paid-in surplus cannot be declared as dividends because they are part of the
capital. Also called the premium (par value-issued value or selling price=paid-in
surplus)

Treasury shares cannot be declared as stock or cash dividends because they

are not considered part of earned or surplus profits.

Reason: The conversion would be converted into both a debtor and

creditor for the same amount at the same time

Revaluation surplus is an increase in the value of the assets. Cannot be

declared as dividend because they cannot be considered earnings of the
corporation. They are by nature subject to fluctuations

Who are entitled?

1.Stockholders are entitled to dividends pro rata based on the
total number of shares and not on the amount paid for
share.
2.Dividends belong to the person who owns the stock when the
dividend is declared
3.Even unpaid subscribers are entitled to dividends (Sec 71)
4.Even delinquent shareholders are entitled (Sec 70)

When vested?
The right of the stockholders to be paid dividends accrues as soon
as the declaration is made.

Result: Corporation becomes their debtor for their respective shares in

the dividends

K. Management Contract
It is an agreement whereby one undertakes to manage or operate all or
substantially all of the business of another, whether such contracts are called
service contracts, operating agreements or otherwise.

*Between two corporations

*If with natural person, it is more appropriately an employment
contract

Requirement:
1. Majority vote of the Board + majority of the OCS or
members at a meeting duly called for the purpose, or
2. Approved by the stockholders of the managed corporation owning
at least 2/3 of the OCS or 2/3 of the members , if :
-If BOD constitutes a majority of both the managed and
managing corporation
Period
-if eholders representing the same interest of both the managing
the or managed corporations own or control more than 1/3 of the
shar total OCS entitled to vote of the managing corporation
Shall not exceed 5 years for any one term

Issuance of shares
Majority of stockholders of Ruby Industrial Corp. v Lim Gr No.
165887 (2011)
A stock corporation is expressly granted the power to issue or sell stocks.
The power to issue shares of stock in a corporation is lodged in the board
of directors and no stockholders’ meeting is required to consider it
because additional issuances of shares of stock do not need approval of the
stockholders. What is only required is the board resolution approving
the additional issuance of shares. The corporation shall also file the
necessary application with the SEC to exempt these from the registration
requirements under the Revised Securities Act (now the Securities
Regulation Code).

M. Merger and Consolidation

Merger is one where a corporation absorbs another corporation and remains in
existence while the other is dissolved

Consolidation is one where a new corporation is created, and consolidating

corporations are extinguished

Reason:
1. Economies of scale, meaning , a combination of two production
units enlarges the production output over which the fixed cost
per unit of the output
2. Economies of the scope, meaning, the costs-and even
management talent are spread across a broader range of
related activities
3. Costs are reduced through vertical integration, meaning there is
a merger with a supplier or a customer
Effects:
1. 2The constituent corporations shall become a single corporation
2. The separate existence of the constituents shall cease except that
of the surviving corporation (merger) or the consolidated
corporation (consolidation)
3. The surviving or the consolidated corporation shall possess all
the rights, privileges, immunities and powers and shall be
subject to all duties and liabilities of a corporation and
franchises of each constituent and properties shall be deemed
transferred to the surviving or consolidated corporation

2
 4. All the liabilities of the constituents shall pertain to the surviving
or the consolidated corporation

Note: Thus, there is no winding up of their affairs or liquidation of their

assets although there is dissolution of the absorbed corporations.

Powers Required Vote Is appraisal right

available
Extend or shorten Majority vote + Yes
corporate term Ratification 2/3 of
OCS/M at a duly
called
meeting
Increase or decrease of Majority vote No
capital stock +
Ratification 2/3 of OCS
+
Approval of the SEC
Incur Majority vote No
bondedindebtendness +
Ratification 2/3 of
OCS/M
Deny Pre-emptive right Provision in the articles No
of incorporation
Sale or Disposition of Majority vote of the
individual corporate board
asset
Sale of all or Majority vote + Yes
substantially all of Ratification 2/3 of
corporation’s properties, OCS/M at a duly
including goodwill called meeting

Abandonment of sale
may be done by the
board alone
Acquire own share There must be No
unrestricted retained
earnings; and it must
be for a legitimate
corporate
purpose.
Invest corporate funds Majority if the board + Yes
in Ratification by 2/3 of
another corporation or the OCS/M
business
Declare cash or Majority vote of the No
property board
dividends
Declare stock dividends Majority vote of the No
board + approval of
the 2/3 OCS at a
regular/ special
meeting dully
 called for the purpose

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