2019 PRE-BAR LECTURE IN CORPORATION LAW AND SRC
DEAN NILO T. DIVINA
Faculty of Civil Law
University of Santo Tomas
_________________________________________________________________________________
I. THE CORPORATION CODE
A. General Principles
1. Nationality of corporations
Test to determine the nationality of a
corporation
1. Place of incorporation test- This
means that the nationality of the
corporation is determined by the place
of incorporation. Under this test then,
a corporation is a Philippine national
if it is organized and existing under
Philippine laws regardless of the
nationality of the the shareholders.
This test is applied if the corporation
is not engaged in areas of activities
reserved in whole or in part for
Filipinos.
2. Control test- It is a mode of
determining the nationality of a
corporation engaged in nationalized
areas of activities provided for under
the Constitution and other laws,
where corporate shareholders with
foreign shareholdings are present, by
ascertaining the nationality of the
controlling stockholder of the
corporation. If the capital of the
investing Corporation is at least 60%
owned by Filipinos, then the entire
shareholdings of the investing
Corporation shall be recorded as
Filipino-owned thus making both the
investing and investee -corporations
Philippine national.
3. Grandfather rule- This is the
method by which the percentage of
Filipino equity in a be 70% owned by Filipinos, it shall be
corporation engaged in nationalized
and/or partly nationalized areas of
activities, provided for under the
Constitution and other
nationalization laws, is accurately
computed, in cases where corporate
shareholders with foreign
shareholdings are present, by
attributing the nationality of the
second or even subsequent tier of
ownership to determine the
nationality of the corporate
shareholder.” Thus, to arrive at the
actual Filipino ownership and control
in a corporation, both the direct and
indirect shareholdings in the
corporation are determined. In the
case of a multi-tiered corporation, the
stock attribution rule must be allowed
to run continuously along the chain of
ownership until it finally reaches the
individual stockholders.
Common conditions for the application
of the control test and grandfather rule
1. The corporation is engaged in
economic activities which are reserved
in whole or in part for Filipinos,
otherwise known as nationalized
activities.
2. Stockholders include corporation/s.
If stockholders are all natural persons,
the nationality of the corporation,
under this test, is ascertained by
simply computing the percentage of
stock ownership by Filipino and
foreigners. By way of example, in case
of corporation engaged in advertising,
the capital of which, under the
Philippine Constitution, is required to
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considered a Philippine national if the
Filipino stockholders own at least 70%
of total shares issued.
3. Foreign stockholders are present
either by owning shares directly in the
corporation or owning shares in a
corporation which invested in the
equity of the corporation whose
nationality is in issue.
Rule I:
Rule II:
Rule III:
There are two cases in determining the
nationality of the Investee Corporation. The
first case is the ‘liberal rule’, later coined by
the SEC as the Control Test in its 30 May 1990
Opinion, and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which
states, ‘(s)hares belonging to corporations or
partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be
considered as of Philippine
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nationality.’ Under the liberal Control Test,
there is no need to further trace the
ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation
since a corporation which is at least 60%
Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the
Grandfather Rule Proper and pertains to the
portion in said Paragraph 7 of the 1967 SEC
Rules which states, “but if the percentage of
Filipino ownership in the corporation or
partnership is less than 60%, only the
number of shares corresponding to such
percentage shall be counted as of Philippine
nationality.” Under the Strict Rule or
Grandfather Rule Proper, the combined
totals in the Investing Corporation and the
Investee Corporation must be traced (i.e.,
“grandfathered”) to determine the total
percentage of Filipino ownership.
The “control test” is still the prevailing mode
of determining whether or not a corporation
is a Filipino corporation, within the ambit of
Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration,
development and utilization of the natural
resources of the Philippines. When in the
mind of the Court there is doubt, based on
the attendant facts and circumstances of the
case, in the 60-40 Filipino-equity ownership
in the corporation, then it may apply the
“grandfather rule.” Narra Nickel Mining
And Development Corpvs. Redmont
Consolidated Mines Corp.G.R. No. 195580,
21 April 2014
The Control Test can be, as it has been,
applied jointly with the Grandfather Rule to
determine the observance of foreign
ownership restriction in nationalized
economic activities. The Control Test and
the Grandfather Rule are not, as it were,
incompatible ownership-determinant
methods that can only be applied alternative
to each other. Rather, these methods can, if
appropriate, be used cumulatively in the
determination of the ownership and
control of corporations engaged in fully
or partly nationalized activities, as the
mining operation involved in this case or the
operation of public utilities as
in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should
not be used to determine the Filipino
ownership and control in a corporation, as it
 3

could result in an otherwise foreign contravenes the intent and letter of the
corporation rendered qualified to perform Constitution that the “State shall develop a
nationalized or partly nationalized activities. self-reliant and independent national
Hence, it is only when the Control Test is economy effectively controlled by Filipinos.”
first complied with that the Grandfather A broad definition unjustifiably disregards
Rule may be applied. Put in another who owns the all-important voting stock,
manner, if the subject corporation’s Filipino which necessarily equates to control of the
equity falls below the threshold 60%, the public utility. Gamboa v. Teves, et al.,G.R.
corporation is Immediately considered No. 176579, June 28, 2011
foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears. If a corporation is engaged in a partially
nationalized industry, issues a mixture of
On the other hand, a corporation that common and preferred non-voting shares, at
complies with the 60-40 Filipino to least 60 percent of the common shares and at
foreign equity requirement can be least 60 percent of the preferred non-voting
considered a Filipino corporation if there shares must be owned by Filipinos. Of course,
is no doubt as to who has the “beneficial if a corporation issues only a single class of
ownership” and “control” of the shares, at least 60 percent of such shares must
corporation. In that instance, there is no necessarily be owned by Filipinos. In short,
need for a dissection or further inquiry on the 60-40 ownership requirement in favor of
the ownership of the corporate shareholders Filipino citizens must apply separately to
in both the investing and investee each class of shares, whether common,
corporation or the application of the preferred non-voting, preferred voting or any
Grandfather Rule. As a corollary rule, even other class of shares. Heirs of Wilson P.
if the 60-40 Filipino to foreign equity ratio is Gamboa vs. Teves, 682 SCRA 397(2012)
apparently met by the subject or investee
corporation, a resort to the Grandfather NB In a November 2016 resolution, the
Rule is necessary if doubt exists as to the SC held that the 60-40% Filipino-foreign
locus of the “beneficial ownership” and ownership ( in mining companies,
“control.” In this case, a further public utility and corporations engaged
investigation as to the nationality of the in the exploration of natural resouces
personalities with the beneficial ownership need not be in each class of shares;
and control of the corporate shareholders in provided that at least 60% of the
both the investing and investee corporations outstanding capital stock and 60% of
is necessary. Narra Nickel Mining And the voting shares are owned by Filipinos
Development Corp Vs. Redmont
Consolidated Mines Corp. G.R. No. The following is the composition of the
195580, 28 January 2015 outstanding capital stock of Company X:
 100 common shares
Considering that common shares have voting  100 Class A preferred shares (with
rights which translate to control, as opposed right to elect directors)
to preferred shares which usually have no  100 Class B preferred shares (without
voting rights, the term "capital" in Section 11, right to elect directors)
Article XII of the Constitution refers only to
common shares. However, if the preferred SEC-MC GAMBOA APPLICATIO
shares also have the right to vote in the No. 8 DECISION N
election of directors, then the term "capital" (1) 60% If at least a
shall include such preferred shares because (required total of 120 of
the right to participate in the control or "shares of
percentage common
management of the corporation is exercised stock
of Filipino) shares and
through the right to vote in the election of entitled to
applied to Class A
directors. In short, the term "capital" in vote in the
the total preferred
Section 11, Article XII of the Constitution election of
number of shares (in any
refers only to shares of stock that can vote in directors"(
outstandin combination)
the election of directors. To construe broadly 60% of the
g shares of are owned and
the term “capital” as the total outstanding voting
stock controlled by
capital stock, including both common rights)
entitled to Filipinos,
and non-voting preferred shares, grossly vote in the Company X is

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 4

election of compliant with

directors the 60% of the The pronouncement of the Court in the
voting rights in Gamboa Resolution -the constitutional
favor of requirement to "apply uniformly and
Filipinos across the board to all classes of shares,
requirement of regardless of nomenclature and category,
both SEC-MC comprising the capital of a corporation - is
No. 8 and the clearly an obiter dictum that cannot
Gamboa override the Court's unequivocal definition of
Decision. the term "capital" in both the Gamboa
If at least a Decision and Resolution.
total of 180
shares of all the Nowhere in the discussion of the definition of
"Full
outstanding the term "capital" in Section 11, Article XII of
beneficial
capital stock of the 1987 Constitution in the Gamboa
ownership
Company X are Decision did the Court mention the 60%
of 60
owned and Filipino equity requirement to be applied to
percent of
controlled by each class of shares. The definition of
the
(2) 60% Filipinos, "Philippine national" in the FIA and
outstandin
(required provided that expounded in its IRR, which the Court
g capital
percentage among those adopted in its interpretation of the term
stock,
of Filipino) 180 shares a "capital", does not support such application.
coupled
applied to total of 120 of In fact, even the Final Word of the Gamboa
with 60
BOTH (a) the common Resolution does not even intimate or suggest
percent of
the total shares and the need for a clarification or re-
the voting
number of Class A interpretation.
rights" or
outstandin preferred
"Full
g shares of shares (in any To revisit or even clarify the unequivocal
beneficial
stock, combination) definition of the term "capital" as referring
ownership
entitled to are owned and "only to shares of stock entitled to vote in the
of the
vote in the controlled by election of directors" and apply the 60%
stocks,
election of Filipinos, then Filipino ownership requirement to each class
coupled
directors; Company X is of share is effectively and unwarrantedly
with
AND (b) compliant with amending or changing the Gamboa Decision
appropriat
the total both and Resolution. The Gamboa Decision and
e voting
number of requirements Resolution Doctrine did NOT make any
rights x x x
outstandin of voting rights definitive ruling that the 60% Filipino
shares with
g shares of and beneficial ownership requirement was intended to
voting
stock, ownership apply to each class of share. Jose Roy III
rights, as
whether or under SEC-MC vs. Chairperson Teresita Herbosa, G.R.
well as with
not entitled No. 8 and the No. 207246, April 18, 2017,
full
to vote in Gamboa
beneficial
the Decision and
ownership"
election of Resolution.
directors.

While SEC-MC No. 8 does not expressly

mention the Beneficial Ownership Test or full
beneficial ownership of stocks requirement
in the FIA, this will not render it invalid -
meaning, it does not follow that the SEC will
not apply this test in determining whether
the shares claimed to be owned by Philippine
nationals are Filipino, i.e., are held by them
by mere title or in full beneficial ownership.
Roy vs Herbosa, November 2016

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 5
The grandfather rule is only employed when
the 60% Filipino ownership is in doubt. In
this case, not even the slightest doubt is cast
since the petition is severely wanting in facts
and circumstances that raise legitimate
challenges to the Joint venture company’s 60-
40 Filipino ownership. The application of the
control test then will yield the result that the
JV Company is a Philippine national.
Querubin vs. COMELEC, GR. NO. 218787,
December 80 2015
2. Doctrine of separate juridical
personality
a. Relevant cases on doctrine of separate
legal entity
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. Likewise, the
existence of interlocking directors, corporate
officers and shareholders is not enough
justification to pierce the veil of corporate
fiction in the absence of fraud or other public
policy considerations. It must be noted that
Pacific Carpet was registered with the SEC on
January 29, 1999, such that it could not be
said that Pacific Carpet was set up to evade
Phil Carpet's liabilities. As to the transfer of
Phil Carpet's machines to Pacific Carpet,
settled is the rule that "where one
corporation sells or otherwise transfers all its
assets to another corporation for value, the
latter is not, by that fact alone, liable for the
debts and liabilities of the transferor. " All
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told, the petitioners failed to present
substantial evidence to prove their allegation
that Pacific Carpet is a mere alter ego of Phil
Carpet. (Rommel M. Zambrano, et. al v.
Philippine Carpet Manufacturing
Corporation, et. al, G.R. No. 224099, June
21, 2017, Mendoza, J.)
The personality of a corporation is distinct
and separate from the personalities of its
stockholders. Hence, its stockholders are not
themselves the real parties in interest to
claim and recover compensation for the
damages arising from the wrongful
attachment of corporate assets. Only the
corporation is the real party in interest for
that purpose. Stronghold Insurance
Company, Inc. v. Cuenca,G.R. No. 173297,
March 6, 2013 J Bersamin
Where two banks foreclosed mortgages on
certain properties of a mining company and
resumed business operations thereof by
organizing a different company to which the
banks transferred the foreclosed assets, the
banks are not liable to a contractor engaged
by the re-organized mining company even
though the latter is wholly-owned by the two
banks and they have interlocking directors,
officers and stockholders. Development
Bank of the Philippines vs. Hydro
Resources Contractors Corporation, GR.
No. 167603, March 13, 2013.
When an investor has a claim against a
subsidiary of another corporation which
subsequently became the acquired
corporation in a merger, the claim against the
subsidiary can not be enforced against the
surviving corporation even though the latter
corporation by virtue of the merger acquired
all the shares of the absorbed corporation.
This is because the fact that a corporation
owns almost all of the stocks of another
corporation, taken alone, is not sufficient to
justify their being treated as one entity.
Spouses Ramon Nisce vs. Equitable PCI
Bank 516 SCRA 231 (2007)
Instead of holding the decedent's interest in
the corporation separately as a stockholder,
the probate court ordered the lessees of the
corporation to remit rentals to the estate's
administrator without taking note of the fact
that the decedent was not the absolute owner
of Primrose but only an owner of shares
thereof.
 6
Furthermore, the probate court in this case
has not acquired jurisdiction over Primrose
and its properties. Piercing the veil of
corporate entity applies to determination of
liability not of jurisdiction.. Hence, before
this doctrine can be even applied, based on
the evidence presented, it is imperative that
the court must first have jurisdiction over the
corporation. A corporation not impleaded in
a suit cannot be subject to the court's process
of piercing the veil of its corporate fiction.
Resultantly, any proceedings taken against
the corporation and its properties would
infringe on its right to due process. Manuela
Azucena Mayor, Petitioner, - Versus -
Edwin Tiu And Damiana Charito Marty,
Respondents; G.R. No. 203770, Second
Division, November 23, 2016
Personal liability of a corporate director,
trustee or officer along (although not
necessarily) with the corporation may so
validly attach, as a rule, only when —
1. He assents (a) to a patently unlawful act
of the corporation, or (b) for bad faith or
gross negligence in directing its affairs,
or (c) for conflict of interest, resulting in
damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered
stocks or who, having knowledge
thereof, does not forthwith file with the
corporate secretary his written objection
thereto;
2. He agrees to hold himself personally and
solidarity liable with the corporation; or
3. He is made, by a specific provision of law,
to personally answer for his corporate
action.
Pioneer Insurance Surety Corporation V.
Morning Star Travel & Tours, Inc., Et. Al.;
G.R. No. 198436, 08 July 2015
The courts a quo erred in concluding that
Tompar, in his capacity as then-
President/CEO of MRII, should be held
solidarily liable with MRII for the latter's
obligations to Germo. As a general rule,
directors, officers, or employees of a
corporation cannot be held personally liable
for the obligations incurred by the
corporation, unless it can be shown that such
director/officer/employee is guilty of
negligence or bad faith, and that the same
was clearly and convincingly proven.
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Before a director or officer of a corporation
can be held personally liable for corporate
obligations, the following requisites must
concur: (1) the complainant must allege 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; and (2) the
complainant must clearly and convincingly
prove such unlawful acts, negligence or bad
faith. In this case, Tompar's assent to patently
unlawful acts of the MRII or that his acts were
tainted by gross negligence or bad faith was
not alleged in Germo's complaint, much less
proven in the course of trial. Therefore, the
deletion of Tompar's solidary liability with
MRII is in order. Mactan Rock Industries vs
Germo, GR No. 228799, January 10, 2018 J
Bernabe
b. Liability for Torts and Crimes
A corporation is civilly liable in the same
manner as natural persons for torts, because
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. 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. Philippine National Bank vs. Court
of Appeals, et al., G.R. No. L-27155, May 18,
1978
The Trust Receipts Law recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
directors, officers or employees or other
persons responsible for the offense liable to
suffer the penalty of imprisonment. Edward
C. Ong, vs. the Court of Appeals and the
People of the Philippines, G.R. No. 119858,
April 29, 2003
Though the entrustee is a corporation,
nevertheless, the law specifically makes the
officers, employees or other officers or
persons responsible for the offense, without
prejudice to the civil liabilities of such
corporation and/or board of directors,
officers, or other officials or employees
responsible for the offense. The rationale is

that such officers or employees are vested
with the authority and responsibility to
devise means necessary to ensure compliance
with the law and, if they fail to do so, are held
criminally accountable; thus, they have a
responsible share in the violations of the law.
Alfredo Ching vs. the Secretary of Justice,
et al., G. R. No. 164317, February 6, 2006
c. Recovery of Moral Damages
A juridical person is generally not entitled to
moral damages because unlike natural
persons it can not experience physical
suffering or such sentiments as wounded
feeling, serious anxiety, mental anguish and
mental shock. Nevertheless, if a corporation’s
claim for moral damages falls under section 7
Article 2219 of the Civil Code which
authorizes recovery of moral damages in
cases of libel, slander or any form of
defamation, then moral damages may be
awarded. This is because. Article 2219 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.
Filipinas Broadcasting Network vs. Ago
Medical and Educational Center 448
SCRA 413 (2005)
As a rule, a 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 reputation that
is debased, resulting in its humiliation in the
business realm. But in such a case, it is
imperative for the claimant to present proof
to justify the award. Thus, where the records
are bereft of any evidence that the name or
reputation of a corporation has been debased
as a result of Meralco’s act, which in this case
is the disconnection of the electricity supply
to the building of the corporation ( without
written notice ) due to non-payment of
differential billing representing unregistered
consumption for alleged tampering with the
electric meter, the corporation is not entitled
to moral damages. Meralco v. TEAM
Electronics Corp. 540 SCRA 62 (2007)
3. Doctrine of Piercing
Corporate Veil
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7
i. Definition
ii. Areas where the doctrine
applies
The doctrine of piercing the corporate veil
applies only in three (3) basic instances,
namely: a) when the separate and distinct
corporate personality defeats public
convenience, as when the corporate fiction is
used as a vehicle for the evasion of an existing
obligation; b) in fraud cases, or when the
corporate entity is used to justify a wrong,
protect a fraud, or defend a crime; or c) is
used in alter ego cases, i.e., where a
corporation is essentially 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
so conducted as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation.
iii. Elements of the Alter-Ego
Test
Piercing the corporate veil based on the alter
ego theory requires the concurrence of three
elements, 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.
Development Bank of the Philippines
vs. Hydro Resources Contractors
Corporation, GR. No. 167603, March 13,
2013;
iv. Case example
Aggravating the Respondent Corporation’s
the clear evasion of payment of its financial
obligations is the organization of a "run-away
corporation," at the time the unfair labor
 8
practice case was pending before the CIR by
the same persons who were the officers and
stockholders of the Respondent Corporation
, engaged in the same line of business,
producing the same line of products,
occupying the same compound, using the
same machineries, buildings, laboratory,
bodega and sales and accounts departments
used by the Respondent Corporation , and
which is still in existence. This is another
instance where the fiction of separate and
distinct corporate entities should be
disregarded as 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. A.C. Ransom
Labor Union-CCLU vs. National Labor
Relations Commission, et al., G.R. No. L-
69494, May 29, 1987
Piercing the corporate veil is warranted if in
the middle of a labor dispute, a corporation
sold its franchise as well as most of its bus
units to a company controlled by the
daughter of the controlling shareholder of
the assignor corporation where daughter is
also a director. It is evident that the
transaction was made in order to remove the
corporation’s remaining assets from the
reach of any judgment that may be rendered
in the unfair labor practice case filed against
it. Times Transportation Co., Inc., vs.
Sotelo, 451 SCRA 587 (2005)
In this case, petitioners advance the
application of the doctrine because they were
terminated from employment on the pretext
that there will be an impending permanent
closure of the business as a result of an
intended sale of its assets to an undisclosed
corporation, and that there will be a change
in the management.
Subsequent events, however, revealed that
the buyer of the assets of their employer was
a corporation owned by the same employer
and members of his family. Furthermore, the
business re-opened in less than a month
under the same management. Admittedly,
mere ownership by a single stockholder of all
or nearly all of the capital stock of the
corporation does not by itself justify piercing
the corporate veil. Nonetheless, in this case,
other circumstances show that the buyer of
the assets of petitioners' employer is none
other than his alter ego. (Leo R. Rosales, Et.
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Magnificus Juris Reviews and Seminars, Inc. (“Magnificus”).
Al. V. New A.N.J.H. Enterprises & N.H. Oil
Mill Corporation, et. al., G.R. No. 203355,
18 August 2015
Where it appears that business enterprises
are owned, conducted and controlled by the
same parties, law and equity will disregard
the legal fiction that these corporations are
distinct entities and shall treat them as one.
This is in order to protect the rights of third
persons, as in this case, to safeguard the
rights of respondents. Vicmar
Development Corporation Vs. Elarcosa
(G.R. No. 202215, December 9, 2015,
Second Division, Del Castillo, J.
Where companies engaged in a work-pooling
scheme, in light of which they might be
considered as one and the same entity for the
purpose of determining the appropriate
bargaining unit in a certification election, . it
is only proper that, in order to safeguard the
right of the workers and Unions A, B, and C
to engage in collective bargaining, the
corporate veil of Express Lamination and
Express Coat must be pierced. The separate
existence of Super Lamination, Express
Lamination, and Express Coat must be
disregarded. Erson Ang Lee Doing
Business As "Super Lamination Services,"
Petitioner, - Versus - Samahang
Manggaga Wa Ng Super Lamination
(Smslsnaflu-kmu), Respondent; G.R. No.
193816, First Division, November 21, 2016
Should the court first acquire jurisdiction
over the corporation involved before its
separate legal personality may be
disregarded?
The court must first acquire jurisdiction over
the corporation or corporations involved
before its or their separate personalities are
disregarded; and 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. Kukan
International Corporation vs. Hon.
Judge Amor Reyes, G.R. No. 182729, 29
September 2010
In one case, Supreme Court ruled that if the
RTC had sufficient factual basis to conclude
 9
that the two corporations are one and the
same entity as when they have the same
President and controlling shareholder and it
is generally known in the place where they do
business that they are one, the third party
claim filed by the other corporation was set
aside and the levy on its property held valid
even though the latter was not made a party
to the case . The judgment may be enforced
against the other corporation to prevent
multiplicity of suits and save the parties
unnecessary expenses and delay. Gold Line
Tours vs. Heirs of Maria Concepcion
Lacsa, GR No. 159108, 18 June 2012 , J
Bersamin
Piercing the corporate veil is warranted when
a corporation ceased to exist only in name as
it re-emerged in the person of another
corporation for the purpose of evading its
unfulfilled obligation under a compromise
agreement. Thus, if the judgment for money
claim could not be enforced against the
employer corporation, an alias writ may be
enforced against the other corporation
considering the indubitable link between the
closure of the corporation and of the other.
Livesey vs Binswanger Philippines, GR
No. 177493, March 19, 2014
Where the court rendered judgment against
a stock brokerage firm directing the latter to
return securities which it sold without
authority but the writ of execution was
returned unsatisfied, an alias writ could not
be enforced against its parent company
because the court has not acquired
jurisdiction over the latter and while the
parent company owns and controls the
brokerage firm, there is no showing that the
control was used to violate the rights of the
plaintiff. Pacific Rehouse Corporation vs.
Court of Appeals, GR 199687, March 24,
2014
Compliance with the recognized modes of
acquisition of jurisdiction can not be
dispensed with in piercing the veil of
corporate fiction. In an action for subrogation
against the travel agent after the insurer paid
the former’s obligation to IATA for
unremitted collections, the insurer can not
hold an unimpleaded corporation liable as it
would offend due process. Pioneer
Insurance Surety Corporation vs Morning
Star Travel and Tours, GR No. 198436, July
08, 2015
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NB. There appears to be a lack of conclusive
yardstick as to when the court may pierce the
veil of corporate fiction of a corporation
which has not been brought to its jurisdiction
by summons, voluntary appearance or other
recognized modes of acquiring jurisdiction.
For academic purposes, it depends on the
similarity with the facts of each case.
Effects
While a third party mortgagor is liable only
up to the extent of the value of the mortgaged
property, such third party mortgagor may be
required to pay the deficiency between the
loan obligation and the proceeds of the sale if
it is only an instrumentality or alter ego of the
borrower corporation. The two corporations
were treated as one entity because of the
following factors : a ) both corporations are
family corporations of the same controlling
shareholder; b) the two corporation share
the same office and practically transact their
business from the same place; c ) they had a
common President; d ) the promissory notes
were signed by the same person as President
of the borrower corporation and President of
the mortgagor corporation; and, e ) the assets
of the two corporations are co-mingled.
Heirs of Fe Tan Uy vs. International
Exchange Bank, February 13, 2013
Corporate representatives may be compelled
to submit to arbitration proceedings
pursuant to a contract entered into by the
corporations they represent if there are
allegations of bad faith or malice in their acts
representing the corporation even though
the arbitral agreement only covers the
corporations. This is because when the
allegations of bad faith or malice in the acts
of corporate representatives are proven, then
the corporation and the corporate
representatives become one and the same.
Gerardo Lanuza, Jr. And Antonio O. Olbes
vs. BF Corporation, G.R. No. 174938,
October 01, 2014
B. Stock vs non-stock corporations
While BCDA has an authorized capital of
Php100 Billion, it is not divided into shares of
stock. BCDA has no voting shares. There is
likewise no provision which authorizes the
distribution of dividends and allotments of
surplus and profits to BCDA's stockholders.
Hence, BCDA is not a stock corporation.
 10
BCDA also does not qualify as a non-stock
corporation because it is not organized for
any of the purposes mentioned under Section
88 of the Corporation Code namely
charitable, religious, educational,
professional, cultural, fraternal, literary,
scientific, social, civic service, or similar
purposes, like trade industry, agricultural and
like chambers, or any combination thereof.
A cursory reading of Section 4 of R.A. No.
7227 shows that BCDA is organized for a
specific purpose — to own, hold and/or
administer the military reservations in the
country and implement its conversion to
other productive uses.
BCDA is neither a stock nor a non-stock
corporation. BCDA is a government
instrumentality vested with corporate
powers. Bases Conversion and
Development Authority v. Commissioner
of Internal Revenue, G.R. No. 205925, June
20, 2018
Under Section 52 of the Corporation Code,
for stock corporations, the quorum is based
on the number of outstanding voting stocks
while for non-stock corporations, only those
who are actual, living members with voting
rights shall be counted in determining the
existence of a quorum. To be clear, the basis
in determining the presence of quorum in
nonstock corporations is the numerical
equivalent of all members who are entitled
to vote, unless some other basis is provided
by the By-Laws of the corporation. The
qualification "with voting rights" simply
recognizes the power of a non-stock
corporation to limit or deny the right to vote
of any of its members.
Similarly, Section 6 of Condocor's By-Laws
reads: "The attendance of a simple majority
of the members who are in good standing
shall constitute a quorum ... xxx" In relation
thereto, Section 733 of the By-Laws,
referring to voting rights, also qualified that
only those members in good standing are
entitled to vote.
Applying the law and Condocor's By-Laws,
if there are 100 members in a non-stock
corporation, 60 of which are members in
good standing, then the presence of 50%
plus 1 of those members in good standing
will constitute a quorum. Thus, 31 members
in good standing will suffice in order to
*No part of this material may be reproduced in any manner or form without permission by the Lecturer and
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consider a meeting valid as regards the
presence of quorum. The 31 members will
naturally have to exercise their voting rights.
It is in this instance when the number of
voting rights each member is entitled to
becomes significant. If 29 out of the 31
members are entitled to 1 vote each, another
member (known as A) is entitled to 20 votes
and the remaining member (known as B) is
entitled to 15 votes, then thetotal number of
voting rights of all 31 members is 64. Thus,
majority of the 64 total voting rights, which
is 33 (50% plus 1), is necessary to pass a valid
act. Assuming that only A and B concurred
in approving a specific undertaking, then
their combined votes are more than
sufficient to authorize such act. The
quorum during the July 21, 2012 meeting
should have been majority of Condocor's
members in good standing. Accordingly,
there was no quorum during the July 21, 2012
meeting considering that only 29 of the 108
unit buyers were present. Lim Vs Moldex
Land, Inc., G.R. No. 206038, January 25,
2017, J. Mendoza
Moldex can send representatives as it is
allowed under Section 58 of the Corporation
Code. But whether these representatives can
vote themselves as directors is another
story because Section 23 and 92 of the
Corporation Code requires that trustees of
non-stock corporations must be members
thereof. While Moldex may rightfully
designate proxies or representatives, the
latter, however, cannot be elected as
directors or trustees of Condocor. First, the
Corporation Code clearly provides that a
director or trustee must be a member of
record of the corporation. Further, the
power of the proxy is merely to vote. If said
proxy is not a member in his own right, he
cannot be elected as a director or proxy. Lim
Vs Moldex Land, Inc., G.R. No. 206038,
January 25, 2017
C. De facto corporations and
corporations by estoppel
Corporation by estoppel results when a
corporation represented itself to the public
as such despite its not being incorporated. A
corporation by estoppel may be impleaded as
a party defendant considering that it
possesses attributes of a juridical person,
otherwise, it can not be held liable for
damages and injuries it may inflict to other
 11
persons. Macasaet vs. Francisco, GR No.
156759, June 5, 2013, J Bersamin
When the petitioner is not trying to escape
liability from the contract but rather the one
claiming from the contract, the doctrine of
corporation by estoppel is not applicable.
This doctrine applies to a third party only
when he tries to escape liability on a contract
from which he has benefited on the irrelevant
ground of defective incorporation.
International Express Travel & Tour
Services, Inc. vs. Hon. Court of Appeals,
Henri Kahn, Philippine Football
Federation, G.R. No. 119002, October 19,
2000
In a dispute between the presidents of the
two associations which agreed to consolidate
but were not actually consolidated, the
proposed consolidated corporation cannot be
considered a corporation by estoppel, since
there is no third person involved and the two
presidents knew the consolidated
corporation had not been registered.
Corporation by estoppel is founded on
principles of equity and is designed to
prevent injustice and unfairness, and where
there is no third party involved and the
conflict arises only among those assuming
the form of a corporation, who know that it
has not been registered, there is no
corporation by estoppel Lozano vs. Delos
Santos, 272 SCRA 452 (1997)
Where persons associate themselves together
under articles to purchase property to carry
on a business, and their organization is so
defective as to come short of creating a
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.
Pioneer Insurance & Surety Corporation
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vs. the Hon. Court of Appeals, Border
Machinery & Heavy Equipment, Inc.,
(BORMAHECO), Constancio M. Maglana
and Jacob S. Lim, G.R. No. 84197, July 28,
1989
NB Neither is there a corporation by
estoppel if two or more persons did not
assume themselves to be a corporation
with respect to a third party
A person who has reaped the benefits of a
contract entered into by others with whom
he previously had an existing relationship is
deemed to be part of said association and is
covered by the scope of the doctrine of
corporation by estoppel. Lim Tong Lim vs.
Philippine Fishing Gear Industries, Inc.,
317 SCRA 728 (1999)
The persons who illegally recruited workers
for overseas employment by representing
themselves to be officers of a corporation
which they knew had not been incorporated
are liable as general partners for all debts,
liabilities and damages incurred or arising as
a result thereof. People vs. Garcia, 271 SCRA
621 (1997)
Where someone convinced other parties to
contribute funds for the formation of a
corporation which was never formed, there is
no partnership among them, and the latter
cannot be held liable to share in the losses of
the proposed corporation. Pioneer Surety &
Insurance Corporation vs. Court of
Appeal, 175 SCRA 668 (1989)
While the donation was accepted at the time
the petitioner was not yet incorporated, the
subsequent incorporation of the petitioner
and its affirmation of Mother Concepcion's
authority to accept on its behalf cured
whatever defect that may have attended the
acceptance of the donation, applying the
doctrine of corporation by estoppel under the
Corporation Code. Missionary Sisters of
Our Lady of Fatima v. Alzona, et al., G.R.
No. 224307, August 6, 2018
D. Board of Directors and Trustees
1. Basic Principles
a. Doctrine of centralized
management
2. Business Judgment Rule

The determination of the necessity for
additional offices and/or positions in a
corporation, if authorized under the by-laws,
is a management prerogative which courts
are wont to review in the absence of any proof
that such prerogative was exercised in bad
faith or with malice. Similarly, the Board of
Directors may create an executive committee
or other board committees as part of its
management prerogative provided that such
committees do not function as an executive
committee as contemplated by Section 35 of
the Corporation Code, in which case,
authority in the by-laws is required.
Questions of policy or of management are left
solely to the honest decision of the board as
the business manager of the corporation, and
the court is without authority to substitute its
judgment for that of the board, and as long as
it acts in good faith and in the exercise of
honest judgment in the interest of the
corporation, its orders are not reviewable by
the courts. Filipinas Port Services, Inc., v.
Go et al. 518 SCRA 453 (2007)
The Board of Directors of a corporation can
not validly delegate the power to create a
corporate office to the President, in the light
of Section 25 of the Corporation Code
requiring the Board of Directors itself to elect
the corporate officers. Verily, the power to
elect the corporate officers is a discretionary
power that the law exclusively vested in the
Board of Directors, and can not be delegated
to subordinate officers or agents. The Office
of Vice President for Finance and
Administration created by the President of
the Corporation pursuant to the pertinent
provision in the by-laws of the corporation
was an ordinary, not a corporate, office.
Matling Industrial and Commercial
Corporation vs. Coros , G.R. No. 157802, 13
October 2010
2. Duties, Liabilities
responsibility for unlawful acts
Article 212(e) does not state that corporate
officers are personally liable for the unpaid
salaries or separation pay of employees of the
corporation. The liability of corporate
officers for corporate debts remains governed
by Section 31 of the Corporation Code. A
director is not personally liable for the debts
of the corporation, which has a separate legal
personality of its own. A director is
personally liable for corporate debts only if he
wilfully and knowingly votes for or assents to
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12
patently unlawful acts of the corporation or
he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.
However, 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. Moreover, bad faith
does not automatically arise 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.
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. Carag v. NLRC 520 SCRA
28 (2007)
Solidary liability will attach to the
directors, officers or employees of the
corporation in certain circumstances,
such as:
1. When directors and trustees or, in
appropriate cases, the officers of a
corporation: (a) vote for or assent to
patently unlawful acts of the
corporation; (b) act in bad faith or with
gross negligence in directing the
corporate affairs; and (c) are guilty of
conflict of interest to the prejudice of the
corporation, its stockholders or
members, and other persons;
2. When a director or officer has consented
to the issuance of watered stocks or who,
having knowledge thereof, did not
forthwith file with the corporate
secretary his written objection
and 3. When a director, trustee or officer has
contractually agreed or stipulated to
hold himself personally and solidarily
liable with the corporation; or
4. When a director, trustee or officer is
made, by specific provision of law,
personally liable for his corporate action.
Before a director or officer of a
corporation can be held personally liable
for corporate obligations, however, the
following requisites must concur:
 13
1. the complainant must allege 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; and
2. the complainant must clearly and
convincingly prove such unlawful acts,
negligence or bad faith.
Thus, the President of the corporation cannot
be held personally liable if the complaint
merely averred that he signed as a surety to
secure the obligation of the corporation and
which surety turned out to be spurious.
Heirs of Fe Tan Uy vs. International
Exchange Bank Feb 13,
2013
To hold a director or officer personally liable
for corporate obligations, two requisites must
concur: (1) complainant must allege 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; and (2)
complainant must clearly and convincingly
prove such unlawful acts, negligence or bad
faith. 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. . 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. Bank of Commerce v.
Marilyn P. Nite, G.R. No. 211535, 22 July
2015
The execution of a document by a bank
manager called “ pagares “ which guaranteed
purchases on credit by a client is contrary to
the General Banking law which prohibits
bank officers from guaranteeing loans of
bank clients. United Coconut Planters
Bank vs. Planters Products Inc. GR No.
179015, 13 June 2012
E. Powers of Corporations
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1. How powers are exercised
a. By the Shareholders
a.1 Corporate powers
reserved for
stockholders
a.2 Corporate Powers
exercised with the
board of directors
b. By the Board of
Directors
By the express mandate of the Corporation
Code (Section 26), all corporations duly
organized pursuant thereto are required to
submit within the period therein stated (30
days) to the Securities and Exchange
Commission the names, nationalities and
residences of the directors, trustees and
officers elected. In determining whether the
filing of a suit was authorized by the board of
directors, the list of directors in the latest
general information sheet filed with the
Securities and Exchange Commission is
controlling. Premium Marble Resources,
Inc.vs. the Court of Appeals, G.R. No.
96551. November 4, 1996
Under Section 36 of the Corporation Code,
read in relation to Section 23,it is clear that
where a corporation is an injured party, its
power to sue is lodged with its board of
directors or trustees. In this case, the
petitioner failed to show any proof that he
was authorized or deputized or granted
specific powers by the corporation’s board of
director to sue Victor AngSiong for and on
behalf of the firm, and therefore he had no
such power or authority to sue on Concord’s
behalf. Tam Wing Takvs. Hon. Ramon P.
Makasiar, G.R. No. 122452, January 29, 2001
c. By the Officers
In turn, physical acts of the corporation,
like the signing of documents, can be
performed only by natural persons duly
authorized for the purpose by corporate by-
laws or by a specific act of the board of
directors. It necessarily follows that "an
individual corporate officer cannot solely
exercise any corporate power pertaining to
the corporation without authority from the
board of directors."
Section 23, in relation to Sec. 25 of the Code,
clearly enunciates that all corporate powers
 14
are exercised, all business conducted, and all
properties controlled by the board of
directors. A corporation has a separate and
distinct personality from its directors and
officers and can only exercise its corporate
powers through the board of directors. Thus,
it is clear that an individual corporate officer
cannot solely exercise any corporate power
pertaining to the corporation without
authority from the board of directors. Absent
the said board resolution, a petition may not
be given due course. Philippine
Numismatic and Antiquarian Society V.
Genesis Aquino, Et Al., G.R. No. 206617.
January 30, 2017, Peralta, J.
The doctrine of apparent authority provides
that even if no actual authority has been
conferred on an agent, his or her acts, as long
as they are within his or her apparent scope
of authority, bind the principal. However, the
principal's liability is limited to third persons
who are reasonably led to believe that the
agent was authorized to act for the principal
due to the principal's conduct. Apparent
authority is determined by the acts of the
principal and not by the acts of the agent.
Thus, it is incumbent upon Calubad to prove
how Ricarcen’s acts led him to believe that
Marilyn was duly authorized to represent it.
As the former president of Ricarcen, it was
within Marilyn's scope of authority to act for
and enter into contracts in Ricarcen's behalf.
Her broad authority from Ricarcen can be
seen with how the corporate secretary
entrusted her with blank yet signed sheets of
paper to be used at her discretion. She also
had possession of the owner's duplicate copy
of the land title covering the property
mortgaged to Calubad, further proving her
authority from Ricarcen. Calubad could not
be faulted for continuing to transact with
Marilyn, even agreeing to give out additional
loans, because Ricarcen clearly clothed her
with apparent authority. Likewise, it
reasonably appeared that Ricarcen's officers
knew of the mortgage contracts entered into
by Marilyn in Ricarcen's behalf as proven by
the issued Banco De Oro checks as payments
for the monthly interest and the principal
loan. Ricarcen claimed that it never granted
Marilyn authority to transact with Calubad or
use the Quezon City property as collateral for
the loans, but its actuations say otherwise. It
appears as if Ricarcen and its officers gravely
erred in putting too much trust in Marilyn.
However, Calubad, as an innocent third party
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dealing in good faith with Marilyn, should
not be made to suffer because of Ricarcen's
negligence in conducting its own business
affairs. Calubad v. Ricarcen Development
Corp., G.R. No. 202364, August 30, 2017
When a bank, by its acts and failure to act,
has clearly clothed its manager with apparent
authority to sell an acquired asset in the
normal course of business, it is legally obliged
to confirm the transaction by issuing a board
resolution to enable the buyers to register the
property in their names. It has a duty to
perform necessary and lawful acts to enable
the other parties to enjoy all benefits of the
contract which it had authorized. Rural
Bank Of Milaor (Camarines Sur) vs.
Francisca Ocfemia, Rowena Barrogo,
Marife O. Niño, FelicisimoOcfemia,
Renato Ocfemia Jr., and Winston
Ocfemia, G.R. No. 137686, February 8,
2000
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.
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, within or beyond the
scope of his ordinary powers. 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. When the sole management of
the corporation was entrusted to two of its
officers/incorporators with the other officers
never had dealings with the corporation for
14 years and that the board and the
stockholders never had its meeting, the
corporation is now estopped from denying
the officers’ authority to obtain loan from the
lender on behalf of the corporation under the
doctrine of apparent authority. Advance
Paper Corporation vs Arma Traders
Corporation , G.R. No 176897, December
11, 2013.
 15
Under the doctrine of apparent authority, a
bank is liable to the seller who transferred
ownership of his property in favor of its buyer
after the seller relied on the letter of the bank
manager that the buyer had an approved real
estate loan with the bank and guaranteed
that subsequent releases from the loan would
be made directly to the seller but the
manager released the loan instead to the
buyer who, however, failed to pay the seller.
Games and Garment Developers vs Allied
Banking Corporation, GR No. 181426, July
13, 2015
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 does not apply, however, if the
principal did not commit any act or conduct
which a third party knew and relied upon in
good faith as a result of the exercise of
reasonable prudence. PRHTAI is an
association of professional horse trainers in
the Philippine horse racing industry
organized as a non-stock corporation and it is
committed to the uplifting of the economic
condition of the working sector of the racing
industry. It is not in its ordinary course of
business to enter into housing projects,
especially not in such scale and magnitude so
massive as to amount to P101,150,000.00.
Philippine Race Horse Trainer's
Association, Inc. V. Piedras Negras
Construction and Development
Corporation G.R. No. 192659, December
02, 2015, PERALTA, J.
Acts of an officer that are not authorized by
the board of directors/trustees do not bind
the corporation unless the corporation
ratifies the acts or holds the officer out as a
person with authority to transact on its
behalf.
Petitioner does not have the power to
mortgage its properties in order to secure
loans of other persons. Securing FISLAI's
loans by mortgaging petitioner's properties
does not appear to have even the remotest
connection to the operations of petitioner as
an educational institution. Not having the
proper board resolution to authorize
Saturnino Petalcorin to execute the mortgage
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contracts for petitioner, the contracts he
executed are unenforceable against
petitioner. University Of Mindanao vs
Bangko Sentral Pilipinas, et al, G.R. No.
194964-65, January 11, 2016
2. Ultra vires doctrine
While as a rule an ultra vires act is one
committed outside the object for which a
corporation is created as defined by the law
of its organization and therefore beyond the
powers conferred upon it by law, there are
however certain corporate acts that may be
performed outside of the scope of the powers
expressly conferred if they are necessary to
promote the interest or welfare of the
corporation such as the establishment of the
local post office which is a vital improvement
in the living condition of the employees and
laborers who came to settle in a mining camp
which is far removed from the postal
facilities. The term ultra vires should be
distinguished from an illegal act for the
former is merely voidable which may be
enforced by performance, ratification, or
estoppel, while the latter is void and cannot
be validated. (Republic of the Philippines
vs. Acoje Mining Company, Inc., G.R. No.
L-18062, February 28, 1963)
The act of issuing the checks was well within
the ambit of a valid corporate act, for it was
for securing a loan to finance the activities of
the corporation, hence, not an ultra vires act.
(Atrium Management Corporation vs.
Court of Appeals, et al., G.R. No. 109491,
February 28, 2001)
A corporation, under the Corporation Code,
has only such powers as are expressly granted
to it by law and by its articles of
incorporation, those which may be incidental
to such conferred powers, those reasonably
necessary to accomplish its purposes and
those which may be incident to its existence.
In the case at bar, a company engaged in the
practice of lending money is categorically
prohibited from “engaging in pawnbroking as
defined under PD 114.”(Pilipinas Loan
Company, Inc. vs. Hon. Securites and
Exchange Commission and Filipinas
Pawnshop, Inc., G.R. No. 104720, April 4,
2001)
A mining corporation cannot engage in the
highly speculative business of urban real
 16
estate development, and could not have
validly acquired real estate property. ((Heirs
of Antonio Pael and Andrea Alcantara
and CrisantoPael vs. Court of Appeals,
Jorge H. Chin and Renato B. Mallari, G.R.
No. 133547, February 10, 2000)
A corporation is not restricted to the exercise
of powers expressly conferred upon it by its
charter but has the power to do what is
reasonably necessary or proper to promote
the interest or welfare of the corporation. A
corporation (NAPOCOR) formed for the
purpose of generating electrical power can
undertake stevedoring services to unload coal
into its pier to be brought to and fuel its
power plant, since this is reasonably
necessary for the operation and maintenance
of its power plant. National power
Corporations vs. Vera, 170 SCRA 721 (1989)
3. Trust fund doctrine
The trust fund doctrine provides that
subscriptions to the capital stock of a
corporation constitute a fund to which the
creditors have a right to look for the
satisfaction of their claims. This doctrine is
the underlying principle in the procedure for
the distribution of corporate capital only in
three instances : 1 ) amendment of articles of
incorporation to reduce the authorized
capital stock, 2 ) purchase of redeemable
shares by the corporation regardless of the
existence of unrestricted retained earnings,
and 3 ) dissolution and eventual liquidation
of the corporation. Furthermore, the doctrine
is articulated in Section 41 of the Corporation
Code on the power of the corporation to
acquire its own shares and in Section 122 on
the prohibition against the distribution of
corporate assets and property unless the
stringent requirements are complied with.
Ong vs Tiu 401 SCRA 1 ( 2003 )
The creditor is allowed ro maintain an action
upon any unpaid subscriptions (in the same
collection suit against the corporation) and
thereby steps into the shoes of the
corporation for the satisfaction of the 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 the
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. Subscriptions
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to the capital stock of a corporation
constitute a fund to which creditors have the
right to look for satisfaction of their claims.
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. Halley vs. Printwell, Inc., G.R. No.
157549, may 30, 2011 J. Bersamin
Novation extinguished an obligation between
two parties. Clearly, the effect of the
assignment of the subscription agreements to
SSI was to extinguish the obligation of R.C.
Lee to Oceanic, now Interport, to settle the
unpaid balance on the subscription. As a
result of the assignment, Interport was no
longer obliged to accept any payment from
R.C. Lee because the latter had ceased to be
privy to Subscription Agreements. On the
other hand, Interport was legally bound to
accept SSI's tender of payment for the 75%
balance on the subscription price because SSI
had become the new debtor under
Subscription Agreements. As such, the
issuance of the stock certificates in the name
of R.C. Lee had no legal basis in the absence
of a contractual agreement between R. C. Lee
and Interport. Interport Resources
Corporation Vs. Securities Specialist,
Inc., And R.C. Lee Securities Inc. G .R. No.
154069, June 6, 2016, Bersamin, J.
F. Stockholders and members
1. Doctrine of equality of shares
2. Proprietary rights
a. Right to dividends
The dividends received by a corporation from
corporate investments in other companies
are corporate earnings. As such shareholder,
the dividends paid to it were its own money,
which may then be available for wage
increments. Madrigal & Company, Inc. vs.
Hon. Ronaldo B. Zamora, et al., G.R. NO.
L-48237, June 30, 1987
Dividends cannot be declared for preferred
shares which were guaranteed a quarterly
dividend if there are no unrestricted retained
earnings. "Interest bearing stocks", on which
the corporation agrees absolutely to pay
interest before dividends are paid to common
stockholders, is legal only when construed as
requiring payment of interest as dividends
 17
from net earnings or surplus only. Republic
Planters Bank vs. Hon. Enrique A. Agana,
Sr., as Presiding Judge, Court of First
Instance of Rizal, Branch XXVIII, Pasay
City, Robes-Francisco Realty &
Development Corporation and Adalia F.
Robes, G.R. No. 51765, March 3, 1997
b. Right to inspect
The right of the shareholder to inspect the
books and records of the petitioner should
not be made subject to the condition of a
showing of any particular dispute or of
proving any mismanagement or other
occasion rendering an examination proper,
but if the right is to be denied, the burden of
proof is upon the corporation to show that
the purpose of the shareholder is improper,
by way of defense.
Among the purposes held to justify a demand
for inspection are the following: (1) To
ascertain the financial condition of the
company or the propriety of dividends; (2)
the value of the shares of stock for sale or
investment; (3) whether there has been
mismanagement; (4) in anticipation of
shareholders' meetings to obtain a mailing
list of shareholders to solicit proxies or
influence voting; (5) to obtain information in
aid of litigation with the corporation or its
officers as to corporate transactions.
Among the improper purposes which may
justify denial of the right of inspection are: (1)
Obtaining of information as to business
secrets or to aid a competitor; (2) to secure
business "prospects" or investment or
advertising lists; (3) to find technical defects
in corporate transactions in order to bring
"strike suits" for purposes of blackmail or
extortion.
In general, however, officers and directors
have no legal authority to close the office
doors against shareholders for whom they are
only agents, and withhold from them the
right to inspect the books which furnishes the
most effective method of gaining information
which the law has provided, on mere doubt
or suspicion as to the motives of the
shareholder. While there is some conflict of
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authority, when an inspection by a
shareholder is contested, the burden is
usually held to be upon the corporation to
establish a probability that the applicant is
attempting to gain inspection for a purpose
not connected with his interests as a
shareholder, or that his purpose is otherwise
improper. The burden is not upon the
petitioner to show the propriety of his
examination or that the refusal by the officers
or directors was wrongful, except under
statutory provisions. Terelay Investment
and Development Corporation vs Cecilia
Teresita Yulo, GR. No. 160924, August 05,
2015
A stock certificate is prima facie evidence
that the holder is a shareholder of the
corporation, but the possession of the
certificate is not the sole determining factor
of one’s stock ownership. A certificate of
stock is merely: x x x the paper representative
or tangible evidence of the stock itself and of
the various interests therein. The certificate
is not stock in the corporation but is
merely evidence of the holder’s interest
and status in the corporation, his
ownership of the share represented
thereby, but is not in law the equivalent
of such ownership. It expresses the contract
between the corporation and the
stockholder, but it is not essential to the
existence of a share in stock or the creation of
the relation of shareholder to the
corporation.
Considering that Section 23 of
the Corporation Code requires every director
to be the holder of at least one share of capital
stock of the corporation of which he is a
director, the respondents would not have
then allowed any of the petitioners to be
elected to sit in the Board of Directors as
members unless they believed that the
petitioners so elected were not disqualified
for lack of stock ownership. Neither did the
respondents thereafter assail their acts as
Board Directors. Conformably with the
doctrine of estoppel, the respondents could
no longer deny the petitioners’ status as
stockholders of Abra Valley. Grace Borgona
Insigne, Et Al. V. Abra Valley Colleges,
Inc. And Francis Borgona, G.R. No.
204089, July 29, 2015,
 18

The termination of the life of a juridical entity a violation of the second and fourth
does not, by itself, cause the extinction or paragraphs of Section 74. That is simply not
diminution of the rights and liabilities of such the situation contemplated by the second
entity nor those of its owners and creditors. and fourth paragraphs of Section 74 of the
Thus, the revocation of BMTODA's Corporation Code. Aderito Z. Yujuico And
registration does not automatically strip off Bonifacio C. Sumbilla Vs. Cezar T.
Ongjoco of his right to examine pertinent Quiambao And Eric C. Pilapil G.R. No.
documents and records relating to such 180416, 02 June 2014
association. Alejandro· D.C. Roque v.
In the case at bar, the petitioners were
People of The Philippines, G.R. No. 211108,
charged with violations of Section 74, in
June 7, 2017, Tijam, J.
relation to Section 144, of the Corporation
A perusal of the second and fourth Code, a special law. Accordingly, since the
paragraphs of Section 74, as well as the first stockholder was deprived of the exercise of
paragraph of the same section, reveal that an effective right of inspection, offenses had
they are provisions that obligates a in fact been committed, regardless of the
corporation: they prescribe what books or petitioners' intent. Alfredo L. Chua - Versus
records a corporation is required to keep; - People Of The Philippines, G.R. No.
where the corporation shall keep them; and 216146, August 24, 2016
what are the other obligations of
c. Pre-emptive right
the corporation to its stockholders or
members in relation to such books and d. Right of first refusal
records. Hence, by parity of reasoning, the
second and fourth paragraphs of Section 74, 3. Intra-corporate disputes
including the first paragraph of the same
a. Concept
section, can only be violated by
a corporation. A dispute is considered an intra-corporate
controversy under the relationship test when
It is clear then that a criminal action based on
the relationship between or among the
the violation of the second or fourth
disagreeing parties is any one of the
paragraphs of Section 74 can only be
following: (a) between the corporation,
maintained against corporate officers or such
partnership, or association and the public; (b)
other persons that are acting on behalf of the
between the corporation, partnership, or
corporation. Violations of the second and
association and its stockholders, partners,
fourth paragraphs of Section 74 contemplates
members, or officers; (c) between the
a situation wherein a corporation, acting
corporation, partnership, or association and
thru one of its officers or agents, denies
the State as far as its franchise, permit or
the right of any of its stockholders to
license to operate is concerned; and (d)
inspect the records, minutes and the
among the stockholders, partners, or
stock and transfer book of such
associates themselves.
corporation.
Section 25 of the Corporation Code explicitly
However, petitioners are not actually
provides for the election of the corporation's
invoking their right to inspect the records
president, treasurer, secretary, and such
and the stock and transfer book of STRADEC
other officers as may be provided for in the
under the second and fourth paragraphs of
by-laws. In interpreting this provision, the
Section 74. What they seek to enforce is
Court has ruled that if the position is other
the proprietary right of STRADEC to be in
than the corporate president, treasurer, or
possession of such records and
secretary, it must be expressly mentioned in
book. Such right, though certainly legally
the by-laws in order to be considered as a
enforceable by other means, cannot be
corporate office.
enforced by a criminal prosecution based on

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 19
Clearly, there may be one or more vice
president positions in petitioner North Star
and, by virtue of its by-laws, all such positions
shall be corporate offices. xxx
The existence of an intra-corporate
controversy does not wholly rely on the
relationship of the parties. The incidents of
their relationship must also be considered.
Thus, under the nature of the controversy
test, the disagreement must not only be
rooted in the existence of an intra-corporate
relationship, but must as well pertain to the
enforcement of the parties' correlative rights
and obligations under the Corporation Code
and the internal and intra-corporate
regulatory rules of the corporation. If the
relationship and its incidents are merely
incidental to the controversy or if there will
still be conflict even if the relationship does
not exist, then no intra-corporate
controversy exists.
From these, it is clear that the termination
complained of is intimately and inevitably
linked to respondent Balagtas's role as
petitioner North Star's Executive Vice
President: first, the alleged
misappropriations were committed by
respondent Balagtas in her capacity as vice
president, one of the officers responsible for
approving the disbursements and signing the
checks. And, second, these alleged
misappropriations breached petitioners
Cacho's and North Star's trust and confidence
specifically reposed in respondent Balagtas as
vice president.
That all these incidents are adjuncts of her
corporate office lead the Court to conclude
that respondent Balagtas's dismissal is an
intra-corporate controversy, not a mere
labor dispute. Norma D. Cacho And North
Star International Travel, Inc.
Vs. Virginia D. Balagtas, G.R. No. 202974.
February 7, 2018
Under the Relationship Test, no doubt exists
that the parties were members of the same
association, but this conclusion must still be
supplemented by the controversy test before
it may be considered as an intra-corporate
dispute. Relationship alone does not ipso
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facto make the dispute intra-corporate; the
mere existence of an intra-corporate
relationship does not always give rise to an
intra-corporate controversy. The incidents of
that relationship must be considered to
ascertain whether the controversy itself is
intra-corporate. This is where the
Controversy Test becomes material.
Under the controversy test, the dispute must
be rooted in the existence of an intra-
corporate relationship, and must refer to the
enforcement of the parties' correlative rights
and obligations under the Corporation Code,
as well as the internal and intra-corporate
regulatory rules of the corporation, in order
to be an intra-corporate dispute. These are
essentially determined through the
allegations in the complaint which determine
the nature of the action. Gulfo v. Ancheta,
G.R. No. 175301, August 15, 2012
CASES CONSIDERED INTRA-
CORPORATE IN NATURE
Although the extrajudicial sale of the
condominium unit ( for non-payment of
condominium dues and assessment ) has
been fully effected and that the petition of the
owner questioning the sale has been
dismissed with finality, the completion of the
sale does not bar the condominium unit
owner from questioning the amount of the
unpaid dues that gave rise to the foreclosure
and to the subsequent sale of the property.
The propriety and legality of the sale of the
condominium unit is different from the
propriety and legality of the unpaid
assessment dues. The latter partakes of the
nature of an intra-corporate dispute.
Chateau De Baie Condominium
Corporation vs. Spouses Moreno, GR No.
186271, February 23, 2011
Civil cases involving the inspection of
corporate books are governed by the rules of
procedure set forth in the Interim Rules of
Procedure for Intra-Corporate Controversies
under Republic Act No. 8799 (Interim Rules).
In order to assail the decision or order issued
under the Interim order must be sought from
the appellate court to enjoin the enforcement
or implementation of the decision or order,
and unless a restraining order is so issued, the
 20
decision or order rendered under the Interim
Rules shall remain to be immediately
executory.
In the inspection of Corporate Books, the
burden of proof lies with the corporation who
refuses to grant to the stockholder the right
to inspect corporate records.
Supervening events refer to facts which
transpire after judgment has become final
and executory or to new circumstances which
developed after the judgment has acquired
finality, including matters which the parties
were not aware of prior to or during the trial
as they were not yet in existence at that time,
a supervening event affects or changes the
substance of the judgment and renders the
execution thereof inequitable, impossible or
unjust. Dee Ping Wee, Araceli Wee And
Marina U. Tan Vs. Lee Hiong Wee And
Rosalind Wee G.R. No. 169345, August 25,
2010
A complaint filed by condominium unit
owners against the developer of the
condominium for unsound business practice
and violation of the Master Deed and
Declaration of Restrictions in that the
developer committed misrepresentations in
its circulated flyers and brochures as to the
facilities and amenities that would be
available in the corporation is an intra-
corporate controversy. Go vs. Distinction
Properties Development Corporation, GR
no. 194024, April 25, 2012
Where a member of the condominium
corporation was denied the right to vote for
alleged non-payment of condominium dues
and assessment, the action although
denominated as one for damages is an intra-
corporate controversy and therefore, falling
within the jurisdiction of the regional trial
court designated as a special commercial
court. In determining whether a dispute
constitutes an intra-corporate controversy,
the Court uses two tests, namely, the
relationship test and the nature of the
controversy test. Applying these two tests,
the present case is indeed an intra-corporate
controversy.
Anent the first test, it is admitted that
petitioner is a condominium corporation. On
the other hand, respondent is a member of
the condominium corporation.
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As regards the second test, the case
principally dwells on the propriety of the
assessment made by petitioner against
respondent as well as the validity of
petitioner’s act in preventing respondent
from participating in the election of the
corporation’s Board of Directors. To be sure,
this action partakes of the nature of an intra-
corporate controversy. While the CA may be
correct that the RTC has jurisdiction, the case
should have been filed not with the regular
court but with the branch of the RTC
designated as a special commercial court. The
CA, therefore, gravely erred in remanding the
case to the RTC for further proceedings. Also,
while Republic Act (RA) No. 9904, or the
Magna Carta for Homeowners and
Homeowners’ Associations empowers the
HLURB to hear and decide inter-association
and/or intra-association controversies or
conflicts concerning homeowners’
associations, the same can not be applied in
the present case as it involves a controversy
between a condominium unit owner and a
condominium corporation. While the term
association as defined in the law covers
homeowners’ associations of other
residential real property which is broad
enough to cover a condominium corporation,
it does not seem to be the legislative intent.
Medical Plaza Makati Condominium
Corporation v. Robert H. Cullen G.R. No.
181416, November 11, 2013
An intra-corporate dispute involving a
corporation under sequestration of the
Presidential Commission on Good
Government (PCGG) falls under the
jurisdiction of the Regional Trial Court
(RTC), not the Sandiganbayan. Philippine
Overseas Telecommunications
Corporation Vs. Africa, Et Al. G.R. No.
184622, July 3, 2013; Philippine
Communications Satellite Corporation V.
Sandiganbayan,G.R. No. 203023, 17 June
2015, J Bersamin
Upon the enactment of Republic Act No.
8799, the jurisdiction of the SEC over intra-
corporate controversies and the other cases
enumerated in Section 5 of P.D. No. 902-A
was transferred to the Regional Trial Court.
The jurisdiction of the Sandiganbayan has
been held not to extend even to a case
involving a sequestered company
notwithstanding that the majority of the
members of the board of directors were
 21
PCGG nominees. Abad vs. Araneta, et al.
G.R. No. 200620, March 18, 2015
The dismissal of a corporate officer is
considered an intra-corporate dispute, not a
labor dispute; hence, the jurisdiction belongs
to regular courts. In this case, petitioner was
the president of the corporation; thus, a
corporate officer. Therefore, he erred when
he filed his complaint for illegal dismissal
before the labor arbiter. Malcaba v.
ProHealth Pharma Philippines, Inc.,G.R.
No. 209085, June 6, 2018
Based on the foregoing tests, it is clear that
this case involves an intra-corporate dispute.
It is a conflict between a stockholder and the
corporation, which satisfies the relationship
test, and it involves the enforcement of the
right of Ozamiz, as a stockholder, to inspect
the books of Philcomsat Holdings
Corporation (PHC) and the obligation of the
latter to allow its stockholder to inspect its
books. And because this is an intra-corporate
dispute, the matter was properly elevated to
the CA. San Jose v. Ozamiz, G.R. No.
190590, July 12, 2017, Justice Carpio
To determine if a case involves an intra-
corporate controversy, the courts have
applied two tests: the relationship test and
the nature of the controversy test. Under the
relationship test, an intra-corporate
controversy arises when the conflict is
"between the corporation, partnership or
association and its stockholders, partners,
members or officers." The nature of the
controversy test examines the controversy in
relation to the "enforcement of the parties'
correlative rights and obligations under the
Corporation Code and the internal and intra-
corporate regulatory rules of the
corporation." The act of Chairman Sabio in
asking the SEC to suspend the listing of PHC's
shares was done in pursuit of protecting the
interest of the Republic of the Philippines, a
legitimate stockholder in PHC's controlling
parent company, POTC. The character of the
shares held by the PCGG/Republic, on whose
behalf the PCGG Chairman is presumed to be
acting, is irrelevant to Chairman Sabio's
actions. Any shareholder, harboring any
apprehensions or concerns, could have done
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the same or posed the same objection. It was
an act that had no relation to any proceeding
or question of ill-gotten wealth or
sequestration. The PCGG was merely
protecting the rights and interest of the
Republic of the Philippines.
From the foregoing, it is clear that the dispute
in the present case is an intra-corporate
controversy. As such, it is clear that the
jurisdiction lies with the regular courts and
not with the Sandiganbayan. Philippine
Communications Satellite Corporation
And Philcomsat Holdings Corporation V.
Sandiganbayan G.R. No. 203023, 17 June
2015
CASES CONSIDERED NOT INTRA-
CORPORATE IN NATURE
The Board of Directors of a corporation can
not validly delegate the power to create a
corporate office to the President, in the light
of Section 25 of the Corporation Code
requiring the Board of Directors itself to elect
the corporate officers. Verily, the power to
elect the corporate officers is a discretionary
power that the law exclusively vested in the
Board of Directors, and can not be delegated
to subordinate officers or agents. The office
of Vice President for Finance and
Administration created by the President of
the Corporation pursuant to the pertinent
provision in the by-laws of the corporation
was an ordinary, not a corporate, office.
Matling Industrial and Commercial
Corporation vs. Coros , G.R. No. 157802, 13
October 2010
Respondent was not a corporate officer of the
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 the
corporation’s 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
can not make such position a corporate
office. 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 may create
 22
appointive positions other than the positions
of corporate officers, the persons occupying
such positions can not be viewed as corporate
officers under Section 25 of the Corporation
Code. March II Marketing vs Joson, GR
No. 171993, December 12, 2011
The Court held that the complaint for
annulment of sale was properly filed with the
regular court, because the buyer of the
property had no intra-corporate relationship
with the stockholders, hence, the buyer could
not be joined as party-defendant in the SEC
case. To include said buyer as a party-
defendant in the case pending with the SEC
would violate the then existing rule on
jurisdiction over intra-corporate disputes.
Lisam Enterprises vs. Banco De Oro G.R.
No. 143264, APRIL 23, 2012.
A complaint for damages filed by a member
of the subdivision homeowners association
for the harm he suffered when another
member maliciously closed a portion of the
plaintiff’s drainage pipe which led to the
overflowing of his septic tank is not an intra
corporate controversy following nature of the
controversy test. Gulfo v. Ancheta, G.R. No.
175301, August 15, 2012
In Reyes, the Court pronounced that “in cases
governed by the Interim Rules of Procedure
on Intra-Corporate Controversies a bill of
particulars is a prohibited pleading. It is
essential, therefore, for the complaint to
show on its face what are claimed to be the
fraudulent corporate acts if the complainant
wishes to invoke the court’s special
commercial jurisdiction.” This is because
fraud in intra-corporate controversies must
be based on “devises and schemes employed
by, or any act of, the board of directors,
business associates, officers or partners,
amounting to fraud or misrepresentation
which may be detrimental to the interest of
the public and/or of the stockholders,
partners, or members of any corporation,
partnership, or association,” as stated under
Rule 1, Section 1 (a)(1) of the Interim Rules.
The act of fraud or misrepresentation
complained of becomes a criterion in
determining whether the complaint on its
face has merits, or within the jurisdiction of
special commercial court, or merely a
nuisance suit. Guy vs. Guy, G.R. No.
189486.September 5, 2012
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A college dean is not a corporate officer if his
position is not provided for in the by-laws.
The complaint for constructive dismissal is a
labor dispute, not an intra-corporate
controversy. Barba vs. Liceo de Cagayan
University, GR. No. 193857, November 28,
2012
The mere fact that petitioner was a
stockholder and officer of the Corporation at
the time the subject controversy developed
failed to necessarily make the case intra-
corporate dispute. The Labor Arbiter had the
original jurisdiction over the complaint for
illegal dismissal because petitioner although
an officer of the corporation for being AVP
for Sales was not a “ corporate officer “ as the
term is defined by law. It is only when the
officer claiming to have been illegally
dismissed is classified as a corporate officer
that the issue is deemed intra-corporate
dispute which falls within the jurisdiction of
the trial court designated as special
commercial court. The enabling clause in a
corporation’s by-laws empowering its
board of directors to create additional
officers, even with the subsequent
passage of the board resolution to that
effect, can not make such position a
corporate office. 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 Cosare
vs. Bradcom Asia, GR. No. 201298,
February 5, 2014
If a complaint involving an intra-
corporate controversy is raffled to a
branch of the RTC that is not a special
commercial court, should the court
dismiss the complaint for lack of
jurisdiction or order its re-raffle to the
special commercial court?
Pertinent to this case is RA 8799 which took
effect on August 8, 2000. By virtue of said law,
jurisdiction over cases enumerated in Section
5 of Presidential Decree No. 902-A was
transferred from the Securities and Exchange
Commission (SEC) to the RTCs, being courts
of general jurisdiction. Item 5.2, Section 5 of
RA 8799 provides:
SEC. 5. Powers and Functions of the
Commission. - x x x x x x x
 23
5.2 The Commission's jurisdiction over all
cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby
transferred to the Courts of general
jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in
the exercise of its authority may designate the
Regional Trial Court branches that shall
exercise jurisdiction over the cases. The
Commission shall retain jurisdiction over
pending cases involving intra-corporate
disputes submitted for final resolution which
should be resolved within one (1) year from
the enactment of this Code. The Commission
shall retain jurisdiction over pending
suspension of payments/ rehabilitation cases
filed as of 30 June 2000 until finally disposed.
To clarify, the word "or" in Item 5.2, Section 5
of RA 8799 was intentionally used by the
legislature to particularize the fact that the
phrase "the Courts of general jurisdiction" is
equivalent to the phrase "the appropriate
Regional Trial Court." In other words, the
jurisdiction of the SEC over the cases
enumerated under Section 5 of PD 902-A was
transferred to the courts of general
jurisdiction, that is to say (or, otherwise
known as), the proper Regional Trial Courts.
Going back to the case at bar, the Court
nonetheless deems that the erroneous
raffling to a regular branch instead of to a
Special Commercial Court is only a matter of
procedure - that is, an incident related to the
exercise of jurisdiction - and, thus, should not
negate the jurisdiction which the RTC of
Muntinlupa City had already acquired. In
such a scenario, the proper course of action
was not for the commercial case to be
dismissed; instead, Branch 276 should have
first referred the case to the Executive Judge
for re-docketing as a commercial case;
thereafter, the Executive Judge should then
assign said case to the only designated Special
Commercial Court in the station, i.e., Branch
256. Note that the procedure would be
different where the RTC acquiring
jurisdiction over the case has multiple special
commercial court branches; in such a
scenario, the Executive Judge, after re-
docketing the same as a commercial case,
should proceed to order its re-raffling among
the said special branches. Manuel Luis
Gonzales vs GJH Land, Inc, GR No.
202664, November 20, 2015
Guidelines
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The ruling also applies to other commercial
cases, such as for rehabilitation, liquidation in
insolvency and intellectual property cases,
that may have been filed with or raffled to the
wrong court.
For the guidance of the bench and the bar, this
case provided guidelines not only for
intracorporate disputes but also for other
commercial cases as follows:
1. If a commercial case filed before the
proper RTC is wrongly raffled to its
regular branch, the proper courses of
action are as follows:
1.1 If the RTC has only one branch
designated as a Special Commercial Court,
then the case shall be referred to the
Executive Judge for re-docketing as a
commercial case, and thereafter, assigned
to the sole special branch;
1.2 If the RTC has multiple branches
designated as Special Commercial Courts,
then the case shall be referred to the
Executive Judge for re-docketing as a
commercial case, and thereafter, raffled off
among those special branches; and
1.3 If the RTC has no internal branch
designated as a Special Commercial Court,
then the case shall be referred to the
nearest RTC with a designated Special
Commercial Court branch within the
judicial region. Upon referral, the RTC to
which the case was referred to should re-
docket the case as a commercial case, and
then:
(a) If the said RTC has only one branch
designated as a Special Commercial Court,
assign the case to the sole special branch;
or
(b) if the said RTC has multiple branches
designated as Special Commercial Courts,
raffle off the case among those special
branches.
2. If an ordinary civil case filed before the
proper RTC is wrongly raffled to its
branch designated as a Special
Commercial Court, then the case shall be
referred to the Executive Judge for re-
docketing as an ordinary civil case.
Thereafter, it shall be raffled off to all
courts of the same RTC (including its
designated special branches which, by
 24
statute, are equally capable of exercising
general jurisdiction same as regular
branches), as provided for under existing
rules.
3. All transfer/raffle of cases is subject to the
payment of the appropriate docket fees in
case of any difference. On the other hand,
all docket fees already paid shall be duly
credited, and any excess, refunded.
4. Finally, to avert any future confusion, all
initiatory pleadings must state the
action’s nature both in its caption and
body. Otherwise, the initiatory pleading
may, upon motion or by order of the court
motu proprio (on its own), be dismissed
without prejudice to its re-filing after due
rectification. This last procedural rule is
prospective in application.
The designation of the said branch as a
Special Commercial Court by no means
diminished its power as a court of general
jurisdiction to hear and decide cases of all
nature, whether civil, criminal or special
proceedings. There is no question, therefore,
that the Makati RTC, Branch 149 erred in
dismissing the petition for injunction with
damages, which is clearly an ordinary civil
case. As a court of general jurisdiction, it still
has jurisdiction over the subject matter
thereof.
As the suit between petitioner and
respondents neither arises from an intra-
corporate relationship nor does it pertain to
the enforcement of their correlative rights
and obligations under the Corporation Code,
and the internal and intra-corporate
regulatory rules of the corporation, RTC
correctly found that the subject matter of the
petition is in the nature of an ordinary civil
action. Here, petitioner seeks (1) to enjoin
respondents Baculio and New PPI
Corporation from misrepresenting to the
public, as well as to private and government
offices/agencies, that they are the owners of
the disputed lots and Concorde
Condominium Building, and from pushing
for the demolition of the building which they
do not even own; (2) to prevent respondent
Asian Security and Investigation Agency from
deploying its security guards within the
perimeter of the said building; and (3) to
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restrain respondents Engr. Morales, Supt.
Perdigon and F/C Supt. Laguna from
responding to and acting upon the letters
being sent by Baculio, who is a mere impostor
and has no legal personality with regard to
matters concerning the revocation of
building and occupancy permits, and the fire
safety issues of the same building. Concorde
Condominium, Inc., By Itself And
Comprising The Unit Owners Of
Concorde Condominium
Building, Petitioner, V. Augusto H.
Baculio G.R. No. 203678, February 17, 2016,
Peralta, J.
Intra-corporate controversies, previously
under the SEC's jurisdiction, are now under
the jurisdiction of RTCs designated as
commercial courts. However, this does not
oust the SEC of its jurisdiction to determine
if administrative rules and regulations were
violated. Securities And Exchange
Commission V. Subic Bay Golf And
Country Club, Inc. And Universal
International Group Development
Corporation G.R. No. 179047
b. Individual vs. representative vs
derivative suit
The bare claim that the complaint is a
derivative suit will not suffice to confer
jurisdiction on the RTC as a special
commercial court if the stockholder can not
comply with the requisites for the existence
of a derivative suit which are : a ) the party
bringing suit should be a stockholder during
the act or transaction complained of, the
number of shares not being material; b ) the
party has tried to exhaust intra-corporate
remedies; and c ) the cause of action devolves
upon the corporation; the wrongdoing or
harm having been caused to the corporation
and not to the particular stockholder
bringing the suit. Reyes vs. Hon. RTC of
Makati Branch 142, 561 SCRA 593 ( 2008 )
The stockholder filing a derivative suit should
have exerted all reasonable efforts to exhaust
all remedies available under the articles of
incorporation, by-laws, laws or rules
governing the corporation to obtain the relief
he desires and to allege such fact with
particularity in the complaint. The allegation
that the suing stockholder talked to the other
stockholder regarding the dispute hardly
 25
constitutes “ all reasonable efforts to exhaust
all remedies available “. The complaint
should also allege the fact that there was no
appraisal right available under for the acts
complained of and that the suit was not a
nuisance or harassment suit. The fact that the
corporation involved is a family corporation
should not in any way exempt the suing
stockholder from the requirements and
formalities for filing a derivative suit. Yu vs.
Yukayguan, 588 SCRA 589 ( 2009 )
Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra Corporate
Controversies imposes the following
requirements for derivative suits:
1. He was a stockholder or member at
the time the acts or transactions
subject of the action occurred and at
the time the action was filed;
2. He exerted all reasonable efforts, and
alleges the same with particularity in
the complaint, to exhaust all remedies
available under the articles of
incorporation, by-laws,laws or rules
governing the corporation or
partnership to obtain the relief he
desires;
3. No appraisal rights are available for
the act or acts complained of; and
4. The suit is not a nuisance or
harassment suit.
The RTC dismissed the Complaint for failure
to comply with the second and fourth
requisites above.
Upon a careful examination of the
Complaint, this Court finds that the same
should not have been dismissed on the
ground that it is a nuisance or harassment
suit. Although the shareholdings of
petitioners are indeed only two out of the 409
alleged outstanding shares or 0.24%, the
Court has held that it is enough that a
member or a minority of stockholders file a
derivative suit for and in behalf of a
corporation.
With regard, however, to the second
requisite, we find that petitioners failed to
state with particularity in the Complaint that
they had exerted all reasonable efforts to
exhaust all remedies available under the
articles of incorporation, by-laws, and laws or
rules governing the corporation to obtain the
relief they desire. The Complaint contained
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no allegation whatsoever of any effort to avail
of intra-corporate remedies. Indeed, even if
petitioners thought it was futile to exhaust
intra-corporate remedies, they should have
stated the same in the Complaint and
specified the reasons for such opinion.
Failure to do so allows the RTC to dismiss the
Complaint, even motu proprio, in accordance
with the Interim Rules. The requirement of
this allegation in the Complaint is not a
useless formality which may be disregarded
at will. We ruled in Yu v. Yukayguan:
The wordings of Section 1, Rule 8 of the
Interim Rules of Procedure Governing Intra-
Corporate Controversies are simple and do
not leave room for statutory construction.
The second paragraph thereof requires that
the stockholder filing a derivative suit should
have exerted all reasonable efforts to exhaust
all remedies available under the articles of
incorporation, by-laws, laws or rules
governing the corporation or partnership to
obtain the relief he desires; and to allege such
fact with particularity in the complaint. The
obvious intent behind the rule is to make the
derivative suit the final recourse of the
stockholder, after all other remedies to
obtain the relief sought had failed. Nestor
Ching Vs. Subic Bay Golf And Country
Club, Inc. G.R. No. 174353 September 10,
2014
The fifth requisite for filing derivative suits,
while not included in the enumeration, is
implied in the first paragraph of Rule 8,
Section 1 of the Interim Rules: The action
brought by the stockholder or member must
be "in the name of [the] corporation or
association. ..." This requirement has already
been settled in jurisprudence.
Among the basic requirements for a
derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of
the corporation must allege in his complaint
before the proper forum that he is suing on a
derivative cause of action on behalf of the
corporation and all other shareholders
similarly situated who wish to join [him]."
Moreover, it is important that the
corporation be made a party to the case.
Alfredo L. Villamor, Jr., Vs. John S.
Umaleg.R. Nos. 172843 & 172881, 24
September 2014
Petitioners seek the nullification of the
election of the Board of Directors for the
 26
years 2004-2005, composed of herein
respondents, who pushed through with the
election even if petitioners had adjourned the
meeting allegedly due to lack of
quorum. Petitioners are the injured party,
whose rights to vote and to be voted upon
were directly affected by the election of the
new set of board of directors. The party-in-
interest are the petitioners as stockholders,
who wield such right to vote. The cause of
action devolves on petitioners, not the
condominium corporation, which did not
have the right to vote. Hence, the complaint
for nullification of the election is a direct
action by petitioners, who were the
members of the Board of Directors of the
corporation before the election, against
respondents, who are the newly-elected
Board of Directors. Under the circumstances,
the derivative suit filed by petitioners in
behalf of the condominium corporation in
the Second Amended Complaint is improper.
Legaspi Towers 300, vs. Muer, G.R. No.
170783, June 18, 2012
The complaint filed by a stockholder to
compel another stockholder to settle his
share of the loan because this will affect the
financial viability of the corporation can not
be considered as a derivative suit because the
loan was not a corporate obligation but a
personal debt of the stockholders. The fact
that the stockholders attempted to constitute
a mortgage over “ their “ share in a corporate
asset can not affect the corporation where the
wordings of the mortgage agreement reveals
that it was signed by the stockholders in their
personal capacity as the owners of the pro-
indiviso share in the corporate property and
not on behalf of the corporation. Ang, for
and in behalf of Sunrise Marketing
(Bacolod), Inc. v. Sps. Ang.G.R. No.
201675, June 19, 2013
A stockholder may suffer from a wrong done
to or involving a corporation, but this does
not vest in the aggrieved stockholder a
sweeping license to sue in his or her own
capacity. The determination of the
stockholder's appropriate remedy—whether
it is an individual suit, a class suit, or a
derivative suit—hinges on the object of the
wrong done. When the object of the wrong
done is the corporation itself or "the whole
body of its stock and property without any
severance or distribution among individual
holders," it is a derivative suit, not an
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individual suit or class/representative suit,
that a stockholder must resort to.
What the Marcelino, Jr. Group asks is the
complete reversal of a number of corporate
acts undertaken by People' Broadcasting's
different boards of directors. These boards
supposedly engaged in outright fraud or, at
the very least, acted in such a manner that
amounts to wanton mismanagement of
People's Broadcasting's affairs. The ultimate
effect of the remedy they seek is the
reconfiguration of People's Broadcasting's
capital structure. The remedies that the
Marcelino, Jr. Group seeks are for People's
Broadcasting itself to avail. Rogelio M.
Florete Sr., Petitioner, V. Marcelino M.
Florete, Jr., Maria Elena F. Muyco And
Raul A. Muyco, Respondents., G.R. No.
177275, January 20, 2016
Individual suits are filed when the cause of
action belongs to the individual stockholder
personally, and not to the stockholders as a
group or to the corporation. A derivative suit
"is an action filed by stockholders to enforce
a corporate action." A derivative suit,
therefore, concerns "a wrong to the
corporation itself." The real party in interest
is the corporation, not the stockholders filing
the suit. The stockholders are technically
nominal parties but are nonetheless the
active persons who pursue the action for and
on behalf of the corporation. Thus, an
individual stockholder is permitted to
institute a derivative suit on behalf of the
corporation wherein he holds stock in order
to protect or vindicate corporate rights,
whenever officials of the corporation refuse
to sue or are the ones to be sued or hold the
control of the corporation. In such actions,
the suing stockholder is regarded as the
nominal party, with the corporation as the
party in interest.
The remedies that the Marcelino, Jr. Group
seeks are for People's Broadcasting itself to
avail. Ordinarily, these reliefs may be
unavailing because objecting stockholders
such as those in the Marcelino, Jr. Group do
not hold the controlling interest in People's
Broadcasting. This is precisely the situation
that the rule permitting derivative suits
contemplates: minority shareholders having
no other recourse "whenever the directors or
officers of the corporation refuse to sue to
vindicate the rights of the corporation or are
the ones to be sued and are in control of the
 27
corporation. Rogelio M. Florete, Sr., Et
Al. Vs. Marcelino M. Florete, Jr. Et
Al, G.R. No. 223321, April 02, 2018, Second
Division (Peralta, J.)
G. Foreign Corporations
1. What constitutes doing business
2. Personality to Sue and suability
The appointment of a distributor in the
Philippine is not sufficient to constitute
doing business unless it is under the full
control of the foreign corporation. If the
distributor is an independent entity which
buys and distributes products, other than
those of the foreign corporation, for its own
name and its own account, the latter can not
be considered doing business. SteelCase vs.
Design International Selections, GR no.
171995, April 18, 2012
H. Mergers and Consolidations
1. Definition and Concept
2. Effects and Limitations
No merger took place between Bancommerce
and TRB as the requirements and procedures
for a merger were absent. A merger does not
become effective upon the mere agreement of
the constituent corporations. All the
requirements specified in the law must be
complied with in order for merger to take
effect. Section 79 of the Corporation Code
further provides that the merger shall be
effective only upon the issuance by the
Securities and Exchange Commission (SEC)
of a certificate of merger.
No de facto merger took place in the present
case simply because the TRB owners did not
get in exchange for the bank’s assets and
liabilities an equivalent value in
Bancommerce shares of stock. Bancommerce
and TRB agreed with BSP approval to exclude
from the sale the TRB’s contingent judicial
liabilities, including those owing to RPN, et
al.
The dissenting opinion of Justice Mendoza
cites certain instances indicating the
existence of a de facto merger in this case.
One of these is the fact that the P & A
Agreement involved substantially all the
assets and liabilities of TRB. But while this is
true, such fact alone would not prove the
existence of a de facto merger because a
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corporation “does not really lose its juridical
entity” on account of such sale. Actually, the
law allows a corporation to “sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
properties and assets including its goodwill”
to another corporation. This is not merger
because it recognizes the separate existence
of the two corporations that transact the sale.
If one corporation sells or otherwise transfers
all its assets to another corporation, the latter
is not liable for the debts and liabilities of the
transferor if it has acted in good faith and has
paid adequate consideration for the assets,
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. Bank Of Commerce
Vs. Radio Philippines Network, G.R. No.
195615, 21 April 2014.
There were several specific facts whose
existence must be shown (not assumed)
before the merger of two or more
corporations can be declared as established.
Among such facts are the plan of merger that
includes the terms and mode of carrying out
the merger and the statement of the changes,
if any, of the present articles of the surviving
corporation; the approval of the plan of
merger by majority vote of each of the boards
of directors of the concerned corporations at
separate meetings; the submission of the plan
of merger for the approval of the stockholders
or members of each of the corporations at
separate corporate meetings duly called for
the purpose; the affirmative vote of 2/3 of the
outstanding capital in case of stock
corporations, or 2/3 of the members in case of
non-stock corporations; the submission of
the approved articles of merger executed by
each of the constituent corporations to the
SEC; and the issuance of the certificate by the
SEC on the approval of the merger. Bank of
Commerce v. Heirs of Dela Cruz, G.R. No.
211519, August 14, 2017, Justice Bersamin
Yes. Sumifru Philippines Corporation, as the
surviving entity in its merger with Davao
Fruits Corporation (DFC), must be held
answerable for the latter's liabilities,
including its solidary liability with AMS
 28
Farming Corporation (AMSFC) arising
herein.
Section 80 of the Corporation Code of the
Philippines clearly states that one of the
effects of a merger is that the surviving
company shall inherit not only the assets, but
also the liabilities of the corporation it
merged with. Sumifru (Philippines)
Corporation (Surviving Entity In A
Merger With Davao Fruits Corporation
And Other Companies) V. Bernabe Baya,
G.R. No. 188269, April 17, 2017, Perlas-
Bernabe, J.
Even if it is true that the Monetary Board of
the Central Bank of the Philippines
recognized the merger of two banks, the
merger is still incomplete without the
certificate of merger duly issued by the SEC.
The issuance of the certificate of merger is
crucial because not only does it bear out
SEC’s approval but it also marks the moment
when the consequences of a merger take
place. By operation of law, upon the
effectivity of the merger, the absorbed
corporation ceases to exist but its rights and
properties, as well as liabilities, shall be taken
and deemed transferred to and vested in the
surviving corporation. Mindanao Savings
and Loan Association vs. Willkom, G.R.
No. 178618, 11 October 2010
It is contrary to public policy to declare the
former employees of the absorbed
corporation as forming part of its assets or
liabilities that were transferred to and
absorbed by the surviving corporation in the
Articles of Merger. Assets and liabilities, in
this instance, should be deemed to refer only
to property rights and obligations and do not
include the employment contracts of its
personnel. A corporation cannot unilaterally
transfer its employees to another employer
like chattel. Certainly, if the surviving
corporation as an employer had the right to
choose who to retain among the employees of
the absorbed corporation, the latter
employees had the concomitant right to
choose not to be absorbed by the
corporation. Even though the employees of
the absorbed corporation had no choice or
control over the merger of their employer,
they had a choice whether or not they would
allow themselves to be absorbed by the
surviving corporation. Certainly nothing
prevented the employees of the absorbed
corporation from resigning or retiring and
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seeking employment elsewhere instead of
going along with the proposed
absorption. Bank of the Philippine Islands
v. BPI Employees Union – Davao
Chapter, G.R. No. 164301, October 19, 2011
NB On motion for reconsideration, the SC
held that it is more in keeping with social
justice to consider the employees of the
absorbed corporation the employees of
the surviving corporation even in the
absence of a provision in the articles of
merger.
In the merger of two or more existing
corporations, one of the combining
corporations survives and continues the
business while the rest are dissolved and all
their rights, properties and liabilities are
acquired by the surviving corporation.
Although there is dissolution of the absorbed
corporations, there is no winding up of their
affairs or liquidation of their assets because
the surviving corporation automatically
acquires all their rights, privileges and
powers, as well as their liabilities. All
contracts of the absorbed corporations,
regardless of the date of execution, shall
pertain to the surviving corporation.
Associated Bank vs. Court of Appeals, 291
SCRA 511
The terms of merger between two
corporations, when determinative of their
joint or respective liabilities towards third
parties, cannot be assumed. The party
alleging the corporations’ joint liabilities
should establish the allegation. Otherwise,
the liabilities of each of them shall be
separate. Bank of Commerce vs. Heirs of
Rodolfo Dela Cruz, G.R. No. 211519; August
14, 2017
The merger of a corporation with another
does not operate to dismiss the employees of
the corporation absorbed by the surviving
corporation. This is in keeping with the
nature and effects of a merger as provided
under law and the constitutional policy
protecting the rights of labor. The
employment of the absorbed employees
subsists. Necessarily, these absorbed
employees are not entitled to separation pay
on account of such merger in the absence of
any other ground for its award. The
Philippine Geothermal Inc. Employees
Union, versus- Unocal Philippines, Inc.
(Now Known As Chevron Geothermal
 29
Philippines Holdings, Inc.), Gr. No.
190187, September 28, 2016
The surviving corporation can not avoid the
obligation attached to the writ of
garnishment by claiming that the fund was
not transferred to it ( as the bank records of
the garnished deposit of the absorbed
corporation have been lost ) in the light of the
provision of the Corporation Code that all
liabilities and obligations of the absorbed
corporation shall be transferred to and
become the liabilities of the surviving
corporation in the same manner as if the
latter had itself incurred such liabilities or
obligations. Bank of the Philippine
Islands vs Carlito Lee, GR No. 190144,
August 1, 2012
Applying the pertinent provisions of the
Corporation Code, BPI did not only acquire
all the rights, privileges and assets of BSA but
likewise acquired the liabilities and
obligations of the latter as if BPI itself
incurred it. Since BSA incurred delay in the
performance of its obligations and
subsequently cancelled the omnibus line
without Spouses Ong’s consent, its successor
BPI cannot be permitted to foreclose the loan
for the reason that its successor BSA violated
the terms of the contract even prior to
Spouses Ong’s justified refusal to continue
paying the amortizations. As such, BPI is
liable for BSA, its predecessor. Spouses Ong
v. BPI Family Savings Bank, Inc. G.R. No.
208638 January 24, 2018
Distinguished from sale of all of the
assets or business
There are two types of corporate acquisitions:
asset sales and stock sales. In asset sales, the
corporate entity sells all or substantially all of
its assets to another entity. In stock sales, the
individual or corporate shareholders sell a
controlling block of stock to new or existing
shareholders.
In asset sales, the rule is that the seller in
good faith is authorized to dismiss the
affected employees, but is liable for the
payment of separation pay under the law. The
buyer in good faith, on the other hand, is not
obliged to absorb the employees affected by
the sale, nor is it liable for the payment of
their claims. The most that it may do, for
reasons of public policy and social justice, is
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to give preference to the qualified separated
personnel of the selling firm.
In contrast with asset sales, in which the
assets of the selling corporation are
transferred to another entity, the transaction
in stock sales takes place at the shareholder
level. Because the corporation possesses a
personality separate and distinct from that of
its shareholders, a shift in the composition of
its shareholders will not affect its existence
and continuity.
Thus, notwithstanding the stock sale, the
corporation continues to be the employer of
its people and continues to be liable for the
payment of their just claims. Furthermore,
the corporation or its new majority
shareholders are not entitled to lawfully
dismiss corporate employees absent a just or
authorized cause.
The fact that there was a change in the
composition of its shareholders did not affect
the employer-employee relationship between
the employees and the corporation, because
an equity transfer affects neither the
existence nor the liabilities of a corporation.
Thus, the corporation continued to be the
employer of the corporation’s employees
notwithstanding the equity change in the
corporation. This outcome is in line with the
rule that a corporation has a personality
separate and distinct from that of its
individual shareholders or members, such
that a change in the composition of its
shareholders or members would not affect its
corporate liabilities.
In this case, the corporate officers and
directors who induced the employees to
resign with the assurance that they would be
rehired by the new management are
personally liable to the employees who were
not actually rehired. However, the officer
who did not participate in the termination of
employment and persons who participated in
the unlawful termination of employment but
are not directors and officers of the
corporation are not personally liable. SME
BANK INC, vs. GASPAR, G.R. No. 186641,
October 8, 2013
 30
II. SECURITIES REGULATION CODE
(R.A.No. 8799)
Registration Requirement
Exemptions
Definition ogf Securities
Section 3. Definition of Terms. - 3.1.
"Securities" are shares, participation or
interests in a corporation or in a commercial
enterprise or profit-making venture and
evidenced by a certificate, contract,
instruments, whether written or electronic in
character. It includes:
a) Shares of stocks, bonds, debentures,
notes evidences of indebtedness,
asset-backed securities;
b) Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certifies of deposit
for a future subscription;
c) Fractional undivided interests in oil,
gas or other mineral rights;
d) Derivatives like option and warrants;
e) Certificates of assignments,
certificates of participation, trust
certificates, voting trust certificates or
similar instruments
f) Proprietary or nonproprietary
membership certificates in
corporations; and
g) Other instruments as may in the
future be determined by the
Commission.
In this jurisdiction, the Supreme Court
employs the Howey test to determine
whether or not the security being offered
takes the form of an investment contract.
Under the Howey test, the following must
concur for an investment contract to exist: (1)
a contract, transaction, or scheme; (2) an
investment of money; (3) investment is made
in a common enterprise; (4) expectation of
profits; and (5) profits arising primarily from
the efforts of others. Indubitably, all of the
elements are present in the extant case.
First, Westmont Investment Corporation
(Wincorp) offered what it purported to be
"sans recourse" transactions wherein the
investment house would allegedly match
investors with pre-screened corporate
borrowers in need of financial assistance.
Second, Ng Wee invested the aggregate
amount of P213,290,410.36 in the "sans
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recourse" transactions through his trustees,
as embodied in the Confirmation Advices.
Third, prior to being matched with a
corporate borrower, all the monies infused by
the investors are pooled in an account
maintained by Wincorp. This ensures that
there are enough funds to meet large
drawdowns by single borrowers. Fourth, the
investors were induced to invest by Wincorp
with promises of high yield. In Ng Wee's case,
his Confirmation Advices reveal that his
funds were supposed to earn 13.5% at their
respective maturity dates. Fifth, the
profitability of the enterprise depended
largely on whether or not Wincorp, on best
effort basis, would be able to match the
investors with their approved corporate
borrowers.
Apparent then is that the factual milieu of the
case at bar sufficiently satisfies the Howey
test. The "sans recourse" transactions are, in
actuality, investment contracts wherein
investors pool their resources to meet the
financial needs of a borrowing company.
Virata v. Ng Wee, G.R. Nos. 220926, 221058,
221109, 221135 & 221218, July 5, 2017, Justice
Velasco
A corporation allowing aprincipal investor to
enroll in its program by paying a certain
amount, which in turn entitles him to be paid
a certain amount if the recruit was able to get
a minimum recruitment of four (4) investors,
is engaged in the sale or distribution of an
investment contract. It must be registered
with sec before its sale or offer for sale or
distribution to the public, otherwise the SEC
cannot protect the investing public from
fraudulent securities is founded on the
premise that the capital markets depend on
the investing public’s level of confidence in
the system. Power Homes Unlimited
Corporation vs. Court of Appeals , 546
SCRA 567 (2008)
For an investment contract to exist, the
following elements, referred to as the Howey
test must concur: (1) a contract, transaction,
or scheme; (2) an investment of money; (3)
investment is made in a common enterprise;
(4) expectation of profits; (5) profits arising
primarily from the efforts of others. Network
marketing, a scheme adopted by companies
for getting people to buy their products
outside the usual retail system where
products are bought from the store's shelf
and where the buyer can become a down-line
 31
seller, earning commissions from purchases
made by new buyers whom he refers to the
person who sold the product to him, is not an
investment contract. Securities and
Exchange Commission vs Prosperity
Com, Inc. G.R. No. 164197, January 25, 2012
While the issuance of checks for the purpose
of securing a loan to finance the activities of
the corporation is well within the ambit of a
valid corporate act, it is one thing for the
corporation to issue checks to satisfy isolated
obligations and another for a corporation to
execute an elaborate scheme where it would
comport itself to the public as a pseudo-
investment house and issue post-dated
checks instead of stocks or traditional
securities to evidence the investments of its
patrons. Gabioza vs. Court of Appeals 565
SCRA 38 (2008)
A corporation is absolutely proscribed in
selling and distributing unregistered
timeshare certificates unless it complies with
the registration requirements under the
Securities Regulation Code. Timeshare
Realty Corporation vs Cesar Lao 544 SCRA
254 (2008)
To equally protect individuals and
corporations from baseless and improvident
issuances, the authority of the SEC under this
rule is nonetheless with defined limits. A
cease and desist order may only be issued by
the Commission after proper investigation or
verification, and upon showing that the acts
sought to be restrained could result in injury
or fraud to the investing public. Without
doubt, these requisites were duly satisfied by
the SEC prior to its issuance of the subject
cease and desist order.
It is beyond dispute that Primasa plans were
not registered with the SEC. Primanila was
then barred from selling and offering for sale
the said plan product. A continued sale by
the company would operate as fraud to its
investors, and would cause grave or
irreparable injury or prejudice to the
investing public, grounds which could justify
the issuance of a cease and desist order under
Section 64 of the SRC. Primanila Plans,
Inc., Herein Represented By Eduardo S.
Madrid Vs. Securities And Exchange
Commission G.R. No. 193791, 02 August
2014
Rule on registration of securities
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Except in case of sale of exempt securities or
securities sold on exempt transactions,
securities shall not be sold or offered for sale
or distribution within the Philippines
without a registration statement duly with
and approved by the SEC.
EXEMPTIONS Securities
G2 R I B O
Section 9. Exempt Securities. – 9.1. The
requirement of registration under Subsection
8.1 shall not as a general rule apply to any of
the following classes of securities:
(a) Any security issued or guaranteed by
the Government of the Philippines, or
by any political subdivision or agency
thereof, or by any person controlled or
supervised by, and acting as an
instrumentality of said Government.
(b) Any security issued or guaranteed by
the government of any country with
which the Philippines maintains
diplomatic relations, or by any state,
province or political subdivision
thereof on the basis of reciprocity:
Provided, That the Commission may
require compliance with the form and
content for disclosures the
Commission may prescribe.
(c) Certificates issued by a receiver or by
a trustee in bankruptcy duly approved
by the proper adjudicatory body.
(d) Any security or its derivatives the sale
or transfer of which, by law, is under
the supervision and regulation of the
Office of the Insurance Commission,
Housing and Land Use Rule
Regulatory Board, or the Bureau of
Internal Revenue.
(e) Any security issued by a bank except
its own shares of stock.
9.2. The Commission may, by rule or
regulation after public hearing, add to the
foregoing any class of securities if it finds that
the enforcement of this Code with respect to
such securities is not necessary in the public
interest and for the protection of investors.
Exempt Transactions ( section 10 )
- John Fitzgerald Is Selling
Cake to Sam B E2 S T-Quality
1. Judicial sale
 32
2. Foreclosure of pledge or mortgage to
liquidate a bonafide debt
3. Isolated transaction in which security is
sold or offered for sale, such sale not
being made in the course of repeated and
successive transaction of a like character
by such owner.
4. Stock dividends
5. Sale of capital stock to its own
stockholders exclusively where no
commission or remuneration is paid
6. Issuance of bond secured by mortgage
when the entire mortgage with the bond
is sold to a single purchaser ina single
sale.
7. Brokers transaction
8. Issue and delivery of security in exchange
for any security pursuant to a right of
conversion; provided that the security so
surrendered has been registered or
exempt from registration
9. Exchange of securities with the existing
security holder exclusively where no
commission or remuneration is paid
10. Sale to less than 20 persons in the Phil.
During any 12 month period
11. Sale to qualified buyers
a. Bank
b. Registered investment house
c. Insurance company
d. Pension fund
e. Investment company
f. Other persons as the sec may
determine as qualified buyers
12. Other transactions as may be exempted
by the SEC if it finds that the registration
requirement is not necessary in the
public interest or for the protection of
the investors as by reason of the small
amount involved or the limited character
of the public offering.
Liabilities in case of sale of unregistered
securities or false registration statement
Under Section 62 of the SRC, no action shall
be maintained to enforce any liability created
under Section 56 of the SRC (False
registration statement) and Section 57 (sale
of unregistered security and liabilities arising
in connection with prospectus,
communication and other reports) unless
brought within two (2) years after discovery
of the untrue statement or omission or after
the violation upon which it is based but not
more than five (5) years after the security was
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bona fide offered to the public or more than
5 years after the sale, respectively. However,
it should be noted that the civil liabilities
provided in the SRC are not limited to
Sections 56 and 57. Clearly, the intent is to
encompass in Section 62 the prescriptive
periods only of the civil liability in cases of
violations of the SRC. Given the absence of
prescriptive period for the enforcement of
criminal liability in violations of SRC, ACT
No. 3326, the law applicable to offenses under
special laws, applies. Under Section 73 of the
SRC, violation of its provisions is punishable
by imprisonment of not less than seven years
nor more than 21 years. Applying ACT no.
3326, criminal prosecution for violations of
SRC prescribes in 12 years. Citibank N.A. vs.
TANCO-GABALDON, et al. G.R. No.
198444, September 4, 2013
Civil suits falling under the SRC ( like liability
for selling unregistered securities ) are under
the exclusive original jurisdiction of the RTC
and hence, need not be first filed before the
SEC, unlike criminal cases wherein the latter
body exercises primary jurisdiction. Pua vs.
Citibank, N. A. G.R. No. 180064,
September 16, 2013
The violation of Section 28 of the SRC has
the following elements: a ) engaging in the
business of buying or selling securities as
a broker or dealer; or b ) acting as salesman;
or c) acting as associated person of any broker
or dealer unless registered as such with the
SEC. Thus, a person is liable for violating
Section 28 of the SRC where acting as a
broker, dealer or salesman, is in the employ
of a corporation which sold or offered for sale
unregistered securities in the Philippines.
Securities and Exchange Commission vs
Santos, GR. No. 195542, March 19, 2014
B. Prohibitions on Fraud, Manipulation
and Insider Trading
1. Manipulation of security prices; devices and
practices
a. Creating a false or misleading
appearance of active trading through
i.wash sale
11. Matched order
111. Similar acts where
there is no change of beneficial
ownership
b. Effect alone or with other
transactions in securities that raises
their price to induce the purchase or
 33
depresses the price to induce their
sale; or creating active trading to
induce purchase or sale through
manipulative devices
c. Circular information that the price of
any security will rise or fall because of
manipulative market operations
d. Make false or misleading statement
to induce purchase or sale
e. To effect alone or others series of
transactions for the purchase and or
sale any security traded in the
exchange to peg, fix or stabilize price
of security
2. Short sale
3. Short swing transaction
The SRC punishes the persons primarily
liable for fraudulent transactions under
Section 58 and their aiders or abettors under
Section 51.5, by making their liability for
damages joint and solidary. Thus, one cannot
condone the liability of the person primarily
liable and proceed only against his aiders or
abettors because the liability of the latter is
tied up with the former. Liability attaches to
the aider or abettor precisely because of the
existence of the liability of the person
primarily liable. Margarita M. Benedicto-
Muñoz V. Maria Angeles Cacho-Olivares,
Edgardo P. Olivares, Peter C. Olivares,
Carmela Q. Olivares, Michael C. Olivares,
Alexandra B. Olivares, And Melissa C.
Olivares G.R. No. 179121, November 09,
2015, Jardeleza, J.
PROTECTION OF INVESTORS
RULES ON TENDER OFFER
A. Definition
19.1.8. "Tender offer" means a publicly
announced intention by a person acting alone
or in concert with other persons (hereinafter
referred to as "person") to acquire
outstanding equity securities of a public
company as defined in SRC Rule 3, or
outstanding equity securities of an associate
or related company of such public company
which controls the said public company.
B. Mandatory Tender Offer
19.2. Mandatory tender offers
19.2.1. Any person or group of persons acting
in concert, who intends to acquire fifteen
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percent (15%) of equity securities in a public
company in one or more transactions within
a period of twelve (12) months, shall file a
declaration to that effect with the
Commission.
19.2.2. Any person or group of persons acting
in concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares that
are sufficient to gain control of the board in a
public company in one or more transactions
within a period of twelve (12) months, shall
disclose such intention and
contemporaneously make a tender offer for
the percentage sought to all holders of such
securities within the said period.
If the tender offer is oversubscribed, the
aggregate amount of securities to be acquired
at the close of such tender offer shall be
proportionately distributed across selling
shareholders with whom the acquirer may
have been in private negotiations and other
shareholders. For purposes of SRC Rule 19.2.2,
the last sale that meets the threshold shall not
be consummated until the closing and
completion of the tender offer.
19.2.3. Any person or group of persons acting
in concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares that
are sufficient to gain control of the board in a
public company through the Exchange
trading system shall not be required to make
a tender offer even if such person or group of
persons acting in concert acquire the
remainder through a block sale if, after
acquisition through the Exchange trading
system, they fail to acquire their target of
thirty five percent (35%) or such outstanding
voting shares that is sufficient to gain control
of the board.
19.2.4. Any person or group of persons acting
in concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares that
are sufficient to gain control of the board in a
public company directly from one or more
stockholders shall be required to make a
tender offer for all the outstanding voting
shares. The sale of shares pursuant to the
private transaction or block sale shall not be
completed prior to the closing and
completion of the tender offer.
 34

19.2.5. If any acquisition that would result in 19.13. Violation

ownership of over fifty percent (50%) of the
total outstanding equity securities of a public
company, the acquirer shall be required to
make a tender offer under this Rule for all the
outstanding equity securities to all remaining
stockholders of the said company at a price
supported by a fairness opinion provided by
an independent financial advisor or
equivalent third party. The acquirer in such a
tender offer shall be required to accept all
securities tendered.
If equity securities of a public company are
purchased at threshold amounts provided for
in this Rule without complying with the
tender offer requirements under this Rule, the
Commission may, upon complaint, nullify
such purchase and order the conduct of a
tender offer, without prejudice to the
imposition of other sanctions under the Code.

C. Exemptions from Tender Offer

Requirement
1.
19.3.1. Unless the acquisition of equity
securities is intended to circumvent or defeat
the objectives of the tender offer rules, the
mandatory tender offer requirement shall not
apply to the following:

19.3.1.1. Any purchase of securities from 2.

the unissued capital stock;
Provided, the acquisition will
not result to a fifty percent
(50%) or more ownership of
securities by the purchaser or
such percentage that is
sufficient to gain control of the
board;
19.3.1.2. Any purchase of securities from
an increase in authorized
capital stock;
19.3.1.3. Purchase in connection with
foreclosure proceedings
involving a duly constituted
pledge or security arrangement
where the acquisition is made
by the debtor or creditor;
19.3.1.4. Purchases in connection with a
privatization undertaken by the
government of the Philippines;
19.3.1.5. Purchases in connection with
corporate rehabilitation under
court supervision;
19.3.1.6. Purchases in the open market
at the prevailing market price;
and
19.3.1.7. Merger or consolidation.
19.3.2. Purchasers of securities in the
foregoing transactions shall, however, comply
with the disclosure and other obligations
under SRC Rules 18.1 and 23.
D. Violation
3.
The coverage of the tender offer rule covers
not only direct acquisition but also indirect
acquisition or any type of acquisition.
Whatever may be the method by which
control of a public company is obtained
either through the direct purchase of its
stocks or through indirect means,
mandatory tender offer rule applies. Cemco
Holdings vs. National Life Insurance
Company , 529 SCRA 355 (2007) 0
2. Rules on proxy solicitation
The power of the SEC to regulate proxies
remains in place in instances when
stockholders vote on matters other than the
election of directors. The test is whether the
controversy relates to such election. All
matters affecting the manner and conduct of
the election of directors are properly
cognizable by the regular courts. Otherwise,
these matters may be brought before the SEC
for resolution based on the regulatory powers

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 35

it exercises over corporations, partnerships

and associations.

Indeed, the validation of proxies in this case

relates to the determination of the existence
of a quorum. Nonetheless, it is a quorum for
the election of the directors, and, as such,
which requires the presence – in person or by
proxy – of the owners of the majority of the
outstanding capital stock of the corporation.
The SEC therefore has no jurisdiction over
the dispute but the Regional Trial Court.
Securities And Exchange Commission vs.
The Honorable Court Of Appeals et. al.
G.R. No. 187702, October 22, 2014

3. Disclosure rule

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