BUSORG 2 1st Exam | Cases
History of Corporations
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C.
HART, in their own behalf and in that all other
stockholders of the Balatoc Mining Company, etc. v.
BENGUET CONSOLIDATED MINING COMPANY,
BALATOC MINING COMPANY, H. E. RENZ, JOHN W.
JAUSSERMANN, & A. W. BEAM
G.R. L-37331 | March 18, 1933
Discussion on sociedad anonima  The defendant Benguet Company has committed no civil
For the purposes general description only, the sociedad
anonima is something very much like the English joint stock
company, with features resembling those of both the
partnership is shown in the fact that sociedad, the generic
component of its name in Spanish, is the same word that is used in
that language to designate other forms of partnership, and in its
organization it is constructed along the same general lines as the
ordinary partnership.  committed, the Court forewent any discussion of the further
It is therefore not surprising that for purposes of loose translation,
the expression sociedad anonima is generally translated to the
word corporation.
History
PROHIBITION: ”...it shall be unlawful for
Spanish to any member of a corporation engaged in
American Rule agriculture or mining and for any
corporation organized for any purpose
Philippine Bill except irrigation to be in any wise interested
July 1, 1902 in any other corporation engaged in
agriculture or in mining.”
The evident purpose of the commission
was:  component of its name in Spanish, is the same word that is used in
 to introduce the American
corporation into the Philippine
Islands as the standard commercial
entity and  Discussion:  It is like an association, just like a partnership. We
 to hasten the day when
the sociedad anonima of the
Spanish law would be obsolete.  to a corporation. Whatever the liabilities of the corporation, it
Corporation
Law That statute is a sort of codification of
(Act No. 1459 of American corporate law.
the Philippine In Section 75, a provision is found making
Commission) the sociedad anonima subject to the
provisions of the Corporation Law "so far as
General law such provisions may be applicable", and
authorizing the giving to the sociedades
creation of anonimas previously created in the Islands
corporations in the option to continue business as
the Philippine such or to reform and organize under
Islands the provisions of the Corporation
Law.
Section 191, the Code of Commerce is
repealed in so far as it relates
to sociedades anonimas. 
(To compel commercial entities thereafter
organized to incorporate under the
Corporation Law, unless they should prefer
to adopt some form or other of the
partnership.)
In Section 7, the inhibition contained in
the original provision against members of a
corporation engaged in agriculture or
mining from being interested in other
corporations engaged in agriculture or in
Act No. 3518 of mining was so modified as merely to
the Philippine
prohibit any such member from
Legislature holding more than fifteen per centum
of the outstanding capital stock of
March 1, 1929 another such corporation.
It did not contain any appropriate clause
directly penalizing the act of a corporation, a
member of a corporation, in acquiring an
interest contrary to the prohibition.
Section 190 (A). Penalties. — The
violation of any of the provisions of this Act
and its amendments not otherwise penalized
therein, shall be punished by a fine of not
Insertion of a
more than five thousand pesos and by
new section in
imprisonment for not more than five
the Corporation
years, in the discretion of the court. If the
Law, forming
violation is committed by a corporation,
Section 190
the same shall, upon such violation being
(A)
proved, be dissolved by quo
warranto proceedings instituted by the
Attorney-General or by any provincial
fiscal by order of said Attorney-General: . . . .
RULING: The plaintiffs cannot maintain an action based upon
the violation of law supposedly committed by the Benguet Company
in this case. 
The penalties imposed in what is now Section 190 (A) of the
Corporation Law for the violation of the prohibition in question are
of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. But these
proceedings can be maintained only by the Attorney-General in
representation of the Government.
wrong against the plaintiffs, and if a public wrong has been
committed, the directors of the Balatoc Company, and the plaintiff
Harden himself, were the active inducers of the commission of that
wrong.
Since the plaintiffs have no right of action against the Benguet
Company for the infraction of law supposed to have been
question whether a sociedad anonima created under Spanish law,
such as the Benguet Company, is a corporation within the meaning
of the prohibitory provision. 
That important question should, in the Court’s opinion, be left until
it is raised in an action brought by the Government.
DISCUSSION: This case actually gives us the history of corporations.
My question is, can you still establish a Sociedad Anonimus now? 
Q: What is the peculiarity of a sociedad anonima? 
A: The sociedad anonima is something very much like the English
joint stock company, with features resembling those of both the
partnership is shown in the fact that sociedad, the generic
that language to designate other forms of partnership, and in its
organization it is constructed along the same general lines as the
ordinary partnership (from the full text). 
will learn later on that the concept of corporation is really premised
on the fact that you are given a separate juridical personality totally
cannot be extended to its owners. That is not what is present in
Sociedad anonima. 
That is why the Congress tried to introduce a corporation by
enacting Philippine Act 1459 the Old Corporation Code. That is the
first corporation law enacted on 1906. 
In foreign jurisprudence just like the US, they have already that One
Person Corporation. Ours is just new. We just responded to the cry
for ease of doing business. The reason is ease of doing business,
ease for investors to do business in the Philippines. 
Before you need to have at least 5. There is a common scenario that
dummies are resorted to in order to form a corporation in the
Philippines. When I say dummy it can be the worker, helper, who
are made as stockholders just to make a corporation. 
With the advent of One Person Corporations, they can do
businesses by themselves without having to use dummies. That is
the concept of ease of doing business. 
It is not new to us because foreign jurisdiction already has that. 
The point is corporation law must adopt to the changing types. It
must not be fixed. Who would’ve thought that you could have a
player in the hospitality industry without owning real estate? Who
would’ve thought you could have a player in the transportation
industry that does not own a fleet of vehicles? I’m talking about,
Uber, I’m talking about Airbnb. 
Before, in order to operate a hotel, you need real estate. The times
are really changing, the business models of business are really
changing that’s why the regulation must also change. Otherwise the
regulation cannot keep up with the changing times. 
That is the history of corporations.
Franchises
JRS vs. Imperial
Ruling: A franchise is a special privilege conferred by
governmental authority, and which does not belong to citizens of
the country generally as a matter of common right, x x x Its meaning
depends more or less upon the connection in which the word is
employed and "the property and corporation to which it is applied.
It may have different significations."
For practical purposes, franchises, so far as relating to
corporations, are divisible into
(1) corporate or general franchises; and
(2) special or secondary franchises.
BUSORG 2 1st Exam | Cases
The former is the franchise, to exist as a corporation, while the latter
are certain rights and privileges conferred upon existing
corporations, such as the right to use the streets of a municipality to
lay pipes or tracks, erect poles or string wires.
The primary franchise of a corporation, that is, the right to exist as
such, is vested 'in the individuals who compose the corporation and
not in the corporation itself, and cannot be conveyed in the absence
of a legislative authority so to do, but the special or secondary
franchises of a corporation
GR: are vested in the corporation and may ordinarily be conveyed
or mortgaged under a general power granted to a corporation to
dispose of its property,
XPN: such special or secondary franchises as are charged with a
public use.
The right to operate a messenger and express delivery service, by
virtue of a legislative enactment, is admittedly a secondary
franchise.
Under our corporation law, a secondary franchise is subject to
levy and sale on execution together and including all the
property necessary for the enjoyment thereof.
The law, however, indicates the procedure under which the same
(secondary franchise and the properties necessary for its
enjoyment) may be sold under execution.
Said franchise can be sold under execution, when such sale is
especially decreed and ordered in the judgment and it becomes
effective only when the sale is confirmed by the Court after due
notice (Sec. 56, Corp. Law).
The compromise agreement and the judgment based thereon, do
not contain any special decree or order making the franchise
answerable for the judgment debt.
The same thing may be stated with respect to the Corporation's
trade name or business name and its capital stock.
Incidentally, the trade name or business name corresponds to the
initials of the President of the Corporation. There can be no serious
dispute regarding the fact that
A trade name or business name and capital stock are necessarily
included in the enjoyment of the franchise. Like that of a franchise,
the law mandates, that property necessary for the enjoyment of said
franchise, can only be sold to satisfy a judgment debt if the decision
especially so provides.
A trade name or business name cannot be sold separately from the
franchise, and the capital stock of the Corporation or any other
corporation, for the matter, represents the interest and is the
property of stockholders in the corporation, who can only be
deprived thereof in the manner provided by law.
It, therefore, results that the inclusion of the franchise, the trade
name and/or business name and the capital stock of the petitioner
corporation, in the sale of the properties of the JRS Business
Corporation, has no justification. The sale of the properties of
petitioner corporation is set aside, in so far as it authorizes the levy
and sale of its franchise, trade name and capital stocks.
Discussion:  of the amount of shares of stock or of the interest of each
Ruling: The primary franchise of a corporation that is, the right to
exist as such, is vested in the individuals who compose the
corporation and not in the corporation itself. The right to operate a
messenger and express delivery service, by virtue of a legislative
enactment, is admittedly a secondary franchise.  party whose rights have been impaired thereby, and that
Corporation as an artificial being
VASQUEZ v. BORJA (1944)  officers.
Ruling: It is well known that a corporation is an artificial being
invested by law with a personality of its own, separate and distinct
from that of its stockholders and from that of its officers who
manage and run its affairs.  BACHE & CO. vs RUIZ
The mere fact that its personality is owing to a legal fiction and that
it necessarily has to act thru its agents, does not make the latter
personally liable on a contract duly entered into, or for an act
lawfully performed, by them for an in its behalf. 
The legal fiction by which the personality of a corporation is created
is a practical reality and necessity. Without it no corporate entities
may exist and no corporate business may be transacted. Such legal
fiction may be disregarded only when an attempt is made to use it
as a cloak to hide an unlawful or fraudulent purpose.  all, an association of individuals under an assumed name and with a
No such thing has been alleged or proven in this case. It has not
been alleged nor even intimated that Vazquez personally benefited
by the contract of sale in question and that he is merely invoking the
legal fiction to avoid personal liability. Neither is it contended that
he entered into said contract for the corporation in bad faith and
with intent to defraud the plaintiff. Thus, there is no basis upon
which to hold him liable on the contract either principally or
subsidiarily.
Discussion:
Ruling: Corporation is separate and distinct from its stockholders. 
INTERNATIONAL EXPRESS TRAVEL and TOUR
SERVICES v. CA 
R.A. 3135 and P.D. No. 604 recognize the juridical existence of
national sports associations. However, while national sports
associations may be accorded corporate status, such does
not automatically take place by the mere passage of these
laws. Before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a
general enabling act.
Before an entity may be considered as a national sports association,
such entity must be recognized by the accrediting organization. The
Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D. 604.
This fact of recognition, however, Henri Kahn failed to substantiate.
The copy of the constitution and by-laws of the Philippine, Football
Federation does not prove that said Federation has indeed been
recognized and accredited.
The Philippine Football Federation is not a national sports
association within the purview of the aforementioned laws and does
not have corporate existence of its own. It follows that Henry Kahn
should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation.
Discussion: 
How may a corporation acquire legal personality? 
Before a corporation may acquire juridical personality, the State
must give its consent either in the form of a special law or a general
enabling act.  
Q. Was the Federation ever incorporated? 
A. The court here held that the Federation was unincorporated. 
Application of due process to Corporations
SMITH, BELL & COMPANY v. NATIVIDAD
(40 Phil 136)
A corporation can invoke the due process clause of the constitution
– part of its rights as a corporation – being an artificial being.
STONEHILL v. DIOKNO
GR L-19550, JUNE 19, 1967
Does a Corporation has the right against unreasonable Searches and
Seizure? NO
Lawfulness of a seizure can be raised only by one whose rights have
been invaded.
Corporations have their respective personalities, separate
and distinct from the personality of its officers, regardless
of them in the corporations, and whatever offices they
hold therein may be.
Thus, the legality of a seizure can be contested only by the
the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties.
Who can raise the rights against unreasonable searches? Corporate
Can corporate property be taken without due process of law?
May Corporate Property be taken without Due Process of Law?
Its property cannot without compensation
It can only be proceeded against by due process of law.
As a general rule, a corporation, which is charged with a violation of
a statute of the state which allowed its creation, cannot refuse to
produce the books and papers when required by the State. However,
it should not mean that corporation is not entitled to immunity
against unreasonable searches and seizures. A corporation is, after
distinct legal entity. In organizing itself as a collective body it waives
no constitutional immunities appropriate to such body. Its property
cannot be taken without compensation. It can only be proceeded
BUSORG 2 1st Exam | Cases
against by due process of law, and is protected against unlawful
discrimination"
In Stonehil v. Diokno, this Court impliedly recognized the right of a
corporation to object to unreasonable searches and seizures.  as a result of Meralco's acts. Besides, the trial court simply
In the case at bar, the corporation to whom the seized documents
belong, and whose rights have thereby been impaired, is itself a
petitioner. Therefore, it has standing to object to the legality of the
search and seizure.
Right against Self- Incrimination
BATAAN SHIPYARD vs PCGG
EN BANC G.R. No. 75885 May 27, 1987
Does the right against self-incrimination apply to
Corporations?
It is elementary that the right against self-incrimination has no
application to juridical persons.
The right against self-incrimination has no application to
juridical persons.
While it is true an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it
does not follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse
of such privileges
Jurisprudence provides that corporations are not entitled to all of
the constitutional protections which private individuals have. 
The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain special
privileges and franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its powers are limited by law.
Discussion:
Atty. Ong: So what makes this different from the previous rights? Bakit
hindi binigyan ng right ang corporation against self-incrimination? Na
in fact inallow siya the right to invoke the due process clause, right
against illegal searches and seizures, what makes this different?
A: Since the orders here were about producing documents wherein,
since a corporation holds a franchise granted by the state, it could not
refuse to give out those certain documents.
Atty. Ong: Sabi dito, in this case, the act of giving a franchise, the
existence of a corporation, that is for the public. So hindi pwedeng you
would deny the same person who gave you the right to exist. So yun
yung sinasabi ng case ng Bataan Shipyard. You cannot invoke the right
against self-incrimination if you are a corporation.
MAMBULAO LUMBER v. PNB
22 SCRA 359 (1968)
General Rule: Artificial person cannot experience physical
sufferings, mental anguish, fright, serious anxiety, xxx.
Exception: A corporation may have a good reputation, which, if
besmirched, may also be a ground for the award of moral damages.
An artificial person like herein appellant corporation cannot
experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which
are the basis of moral damages.  A corporation may have a good
reputation which, if besmirched, may also be a ground for the award
of moral damages. The same cannot be considered under the facts
of this case, however, not only because it is admitted that herein
appellant had already ceased in its business operation at the time of
the foreclosure sale of the chattels, but also for the reason that
whatever adverse effect the foreclosure sale of the chattels could
have upon its reputation or business standing would undoubtedly
be the same whether the sale was conducted at Jose Panganiban.
Camarines Norte, or in Manila which is the place agreed upon by
the parties in the mortgage contract.
DISCUSSION: So, in this case the Court said that no a corporation
cannot be entitled to moral damages except if the basis is a besmirched
reputation. Because corporation’s have reputation so if na besmirch
yun, pwede yun.
Is the award of moral damages to a corporation automatic?
MERALCO v. TEAM ELECTRONICS CORP
540 SCRA 62 (2007)
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. It is essential
to prove the existence of the factual basis of the damage and
its causal relation to petitioner's acts.
In the present case, the records are bereft of any evidence
that the name or reputation of TEC/TPC has been debased
awarded moral damages in the dispositive portion of its decision
without stating the basis thereof.
ABS CBN Broadcasting vs. Court of Appeals
301 SCRA 589 (1999)
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence
only in legal contemplation, it has no feelings, no emotions, no
senses, It cannot, therefore, experience physical suffering and
mental anguish, which call be experienced only by one having a
nervous system. The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB  67 that a
corporation may recover moral damages if it "has a good reputation
that is debased, resulting in social humiliation" is an obiter dictum.
On this score alone the award for damages must be set aside, since
RBS is a corporation.
DISCUSSION: I want you to take note of this case because the Court
here said that:
“The statement in People v. Manero and Mambulao Lumber Co.
v. PNB that a corporation may recover moral damages if it
"has a good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone the
award for damages must be set aside, since RBS is a
corporation.”
So in ABS CBN the court has been very very expressive and very very
definite that a corporation can never be entitled to moral damages even
if there is a besmirched or debase reputation kasi wala nga daw siyang
central nervous system. ABS CBN was decided before Meralco.
Employees’ Union of Bayer Phils vs. Bayer Phil.
636 SCRA 437 (2010)
ISSUE: Can EUBP, a labor organization, claim for moral
damages?
RULING: NO. 
General rule: a corporation cannot suffer nor be entitled to moral
damages. 
A corporation, and by analogy a labor organization, being
an artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and
mental anguish. 
Mental suffering can be experienced only by one having a nervous
system and it flows from real ills, sorrows, and griefs of life - all of
which cannot be suffered by an artificial, juridical person. A fortiori,
the prayer for exemplary damages must also be denied.
San Fernando Regala Trading Inc. vs. Cargill Phil.
707 SCRA 187 (2013)
ISSUE: Whether TEC San Fernando Regala Trading Inc. is
entitled to moral damages?
RULING: NO.
As a rule, moral damages are not awarded to a corporation unless it
enjoyed good reputation that the offender debased and besmirched
by his actuations. San Fernando failed to prove by sufficient
evidence that it fell within this exception.
Besides, moral damages are, as a rule, also not recoverable in culpa
contractual except when bad faith had been proved. San Fernando
failed to show that Cargill was motivated by bad faith or ill will
when it failed to deliver the molasses as agreed.
DISCUSSION: So in this 2013 case, the Court said that moral
damages are not awarded to a corporation unless it enjoyed good
reputation that the offender debased and besmirched by his
actuations. 
So in this case, it reverted again to the ruling in Mambulao.
Doctrine of Separate Juridical Personality
Stockholders of F.Guenon and Sons, Inc. vs. ROD of
Manila [6 SCRA 373]
Is a stockholders a co-owner and a tenant of corporate
property?
Issue: Whether the Certificate of Liquidation was a conveyance
from the corporation to its stockholders? 
BUSORG 2 1st Exam | Cases
Held: Yes. A corporation is a juridical person distinct from the
members composing it.  corporation, and vice-versa, for they are separate entities. As a
Properties registered in the name of the corporation are owned by it
as an entity separate and distinct from its members.  stockholder, nor is the stockholder’s debt or credit that of the
While shares of stock constitute personal property they don’t
represent property of the corporation.  In the case at bar, the supposed payments were not made to Roces-
The corporation has property of its own which consists chiefly of
real estate.  it. No such proof was submitted but merely inferred by the RTC
A share of stock only typifies an aliquot part of the corporation’s
property, or the right to share in its proceeds to that extent when
distributed according to law and equity but its holder is not the
owner of any part of the capital of the corporation. Nor is he entitled
to the possession of any definite portion of its property or assets. 
The stockholder is not a co-owner or tenant in common of
the corporate property.  Relations Commission
Therefore, it is clear that the act of liquidation made by the
stockholders of the F. Guanzon and Son, Inc. of the latter’s assets is
not and cannot be considered a partition of community property,
but rather a transfer or conveyance of the title of its assets to the
individual stockholders.  Ownership of majority of capital stock and fact that majority of
Indeed, since the purpose of the liquidation, as well as the
distribution of the assets of the corporation, is to transfer their title
from the corporation to the stockholders in proportion to their
shareholdings, that
transfer cannot be effected without the corresponding deed of
conveyance from the corporation to the stockholders.  over the case on the labor arbiter.
It is, therefore, fair and logical to consider the certificate of
liquidation as  one in the nature of a transfer or conveyance.  POLYTECHNIC UNIVERSITY VS CA
Discussion: This reiterates the principle that the assets of the
corporation are not the assets of the stockholders. The stockholder has
proprietary interest, the net assets of the entity and not the gross
assets.  there is not just one party involved in the questioned transaction.
Traders Royal Bank vs. CA [177 SCRA 789]
Are corporate debts, debts of the individual
stockholders?
Issue: Whether the SEC also acquired jurisdiction over Alfred
Ching with regards its decisions on the rehabilitation proceedings of
PBM?
Held: No.
Although Ching was impleaded in the SEC case as a co-petitioner of
PBM, the SEC couldn’t assume jurisdiction over his person and
properties. The Securities and Exchange Commission was
empowered, as rehabilitation receiver, to take custody and control
of the assets and properties of PBM only, for the SEC has
jurisdiction over corporations only not over private individuals,
except stockholders in an intra- corporate dispute (Sec. 5, PD 902-A
and Sec 2, PD 1758).
Being a nominal party in the SEC Case No. 2250, Ching’s properties
were not included in the rehabilitation that the SEC constituted to
take custody of PBM’s assets.
Therefore, the petitioner bank was not barred from filing a suit
against Ching, as a surety of PBM.
It is elementary that a corporation has a personality distinct and
separate from its individual stockholders or members. Being an
officer of stockholder of a corporation doesn’t make one’s property
the property also of the corporation, for they are separate entities.
Ching’s act of joining as a co-petitioner with PBM in the SEC case
didn’t vest in the SEC jurisdiction over his person or property, for
jurisdiction doesn’t depend on the consent or acts of the parties but
upon express provision of the law.
Good Earth Emporium Inc. vs Court of Appeals
194 SCRA 544 [GR No. 82797 February 27, 1991]
Being an officer or stockholder of a corporation does not
by itself make one’s property also of the corporation, and
vice versa.
Ruling: Under article 1240 of the civil code of the Philippines –
Payment shall be made to the person in whose favor the obligation
has been constituted, on his successor in interest or any person
authorized to receive it.
A corporation has a personality distinct and separate from its
individual stockholders or members. Being an officer or stockholder
of a corporation does not make one’s property also of the
consequence of the separate juridical personality of a corporation,
the corporate debt or credit is not the debt or credit of the
corporation.
Reyes Realty Inc. or to its successors in interest nor is there positive
evidence that payment was made to a person authorized to receive
from Marcos Roces having signed the lease contract as President
which was witnessed by Jesus Marcos Roces. The later, however,
was no longer President or even an officer of the Roces-Realty Inc at
the time he received the money and signed the sale with pacto de
retro.
Development Bank of the Philippines vs. National Labor
ISSUE: WON THE OWNERSHIP OF THE MAJORITY OF THE
SUBSCRIBED AND PAID UP CAPITAL STOCK WOULD CREATE
AN EMPLOYER-EMPLOYEE RELATIONSHIP.
RULING: NO. 
directors of a corporation are the directors of another corporation
creates no employer-employee relationship with latter’s employees.
—
These circumstances are NOT sufficient indicia of the existence of
an employer-employee relationship as would confer jurisdiction
ISSUE: Whether the conveyance from NDC to PUP can be
considered a sale. 
RULING: Yes Contrary to what petitioners PUP and NDC propose,
Petitioners NDC and PUP have their respective charters and
therefore each possesses a separate and distinct individual
personality. 
The inherent weakness of NDCs proposition that there was no sale
as it was only the government which was involved in the transaction
thus reveals itself. Tersely put, it is not necessary to write an
extended dissertation on government owned and controlled
corporations and their legal personalities. 
A GOCC has a personality of its own, distinct and separate from that
of the government. The intervention in the transaction of the Office
of the President through the Executive Secretary did not change the
independent existence of these entities. The involvement of the
Office of the President was limited to brokering the consequent
relationship between NDC and PUP.
But the withdrawal of the appeal by the Executive Secretary is
considered significant as he knew, after a review of the records, that
the transaction was subject to existing liens and encumbrances,
particularly the priority to purchase the leased premises in favor of
FIRESTONE.
The defendants-appellants' interpretation that there was a mere
transfer, and not a sale, apart from being specious sophistry and a
mere play of words, is too strained and hairsplitting. For it is
axiomatic that every sale imposes upon the vendor the obligation to
transfer ownership as an essential element of the contract. Transfer
of title or an agreement to transfer title for a price paid, or promised
to be paid, is the very essence of sale.
Therefore, the inescapable fact remains that all the requisites of a
valid sale were attendant in the transaction between NDC and PUP
concerning the realities subject of the present suit.
DISCUSSION: A GOCC has a personality of its own distinct and
separate from that of the government. 
SAVERIO V. PUYAT
G.R. No. 186433| November 27, 2013
A corporation is vested by law with a personality separate and
distinct from the persons composing it. Following this principle, a
stockholder, generally, is not answerable for the acts or liabilities of
the corporation, and vice versa.
The obligations incurred by the corporate officers, or other persons
acting as corporate agents, are the direct accountabilities of the
corporation they represent, and not theirs.
Mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stocks of the corporation is not, by
itself, a sufficient ground for disregarding the separate corporate
personality. 
BUSORG 2 1st Exam | Cases
In order for the ground of corporate ownership to stand,
the following circumstances should also be established:
That the stockholders had control or complete domination of the
corporation‘s finances and that the latter had no separate existence
with respect to the act complained of;
That they used such control to commit a wrong or fraud; and  with respect to the act complained of;
The control was the proximate cause of the loss or injury
SC held that there was no clear and convincing explanation that
would justify piercing the veil of corporate fiction.
The mere fact that it was MOA who, in behalf of the corporation,
signed the MOA is not sufficient to prove that he exercised control
over the corporation‘s finances.  The mere fact that it was MOA who, in behalf of the corporation,
Neither the absence of a board resolution authorizing him to
contract the loan nor NSI‘s failure to object thereto supports this
conclusion. These may be indicators that, among others, may point
the proof required to justify the piercing the veil of corporate fiction,
but by themselves, they do not rise to the level of proof required to
support the desired conclusion
That the business did not materialize is not also sufficient proof to
justify a piercing, in the absence of proof that the business plan was
a fraudulent scheme geared to secure funds from the respondent for
the petitioners‘ undisclosed goals.  of the loan and the money was delivered to him, the proceeds of the
Situs Dev Corp vs Asiatrust Bank
G.R. No. 180036. July 25, 2012
ISSUE: Whether such properties belong to the corporate assets.
RULING: NO.  the petitioners‘ undisclosed goals.
The properties do not belong to the corporate assets and as such,
the rehabilitation plan is not in order.  Sir: So again, majority ba siya dito? 40% lang diba? Mas lalo na, you
cannot justify piercing.
It is a fundamental principle in corporate law that a corporation is a
juridical entity with a legal personality separate and distinct from
the people comprising it. Hence, the rule is that assets of
stockholders may not be considered as assets of the corporation,
and vice-versa. The mere fact that one is a majority
stockholder of a corporation does not make one‘s property
that of the corporation, since the stockholder and the
corporation are separate entities.  and vice-versa. The mere fact that one is a majority stockholder of a
In this case, the parcels of land mortgaged to respondent banks are
owned not by petitioners, but by spouses Chua. Applying the
doctrine of separate juridical personality, these properties cannot be
considered as part of the corporate assets.
Even if spouses Chua are the majority stockholders in petitioner
corporations, they own these properties in their individual
capacities.
POLYTECHNIC UNIVERSITY VS CA
 
A government owned and controlled corporation has a personality
of its own, distinct and separate from that of the government. The
intervention in the transaction of the Office of the President through
the Executive Secretary did not change the independent existence of
these entities. The involvement of the Office of the President was
limited to brokering the consequent relationship between NDC and
PUP. But the withdrawal of the appeal by the Executive Secretary is
considered significant as he knew, after a review of the records, that
the transaction was subject to existing liens and encumbrances,
particularly the priority to purchase the leased premises in favor of
FIRESTONE.
The defendants-appellants' interpretation that there was a mere
transfer, and not a sale, apart from being specious sophistry and a
mere play of words, is too strained and hairsplitting. For it is
axiomatic that every sale imposes upon the vendor the obligation to
transfer ownership as an essential element of the contract. Transfer
of title or an agreement to transfer title for a price paid, or promised
to be paid, is the very essence of sale. Therefore, the inescapable fact
remains that all the requisites of a valid sale were attendant in the
transaction between NDC and PUP concerning the realities subject
of the present suit.
SAVERIO V. PUYAT
A corporation is vested by law with a personality separate and
distinct from the persons composing it. Following this principle, a
stockholder, generally, is not answerable for the acts or liabilities of
the corporation, and vice versa.
The obligations incurred by the corporate officers, or other persons
acting as corporate agents, are the direct accountabilities of the
corporation they represent, and not theirs.
Mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stocks of the corporation is not, by
itself, a sufficient ground for disregarding the separate corporate
personality.  Hence, SNN, not ABS-CBN, should have been made respondent in
In order for the ground of corporate ownership to stand,
the following circumstances should also be established:
That the stockholders had control or complete domination of the
corporation‘s finances and that the latter had no separate existence
That they used such control to commit a wrong or fraud; and 
The control was the proximate cause of the loss or injury
SC held that there was no clear and convincing explanation that
would justify piercing the veil of corporate fiction.
signed the MOA is not sufficient to prove that he exercised control
over the corporation‘s finances. 
Neither the absence of a board resolution authorizing him to
contract the loan nor NSI‘s failure to object thereto supports this
conclusion. These may be indicators that, among others, may point
the proof required to justify the piercing the veil of corporate fiction,
but by themselves, they do not rise to the level of proof required to
support the desired conclusion
It should be noted in this regard that while Nuccio was the signatory
loan were unquestionably intended for NSI‘s proposed business
plan. 
That the business did not materialize is not also sufficient proof to
justify a piercing, in the absence of proof that the business plan was
a fraudulent scheme geared to secure funds from the respondent for
 
  
Situs Dev Corp vs Asiatrust Bank
It is a fundamental principle in corporate law that a corporation is a
juridical entity with a legal personality separate and distinct from
the people comprising it. Hence, the rule is that assets of
stockholders may not be considered as assets of the corporation,
corporation does not make one‘s property that of the corporation,
since the stockholder and the corporation are separate entities. 
In this case, the parcels of land mortgaged to respondent banks are
owned not by petitioners, but by spouses Chua. Applying the
doctrine of separate juridical personality, these properties cannot be
considered as part of the corporate assets. Even if spouses Chua are
the majority stockholders in petitioner corporations, they own these
properties in their individual capacities. Thus, the parcels of land in
question cannot be included in the inventory of assets of petitioner
corporations.
Fortun v. Quinsayas
G.R. No. 194578, Feb. 13, 2013
ISSUE: 
1. Whether PDI and Inquirer.net are 2 different
corporations? NO
2. Whether SNN is a subsidiary of ABS-CBN although it has
interlocking directors. YES
RULING: 
Philippine Daily Inquirer, Inc.
PDI averred that it only shares its contents with Inquirer.net
through a syndication. PDI attached a photocopy of the syndication
page stating that "[d]ue to syndication agreements between PDI and
Inquirer.net, some articles published in PDI may not appear in
Inquirer.net."
A visit to the website describes Inquirer.net as "the official news
website of the Philippine Daily Inquirer, the Philippines’ most
widely circulated broadsheet, and a member of the Inquirer Group
of Companies."
PDI was not able to fully establish that it has a separate
personality from Inquirer.net.
ABS-CBN Corporation
ABS-CBN alleged that SNN is its subsidiary and although they have
interlocking directors, SNN has its own juridical personality
separate from its parent company. ABS-CBN alleged that SNN
controls the line-up of shows of ANC.
SC: We agree with ABS-CBN on this issue. 
A subsidiary has an independent and separate juridical
personality distinct from that of its parent company and
that any suit against the latter does not bind the former and vice-
versa.
A corporation is an artificial being invested by law with a
personality separate and distinct from that of other corporations to
which it may be connected. 
BUSORG 2 1st Exam | Cases
this case.
Heirs of Fe Ten Uy v. International Exchange Bank
G.R. No. 166282
ISSUE: Whether the Doctrine of Piercing the Corporate Veil can be
applied.
RULING: NO.
Basic is the rule in corporation law that a corporation is a juridical
entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the
corporation, acting through its directors, officers and employees, are its
sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.
 
xxx xxx
Before a director or officer of a corporation can be held personally
liable for corporate obligations, however, 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  its stockholders be held liable for its obligations.
(2) the complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.
 
Considering that the only basis for holding Uy liable for the payment of
the loan was proven to be a falsified document, there was no sufficient
justification for the RTC to have ruled that Uy should be held jointly
and severally liable to iBank for the unpaid loan of Hammer. Neither
did the CA explain its affirmation of the RTC’s ruling against Uy. The
Court cannot give credence to the simplistic declaration of the RTC that
liability would attach directly to Uy for the sole reason that she was an
officer and stockholder of Hammer.
 
At most, Uy could have been charged with negligence in the
performance of her duties as treasurer of Hammer by allowing the
company to contract a loan despite its precarious financial position.
Furthermore, if it was true, as petitioners claim, that she no longer
performed the functions of a treasurer, then she should have formally
resigned as treasurer to isolate herself from any liability that could
result from her being an officer of the corporation. Nonetheless, these
shortcomings of Uy are not sufficient to justify the piercing of the
corporate veil which requires that the negligence of the officer must be
so gross that it could amount to bad faith and must be established by
clear and convincing evidence. Gross negligence is one that is
characterized by the lack of the slightest care, acting or failing to act in
a situation where there is a duty to act, willfully and intentionally with
a conscious indifference to the consequences insofar as other persons
may be affected.
Comment:
The quantum of proof in piercing is clear and convincing evidence, so
hindi siya basta basta i-pierce. Again, it is an exception.
De Lima v. Gois
G.R. No. 178352
ISSUE: Whether the vehicle registered in the name of Gois may be
used to pay for the liabilities of Golden Corporation.
 
RULING: NO.
A corporation has a personality distinct and separate from its
individual stockholders or members and from that of its officers who
manage and run it’s affairs.  Development Bank of the Philippines (DBP), will not make PNB
 
The rule is that obligations incurred by the Corporation, acting through
its directors, officers and employees, are its sole liabilities. Thus,
property belonging to a corporation cannot be attached to satisfy the
debt of a stockholder and vice versa, the latter having only an indirect
interest in the assets and business of the former.  (1) control not mere stock control, but complete domination² not
 
In the case at bar, the LA directed only Golden Corporation to pay
Delima and the same was not joint and solidary obligation with Gois.
Hence, Gois cannot be personally liable since Golden has a separate
and distinct personality of its own.
 
Further, it was found that the vehicle was owned by Gois. Hence, the
vehicle cannot be attached to answer for the liabilities of Golden
Corporation.  (3) the said control and breach of duty must have proximately
 
Unless they have exceeded their authority, corporate officers are, as a
general rule, not personally liable for their official acts, because a
corporation, by legal fiction, has personality separate and distinct from
its officers. 
No evidence was shown that the termination of Delima was done with
bad faith for it to hold the corporate officers, like Gois, solidarily liable
with the corporation.
Padilla and Phoenix-Omega v. CA and Susana Realty
G.R. No. 123893
ISSUE: Whether the issuance of the writ not only against PKA but also
to Phoenix-Omega and Padilla was proper.
 
RULING: NO.
As a rule, the participation by the general manager of a corporation—
which manager was also the chairman of the board of another
corporation—in an action involving the first corporation, cannot equate
to participation by the second corporation in the same proceedings.
 
Here, the fact that at the same time Padilla was the chairman of PKA
and at the same time chairman of the board of Phoenix-Omega cannot
equate to participation by Phoenix-Omega in the same proceedings.
Phoenix-Omega was not a party to the case and so could not have taken
part therein. 
The court applied the general rule of the separate juridical personality
of a corporation. 
 
The general rule is that a corporation is clothed with a personality
separate and distinct from the persons composing it. It may not be held
liable for the obligations of the persons composing it, and neither can
 
As an exception, a veil of corporate fiction may only be disregarded in
cases where the corporate vehicle is being used to defeat public
convenience, justify wrong, protect fraud, or defend crime. 
 
PKA and Phoenix-Omega are admittedly sister companies, and may be
sharing personnel and resources, but in this case there is no allegation,
much less positive proof, that their separate corporate personalities are
being used to defeat public convenience, justify wrong, protect fraud,
or defend crime. 
 
For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. Thus, there is reason to justify
piercing the corporate veil in this case.
Ruling on Issue 2: The veil of corporate fiction may only be
disregarded in cases where the corporate vehicle is being used to defeat
public convenience, justify wrong, protect fraud, or defend crime
Comment: So again, quantum of proof is clear and convincing
evidence. 
PNB, NASUDECO vs. Andrada Electric and Engineering
Company
Gr No. 142936.April 17,2002
Issue:
Whether the Doctrine of Piercing Corporate Fiction applies in this
case?
 
Ruling: NO. Basic is the rule that a corporation has a legal
personality distinct and separate from the persons and entities
owning it. The corporate veil may be lifted only if it has
been used to shield fraud, defend crime, justify a wrong,
defeat public convenience, insulate bad faith or
perpetuate injustice. 
 
Thus, the mere fact that the Philippine National Bank (PNB)
acquired ownership or management of some assets of the
Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by the
liable for the PASUMIL's contractual debts to Andrada
Electric & Engineering Company (AEEC). 
 
Piercing the veil of corporate fiction may be allowed only
if the following elements concur: 
only of finances, but of policy and business practice in respect to the
transaction attacked, must have been such 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 a
fraud or a wrong to perpetuate the violation of a statutory or other
positive legal duty, or a dishonest and an unjust act in contravention
of plaintiff's legal right; and 
caused the injury or unjust loss complained of. 
 
The absence of the foregoing elements in the present case precludes
the piercing of the corporate veil. 
 
BUSORG 2 1st Exam | Cases
First, other than the fact that PNB and NASUDECO acquired the
assets of PASUMIL, there is no showing that their control over it
warrants the disregard of corporate personalities.  fraud or wrong, to perpetuate the violation of a statutory or other
Comment: So in this case, it was not pierced, but this case gave us the
requisites for alter ego as an exception to the separate legal
personality.  3. The aforesaid control and breach of duty must proximately cause
Note that ALL THE ELEMENTS MUST CONCUR.
Tantongco v. Kaisahan ng Mangagawa
Issue: Whether the Doctrine of Piercing the veil of corporate
existence applies given that the two corporations are operating
under one single management.
Held: Even when a corporation’s legal personality had been pierced
a corporation still possessed social personality and any other case.  mere sheet or paper corporation, a sham or a subterfuge is purely
 
If it has been pierced once such is not perpetual. So if it was pierced
in that particular transaction that does not mean the corporation
has no longer personality. If it is done to perpetrate a fraud for a
particular transaction or for a particular contract so it can be
pierced but that doesn't mean that in all other contracts with that
corporation the separate personality of corporation can be pierced.
It differs per transaction. It does not destroy the separate juridical
personality of the corporation for a certain wrong doing of the
corporation. 
 
Boyer- Roxas v. CA
Issue: Whether petitioner’s contention were correct as regards the
piercing of the corporate veil.
Petitioner’s contention to pierce the veil of corporate fiction is
untenable. As aptly held by the court: “..The separate personality of
a corporation may ONLY be disregarded when the corporation is
used as a cloak or cover for fraud or illegality, or to work injustice,
or when necessary to achieve equity or when necessary for the
protection of creditors.”
 
Concept Builders Inc. v. NLRC
 
Issue: Whether or not the doctrine of piercing of corporate veil is
applicable in this case. Yes
 
Held:  a group, disregarding the separate juridical personality of the
It is a fundamental principle of corporation law that a corporation is
an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. But, this separate and
distinct personality of a corporation is merely a fiction created by
law for convenience and to promote justice. So, when the notion of
separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to
defeat the labor laws, this separate personality of the corporation
may be disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.  caution, albeit the Court will not hesitate to disregard the corporate
 
The conditions under which the juridical entity may be disregarded
vary according to the peculiar facts and circumstances of each case.
No hard and fast rule can be accurately laid down, but certainly,
there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
 
"1. Stock ownership by one or common ownership of both
corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business."  3) alter ego cases, where a corporation is merely a farce since it is a
 
The SEC en banc explained the "INSTRUMENTALITY RULE"
which the courts have applied in disregarding the separate juridical
personality of corporations as follows:
"Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the corporate entity of the
‘instrumentality’ may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but
such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must be
kept in mind that the control must be shown to have been exercised
at the time the acts complained of took place. Moreover, the control
and breach of duty must proximately cause the injury or unjust loss
for which the complaint is made."
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
 
"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
positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal rights; and
the injury or unjust loss complained of:chanrob1es virtual 1aw
library
The absence of any one of these elements prevents ‘piercing the
corporate veil’. In applying the ‘instrumentality’ or ‘alter ego’
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant’s
relationship to that operation." 
Thus, the question of whether a corporation is a mere alter ego, a
one of fact. 
  
Petitioner ceased its business operations in order to evade the
payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a
business conduit of petitioner corporation and its emergence was
skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.
 
General Credit Corp vs. Alsons Dev and Investment Corp
 Issue: Whether or not the doctrine of piercing of corporate veil is
applicable in this case. Yes 
 
Held:
A corporation is an artificial being vested by law with a personality
distinct and separate from those of the persons composing it as well
as from that of any other entity to which it may be related. The first
consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be made
to answer for acts and liabilities of its stockholders or those of legal
entities to which it may be connected or vice versa. 
 
The notion of separate personality, however, may be disregarded
under the doctrine - "piercing the veil of corporate fiction" - as in
fact the court will often look at the corporation as a mere collection
of individuals or an aggregation of persons undertaking business as
corporation unifying the group. Another formulation of this
doctrine is that when two (2) business enterprises are owned,
conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard
the legal fiction that two corporations are distinct entities and treat
them as identical or one and the same.
 
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts, appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
veil when it is misused or when necessary in the interest of justice.
After all, the concept of corporate entity was not meant to promote
unfair objectives.
 
(3) basic areas where piercing the veil, with which the law
covers and isolates the corporation from any other legal
entity to which it may be related, is allowed.
1) defeat of public convenience, as when the corporate fiction is
used as vehicle for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.
Again complete the domination not merely stockholdings, not merely
the fact of interlocking directors, there must be complete domination.
And when complete domination is enough there must be fraud there
must be a wrong doing and the complete domination must be the
conduit for that wrong doing to materialize. Again piercing cases are
exceptions. 
May corporate Representatives who did not personally bind
themselves to an arbitration agreement be forced to
participate in arbitration proceedings?
Ans: Yes. They may be compelled to participate in the arbitration
proceedings.
Lanuza vs. BF Corporation
Issue: W/N petitioners (Board of Directors) should be made parties to
the arbitration proceedings, pursuant to the arbitration clause provided
in the contract between BF Corporation and Shangri-La, thereby
piercing the veil of corporate fiction? 
 
BUSORG 2 1st Exam | Cases
Held: Yes.  In the present case, overwhelming evidence supports the CTA in
The petitioners may be compelled to submit to the arbitration disregarding the separate identity of CKCS, Inc. from CKCS
proceedings. and in treating them as one taxable entity.
   
The Supreme Court held that the directors and officers should be 1. First, in DOMINADOR’S Petition for Review before the
included in the arbitration proceedings in order to determine whether CTA, he expressly admitted that he "is engaged in restaurant
or not the distinction between the directors and officers from Shangri- and/or cafeteria business" and that "[i]n 1991, 1992 and 1993, he
la must be disregarded. In other words, the issue is to determine the also operated a branch at Club John Hay, Baguio City with a
application of the Doctrine of Piercing the Corporate Veil. business name of Copper Kettle Cafeteria Specialist."32
  MENGUITO repeated such admission in the Joint
Piercing the veil of corporate fiction - when the distinction Stipulation.33 And then in Exhibit "1"34 for petitioner, a July 18,
between personalities of directors, officers, and representatives, and of 1994 letter sent by Jeanne Menguito to BIR, Baguio City, she
the corporation, are disregarded.  stated.
   
Piercing the corporate veil is warranted when "[the separate 1. Second, in Exhibit "8"43 and Exhibit "E,"44 Texas
personality of a corporation] is used as a means to perpetrate fraud or Instruments identified the concessionaire operating its canteen as
an illegal act, or as a vehicle for the evasion of an existing obligation, "Copper Kettle Catering Services, Inc."45 and/or "COPPER
the circumvention of statutes, or to confuse legitimate... issues."  KETTLE CAFETERIA SPECIALIST SVCS." 46 It being settled that
  respondent's "Copper Kettle Cafeteria Specialist" is also known as
It is also warranted in alter ego cases "where a corporation is merely a "Copper Kettle Catering Services," and that respondent and
farce since it is a mere alter ego or business conduit of a person, or Jeanne Menguito both own, manage and act as
where the corporation is so organized and controlled and its affairs are proprietors of the business, Exhibit "8" and Exhibit "E"
so conducted as to make it... merely an instrumentality, agency, further establish that, through said business, respondent also had
conduit or adjunct of another corporation."  taxable transactions with Texas Instruments.
   
When corporate veil is pierced, the corporation and persons who are 1. In view of the foregoing facts and circumstances, the Articles
normally treated as distinct from the corporation are treated as one of Incorporation of CKCS, Inc. -- a certified true copy of which
person, such that when the corporation is adjudged liable, these respondent attached only to his Reply filed with the CA 47 -- cannot
persons, too, become liable as if they were the corporation.  insulate it from scrutiny of its real identity in relation to CKCS. 
   
In addition the Supreme Court held that when there are allegations of It is noted that said Articles of Incorporation of CKCS, Inc. was
malice or bad faith against corporate directors, it becomes the duty of issued in 1989, but documentary evidence indicate that
the Court to determine if this person and the corporation should be after said date, CKCS, Inc. has also assumed the name
treated as one.  CKCS, and vice-versa. 
   
Hence, when the directors, as in this case, are impleaded in a case The most concrete indication of this practice is the 1991 Quarterly
against a corporation, alleging malice or bad faith on their part in Percentage Tax Returns covering the business name/trade "19th Tee
directing the affairs of the corporation, complainants are effectively Camp John Hay." In said returns, the taxpayer is identified as "Copper
alleging that the directors and the corporation are not acting as Kettle Cafeteria Specialist"48 or CKCS, not CKCS, Inc. Yet, in several
separate entities. Here, petitioners may be compelled to submit to the documents already cited, the purported owner of 19th Tee Bar at Club
arbitration proceedings.  John Hay is CKCS, Inc.
 
The directors and officers should be included in the arbitration 2019 TSN
proceedings in order to determine whether or not the distinction Discussion:
between the directors and officers from Shangri-la must be Q: What are the attendant facts that the Supreme Court appreciated in
disregarded. In other words, the issue is to determine the application of deciding to pierce the corporate veil?
the Doctrine of Piercing the Corporate Veil.
A: The following are the facts:
Q: Did the court appreciate any attending facts that warrant the  In the stipulation of facts, the spouses alleged that Menguito
piercing of the corporate veil? was engaged in the restaurant and/or cafeteria business;
 That Jeanne Menguito owned both Copper Kettle Catering
A: In this case, the ruling of the arbitral tribunal was to dismiss the Services Inc. and Copper Kettle Cafeteria Specialist SVCS
complaint/claims of BF Corporation against the Directors and Officers
of Shangri-La. That decision of the arbitral tribunal binds the parties. In the quarterly tax return it was alleged that the name of the business
is Copper Kettle Cafeteria Services and not Copper Kettle Incorporated.
Sir: So this is an arbitral case, because this refers to arbitration.  However, in many other documentary evidence the owner of Copper
Kettle Cafeteria Services and Copper Kettle Incorporated are one and
Now let’s discuss piercing in relation to fraud cases. the same;

CIR vs Menguito
Comment: What is the effect if the corporate veil is lifted?
ANs: The effect is that both entities will be treated as one entity.
COMMISSIONER OF INTERNAL REVENUE vs.
DOMINADOR MENGUITO
G.R. No. 167560 | September 17, 2008
DOCTRINE OF PIERCING THE VEIL OF THE
CORPORATION
 
ISSUE: WHETHER CKCS AND CKCS, INC SHOULD BE
TREATED AS ONE TAXABLE PERSON?
 
RULING: YES
 
In a number of cases, the Court has shredded the veil of corporate
identity and ruled that where a corporation is merely an adjunct,
business conduit or alter ego of another corporation or when they
practice fraud on our internal revenue laws,[29] the fiction of
their separate and distinct corporate identities shall be
disregarded, and both entities treated as one taxable person,
subject to assessment for the same taxable transaction.
 
The Court considers the presence of the following circumstances, to
wit: 
 when the owner of one directs and controls the operations of
the other, and the payments effected or received by one are for the
accounts due from or payable to the other;30 or  person to represent the bank. What the banks would do to be safe,
 when the properties or products of one are all sold to the
other, which in turn immediately sells them to the public,[31] as
substantial evidence in support of the finding that the two are
actually one juridical taxable personality.
MENDOZA AND YOTOKO vs. BANCO REAL
DEVELOPMENT BANK
G.R. No. 140923 | September 16, 2005
ISSUE:  WON THE DOCTRINE OF PIERCING ON THE
COPRORATE VEIL IS APPLICABLE IN THIS CASE. NO. IT IS NOT
APPLICABLE.
RULING: The general rule is that obligations incurred by a
corporation, acting through its directors, officers or employees, are its
sole liabilities. However, the veil with which the law covers and isolates
the corporation from its directors, officers or employees will be lifted
when the corporation is used by any of them as a cloak or cover for
fraud or illegality or injustice.
Here, the fraud was committed by the officers to the prejudice of the
bank. As reported by the sheriff, TVI is no longer doing business at its
given address and Mendoza, when asked of its whereabouts have
denied any knowledge thereof.
The Supreme Court ruled that with the presence of fraud, the doctrine
of piercing on the corporate veil is not applicable in this case. The
officers shall be held personally liable to the bank. 
Comment: Veil is lifted if it is used by any of them as a cloak or cover
for fraud or illegality or injustice.
Normally hindi naman talaga liable ang officer who signed the loan
agreement. The officers have to sign because they are the physical
because they know that there is a separate juridical personality ang
bank, they would require a surety agreement with the officers to serve
as leverage. In this particular case, the veil was pierced because there
were badges of fraud.
BUSORG 2 1st Exam | Cases
Livesey v. Binswanger Philippines
719 SCRA 433
ISSUE:  W/N the Doctrine of Piercing the Veil of Corporate
Fiction applies in this case.
HELD: Yes. The doctrine applies in this case.
Piercing the veil of corporate fiction is an equitable doctrine
developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful
purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or to justify a
wrong, to shield or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable aims or intentions, in
which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical.  officers, or other persons acting as corporate agents, are the direct
In the present case, we see an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB ceased to exist only in
name; it re-emerged in the person of Binswanger for an urgent
purpose — to avoid payment by CBB of the last two installments of
its monetary obligation to Livesey, as well as its other financial
liabilities. Freed of CBB’s liabilities, especially that owing to Livesey,
Binswanger can continue, as it did continue, CBB’s real estate
brokerage business.
This is also true with respect to the question of whether the totality
of the evidence adduced by the respondent warrants the application
of the piercing the veil of corporate fiction doctrine. [The Court
reviewed the facts because there was a misapprehension of the facts
by the RTC and CA.]
 
The application of the principle of piercing the veil of corporate
fiction is unwarranted in the present case.
On the Application of the Principle of Piercing the Veil of
Corporate Fiction
The rule is settled that a corporation has a personality separate and
distinct from the persons acting for and in its behalf and, in general,
from the people comprising it. 
Following this principle, the obligations incurred by the corporate
accountabilities of the corporation they represent, and not theirs.
Thus, a director, officer or employee of a corporation is generally
not held personally liable for obligations incurred by the
corporation; it is only in exceptional circumstances that solidary
liability will attach to them.
Three instances when the doctrine applies
Incidentally, the doctrine of piercing the corporate veil applies only
in three (3) basic instances, namely: 

Livesey’s evidence, whose existence the respondents never denied, 1. when the separate and distinct corporate personality
converged to show this continuity of business operations from CBB defeats public convenience, as when the corporate fiction is
to Binswanger. It was not just coincidence that Binswanger is used as a vehicle for the evasion of an existing obligation; 
engaged in the same line of business CBB embarked on:  2. in fraud cases, or when the corporate entity is used to
1. it even holds office in the very same building and on the justify a wrong, protect a fraud, or defend a crime; or 
very same floor where CBB once stood;  3. is used in alter ego cases, i.e.: 
2. CBB’s key officers, Elliot, no less, and Catral moved over 1. where a corporation is essentially a farce, since
to Binswanger, performing the tasks they were doing at it is a mere alter ego or business conduit of a person,
CBB;  or 
3. notwithstanding CBB’s closure, Binswanger’s Web Editor 2. where the corporation is so organized and
(Young), in an e-mail correspondence, supplied the controlled and its affairs so conducted as to make it
information that Binswanger is "now known" as either merely an instrumentality, agency, conduit, or
CBB (Chesterton Blumenauer Binswanger or as adjunct of another corporation.
Chesterton Petty, Ltd., in the Philippines;   
4. the use of Binswanger of CBB’s paraphernalia (receiving Three elements before the doctrine can apply
stamp) in connection with a labor case where Binswanger Piercing the corporate veil based on the alter ego theory
was summoned by the authorities, although Elliot requires the concurrence of three elements, namely:
claimed that he bought the item with his own money; and 
5. Binswanger’s takeover of CBB’s project with the PNB. 1. Control, not mere majority or complete stock control,
Comment: So here, the court allowed the piercing. For what purpose? but complete domination, not only of finances, but of
To pay the obligation. Because they were trying to avoid the creditors in policy and business practice in respect to the transaction
this case anoh? attacked so that the corporate entity as to this transaction
had at the time no separate mind, will, or existence of
Was there an interlocking directorship? Was there majority ownership? its own;
Was there similar or same stockholders in the new corporation? Yes 2. Such control must have been used by the defendant to
there was.  commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
Francisco v. Mejia unjust act in contravention of plaintiff’s legal right; and
326 SCRA 738 3. The said control and breach of duty must have
ISSUE: W/N Merryland, Cardale and Francisco should be held proximately caused the injury or unjust loss complained
solidarily liable. W/N the veil of corporate fiction of Merryland in of.
this case should be pierced.
The absence of any of these elements prevents piercing the
HELD: NO. The act of not paying or failing to pay taxes due the corporate veil.
government by the defendant Adalia B. Francisco, as treasurer of  
Cardale Financing and Realty Corporation do not, per se, constitute RULE: The control necessary to invoke the instrumentality or
perpetration of fraud or an illegal act. It do [sic] not also constitute alter ego rule is not majority or even complete stock control but
an act of evasion of an existing obligation (to plaintiff) if there is no such domination of finances, policies, and practices that
clear showing that such an act of non-payment of taxes was the controlled corporation has, so to speak, no separate
deliberately made despite its (Cardales) solvency and capability to mind, will or existence of its own, and is but a conduit for
pay. There is no evidence showing that Cardale Financing and its principal. 
Realty Corporation was financially capable of paying said taxes at
the time. The control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of
There are times when the corporate fiction will be duty must proximately cause the injury or unjust loss for which the
disregarded:  complaint is made.
1. where all the members or stockholders commit illegal
act;  The piercing of the veil of corporate fiction is frowned
2. where the corporation is used as dummy to commit fraud upon and thus, must be done with caution. It can only be
or wrong;  done if it has been clearly established that the separate and distinct
3. where the corporation is an agency for a parent personality of the corporation is used to justify a wrong, protect
corporation; and  fraud, or perpetrate a deception. The court must be certain that the
4. where the stock of a corporation is owned by one person. corporate fiction was misused to such an extent that injustice, fraud,
(I, Fletcher, 58, 59, 61 and 63).  or crime was committed against another, in disregard of its rights; it
cannot be presumed.
ALTER EGO CASES
Corporation as a tool to avoid estate taxes. 

WPM INTERNATIONAL TRADING, INC. & MANLAPAZ Gala v. Ellice Agro-Industrial

v. LABAYEN 418 SCRA 431
G.R. 182770 | September 17, 2014 RULING:
ISSUE: Whether WPM is a mere instrumentality, alter-ego, and 1. A perusal of the Articles of Incorporation of Ellice and
business conduit of Manlapaz. – NO. Margo shows no sign of the allegedly illegal purposes that
petitioners are complaining of.
RULING: The question of whether a corporation is a mere
instrumentality or alter-ego of another is purely one of fact.  If a corporation‘s purpose, as stated in the Articles of Incorporation,
is lawful, then the SEC has no authority to inquire whether the
BUSORG 2 1st Exam | Cases
corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation.
With regard to their claim that Ellice and Margo were meant to be
used as mere tools for the avoidance of estate taxes, suffice it say
that the legal right of a taxpayer to reduce the amount of what
otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted.
Thus, even if Ellice and Margo were organized for the purpose of
exempting the properties of the Gala spouses from the coverage of
land reform legislation and avoiding estate taxes, the court cannot
disregard their separate juridical personalities.
2. Petitioners pray that the veil of corporate fiction that
shroud both Ellice and Margo be pierced, consistent with
their earlier allegation that both corporations were
formed for purposes contrary to law and public policy.
In sum, they submit that the respondent corporations are mere
business conduits of the deceased Manuel Gala and thus may be
disregarded to prevent injustice, the distortion or hiding of the truth
or the “letting in” of a just defense.
However, to warrant resort to the extraordinary remedy of piercing
the veil of corporate fiction, there must be proof that the
corporation is being used as a cloak or cover for fraud or illegality,
or to work injustice.
The petitioners have failed to prove that Ellice and Margo were
being used thus. They have not presented any evidence to show how
the separate juridical entities of Ellice and Margo were used by the
respondents to commit fraudulent, illegal or unjust acts. Hence, this
contention, too, must fail.
It is always sad to see families torn apart by money matters and
property disputes.
The concept of a close corporation organized for the purpose of
running a family business or managing family property has formed
the backbone of Philippine commerce and industry. Through this
device, Filipino families have been able to turn their humble, hard-
earned life savings into going concerns capable of providing them
and their families with a modicum of material comfort and financial
security as a reward for years of hard work.
A family corporation should serve as a rallying point for family unity
and prosperity, not as a flashpoint for familial strife. It is hoped that
people reacquaint themselves with the concepts of mutual aid and
security that are the original driving forces behind the formation of
family corporations and use these tenets in order to facilitate more
civil, if not more amicable, settlements of family corporate disputes.
Discussion: I want to highlight the words of the Supreme Court,
“However, to warrant resort to the extraordinary remedy of piercing
the veil of corporate fiction, there must be proof that the corporation is
being used as a cloak or cover for fraud or illegality, or to work
injustice,”.
So, here, you would know that  the remedy (the piercing remedy), that
is an extraordinary remedy based on the strong separate juridical
personality of corporations. Again, if you have the clear and convincing
evidence, that is the time that you can pierce. Otherwise, you have no
authority to pierce the corporate fiction.  case since the petitioner was not sued because it is the parent
PNB vs Ritratto Group
362 SCRA 216
Ruling: As a general rule, a corporation has a personality distinct
and separate from its individual stockholders or members. The
mere fact that a corporation owns all of the stocks of
another corporation, taken alone is not sufficient to justify
their being treated as one entity. If used to perform legitimate
functions, a subsidiary's separate existence may be respected, and
the liability of the parent corporation as well as the subsidiary will
be confined to those arising in their respective business.  being used as an alter ego of the parent company.
The ruling in Koppel finds no application in the case at bar. In said
case, the Court disregarded the separate existence of the parent and
the subsidiary on the ground that the latter was formed merely for
the purpose of evading the payment of higher taxes. In the case at
bar, respondents failed to show any reason why the separate
entities of the PNB and PNB-IFL should be disregarded. 
While there exists no definite test of general application in
determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have been
identified that will justify the application of the treatment of the
doctrine of the piercing of the corporate veil. 
In the U.S. case of Garrett vs. Southern Railway Co, outlined the
circumstances which may be useful in the determination of whether
the subsidiary is but a mere instrumentality of the parent-
corporation:  foregoing elements disauthorizes the piercing of the
The Circumstance rendering the subsidiary an
instrumentality.  The doctrine of piercing the corporate veil has no
a. The parent corporation owns all or most of the capital
stock of the subsidiary. 
b. The parent and subsidiary corporations have common
directors or officers. 
c. The parent corporation finances the subsidiary. 
d. The parent corporation subscribes to all the capital stock
of the subsidiary or otherwise causes its incorporation. 
e. The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other
expenses or losses of the subsidiary. 
f. The subsidiary has substantially no business except with
the parent corporation or no assets except those conveyed
to or by the parent corporation. 
g. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its
business or financial responsibility is referred to as the
parent corporation's own. 
h. The parent corporation uses the property of the
subsidiary as its own. 
i. The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take
their orders from the parent corporation. 
j. The formal legal requirements of the subsidiary are not
observed. 
In this jurisdiction, the doctrine of piercing the corporate veil is an
equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for
wrongful purposes. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a
person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation.
The case of Concept Builders, Inc. v. NLRC laid the test in
determining the applicability of the doctrine of piercing the veil of
corporate fiction, to wit: 
1. Control, not mere majority or complete 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 plaintiffs legal rights; and, 
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. 
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to the operation.
In any case, the parent-subsidiary relationship between PNB and
PNB-IFL is not the significant legal relationship involved in this
company of PNB-IFL. Rather, the petitioner was sued because it
acted as an attorney-in-fact of PNB-IFL in initiating the
foreclosure proceedings. A suit against an agent cannot without
compelling reasons be considered a suit against the principal. 
Discussion: These are just badges (referring to “the circumstances
rendering the subsidiary an instrumentality”) of the instrumentality –
using the subsidiary as an alter ego of the parent company. It doesn’t
mean that if there is one present, it doesn’t mean that the subsidiary is
 
Commissioner of Customs v. Oilink
G.R. No. 161759, July 2, 2014
The separate and distinct personality of the corporation is a mere
fiction established by law for convenience and to promote the ends
of justice.
In Philippine National Bank v. Ritratto Group, Inc., the Court has
outlined the following circumstances that are useful in the
determination of whether a subsidiary is a mere
instrumentality of the parent-corporation, (already
mentioned in other cases)
In applying the "instrumentality" or “alter ego" doctrine, the courts
are concerned with reality, not form, and with how the corporation
operated and the individual defendant's relationship to the
operation. Consequently, the absence of any one of the
corporate veil.
BUSORG 2 1st Exam | Cases
application here because the Commissioner of Customs did not
establish that Oilink had been set up to avoid the payment of taxes
or duties, or for purposes that would defeat public convenience,
justify wrong, protect fraud, defend crime, confuse legitimate legal
or judicial issues, perpetrate deception, or otherwise circumvent the
law.
Discussion:
Q. What was the contention of COC to say that we should
pierce the corporate fiction?  protection of personal assets.
A. Oilink here is 100% owned by URC. So, they contended that it was a
mere alter ego.  In this case, Outsider reverse piercing is applicable. Litton, as
Claim for Workmen Compensation
A.D. Santos vs. Vasquez
Issue: Whether or not the claim for compensation should be
directed against Amador Santos, not against A. D Santos Inc.
Ruling: No. The claim for compensation should not be directed
against Amador Santos, but against A. D Santos Inc.
piercing. 
Outsider reverse piercing – occurs when a party with a claim against
an individual or corporation attempts to be repaid with assets of a
corporation owned or substantially controlled by the defendant. 
Insider reverse piercing – the controlling members will attempt to
ignore the corporate fiction in order to take advantage of a benefit
available to the corporation, such as an interest in a lawsuit or
judgment creditor, seeks the Court's intervention to pierce the
corporate veil of I/AME in order to make its Makati real property
answer for a judgment against Santos, who formerly owned and still
substantially controls I/AME.
The Court discussed that the equitable remedy of reverse corporate
piercing or reverse piercing is not meant to encourage a creditor’s
failure to undertake such remedies that could have otherwise been
available, to the detriment of other creditors.

The Supreme Court took into consideration the fact that petitioner,
in answer to the claim, categorically admitted that claimant was its
taxi driver. Add to this is the fact that the claimant contracted
pulmonary tuberculosis by reason of his said employment. And
respondent's cause of action against petitioner is complete.
But petitioner, cites the fact that respondent driver, in the course of
his testimony, mentioned that he worked for the City Cab operated
by Amador Santos. This will not detract from the validity of
respondent's right to compensation. For, the truth is that really at
one time Amador Santos was the sole owner and operator of the
City Cab. It was subsequently transferred to petitioner A.D. Santos,
Inc. in which Amador Santos was an officer. The mention by
respondent of Amador Santos as his employer in the course of his
testimony, in the words of this Court in Sugay vs. Reyes, L-20451,
December 28, 1964, "should not be allowed to confuse the facts
relating to employer-employee relationship" for "when the veil of
corporate fiction is made as a shield to perpetrate a fraud and/or
confuse legitimate issues (here, the relation of employer-employee),
the same should be pierced."
Discussion:
Does piercing apply to natural persons?
International Academy and Economics vs. Litton and
Company, Inc. (2017)
a) When the Corporation is the Alter Ego of a Natural
Person
Reverse corporate piercing is an equitable remedy which if utilized
cavalierly, may lead to disastrous consequences. 
The Court discussed that it may have been possible for the Court to
recommend, pursuant to the Rules of Civil Procedure, that Litton
run after the other properties of Santos that could satisfy the money
judgment 
However, if this were allowed, it would frustrate the decades-old yet
valid MeTC judgment which levied on the real property now titled
under the name of the school. Moreover, this Court will unwittingly
condone the action of Santos in hiding all these years behind the
corporate form to evade paying his obligation under the judgment
in the court a quo. This we cannot countenance without being a
party to the injustice.
Thus, the reverse piercing of the corporate veil of I/AME to enforce
the levy on execution of the Makati real property where the school
now stands is applied.
 
Ruling: The privilege of being considered a distinct separate entity
is confined to legitimate uses, and is subject to equitable limitations
to prevent its being exercised for fraudulent, unfair or illegal
purposes. 

The doctrine of alter ego is based upon the misuse of a corporation
by an individual for wrongful or inequitable purposes, and in such
case the court merely disregards the corporate entity and holds the
individual responsible for acts knowingly and intentionally done in
the name of the corporation.
Digest from 2019 TSN
Maricalum Mining Corporation vs Florentino
(G.R. No. 221813, G.R. No. 222723 July 23, 2018)
The piercing of the Corporate veil fiction is not proper. 

This Court has held that the "corporate mask may be lifted and the
corporate veil may be pierced when a corporation is just but the
alter ego of a person or of another corporation.
I/AME is the alter ego of Santos and Santos - the natural person - is
the alter ego of I/AME. Santos falsely represented himself as
President of I/AME in the Deed of Absolute Sale when he bought
the Makati real property, at a time when I/AME had not yet existed.
There were also several uncontroverted facts showing IAME and
Santos as being one and the same person:
The Supreme Court said, the doctrine of piercing the corporate veil
applies only in three (3) basic areas, namely:
1. (a) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an
existing obligation; 
2. (b) fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a crime;
or 

1. (c) alter ego cases, where a corporation is

 Santos is the conceptualizer and implementor of IAME.
 Santos is the majority contributor of IAME (1.2M out of
the 1.5M)
 The building occupied by IAME is named after Santos
 Santos made admissions in his pleadings that the
corporate entity is his alter ego
(b) Reverse Piercing of the Corporate Veil
The Court discussed that we borrow from American parlance what
is called reverse piercing or reverse corporate piercing or piercing
the corporate veil "in reverse.
The court cited a US Case:
In a traditional veil-piercing action, a court disregards the existence
of the corporate entity so a claimant can reach the assets of a
corporate insider. In a reverse piercing action, however, the plaintiff
seeks to reach the assets of a corporation to satisfy claims against a
corporate insider."
"Reverse-piercing flows in the opposite direction (of traditional
corporate veil-piercing and makes the corporation liable for the
debt of the shareholders.
It has two (2) types: outsider reverse piercing and insider reverse
merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation. 
This principle is basically applied only to determine established
liability. However, piercing of the veil of corporate fiction is frowned
upon and must be done with caution. This is because a corporation
is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other
legal entity to which it may be related. 
A parent or holding company is a corporation which owns or is
organized to own a substantial portion of another company's voting
shares of stock enough to control or influence the latter's
management, policies or affairs thru election of the latter's board of
directors or otherwise. However, the term "holding company" is
customarily used interchangeably with the term "investment
company" which, in turn, is defined by Section 4 (a) of Republic Act
(R.A.) No. 262961 as "any issuer (corporation) which is or holds
itself out as being engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting, or trading in
securities." 
In other words, a "holding company" is organized and is basically
conducting its business by investing substantially in the equity
securities of another company for the purposes of controlling their
BUSORG 2 1st Exam | Cases
policies (as opposed to directly engaging in operating activities) and
"holding" them in a conglomerate or umbrella structure along with
other subsidiaries. Significantly, the holding company itself-being a
separate entity-does not own the assets of and does not answer for
the liabilities of the subsidiary or affiliate. The management of the
subsidiary or affiliate still rests in the hands of its own board of
directors and corporate officers. It is in keeping with the basic rule a
corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. The corporate
form was created to allow shareholders to invest without incurring
personal liability for the acts of the corporation.  7) The subsidiary has substantially no business except with the
While the veil of corporate fiction may be pierced under certain
instances, mere ownership of a subsidiary does not justify the
imposition of liability on the parent company. It must further
appear that to recognize a parent and a subsidiary as separate
entities would aid in the consummation of a wrong. Thus, a holding
corporation has a separate corporate existence and is to be treated
as a separate entity; unless the facts show that such separate
corporate existence is a mere sham, or has been used as an
instrument for concealing the truth.  independently in the interest of the subsidiary but take their orders
In the case at bench, complainants mainly harp their cause on the
alter ego theory. (Elements removed – already mentioned)
1) The parent corporation owns all or most of the capital stock of the
subsidiary; 
2) The parent and subsidiary corporations have common directors
or officers; 
3) The parent corporation finances the subsidiary; 
4) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation; 
5) The subsidiary has grossly inadequate capital; 
6) The parent corporation pays the salaries and other expenses or
losses of the subsidiary; 
parent corporation or no assets except those conveyed to or by the
parent corporation; 
8) In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of
the parent corporation, or its business or financial responsibility is
referred to as the parent corporation's own; 
9) The parent corporation uses the property of the subsidiary as its
own; 
10) The directors or executives of the subsidiary do not act
from the parent corporation; and 
11) The formal legal requirements of the subsidiary are not
observed. 

The elements of the alter ego theory were discussed in However, mere presence of control and full ownership of a
Philippine National Bank v. Hydro Resources Contractors parent over a subsidiary is not enough to pierce the veil
Corporation, to wit:  of corporate fiction. It has been reiterated by this Court time
and again that mere ownership by a single stockholder or by
The first prong is the "instrumentality" or "control" test. This test another corporation of all or nearly all of the capital stock of a
requires that the subsidiary be completely under the control and corporation is not of itself sufficient ground for disregarding the
domination of the parent. It examines the parent corporation's separate corporate personality. 
relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so I want you all to read this case because the Supreme Court here gave an
conducted as to make it a mere instrumentality or agent of the exhaustive discussion on using control to perpetuate fraud.
parent corporation such that its separate existence as a distinct ROD RIZAL vs. UNG SUI SI TEMPLE
corporate entity will be ignored. It seeks to establish whether the 97 Phil. 58 (1955)
subsidiary corporation has no autonomy and the parent Section 5, Title XIII, of the Constitution, the provisions of Act
corporation, though acting through the subsidiary in form and No. 271 of the old Philippine Commission must be deemed repealed
appearance, "is operating the business directly for itself."  since the Constitution was enacted, in so far as incompatible
therewith. In providing that, — 
The second prong is the "fraud" test. This test requires that the
parent corporation's conduct in using the subsidiary corporation be Save in cases of hereditary succession, no private agricultural land
unjust, fraudulent or wrongful. It examines the relationship of the shall be transferred or assigned except to individuals,
plaintiff to the corporation. It recognizes that piercing is corporations or associations qualified to acquire or hold lands of
appropriate only if the parent corporation uses the subsidiary in a the public domain in the Philippines, 
way that harms the plaintiff creditor. As such, it requires a showing
of "an element of injustice or fundamental unfairness."  The Constitution makes no exception in favor of religious
associations. Neither is there any such saving found in sections 1
The third prong is the "harm" test. This test requires the plaintiff and 2 of Article XIII, restricting the acquisition of public
to show that the defendant's control, exerted in a fraudulent, illegal agricultural lands and other natural resources to "corporations or
or otherwise unfair manner toward it, caused the harm suffered. A associations at least sixty per centum of the capital of which is
causal connection between the fraudulent conduct committed owned by such citizens"(of the Philippines). 
through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff should be The fact that the appellant religious organization has no capital
established. The plaintiff must prove that, unless the corporate veil stock does not suffice to escape the Constitutional inhibition, since
is pierced, it will have been treated unjustly by the defendant's it is admitted that its members are of foreign nationality. The
exercise of control and improper use of the corporate form and, purpose of the sixty per centum requirement is obviously to ensure
thereby, suffer damages.  that corporations or associations allowed to acquire agricultural
land or to exploit natural resources shall be controlled by Filipinos;
To summarize, piercing the corporate veil based on the alter ego and the spirit of the Constitution demands that in the absence of
theory requires the concurrence of three elements: control of the capital stock, the controlling membership should be composed of
corporation by the stockholder or parent corporation, fraud or Filipino citizens. 
fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the To permit religious associations controlled by non-Filipinos to
corporation. The absence of any of these elements prevents piercing acquire agricultural lands would be to drive the opening wedge to
the corporate veil. (emphases and underscoring supplied)  revive alien religious land holdings in this country. We cannot
ignore the historical fact that complaints against land holdings of
Again, all these three elements must concur before the corporate that kind were among the factors that sparked the revolution of
veil may be pierced under the alter ego theory. Keeping in mind the 1896.
parameters, guidelines and indicators for proper piercing of the
corporate veil, the Court now proceeds to determine whether
Maricalum Mining's corporate veil may be pierced in order to allow TATAD vs. GARCIA, JR.
complainants to enforce their monetary awards against G Holdings.  243 SCRA 436 (1995)

I. Control or Instrumentality Test  ISSUE: Whether EDSA LRT Corp, a foreign owned corporation,
can own a public utility.
In Concept Builders, Inc. v. National Labor Relations Commission,
et al the Court first laid down the first set of probative factors of RULING: NO.
identity that will justify the application of the doctrine of piercing
the corporate veil, viz:  Private respondent EDSA LRT Corporation, Ltd. to whom the
contract to construct the EDSA LRT III was awarded by public
1) Stock ownership by one or common ownership of both respondent, is admittedly a foreign corporation "duly incorporated
corporations.  and existing under the laws of Hongkong" (Rollo, pp. 50, 79). 
2) Identity of directors and officers. 
3) The manner of keeping corporate books and records.  There is also no dispute that once the EDSA LRT III is constructed,
4) Methods of conducting the business.  private respondent, as lessor, will turn it over to DOTC, as lessee,
for the latter to operate the system and pay rentals for said use. 
Later, in Philippine National Bank v. Ritratto Group Inc., et al., the
Court expanded the aforementioned probative factors and What EDSA LRT Corp. owns are the rail tracks, rolling stocks like
enumerated a combination of any of the following common the coaches, rail stations, terminals and the power plant, not a
circumstances that may also render a subsidiary an instrumentality, public utility. While a franchise is needed to operate these
to wit:  facilities to serve the public, they do not by themselves constitute a
BUSORG 2 1st Exam | Cases
public utility.  Mass media – refers to any medium of communication designed
to reach a mass of people. For this purpose, mass media includes
What constitutes a public utility is not their ownership but print media such as but not limited to, newspapers, magazines, and
their use to serve the public  publications; broadcast media such as but not limited to, radio,
television, cable television, and cinema; electronic media such as
Section 11 Article XII of the Constitution, in no uncertain terms, but not limited to the internet [Tobacco Regulation Act of 2003]
requires a franchise for the operation of a public utility. However, it
does not require a franchise before one can own the facilities needed What matters to the commission in determining what is mass media
to operate a public utility so long as it does not operate them to is the transmission of information to the masses through any
serve the public.  medium of communication which includes technologies that were
not present at the time the Constitution was drafted but are
In law, there is a clear distinction between the "operation" of a nonetheless embraced by the spirit and intent of the law which is to
public utility and the ownership of the facilities and equipment used prevent foreigners from wielding influence over the minds of the
to serve the public.  Filipino people.

Ownership is defined as a relation in law by virtue of which a RULING #2: Reasonable person who read Paragraph 12.2.2 of the
thing pertaining to one person is completely subjected to his will in ON PDR would agree that there is some control – definitely not zero
everything not prohibited by law or the concurrence with the rights – granted to the foreign holder. 
of another.
It clearly says that when a corporate action would affect the PDR
The right to operate a public utility may exist holders, the stockholders must consult the ON PDR holders and
independently and separately from the ownership of the obtain their approval. Thus, there is substantial evidence of a
facilities thereof.  violation of the Foreign Equity Restriction.

One can own said facilities without operating them as a public
utility, or conversely, one may operate a public utility without
owning the facilities used to serve the public. The devotion of
property to serve the public may be done by the owner or by the
person in control thereof who may not necessarily be the owner
thereof.  Section 2 of PD 1018, Limiting the Ownership and Management of
This dichotomy between the operation of a public utility and the
ownership of the facilities used to serve the public can be very well
appreciated when we consider the transportation industry.
Enfranchised airline and shipping companies may lease their
aircraft and vessels instead of owning them themselves.  citizens of the Philippines, or to corporations or associations wholly
While private respondent is the owner of the facilities necessary to
operate the EDSA. LRT III, it admits that it is not enfranchised to
operate a public utility (Revised and Restated Agreement, Sec. 3.2;
Rollo, p. 57).  underlying shares, Rappler, Inc. The ON PDR instrument may be
In view of this incapacity, private respondent and DOTC agreed
that on completion date, private respondent will immediately
deliver possession of the LRT system by way of lease for 25 years,
during which period DOTC shall operate the same as a common
carrier and private respondent shall provide technical maintenance
and repair services to DOTC.
Indeed, a mere owner and lessor of the facilities used by a
public utility is not a public utility.
Even the mere formation of a public utility corporation does not
ipso facto characterize the corporation as one operating a public
utility. The moment for determining the requisite Filipino
nationality is when the entity applies for a franchise, certificate or
any other form of authorization for that purpose.
 
DISCUSSION: So you have the difference of ownership and
operation. So what is only proscribed under the Constitution is the
operation of a public utility. So pwede yung nag mamay-ari ng assets is
not compliant to the sixty percent (60%) rule. 
IN RE: RAPPLER INC.
SEC Ruling January 11, 2018
Article XVI, Section 11 (1) of the Constitution provides that:
“The ownership and management of mass media shall be limited to
citizens of the Philippines, or to corporations, cooperatives, or
associations, wholly-owned and managed by such citizens. xxx”
Mass Media to Citizens of the Philippines (in relation to the
sanctions under Section 6 (i) of PD 902-A, as amended and Section
5.1 (f) of the Securities Regulation Code, similarly provides that:
“The ownership and management of mass media shall be limited to
owned and management by such citizens.”
Thus, the ON PDR imposes obligations not just on the Issuer of the
derivative, RHC, but also on the Company which issued the
categorized as an equity derivative, since its value is dependent on
the underlying equity. It follows that legal and economic rights
granted to the ON PDR Holders can be traced back to the legal and
economic rights originally reserved to the shareholders.
Rule 3.1.8.2 of the 2015 Implementing Rules and Regulations of the
Securities Regulation code adds that Control exists whenever one
entity has the power “to govern the financial and operating policies
of another entity under a statute or agreement.”
This would be true even if the controlling entity does not own any
equity, such as through agreements (e.g. derivatives based on
underlying equity that grant influence in corporate matters.
As can be gleaned from the 2015 Implementing Rules and
Regulations of the Securities Regulation Doce, the Commission’s
definition of “control” is neither limited to stock ownership nor to
management in the board, but rather embraces a broad range of
schemes that grant influence over corporate policy.
 
Discussion: The primary issues on the Rappler are, first, are they
engaged in mass media within the purview of the definition in the
Constitution? Then, if yes, did they comply with the with the
percentage ownership of Philippine ownership. 

ISSUE/S: Now, the first question what do we mean by mass media? What did the
1. Whether or not Rappler, Inc. is engaged in Mass media SEC en banc used to say that Rappler engaged in mass media? It is
YES. actually under the Tobacco Regulation Act. 
2. Whether or not Rappler Inc is controlled by foreigners
YES Q: What is the reason why ito yung ginamit? 

A: Kasi walang definite definition, what we have is the definition ng

RULING #1: Rappler fits the description Mass Media.  print media and ang Rappler ay online news communicated
The term mass media was not further defined in the Constitution
itself, evidently to adapt to changing times and to new technologies
that may arise after 1987. Precisely to adapt to changing times, wide
discretion has been given to the legislature and to administrative
agencies. Today’s legislature considers internet or online media a
type of Mass Media. The Commission, an administrative agency, has
followed the lead of the legislature and considers internet or online
media as Mass Media and subject to the Foreign Equity Restrictions
of the Constitution.
through an online platform. 
Q: What is mass media?
A: Mass media  refers to any medium of communication designed to
reach a mass of people. For this purposes, mass media includes print
media such as but not limited to, newspapers, magazines, and
publications; broadcast media such as but not limited to, radio,
television, cable television, and cinema; electronic media such as but
not limited to the internet [Tobacco Regulation Act of 2003].

Mass Media refers to any medium of communication designed to Sir: Do you agree that Rappler engaged in mass media?
reach the masses and that tends to set the standards, ideals and
aims of the masses the distinctive features of which is the Student: Yes Sir because it disseminate information to the public.
dissemination of information and ideas to the public or a portion
thereof. The citizenship requirement is intended to prevent the use Sir: Did they violate the foreign equity restriction? 
of such facilities by aliens to influence public opinion to the
detriment of the best interest of the nation. Sir: Who owns Rappler Inc under their capital structure? 
BUSORG 2 1st Exam | Cases
Sir: Is there any foreigner in the capital structure?
A: None, all of them are Filipinos.
But the SEC en banc ruled that they violate because it grants control
based on the provisions of PDRs. 
Q: What is a Philippine Deposits Receipts? Is it the same with shares of
stocks or stockholdings?
A: It is an equity derivative.
Q: Meaning? What is a derivative?
Q: If shareholders issue PDRs, do they surrender control?
Sir: In this particular case, if you try to look the capital structure, all of
them are Filipinos. Wala namang foreigners. It is compliant at first
instance. But you know the presence of PDRs. PDRs have been
practicing by big corporations. But it is different this time. As stated
PDRs is a derivative. A derivative is an instrument or a security for that
matter that derives its value from other instruments. So meaning, it
cannot stand on its own. Kung walang shares of stocks there is no PDR
kasi nag dederive lang sya ng value doon sa shares of stock. Kaya tawag
derivative.  3. Who complained? Office of the Solicitor General (OSG) –
Another example of derivative are option contracts. For example you
are given options to your employee as part of the compensation
structure, an option to invest to the company, the employer. That
option derives its value because of the relation of the employee to the
employer.  technologies that were not present at the time the Constitution was
Going back to PDR. PDR derives its value from the Certificate of
Stocks.  FROM THE CA DECISION: PD 1018 [Limiting the
What is the nature of PDR? Some businesses wala na silang pera, ito
yung mode to getting money or getting fund without necessarily
allowing the provider to become an owner of the company, bibili ako
ng deposits. So, the deposits receipt actually divide into different
rights. You have the deposit. Deposit lang, so makukuha ko yan later
on.  like, and the broadcast medium of communication,
What’s in it for me so if mag iinvest ako? You have the dividend factor
and the option to buy. Ang PDRs meron yang option to buy at the
definite price. Kung hindi eexercise ng depositor hindi sya magiging
owner, hindi sya macoconvert into shares of stocks. What’s in it for him
is the dividend factor. At the duration of PDRs, all of the dividends to
be declared in the shares of stock which is deriving value. Diba sabi ko
derivative, mag dederive sya doon. So, naka attach sya doon sa
certificate of shares. So, kung may idedeclare na dividend doon, yun
yung mapupuna sa depositor. So, it’s like I am giving you funds and I
am getting interest from it through the dividend factor.  because there is a provision there of mass media.
But what was highlighted in this particular PDR in the Rappler is that if
you read the PDR contract may nakalagay doon na there is certain
decisions that Rappler cannot do alone without getting the approval of
the depositor. And the depositors are all Indians and Americans
(foreigners). The problem with this PDR is if you try to read it, it gives a
certain degree of control to the depositor. In effect, Rappler cannot
make big decision without consulting the depositor, without getting
their approval. 
In other words, PDRs are not really prohibited. What is prohibited if
PDRS provide a stipulation which grants a control in how to
do business. So, in here you are not talking about stock control but
we are talking about beneficial interest given to the depositor, the PDR
holder.  is stated in Tobacco, any medium.
So these are good concepts because this is one way to restructure a
company, to legally make a company compliant with the law.  Tobacco rules] because it includes internet— the “any medium”
What was the decision of the SEC? There was a contravention of a law.
So, di na sya mag ooperate. So, bakit makikita pa natin sya sa
Facebook, bakit nag ooperate pa sya despite sa finding. We will find
that out in the CA Decision.
2019 TSN: 
1. Who owns Rappler Holdings Corporation (RHC)? This is
all Filipino.
Filipino owns RHC. RHC is a domestic corporation – a Filipino
national because all Filipinos are owned and it owns Rappler Inc.
This is a Filipino national –so this is compliant with the
constitutional provision. 
What the problem here is that – RHC issued Philippine Depositary
Receipts (PDR) to North Base Media (NBM) and Omidyar Network
(ON). The ON PDRs contain a provision wherein Rappler is
required to seek approval from ON PDRs holders on corporate
matters.
Let’s talk about PDR— it issued PDR(s) in favor of North Base
Media (NMB) which is a foreign corporation and Omidyar Network
(ON). There is really no foreign ownership but the issue is that it
issued PDR (Philippine Depositary Receipts) in favor of foreign
corporation.
2. How much is the equivalent value (%) of the issued
PDR? [not indicated]
 RHC issued 12, 028, 718 PDR(s) designated as NMB
PDR(s).
 RHC issued 7, 217, 257 PDR(s) designated as ON PDR(s).
which is the lawyer of the State.
4. How did it define mass media?
Mass media is the transmission of information to the masses
through any medium of communication which includes
drafted but are nonetheless embraced by the spirit and intent of the
law.
Ownership and Management of Mass Media to
Citizens of the Philippines, Section 1] – the term
mass media refers to the print medium of
communication which includes all newspapers,
periodicals, magazines, journals, and publications and all
advertising therein, and billboards, neon signs, and the
which includes radio and television broadcasting in all
their aspects and all other cinematographic or radio
promotions and advertising. 
Therefore, what this law says, there are only (2) types – print media
and the broadcast media. But what the SEC applied there is not the
definition of PD1018, but the definition under the Tobacco rules.
5. What’s the title under the Tobacco rules? An Act
Regulating the Packaging, Use, Sale, Distribution and
Advertisements of Tobacco Products and For Other Purposes –
6. How did it define mass media? Mass media – refers to any
medium of communication designed to reach a mass of people. For
this purpose, mass media includes print media such as but not
limited to, newspapers, magazines, and publications; broadcast
media such as but not limited to, radio, television, cable television,
and cinema; electronic media such as but not limited to the internet
[Tobacco Regulation Act]
Notice there are (2) laws of the definition of mass media, you have
the PD 1018 which is specifically, limiting the ownership and you
have your Tobacco rules which regulates the sale, advertisement of
tobacco. What is found in PD 1018 is, it should have to be print or
broadcast medium for it to be considered as mass media. But what
What the SEC states, it is mass media applying this [referring to
includes internet. The SEC said, you are mass media.
7. Do you agree? Yes. Rappler claimed to be a Mass Media entity
before the Commission in its Articles of Incorporation. There is an
admission. There is an advertisement, designation of mass media.
But you will not consider that.
8. How would you consider Rappler? Is it mass media? Yes.
Mass media refers to any medium of communication designed to
reach the masses, and that tends to set the standards, ideals and
aims of the masses, the distinctive feature of which is the
dissemination of information and ideas to the public, or a portion
thereof.
That’s actually correct. PD1018 is archaic, they didn’t think of the
possibility of have an internet in the future. But the purpose of mass
media is to communicate to the masses and that is done through
internet. In fact, there is no print media anymore. It’s in your
phones. Arguably – based on that premise, Rappler is indeed
engaged in mass media. 
9.The second question is more important than the first, is
that, did it violate the proscription under the
Constitution? Yes, there is substantial evidence of a violation of
BUSORG 2 1st Exam | Cases
the Foreign Equity Restriction. Section Article XVI, Section 11 (1) of
the Constitution.
10. What was placed there is equity, is there equity
belonging to foreign national? No. However, the PDR is
considered a derivative equity instrument. The SEC ruled that
control is not limited to stock ownership or management of the
corporation but also includes e.g., agreements (derivatives based on
underlying equity) that grant influence in corporate matters –
because it is not only the stock control but full beneficial control.
11. How did the PDR became equivalent to beneficial
control? The [ON] PDR instrument may be categorized as an
equity derivative, since its value is dependent on the underlying
equity. It follows that legal and economic rights granted to the ON
PDR Holders can be traced back to the legal and economic rights
originally reserved to the shareholders.
PDR [Philippine Depositary Receipts defined as a security
which grants the holder the right to the delivery or sale of the
underlying share and to certain other rights including additional
PDR or adjustments to the terms or upon the occurrence of certain
events in respect of rights issues, capital reorganizations offers and
analogous events or the distribution of cash in the event of a cash
dividend on the shares.
In fact, this is very prevalent in European Depositary Receipts.
What does it do? RHC holds Rappler. RHC has shares of stock of
the capital of Rappler. This is a practice. PDR is not prohibited. In
fact, this is paid to get investments, funding from foreign. What a
PDR does, it’s a derivative – a derivative is financial instruments
deriving its value from underlying equity.
PDR – derivative, because its value derives from [shares]. In other
words, RHC cannot issue PDR(s) if it has no shares of stock of
Rappler – so this is the underlying equity— this is the underlying
asset which is the basis of PDR.
PDR is issued to someone. — X receives PDR, in turn, X gives
money. I’ll give you funding, you give me PDR(s).
In exchange for what? In a PDR, there are (2) components. You
have (1) the deposit and (2) you have the option to purchase.
 Deposit Component: I’ll give you money, give me PDR.
The deposit component – the benefit that I receive is,
when Rappler declares dividends, where will it go? To the
owner, which is RHC. But since it’s in a PDR, instead of
RHC receiving it, it will be given to whoever is stated
there. In fact, PDR is a negotiable instrument. It can be
negotiated, whoever ordered, the dividend will be given to
it. That’s the deposit component.
 Option to Purchase: At a certain time, RHC can say
that you have the option to purchase my shares of stock.
In that case, the PDR will be surrendered. RHC will
execute a deed of sale, covering the shares. That’s why it’s
derivative, it derives its value from an underlying
transaction.
If you look at it, ON does not really have an equity share but
because of the PDR, it has beneficial ownership. Why does it
benefit? Because it receives the dividend in lieu of RHC— it [ON]
has beneficial ownership.
13. The question is, does it have beneficial ownership? Yes.
The ON PDR(s) contain a provision [12.2] wherein the company is
required to seek approval of the ON PDR Holders on corporate
matters.  mass media.
12.2 not to, without prior good faith discussion
with ON PDR Holders and without the approval
of PDR Holders holding at least (2/3s) of all issued and
outstanding PDRs, alter, modify, or otherwise
change the Company Articles of Incorporation or
By-Laws or take any other action where such
alteration, modification, change or action will
prejudice the rights in relation to the ON PDRs;
Normally, in a PDR, that’s why it’s okay because there is no element
of control. It cannot force Rappler to declare a dividend because it
depends on the performance. But what happened here, apart from
receiving the benefits, there is a provision stated in their PDR that,
any change or significant change in the amendments here will be
subject to the approval of the holder of the PDR. In effect, there is
an element of control because you cannot reorganize that, unless
you get the approval of the PDR [holder]. That’s where they were hit
– on the approval— because in that case, this is not entirely
independent – that particular provision is peculiar in this case
because, normally in a PDR, there is nothing like that. It was only
highlighted because there’s an element of control.
And the SEC ruled that— there is substantial evidence that there
was a violation of the Foreign Equity Restriction. The SEC said,
because of that, they violated the constitution
In Re: Rappler Inc., the Rappler was found to be in violation of the
Constitutional prohibition on ownership of mass media because:
1. It was considered as a mass media;
2. The PDRs issued, the usual PDRs being issued to finance or to give
certain capital.
In this case, the receiver of the PDRs are foreign nationals. The
problem with the Rappler is that under the contract, it requires the
approval and the consent of the holder of the PDR to certain decisions,
which the SEC found to be an important exercise an owner. Kaya
giconsider siya as in violation of the Constitutional prohibition.
RAPPLER, INC. v. SECURITIES AND EXCHANGE
COMMISSION
CA-G.R. SP No. 154292 | JULY 26, 2018
ISSUE 1:
Whether Rappler, Inc. is engaged in the business of mass media,
and therefore subject to the foreign equity restriction.
RULING: YES
In PD 1018 (the decree limiting the ownership and management of
mass media to Filipinos), mass media is defined, and according to
the said definition, is classified into two types only—print media and
broadcast media. In the DOJ Opinion No. 040, DOJ stated that the
internet business—in which Rappler operates—is not considered as
a mass media because it merely serves as carrier for transmitting
messages and does not create the messages or information nor
transmit the messages or information to the general public.
However, under Republic Act (RA) No. 9211 or the Tobacco
Regulation Act, the definition of mass media was expanded to
include electronic media such as but not limited to the internet.
Hence, if the statutory definition of mass media under PD No. 1018
is applied, Rappler would not be considered as a mass media entity
because it is neither into print media nor broadcast media. On the
other hand, if the statutory definition of mass media under RA No.
9211 is applied, Rappler would be considered as a mass media
entity.
Notably, the SEC En Banc, in its decision, adopted the statutory
definition of mass media found in RA 9211.
In any case, Rappler cannot credibly claim that it is not engaged in
the business of mass media through its own actions and actuations.
First, it has been held that the best proof of the purpose of a
corporation is its articles of incorporation and by-laws. The Articles
of Incorporation of Rappler states that its primary purpose is to
“xxx operate news, information and social network services xxx via
web, internet, mobile, and other delivery formats xxx.”
Second, as noted by the SEC En Banc, Rappler, in an online article
published in www.rappler.com, characterized itself as an “all-digital
news organization” and “online news site” that “merges traditional
television broadcasting with the internet” and “combines the
discipline and credibility of traditional print and TV journalists” so
that it can “join broadcasting network giants.”
Third, Rappler and RHC emphasized in their Petition that both
Rappler and RHC are wholly owned and managed by Filipinos. In
fact, Rappler’s ownership and management, and even that of RHC,
are structured to comply the foreign equity restriction applicable to
Fourth, the issuance by RHC of PDR Instruments to NBM and
Omidyar, which involve Rappler, is designed to address potential
issues on compliance with the foreign equity restriction applicable
to mass media entities.
Lastly, as pointed out by the SEC En Banc, during the 2016
Presidential Election, Rappler filed a petition before the Supreme
Court against the Commission on Elections (COMELEC) when it
was denied access to live coverage of the presidential and vice-
presidential
debates. In its petition, Rappler claimed that equal access should be
given to all mass media, online or traditional. In Rappler, Inc. v.
Bautista, the Supreme Court agreed with Rappler and ruled that it
is an online mass media entity and should be granted equal rights
with traditional forms of mass media to broadcast the debates via
online live streaming.
ISSUE 2:
BUSORG 2 1st Exam | Cases
Whether the Omidyar PDR confers upon Omidyar foreign control
over Rappler, through RHC, in violation of the foreign equity
restriction.
RULING: YES.
In the rulings of the Supreme Court in Gamboa v. Teves and Roy v.
Herbosa and applying them in the context of foreign ownership and
operation of mass media, to comply with the foreign equity
restriction, not only should the 100% of the total outstanding capital
stock and the shares with voting rights be owned by Filipinos, in
compliance with the Voting Control Test, the right to receive
dividends and the right to vote must also be retained by the Filipino
shareholders who own 100% of the shares with voting rights, in
compliance with the Full Beneficial Ownership Test.
Since the constitutional provision limits both ownership and
management of mass media to Filipinos, the concept of control
comes into play. In the case of mass media, no foreign control is
permissible.
While in the Gamboa case, “control” was equated to “voting rights,”
under Rule 3.1.8 of the 2015 IRR of the SRC, the concept of
“control” was expounded to include other means of gaining control.  Omidyar, a foreign entity.
A PDR is defined as a security which grants the holder the right to
the delivery or sale of the underlying share, and to certain other
rights including additional PDR or adjustments to the terms or
upon the occurrence of certain events in respect of rights issues,
capital reorganizations, offers and analogous events or the
distribution of cash in the event of a cash dividend on the shares.
PDRs are not evidences or statements nor certificates of ownership
of a corporation. For as long as the PDRs are not exercised, the
shares underlying the PDRs are and will continue to be registered in
the name of, and owned by, and all rights pertaining to the shares
shall be exercised by the issuer.
It is undisputed that the Omidyar PDR do not make Omidyar a
shareholder of Rappler. However, the Omidyar PDR contains the
following provision:
12.2 The Issuer undertakes to cause the Company from
the date hereof and while the ON PDRs are outstanding:
xxx
12.2.2 not to, without prior good faith discussion with ON
PDR Holders and without the approval of PDR Holders
holding at least two thirds (2/3s) of all issued and
outstanding PDRs, alter, modify or otherwise change the
Company Articles of Incorporation or By-Laws or take
any other action where such alteration, modification,
change or action will prejudice the rights in relation to the
ON PDRs; xxx
Thus, the SEC En Banc ruled that foreign control over Rappler was
granted to Omidyar through Clause 12.2.2 of the Omidyar PDR
because the said Clause obligates Rappler to hold prior discussions
and approval with at least 2/3 of the holders of the PDRs with RHC,
such that Rappler is at the very least under obligation to consult
with Omidyar and thus, the stockholder allegedly has become, in
effect, subservient to the holder.
Moreover, according to the SEC En Banc, Clause 12.2.2 granted
Omidyar Network a “negative control” of Rappler.
The SEC En Banc explained that “control” is defined under Rule
3.1.8 of the 2015 SRC IRR as “the power to determine the financial
and operating policies of an entity in order to benefit from its
activities” and “control” is “intentionally broad and does not equate
with either ownership of shares of stock or with management as
director or officer.”
It bears stressing that the foreign equity restriction on mass media
implies “zero” foreign control. It thus includes any appearance of
control that will influence the corporate actions and decisions of
Rappler. Also, it does not matter whether the approval from
Omidyar is required only when the actions taken by Rappler will
prejudice the rights of Omidyar, because RHC, will still nonetheless
be required to secure the approval of at least 2/3 of the PDR
Holders before Rappler can carry out or implement any action
which has the effect of altering, modifying or otherwise changing
Rappler's Articles of Incorporation or By-laws or take any other
action where such alteration, modification, change or action will
prejudice the rights in relation to the Omidyar PDR.
Here, Rappler and RHC contend that Clause 12.2.2 is merely a
negative covenant intended to safeguard the interests of Omidyar.
A negative covenant is defined as “a covenant that requires a party
to refrain from doing something.” While it is true that a negative
covenant has long been accepted in this jurisdiction and is
commonly embedded in some commercial or financial agreements
such as loan agreements, Clause 12.2.2 is more than just a negative
covenant.
In loan agreements, the usual consideration why negative covenants
are put in place is to ensure that the creditors will be paid of the
loan. Here, the consideration for the insertion of Clause 12.2.2
effectively allows Omidyar to participate in the corporate actions
and decisions of Rappler.
It should be pointed out that the amendment of the Articles of
Incorporation or By-laws is a corporate act reserved by law to the
board of directors and stockholders of a corporation. Under Section
16 of the Corporation Code, an amendment of the Articles of
Incorporation is exercised by a majority vote of the
board of directors and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock. Meanwhile, under Section 48 of the Corporation Code, an
amendment of the By-laws is exercised by a majority vote of the
board of directors and the owners of at least a majority of the
outstanding capital stock.
Through Clause 12.2.2, this corporate act of amending the Articles
of Incorporation or By-laws, which is a fundamental corporate
action reserved by law to the board of directors and stockholders of
a corporation, is subject to prior discussion and approval of
Moreover, one of the rights of a shareholder is to vote on certain
corporate acts, including amending the Articles of Incorporation or
By-laws. As stated in the Gamboa case, the Supreme Court equated
“voting rights” to “effective control” because according to them, the
“right to participate in the control or management of the
corporation is exercised through the right to vote in the election of
directors” and “it is the board of directors that controls or manages
the corporation.”
In the present case, while the Omidyar PDR states that the right to
vote on the Rappler shares is retained by RHC, said right to vote is
being shared with or exercised jointly by RHC, as the owner of the
shares, and Omidyar, through Clause 12.2.2. Thus, under a “zero”
foreign control standard, it would appear that this is tantamount to
some foreign control.
ISSUE 3:
Whether the sanctions imposed by SEC on Rappler is proper.
RULING: NO.
Here, Rappler contends that it cannot be sanctioned or held liable
for violation of Section 11(1) of Article XVI of the Constitution, as
the acct complained of, which is control by Omidyar of Rappler
never occurred.
The record shows that from the time RHC issued the Omidyar PDR,
Rappler has not amended or sought the amendment of its Articles of
Incorporation. Thus, Omidyar never had the opportunity to exercise
its rights under Clause 12.2.2 of the Omidyar PDR.
Moreover, before Omidyar could exercise its rights under Clause
12.2.2 of the Omidyar PDR, it executed a Waiver dated 11 December
2017, through which it affirms that it “has never exercised its rights
under Section 12.2.2” and “agrees to waive its rights under Section
12.2.2 of the PDR Instrument.”
Furthermore, Omidyar has already donated the Omidyar PDR to the
Rappler staff, a new development which was not presented to, and
considered by the Special Panel in issuing its Investigation Report,
and the SEC En Banc in rendering its assailed Decision. In view of
this donation, the negative foreign control found objectionable by
the SEC appears to have been permanently removed.
Thus, it is incumbent upon the SEC to evaluate the terms and
conditions of the said alleged supervening donation and its legal
effect, particularly whether the same has the effect of mitigating, if
not curing, the violation it found Rappler to have committed. If so,
this may warrant a re-examination of the sanction of revocation of
Rappler and RHC’s Certificates of Incorporation imposed by the
SEC En Banc in the assailed Decision. For this purpose, the case
was remanded to the SEC.
The CA noted that in cases where the articles of incorporation or
any amendment thereto is found by the SEC to be non-compliant
with the requirements of the Corporation Code, the SEC is
mandated to give corporations a reasonable time within which to
correct or modify the objectionable portions of their articles of
incorporation or amendment thereof.
Moreover, the SEC, in the past, had pursued a policy that the
revocation of the certificate of registration should be the last resort.
DISCUSSION:  In this particular case, the reason why Rappler still
exists because it was moot and academic foreign equity ownership
because the investors already waived their rights over the PDRs. 
The SEC actually has the policy of giving leeway to investors of
corporations to comply, kase when you try to setup a corporation,
before ka mabigyan ng certificate of incorporation, you have to undergo
the review of the SEC. By that, pwede sila mag suggest ng amendments,
etc. In this particular case, you know for a fact na nahaluan ng politika,
BUSORG 2 1st Exam | Cases
first na ginawa siya it was all legal and well, but for some reason, they
are questioning the PDRs.
PDRs are perfectly valid, almost all corporations are doing that but
since the ABS-CBN shutdown, this was also tackled as an issue- the
PDRs. GMA also has PDRs, lahat ng mga big companies in television
have PDRs, it is a valid way of getting capital without giving the rights
of ownership.  could result in an otherwise foreign corporation rendered qualified
But in this particular case, the SEC as affirmed by the CA, held that
there is an element of control because of that certain clause in the
contract which gives the holder of PDRs the right to give their approval
or consent pertaining to certain actions such as amendments to by law.
So even if the holder did not exercise its right approve any
amendments, still, there is a potential relinqueshment of control in
favor of the foreign national who are holders of the PDRs. You know
what happened with Rappler, again, they waived their rights hence it
became moot and academic.
S. DAVIS WINSHIP vs. PHILIPPINE TRUST COMPANY
G.R. No. L-3869             January 31, 1952
Issue 1: WON the transfer made by PTC to the Bank of
Taiwan was valid? YES.
 
Ruling: On Nationality : In Filipinas Compañia de Seguros vs.
Christern Henefeld and Co., Inc., Phil., 54, we held that the
nationality of a private corporation is determined by the
character or citizenship of its controlling stockholders;
and this pronouncement is of course decisive as to the hostile
character of the Eastern Isles, Inc., as far as the Japanese Military
Administration was concerned, it being conceded that the
controlling stockholders of said corporations were American
citizens.
As it has been stipulated by the parties that the defendant
transferred the deposits in question to the Bank of Taiwan in
compliance with the order of the Japanese Military Administration,
the defendant was released from any obligation to the
depositors or their transferee (S. Davis)
DISCUSSION: So that the wartime test, that the nationality of a private
corporation is determined by the character or citizenship of its
controlling stockholders. In this case, this pronouncement is of course
decisive as to the hostile character of the Eastern Isles, Inc., as far as
the Japanese Military Administration was concerned, it being conceded
that the controlling stockholders of said corporation were American
Citizens.
NARRA NICKEL MINING AND DEVELOPMENT CORP.,
TESORO MINING AND DEVELOPMENT, INC., and
McARTHUR MINING, INC., vs. REDMONT
CONSOLIDATED MINES CORP.
G.R. No. 195580               January 28, 2015
RULING:  McArthur
Defined by Dean Cesar Villanueva, the Grandfather Rule is "the
method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate
shareholders 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.
BENEFICIAL OWNERSHIP
The method employed in the Grandfather Rule of attributing the
shareholdings of a given corporate shareholder to the second or
even the subsequent tier of ownership hews with the rule that the
"beneficial ownership" of corporations engaged in nationalized
activities must reside in the hands of Filipino citizens.  two (2) levels of corporate relations for publicly-held corporations
That beneficial ownership of the right to dispose, exploit, utilize,
and develop natural resources shall pertain to Filipino citizens, and
that the nationality requirement is not satisfied unless Filipinos are
the principal beneficiaries in the exploitation of the country’s
natural resources.  what is reasonable.
The application of the Grandfather Rule in the present
case does not eschew the Control Test.
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. XII of the 1987 Constitution. When 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."  voting preferred shares) of PLDT, a public utility? COMMON
Application of the Grandfather Rule with the Control Test.
The Control Test can be 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 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.
The Grandfather Rule, standing alone, should not be used to
determine the Filipino ownership and control in a corporation, as it
to perform nationalized or partly nationalized activities. 
GUIDELINES
1. If the subject corporation’s Filipino equity falls below the
threshold 60%, the corporation is immediately
considered foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears.
2. A corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino
corporation if there is no doubt as to who has the
"beneficial ownership" and "control" of the corporation.
In that instance, there is no need for a dissection or
further inquiry on the ownership of the corporate
shareholders.
3. Even if the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee corporation, a
resort to the Grandfather Rule is necessary if doubt exists
as to the locus of the "beneficial ownership" and
"control." In this case, a further investigation as to the
nationality of the personalities.
DOUBT THAT DEMANDS THE APPLICATION OF THE
GRANDFATHER RULE
 "Doubt" refers to various indicia that the "beneficial ownership"
and "control" of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. 
The indicators are:
1. That the foreign investors provide practically all the funds
for the joint investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to provide
practically all the technological support for the joint
venture;
3. That the foreign investors, while being minority
stockholders, manage the company and prepare all
economic viability studies.
With only 40.01% Filipino ownership in petitioner Tesoro, as
compared to 59.99% foreign ownership of its shares, it is clear that
petitioner Tesoro does not comply with the minimum Filipino
equity requirement imposed in Sec. 2, Art. XII of the Constitution.
Hence, the appellate court’s observation that Tesoro is a foreign
corporation not entitled to an MPSA is apt.
As with petitioner Tesoro, with only 40.01% Filipino ownership in
petitioner McArthur, as compared to 59.99% foreign ownership of
its shares, it is clear that petitioner McArthur does not comply with
the minimum Filipino equity requirement imposed in Sec. 2, Art.
XII of the Constitution.
Narra
With 60.36% foreign ownership in petitioner Narra, as compared to
only 39.64% Filipino ownership of its shares, it is clear that
petitioner Narra does not comply with the minimum Filipino equity
requirement imposed in Section 2, Article XII of the Constitution. 
LIMIT AS TO THE NUMBER OF CORPORATE LAYERS
MAY THE GRANDFATHER RULE BE APPLIED
The SEC had already set up a limit. In a 1977 internal
memorandum, the SEC suggested applying the Grandfather Rule on
or where the shares are traded in the stock exchanges, and to three
(3) levels for closely held corporations or the shares of which are not
traded in the stock exchanges. These limits comply with the
requirement in Palting v. San Jose Petroleum, Inc. that the
application of the Grandfather Rule cannot go beyond the level of
GAMBOA v. TEVES
June 28, 2011
ISSUE: Does the term “capital” in Section 11, Article XII of the
Constitution refer to the total common shares only, or to the total
outstanding capital stock (combined total of common and non-
SHARES only
HELD: In the earlier case of Fernandez v. Cojuangco, it was
explained that:
The forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock
BUSORG 2 1st Exam | Cases
entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing
limitations and restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals to be always in
control of the corporation undertaking said activities. Otherwise, if
the Trial Court’s ruling upholding respondents’ arguments were to
be u Following the Trial Court’s ruling adopting respondents’
arguments, the common shares can be owned entirely by foreigners
thus creating an absurd situation wherein foreigners, who are
supposed to be minority shareholders, control the public utility
corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to
apply to both the beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity
limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e.,
common shares.  the "controlling interest" in public utilities always lies in the hands of
Indisputably, one of the rights of a stockholder is the right to
participate in the control or management of the corporation. This is
exercised through his vote in the election of directors because it is
the board of directors that controls or manages the corporation. In
the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same
voting rights as common shares. However, preferred shareholders
are often excluded from any control, that is, deprived of the right to
vote in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.
In fact, under the Corporation Code only preferred or
redeemable shares can be deprived of the right to vote. Common
shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.
Considering that common shares have voting rights which translate
to control, as opposed to preferred shares which usually have no
voting rights, the term "capital" in Section 11, Article XII of the
Constitution refers only to common shares. However, if the
preferred shares also have the right to vote in the election of
directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of
directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that
can vote in the election of directors.
Illustration of the glaring anomaly in giving a broad definition to the
term "capital”: Let us assume that a corporation has 100 common
shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par
value of one peso (₱1.00) per share. Under the broad definition of
the term "capital," such corporation would be considered compliant
with the 40% constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of
the total outstanding capital stock is Filipino owned. This is
obviously absurd.
Gamboa v. Teves
G.R. No. 176579 (2012)
60 percent Filipino ownership required by the Constitution
to engage in certain economic activities applies not only to
voting control of the corporation, but also to the beneficial
ownership of the corporation. Mere legal title is insufficient
to meet the 60 percent Filipino-owned "capital" required in
the Constitution. Full beneficial ownership of 60 percent of
the outstanding capital stock, coupled with 60 percent of the
voting rights, is required.
 
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but also
to the beneficial ownership of the corporation, it is therefore
imperative that such requirement apply uniformly and across the board
to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Under the Corporation Code,
capital stock consists of all classes of shares issued to stockholders, that
is, common shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated in the articles of
incorporation.
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to shares with
voting rights but also to shares without voting rights. Preferred shares,
denied the right to vote in the election of directors, are anyway still
entitled to vote on the eight specific corporate matters mentioned
above. Thus, if a corporation, engaged in a partially nationalized
industry, issues a mixture of common and preferred non-voting shares,
at least 60 percent of the common shares and at least 60 percent of the
preferred non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of
such shares must necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-
voting, preferred voting or any other class of shares.
 
This uniform application of the 60-40 ownership requirement in favor
of Filipino citizens clearly breathes life to the constitutional command
that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is
Filipino-owned. Applying uniformly the 60-40 ownership requirement
in favor of Filipino citizens to each class of shares, regardless of
differences in voting rights, privileges and restrictions, guarantees
effective Filipino control of public utilities, as mandated by the
Constitution.
 
Moreover, such uniform application to each class of shares insures that
Filipino citizens. This, addresses and extinguishes Pangilinan’s worry
that foreigners, owning most of the non-voting shares, will exercise
greater control over fundamental corporate matters requiring two-
thirds or majority vote of all shareholders.
 
There is no dispute, and respondents do not claim the contrary, that (1)
foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and
thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s
common shares, constituting a minority of the voting stock, and thus
Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by
Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of
the dividends that common shares earn; (5) preferred shares have
twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common
shares only 22.15%.
 
Despite the foregoing facts, the Court did not decide, and in fact
refrained from ruling on the question of whether PLDT violated the 60-
40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the 1987 Constitution. Such question indisputably calls
for a presentation and determination of evidence through a hearing,
which is generally outside the province of the Court’s jurisdiction, but
well within the SEC’s statutory powers.
Roy III v. Herbosa
G.R. No. 207246
 
ISSUE: Whether the SEC gravely abused its discretion in issuing SEC-
MC No. 8 in light of the Gamboa Decision and Gamboa Resolution.
 
RULING: NO.
The Court held here as observed in the Gamboa Decision, the “capital”
as required by the Constitution is  "[f]ull [and legal] beneficial
ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights xxx must rest in the hands of Filipino
nationals xxx
 
The Court also said that the same was not modified in the Gamboa
Resolution.
The Court held in the Gamboa resolution that:
 
The Constitution expressly declares as State policy the development of
an economy "effectively controlled" by Filipinos. Consistent with such
State policy, the Constitution explicitly reserves the ownership and
operation of public utilities to Philippine nationals, who are defined in
the Foreign Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60 percent of whose capital with
voting rights belongs to Filipinos. xxx
 
The Court held in this case that Section 2 of SEC-MC No. 8 clearly
incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40
ratio in favor of Filipino nationals in the voting stocks; it
moreover requires the 60-40 percentage ownership in the
total number of outstanding shares of stock, whether voting
or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's
unambiguous pronouncement that "[f]ull beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the
voting rights is required." Clearly, SEC-MC No. 8 cannot be said to
have been issued with grave abuse of discretion.
 
Beneficial ownership test
Mere legal title is not enough to meet the required Filipino equity,
which means that it is not sufficient that a share is registered in the
name of a Filipino citizen or national, i.e., he should also have full
beneficial ownership of the share.
BUSORG 2 1st Exam | Cases
Comment: So again, how do you determine? You look at each type of
shares. It has to be compliant with the 60% Filipino ownership. In fact,
the court held with finality the decision regarding the computation of
(inaudible).
PCAB vs. Manila Waters Company Inc.
Issue: Whether or not the assailed provision of the IRR is void. Yes
Held: The Supreme Court affirmed the RTC decision and ruled that
PCAB exceeded the confines of the delegating statute as the power
to impose nationality requirements in areas of investment is
exclusively vested in Congress under Section 10, Article XII of the
Constitution and not a mere administrative agency.
It was also ruled that PCAB acted beyond its authority when it
created the nationality-based license types under Section 3.1 of the
IRR of R.A. No. 4566. The Court found that nowhere in the
Contractor’s License Law does the legislature authorize petitioner to
impose nationality qualifications in order for an entity to obtain a
license in the construction business. PCAB’s duty to effect the
classification of contractors under Section 17 must be read in
relation to Section 16 of R.A. No. 4566, which enumerated the
statutorily-mandated classification for the contracting business.  corporation.
Nothing in Section 16 creates nationality-based license types as
found under Section 3.1 of the IRR. The clear letter of the law is thus
controlling and cannot be amended by a mere administrative rule
issued for its implementation.
Section 16. Classification. For the purpose of classification, the
contracting business includes any or all of the following branches.
(a) General engineering contracting;
(b) General building contracting; and
(c) Specialty contracting.
Section 17. Power to classify and limit operations. The Board may
adopt reasonably necessary rules and regulations to effect the
classification of contractors in a manner consistent with established
usage and procedure as found in the construction business, and may
limit the field and scope of the operations of a licensed contractor to
those in which he is classified to engage, as respectively defined in
section nine. A license may make application for classification and
be thus classified in more than one classification if the licensee
meets the qualification s prescribed by the Board for such additional
classification or classifications. No additional application or license
fee shall be charged for qualifying or classifying a licensee in
additional classifications.
The Court also held that the Congress could have well placed the
citizenship or equity requirement to qualify for a contractor’s
license had it really intended to do so. The Court noted that it is
Congress which has the power to determine certain areas of
investments which must be reserved to Filipinos, upon
recommendation of the National Economic Development Authority
(NEDA) and when national interest requires.
Moreover, the Court held that Section 14, Article XII of the
Constitution, limiting the practice of all professions to Filipino
citizens, does not apply. The provision refers to the privilege of a
natural person to exercise his profession in the Philippines. On the
other hand, under Article IV of R.A. No. 4566, even partnerships,
corporations and organizations can qualify for a contractor’s license
through its responsible officer.  some of the functions for which it was organized. The SC have
Engaging in construction is not an exercise of profession.
A corporation or juridical person, in this case a construction firm,
cannot therefore be considered a “professional” that is being
exclusively restricted by the Constitution and our laws to Filipino
citizens. The licensing of contractors is not to engage in the practice
of a specific profession, but rather to engage in the business of
contracting/construction. Professionalizing the construction
business is different from the exercise of profession which the
Constitution exclusively restricts to Filipino citizens.
The Decision also clarified that if the Contractors License Law
viewed the construction industry as a profession and contractors as
professionals whose practice may be limited to Filipino citizens,
then the challenged provision runs contrary to such policy, as it
would allow foreigners to operate with a regular license through a
construction firm as long as their equity therein does not exceed
40%.
Accordingly, the Supreme Court found that the construction
industry is not one which the Constitution has reserved exclusively
for Filipinos. Neither do the laws enacted by Congress show any
indication that foreigners are proscribed from entering into the
same projects as Filipinos in the field of construction. Thus, setting
the equity limit for a certain type of contractor’s license has no
basis.
Reference: https://www.fnslaw.com.ph/
Jacobus Bernhard Hulst v. PR Builders
G.R. No. 156364. September 25, 2008
THIRD DIVISION; Austria-Martinez J.
 ISSUE: WON the Contract to Sell between JACOBUS and PR violate
proscription against ownership of land by aliens- NO.
RULING: Foreign nationals can own Philippine real estate through
the purchase of condominium units or townhouses constituted under
the Condominium principle with Condominium Certificates of Title
[Republic Act (R.A.) No. 4726, otherwise known as the
Condominium Act]. 
The law provides that no condominium UNIT can be sold without at
the same time selling the corresponding amount of rights, SHARES or
other interests in the condominium management body, the
Condominium Corporation; and no one can buy SHARES in a
Condominium Corporation without at the same time buying a
condominium UNIT. 
It expressly allows foreigners to acquire condominium UNITS and
SHARES in condominium corporations up to not more than 40% of the
total and outstanding capital stock of a Filipino-owned or controlled
 
Under this set up, the ownership of the land is legally separated from
the unit itself. The land is owned by a Condominium Corporation and
the unit owner is simply a member in this Condominium Corporation.
As long as 60% of the members of this Condominium Corporation are
Filipino, the remaining members can be foreigners. 
Considering that the rights and liabilities of the parties under the
Contract to Sell is covered by the Condominium Act wherein petitioner
as unit owner was simply a member of the Condominium Corporation
and the land remained owned by respondent, then the constitutional
proscription against aliens owning real property does not apply to the
present case. 
There being no circumvention of the constitutional prohibition, the
Court's pronouncements on the invalidity of the Contract of Sale
should be set aside.
Again kung foreigner ka, you are the unit holder at the same time the
shareholder of the condominium corporation. Take note that although
you are not subject to the equity restriction, the condominium
corporation that ow[ns the land must follow the foreign equity
restriction of 60-40. If it is situated in a lease land, pwede sya 100%
kasi iba naman ang may-ari ng land. Usually that happens in a joint
venture between the land owner and the developer.
EUROPEAN RESOURCES AND TECHNOLOGIES, INC
VS INGENIEUBURO BIRKHAN + NOLTE
G.R. No. L-37331, March 18, 1933
ISSUE: 
Whether or not GC engages in a business in the Philippines - Yes
Whether or not GC filing of injunction is proper. – NO. 
RULING:  There is no general rule or governing principle laid
down as to what constitutes doing or engaging in or transacting
business in the Philippines. Thus, it has often been held that a
single act or transaction may be considered as doing business when
a corporation performs acts for which it was created or exercises
held that the act of participating in a bidding process
constitutes doing business because it shows the foreign
corporations intention to engage in business in the
Philippines. In this regard, it is the performance by a foreign
corporation of the acts for which it was created, regardless of
volume of business, that determines whether a foreign corporation
needs a license or not. 
As a general rule, unlicensed foreign non-resident corporations
cannot file suits in the Philippines. Section 133 of the Corporation
Code specifically provides: 
SECTION 133.No foreign corporation transacting
business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines, but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. 
A corporation has legal status only within the state or territory in
which it was organized. For this reason, a corporation organized in
another country has no personality to file suits in the Philippines. In
order to subject a foreign corporation doing business in the country
to the jurisdiction of our courts, it must acquire a license from the
Securities and Exchange Commission (SEC) and appoint an agent
for service of process. Without such license, it cannot institute a suit
BUSORG 2 1st Exam | Cases
in the Philippines.  Appointing a representative does not per se constitute of
However there is an exception to the rule when the party is
estopped from questioning the capacity of a foreign corporation to
institute an action in our courts where it had obtained benefits from
its dealings with such foreign corporation and thereafter committed
a breach of or sought to renege on its obligations.
In the case at bar, petitioners have clearly not received any benefit
from its transactions with the German Consortium. In fact, there is
no question that petitioners were the ones who have expended a
considerable amount of money and effort preparatory to the
implementation of the MOA.
Steelcase, Inc. v. Design International
G.R. No. 171995
ISSUE: Whether Steelcase had been doing business in the
Philippines.  enter into such contracts as may be necessary.
 
RULING: NO.
The phrase "doing business" is clearly defined in Section 3(d) of
R.A. No. 7042 (Foreign Investments Act of 1991). The definition is
supplemented by its Implementing Rules and Regulations, Rule I,
Section 1(f) which elaborates on the meaning of the same phrase:
 
f. "Doing business" shall include soliciting orders, service
contracts, opening offices, whether liaison offices or branches;
appointing representatives or distributors, operating under full
control of the foreign corporation, domiciled in the Philippines or
who in any calendar year stay in the country for a period totalling
one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to and in
progressive prosecution of commercial gain or of the purpose and
object of the business organization.
 
The following acts shall not be deemed "doing business" in
the Philippines:
1. Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or
the exercise of rights as such investor;
 
2. Having a nominee director or officer to represent its
interest in such corporation;
 
3. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in the representative's or distributor's
own name and account;
 
4. The publication of a general advertisement through any
print or broadcast media;
 
5. Maintaining a stock of goods in the Philippines solely for
the purpose of having the same processed by another
entity in the Philippines;
 
6. Consignment by a foreign entity of equipment with a local
company to be used in the processing of products for
export;
 
7. Collecting information in the Philippines; and
 
8. Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis, such
as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing
the same, training domestic workers to operate it, and
similar incidental services. (Emphases supplied)
 
 
The appointment of a distributor in the Philippines is not sufficient
to constitute doing business unless it is under the full control
of the foreign corporation. On the other hand, if the distributor
is an independent entity which buys and distributes products,
other than those of the foreign corporation, for its own
name and its own account, the latter cannot be considered to be
doing business in the Philippines. 
 
In the case at bench, it is undisputed that DISI was founded in 1979
and is independently owned and managed by the spouses Leandro
and Josephine Bantug.  In addition to Steelcase products, DISI also
distributed products of other companies including carpet tiles,
relocatable walls and theater settings. DISI was an independent
contractor which sold Steelcase products in its own name and for its
own account.  YES.
doing business in the Philippines unless na lang if the work
of the representative is fully devoted to the corporation.
CAGAYAN FISHING DEVELOPMENT CO., Inc., v.
TEODORO SANDIKO
[G.R. No. 43350. December 23, 1937.]
The transfer made by Tabora to the Effected May
Cagayan Fishing Development Co., Inc 31, 1930
Actual incorporation Oct 22, 1930
In other words, the transfer was made almost five months
before the incorporation of the company.
Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which
such corporation was formed may permit and for this purpose may
 
But before a corporation may be said to be lawfully organized,
many things have to be done. Among other things, the law
requires the filing of articles of incorporation.
Although there is a presumption that all the requirements of law
have been complied with, IN THIS CASE, the plaintiff was not yet
incorporated when it entered into the contract of sale.
The contract itself referred to the plaintiff as "una
sociedad en vias de incorporacion." [A COMPANY IN THE
PROCESS OF INCORPORATION]
It was not even a de facto corporation at the time. 
Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.
"Corporations are creatures of the law, and can only come
into existence in the manner prescribed by law. 
If conditions precedent are prescribed in the statute, or certain acts
are required to be done, they are terms of the offer, and must be
complied with substantially before legal corporate existence can be
acquired.
A corporation, until organized, has no being, franchises or faculties. 
Nor do those engaged in bringing it into being have any power to
bind it by contract, unless so authorized by the charter. 
Parties to the contract:
Manuel Tabora (as owner of the 4 parcels of land)
Non-existent corpo (Cagayan) 
Manuel Tabora, his wife and others, as mere promoters of a
corporation.
 
For reasons that are self-evident, these promoters could not have
acted as agents for a projected corporation since that which had no
legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. 
It is, as it were, a child (in ventre sa mere) [IN ITS MOTHER’S
WOMB]. 
This is not saying that under no circumstances may the acts of
promoters of a corporation be ratified by the corporation if and
when subsequently organized. 
There are, of course, exceptions (Fletcher Cyc. of Corps., permanent
edition, 1931, vol. I, secs. 207 et seq.) , but under the peculiar facts
and circumstances of the present case we decline to extend the
doctrine of ratification which would result in the commission of
injustice or fraud to the candid and unwary.
Here, the promoters were made liable. It would seem that in this
case, ratification is the key element in upholding the validity and
enforceability of promoter’s contracts. 
Without ratification by a corporation after its due incorporation, a
contract entered into in behalf of a corporation yet to be organized or
still in the process of incorporation is void against the corporation.
ADD:
The transfer by Manuel Tabora to the Cagayan Fishing Development
Company, Inc. was null because at the time it was effected the
corporation was non-existent
RIZAL LIGHT & ICE CO., INC.
vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE
PUBLIC SERVICE COMMISSION
G.R. No. L-20993; September 28, 1968
En Banc; Zaldivar, J
ISSUE: Whether the franchise granted to Morong Electric is valid.
RULING: Rizal Light's contention that Morong Electric did not yet
have a legal personality on May 6, 1962 when a municipal franchise
BUSORG 2 1st Exam | Cases
was granted to it is correct. The juridical personality and legal
existence of Morong Electric began only on October 17, 1962 when
its certificate of incorporation was issued by the SEC. Before that
date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation. But
the fact that Morong Electric had no corporate existence on the day
the franchise was granted in its name does not render the franchise
invalid, because later Morong Electric obtained its certificate of
incorporation and then accepted the franchise in accordance with
the terms and conditions thereof. This view is sustained by eminent
American authorities. Thus, McQuiuin says:
The fact that a company is not completely incorporated at the
time the grant is made to it by a municipality to use the streets
does not, in most jurisdictions, affect the validity of the grant. But
such grant cannot take effect until the corporation is organized.
And in Illinois it has been decided that the ordinance granting the
franchise may be presented before the corporation grantee is fully
organized, where the organization is completed before the
passage and acceptance. (McQuillin, Municipal Corporations, 3rd
Ed., Vol. 12, Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation
is organized, the franchise may, nevertheless, be applied for
before the company is fully organized.
 
A grant of a street franchise is valid although the corporation is
not created until afterwards. (Fletcher, Cyclopedia Corp.
Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
 
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are
numerous in support of the proposition that an ordinance
granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of
the introduction of the ordinance. It is enough that organization
is complete prior to the passage and acceptance of the ordinance.
The reason is that a privilege of this character is a mere license to
the corporation until it accepts the grant and complies with its
terms and conditions. (Thompson on Corporations, Vol. 4, 3rd
Ed., Sec. 2929)
 
The incorporation of Morong Electric on October 17, 1962 and its
acceptance of the franchise as shown by its action in prosecuting the
application filed with the Commission for the approval of said
franchise, not only perfected a contract between the respondent
municipality and Morong Electric but also cured the deficiency
pointed out by the petitioner in the application of Morong EIectric.
Thus, the Commission did not err in denying petitioner's motion to
dismiss said application and in proceeding to hear the same. The
efficacy of the franchise, however, arose only upon its approval by
the Commission on March 13, 1963. The reason is that —
Under Act No. 667, as amended by Act No. 1022, a municipal
council has the power to grant electric franchises, subject to the
approval of the provincial board and the President. However,
under Section 16(b) of Commonwealth Act No. 146, as amended,
the Public Service Commission is empowered "to approve, subject
to constitutional limitations any franchise or privilege granted
under the provisions of Act No. 667, as amended by Act No. 1022,
by any political subdivision of the Philippines when, in the
judgment of the Commission, such franchise or privilege will
properly conserve the public interests and the Commission shall
in so approving impose such conditions as to construction,
equipment, maintenance, service, or operation as the public
interests and convenience may reasonably require, and to issue
certificates of public convenience and necessity when such is
required or provided by any law or franchise." Thus, the efficacy
of a municipal electric franchise arises, therefore, only after the
approval of the Public Service Commission. (Almendras vs.
Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the
franchise granted to Morong Electric is not incompatible with the
holding of this Court in Cagayan Fishing Development Co.,
Inc. vs. Teodoro Sandiko  upon which Rizal Light leans heavily
in support of its position. In said case this Court held that a
corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract
or transact any business. It should be pointed out, however, that
this Court did not say in that case that the rule is absolute or that
under no circumstances may the acts of promoters of a corporation
be ratified or accepted by the corporation if and when subsequently
organized. Of course, there are exceptions. It will be noted that
American courts generally hold that a contract made by the
promoters of a corporation on its behalf may be adopted, accepted
or ratified by the corporation when organized.
Hall v. Piccio
86 Phil 603 (1950)
En Banc
ISSUE: W/N Far Eastern is a De Facto Corporation, if so, it should
be dissolved in a de facto proceeding.
HELD: NO. Section 19 of the RCC, providing for the de facto
corporation doctrine is not applicable in this case. This is because in
this case, all the parties are informed that the Securities and
Exchange Commission has not, so far, issued the corresponding
certificate of incorporation. All of them know, or sought to know,
that the personality of a corporation begins to exist only from the
moment such certificate is issued — not before (sec. 11, Corporation
Law). The complaining associates have not represented to the
others that they were incorporated any more than the latter had
made similar representations to them. And as nobody was led to
believe anything to his prejudice and damage, the principle of
estoppel does not apply. Obviously this is not an instance requiring
the enforcement of contracts with the corporation through the rule
of estoppel.
There are least two reasons why section 19 does not govern the
situation. Not having obtained the certificate of incorporation, the
Far Eastern Lumber and Commercial Co. — even its stockholders —
may not probably claim "in good faith" to be a corporation.
Second, this is not a suit in which the corporation is a party. This is
a litigation between stockholders of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its
dissolution between stockholders, without the intervention of the
state.
Sawadjaan v. CA
G.R. 141735
ISSUE: W/N the failure of AIIBP to file its by-laws within the
period prescribed results in a nullity of all its actions.
HELD: NO. The AIIBP was created by Rep. Act No. 6848. It has a
main office where it conducts business, has shareholders, corporate
officers, a board of directors, assets, and personnel. It is, in fact,
here represented by the Office of the Government Corporate
Counsel, "the principal law office of government-owned
corporations, one of which is respondent bank." At the very least, by
its failure to submit its by-laws on time, the AIIBP may be
considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. 
Moreover, a corporation which has failed to file its by-laws within
the prescribed period does not ipso facto lose its powers as such.
The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations, details the procedures and remedies
that may be availed of before an order of revocation can be issued.
There is no showing that such a procedure has been initiated in this
case. 
Note: So, you have the concept of a de facto.  Kasi for example hindi
mo talaga nagawa all the requirements for you to have that existence to
exercise full corporate powers, tapos biglang you have a dealing with a
third person. Tapos for example nag supply ka sa isang customer.
A corporation which has failed to file its by-laws within the prescribed
period does not ipso facto lost its powers as such.
SAPPARI K. SAWADJAAN
v.
THE HONORABLE COURT OF APPEALS, THE CIVIL
SERVICE COMMISSION and AL-AMANAH INVESTMENT
BANK OF THE PHILIPPINES
ISSUE: W/N the failure of AIIBP to file its by-laws within the
period prescribed results in a nullity of all its actions.
HELD: NO.
The AIIBP was created by Rep. Act No. 6848. It has a main office
where it conducts business, has shareholders, corporate officers, a
board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel,
"the principal law office of government-owned corporations, one of
which is respondent bank." At the very least, by its failure to submit
its by-laws on time, the AIIBP may be considered a de
facto  corporation whose right to exercise corporate powers may not
be inquired into collaterally in any private suit to which such
corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within
the prescribed period does not ipso facto lose its powers as such.
The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations, details the procedures and remedies
that may be availed of before an order of revocation can be issued.
There is no showing that such a procedure has been initiated in this
case.
Asia Banking Corporation vs Standard Products, Co., Inc
GR No. 22106 | September 11, 1924
ISSUE: W/n Standard Products is estopped from denying its own
BUSORG 2 1st Exam | Cases
and Asia Banking’s corporate existence?
RULING: YES.  The general rule provides that in the absence of
fraud of a person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its legal
existence as a corporate body is thereby estopped to deny its
corporate existence in any action leading out of or involving such
contract or dealing. Unless its existence is attacked for cause which
have arisen since making the contract or other dealing relied on as
an estoppel and this applies to foreign as well as to domestic
corporations.  and owned by, Mandarin Development Corporation bought by the
Standard Products having recognized the corporate existence of the
Asia Banking by making a promissory note in its favor and making
partial payments on the same is therefore estopped to deny said
Asia Banking’s corporate existence. It is, of course, also estopped
from denying its own corporate existence.
Is the Petitioner bound by his obligation under the MOA?  of money in a way intended to secure income or profit from its
Paz v. New International Environmental Universality, Inc.
G.R. No. 203993, April 20, 2015
First Division: Perlas-Bernabe
ISSUE: Whether or not Paz is bound by his obligation under the
MOA by estoppel. YES
RULING: Paz is bound by his obligation under the MOA.  generated.
As correctly ruled by the CA, Paz cannot deny that he contracted
with NIEU, since it is evident from the very language itself of the
MOA, whereby he obligated himself to allow the use of the hangar
space for COMPANY aircraft/helicopter. Also, in his final letter, Paz
reiterated and strongly demanded the former to immediately vacate
the hangar space that the COMPANY is occupying/utilizing.
Section 20 of the Corporation Code explicitly provides that one who
assumes an obligation to an ostensible corporation, as such, cannot
resist performance thereof on the ground that there was in fact no
corporation. Clearly, petitioner is bound by his obligation under the
MOA not only on estoppel but by express provision of law.
The lower courts, therefore, did not err in finding petitioner liable
for breach of contract for effectively evicting respondent from the
leased premises even before the expiration of the term of the lease.
President of Philippine Deposit Insurance Corporation
(PDIC) v. Hon. Wilfredo D. Reyes
G.R. No. 154973, June 21, 2005
First Division: Davide, Jr., C.J.
ISSUES:  loan. Try to look at the capital structure, may debt financing, may
[1] Whether or not the Singaporeans’ equity investment with closed
PaBC is entitled to the payment of interest. – NO.
[2] Whether or the not Eastern Shipping Lines, Inc. v. CA
guidelines are applicable in fixing the rates of interest and/or
dividends that allegedly accrued on the equity investment of the
Singaporeans on PaBC. – NO.
RULING:  
Original Remittance of the Singaporeans was not in a
nature of a loan or forbearance of money, goods, or credit.
It is an investment.
The Liquidation Court awarded interest not as a form of accrued
dividends or return of investment, but as actual and compensatory
damages. Categorically, the order states: The December 16, 1993 CA
ruled that the remittance of earnings of this type of foreign
investment is guaranteed. Legal interests are earnings and they are
provided for by law arising from the withholding of funds due to a
party. They are not computed on the amount of earnings of a
business.
When the trial court, in its Order of 11 September 1992, declared the
Singaporeans to have the status of preferred creditors, it did so only
for the purpose of giving them priority in the order of payment upon
the liquidation of the PaBC. Relying only on the Investment
Incentive Act, the trial court did not decide whether the
Singaporeans investment was a loan or equity. Since the
Singaporeans were declared preferred creditors for a limited
purpose, it does not allow that the court likewise implied that the
original remittance of the Singaporeans was in the nature of a loan
or forbearance of money, goods, or credit.
Court of Appeals: the equity investment of US $2,531,632.18 was
not a loan or forbearance of money; hence, Central Bank Circular
No. 416, prescribing 12% interest per annum on loans or
forbearance of money, goods, or credit is inapplicable. It applied
Article 2209 of the Civil Code, which provides for the legal interest
of 6% per annum in the absence of a stipulation to the contrary.
Thus, the CA modified the Order 12 May 1998 and reduced the rate
of interest on the investment of US $2,531,632.18 from 12% to 6% to
run from 15 October 1981 when the outward remittance and equity
investment was actually made up to the closure of PaBC.
Also, following Eastern Shipping Lines, Inc. v. Court of Appeals it
upheld the grant of 12% interest on the monetary award of US
$2,531,632.18 to run from the date of the finality of the 11
September 1992 Order until its satisfaction. It is undisputed that the
amount of US $2,531,632.18 remitted by the Singaporeans
represented the 154,462 PaBC common shares previously issued to,
Singaporeans at the price of US $16.39 per share. The investment
was approved by the Central Bank under Monetary Board
Resolution No. 323 and constituted about 11% of the total
subscribed capital stock of PaBC. Clearly, the amount remitted to
PaBC by the Singaporeans was an investment.
An investment is an expenditure to acquire property or other assets
in order to produce revenue. It is the placing of capital or laying out
employment. To invest is to purchase securities of a more or less
permanent nature, or to place money or property in business
ventures or real estate, or otherwise lay it out, so that it may
produce a revenue or income. Thus, unlike a deposit of money or a
loan that earns interest, the investment of the Singaporeans cannot
be assured of a dividend or an interest on the amount invested. For,
interests or dividends are granted only after profits or gains are
Resultantly, Guidelines in Eastern Shipping Case in
relation to Interest is Not Applicable
We therefore agree with the Court of Appeals in holding that the
amount of US $2,531,632.18 remitted by the Singaporeans to PaBC
was not a loan or forbearance of money in favor of PaBC. Hence, the
guidelines in Eastern Shipping Lines does not come into play.
Neither can we apply Central Bank Circular No. 416, which imposes
the rate of 12% per annum on loans and forbearance of money. Nor
can guidelines be invoked because, as correctly pointed out by the
Liquidator, the closure of the PaBC did not constitute a breach of
obligation.
Article 2209 of the Civil Code, which was relied upon by the Court
of Appeals does not fin application either. That Article, which
provides for 6% interest per annum, governs when there is a delay
in the payment of a sum of money. Such is not the case here. Thus,
the Court of Appeals award of 6% interest on the Singaporeans
equity investment as actual or compensatory damages from the date
of its remittance until the closure of PaBC has no leg to stand on.
So that is an example of how the court differentiates investment from
equity financing. That’s why pag may mga investment scam,
pinapainvest ka tapos sinasabi na hindi mo na makukuha and their
argument would be “investment man yun.” Pag investment you take
the risk na malugi. It’s not a loan that I will pay you the interest.
PLDT vs NTC
539 SCRA 365 | December 04, 2007
What do we mean by capital?
The term capital and other terms used to describe the
capital structure of a corporation are of universal
acceptance and their usages have long been established in
jurisprudence.
Briefly, capital refers to the value of the property or assets of a
corporation
ISSUE: Are stock dividends included in “capital stock subscribed
and paid for”?
RULING: Yes.
In deciding the case, the court cited the case of National
Telecommunications Commission v. Honorable Court of Appeals
wherein it held that:
The term "capital" refers to the value of the property or
assets of a corporation. The capital subscribed is the
total amount of the capital that persons
(subscribers or shareholders) have agreed to take
and pay for, which need not necessarily by, and can be
more than, the par value of the shares. In fine, it is the
amount that the corporation receives, inclusive of
the premiums if any, in consideration of the
original issuance of the shares. 
In the case of stock dividends, it is the amount
that the corporation transfers from its surplus
profit account to its capital account. It is the same
amount that can be loosely termed as the "trust fund" of
the corporation. The "Trust Fund" doctrine considers this
subscribed capital as a trust fund for the payment of the
debts of the corporation, to which the creditors may look
BUSORG 2 1st Exam | Cases
for satisfaction.  yet realized — it was a mere corporate paper transaction. It would
Until the liquidation of the corporation, no part of the subscribed
capital may be returned or released to the stockholder (except in the
redemption of redeemable shares) without violating this principle.
Thus, dividends must never impair the subscribed capital;
subscription commitments cannot be condoned or remitted; nor
can the corporation buy its own shares using the subscribed capital
as the considerations therefor.
PLDT's contention, that stock dividends are not similarly
situated as the subscribed capital stock because the
subscribers or shareholders do not pay for their issuances
as no amount was received by the corporation in
consideration of such issuances since these are effected as
a mere book entry, is erroneous.
Dividends, regardless of the form these are declared, whether in
cash, property or stocks, are valued at the amount of the declared
dividend taken from the unrestricted retained earnings of a
corporation. Thus, the value of the declaration in the case of a stock
dividend is the actual value of the original issuance of said stocks.  venture, willing to share in the profits and losses of the enterprise.
Thus, it cannot be said that no consideration is involved in the
issuance of stock dividends. In fact, the declaration of stock
dividends is akin to a forced purchase of stocks. By declaring
stock dividends, a corporation ploughs back a portion or its entire
unrestricted retained earnings either to its working capital or for
capital asset acquisition or investments. It is simplistic to say that
the corporation did not receive any actual payment for these. When
the dividend is distributed, it ceases to be a property of the
corporation as the entire or portion of its unrestricted retained
earnings is distributed pro rata to corporate shareholders.
In essence, therefore, the stockholders by receiving stock dividends
are forced to exchange the monetary value of their dividend for
capital stock, and the monetary value they forego is considered the
actual payment for the original issuance of the stocks given as
dividends. Therefore, stock dividends acquired by shareholders for
the monetary value they forego are under the coverage of the SRF
and the basis for the latter is such monetary value as declared by the
board of directors.
Discussion:
So in this particular case, the Court said that stock dividend is consider
as capital.
MSCI-NACUSIP vs. NWPC
269 SCRA 173 (1997)
 What is the paid-up capital?
Paid-up capital is that portion of the authorized capital stock
which has been both subscribed and paid.
ISSUE: What is the correct paid up capital of MSCI?
RULING: MSCI’s paid-up capital is P5,000,000.
By express provision of Section 13, paid-up capital is that
portion of the authorized capital stock which has been both
subscribed and paid.
To illustrate, where the authorized capital stock of a corporation is
worth P1,000,000 and the total subscription amounts to
P250,000.00, at least 25% of this amount, namely, P62,500.00
must be paid up per Section 13. The latter, P62,500.00, is the paid-
up capital or what should more accurately be termed as "paid-up
capital stock."
MSCI was incorporated with an authorized capital stock of P60M.
Authorized Capital Stock - 60,000,000
Subscribed Capital Stock - 20,000,000 (more than 25% of the
authorized capital stock)
Paid-up Capital - 5,000,000 (25% of the subscribed capital stock
that has been paid)
Not all funds or assets received by the corporation can be
considered paid-up capital, for this term has a technical
signification in Corporation. Such must form part of the authorized
capital stock of the corporation, subscribed and then actually paid.
CIR v CA
[G.R. No. 108576. January 20, 1999]
Issue: WON ANSCOR's exchange of common shares with preferred
shares can be considered as taxable exchange?  profits arising from its business" in the former law. Thus, the
Ruling: No. Exchange of common with preferred shares is not a
taxable exchange.
There was no change in their proportional interest after the
exchange. There was no cash flow. Both stocks had the same par
value. Under the facts herein, any difference in their market value
would be immaterial at the time of exchange because no income is
have been different, if the exchange transaction resulted into a flow
of wealth, in which case income tax may be imposed. 
Reclassification of shares does not always bring any substantial
alteration in the subscriber's proportional interest. But the
exchange is different — there would be a shifting of the balance of
stock features, like priority in dividend declarations or absence of
voting rights. Yet neither the reclassification nor exchange per se,
yields realize income for tax purposes.
A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. 
Preferred stocks are those which entitle the shareholder to some
priority on dividends and asset distribution. 
Both shares are part of the corporation's capital stock. Both
stockholders are no different from ordinary investors who take on
the same investment risks. 
Preferred and common shareholders participate in the same
Moreover, under the doctrine of equality of shares — all stocks
issued by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of Incorporation
is silent on such differences. In this case, the exchange of shares,
without more, produces no realized income to the subscriber. 
There is only a modification of the subscriber's rights and privileges
— which is not a flow of wealth for tax purposes. 
The issue of taxable dividend may arise only once a subscriber
disposes of his entire interest and not when there is still
maintenance of proprietary interest.
Thus, the exchange of common shares with preferred shares cannot
be taxed.
Republic Planters Bank vs Agana
ISSUE #1: Does ROBES-FRANCISCO have the right to collect
dividends pursuant to the stock certificate? 
RULING #1: 
In spite of the specific preferences granted to preferred shares there
is no guaranty, however, that the share will receive any dividends.
There has to be unrestricted retained earnings. 
A preferred share of stock, is one which entitles the holder thereof
to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares
of a corporation. Preferred shares take a multiplicity of forms. The
most common forms may be classified into two: 
1. Preferred shares as to assets; and 
2. Preferred shares as to dividends. 
The former is a share which gives the holder thereof preference in
the distribution of the assets of the corporation in case of
liquidation; 
the latter is a share the holder of which is entitled to receive
dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock.  
The Supreme Court first discussed the nature of preferred shares
and redeemable shares. 
There is no guaranty, however, that the share will receive any
dividends. 
Under the old Corporation Law in force at the time the contract
between the petitioner and the private respondents was entered
into, it was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its business,
or distribute its capital stock or property other than actual profits
among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful
dissolution."  
Similarly, the present Corporation Code  provides that the board of
directors of a stock corporation may declare dividends only out of
unrestricted retained earnings. 
The Code, in Section 43, adopting the change made in accounting
terminology, substituted the phrase "unrestricted retained
earnings," which may be a more precise term, in place of "surplus
declaration of dividends is dependent upon the availability of
surplus profit or unrestricted retained earnings, as the case may be. 
Preferences granted to preferred stockholders, moreover, do not
give them a lien upon the property of the corporation nor make
them creditors of the corporation, the right of the former being
always subordinate to the latter. 
BUSORG 2 1st Exam | Cases
Dividends are thus payable only when there are profits earned by
the corporation and as a general rule, even if there are existing
profits, the board of directors has the discretion to determine
whether or not dividends are to be declared. 15  transfer of actual ownership interests by the sisters to a third party.
Shareholders, both common and preferred, are considered risk
takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid.  the lease contract
ISSUE #2: Can RPB be compelled to redeem?
RULING #2: NO.  G.R. No. 51765, March 3, 1997
More so, the bank is declared by the CB to be suffering from chronic
reserve deficiency.
Redeemable shares, on the other hand, are shares usually preferred,
which by their terms are redeemable at a fixed date, or at the option
of either issuing corporation, or the stockholder, or both at a certain
redemption price. A redemption by the corporation of its stock is, in
a sense, a repurchase of it for cancellation.  Robes-Francisco.
The present Code allows redemption of shares even if there are no
unrestricted retained earnings on the books of the corporation.  receive dividends and to have RPB redeem said shares.
This is a new provision which in effect qualifies the general rule that
the corporation cannot purchase its own shares except out of
current retained earnings. However, while redeemable shares may
be redeemed regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the corporation has,
after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not
be made where the corporation is insolvent or if such redemption
will cause insolvency or inability of the corporation to meet its debts
as they mature.
The redemption of shares cannot be allowed. As pointed out by the
petitioner, the Central Bank made a finding that said petitioner has
been suffering from chronic reserve deficiency and that such finding
resulted in a directive, prohibiting the latter from redeeming any
preferred share, on the ground that said redemption would reduce
the assets of the Bank to the prejudice of its depositors and
creditors. 24 Redemption of preferred shares was prohibited for a
just and valid reason. 
considering that the terms and conditions set forth in the stock
certificate clearly indicate that redemption of the preferred shares
may be made at any time after the lapse of two years from the date
of issue, private respondents should have taken it upon themselves,
after the lapse of the said period, to inquire from the petitioner the
reason why the said shares have not been redeemed. As it is, not
only two years had lapsed, as agreed upon, but an additional sixteen
years passed before the private respondents saw it fit to demand
their right.  guaranty, however, that the share will receive any dividends. There
Delpher Trades Corp vs IAC
ISSUE:  WON THE “DEED OF EXCHANGE” EXECUTED WAS A
CONTRACT OF SALE WHICH PREJUDICED THE RIGHT OF
HYDRO PIPES’ RIGHT OF FIRST REFUSAL
OR
WON THERE ARE TRANSFER OF OWNERSHIP OVER THE
SUBJECT LEASED PROPERTY.
RULING:  redeemed regardless of the existence of unrestricted retained
No. There was no sale and transfer of ownership.
It must be noted that what was exchanged here is no par value
shares of stocks of Delpher.
A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but
only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the
certificate itself that he is only an aliquot sharer in the assets of the
corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in
the case of par value shares.  FACTS: For consideration is the Urgent Motion to Approve the
The capital stock of a corporation issuing only no-par value shares is
not set forth by a stated amount of money, but instead is expressed
to be divided into a stated number of shares, such as, 1,000 shares.
This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they
may have, to the extent of 100/1,000 or 1/10. Thus, by removing the
par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of
assets and the amount of its debts.
Also, it is to be stressed that by the sisters ownership of the 2,500
no par shares of stock, they have control of the corporation. Their
equity capital is 55% as against 45% of the other stockholders, who
also belong to the same family group.
Thus, the "Deed of Exchange" of property between the sisters and
Delpher cannot be considered a contract of sale. There was no
The Pacheco family merely changed their ownership from one form
to another. The ownership remained in the same hands. Hence, the
Hyrdo Pipes has no basis for its claim of a light of first refusal under
Republic Planters v. Agana
 
FACTS: Robes-Francisco Realty & Development Corporation
secured a loan from Republic Planter’s Bank (RPB). RPB lent
partially in money and partially in the form of stock certificates. The
stock certificates indicated that the preferred stocks in the hands of
Robes-Francisco shall have the right to receive dividends and that
such preferred shares may be redeemed by RPB at the option of
Robes-Francisco filed a complaint against RPB based on its rights to
ISSUE #1:  Does Robes-Francisco Corporation have the right to
collect dividends? – NO. There has to be a dividend declaration.
 
ISSUE #2: Can RPB be compelled to redeem? – NO. The
redemption is merely optional. More so, the bank is suffering from
reverses.
 
(Note: Issues are not relevant to the topic. The SC merely
discussed preferred and redeemable shares in its ruling)
 
HELD: The Supreme Court first discussed the nature of preferred
shares and redeemable shares.
 
A preferred share of stock, is one which entitles the holder thereof
to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares
of a corporation. Preferred shares take a multiplicity of forms. The
most common forms may be classified into two:
 
1. Preferred shares as to assets; and
2. Preferred shares as to dividends.
 
The former is a share which gives the holder thereof preference in
the distribution of the assets of the corporation in case of
liquidation; the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock. There is no
has to be unrestricted retained earnings.
Redeemable shares, on the other hand, are shares usually preferred,
which by their terms are redeemable at a fixed date, or at the option
of either issuing corporation, or the stockholder, or both at a certain
redemption price. A redemption by the corporation of its stock is, in
a sense, a repurchase of it for cancellation.
The present Code allows redemption of shares even if there are no
unrestricted retained earnings on the books of the corporation. This
is a new provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current
retained earnings. However, while redeemable shares may be
earnings, this is subject to the condition that the corporation has,
after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not
be made where the corporation is insolvent or if such redemption
will cause insolvency or inability of the corporation to meet its debts
as they mature.
Philippine Coconut Producers (COCOFED) v. Republic
G.R. Nos. 177857-58 (2009)
 
Conversion of the SMC Common Shares into SMC Series 1 Preferred
Shares dated interposed by petitioners Philippine Coconut
Producers Federation, Inc., et al. (collectively, COCOFED). 
 
SMC’s conversion or stock exchange offer is embodied in its
Information Statement and yields the following relevant features:
 
Instrument - Peso denominated, perpetual, cumulative, non-
voting preferred shares with a par value of Php 5.00 per
share and Issue Price of Php 75 per share.
Dividend Rate - The SMC Board of Directors shall have the sole
discretion to declare dividends on the Series 1 Preferred Shares as
redeemed by SMC, the dividend rate shall be at a fixed rate of
8% per annum, payable quarterly and calculated by reference
to the issue price.
BUSORG 2 1st Exam | Cases
 
Dividend Rate Step Up - Unless the Series 1 Preferred Shares are
redeemed by SMC, the Dividend Rate shall be adjusted at the
end of the fifth year to the higher of (a) the Dividend Rate or (b)
the prevailing 10-year PDSTF rate plus a spread of 300 bps.
 
Optional Redemption and Purchase - SMC has the option, but
not the obligation, to redeem all or part of the Series 1 Preferred
Shares on the third anniversary from the Issue Date or on any
Dividend Date thereafter at a redemption price equal to the Issue
price of the Preferred Shares plus all cumulated and unpaid cash
dividends.
 
Preference in the event of the liquidation of SMC - The Series 1
Preferred Shares shall have preference over the common shares.
 
Selling costs - All selling costs pertaining to the Common Shares
shall be borne by the common shareholders. x x x  based on the book value of the shares, or a total of ₱2,298,760.00.
The shares in this case was sequestered by the PCGG. One of the
standards here is there must be prior approval of the court for the
conversion of the sequestered common shares to preferred shares.
The SMC shares to be exchange.
COCOFED proposes to constitute a trust fund to be known as the
"Coconut Industry Trust Fund (CITF) for the Benefit of the Coconut
Farmers," with respondent Republic, acting through the Philippine
Coconut Authority (PCA), as trustee. As proposed, the constitution
of the CITF shall be subject to terms and conditions which, for the
most part, reiterate the features of SMC’s conversion offer, albeit
specific reference is made to the shares of the 14 CIIF companies
 
Standard 1. There must be a prior approval by this Honorable Court
in this instant case G.R. No. 177857-58 entitled "COCOFED, et. al.
vs. Republic of the Philippines", of the conversion of the
sequestered SMC Common Shares, Both Class "A" and Class "B",
registered in the respective names of the 14 CIIF Holding
Companies, into SMC Series 1 Preferred Shares.
 
Standard 2. The SMC shares to be exchanged are all the shares of
stock of SMC that are presently sequestered and registered in the
respective names of the 14 CIIF Holding Companies in the total
number of 753,848,312, both Class "A" and Class "B" shares x x x
(hereinafter, collectively referred to as the "SMC Common Shares").
The issue arose because Salonga and others filed a
comment asserting that the government bears that the
conversion is indubitably advantageous to the public
interest or will result in clear and material benefit.
 
They further postulate that "even assuming that the proposal to
convert the SMC shares is beneficial to the government, it cannot
pursue the exchange offer because it is without power to exercise
acts of strict dominion over the sequestered shares." Lastly, they
argue that "the proposed conversion x x x is not only not
advantageous to the public interest but is in fact positively
disadvantageous."
 
The more important consideration in the exercise at hand is the
preservation and conservation of the preferred shares and the
innumerable benefits and substantial financial gains that will
redound to the owner of these shares.
 
ISSUE: Whether the conversion will result in the loss of voting
rights of PCGG in SMC and enable Cojuangco, Jr. to acquire the
sequestered shares, without encumbrances, using SMC funds.
 
RULING: NO.  2.
The common shares after conversion and release from
sequestration become treasury stocks or shares. Treasury shares
under Sec. 9 of the Corporation Code (Batas Pambansa Blg. 68) are
"shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such
shares may again be disposed of for a reasonable price fixed by the
board of directors."
A treasury share or stock, which may be common or preferred, may
be used for a variety of corporate purposes, such as for a stock
bonus plan for management and employees or for acquiring another
company. It may be held indefinitely, resold or retired.  corporation has no available unrestricted retained earnings in its
 
While held in the company’s treasury, the stock earns no dividends
and has no vote in company affairs. Thus, the CIIF common shares
that would become treasury shares are not entitled to voting rights.
And should conversion push through, SMC, not Cojuangco, Jr.,
becomes the owner of the reacquired sequestered CIIF SMC
common shares. Should SMC opt, however, to sell said shares in the
future, prospective buyers, including possibly Cojuangco, Jr., have
to put up their own money to acquire said common shares. Thus, it
is erroneous for intervenors to say that Cojuangco, Jr., with the use
of SMC funds, will be acquiring the CIIF SMC common shares.
Turner v. Lorenzo Shipping Corp
This case concerns the right of dissenting stockholders to
demand payment of the value of their shareholdings.
FACTS:
The petitioners Philip and Elnora Turner held 1,010,000
shares of stock of the respondent Lorenzo Shipping
Corporation, a domestic corporation engaged primarily in cargo
shipping activities. 
In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders’ pre-emptive
rights to newly issued shares of stock. Feeling that the
corporate move would be prejudicial to their interest as
stockholders, the petitioners voted against the amendment
and demanded payment of their shares at the rate of ₱2.276/share
The respondent found the fair value of the shares demanded by the
petitioners unacceptable. It insisted that the market value on the
date before the action to remove the pre-emptive right was taken
should be the value, or ₱0.41/share (or a total of ₱414,100.00).
The disagreement on the valuation of the shares led the parties to
constitute an appraisal committee.
the appraisal committee reported its valuation of ₱2.54/share, for
an aggregate value of ₱2,565,400.00 for the petitioners.
 
Subsequently, the petitioners demanded payment based on the
valuation of the appraisal committee.
The respondent refused the petitioners’ demand, explaining that
pursuant to the Corporation Code, the dissenting stockholders
exercising their appraisal rights could be paid only when the
corporation had unrestricted retained earnings to cover the
fair value of the shares, but that it had no retained earnings at the
time of the petitioners’ demand, as could be seen in its Financial
Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00
as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the
respondent for collection and damages.
ISSUE:
Whether or not the petitioners-stockholders can recover the value of
their shareholding. – NO.
RULING:
A stockholder who dissents from certain corporate actions has the
right to demand payment of the fair value of his or her shares. This
right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. – Any
stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class,
or of extending or shortening the term of corporate
existence;
In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all
of the corporate property and assets as provided in
the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders.
Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment . In case the
books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30
days after the award, his voting and dividend rights shall
immediately be restored.
[Unrestricted retained earnings refer to profits a business has
accumulated since its creation that it has not distributed to
stockholders as dividends.]
The trust fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of the shares of
stocks of the withdrawing stockholders. 
BUSORG 2 1st Exam | Cases
Under the doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of
corporate creditors, who are preferred in the distribution of
corporate assets. 
 
The creditors of a corporation have the right to assume that the
board of directors will not use the assets of the corporation to
purchase its own stock for as long as the corporation has
outstanding debts and liabilities.
 
There can be no distribution of assets among the stockholders
without first paying corporate debts. Thus, any disposition of
corporate funds and assets to the prejudice of creditors is null and
void.