Nature and Formation

1. Definition of a corporation

A corporation is an artificial being created by operation law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incidental to its existence.

2. Tri-level Existence in the Corporate Setting (first two levels contain the relationships.)
a. A created being, created by the state through operation of law and the relationship of
the State and Corporation (As a created being)
b. Corporation vis-a-vis natural persons, (contractual relations)
i. Corporation and its agents or representatives, such as directors and its officers
ii. Corporation and shareholders and its members
iii. Between and among the shareholders
iv. Between the corporation and third parties.
c. Corporation as a business economic unit.
3. Relationship (what are the rules of these relationships)
a. Corporation and the state (Creator and creation)
b. Corporation with its agents, representatives, directors and officers
c. Corporation and shareholders
d. Shareholders among other shareholders
e. Corporation to third persons

Nature of Corporations
Corporate Attributes

Theories in the Formation of a corporation

Tayag vs Benguet Consolidated

Facts: The Country Trust Company of New York, USA, adamantly refused to surrender the stock
certificates of the estate of Idonah Slade Perkins, owned by here in a Philippine Corporation
Benguet Consolidated Inc., to satisfy the legitimate claims of local creditors.

The RTC orders Benguet Consolidated to consider as lost for all purposes in connection with the
administration and liquidation of the Philippines estate of Idonah Slade Perkins the stock
certifications and orders the said certificates cancelled, and directs said corporation to issue new
certificates in lieu thereof.

Benguet Consolidate appealed to the Supreme Court arguing that they cannot execute the order
of the court since the stock certificates are in existence, they are today in possession of the
Country Trust Company, in New York, USA, therefore it cannot be declared or considered laws.
Further, it would alleged that there was a failure to observe certain requirements of its by-laws,
 that in case of lost, stolen or destroyed stock certificates, the issuance of new stock should await
the final decision by a court regarding the ownership thereof.

Issue: Whether or not stock certificates cannot be declared lost because it failed to observe
certain requirements of the by-laws

Ruling: No, it is understandable that the Constitution overrides a statute, to which, however, the
judiciary must yield deference, when appropriately invoked and deemed applicable. It would be
most highly unorthodox, however, if a corporation by-law would be accorded such high estate in
the jural order that a court must not only take not of it but yield to its alleged controlling force.
A corporation as known in Philippine jurisprudence is a creature without any existence until it
has received the imprimatur of the state acting according to law. It is logically inconceivable
therefore that it will have rights and privileges of a higher priority than that of its creator. More
than the, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not
excluding the judiciary, whenever called upon to do so. The appeal is denied

Other discussions:

 The challenge order constitutes an emphatic affirmation of judicial authority sought to be

emasculated by wilful conduct of the domiciliary administration in refusing to accord obedience
to a court decree.
 In wells Fargo Bank “In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled here.

Theory of concession

 Is the reality of the group as a social and legal entity independent of state recognition and
concession?
 A corporation is an artificial being created by operation of law. A corporation as known to
Philippine Jurisprudence is a creature without any existence until it has received the imprimatur
of the state acting according to law. It is logically inconceivable therefore that it will have rights
and privileges of higher priority than that of its creator. More than that, it cannot legitimately
refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary
whenever called upon to do so.
 A corporation is not in fact and in reality a person, but the law treats it as though it were a
person by process of fiction, or by regarding it as artificial person distinct and separate from its
individual stockholders.

Ang Pue & Co vs Secretary of Commerce and Industry

Facts: Ang Pue and Tan Siong both Chinese citizens, organized the partnership Ang Pue and
Company for a term of 5 years that is extendible by their mutual consent. RA 1180 was enacted
to regulate retail business, it provided that a partnership not wholly formed by Filipinos could
continue to engage in the retail business until the expiration of its term. Prior the expiration of
the five year term with the period of RA 1180 the partners extended the life of the partnership.
But the SEC refused to recognize the extension since it is a violation of RA 1180.
 Issue: Whether or not the partners can extend the partnership life using the provisions of its by-
laws contrary to RA 1180

Ruling: No, to organize a corporation or partnership that could claim juridical personality of its
own and transact business as such, is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to impose. The State, through
the legislature, in a manner provided by law enacted RA 1180 and to provide therein that only
Filipinos and concerns wholly owned by Filipinos may engage in the retail business cannot be
seriously disputed. To argue that because the original articles of partnership provided that the
partners could extend the term of partnership, the provisions of RA 1180 cannot adversely
affect appellants herein, is to erroneously assume that the partnership provision constitute a
property right of which the partners cannot be deprived without due process or without their
consent.

The agreement contained therein must be deemed subject to the law existing at the time when
the partners came to agree regarding the extension. Appeal denied.

To organize a corporation or partnership that could claim a juridical personality of its

own and transact business as such, is not a matter of absolute right but a privilege which
may be enjoyed only under such terms as the State may be deemed necessary to
impose. Xxx to argue that because the original articles of partnership provided that the
partners could not extend the term of the partnership, the provisions of RA 1180 cannot
adversely affect appellants herein, is to erroneously assume that the aforesaid provision
constitute a property right of which the partners cannot be deprived without due
process or without their consent. The agreement contained therein must be deemed
subject to the law existing at the time when the partners cam to agree regarding the
extension.

 Theory of Enterprise Entity (It is the underlying enterprise (business activity) that clothes it with
juridical personality)
Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for commission of injustice and inequity, such as
the use of separate personality to avoid the execution of the property of a sister
company (Tan boon bee and co vs Jarencio)
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites appropriate to such a body
(PSE vs CA)

The enterprise theory is meant to cover the situations where the courts have either:
a) Erected corporate personality which the state had not granted or;
b) Disregard corporate personality where the state had granted it; both for the
purpose of giving legal effect to factual relationships set up between an
economic entity and an outsider
 The corporation is emerging as an enterprise bounded by economics, rather than an
artificial juridical personality bounder by forms of words in a charter, minute books, and
books of account.

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

Summary
 Theory of concession – corporation is a creature of the state, completely within its control
 Theory of enterprise –the corporate fiction cannot be created unless there is an enterprise or
group upon whom it would be conferred.

National Development Company and New Agrix, Inc. vs Philippine Veterans Bank

Facts: PD 1717 ordered the rehabilitation of the Agrix Group of Companies to be administered by the
National Development Company, it provides that all mortgages and other liens presently attaching to
any assets of the dissolved corporations are hereby extinguished. The Philippine Veterans bank claimed
a REM against the agrix but was denied. Hence the appeal

Issue: whether or not New Agrix Inc is a valid corporation sanctioned by law

Ruling: No, One may also wonder why AGRIX was singled out for government help, among other
corporations where the stockholders or investors were also swindled. It is not clear why other
companies entitled to similar concern were not similarly treated. Furthermore, New Agrix, Inc was
created by a special decree notwithstanding the provision of Article XIV, Section 4 of 1973 (Now Art XII.
Section 16) that The Batasang Pambasa shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned and controlled
by the Governmetn or any subdivision or instrumentality thereof.
The new corporation is neither owned nor controlled by the government. The NDC was merely required
to extend a loan of not more than 10M to New Agrix Inc. pending payment, the NDC would undertake
the management of the corporation, but with the obligation of making periodic reports to Agrix, after
payment the board of Agrix can appoint its own management. The stocks of the new corporation are to
be issued to the old investors and stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation. New Agrix is entirely private and so
should have been organized under the Corporation law in accordance with the above-cited
constitutional provision.

The new corporation, being neither owned nor controlled by the government, should have been created
only by general and not special law.
PD 1717 is unconstitutional.
Civil Code
Art 44. The following are juridical persons:
1. The state and its political subdivisions
2. Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law
3. Corporations, partnerships and associations for private or public purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or
member.

Art 45: Juridical persons mentioned in nos .1 and 2 of the preceding article are governed by the laws
creating or recognizing them

Private corporations are regulated by laws of general application on the subject

Partnership and associations for private interest or purpose are governed by the provision of this code
concerning partnership

Franchise
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, xxx 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

Franchises relative to corporations are

1. Corporate or general franchises – the franchise to exist as a corporation

2. Special or secondary franchise – 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 (Fletchers Cyclopedi Corp)

The primary franchise of a corporation – 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 to do so. (Legislative grant that allows a juridical person to exist as a juridical
personality)

Secondary or special franchise of a corporation - are vested in the corporation and may ordinarily be
conveyed or mortgage under a general power granted to a corporation to dispose of its property, except
such special or secondary franchises as are charged with a public use. (A permit, a right given to an
entity to engage in a regulated activity, subject to a supervision by a state organ)

 Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use public property
or any portion of the public domain or any right of way over public property or the public
domain, and any rights and privileges acquired under such franchise may be levied upon and
sold under execution together with the property necessary for the enjoyment, the exercise of
the powers, and the receipt of the proceeds of such franchise or right of way, in the same
manner and with like effect as any other property to satisfy any judgment against the
corporation. Provided, that the sale of the franchise or right of way and the property necessary
for the enjoyment, the exercise of the powers, and the receipt of the proceeds of said franchise
 or right of way is especially decreed and ordered in the judgment: and provided, further, that
the sale shall not become effective until confirmed by the court after due notice.

JRS Business Corporation vs Imperial Insurance Inc. (1964)

Facts: JRS Business and Imperial insurance entered into a compromise agreement to settle the debts of
the former. Comes the due date for payment, JRS failed to settle its obligation prompting Imperial
insurance to filed a motion of a writ of execution for auction sale of the whole capital stocks, business
name, right of operation, the whole assets, furniture, and equipment. JRS appealed that the right to
operate under franchise was not transferable and could not be considered a personal or immovable
property subject to levy and sale.

Issue: Whether or not the business name or trade name, franchise (right to operate) and capital stocks
of the petitioner are properties or property rights which could be the subject of levy, execution and sale.

Ruling: Yes, The right to operate a messenger and express delivery service, by virtue of legislative
enactment is admittedly a secondary franchise, under our corporation law, is subject to levy and sale on
execution together and including all the property necessary for the enjoyment thereof. However, only
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. The decisions does not contain any special decree or
order making the franchise answerable for the judgment debt. Therefore the sale of the properties and
its franchise are set aside

Four attributes of a Corporation

1. It is an artificial being
2. Created by operation of law
3. It has the right of succession
4. It has the powers, attributes, and properties expressly authorized by law or incidental to its
existence

It is an artificial being

 It means that the law regards a corporation as a juridical person, with a legal personality
separate and distinct from the persons composing it

It is created by operation of law

 It is not created by mere agreement of the incorporators nor by their execution of the articles of
incorporation. There ought to be a law from which the corporation derives its legal existence. It
may be a general law for private corporations or a special law for government owned and
controlled corporations

It has the right of succession

 It does not connote that the corporation is immortal. It simply means that it has the power to
exist continuously, either by opting to have perpetual existence or to extend it corporate life if a
 fixed term is specified in its articles of incorporation. Its capacity for continued existence is not
affected by any changes in the composition of comparators.

It has the powers, attributes, and properties expressly authorized by law or incidental to its existence.

 This means that a corporation can only exercise powers conferred upon it by law, its articles of
incorporation, those implied from the conferred powers, or incidental to its existence.

Advantages of a corporation from other forms of business organizations

1. It may sue and be sued, enter into contracts, and acquire properties in its own name and in its
own right (juridical personality)
2. Stockholders are not liable for the obligations of the corporations beyond their subscription
(limited liability)
3. It continues to exist despite changes in corporators’ composition (Continuous existence)
4. Shares are transferable even without the consent of the corporators or stockholders (Free
Transferability of Shares)
5. Management is clearly defined and centralized through its board of directors or trustees (Clearly
defined management)
6. It can mobilize more capital through the issuance of shares (Bigger capital)

Disadvantages of a corporation from other forms of business organization

1. The ability of stockholder to transfer shares without having to secure the consent of the
corporation and/or other stockholders may result in persons having conflicting interest against
the same corporation (Possible conflict of interest)
2. It is subject to more stringent administrative and reportorial requirements (administrative red
tape)
3. Minority stockholders may be denied the right to actively participate in the management of the
corporation and are subject to the decisions of the majority stockholder. (Majority over
minority)
4. Business activities are limited by the powers provided by law, its articles of incorporation, and
powers incidental thereto (limited business activities)

Corporate entity compared to other business forms

Corporation vs Sole proprietorship

Sole Proprietorship Corporation

Does not possess a juridical personality. Has a separate and distinct juridical personality
The personal assets of the proprietor may be apart from its corporators
held to answer for the obligations incurred by
the sole proprietorship in conducting its
business

Corporation vs Partnership
Partnership Corporation
 As to definition
An agreement whereby two or more persons An artificial being created by operation of law,
bind themselves together to contribute money, having the right of succession, and the powers,
property or industry to a common fund with the attributes, and properties expressly authorized by
intention of dividing the profits among law or incidental to its existence
themselves
As to manner of creation
By agreement By operation of law
As to composition
At least two partners One person may compose a corporation
As to commencement of juridical personality
From the moment two or more persons agree to Commences to have corporate existence and
form a partnership. juridical personality and is deemed incorporated
from the date of the SEC issues a certificate of
incorporation under its official seal
As to liability
General partners may be held liable beyond The liability of stockholders, who are not
their contribution to the partnership if the directors, officers, and agents is limited to their
assets of the partnership thereof are not subscription to the capital stock of the
sufficient to answer for the creditor’s claim corporation
As to the transfer of share of rights
May sell his fully-paid shares of stock without A partner cannot assign his interest in the
the necessity of securing the consent of the partnership in favour of a third party without the
corporation and/or other stockholders consent of the partners because partnership is
essential based on trust and confidence
AS to the management
Generally conducted by the board of directors Managed by the Managing partner
As to the exercise of powers
Cannot exercise powers except those conferred May perform any act unless it is contrary to laws,
by law and its articles of incorporation or those good morals, custom, public order, and public
incidental to its existence policy.

JM Tuason and Co., Inc represented by its Managing partner, Gregorio Araneta Inc. vs Quirino
Bolanos

Facts: JM tuason a corporation, represented by its Managing partner, another corporation, Gregorio
Araneta filed an action for the recovery of parcel of land. The RTC ruled in favour of the plaintiff. The
defendant appealed arguing that the plaintiff is not real party in interest, and corporation are prohibited
to enter into partnerships with another corporation.

Issue: Whether or not the judgment should be annulled.

Ruling: No, the present action is brought in the name of the real party in interest. The practice is for an
attorney-at-law to bring the action that is to file the complaint in the name of the complaint. That
practice has been followed here. It is also true that the complaint also states that the plaintiff is
represented herein by its Managing Partner Gregorio Araneta, Inc. another corporation, but there is
nothing against one corporation represented by another person, natural or juridical in a suit in court.
The contention that Gregorio Araneta Inc. cannot act as managing partner for plaintiff on the theory
that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that
though a corporation has no power to enter into partnership. It may nevertheless enter into joint
venture with another where the nature of the venture is in line with the business authorized by its
charter. There is nothing in the record to indicate that the venture in which plaintiff is represented by
Gregorio Araneta Inc. as its managing partner is not in line with the corporate business of either of
them.

Joint venture – The legal concept of a joint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for some temporary
purpose. It is in fact distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control.

The main distinction is that the partnership contemplates a general business with some degree of
continuity, while joint venture is formed for the execution of a single transaction and is thus of
temporary nature. This observation is not entirely accurate in this jurisdiction, since under the civil code,
a partnership may be particular or universal, and a particular partnership may have for its object a
specific undertaking.

It would seem therefore that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The SC however, recognized a distinction between these
two business forms, and has held that although a corporation cannot enter into a partnership contract,
it may however engage in a joint venture with others (Tuazon vs Bolanos)

A corporation who entered in a Joint venture, board of directors should have the foresight to secure
themselves from liability, like an insurance, without insurance, the Directors of Corporations in a Joint
Venture can be held personally liable.

Wolgang Aurbach vs Sanitary Wares Manufacturing Corporation

Facts: ASI a foreign corporation and Saniwares a local corporation entered into a partnership to sell,
manufacture saniwares and china. ASI and Saniwares later argued on a corporate decision to expand
that later on escalated into an election dispute. They submitted their arguments that leads to the
question of whether the nature of the business established is joint venture or a corporation

ASI group contends that the actual intention is to form a corporation based on the agreement The
Lagdameo and Young group pleaded that the agreement failed to express the true intent of the parties
which is to form a joint venture, basing not only to the agreement but also to the contemporaneous and
subsequent acts of the parties

Issue: Whether the nature of the business established by the parties was a joint venture or a
corporation

Ruling: The parties agreed to establish a joint venture and not a corporation. In an action at law, where
there is evidence tending to prove that the parties joined their efforts in furtherance of an enterprise for
their joint profit, the question whether they intended by their agreement to create a joint adventure, or
to assume some other relation is a question of fact for the jury.
It is said that participants in a joint venture, in organizing the joint venture deviate from the traditional
pattern of corporation management. A noted authority has pointed out that just as in close
corporations, shareholders; agreement in joint venture corporations often contain provisions which do
one or more of the following:
1. Require greater than majority vote for shareholder and director action ( 7 out of 9 directors
required in certain enumerated corporate acts)
2. Given certain shareholders or groups of shareholders power to select a specified number of
directors (3 for ASI, 6 for Saniware)
3. Give to the shareholders control over the selection and retention of employees (ASI given the
right to designate the president and plant manager)
4. Set up procedure for the settlement of disputes by arbitration
As in other joint venture companies, the extent of ASI’s participation in the management of the
corporation is spelled out in the Agreement. 3 of the nine directors only. Having entered into a well-
defined contractual relationship it is imperative that the parties honour and adhere to their respective
rights and obligations thereunder.

Other doctrines:

 Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world. Arrangements are formalized where a
foreign group becomes a minority owner of a firm in exchange for its manufacturing expertise,
use of its brand names, and other such assistance. However, there is always a danger from such
arrangements. The foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture arrangement to gain a foothold or
test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group undermines the local
majority ownership and actively tries to completely or predominantly take over the entire
company. This undermining of joint ventures is not consistent with fair dealing to say the least.
To the extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve
controlling ownership to Filipino citizens.

Business Trust

Art. 1441 NCC: Trust are either express or implied. Express trust are created by the intention of the
trustor or of the parties. Implied trusts come into being by operation of law.

A business trust is simply a deed of trust which is easier and less expensive to constitute for it is not
bound by any legal requirement like the corporation. It does not have a separate juridical personality
and is mainly governed by contractual doctrines and common law principles on trust. Trust relationship
is centered upon properties, and which places naked title in the trustee, and the beneficial title in the
beneficiary

The corporation and the Bills of Rights

 The Equal Protection
Smith Bell ltd vs Joaquin Natividad

Facts: Smith, Bell and Co., Ltd is a corporation organized and existing under the laws of the Philippine
Islands. Its majority stockholders are British subjects and the owner of a motor vessel known as the
Bato. They applied for registration of said vehicles but was denied by the commissioner of customs due
to Act of Congress which prohibits registration of vessels which is not wholly owned by Filipinos or
Americans or both. Smith, Bell and Co petitioned for mandamus and assailed the unconstitutionality of
the Act as it deprives them of the right to equal protection.

Issue: Whether or not the act is violate the equal protection.

Ruling: No, although Smith, bell and Co. in having alien stockholders is still entitled to the protection
afforded by the due process of law and equal protection of the laws clause in the Philippine Bill of
Rights, nevertheless, Act No. 2761 of the Philippine Legislature in denying to corporations such as them
the right to register vessels in the Philippines coastwise trade is valid. Notably, because it is within the
purview of the police power of the state, and so does not offend against the constitutional provision of
equal protection. Mandamus is denied.

Other doctrines:

 The guaranties of the Fourteenth Amendment and so of the first paragraph of the bill of rights,
are universal in their application to all persons within the territorial jurisdiction, without regard
to any difference of race, colour, or nationality. The word “person” includes aliens. Furthermore,
private corporations, likewise, are persons within the scope of the guaranties in so far as their
property is concerned.

Harry S. Stonehill vs Hon. Jose W. Diokno as secretary of Justice

Facts: By virtue of a 42 search warrants against 3 petitioners (Stonehill, Brooks and Beck) herein and/or
the corporations of which they were officers directly law enforcers to search the persons and/or the
premises of their offices, warehouses, and/or residences, and to seize and take possession of the
following personal property: books of account, financial records xxx as the subject of the offense in
violation of different laws related to bank laws, tariffs and customs laws, internal revenue and RPC.
Petitioners alleged that the warrant were null and void, they filed unto the Supreme Court to prevent
the law enforcers in using the articles as evidence to any proceeding against them.
There were two major groups of seized items:
a. Those found and seized in the offices of the aforementioned corporations and
b. Those found and seized in the residences of petitioners

Ruling: In the first group, we hold the petitioners have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said
corporations have their respective personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or of the interest of each of them in said
corporations and whatever the offices they hold therein may be. The objection to an unlawful search
and seizure is purely personal and cannot be availed of by third parties, consequently, petitioners herein
may not validly object to the use in evidence against them of the documents, papers and things seized
from the offices and premises of the corporations adverted to above, since the right to object to the
admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects
belong and may not be invoked by the corporate officers in proceedings against them in their individual
capacity.

Bache and Co Inc vs Hon Judge Vivencio M. Ruiz

Facts: Bache and Co., Inc. files an original action of certiorari, prohibition and mandamus to declare null
and void a search warrant issued by Judge Ruiz, and to order respondents to desist from enforcing the
same and/or keeping the documents, papers, and effects seized by virtue thereof. Respondents content
that a corporation is not entitled to protection against unreasonable searches and seizures

Issues: Whether or not a corporation is not entitled to protection against unreasonable searches and
seizures

Ruling: No, a corporation is entitled to such protection. An officer of a corporation which is charged with
a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its
constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not
wish to be understood as holding that a corporation is not entitled to immunity, under the 4 th
Amendment, against unreasonable searches and seizures. A corporation is after all, but an association of
individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective
body it waives no constitutional immunities appropriate to such body. Its property cannot be taken
without compensation. It can only be proceeded against by due process of law, and is protected under
the 14th amendment, against unlawful discrimination. (Hale v Henkel)

Self-incrimination
Bataan Shipyard and Engineering Co., Inc. vs Presidential Commission on Good Governance

Facts: Petitioners challenged that EO number 1 and 2 by President Corazon Aquino and the
sequestration, takeover, and other orders issued, and acts done, in accordance with said executive
orders by the PCGG, particularly the Order to produce documents, it argues that it was issued without
court authority and infringed its constitutional right against self-incrimination and unreasonable search
and seizure

Issue: Whether or not corporations are protected against self-incrimination

Ruling: It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and franchise may
refuse to show its hand when charged with an abuse of such privileges.

The witness may not refuse to comply with the order on the basis of his privilege against self-
incrimination; but no testimony or other information compelled under the order may be used against
the witness in any criminal case, except a prosecution for perjury, giving a false statement, or otherwise
failing to comply with to the order

The constitutional safeguard against unreasonable searches and seizures find no application to the case
at bar either. There has been no search undertaken by any agent or representative of the PCGG and of
course no seizure on the occasion thereof.

Unlike search and seizures, self-incrimination is not intrusive.

Classes of Corporations:
RRC: Section 3. Corporations formed or organized under this Code may be stock or non-stock
corporations. Stock corporations are those which have capital stock divided into shares and are
authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on
the basis of the shares held. All other corporations are non-stock corporations.

Public Corporation cannot be identified by manner of creation or the purpose, you have to look if it
exercises the 3 powers of the state, Police, E.D. and Taxation.

1. Look at the Charter

a. If the 3 powers is complete, it is public corporation
b. If incomplete, it will be a quasi-public corporation
 Essentially a little version of the State.

Public Corporation
National Coal Company v The collector of Internal Revenue (1924)

Facts: The National Coal Company, a corporation created by Act No. 2705 brought an action to the CFI
for the refund of a specific amount paid under protest to the Collector of the internal revenue. It
claimed exemption from taxes under provisions of section 14 and 15 of act no. 2719 (an act to provide
for the leasing and development of coal lands in the Philippine Islands) and prayed for refund. It has the
theory that it claims to be the owner of the land from which it has mined the coal in question and is
therefore subject to the provisions of Section 15 of Act 2719 and not to the provisions of the section
1496 of the Administrative code. The CIR countered that the said sum was due and owing from the
plaintiff to the Government of the Philippine Islands under the provisions of Section 1496 of the admin
code. The lower court Judge ruled that the lands owned by persons should be interpreted as land held in
lease or in usufruct. Hence, the coal lands possessed by the NCC is owned by the government thus, they
are entitled to the refund.

Ruling: The theory of the plaintiff leads us to an examination of the evidence upon the question of the
ownership of the land from which the coal in question was mined. If the plaintiff is the owner of the land
the judgment should be affirmed, if not, the judgment should be reversed.

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

We are persuaded, considering all the provisions of said Act, that said section 15 has reference only to
persons, firms, associations or corporations which had already, prior to the existence of said Act,
become the owners of coal lands

Section 1496 of the admin code provides that on all coal and coke there shall be collected per metric
ton, fifty centavos, said section is a part of article 6 which provides for specific taxes. Said article
provides for a specific internal revenue tax upon all things manufactured or produced in the Philippine
Islands for domestic sale or consumption, and upon things imported from in the P.I and is not a lesses or
owner of the land from which the coal was produced, we are clearly of the opinion, and so hold, that it
is subject to pay the internal revenue tax under the provisions of section 1496 of the Administrative
Code, and is not subject to the payment of the internal revenue tax under Section 15 of Act no. 2719,
nor to any other provisions of said act.

The plaintiff is not subject to any other provisions of act no 2719. Judgment revoke, no refund is to be
made.

Philippine Society for the Prevention of Cruelty to Animals vs Commission on Audit

Facts: Philippine Society for the Prevention of Cruelty to Animals, a corporation incorporated in 1905 by
virtue of Act no 1285 assails the jurisdiction of the Commission on Audit over their accounts. Averring
that they are a private corporation beyond the jurisdiction of the COA. Petitioners argues that 1) even
though it was created by special legislation there was no general law then existing under which it may
be organized or incorporated and they exercise no governmental function, 2) nowhere in its charter is it
indicated that it is a public corporation, 3) if it were a government body, they would have been no need
for the State to grant it tax exemption, 4) its employees are registered and covered by the SSS, 5)
petitioners does not receive any form of financial assistance from the government, 6) they are deprived
to make arrest, 7) no government appointee or representative sits on the board of trustees, 8) no act or
decision of the PSPCA is subject to approval of any government agency, and 9) the committee includes
members both from private and public sectors

COA contends that the petitioner is a body politic created by special legislation. 1) the test to determine
if an entity is public or private corporation lies in the manner of its creation (Charter test,) 2) petitioner
exercises sovereign power tasked to enforce laws, 3) the OP exercises supervision or control over them,
4) under their charter requires them to report to the governor general, which functions was inherited by
the President, 5) they have been incorporated in the Corporation code, 6) they are members of the
Committee on Animal welfare attached to the DA

Issue: Whether or not PSPCA is a private corporation

Ruling. Yes, it is a private corporation. Firstly, the petitioner is correct that the charter test (if created by
special law, then it is public corporation) is not applicable to them since they are created before the
passage of the corporation law and the 1935 constitution, these shall not retroact against them. The
inapplicability of the charter test doctrine hence, the mere fact that a corporation is created by a special
law cannot be applied.

In 1905, the Philippine Commission was well within its power to constitute the petitioner as a private
juridical entity.

1. President Quezon revoked their powers to arrest to correct a serious defect

2. The charter shows that it is not subject to control and supervision by any agency of the state
3. Employees of the petitioner are registered and covered by the SSS
4. The body politic argument is at best scholarly. The fact that a certain juridical entity is impressed
with public interest does not, by that circumstance alone make the entity a public corporation,
inasmuch as a corporation may be private although its charter contains provision of a public
character incorporated solely for the public good. The class of corporations may be considered
quasi-public corporations, which are private corporations which renders public service. It must
be stressed that they are only species of a private corporations, if it performs a public service,
then it becomes a quasi-public corporation.
5. Periodic reports to the civil governor is inconclusive, by virtue of the fiction that all corporations
owe their very existence and powers to the State, the reportorial requirement is applicable to all
corporations of whatever nature.

COA has no jurisdiction.

Quasi-public corporations
Davao City Water District vs Civil Service Commission (1991)

Facts: Petitioners are among the more than 500 water districts existing through the country formed by
virtue of PD 768 and 1479 or the Provincial Water Utilities Act of 1973. It authorized local legislative
bodies to form and create the respective water districts. And formed the LWUA under NEDA. The
respondents are CSC and COA that due to conflicting decisions of divisions of the Supreme Court seeks
to clarify whether the local water districts are under their jurisdictions. The water districts’ main
argument is that they private corporations which are only regarded as quasi-public or semi-public
because they serve public interest and convenience and that since PD 198 is a general legislation it
cannot be considered as a charter.

Issue: Whether or not water districts are private corporations.

Ruling: No, they are Government-owned or controlled corporations with original charters. First, PD 198
is a special law applicable only to the different water districts created pursuant thereto. The fact that the
said decree generally applies to all water districts through the country does not change the fact that PD
198 is a special law: By government-owned or controlled corporation with original charter/we mean
government owned and controlled corporation created by a special law and not under the Corporation
Code of the Philippines. What is only excluded in the jurisdiction of the CSC are those corporations
created pursuant to the Corporation Code

Further PD 198 contains all the essential terms necessary to constitute a charter creating a juridical
person. 1) Section 6 name of the of water district, 2. Prescribes the numbers and qualifications of the
members of the Board of Directors. 3) Manner of their appointment 4) terms of office 5) manner of
filling up vacancies and 5) The compensation and personal liability of the member of the Board of
Directors.

The conclusion is inescapable that the said decree is in truth and in fact the charter of the different
water districts for it clearly defines the latter’s primary purpose and its basic organizational set-up. In
other words, PD 198 as amended, is the very law which gives a water district juridical personality.

Section 3(b) of the law provides that the appointing authority for the members who will comprise the
Board of Directors belongs to the local executives, different from a private corporation where members
of the board are election from among the members of the stockholders thereof.

As to place of incorporation

1. Domestic: formed, organized, or existing under Philippines laws

2. Foreign: Formed, organized, or existing under any laws other than those of the Philippines and
whose laws allows Filipino citizen and corporations to do business in its own country or state.
Section 140: Definitions and rights of foreign corporations- for the purpose of this code, a
foreign corporation is one formed, organized or existing under laws other than those of the
Philippines and whose laws allow Filipino Citizens and corporations to do business in its own
country or State. It shall have the right to transact business in the Philippines after obtaining a
license for the purpose in accordance with this Code and a certificate of authority from the
appropriate government authority.
 A corporation composed entirely of Filipino Citizens formed, organized and existing under the
laws of the USA is a foreign corporation. It is determined by the country or state of
incorporation. Thus a corporation is foreign if it is formed, organized, or existing under the laws
of a foreign country regardless of the nationality of stockholders.

Test

1. Place of incorporation test – by the state of incorporation regardless of the nationality of the
stockholders
2. Principal place of business test/ domiciliary test – determined by the principal place of business
of the corporation
3. Control test- determined by the nationality of the controlling stockholders or members. Test is
applied in times of war
4. Grandfather rule – 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.
Nationality is attributed to the percentage of equity in the corporation used in nationalized or
partly nationalized area.
The combined totals in the investing corporation and the investee corporation must be traced to
determine the total percentage of Filipino ownership. Moreover, the ultimate Filipino ownership
 of the shares must first be traced to the level of the Investing Corporation and added to the
shares directly owned by the investee corporation (joint venture corporation with Filipino and
foreign stockholders with less than 60% of Filipino stockholdings invest in other joint venture
corporation which is either 60-40 Filipino alien or the 59% less Filipino.
Such manner of computation is necessary since the shares of the investee corporation may be
owned both by individual stockholders (investing individuals) and by corporations and
partnerships (Investing corporations) the determination of nationality depending on the
ownership of the investee corporation and in certain instances, the investing corporation

Exploitation of Natural Resources

The register of Deeds of Rizal vs UNG Siu SI Temple (1955)

Facts: The register of deeds for the province of Rizal refused to accept for record a deed of donation by
a Filipino conveying a parcel of land to a religious organization Ung Siu Si Temple operating through
three trustees all of Chinese nationality. The refusal was due to an En Consulta to the RTC that states
that the UNG Siu Si Temple is a religious organization whose deaconess, founder, trustees and
administrators are all Chinese citizens in violation of Section 1 and 5 of the Article XIII of the constitution
limiting the acquisition of land in the Philippines to its citizens or corporations or associations at least 60
per centum of capital stock of which is owned by such citizens adopted and shall not be admitted for
registration. The temple argued that the acquisition for religious purposes is authorized by the old
Philippine commission.

Issue: whether or not the acquisition of religious organization of Philippine lands is valid

Ruling: No. the prohibition in the constitution is absolute and makes no exception in favour of religious
associations. The fact that the appellant religious organization has no capital stock is of no moment to
escape the Constitutional inhibition since it is admitted that its members are of foreign nationality. The
purpose of the 60 per centum rules is to ensure that corporations or associations allowed to acquire
agricultural land or to exploit natural resources shall be controlled by Filipinos and the spirit of the
constitution demands that in the absence of capital stock the controlling membership should be
composed of Filipino citizens.

To permit religious association controlled by non-Filipino to acquire agricultural lands would be to drive
the opening wedge to revive alien religious land holdings in this country.

Public Utilities

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens;
nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines.

The People of the Philippines vs William H. Quasha (1953)

Facts: William H. Quasha was found guilty of Falsification by giving the impression that Baylon, a Filipino,
was the owner of the 60.005% of the subscribed capital stock, where in fact and in truth it is money paid
by American citizens for the establishment of the corporation Pacific airways organized to engage
business as a common carrier. According to the trial court, is a malicious perversion of the truth made
with the wrongful intent of circumventing section 8, Article XIV, now Section 11, Art. XII, of the
constitution which provides, no franchise, certificate, or any other form of authorization shall be granted
except to citizens of the Philippines or to corporations or other entities organized under the laws of the
Philippines, 60 per centum of the capital which is owned by citizens of the Philippines.

Issue: whether or not Qusha is guilty

Ruling: No, the RTC has erroneous assumed that the constitutional provision was meant to prohibit
mere formation of a public utility corporation without 60% of its capital being owned by Filipinos. A
mistaken belief which has induced the lower court to conclude that the accused was under obligation to
disclose the whole truth about the nationality of the subscribed capital stock of the corporation by
revealing that Baylon was a mere trustee or dummy of his American incorporators as a way of
circumvention of the Constitution.

Contrary to this assumption, the Constitution does not prohibit the mere formation of a public utility
corporation without the 60% Filipino ownership requirement. What it does prohibit is the granting of
franchise or other form of authorization for the operation of a public utility corporation already in
existence but without the requisite proportion of Filipino capital.

If the constitution does not prohibit the mere formation of a public utility corporation with alien capital,
then how the accused could be charged with having wrongfully intended to circumvent the fundamental
law? Quasha is acquitted.

It is urged, however, the formation of the corporation with 60 per cent of its subscribed stock appearing
in the name of Baylon was an indispensable preparatory step in the subversion of the constitutional
prohibition and the laws implementing the policy expressed therein is incorrect. It is not necessary that
a corporation be organized with 60 percent Filipino capital from the start as it can change its nationality
of its capital through transfers of shares to Filipino Citizens. The moment for determining whether a
corporation is entitled to operate as a public utility is when it applies for a franchise, certificate, or any
other form of authorization for the purpose.

Other doctrines:

 The terms franchise, certificate or any other form of authorization with the phrase for the
operation of a public utility, thereby making it clear that the franchise meant is not the primary
 franchise that invest a body of men with corporate existence but the secondary franchise or the
privilege to operate a public utility after the corporation has already come into being.

Mass Media
Article XVI. Section 11 (1) 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

The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest
so requires. No combinations in restraint or trade or unfair competition therein shall be allowed

Advertising Industry
Article XVI. Section 11(2) the advertising industry is impressed with public interest, and shall be
regulated by law for the protection of consumers and the promotion of the general welfare

Only Filipino citizens or corporations or associations at least 70% of the capital of which is owned by
such citizens shall be allowed to engage in the advertising industry.

War time test/ Control test

Filipinas Compana de Seguros vs Christern, Huenefeld and CO., Inc

Facts: Respondent, Christern, Huenefeld, and CO., Inc. a company controlled by Germans seeks to
enforce a fire insurance policy from the Petitioner, Filipinas Compana de Seguros. The petitioner refused
to pay the claim on the ground that the policy in favour of the respondent has ceased to be in force on
the date the US declared war against Germany. The petitioner, however, upon orders of the Director of
Bureau of Financing, Philippine Executive Commission paid the claim. The petitioner comes to the court
for the refund of the paid claim under theory that the insurance had ceased to be effective because of
the outbreak of war between US and Germany.

Issue: Whether or not the claim shall be refunded

Ruling: Yes, Pursuant to the US SC decision in Clark vs Uebersse Finanz Korporation the control test was
adopted, where the nationality of a private corporation is determined by the character or citizenship of
its controlling stockholders. In the present case, the majority of the stockholders of a corporation were
German subjects, the corporation became an enemy corporation upon the outbreak of war between US
and Germany. Furthermore, the Philippine Insurance Law provides that anyone except a public enemy
may be insured. An insurance policy ceases to be allowable a soon as an insured becomes a public
enemy. Hence. Where an insurance policy ceases to be effective by reason of war, which has made the
insured an enemy, the premiums paid for the period covered by the policy from the date of war is
declared, shall be refunded.

The property of all foreign interest was place within the reach of the vesting power not to appropriate
friendly or neutral assets but to reach enemy interest which masqueraded under those innocent fronts.
The power of seizure and vesting was extended to all property of any foreign country or national so that
no innocent appearing device could become a Trojan horse.

The Grandfather Rule

The grandfather rule traces the nationality of the stockholders of investor corporations so as to
ascertain the nationality of the corporation where the investment is made

 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 and even subsequent tier of ownership
to determine the nationality of the corporate shareholder. (Villanueva)
 Can only apply if the investors are corporations

When grandfather rules if applied?

1. Under the grandfather rule proper, if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall
be counted as of Philippine nationality
2. Under the strict rule or grandfather rule proper, the combined totals in the Investing
Corporation and the Investee Corporation, when traced (grandfathered) to determine the total
percentage of Filipino ownership, show less than 60% requirement.
3. If based on records, Filipinos own at least 60% of the investing corporation but there is doubt as
to where control and beneficial ownership in the corporation really reside.

Narra Nickel Mining and development corporation vs Redmont Consolidated mines corporation (2014)

Facts: Redmont Consolidated filed a complaint against Narra Nickle Mining, Tesoro Mining and Mcarthur
Mining that they are foreign controlled corporation hiding in a myriad corporate layering to skirt the
constitutional prohibition against foreign mining in the Philippine soil.

The application of conversion during the pendency of the case of MPSA to FTAA is a clear admission that
the respondents are not capable of conducting large scale mining operation and that they need the
financial and technical assistance of a foreign entity in their operation that is why they sought the
participation of MBMI resources. The participation of MBMI proved that it is the Canadian company who
would provide the funding. It is an admission that indeed the respondent is not a Filipino but rather of
foreign nationality who is disqualified under the laws.

The Grandfather Test

DOJ Opinion No. 020, Series 2005

Shares belong to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of the Filipino ownership in
the corporation or partnership is less than 60% only the number of shares corresponding to such
percentage shall be counted as Philippine nationality. Thus, if 100,000 shares are registered in the name
of a corporation or partnership at least 60% of the capital stock or capital respectively, of which belong
to Filipino citizens, all the shares shall be recorded as owned by Filipino. But if less than 60% or say, 50%
of the capital stock or capital of the corporation, or partnership, respectively, belongs to Filipino citizens,
only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as
belonging to aliens.

The liberal rule/control test is the first part – under this rule there is no need to further trace the
ownership of the 60% or more Filipino stockholdings of the investing corporation since a corporation
which is at least 60% Filipino –owned is considered as Filipino

The second part is the strict rule/ grandfather rule – The combined totals in the Investing Corporation
and the Investee Corporation must be traced (grandfathered) to determine the total percentage of
Filipino ownership. Moreover, the ultimate Filipino ownership of the shares must be first traced to the
level of the investing corporation and added to the shares directly owned by the investee corporation.

The grandfather rule will only apply when the 60-40 filipino-foreign equity ownership is in doubt. Stated
differently, where the 60-40 Filipino-foreign equity ownership is not in doubt, the grandfather rule will
not apply.

McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation owns 60% or
more of their equity interest, derived after grandfathering petitioners’ corporate owners: MMI, SMMI
and PLMDC.

Petitioners argue that the grandfather rule is no longer applicable as corporate layering is admitted in
the FIA.

The court disagrees, corporate layering is admittedly allowed by the FIA but if it is used to circumvent
the Constitution and pertinent laws, then it becomes illegal. Grandfather rule is not abandoned as
Article XII. Sect 2 of the constitution provides

Xxx the state may directly undertake such activities, or it may enter into co-production, joint venture or
production-sharing agreements with Filipino citizens, or corporations or associations at least 60% of
whose capital is owned by such citizens.

Since the case centres on the exploitation of natural resources, there is a need to ascertain the
nationality of the petitioners. The intention of the framers of the Constitution to apply the grandfather
rules in cases where corporate layering is present.

Narra Nickel Mining and development corporation vs Redmont Consolidated mines corporation (2015)

Facts: Motion for reconsideration for the 2014 decision. The appellants argues that the court’s
application of the Grandfather Rule to determine their nationality is erroneous and allegedly without
basis in the Constitution, the FIA, the Philippine Mining act and the rules issued by SEC. these laws and
rules supposedly espouse the application of the Control test in verifying the Philippine nationality of
corporate entities.

Issue: Whether or not Grandfather Rule finds no application

Ruling: Nowhere in the 2014 decision did the court foreclose the application of the Control Test in
determining which corporations may be considered as Philippines Nationals. Instead, to borrow Justice
Leonen’s term the Court used the Grandfather Rule as a supplement to the Control test so that the
intent underlying the averted Sec 2. Article XII of the Constitution be given effects:
The control test is still the prevailing mode of determining whether or not a corporation is Filipino
corporation, but, when in the mind of the court there is doubt, based on the attendant facts and
circumstances of the case in the 60-40 filipino equity ownership in the corporation, then it may apply
the grandfather rule. The use of grandfather rule as a supplement to the control test is not proscribed by
the Constitution or the Philippine Mining Act of 1995

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution, it was
originally conceived to look into the citizenship of the individuals who ultimately own and control the
shares of stock of a corporation for purposes of determining compliance with the constitutional
requirement of Filipino ownership.

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 and even subsequent tier of ownership to determine the
nationality of the corporate shareholder.

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches the individual stockholders.

If there are layers of intervening corporations investing in a mining joint venture we must delve into the
citizenship of the individual stockholders of each corporation. Indeed the framers of the Constitution
intended for the grandfather rule to apply in case of 60-40 filipino-foreign equity corporation invest in
another corporation engaging in an activity where the Constitution restricts foreign participation.

Beneficial ownership was subsequently used in tandem with the situs of control

The Grandfather Rules is applied specifically in cases where the corporation has corporate stockholders
with alien stockholdings, otherwise, if the rules is not applied, the presence of such corporate
stockholders could diminish the effective control of Filipinos

The pairing of the concepts beneficial ownership and the situs of control in determining what
constitutes capital has been adopted by this Court in Heirs of Wilson P. Gamboa vs Teves.

Ex. Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential

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
ruler are not, as it were, incompatible ownership-determinant methods that can only be applied
alternatively to each other. Rather, these methods can, if appropriate, be used cumulatively, in the
determination of ownership and control of corporations engaged in fully or partly nationalized activities.

The Grandfather rule standing alone should not be used to determine the Filipino ownership and control
in a corporation as it could result in an otherwise foreign corporation rendered qualified to perform
nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with
the Grandfather Rule may be applied. 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 instant there is no need for 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.
 When foreigners contribute more capital to an enterprise, doubt exists as to the actual control
and ownership of the subject corporation even if the 60% Filipino equity threshold is met.

Classifications of Corporation
Municipal Corporations: political subdivisions created by the legislature for the convenient
administration of the government, or some aspect of the government, of the inhabitants of a defined
district, remain entirely subject to the legislative control. They are organized for the purpose of serving
the communal welfare of the inhabitants of a town or a city.

Possess two-fold character:

1. Public or government character, in which it acts as agent of the state and exercises, by
delegation a party of the sovereignty of the state
2. A private, corporate or proprietary character, in which it acts as a private or business
corporation, and stands for the community in the administration of its local affairs
wholly beyond the sphere of public purposes for which its governmental powers are
conferred. They can be sue and be sued, enter into contracts and may be held liable for
damages for torts committed by them in the exercise of their corporate functions as
distinguished from public and governmental functions.

As to organizers

1. Public by the state only

2. Private by private persons alone or with the state

As to function

1. Public organized for the government of a portion of the state

2. Private usually organized for profit

As to governing law

1. Government-owned and controlled corporation (GOCC): governed by the special law creating it
and the provisions of the RCC suppletorily, to the extent applicable. In case of conflict, the
special law prevails
2. Private: Governed by the RCC. The RCC is also the governing law for non-chartered GOCC

As to legal status

1. De Jure: One that has fulfilled all the requirements mandated by law and can successfully resist
a suit by the state to challenge its existence
2. De facto: is one organized with colourable compliance with the requirements of a valid law. Its
existence cannot be inquired collaterally. Such inquiry may be inquired only by a direct attack by
the state through quo warranto proceeding
 3. By estoppel: it exist when two or more persons assume to act as a corporation knowing it to be
without authority to do so. They are liable as general partners for all debts, liabilities, and
damages incurred or arising as a result thereof
4. By Prescription: one which has exercised corporate powers for an indefinite period without
interference on the part of the sovereign power.

As to relationship of management and control

1. Holding corporation: a corporation that holds stocks in other companies for purposes of control
rather than for mere investment
2. Subsidiary corporation: a company that is owned and controlled by another company, called the
parent company
3. Affiliates: two companies are affiliates when one company owns less than the majority of the
voting stock of the toher
4. Parent company: a corporation that owns enough voting stock in another company to control
management and operation by influencing or electing its board of directors. Companies that
operate under this management are deemed subsidiaries of the parent company

Other classifications:

1. Closed Corporation: is one whose articles of incorporation provides that all of the corporation’s
issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than
a specified number of persons, not exceeding twenty; subject to specified restrictions on
transfers; and it shall into list in any stock exchange or make any public offering of its stocks of
any class.
2. Special corporations: these include educational corporations and religious corporations.
Religious corporations include corporation sole and religious societies
3. One-person corporation: a corporation wherein all of the stocks are held directly or indirectly by
one person.
4. Acquired-asset corporation is a corporation under private ownership, the coting or outstanding
shares of which were conveyed to the government in the satisfaction of debts.

Elements of a GOCC

1. Its organization as stock or non-stock corporation

2. The public character of its function
3. Government ownership of the same

Corporation Sole
Catholic Church vs LRC 1957

Facts: Mateo Rodis executed a deed of sale of a parcel of land in favour of the Roman Catholic
Administrator of Davao, Inc., a corporation sole with Msgr. Clovis Thibault, a Canadian citizen as actual
incumbent. The Register of Deeds of Davao required said corporation sole to submit an affidavit
declaring that 60% of the members were Filipino Citizens. The Corporation sole submitted an affidavit
stating that the totality of the Catholic population of Davao would become the owner of the property
sought to be registered. The RD referred to the LRA and found that the vendee was not qualified to
acquire private lands in the Philippines in the absence of proof that at least 60% of the capital, property,
or assets of the RC administrator of Davao Inc was actually owner or controlled by Filipino Citizens.
Because the present incumbent is a Canadian citizen, registration must be denied, unless proof of
compliance with such condition is presented.

In the Mandamus, it was asserted that under the Corporation law and Cannon law, the deed of sale was
in favour of the Catholic Church which is qualified to acquire private agricultural lands for the
establishment and maintenance of places of worship.

Issue: Whether or not the registration must be allowed

Ruling: Yes, the corporation code and cannon law leaves no room for doubt that the bishops or
archbishops in corporation sole are merely administrators of the church properties that come to their
possession. Upon his death, these properties pass not to his personal heirs but to his successor in office.
Ownership of these temporalities logically fall and devolve upon the church, diocese or congregation
acquiring the same.

On the question of citizenship: There is no question that the RCC in the Philippines is a tributary and part
of that international religious organization for the word Roman clearly expresses its unity with and
recognizes the authority of the Pope in Rome. However, the fact that the RCC in almost every country
springs from that society that saw its beginning in Europe and the fact that the clergy of this faith derive
their authorities and receive orders from the Holy See do not give or bestow the citizenship of the Pope
upon these branches. Citizenship is a political right which cannot be acquired by a sort of radiation. The
same can be said with regard to the nationality or citizenship of the corporation sole created under the
laws of the Philippines, which is not altered by the change of citizenship of the incumbent bishop or
heads of corporation sole.

We must declare that although a branch of the Universal Roman Catholic Church in different countries,
if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it
is located, is considered an entity or person with all the rights and privileges granted to such artificial
being under the laws of that country, separate and distinct from the personality of the Roman Pontiff.

On whether the Roman Catholic Apostolic Church in the Philippines as a corporation sole is qualified to
acquire private agricultural lands in the Philippines pursuant to the provisions of Article XIII of the
Constitution. We might safely state that even before the establishment of the Philippine Commonwealth
and of the RP every corporation sole then organized and registered had by express provision of law the
necessary power and qualification to purchase in its name private lands located in its territory in which it
exercised its functions or ministry and for which it was created, independently of the nationality of its
incumbent unique and single member and head, the bishop of the diocese. It can be also maintained
without fear of being gainsaid that the Roman Catholic Apostolic Church in the Philippines has no
nationality and that the framers of the Constitution, as will be hereunder explained did not have it in
mind the religious corporations sole when they provided that 60 per centum requirement.

Section 1 of Article XIII xxx Subject to any existing right at the time of the inauguration of the
government established under this constitution

Justice Laurel This recognition (saving clause) is not mere graciousness but springs from the just
character of the government established. The framers of the Constitution were not obscured by
 the rhetoric of democracy or swayed to hostility by an intense spirit of nationalism. They well
knew that conservation of our natural resources did not mean destruction or annihilation of
ACQUIRED PROPERTY RIGHTS.

It will tend to prove the inescapable conclusion that the 60% requirement was never intended
to apply to corporations sole.

A corporation sole is a special form of corporation usually associate with the clergy. Conceived and
introduced into the common law by sheer necessity, this legal creation which was referred to as the
unhappy freak of English law was designed to facilitate the exercise of the functions of ownership
carried on by the clerics for and on behalf of the church which was regarded as property owner.

Consist of one person only, and his successors (who will always be one at a time), in some particular
stations, who are incorporated by law in order to given them some legal capacities and advantages
particularly that of perpetuity, which in their natural persons they could have had. In this sense, the king
is a sole corporation; so is a bishop, or dens distinct from their several chapters.

Other discussions

Who are qualified to acquire and hold agricultural lands in the Philippines?
What is the effect of these constitutional prohibition on the right of a religious corporation
recognized by our Corporation Law and registered corporation sole to possess, acquire, and
register real estates in its name when the Head, Manager, Administrator or actual incumbent is
an alien?
 In cannon law,, it is explicit that the provisions of a corporation sole or ordinary is not
the owner of the properties that he may acquire but merely the administrator thereof.
 The Catholic Church is made up of 2 elements or divisions, the clergy or religious
members and the faithful or lay members. There will be 80% of the entire catholic
population in Davao that is Filipino.
 Respondent said that although that it might be true the petitioner is not the owners, he
has all the rights exercising all rights of ownership over the propert.

Republic vs Villanueva 1982

Facts: Section 11, Article XIV. No private corporation or association may hold alienable lands of the
public domain except by lease not to exceed one thousand hectares in area. Iglesia ni Cristo, a
corporation sole acquired certain lots in Plaridel Bulacan and filed for its registration in the CFI of
Bulacan. The Director of Lands opposed the application on the ground that the applicant is a private
corporation is disqualified to hold alienable lands of public domain, that the land applied for is public
land not susceptible of private appropriation and that the applicant and its predecessors-in-interest
have not been in the open, continuous, exclusive and notorious possession of the land since June 12,
1945. The trial court ruled in favour of INC.

Issue: whether or not INC should be disqualified to own lands

Ruling: yes, INC as a corporation sole is disqualified to acquire or hold alienable lands of the Public
Domain, because of the constitutional prohibition already mentioned and because the said church is not
entitled to avail itself of the benefits of section 48(b) which applies only to Filipino citizens or natural
persons. A corporation sole has no nationality.

As to existence of share of Shares of Stock

1. Stock Corporation: has a capital stock divided into shares and is authorized to distribute to the
holders of such shares dividends or allotments of the surplus profits based on the shares held.
2. Non-stock Corporation: has no capital stock and/or not authorized to distribute dividend to its
members.

Non-Stock corporations

CIR vs Club Filipino 1962

Facts: Club Filipino Inc. owns and operates a club house, bowling alley a golf course and a bar restaurant
where is sells wines and liqueurs etc. The club is operated mainly with funds derived from membership
fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve it golf
course. Sometime, as a result of a capital surplus, arising from the re-valuation of properties, the value
or price of which increased, the Club declared stock dividends, but no actual cash dividends were
distributed to the stockholders. A BIR agent discovered that the Club has never paid percentage tax on
the gross receipts, and the Club was charged and penalized.

Issue: whether or not the Club shall be charged and penalized

Ruling: The Club Filipino was organized to develop and cultivate sports of all class and denomination, for
the healthful recreation and entertainment of its stockholders and members; that upon its dissolution,
its remaining assets, after paying debts shall be donated to a charitable Philippine institution in Cebu;
that it is operated mainly with funds derived from membership fees and dues; that the Club’s bar and
restaurant catered only to its members and their guest; there was no cash dividend distribution to its
stockholders. It stands to reason that the Club is not engaged in the business of an operator of bar and
restaurant

It is conceded that the club derived profit from the operation of its bar and restaurant but such fact does
not necessarily convert it into profit-making enterprise.

It is claimed that unlike the two cases cited above, which are non-stock, the apellee club is a stock
corporation. This is unmeritous. The facts that the capital stock of the respondent Club is divided into
shares does not detract from the finding of the trial court that it is not engaged in the business of
operator of bar and restaurant. What is determinative of whether or not the club is engage in such
business is its object and purposes as stated in its articles and by-laws. Moreover, a stock corporation
must comply with two requisites 1) capital stock divided into shares and 2) an authority to distribute to
the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held.
In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it cannot be considered a stock
corporation, within the contemplation of the corporation law.
Closed Corporation

Manuel R. Dulay Enterprises Inc. vs CA

Facts: Petitioner Corporation through President Manuel Dulay obtained various loans for the
construction of its hotel project. It even had to borrow money from Virgilio Dulay to be able to continue
the project. As a result of said loan, petitioner Virgilio occupied one of the unit apartments. Sometime,
Manual Dulay by virture of a Board resolution sold the properties (Apartment) to spouses Maria Theresa
and Castrene Velos they later attached a 2 year repurchase agreement.

Later Maria Veloso without knowledge of Manual Dulay mortgage the property to Manual Torres. Maria
Veloso failed to pay the loan, and thru extra-judicial foreclosure, the land was sold to Torres. Maria
Velos executed a deed of absolute assignment of the right to redeem in favour of manuel dulay
assigning her right to repurchase the subject property.

Maria Veloso and Manuel Dulay failed to redeem the land within one year statutory period for
redemption. Torres filed for an affidavit of consolidation of ownership. Torres filed for issuance of writ of
possession against the spouses and manuel dulay. Virgilio intervened alleging that Manuel Dulay was
never authorized by the corporation to sell or mortgage the subject property.

Petitioners contend that the respondent court had acted with grave abuse of discretion when it applied
the doctrine of piercing the veil of corporate entity in the instant case considering that the sale of the
subject property between private respondents spouses Veloso and Manuel Dulay has no binding effect
on the petitioner corporation as Board resolution No 18 which authorized the sale of the subject
property of the board of directors and said Board Resolution was prepared by a person not designated
by the corporation to be its secretary.

In the instant case, petitioner corporation is classified as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the
corporate action taken at a board meeting without proper call or notice in a close corporation is deemed
ratified by the absent director unless the latter promptly files his written objection with the secretary of
the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio Dulay failed
to do.

In ordinary parlance, a closed corporation is loosely referred to as a family corporation. The

nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is
typical: 4/5 of its incorporators being close relatives namely, there children and their father whose name
identified their corporation.

The corporation was a closed family corporation and the only non-relative in the Board of Directors was
Atty. Plaridel Jose who appeared on paper as a secretary. There is no denying the fact, however, that
Maria Socorro R. Dulay at times acted as Secretary. The court cannot lose sight of the fact that the
Manuel R. Dulay Enterprise Inc is a close family corporation where the incorporators and directors
belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and
general manager almost had absolute control over the business and affairs of the corporation.

Withdrawals and dissolutions

Financing Corp vs Teodoro

Facts: Several minority stockholders filed a complaint against Financing Corporation and J. Amado
Araneta for alleged gross mismanagement and fraudulent conduct of the corporate affairs. The trial
court favoured the minority stockholders and appointed a receiver. The Corporation and Amado
opposed the appointment saying it is merely an auxiliary remedy, that the principal remedy sought by
respondent in the action was the dissolution of the Corporation. And the dissolution can only be brought
by the state through its legal counsel, and the minority stockholders have no right or personality to
maintain the action for dissolution.

Ruling: True it is the general rule that the minority stockholders of a corporation cannot sue and
demand its dissolution. However, there are instances that allows minority stockholders to ask for
dissolution.

As a rule, minority stockholders of a corporation may not ask for its dissolution in a private suit,
and that such action should be brought by the Government through its legal officer in a quo warranto
case, at their instance and request, there might be exceptional cases wherein the intervention of the
State, for one reason or another cannot be obtained, as when the State is not interested because the
complaint is strictly a matter between stockholders. Xxx in which case the minority stockholders are
entitled to have such dissolution.

We hold that the trial court through respondent Judge Teodoro had jurisdiction and properly
entertained the original case,.

Promoter

A person or group of persons who bring about or cause to bring about the formation or organization of a
corporation by bringing together the incorporators or the persons interested in the enterprise,
procuring subscriptions or capital for the corporation and setting in motion the machinery which leads
to the incorporation of the corporation itself

Promoter includes:

1. Any person who, acting alone or in conjunction with one or more other persons, directly or
indirectly, takes initiative in founding and organizing the business or enterprise of an issuer
2. Any person, who in connection with the founding and organizing of the business of an
issuer, directly or indirectly, receives in consideration of services or property or both
services or property (10% per centum or more of any class of securities of the issuer or ten
(10%) per centum or more of the proceeds from the sale of any class of such securities.
However, a person who receives such securities or proceeds either solely as underwriting
commission or solely as consideration of property shall not be deemed as a promoter within
the meaning of this paragraph if such person does not otherwise take part in the founding
and organizing the enterprise.

A promoter’s contract is a promoter’s own. – When a promoter enters into a contract, that contract
shall be his own personal liability unless it is ratified by the corporation
Cagayan Fishing Development vs Sandiko (1937)

Facts: A certain Manuel Tabora is the registered owner of four parcels of land. He mortgaged it to PNB
to secure loan. Later, he executed a public document entitled Escritura de Traspaso de Propiedad
Inmueble (Real Property Transfer Deed) which sold the four parcels of land to his company (Cagayan
Fishing Development) which during that time is in the process of incorporation. There is a condition that
the CT to said lands shall not be transferred to the name of the plaintiff company until the latter has full
and completely paid Tabora’s indebtedness to the PNB. The company was then incorporated and thru a
resolution authorized its president Jose Ventura to sell the four parcels of land to Teodoro Sandiko

The defendant failed to pay the sum stated, plaintiff brought the action in the CFI praying that judgment
be rendered against the defendant for a certain sum of money with interest. The CFI find for the
defendant absolving him of obligations due to vice of consent and repugnancy to law.

Issue: Whether or not the lower court is correct

Ruling: Yes, but with a different reasons. The transfer made by Tabora to his corporation Cagayan
Fishing Developmetn Co., Inc., was made almost five months before the Incorporation of the company.
Before a corporation may be said to be lawfully organized, many things have to be done. It is clear upon
this case that the plaintiff (CFD) was not yet incorporated when it entered into the contract of sale. Not
being in legal existence then, it did not possess juridical capacity to enter into a contract.

Hence, the contract here, was entered into not only between Manuel Tabora and a non-existence
corporation but between Manuel Tabora as owner of the lands and Manuel Tabora, his wife and others
as mere promoters of a corporation. Consequently, 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 on life, and therefore no faculties. It is as it were, as child in its mother’s womb.

Although acts of promoters of a corporation may be ratified by the corporation if and when
subsequently organized. But under the present case, there has been no ratification as it would result in
the commission of injustice and fraud to the candid and unwary.

The transfer of Manuel Tabora to the CFD was null because at the time that it was effected the
corporation was non-existent.

Rizal Light and Ice Co., Inc vs Municipality of Morong Rizal and The Public Service Commission (1968)

Facts: Petitioner is a local electric company, first petition is a prayer for reversal of the decision of the
PSC to revoke their certificate of public convenience and the second petition is to revoke the franchise
given to Morong Electric Co.

Morong Electric had no legal personality when it filed its application on September 10, 1962 because its
certificate of incorporation was issued by the SEC only on October 17, 1962. This was denied because
the PSC considered Morong Electric as de facto corporation.

Issue: Whether or not Morong Election have a corporate personality at the time it was granted a
franchise and when it applied for said certificate.
Ruling: Yes, while it is true the Morong Electric’s juridical personality and legal existence began only on
October 17, 1962 when its certificate of incorporation was issued by SEC and before that date cannot be
considered as de facto. However, the fact the 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
terms and conditions thereof.

While a franchise cannot take effect until the grantee corporation is organized, the franchise
may nevertheless be applied for before the company of fully organized. – Fletcher

This is not incompatible with CFD Co. Inc vs Sandiko where the 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 an when subsequently organized. 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.

For ratification there must be a continuing offer for the liability of the promoter to cease, and the
Corporation’s liability begin.

The validity of the franchise and the corporate personality of Morong Electric is upheld.

Caram vs CA and Alberto Arellano (1987)

Facts: Caram, Garcia and Barreto were involved in the incorporation of the Filipinas Orient Airways.
Barreto and Garcia approach respondent Alberto Arellano to create a project study, and upon
completion was presented to Caram for investment. The airline was eventually organized on the basis of
the project study and petitioner with Barreto and Garcia as principal officers. Arellano filed a suti for
collection of sum of money and the trial court held the three solidary liable for 50,000. Caram filed for
reconsideration as he should not be held solidary liable with Barreto and Garcia.

Issue: Whether or not there is solidary liability

Ruling: No, the petitioners were not involved in the initial stages of the organization of the airline, which
were being directed by Barretto as the main promoter. The petitioners were merely among the
financers whose interest was to be invited and who were in fact persuaded. Furthermore, there was not
showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate
juridical personality to justify the making of the petitioners as principal stockholders thereof, responsible
for its obligations. As a bona fide corporation, the FOA should alone be liable for its corporate acts as
duly authorized by its officers and directors.

We hold that petitioners cannot be held personally liable for the compensation claimed by the private
respondent for the services performed by him in the organization of the corporation. The petitioners did
not contract such services. The most that can be said is that they benefited from such services, but that
surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of
the corporation, including those who came in later, and regardless of the amount of their shareholdings,
would be equally and personally liable also with the petitioners for the claims of the private respondent.

Other Doctrines:
 The court stated that it would not resolve the issue whether it is the promoters or the
corporation itself that shall be responsible for the expenses incurred in connection with such
organization. Nevertheless it ruled that investors who were not the moving spirit behind the
organization of the corporation, but who were merely convinced to invest in the proposed
corporate venture on the basis of the feasibility study undertaken, are not liable personally with
the corporation for the cost of such feasibility study.

Kind of Shares:

Shares of stock – forms of securities representing equity ownership in a corporation, divided up into
units. They are the measure of the stockholder’s proportionate interest in the corporation in terms of
the right to vote and to receive dividends, as well as the right to share in the assets of the corporation
when distributed in accordance with law and equity.

 Common Shares – basic class of stock ordinarily and usually issued without privileges and
advantages except that they cannot be denied the right to vote
 Preferred share – shares that are given certain preferences as may be provided in the articles of
incorporation but may be denied the right to vote
o Preferred shares to assets
o Preferred shares to dividends
 Holders of preferred shares as to dividends are paid first prior to any
distribution to the holders of common shares.
 Cumulative preferred shares – if not paid on any given year, it shall be added to
the dividends which shall be due the following year/s and holders of said
preferred shares shall be paid the accumulated dividends during the
accumulated period before dividends are paid to the holders of common shares.
 Non-cumulative preferred shares – if the dividends are not declared for a
particular year within the covered period, the right to receive dividends for such
year is extinguished
 Participating preferred shares –after payment of the dividends due to shares,
the holder thereof is entitled to participate in the remaining dividends with the
holders of the common shares based on the amount specified in the agreement,
otherwise, in proportion to the common shares
 Non-participating preferred shares –after receiving the dividend due on the
shares, the remaining dividends are distributed proportionately to holders of
the common shares.
o Par value shares – shares which have a fixed arbitrary amount specified in the articles of
incorporation and in the stock certificate. Par value represents the minimum amount of
consideration for the issuance of shares.
 Shares issued below the par value are considered watered stocks. Shares of
stock may also be issued above par value. The amount received over the par
value forms part of the additional paid-up capital of the corporation.
 No par value is the stock without par value on the face of the stock certificate. It
can be issued for varying amounts provided that the value or price for every
issuance is not less than P5
 o Voting shares – share which can vote on all corporate acts requiring stockholders
approval. The corporation should always have voting shares. These are common shares
of stock
o Non-voting shares – share that are denied the right to vote in the articles of
incorporation
 No share may be deprived of voting rights except those classified and issued as
preferred or redeemable shares
o Founder’s shares are shares classified as such in the articles of incorporation which may
be given certain rights and privileges not enjoyed by the owners of other stocks.
o Redeemable shares – they are shares which may be purchased by the corporation from
the holders of such shares upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation. They may be
redeemed, regardless of the existence of restricted retained earnings, and provided that
the corporation has, after such redemption, sufficient assets in its books to absorb
corporate debts or liabilities.
 Mandatory – the issuing corporation must redeem the shares after the
expiration of a stated period or when demanded by the holder
 Optional – the issuing corporation may or may not redeem the shares after
stated period
o Treasury shares – shares that have been issued and fully paid for but subsequently
reacquired by the issuing corporation through purchase, redemption, donation or some
other lawful means, such shares may again be disposed of for a reasonable price fixed
by the board of directors.

Definitions:

Authorized Capital Stock – the amount fixed in the articles of incorporation to be subscribed and paid by
the stockholders of the corporation. It is the maximum number of shares that the corporation is legally
allowed to issue without amending the articles of incorporation

Subscribed Capital Stock – the portion of the authorized capital stock which is covered by subscription
agreements whether fully paid or not

Outstanding Capital stock means the total shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid

Paid up capital stock is the portion of the authorized capital stock which has been subscribed and paid
by the stockholders of the corporation

Pre-incorporation Subscription Agreement

Section 59. Subscription Contract – any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.

Section 60. Pre-incorporation Subscription – a subscription of shares in a corporation still to be formed

shall be irrevocable for a period of at least 6 months from the date of subscription, unless all of the
other subscribers consent to the revocation, or the corporation fails to incorporate within the same
period or within a longer period stipulated in the contract of subscription. No pre-incorporation is
submitted to the Commission.

Pre-incorporation agreement is a type of promoter’s contract and the prevailing theories in the
Philippines Jurisdiction are consistent with the fact that a promoter’s contract is not necessarily binding
on the corporation once it is formed or organized and may be refused by the corporation once formed.
The only time when the corporation is bound by the promoter’s contract is when it has at the time of its
constitution received benefits from the contract

Subscription agreement are special contracts, although they are contracts between the subscriber and
the corporation, they are at the same time deemed to be contracts among the stockholders of the
corporation. That special relationship among the subscribers of a corporation can be sustained only if
we look beyond the pale of the corporate fiction and see that actually, beneath the corporate shell, in
an association of warm-bodied persons who decided to band together in the corporation in pursuit of a
business.

3 requirement of Subscription contract

 Obligation to pay must be absolute, provisions that is contrary will be deemed not written
 Obligation to pay may be suspended (may be paid through instalment)
 Regardless of the first two rules, if the corporation becomes insolvent, all subscription contract
will become due and demandable.

Nazario Trillana vs Quezon College 1953

Facts: Crisostomo sent a letter to the Board of Trustees of Quezon College which states the she will be
subscribing to 200 shares of capital stock with a par value of 100 each which will be paid after the
harvest of fish. Crisostomo died and no payment have been made. Quezon College presented a claim
before the CFI for the collection of 20,000. The claim was opposed and the CFI dismissed the case.

Issue: Whether or not Quezon College can demand the 20,000

Ruling: No, the relation between Crisostomo and the Quezon College, Inc. had only thus reached the
preliminary stage whereby the latter offered its stock for subscription on the terms stated in the form of
letter, and Crisostomo applied for subscription fixing her own plan of payment – a relation, in the
absence as in the present case of acceptance by the Quezon College, Inc. of the counter offer of
Crisostomo, had not ripened into an enforceable contract.

Bayla vs Silang Traffic Co, 1942

Facts: Petitioners instituted an action for the recovery of certain sums of money which they had paid
severally to the corporation on account of shares of stock they individually agreed to take and pay under
certain specified terms and conditions. “Agreement for instalment sale of shares in the Silang Traffic
Company, Inc.,” Respondent Company states that Bayla’s subscribed shares of stock had already
automatically reverted to the corporation and the instalments paid by them had already been forfeited.

Issue: Whether or not Bayla is entitled to payment

Ruling: yes, the parties, RTC and the CA have interpreted or considered the said agreement as a contract
of subscription to the capital stock of the respondent corporation. However, a particular contract is a
subscription or a sale of stock is a matter of construction and depends upon its terms and the intention
of the parties. In a case, the Court held that a subscription to stock in an existing corporation is, as
between the subscriber and the corporation, simply a contract of purchase and sale. In the present case,
they are contract of sale and not subscription.

A subscription is a mutual agreement of subscribers to take and pay for the stock of a corporation, while
a purchase is an independent agreement between the individual and the corporation to buy shares of
stock from it at stipulated price.

There is a provision in the contract regarding interest on deferred payments, which would not have
been inserted if it had been the intention of the parties to provide for automatic forfeiture and
cancelation of the contract. Moreover, the contract did not expressly provide that the failure of the
purchaser to pay any instalment would give rise to forfeiture and cancelation without the necessity of
any demand from the seller

The contract in question being one of purchase and not subscription as we have heretofore pointed out,
we see no legal impediment to its rescission by agreement of the parties.

There is no intimation that the corporation was insolvent or that the right of nay creditor of the same
was in any way prejudiced by the rescission

Trust fund doctrine considers the subscribed capital as a trust fund for the payment of the debts of the
corporation to which the creditors may look for satisfaction. 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 capita as the considerations therefor.

 Offer theory construes subscription agreement as only continuing offers to proposed

corporations, which offer does not ripen into a contract until accepted or ratified by the
corporation when organized. It allows withdrawal of subscriber at least before the corporation
comes into existence and accepts the offer
 Contract theory a subscription agreement among several persons to take shares in a proposed
corporation becomes a binding contract and is irrevocable from the time of subscription, unless
cancelled by all parties before acceptance by the corporation.
 The essence of the stock subscription is an agreement to take and pay for original unissued
shares of a corporation, formed or to be formed.

Miguel Velasco vs Jean M. Poizat (1918)

Facts: Jean Poizat was a stock holder in The Philippine Chemical Produce Co. from the inception of the
enterprise, he served as treasurer and manager. In his capacity he called in and collected all
subscriptions to the capital stocks except his 15 shares and 15 shares by Infante. A resolution was
passed by the BOD of the company to that directors or shareholders of the company should make good
by new subscriptions in proportion to their respective holdings. 15 shares was surrender by Infante with
a condition that he will be released of his subscription with a forfeiture of what he has already paid.

Another proposition was that Poizat who was absent should be required to pay the amount of his
subscription he was still indebted to the company. And in case he should refuse to make such payment,
the management of the corporation should be authorized to undertake judicial proceedings against him.
Upon receipt of notice, Poizant admitted that he was lead to believe that he was relieved from his
subscription upon the terms conceded to Infante. The company went to voluntary insolvency.

Issue: Whether or not Poizant is released from his obligation to pay the subscription

Ruling: Yes, The provisions of the Corporation Law given recognition of 2 remedies for the enforcement
of stock subscriptions. The first and most special remedy given by the statute consist in permitting the
corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent
subscriber in which section 38 and 48 of the Old corporation code are applicable.

The other remedy is by action in court, which follows section 49: Nothing in this act shall prevent the
directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid
subscription, together with accrued interest and costs and expenses incurred.

The assignee of the insolvent corporation succeeds to all the corporate rights of action vested in the
corporation prior to its insolvency, and the assignee therefore has the same freedom with respect to
suing upon the stock subscription as the directors themselves would have had under section 49 cited.
Even if the directors fail to comply with the requirements of the provisions of Section 38-48, when
insolvency supervenes upon a corporation and the court assumes jurisdiction to wind up, all unpaid
stock subscriptions become payable on demand, and are at once recoverable in an action instituted by
the assignee or receiver appointed by the court.

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

Other doctrines:

 A stock subscription is a contract between the corporation on one side, and the subscriber on
the other, and courts will enforce it for or against either. It is a rule accepted by the Supreme
Court of the US, that a subscription for shares of stock does not require an express promise to
pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber.
 Section 36 of the Corporation law clearly recognizes that a stock subscription is subsisting
liability from the time subscription is made, since it requires the subscriber to pay interest
quarterly from the date unless he is relieved from such liability by the by-laws of the
corporation. The subscriber is as much bound to pay the amount of the share subscribed by him
 as he would be to pay any other debt, and the right of the company to demand payment is no
less incontestable.
 It is generally accepted doctrine that the statutory right to sell the subscriber’s stock is merely a
remedy in addition to that which proceeds by action in court, and it has been held that the
ordinary legal remedy by action exists even though no express mention thereof is made in the
statute.

PNB vs Bitulok Sawmill, Inc,

Facts: President Roxas organized the Philippine Lumber Distributing Agency Inc and had called several
conferences between him and the subscribers and organizers of the Agency. The president convined the
lumbers producers to pool their resources together and promise to finance the agency by making the
government invest 9.00 for every peso the members would invest. By this assurance Bitulok sawmill and
others subscribed to the stocks of PLDA. The legislature was not able to appropriate the counterpart
fund which prompted President Roxas to instruct PNB to grant the loan to PDLA. The loan was not paid,
as a consequence, PNB filed a suit on their subscriptions to the PDLA. The RTC denied the petitions due
to equity, that the lumber producers only invested due to the unfulfilled promised of President Roxas.

Issue: Whether or not BItulok sawmill and others are liable on the payment of their subscription shares.

Ruling: Yes, the lumber producers remain liable to the balance of their subscriptions as it is indicated in
the Corporation law, also in jurisprudence It is established doctrine that subscription to the capital of a
corporation constitute a fund which creditors have a right to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt. It is unwarranted to ascribe to the view that payment of stock
subscriptions as required by law could be condoned in the event that the counterpart fund to be
invested by the Government would not be available. The executive cannot suspend the operation of
law.

Government of the Philippine Islands vs Manila Railroad. (AOI is the contract between 3 parties, the
corporation, shareholders, and state)

Facts: The Government of the P.I petitioned the court to compel Manila Railroad Company to provide
and equip the telegraph poles of said company between a certain municipalities with crosspieces for six
telegraph wires belonging to the government relying on Act 1459 of the General Corporation code.

The respondent defendant that Action 1459 was repealed by Act 1501 or the Charter of the Manila
Railroad Company.

Issue: Whether or not Manila Railroad Company is governed by which law

Ruling: By Act 1510. Act 1519 is the charter of the Company and constitute a contract between it and
the government, the company is governed by this contract not by the provisions of any general law
upon questions covered by said contract. In the said charter, it would be seen that there is no indication
that the government intended to impose upon said company any other conditions as obligations not
express found in said charter or contract. And it is certain that the Government cannot impose upon said
company any condition or obligations found in any general law, which does not expressly modify said
contract. For the state to impose an obligation or a duty upon the respondent company, which is not
expressly provided for in the charter would amount to a violation of said contract between the state and
the respondent company.

 Act 1459 applies to all railways in the Philippine islands which did not have a special charter. Act
1510 applies only to the Company had the effect of superseding the provisions of the general
corporation law which are applicable to railroads in general.
 The special charter had the effect of superseding the general corporation law upon all matters
covered by the said charter. Since the act inasmuch as it contained a special provision relating to
the erection of telegraph and telephone poles, and the number of wires which the government
might place thereon, superseded the general law upon the question
 The charter of a corporation is a contract between three parties
o A contract between the state and the corporation to which the charter is granted
o A contract between the stockholders and the state
o A contract between the corporation and its stockholders.

Rural Bank of Salinas vs CA (Free flow of shares cannot be regulated by the corporation itself, it must
have a legislative source)

Facts: Celemente Guerrero executed an SPA in favour of his wife Melania Guerrero, giving and granting
the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of
the Bank. Melania executed a Deed of Assignment of 472 shares in favour of Andico, rosales, and
Guerrero Jr and the subsequent 1 share to Guerrero Sr.

Melanie presented to the Rural Bank the two deeds of assignment for registration and transfer but was
denied by the bank. Melania filed for mandamus in SEC. the Rural bank argued that upon death of
Clemente his shares of stock became the property of his estate and his property and that of his widow
should first be settled and liquidated in accordance with the law before any distribution can be effected.

Issue: whether or not the Rural Bank can impede the free flow of shares

Ruling: No, The Corporation code contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be created by the corporation in favour of,
or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under
said section to dispose them in favour of whomever he pleases, without limitation in this respect, than
the general provisions of law. Further, restrictions in the traffic of stock must have their source in
legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended
merely for protection of the corporation and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in absence of such power, cannot ordinarily
inquire into or pass upon the legality of the transaction by which its stock passes from one person to
another, nor can it question the consideration upon which a sale is based.

Red Line Transit vs Rural Transit (use of name is essential in regard to the corporation’s relation to the
state)
Facts: Rural Transit Company, Ltd filed for certificate of Public Convenience to operate a bus line. Red
Line Transportation Opposed the petition, but it was nevertheless approved. Red line filed a motion for
reconsideration notifying the court of an existence of Voluntary Dissolution case by rural transit
company ltd pending in a court. At the trial for reconsideration before the PSC, an issue was raised as to
who was the real party in interest, making the application, whether the Rural Transit Company, Ltd., as
appeared on the face of the application, or the Bachrach Motor Company, Inc., using the name of the
Rural Transit Company, Ltd., as a trade name. The Bachrach Motor Company, inc entered no appearance
and took no part in the hearing of the application of the Rural Transit Company Ltd. The hearing
continued and judge in favour of Rural Transit, the PSC also authorized Bachrach Motor Co to continue
using the name of Rural Transit Co., Ltd as its trade name in all its application.

Issue: Whether or not Barach can continually use Rural Transit Company Ltd.

Ruling: No, There is no law that empowers the Public Service Commission or any court to authorize one
corporation to assume the name of another corporation as a trade name. Both Rural Transit and
Bachrach are Philippine Corporations and the very law of their creation and continued existence
requires each to adopt and certify a distinctive name. The incorporators constitute a body politic and
corporate under the name stated in the certificate. A corporation has the power of succession by its
corporate name. The name of a corporation is therefore essential to its existence. It cannot change its
name except in the manner provided by the Statute. By that name alone is it authorized to transact
business?

The law gives a corporation no express or implied authority to assume another name that is
unappropriated: still less that of another corporation, which is expressly set apart for it and protected by
the law. If any corporation could assume at pleasure as an unregistered trade name the name of
another corporation, this practice would result in confusion and open the door to frauds and evasions
and difficulties of administration and supervision. The policy of the law expressed in our corporation
statute and the code of commerce is clearly against such practice.

Philippine Insurance vs Hartigan (Contract: what is important is the identity not the name)

Facts: Philippine First Insurance Company, Inc., was originally organized under the name of The Tek Tong
Lin Fire and Marine Insurance Co., Ltd., In 1953. But on 1961, the articles of incorporation were
amended pursuant to a certificate of the Board of Directors dated March 8, 1961 changing the name of
the corporation to Philippine Insurance Co.,

The issue arose when the plaintiff under its previous name Tek Tong Lin Fire and Marine Insurance
signed as a co-maker together with the other defendants in a promissory note in favour of China Bank.
An indemnity agreement was signed as a form of security. One defendant Hartigan failed to pay the sum
of money. The plaintiff under their new name sued the defendants.

The defendants claim that the plaintiff has no cause of actions against them considering that the
complaint does not allege that Philippine Insurance is one and the same with Tek Tong Lin Fire or the
Philippine Insurance acquired the rights of the latter.

The trial court dismissed the action based on:

  The change of name is of dubious validity, because such change in effect dissolved the original
corporation by a process of dissolution not authorized by the corporation law
 Even if the change is valid, Tek Tong line is considered dissolved, hence, at the time the
indemnity agreement was signed, it has no capacity to enter into suc

Issue: Whether or not a Philippine corporation can change its name and still retain its original
personality and individuality as such?

Ruling: Yes, Section 18 of the Corporation Code authorizes corporation to amend their charter which
provide no prohibition in the change of name. The change of corporate name is not against public policy,
what is contrary to public policy as held in Red line transit is the use by one corporation of the name of
another corporation.

Furthermore, the change of name does not result in a corporation’s dissolution. It is settled that the an
authorized change in the name of a corporation has no more effect upon its identity as a corporation
than a change of name of a natural person has upon his identity. It does not affect the rights of the
corporation or lessen or add to its obligations. After a corporation has effected a change in its name it
should sue and be sued in its new name

Universal Mills vs Universal Textile (1977) (name used to established identity)

Facts: Universal textile Mills was registered on January 8, 1954, while the Universal Mills Corporation
was registered on October 27, 1954 under its original name Hosiery Mills Corporation. On May 24, 1963
Hosier Mills Corporation filed an amendment in its corporation name to Universal Mills Corporation
approved on June 10, 1963. Because of a fire incident that caused confusion, SEC ordered the Universal
Mill Corporation from further using its present corporate name.

Issue: Whether or not in ordering the change of name, the Commission committed a grave abuse of
discretion

Ruling: No, the order has a rational basis. The corporate names in questions are not identical but they
are indisputably so similar that even under the test of reasonable care and observation as the public
generally are capable of using and may be expected to exercise. Confusion will still arise, considering
that under the its amended articles of incorporation it included among its primary purposes the
manufacturing, dye-ing, finishing and selling fabrics of all kinds in which the other corporation is
engaged for more than a decade ahead of them. The factual finding of the commission of the existence
of such confusion if supported by evidence. Further, the court cannot perceived why of all names, it had
to choose a name already being used by another firm engaged in practically the same business for more
than a decade enjoying well-earned patronage and goodwill, when there are many other appropriate
names it could possible adopt without arousing any suspicion as to its motive and, more importantly,
any degree of confusion in the mind of the public which could mislead even its own customers, existing
or prospective.

- (AOI as to purpose)

Uy Siulong vs Director
Facts: Former partners formed a corporation to be known as Siuliong y Compania Incorporada. In their
articles of incorporation it shows that it is to be organized for the 1) Purchase and sale, importation and
exportation of the products of the country as well as of foreign countries 2) Discount promissory notes,
3) purchase and sale of bills of exchange, bonds, stocks, etc 4) act as agents for life, marine, and fire
company 5) purchase and sell boats 6) purchase and sell industrial and mercantile establishments. The
SEC denied the registration as the articles of incorporation presented will permit the petitioners to
engage in a business which had for its end more than one purpose.

Issue: Whether or not the proposed articles of Incorporation by Siuliong y Cia., Inc., permits it to engage
in a business with more than one purpose.

Ruling: No, the examination of the AOI states that its purpose is to engage in a business with but one
principal purpose, and to engage in such incidental business as may be necessary and advisable to give
effect to and aid in, the successful operation and conduct of the principle business. In the present case,
all the power and authority included in the articles of incorporation of Siuliong are only incidental to the
principal purpose of said proposed incorporation Mercantile Business. The proposed Articles of
incorporation do not authorize the petitioners to engage in a business with more than one purpose.

Other doctrines:

 The court do not mean to be understood that corporations under the laws of the Philipine
Islands may not engage in a business with more than one purpose. Such an interpretation
might work a great injustice to corporations under the Philippine laws. Such an
interpretation would give foreign corporations, which are permitted to be registered under
the laws here and which may be organized for more than one purpose, a great advantage
over domestic corporations. We do not believe that it was the intention of the legislature to
give foreign corporations such an advantage over domestic corporations.

Separate opinion by Justice Street.

Aside from the lines that are laid down in the fundamental classification contained in the Corporation
Law, there seems to be no limit upon the legitimate activities of corporate enterprise. For instance, a
corporation organized for commercial purposes can lawfully engage in any one of the thousand or more
activities which may be imagined under the head of commercial; but it must abstain from activities
peculiar to the forms of corporate enterprise for which special provisions are made .

Clavecilla Radio System vs Hon. Agustin Antillon (1967) (AOI as to principal office)

Facts: New Cagayan Grocery filed a complaint against Clevecilla Radio System for a wrong message that
was broadcasted. The Radio System filed a motion to dismiss on the grounds of improper venue,
averring that the Radio System’s principal office is in Manila which should be the venue for the case. The
motion was denied by the City Judge.

Issue: Whether or not there is improper venue

Ruling: Yes, settled in the principle of corporation law is that the residence of a corporation is the place
where its principal office is established. Since it is not disputed that the Clavecilla Radio System has its
principal office in Manila it follows that the suit against it may properly be field in the City of Manila. The
fact that it maintains branch offices in some parts of the country does not mean that it can be sued in
any of these placed. To allow an action to be instituted in any place where a corporate entity has its
branch offices would create confusion and work untold inconvenience to the corporation.

Alhambra Cigar & Cigarette vs SEC 25 SCRA 269

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

Alhambra Cigar was duly incorporated under Philippine Laws on January 15, 1912 its term of existence
expired on January 15, 1962. On that date, it ceased transacting business and entered in a state of
liquidation. On June 20, 1963 RA 3531 was enacted into law that allows private corporations to extend
their corporate life beyond the period fixed by the articles of incorporation. On July 15, 1963 at a special
meeting the BOD resolved to extend the life of the corporation

Issue: Whether or not the corporation is able to extend its life during the statutory period.

Ruling: No, Implicit in Section 77 of the corporation law is that the privilege given to prolong corporate
life under the amendment must be exercised before the expiry of the term fixed in the articles of
incorporation. The authority to prolong corporate life was inserted by RA 3531 into a section of the law
that deals with the power of a corporation to amend its articles of incorporation and it should be clearly
evident that under this section no corporation in a state of liquidation can act in any way, must less
amend its articles for the purpose of continuing the business for which it was established. It is surely
impermissible to stretch the law which merely empowers a corporation to act in liquidation to inject
therein the power to extend its corporate existence.

When a corporation expires by the terms of its articles of incorporation, it may be thereafter continued
to act for the purpose of closing up its business, but for no other purpose. At the expiration of its life, by
the mandate of statute it could continue to act for the purpose of closing up its business, but for no
other purpose. When the corporate life of the corporation was ended, there was nothing to extend.
Thus, when the articles of a corporation have expired, it is too late to adopt an amendment extending
the life of a corporation, for, the corporation having expired, this is in effect to create a new corporation.

 There is a broad distinction between the extension of a charter and the grant of a new one.
To renew a charter is to revive a charter which has expired or in other words to give a new
existence to one which has been forfeited or which has lost its vitality by lapse of time. To
extend a charter is to increase the time for the existence of one which would otherwise
reach its limit at an earlier period

Statutory period – the 3 year period after the expiration of the corporation’s life for the purpose of
prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs,
to dispose of and convey its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.
Benguet Consolidate Mining Co. vs Pineda

Facts: Benguet Consolidated Mining Co. was organized as a sociedad anonima regulated by Articles 151
et seq of the Spanish Code of Commerce of 1886. The articles of association expressly provided that it
was organized for a term of 50 years. In 1906 the Philippine Commission enacted Act 1459 or the
Corporation code. As the expiration of its original 50 year term the BOD of Benguet adopted a resolution
to extend its life for another 50 years and submitted to the SEC. the SEC denied the amendments as such
extension was contrary to law. Benguet appeals and contend that the period of corporate life relates to
its organization and rights of its members inter se, and not its relations to the public or public officials.

Issue: Whether or not that the period of corporate life relates to its organization and the rights of its
members inter se, and not to its relations to the public or public officials

Ruling: No, Section 18 applies. The term of existence of association is coterminous with their possession
of an independent legal personality, distinct from that of their component members. When the period
expires, the sociedad loses the power to deal and enter into further legal relations with other persons, it
is no longer possible for it to acquire new rights or incur new obligations, have only as may be required
by the process of liquidating and winding up its affairs. By the same token, its officers and agents can no
longer represent it after the expiration of the life term prescribed. Save for settling its business.
Necessarily, therefore, third persons or strangers have an interest in knowing the duration of the
juridical personality of the sociedad anonima, since the latter cannot be dealt with after that period,
wherefore its prolongation or cessation is a matter directly involving the company’s relations to the
public at large.

No agreement between associates can result in giving rise to a new and distinct personality, possessing
independent rights and obligations unless the law itself shall decree such result. And the state is
naturally interested that this privilege be enjoyed only under the conditions and not beyond the period
that it sees fit to grant, and particularly, that it be not abused in fraud, and to the detriment of other
parties, and for this reason it has been ruled that the limitation to a definite period is an exercise of
control in the interest of public.

Norberto Asuncion vs Manuel De Yriate 28 Phil 67

Facts: the proposed incorporators filed mandamus to compel the chief of the division of archives to
receive and register said articles of incorporation and to do any and all acts necessary for the complete
incorporation of the persons named in the articles. Holding that the object of the proposed corporation
is repugnant to law.

Issue: whether or not the chief of the division of archives has the power to pass upon the lawfulness of
the purposes of the proposed corporation.

Ruling: Yes, simply because the duties of an official happen to be ministerial, it does not necessarily
follow that he may not in the administration of his office, determine questions of law. We are of the
opinion that it is the duty of the division of archives when articles of incorporation are presented for
registration, to determine whether the objects of the corporation as expressed in the articles are lawful.
We do not believe it was intended that the division of archives should issue a certificate of incorporation
to, and thereby put the seal of approval of the government upon, a corporation which was organized for
base or immoral purposes. That such corporation might later, if it sought to carry out such purposes, be
dissolved, or its officials imprisoned or itself heavily fined furnished no reason why it should have been
created in the first instance.

Furthermore, the object of the proposed corporation is to make the barrio of Pulo or San Miguel a
corporation which will become the owner of and have the right to control and administer any property
belonging to the municipality of Pasig within the limits of that barrio. This clearly cannot be permitted.
Otherwise, municipalities as now established by law could be deprived of the property which they now
own and administer. Each barrio of the municipality would become, under the scheme proposed, a
separate corporation, would take over the owners administration, and control of that portion of the
municipality within its limits. This would disrupt, the municipalities of the islands by dividing them into a
series of smaller municipalities entirely independent of the original municipality.

What the law does not permit cannot be obtained by indirection.

Loyola Grand Villas Homeowners (south Association) vs CA GR 117188

Question: May the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by section 46 of the corporation, result in its automatic dissolution?

Facts: Loyola Grand villas Homeowners Association (LGVHA) was recognized as the sole homeowner’s
association in Loyola Gran villas failed to file its corporate by-laws. During the period, two homeowners
association North and South were existing. Home Insurance and Guaranty Corporation (HIGC) upon
inquiry states the LHVHAI had been automatically dissolved because of its non-submission of its by-laws
within the period required by the Corporation code.

Issue: Whether or not the non-filing of by-laws within the period prescribed, results to automatic
dissolution.

Ruling: No, The failure to file the by-laws within that period does not imply the demise of the
corporation. By- law may be necessary for the government of the corporation but these are subordinate
to the articles of incorporation as well as to the Corporation Code and related Statutes. The non-filing
may only be considered only a ground for such dissolution in a hearing conducted by SEC. Although the
Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of
the non-filing of the same within the period provided.

 In the absence of charter or statutory provisions to the contrary, by-law are not necessary
either to the existence of a corporation or to the valid exercise of the powers conferred
upon it, certainly in all cases where the charter sufficiently provides for the government of
the body, and even where the governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to
mere non-action which will not render void any acts of the corporation which would
otherwise be valid.
 It has been said that the by-laws of a corporation are the rule of its life, and that until by-
laws have been adopted the corporation may not be able to act for the purposes of its
creation, and that the first and most important duty of the members is to adopt them. The
adoption of by-laws is a matter of practical, if not one of legal, necessity. The mere fact,
 however, of the existence of power in the corporation to adopt by-laws does not ordinarily
and of necessity make the exercise of such power essential to its corporate life, or to the
validity of any of its acts. (fletcher)

PMI Colleges vs NLRC and Alejandro Galvan GR 121466

Facts: PMI Colleges is an educational institution that hired Galvan as a contractual instructor. For
reasons unknown, Galvan suddenly stopped receiving payments. Galvan demanded payment, however,
PMI argues that under their by-laws only the chairman is authorized to sign any contract and that the
private respondent, in any event, failed to submit documents on the alleged shipyard and plant visits in
Cavite Naval base.

Issue: Whether or not the non-signing of the Chairman according to their by-laws will prejudice Galvan

Ruling: No, it cannot be conceded that such contract would be invalid just because the signatory
thereon was not the Chairman of the Board which allegedly violated petitioner’s by-laws. By-laws
operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons
who deal with the corporation, unless they have knowledge of the same. No proof appears on record
that private respondent ever knew anything about the provisions of said by-laws. In fact, petitioner itself
merely asserts the same without even bothering to attach a copy or except thereof to show that there is
such a provision.

Rosita Pena vs CA, spouses Yap, PAMBUSCO, Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez, Edgardo Zabat. 193 SCRA 7117

Facts: PAMBUSCO are the original owners of the lots in question. They mortgage it to the DBP and was
eventually foreclosed. In the foreclosure sale the said properties were awarded to Rosita Pena as
highest bidder in October 1974.

On November 1974 The Board of Directors of PAMBUSCO through 3 out of 5 directors resolved to assign
its right of redemption over the lots and assigned one of its members Atty. Briones to execute and sign a
deed of assignment in favour of any interested party. On March 1975, Briones executed a Deed of
Assignment of the redemption rights to Marcelino Enriquez who redeemed the said properties on April
1975. He then executed a deed of sale to Rising Yap and Catalina Lugue.

On August 1975 levy on the property was annotated due to the civil case between Dante Gutierrez and
Pambusco

On August 1975 the Provincial Sheriff of San Fernando informed Pena that the properties was redeemed
by Enriquez. ON September 1975, Pena wrote the sheriff notifying him that the redemption was not
valid as it was made under a void deed of assignment, she then requested the recall of said redemption.

On September 1975 the CFI Branch III of Pampanga hearing the said civil case ordered the RD of
Pampanga to desist from registering or noting in his registry of property any of the 1) deed of
assignment of pambusco to enriquez, 2) Certificate of redemption issued in favour Enriquez, and 3) deed
of sale by enriquez to spouses yap.
On November 1975 LRC opined that the levy on attachment in favour of Capital Allied Trading (rep by
Dante Gutierrez) should be carried over on the new title that would be issued in the name of Rising Yap
in the event that he is able to present the owner’s duplicates of certificates of title herein involved.

Defendant Pena through counsel wrote sheriff asking for the execution of a deed of final sale in her
favour on the ground that the one 1 year period of redemption has elapse without any valid redemption
having exercised.

On December 1977 Yap wrote defendant Pena asking payment of back rentals for use and occupancy of
the land and house on the lots.

On June 1978, the subjects lots were registered under the name of spouse Yap with an annotation of a
levy on attachment in favour of capitol allied trading. The Civil case was dismissed. Pena still possessed
the land.

Present petition

Spouses Yap filed a complaint to recover possession over the subject lands from Pena and Washington
Distillery. Pena defended that she is the legitimate owner of the subject lands for having purchased the
same in a foreclosure proceedings and no valid redemption has been effected within the period
provided by law. She further asserted that the petitioner cannot validly acquire ownership of the land
from Enriquez who likewise could not have become the owner of the properties in question by
redeeming the same due to a void deed of assignment executed by the BOD of PAMBUSCO. As the deed
of assignment was an ultra vires act of its board.

The trial court declared the BOD resolution assigning Pambusco’s right of redemption concerining the
parcels of land involved ordering the finalization of ownership to pena. The CA reversed, hence this
petition.

Issue: Whether or not there is a valid deed of assignment by the BOD of PAMBUSCO

Ruling: No, it is not valid. In the By-laws of PAMBUSCO, four directors are needed to provide a quorum.
In the meeting for the deed of assignment only 3 directors a present, 1 short of the required number
required by their by-laws. Further, the by-laws of a corporation are its own private laws, which
substantially have the same effect as the laws of the corporation. They are in effect, written, into the
charter. In this sense, they become part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply.

Piercing doctrine

US vs Milwaukee

If any general rule can be laid down, in the present state of authority, it is that a corporation will
be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary
appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons.

Philippine SC
When the fiction is used as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.

Separate Juridical Personality

 A corporation is a juridical entity with a legal personality separate and distinct from those acting
for and in its behalf and, in general, from the people, comprising it; and that obligations incurred
by the corporation, acting through its directors, officers and employees are its sole liabilities.
 A corporation is an entity separate and distinct from its stockholders. While not in fact and in
reality to a person the law treats the corporation as though it were a person by process of
fiction or by regarding it as an artificial person distinct and separate from its individual
stockholders.

Benjamin A. Santos vs National Labor Relations Commission, Hon. Labor Arbiter Fructuoso T. Aurellano
and Melvin D. MIllena

Facts: The NLRC affirmed the Labor Arbiter’s decision that Melvin D. MIllena, an accountant of the
MMDC was illegally dismissed. It found that the reason of rainy season, deterioration of peace and order
situation and little paperwork were not causes mentioned in the labour code, that Millena being a
regular employee was shielded by the tenurial clause mandated under the law. Thus, making MMDC,
and its President Benjamin Santos personally liable.
In holding the petitioner liable, NLRC cited Article 289 and the ruling in A.C. Ransom Labour Union CCLU
vs NLRC to effect that the responsible officer of an employer corporation could be held personally, not
to say even criminally liable for non-payment of back wages and that of Gudez vs NLRC which amplified
that where the employer corporation was no longer existing and unable to satisfy the judgment in
favour of the employee, the officer should be liable for acting on behalf of the corporation

Petitioner argues that there is grave abuse of discretion when it finds that he is solidarily liable with
MMDC even in the absence of bad faith and malice on his part.

Issue: whether or not Santos is solidarily liable

Ruling: No, A corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations
incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities.
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit
done sparingly, the disregard of its independent being and the lifting of the corporate veil.
As a rule, this situation might arise when a corporation is used to evade a just and due obligation or to
justify a wrong, to shield or perpetrate fraud, to carry out similar other unjustifiable aims or intentions,
or as a subterfuge to commit injustice and so circumvent the law.

In Tramat Mercantile vs CA, instances without necessarily piercing the veil of corporate fiction,
personal liability can also be said to lawfully attach to a corporate director, trustee or officer:
when-
 1. He assents a) to a patently unlawful act of the corporation or b) for bad faith or gross
negligence in directing its affairs or c) for conflict of interest, resulting in damages to the
corporation, it stockholders or other persons;
2. He consents to the issuance of watered stocks, or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto:
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made by a specific provision of law, to personally answer for his corporate action.
The petitioner has no direct hand in the dismissal of private respondent, the dismissal was due to a
collective decision to mitigate losses. The decision making Santos personally liable is set aside.

Stockholders of F. Guanzon vs Register of Deeds of Manila 6 SCRA 373

Facts: Five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the
assets of the corporation. They have distributed among themselves in proportion of their shareholdings,
as liquidating dividends the assets, including real properties located in Manila. The certificate when
presented to the Register of Deeds of Manila denied registration due to, among others, the number of
parcels not certified to in the acknowledgment. This hinges on the main question whether that
certificate merely involves a distribution of the corporation’s assets or should be considered a transfer
or conveyance. Stockholders argue that this is mere distribution hence the there is no need to contain a
statement of the number of parcel of land involved, the officers argues the opposite.

Issue: Whether or not the distribution is a conveyance or mere distribution of assets

Ruling: It is conveyance. A corporation is a juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property, they do not represent property of
the corporation. The corporation has property of its own which consist chiefly of real property.
A share of stock only typifies an aliquot 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.
Hence, the partition 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. The purpose of liquidation
is to transfer their title from the corporation to the stockholders in proportion to their shareholdings

Manila Gas vs CIR 62 PHIL 895 (re-Read)

Facts: Manila Gas Corporation paid under protest 56,000 to CIR for the various sums paid by the
corporation to foreign corporations as dividends and interest on bonds and other indebtedness.
Manila Gas is a domestic corporation associated with Island Gas and Electric Company and the
General Finance Company all non-resident to the Philippines
For years, Manila has paid dividends to Island gas in the capacity as stockholders upon which
withholding income taxes were paid to the defendant. The place of payments was the US and
Switzerland
Manila Gas contends that the dividends paid by it to its stockholders were not subject to tax
because to impose a tax thereon would be to do so on the corporation, in violation of the terms of its
franchise and would be oppressive and inequitable
Issue: Whether or not the trial court erred in holding that the dividends paid by the Plaintiff Corporation
were subject to income tax in the hands of its stockholders, because to impose the tax thereon would be
to impose a tax on the plaintiff, in violation of the terms of its franchise, and would, moreover be
oppressive and inequitable

Ruling: No, the stockholders and the corporation has a separate and distinct personality. The franchise
provides that the Corporation shall pay annually to the City of Manila and the Province of Rizal, said
payment shall be in lieu of all taxes. However, the ratio decidendi of the tax exemption provision
relating to the Manila Gas Corporation and a previously decided case is substantially the same. As there
held, a corporation has a personality distinct from that of its stockholders, enabling the taxing power to
reach the latter when they receive dividends from the corporation. It must be considered as settled in
this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign
stockholders, are subject to the payment in the income tax, the exemption clause in the charter of the
corporation notwithstanding.

Concepcion Magsaysay-Labrador vs CA 180 SCRA 266

Facts: Adelaida Rodriguez-Magsaysay was the widow and special administratix of the estate of the late
senator Genero Magsaysay. In a complaint she alleged the she and her husband acquired thru conjugal
funds a parcel of land known as Pequena Island, the after the death of her husband she discovered an
annotation at the back of the TCT that the land was acquired by her husband from his separate capital
and register a deed of assignment in favour of SUBIC. Petitioners, sisters of the late senator filed a
motion for intervention claimed that their brother conveyed to them one-half of his shareholdings in
SUBIC and that they have legal interest in the success of the suit in respect to SUBIC.

Issue: Whether or not petitioner has substantial interest in the proceedings.

Ruling, None, The interest of the sister, if it exist at all, is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest if purely inchoate, or in sheer expectancy a
right in the management of the corporation and to share in the profits thereof and in the properties and
assets thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation,
it does not vest the owner thereof with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the
owners of corporate property, which is owned by the corporation as a distinct legal person.

Good Earth Emporium and Lim Ka Ping vs CA and Roces Reyes Realty Inc. 194 SCRA 544

Facts: Roces-Reyes Realty, Inc. leased a building to Good Earth Emporium (GEE) Inc. GEE defaulted in
payment of rentals, ROCES filed unlawful detainer. The MTC ruled in favour of ROCES and a writ of
execution was issued for the payment of rentals 65,000. GEE filed a motion to quash the writ of
execution, where the court issued a TRO pending resolution of the motion to quash. GEE filed another
petition for relief from judgement before another court. The Court handling the motion to quash
dismissed the motion, which GEE appealed.
The RTC Manila finds that P1M evidence by Exhibit I and another 1M evidenced by the Pacto de retro
sale instrument were in full satisfaction of the judgment obligation, reversed the decision of the MTC
stating that the judgment debt having fully paid and/or liquidated. The CA reverse the RTC

Issue: Whether or not there was full satisfaction of the judgment debt in favour of ROCES which would
justify the quashing of the Writ of Execution.

Ruling: None, the exhibits shows no writing alluding to or referring to any settlement between the
parties of petitioner’s judgment obligation. Moreover, there is no indication in the receipt, Exhibit 1 that
it was in payment, full or partial, of the judgment obligation. Also, no indication in the pacto de retro
sale which was drawn in favour of Jesus Marcos Roces and Marcos V. Roces and not the respondent
Corporation, which the obligation embodied therein had something to do with petitioners’ judgment
obligation with Respondent Corporation.
The common exhibits had been signed by person other than judgment creditors, there was in fact no
payment of the judgment debt.
In the present case, the payments were not made to Roces or to its successors in interest nor is there
positive evidence that the payment was made to a person authorized to receive it. Marcos Roces was no
longer President or even an officer of ROCES at the time he received the money and signed the sale with
Pacto de retro. He, in fact, denied being in possession of authority to receive payment for the
respondent corporation nor does the receipt show that he signed in the same capacity as he did in the
Lease Contract at the time he was president.
Jesus Marcos Roces testified that the 1M is the payment for a loan extended by him and Marcos Roces
in favour of Lim Ka Ping.
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 corporation, and vice-versa, for they are separate entities. Shareowners are in no legal sense
the owners of corporate property (or credits) which is owned by the corporation as a distinct
lega person. As a consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder’s debt
or credit that of the corporation.
Hence, the fact that at the time payment was made to the two Roces Brothers, GEE was also indebted to
respondent corporation for a larger amount, is not supportive of the RTC’s conclusion that the payment
was in favour of the latter, especially in the case at bar where the amount was not receipted for by
respondent corporation and there is absolutely no indication in the receipt from which it can be
reasonably inferred that said payment was in satisfaction of the judgment debt.

Defective Corporation
De Facto

Qualified view against those declared unconstitutional by court – a corporation defectively organized
under the law before it was declared unconstitutional can claim to be a de facto corporation, since it
was organized under colour of the law, the statute is presumptively constitutional until it has been
judicially declared to be invalid. And that until it is so declared, men have a right to act and contract
under such presumptions.
Elements:
1. Existence of a valid law under which it may be organized
2. Attempt in good faith to incorporate (the very least obtaining a Certification of incorporation by
sect) and;
3. Actual use or exercise in good faith of corporate powers.

Felipe Tayko, Eduardo Bueno, Bautista Tayko, Bernardo Solde, and Vicente Elum, vs Nicolas Capistrano
acting as Judge of First Instance of Oriental Negros, Alfredo B. Cacnio, as Provincial Fiscal of Oriental
Negros and Juan Gadiani. (Colourable authority because of reliance of third parties to a previously held
valid authority)

Facts: Petitioner assails through prohibition the acts of Judge Nicolas Capistrano to take cognizance of
elections cases alleging among others, that he is beyond 65 and is neither a de facto nor jure judge.

Issue: Whether or not Judge Capistrano can be assailed through prohibition

Ruling: No, It is well settled that the title of the office of a judge, whether de jure or de facto, can only
be determined in a proceeding in the nature of Quo Warranto and cannot be tested by prohibition. Even
if we assume that the allegation is true, it is evident that the judge is not a judge de jure but it cannot be
successfully disputed that he is still a judge de facto. A de facto judge is one who exercises the duties of
a judicial office under colour of an appointment or election thereto. He differs from a mere usurper who
undertakes to act officially without any colour of right, and from a judge de jure who is in all respects
legally appointed and qualified and whose term of office has not expired.
The rightful authority of a judge, in the full exercise of his public judicial functions cannot be
questions by any merely private suitor, nor by any other excepting in the form especially
provided by law. A judge de facto assumes the exercise of a part of the prerogative of
sovereignty, and the legality of that assumption is open to the attack of the sovereign power
alone.

The official acts of a de facto judger are just as valid for all purposes as those of a de jure judge, so far as
the public or third persons who are interested therein are concerned.

The principle is one founded in policy and convenience, for the right of no one claiming a title or interest
under or through the proceedings of an officer having an apparent authority to act would be safe, if it
were necessary in every case to examine the legality of the title of such officer up to its original source,
and the title or interest of such person were held to be invalidated by some accidental defect or flaw in
the appointment, election or qualification of such officer, or in the right of those from whom his
appointment or election emanate; nor could the supremacy of the laws be maintained, or their
execution enforced, if the acts of the judge having colourable, but not a legal title, were to be deemed
invalid.
Requisites

Federico Fernandez vs P. Cuerva & Co. (operative fact doctrine)

October 1959 – separation

July 26, 1960 – Regional Office of DOLE
June 30, 1961 – Reorganization plan declare unconstitutional
December 17, 1962 – CFI of Manila

Facts: Petitioner was employed as salesman by P. Cuerva & Co. After his separation from the service, he
filed to recover unpaid salaries and commission and separation pay. Defendant filed a motion to dismiss
upon the grounds that the actions had prescribed. The Court dismissed the case. Plaintiff move to
reconsider arguing that the fact his having filed a similar claim with RO 4 of DOLE has suspended the
running of the prescriptive period.

Issue: Whether or not the right of action is prescribed.

Ruling: No, the cause of action arise in October 1959, the plaintiff filed in December 1972 but plaintiff
filed a similar claims with RO 4 of DOLE on July 1960. Under RA 997 or the reorganization Plan No. 20-A
DOLE RO was vested with original and exclusive jurisdiction over all cases affecting all money claims
arising from violations of labour standards on working conditions. Hence, the plaintiff acted in
accordance with procedure thus interrupting the running of the period of prescription.

Section 25 of the Reorganization Plan has been declared unconstitutional on June 30, 1961, however,
the plaintiff filed his claim before RO 4 of DOLE on July 26, 1960 The declaration of unconstitutionality
should not be counted against the defendant in the present case. “There are several instances wherein
courts, out of equity, have relaxed its operation or qualified its effects since the actual existence of a
statute prior to such declaration is an operative fact, and may have consequences which cannot justly be
ignored, and a realistic approach is eroding the general doctrine.

C. Arnold Hall and Bradley P. Hall vs Edmundo S. Piccio Judge, Fred Brown, Emma Brown, Hipolita
Capuciong

Facts: Petitioners Halls and Respondents signed and acknowledged in Leyte, the articles of incorporation
of the Far Eastern Lumber and Commercial incorporation. The AOI were filed in the office of the SEC,
pending action on the AOI, the respondents filed before the CFI alleging that Far Eastern Lumber was an
unregistered partnership and the wish to dissolve it. The CFI ordered the dissolution of the company.
The defendants argued that the court has no jurisdiction to decree dissolution because it being a de
facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding.

Issue: Whether or not the dissolution is proper

Ruling: All the parties are informed that the SEC has not, so far, issued the corresponding certificate of
incorporation. All of them know, or ought to know, that the personality of the corporation begins to
exist only from the moment such certificate is issued – not before. The corporation is not a de facto
corporation for 2 reasons. 1) The Far Eastern Lumber and Commercial Co. not having obtained the
certificate of incorporation may not probably claim in good faith to be a corporation “The immunity
from collateral attach is granted to corporations claiming in good faith to be a corporation under the act.
Such a claim is compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply with the law the
claim to be a corporation under this act could not be made in good faith.

Benguet Consolidated vs Pinenda

Facts: can a sociedad anonima extend its corporate existence by amendment of its original articles of
association, or alternatively, to reform and continue existing under the Corporation Law beyond the
original period.

Benguet Consolidated Mining Co. was a sociedad Anonima regulated by Articles 151 of the Spanish Code
of Commerce for 50 years. The corporation law was passed by Congress to hasten the day when the
sociedad anonima would be obsolete. Section 75 of the corporation law made the sociedad subject to its
provisions so far as such provisions may be applicable and giving to the sociedades the option to
continue business as such or to reform and organize under the provisions of the Corporation Law. These
provision was later on repealed to compel commercial entities to incorporate under the Corporation
Law. “The existing corporations or sociedades anonimas lawfully organized as such which elect to
continue their business as such instead of reforming and reorganizing under and by virtue of the
provision of this act shall continue to be governed by the laws that were in force prior to the passage of
this Act in relation to their organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the public and public officials shall be
governed by the provisions of this act.

As the expiration of Benguet’s original 50 year term the BOD adopted a resolution to extend its life for
another 50 years, which they submitted to the SEC. The SEC denied registration as it was contrary to law.
The matter was dropped as it was alleged that the Stockholders of Benguet did not approve of the
Director’s action. After 6 years, the shareholders through a resolution empowered the Director to
effectuate the extension of the Company’s business life for not less than 20 years but not more than 50
years by either amendment to the Articles of association or charter or by reforming and reorganizing as
a Philippine Corporation or by both or by any other means.

Benguet submitted to SEC which was denied the registration. Averring that Benguet as sociedad
anonima had1) no right to extend the original term of corporate existence by subsequent amendment
adopted after enactment of the Corporation Law, and 2) by its conduct has chosen to continue as
sociedad anonima and could no longer exercise the option to reform into a corporation.

Benguet claims that the last provision of section 191 of the Corporation Law “in relation to their
organization and method of transacting business and to the rights of members among themselves; but
their relations to the public and public officials shall be governed by the provisions of this Act. Thereby
contends that the period of corporate life relates to its organization and the rights of its members inter
se, and not to its relations to the public or public officials.

Issue: Whether or not Benguet is correct

Ruling: no, the thesis of Benguet that its period of corporate existence has relation to its organization.
Organize or organization as used in reference to corporations has a well-understood meaning, which is
the election of officers, providing for the subscription and payment of the capital stock, the adoption of
by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact
the legitimate business for which it was created.
Under a statute providing that, until articles of incorporation should be recorded, the corporation should
transact no business except its own organization, it is held that the term organization means simply the
process of forming and arranging into suitable disposition the parties who are to act together in, and
defining the objects of, the compound body, and that this process, even when complete in all its parts,
does no confer a franchise either valid or defective, but, on the contrary, it is only the act of the
individuals, and something else must be done to secure the corporate franchise.

It is apparent that the term organization relates merely to the systematization and orderly arrangement
of the internal managerial affairs and organs of the petitioner and has nothing to do with the
prolongation of its corporate life.

Corporation by Estoppel
Sec 21. Corporation Code. Corporation by estoppel – all persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof, provided, however, that when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defence its lack of corporate personality.

Additional Notes
 If there is representation of a non-existing corporation – liability as general partners
 If there is misrepresentation as to the existing corporation – law of agency applies

Asia Banking vs Standard Products 46 Phil 144

Facts: The action was filed by plaintiff to recover the sum of P24, 000 due to a promissory note issued by
Standard Products. The court finds for the plaintiff. On appeal, it was mentioned that during trial plaintiff
failed to prove affirmatively the corporate existence of the parties and the appellant insist that under
these circumstances the court erred in finding that the parties were corporations with juridical
personality and assigns the same as reversible error.

Ruling: No, the general rule is that in the absence of fraud a person who has contracted or otherwise
dealt with an association in such a way as to recognized and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate existence in any action leading out of or
involving such contract or dealing, unless its existence is attacked for cause which have arisen since
making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to
domestic corporations.
The defendant having recognized the corporate existence of the plaintiff by making a promissory note in
its favour and making partial payments on the same is therefore estopped to deny said plaintiff’s
corporate existence. It is of course, also estopped from denying its own corporate existence.
Manuela T. Vda. De Salvatierra vs Hon. Lorenzo C. Garlitos as Judge and Segundino Rufeurzo 1958

Facts: Manuela Salvatierra owned several parcels of land leased to the Philippine Fibers Producers Co.,
Inc., represented by its President Refuerzo. The company failed to comply with the obligations in the
lease agreement, thus Salvatierra filed with the CFI a complaint against Philippine Fibers and Refuerzo
for accounting, rescission and damages. The CFI favoured Salvatierra and thru a writ of execution the
Sheriff attached lands under the name of Refuerzo. Refuerzo filed a motion arguing that the decision
was null and void with respect to him because of the existence of the corporation, and the attachment
to his personal property shall be lifted.

Issue: Whether or not there is a corporation by estoppel

Ruling: No, the defence of Refuerzo that he signed the lease contract as president of the Corporation
and not in his personal capacity cannot be upheld. While it is a general rule a person who has contracted
or dealt with an association in such a way as to recognize its existence as a corporate body is estopped
from denying the same in an action arising out of such transaction or dealing, this doctrine may not be
held to be applicable where fraud takes a part in the said transaction. In the present case. It is
undeniable that the plaintiff was led to believe that she was dealing with a corporation duly organized
by law. Refuerzo, in acting as an agent of a corporation he knew was unregistered, he assumed the risk
of reaping the consequential damages or resultant rights, if any, arising out of such transaction.
There can be no question that a corporation registered has a juridical personality separate and
distinct from its component members or stockholders and officers such that a corporation cannot be
held liable for the personal indebtedness of a stockholder even if he should be its president and
conversely, a stockholder or member cannot be held personally liable for any financial obligation by the
corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an unincorporated
association. The reason behind this doctrine is obvious-since an organization which before the law is
non-existent has no personality and would be incompetent to act and appropriate for itself the powers
and attribute of a corporation as provided by law; it cannot create agents or confer authority and at
their own risk. And as it is an elementary principle of law that a person who acts as agent without
authority or without a principal is himself regarded as principal, possessed of all the rights and subjects
to all the liability of a principal, a person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and comes personally liable for contracts
entered into or for other acts performed as such agent.

Mariano A. Albert vs University Publishing Co., Inc.

Facts: After 2 appeals finalizing the 15,000 money award, the court is asked whether the judgment may
be executed against Jose M. Aruego, supposed President of University Publishing Co.,

Mariano Albert and University Publishing Co., a supposed domestic corporation entered into contract
regarding book publication. The Corporation failed to pay a certain instalment for Albert’s share in sales
of book. After the award of 15,000 was finalized, the sheriff of Manila discovered that there is no such
entity as University Publishing Co., Inc. either as a corporation or partnership hence, impleaded Aruego
as the real defendant. Aruego argued that he is not a real party to the case.
Issue: Whether or not Aruego is the real party to the case

Ruling: Yes, Defendant raised the point that University Publishing Co., and not Jose M. Aruego is the
party defendant, and assumed that University Publishing Co., Inc is an existing corporation with an
independent juridical personality. However, on account of non-registration it cannot be considered a
corporation, not even a corporation de facto. It cannot be sued independently of Arguego.

The corporation by estoppel doctrine has not been invoke, at any rate is also not applicable. Aruego
represented a non-existing entity and induced not only the plaintiff but even the court to believe in such
representation. One who has induced another to act upon his wilful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter set up against his victim
the principle of corporation by estoppel.
University Publishing Co., Inc purported to come to court, answering the complaint and litigation upon
the merits. But as stated, University Publishing Co. Inc. has no independent personality; it is just a name.
Jose M. Aruego was, in reality the one who answered and litigated through his own law firm as counsel.
.
Lim vs Philippine Fishing Gear Gr. 136448
A partnership may be deemed to exist among parties who agree to borrow money to pursue a business
and to divide the profits or losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a common fund. Their contribution may be in the form of credit
or industry, not necessarily cash or fixed assets. Being partner, they are all liable for debts incurred by or
on behalf of the partnership. The Liability for a contract entered into on behalf of a unincorporated
association or ostensible corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.

Facts: On Behalf Ocean Quest Fishing Corporation Chua and Yao entered into a contract for the
purchase of fishing nets from the Philippine Fishing Gear Industries Inc. They also claimed they were
engaged in a business venture with Lim Tong Lim who was not a signatory to the agreement. Chua and
Yao failed to pay the fishing nets and floats. Hence, Philippine Fishing Gear filed a collection suit against
Chua, Yao and Lim Tong Lim as general partners on the allegation that Ocean Quest was a non-existing
corporation as shown by a Certification from SEC. Chua and Yao admitted liability while Lim filed
counterclaim and cross-claim. The RTC ruled that the 3 were jointly liable. The CA affirmed the liability of
Lim stating that he was a partner of Chua and Yao in a fishing Business.

Issue: Whether or not by the acts of Lim, Chua, and Yao be deemed to have entered into a partnership

Ruling: Yes, Lim disclaims any direct participation in the purchase of the nets, and that the negotiations
were conducted by Chua and Yao only. From the facts it was clear that the 3 are partners and had
decided to engage in a fishing business, which they started by buying boats worth 3.35 million, financed
by a loan secured from Jesus Lim who was petitioner’s brother. In fact he consented to the sale of his
own boat to pay the debt of Chua and Yao with the excess of the proceeds to be divided among the
three of them. His consent to the sale proved that there was a pre-existing partnership among all three

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and yao and not to him. Even if the ostensible corporate entity is proven to be legally non-existent,
a party may be estopped from denying its corporate existence.
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the
first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for
a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated
it as a corporation and received benefits from it, may be barred from denying it corporate existence in a
suit brought against the alleged corporation. In such as case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage of. Clearly, under the law on estoppel,
those acting on behalf of a corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners.

Piercing the veil

The doctrine that allows the State to disregard, for certain justifiable reasons, the notion or fiction that
the corporation has a separate legal personality from those composing it. The doctrine of separate legal
entity is only a fiction to promote public convenience, if this fiction is misused or abused, then the state
shall pierce the corporate veil and treat the corporation and the persons composing it as one and the
same.

Buenaflor C. Umali, Mauricia M. Vda. De Castillo, Victoria M. Castillo, Bertilla C. Rada, Marietta C.
Abanez, Leovina C. Jalbuena and Santiago M. Rivera vs CA, Bormaheco and Philippine Machinery Parts
Manufacturing Co., Inc.,

Facts: Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. De Castillo. The Castillo
family are the owners of a parcel of land located in Lucena City which was given as security for a loan
from the DBP. For their failure to pay the amortization, foreclosure of said property was about to be
initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into
subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the necessary
fund. The idea was accepted by the Castillo family.
To carry out the project, a MOA was executed by and between Slobec Realty and Development, Inc.,
represented by its President Santiago Rivera and the Castillo Family. In this agreement, Santiago Rivera
obliged himself to pay the Castillo family the sum of 70,000 immediately after the execution of the
agreement and to pay the amount of 400,000 after the property has been converted into a subdivision.
Rivera, armed with the agreement, Exhibit U, approached Mr. Modesto Cervantes, President of
defendant Bormaheco, and proposed to purchase from Bormaheco 2 tractors which resulted to a sales
agreement.
Bormaheco, Inc and Slobec Realty and Development Inc. executed a sales agreement over one unit of
tractor. Also Slobec, through Rivera executed in favour of Bormaheco a Chattel Mortgage over the said
equipment as security for the payment of the aforesaid balance, Slobec also obtained a surety bond
from ICP, this surety bond was then secured by a Countery-guaranty with REM executed by Rivera as
President of Slobec, and the Catillos as mortgagors, and ICP as mortgagee.
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement, the
properties of the Castillos were foreclosed by ICP as the highest bidder. ICP sold to Phil machinery the
four parcels of land, and PM transferred under itself the titles. PM requested Mrs. Castillo to vacate the
subject property.
Castillo administratrix filed an action for annulment of title before the CFI impleding Santiago M. Rivera
as a party plaintiff. The Counter-Guaranty as well as Deed of Sale are void for being entered into in fraud
and without the consent and approval of the CFI.
The CFI finds for the adminsitratix. CA reversed.
Petitioners aver that the transactions entered into between Santiago M. Rivera as President of Slobec
and Mode Cervantes, as VP of Bormaheco, such as the Sales Agreement, Chattel Mortgage, and the
Agreemetn of Counter Guaranty are all fraudulent and simulated and should therefore be declared null
and void.

Issue: Whether or not the doctrine of piercing the veil of corporation entity is the proper remedy in
order that the foreclosure proceeding may be declared a nullity.

Ruling: No, under the doctrine of piercing the veil of corporate entity, when valid grounds therefore
exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct
from its members or stockholders may be disregarded. In such cases, the corporation will be considered
as mere associations of persons. The members or stockholders of the corporation will be considered as
the corporation, that is, liability will attach directly to the officers and stockholders.
Piercing of the veil is used to defeat public convenience, justify wrong, protect fraud, or defend crime or
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.

In the present case, petitioners seek to pierce the veil of Bormaheco, ICP and PM Parts alleging the
existence of Fraud in causing the foreclosure and subsequent sale of the real properties. The courts did
not pierce the veil as it is not the proper remedy in order that the foreclosure proceeding may be
declared a nullity under the circumstances.
Other doctrines:
1. The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders
directly liable for a corporate debt or obligation.
2. The mere fact that the businesses of two or more corporations are interrelated is not a
justification for disregarding their separate personality, absent sufficient showing that the
corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.

Koppel Philippines Inc vs Alredo L. Yatco, CIR

Facts: Koppel Philippines is a domestic corporation which transacts business through cabling or orders to
Koppel Industrial Car and Equipment Company, a foreign company with no business in the Philippines.
Koppel Industrial holds 995 shares of the 1000 shares of Koppel Philippines. The mode of business is the
following process: 1) when a local buyer was interested in the purchase of railway materials, machinery,
and supplies, it asked for price quotations from plaintiff; 2) plaintiff then cable for quotation desired
from Koppel industrial car and equipment company, 3) plaintiff, however, quoted to the purchaser a
selling price above the figures quoted by Koppel industrial car and equipment company and 4) on the
basis of these quotations, orders were placed by local purchasers. According to Koppel, it is clearly
understood that the intent of this contract is that the broker shall perform only the functions of a broker
as set forth above, and shall not take possession of any of the materials or equipment applying to said
orders or perform any acts or duties outside the scope of a broker; and in no sense shall this contract be
construed as granting to the broker the power to represent the principal as its agent or to make
commitments on its behalf.

They have three transaction which realize a profit of 3M, which the defendant CIR demanded a sum of
64K as the merchant’s sales tax and 25% surcharge. Koppel paid under protest. The lower court found
and held that Koppel (Philippines) is a mere dummy or brach of Koppel Industrial Car and Equipment
Company, hence, public interest and convenience would be defeated and what would amount to a tax
evasion perpetrated, unless resort is had to the doctrine of disregard of the corporate fiction.

Koppel appealed that it has a separate and distinct personality and not a mere branch of Koppel
Industrial Car and Equipment Company. It contends that its corporate existence as Philippines
Corporation cannot be collaterally attacked and that the Government is estopped from so doing.

Issue: Whether or not Koppel is a dummy

Ruling: Yes, Koppel is a dummy, the lower court did not deny legal personality to appellant for any and
all purposes, but held in effect that in the transaction involved in this case the public interest and
convenience would be defeated and what would amount to a tax evasion perpetrated, unless resort is
had to the doctrine of disregard of corporate fiction.

In looking through the corporate form to the ultimate person or corporation behind that form, in the
particular transactions which were involved in the case submitted to its determination and judgment,
the court did so in order to prevent the contravention of the local internal revenue laws, and the
perpetration of what would amount to a tax evasion, inasmuch as it considered – in our opinion,
correctly – that appellant Koppel was a mere branch, agency or dummy of Koppel industrial.

The court did not hold that the corporate personality of Koppel (Philippines) would be disregarded in
other cases or for other purposes. It would have had no power to so hold. The court’s action in this
regard must be confine dot the transactions involved in the case at bar, for the purpose of adjudging the
rights and liabilities of the parties in the case, they have no jurisdiction to do more.

On the question of shares:

Koppel (Philippines) was in fact a branch or subsidiary of Koppel Industrial not licensed to do business in
the Philippines but actually doing business here through the plaintiff. 995 shares of 1,000 shares are
held by Koppel Industrial. Koppel (Philippines) was organized as a Philippine corporation for the purpose
of evading the payment by its parent foreign corporation of merchant’s sales tax on the transaction
involved in this case and others of similar nature.

 when the corporation is the mere alter ego, or business conduit of a person, it may be
disregarded
 Wherein the corporate entity is disregarded is that it 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
 While we recognize the legal principle that a corporation does not lose its entity by the
ownership of the bulk or even the whole of its stock, by another corporation, yet it is equally
well settled and ignore corporate forms.
  Where it appears that two business enterprises are owned, conducted, and controlled by the
same parties, both law and equity will, when necessary to protect the rights of third persons,
disregard the legal fiction that two corporations are distinct entities, and treat them as identical

Hence, Koppel industrial car and Equipment Company are to all intents and purposes one and the same;
or to use another mode of expression, that, as regard those transactions, the former corporation is a
mere branch, subsidiary, or agency of the latter.
This is evidenced by that the amount of the so-called share in the profits of Koppel (Philippines) was
ultimately left to the sole, unbridled control of Koppel Industrial.

Ricardo Tantongco vs Kaisahan ng mga Mangagawa sa La Campan

Facts: Ricardo Tantongco as the administrator of the Estate of Ramon Tantongco has filed a preliminary
injunction to prohibit the CIR proceeding hearing his contempt proceedings. The Contempt proceedings
roots from the CIR order of reinstatement of workers in La Camapana Starch Factory and La Campana
Coffee Factory.

The order was based on a case where the court pierced the veil of corporate existence of La Camapana
Starch Factory and La Campana Coffee Factory as one and the same and not as two separate entities to
avoid the subversion of justice. “There was only management for the business of gewgaw and coffee
with whom the labourers are dealing regarding their work. Hence the filing of action against the La
Campana Starch and Coffee Factory is proper and justified. The court order reinstatement and payment
of back wages, ordering management of the respondent company and or the administrator of the Estate
of Ramon Tantongco

Ramon Tantongco died, hence, Ricardo Tantongco as administration filed a motion to dismiss all the
cases on the grounds that said cases involved claims for sums of money and consequently should be
filed before the probate court having jurisdiction over the estate.

Issue: Whether or not the case should be dismissed.

Ruling: No, the party in the case was La Campana Starch Packing and La Campana Coffee Factory,
naturally the claims contained in said cases were not the claims contemplated by law to be submitted
before the administrator. Petitioner contends that the piercing of the veil in the previous case held that
La Campana Starch and Coffee Factory and its owner ceased to exist, resulting in the loss of jurisdiction
of the CIR to enforce its order against said entities. This is wrong, the reason applied by the court in
piercing the veil of corporate existence in the previous case was to avoid the technicality (one company
has only 14 employees) therein advanced in order to defeat the jurisdiction of the CIR. It was found that
although there were ostensibly two separate companies or entities, they were managed by the same
person or persons and the workers in both were used interchangeably so that in order to determine
whether or not the CIR had jurisdiction, the number of workers in both entities, not in only one, was to
be considered.

However, even Ramon Tantongco was practically the owners both coffee factory and starch factory,
these entities are separate from the personality of Ramon.
In conclusion, we find and hold that the la campana starch and food products company which stands for
the La Campana Starch and Coffee Factory are entities distinct from the personality of Ramon
Tantongco, that after the death of Ramon these two entities continued to exist and to operate under the
management of the petitioner and that consequently he is the proper person and official to which the
orders of the CIR are addressed and who is duty bound to comply with the same.

Quintin Robledo, Mario Sinlao, Leonardo Saavedra, Vicente Secapuri, Daniel Austria, Et. Al vs NLRC,
Bacani Security and Allied Services Co., Inc., and Bacani Security and Protective Agency and/or Alicia
Bacani

Facts: Petitioners were former employees of BSPA, a single proprietorship owned, managed, and
operated by the late Felipe Bacani. Later, it ceased operation and Felipe Bacani Died. Sometime, BASEC
was organized and registered as a corporation with the same primary purpose. Petitioners filed a
complaint for underpayment of wages, overtime, legal holidays, separation, and retirement. BSPA and
BASEC were made respondents. The LA finds for the petitioners but the NLRC reversed, stating that the
claims should be filed in the RTC where an intestate proceeding was pending.

Issue: Whether or not BASEC can be held liable for the liabilities of BSPA

Ruling: No. Petitioners claim that BSPA and BASEC are the same, that the former was intentionally
retired to allow expansion of its business. They claim further that the Bacani family merely continued
the operations of BSPA and urge piercing of the veil to hold BASEC liable.

The doctrine of the piercing of the veil is used whenever a court finds that the corporate fiction is being
used to defeat public convenience, justify wrong, protect fraud, or defend crime, or to confuse
legitimate issues, or that 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.

It has no application here where the purpose is not to hold the individual stockholders liable for the
obligations of the corporation but, on the contrary, to hold the corporation liable for the obligations of a
stockholder or stockholders. (Felipe Bacani was a stockholder of BASEC)

Piercing of the veil of corporate entity means looking through the corporate form to the individual
stockholders composing it. Here there is no reason to pierce the veil of corporate entity because there is
no question that the petitioner’s claims, assuming them to be valid, are the personal liability of the late
Felipe Bacani.

Fraud Cases
Gregorio Araneta, Inc. vs Tuazon (1952)
Facts: Paz Tuazon owned a lot in Sta Mesa Manila, parts of the lands was leased to the tenants with a
stipulation of rights of first refusal. Paz entered into loan with Vidal and constituted mortgages on her
property as security.

Paz then, had a negotiations with Gregorio Araneta Inc. in which they agreed that the latter would
purchase her property for 400k. Their first agreement was attached as Exhibit 1. Since the rights of first
refusal were to be respected, Paz sent out letters to tenants and the others took advantage of their right
and purchased the lots they occupied. The deed of sale was then executed between Paz and Gregorio
Araneta Inc. taking into account Paz Loan to Vidal and the conveyance of the land to those tenant-
purchasers.

Gregorio Araneta Inc. then demanded Paz to deliver clean titles to the parcels of land they purchased,
and Paz refused invoking that there was fraud in the contract she alleged that Attorneys Araneta and
Antonio Arante who had been her attorneys had drawn Exhibit A and not informed her about its
contents. she made the sale to her agent, Jose Aranete, who was also the president of Gregorio Araneta
Inc. she further aver that the courts, at law and in equity will disregard the fiction of corporate entity
apart from the members of the corporation when it is attempted to be used as a means of
accomplishing a fraud or an illegal act

Issue: WON Jose Araneta employed fraud in the transaction, hence there must be piercing.

Ruling: The court rules that such was inapplicable to the case because Araneta Inc had been long
organized and engaged in real estate business. The corporate entity was not used to circumvent the law
or perpetrate deception. There is no denying that Araneta Inc. entered into contract for itself and for its
benefit as a corporation. The Contract and the roles of the parties who participated therein where
exactly as they purported to be and were fully revealed to Paz.

Gregorio Palacio in his own behalf and in behalf of his minor child, Mario Palacio vs Fely Transporation
Company

Facts: Alfredo Carillo was a driver of Fely Transporation Company, who sometime run over a child Mario
Palacio and his Father Gregorio Palacio, the child suffered injuries as well as the father. Gregorio was
deprived to work since he needs to watch over his child. The Gregorio filed for claims of damages
against Fely Transportation Company. The company filed for a motion to dismiss on the grounds that
there is no cause of action against them.

Issue: Whether or not there is cause of action

Ruling: Yes, the sale of it of the jeep in question after conviction of Alfred Carillo was merely an attempt
on the part of Isabelo Calingasan its president and general manager to evade his subsidiary civil liability.
Thus, it may be regarded that Isabelo Calingasan and Fely Transporation as one and the same person. It
is evident that Isabelo Calingasan’s main purpose in forming the corporation was to evade his subsidiary
civil liability resulting from the conviction of his driver, Alfredo Carilo. This is one case where the
defendant corporation should not be heard to say that it has a personality separate and distinct from its
members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a
shield to further an end subversive of justice.

Palay Inc and Albert Onstott vs Jacobo C. Clave, Presidential Executive Assistant National Housing
Authority and Nazaro Dumpit

Facts: Palay Inc through its President Albert Onstott executed in favour of Nazario Dumpit a contract to
sell a parcel of land through instalment. Paragraph 6 of the contract states for automatic extrajudicial
rescission upon default in payment of any monthly instalment after lapse of 90 days without need of
notice and with forfeiture of all instalments paid. Dumpit failed to pay, and Palay Inc. by virture of
Paragraph 6 rescinded the contract. Dumpit filed for reconveyance or refund in the NHA, the NHA finds
the rescission void for absence of judicial or notarial demand, and order Palay and its president jointly
and severally liable for refund. Palay appeal to the OP which affirmed the decision.

Issue: Whether or not Palay and Onstott should be jointly and severally liable

Ruling: No, 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. As a
general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those
of the legal entities to which it may be connected and vice versa.

However, the veil of corporate fiction may be pierced when it is used as a shield to further an end
subversive of justice; or for purposes that could not have been intended by the law that created it; or to
defeat public convenience, justify wrong, protect fraud, or defend crime, or to perpetuate fraud or
confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct
or business conduit for the sole benefit of the stockholders.

We find no badges of fraud on petitioner’s part. They had literally relied, albeit mistakenly, on paragraph
6 of its contract with private respondent when it rescinded the contract with private respondent when it
rescinded the contract to sell extra judicially and had sold it to a third person.

Petitioner Onstott was made liable because he was then the President of the Corporation and he
appeared to be the controlling stockholder. No sufficient proof exist on record that said petitioner used
the corporation to defraud private respondent. He cannot, therefore, be made personally liable just
because he appears to be the controlling stockholder. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.

Pabalan and Lagdameo vs NLRC

Facts: 84 workers of the Philippine Inter-Fashion (PIF) filed a complaint against the company for illegal
transfer, illegal dismissal in violation of the Labor Code. PIF was notified about the complaint and served
with summons, although hearings where repeatedly re-set. Complainants moved to implead petitioners
as officers of the PIF in the complaint for their illegal transfer. The LA ruled in their favour holding
Pabalan and Lagdameo as officers jointly and severally liable with PIF and order them to pay.

Issue: Whether or not petitioners as officers may be held jointly and severally liable with the corporation
for its liability

Ruling: No, the settled rule is that the corporation is vested by law with a personality separate and
distinct from the persons composing it, including its officers as well as from that of any other legal entity
to which it may be related. Thus, as a general rule, officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their authority, or a company manager
acting in good faith within the scope of his authority in terminating the services of certain employees
cannot be held personally liable for damages. Furthermore, when the notion of legal entity 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, and or confuse legitimate issues the veil which protects the corporation will
be lifted.
In the present case, complainants did not allege or show that petitioners, as officers of the corporation
deliberately and maliciously designed to evade the financial obligation of the corporation to its
employees, or used the transfer of the employees as a means to perpetrate an illegal act or as a vehicle
for the evasion of the existing obligations, the circumvention of statutes, or to confuse legitimate issues.

Francisco V. Del Rosario vs NLRC 187 SCRA 777 (1990)

Facts: In a POEA Case, the POEA promulgated a decision dismissing the complaint for money claims for
lack of merit. The decision was appealed to the NLRC, which reversed the POEA decision and order
Philsa Construction and Trading Co., Inc, the recruiters and Arieb Enterprises, the foreign employer to
jointly and severally pay private respondent their salary differentials and vacation leave benefits.

A writ of execution was issued by the POEA but it was returned unsatisfied as Philsa was no longer
operating and was financially incapable of satisfying the judgment. Private respondent moved for the
issuance of an alias writ against the officer of Philsa. This motion was opposed by the officers, led by
petitioner, the president and general manager of the corporation.

Petitioner appealed to the NLRC. On September 23, 1988 the NLRC dismissed the appeal on the theory
the corporate personality of Philsa should be disregarded. NLRC’s affirmation was based on the POEA
findings that Phisla Construction and Trading Co., Inc. and Phisla International Placement and Services
Corp are one and the same because both corporations has the same set of directors and officers.
Petitioner’s motion for reconsideration was denied. Thus, this petition was filed, alleging that the NLRC
gravely abused its discretion.

Issue: WON the action of the NLRC affirming the issuance of an alias writ of execution against petitioner,
on the theory that the corporate personality of Philsa should be disregarded.

Ruling: Yes, under the law, a corporation is bestowed with juridical personality, separate and distinct
from its stockholders. But when the juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the corporation shall be considered as a
mere association of persons and its responsible officers and/or stockholders shall be held individually
liable. For the same reasons, a corporation shall be liable for the obligations of a stockholder, or a
corporation and its successor-in-interest shall be considered as one and the liability of the former shall
attach to the latter.

But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be
clearly and convincingly established. It cannot be presumed. Thus, at the time Philsa allowed its license
to lapse in 1985 and even at the time it was delisted in 1958, there was yet no judgment in favour of
private respondent. An intent to evade payment of this claims cannot therefore be implied from the
expiration of Philsa’s license and its delisting. Similarly, substantial identity of the incorporators of two
corporations does not necessarily imply fraud.

In the present case, not only there has been a failure to establish fraud, but it has also not been shown
that petitioner is the corporate officer responsible for private respondent’s predicament. It must be
emphasized that the claim for differentials and benefits was actually directed against the foreign
employers. Philsa became liable only because of its undertaking to be jointly and severally bound with
the foreign employer, and undertaking required by the rules.
Villa Rey Transit Inc. vs Ferrer Pantranco and PSC, 1968

Facts: Jose Villarama was an operator of a bus transportation pursuant to two certificates of public
convience. He later sold the certificates to Pangasinan Transportation Company (Pantraco) with the
condition that the seller (villarama) shall not for a period of 10 years apply for any TPU service identical
or competing with the Buyer.

3 months thereafter, a corporation Villa Rey Transit was organized with a capital stock of 500,000
divided into 5,000 shares of the par value of 100.00 each. 200,000 was subscribed stock, 1,000 was
subscribed by the wife of Jose.

Less than a month after its registration with SEC, the corporation bought five certificates of public
convenience and a number of buses from Valentin. Later the sheriff of Manila levied 2 of the 5 certs in
favour of Eusebio Ferrer, judgment creditor against Fernando, judgment debtor. A public sale was
conducted, Ferred was the highest bidder, Ferrer sold the two certificates to Pantranco.

The corporation filed a complaint against Ferrer, Pantraco, and the PSC for the annulment of the
sheriff’s sale. Pantranco, on its part, filed a third-party complaint against Villarama, alleging that
Villarama and/or the corporation was disqualified from operating the two certificates in question by
virtue of the previous agreement. The trial court declared null and void the sheriff’s sale of two
certificates of public convenience in favour of ferre and the subsequent sale to Pantranco, and declare
Villa Rey Transit to be the lawful owner.
Pantranco dispute the correctness of the decision insofar as it holds that Villa Rey Transit, inc.
(Corporation) is a distinct a separate entity from Villarama.

Issue: WON the stipulation between Villarama and Pantranco binds Villa Rey Transit, Inc.

Ruling: Yes, the restrictive clause in the contract entered into by Villarama and Pantraco is binding
against Villa Rey Transport. The rule is that a seller or promisor may not make use of a corporate entity
as means of evading the obligation of his covenant.
1. The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the
Corporation, his wife, however, was an incorporator and was elected treasurer.
2. The evidence further shows that the initial cash capitalization of the corporation was mostly
financed by Villarama
3. He supplied the organization expenses and the assets of the Corporation, such as trucks,
equipment,
4. There was no actual payment by the original subscribers of the amounts of 95k and 100k as
appearing in the books
5. Villarama made use of the money of the Corporation and deposited them to his private account
6. The corporation paid his personal accounts
These are strong persuasive pieces of evidence showing that Villarama has been too much involved in
the affairs of the Corporation to altogether negate the claim that he was only a part-time general
manager. It shows beyond doubt that the Corporation was his alter-ego

Hence, the doctrine that a corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which are within reason and the
law. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.

Alter ego cases

G.C Arnold vs Willets and Paterson, ltd., 1923

Facts: Arnold and the Willets and Paterson Ltd. In San Francisco entered in a written contract by which
Arnold would act as an agent of the firm in the Philippines for the operation of a coconut oil mill for a
period of 5 years with $200 a month for salary (1 st contract)

Upon retirement of Patterson, Willits became the sole owners of its assets, he then organized a new
corporation in San Francisco. He came to manila and organized another Corporation known as Willets
and Patterson Ltd. For the two corporation, he both subscribed for all of the capital stock except the
nominal shares necessary for the directors. In legal effect, The San Francisco Corporation took over and
acquired all of the assets and liabilities of the Manila Corporation.

Arnold and Willets signed a new contract in the form of a letter. The purpose of which was to clearly
defined and specify the compensation which Arnold was to receive for his purposes. Later, an
accounting was done and showed that the corporation was due and owing the plaintiff the sum of 100k,
this was denied by the creditors committee at the 2 nd contract (exhibit B) shows no sign of ratification)

It is admitted that Arnold worked under his contract of employment for a period of five years, the
question that arise is for whom he was working? Is it the original firm of Willits and Patterson which was
dissolved and ceased to exist which assets were taken over by the parent Corporation at San Francisco?

Ruling: The first Partnership, the San Francisco Corporation and the Manila Corporation were all owned
by Willits, as the owners of all stock, was the force and dominant power which controlled them. After
the document was signed it was recognized by Willits that the plaintiff’s services were to be performed
and measures by its term and provisions, and there never was any dispute between plaintiff and Willets
on that question

The proposition that a corporation has an existence separate and distinct from its membership has its
limitations. It must be noted that his separate existence is for particular purposes. It must also be
remembered that there can be no corporate existence without persons to compose it; there can be no
association without associates

This separate existence is to a certain extent a legal fiction. Whenever necessary for the interest of the
public or for the protection or enforcement of the rights of the membership, courts will disregard this
legal fiction and operation upon both the corporation and the persons composing it.

The San Francisco and Manila companies are alter-egos of Willets

La Campana Factory Inc and Tan Tong doing business under the trial name La Campana Gaugau Packing
vs Kaisahan ng mga Mangagawa sa La Campanan, and the CIR 1953
Facts: Tan Tong, herein petitioner, has been engaged in the business of buying and selling gaugau under
the trade name La Campana Gaugau Packing. Kaisahan ng mga Mangagawa sa La Campa, with 66
members from both La Campana Gaugagu Packing and La Campana Coffee Factory CO., Inc. presented a
demand for higher wages and more privileges addressed to La Campana Starch and Coffee Factory
which sought to designated the two companies. Demand was not granted and settlement failed, hence
the dispute was raised to the CIR.

La Campanan Gaugau and Coffee factory (combined name of two corporation) filed a motion for the
dismissal of the case on the following:
1. The action is directed against two different entities with distinct personalities with La
Campana Starch Factory and La Campanan Coffee Factory, Inc; and
2. The workers of the La Campana Cofee Factory are less than thirty one (outside jurisdiction of
the CIR)

Issue: WON the filing of action is proper and justified.

Ruling: Yes, La Camapana Gaugau Packing and La Campana Coffee Factory Co. Inc is one business with
two trade names:
1. they are operating under on single management,
2. There is only one entity La Campana Starch and Coffee Factory, as shown by the signboard and
delivery forms
3. All the labourers in the gaugagu or in the coffee factory receive their pay from the same person,
and they can transfer from gagugau to the coffee factory and vice-versa as the management
requires
4. There has been only one payroll for the entire La Campana personnel and only one person
preparing the same
5. All delivery trucks carried both gaugau and coffee.
6. There is only one management for the business of gaugau and coffee with whom the laborers
are dealing regarding their work. Hence the filing of action is proper and justified.
Although it is true that the coffee factory is a corporation, and, by legal fiction, an entity existing
separate and apart from the persons composing it, that is, Tan Tong and his family, but it is settled that
this fiction of law, which had been introduced as a matter of convenience and to sub serve the ends of
justice cannot be invoked to further an end subversive of that purpose.

Notes:
A subsidiary or auxiliary corporation which is created by a parent corporation merely as an
agency for the latter may sometimes be regarded as identical with the parent corporation, especially if
the stockholders or officers of the two corporations are substantially the same or their system of
operation is unified.

Yutivo Sons Hardware vs CTA and CIR, 1 SCRA 160 (1961) (tax avoidance)

Facts: Yutivo is a domestic corporation engage in importation and sale of hardware supplies and
equipment. After the liberation, it resumed business and bought a number of cars and trucks from
General Motors (GM) a foreign corporation doing business in the Philippines. As importer GM paid sales
tax. Yutivo paid no further sales tax on its sales to the public.
Sometime, Southern Motors (SM) was organized to engage in the business of selling cars, trucks and
spare parts. Its major subscribers were the 3 sons of one of Yutivo’s founders. After the incorporation of
SM, GM withdraw from the PH, its cars and trucks were purchased by Yutivo from GM then sold to SM,
and the SM sold it to public

Yutivo paid taxes on the basis of its sales to SM, SM paid no taxes on its sales to the public.

CIR made an assessment and charged Yutivo 1.8M of deficiency tax plus surcharge based on the retail
sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM
and Yutivo were one and the same corporation, the former being the subsidiary of the later. Yutivo
appealed to the CTA. CTA ruled that SM is a mere subsidiary or instrumentality of Yutivo.

Issue: WON SM is a mere subsidiary or instrumentality of Yutivo

Ruling: NO, it is an elementary and fundamental principle of corporation law that a corporation is an
entity separate and distinct from its stockholders and from other corporation petitioners may be
connected. However, when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons, or in
case of two corporations merge them into one. Another rule is that, when the corporation is the mere
alter-ego or business conduit of a person, it may be disregarded.
In the present case, the court in consideration of the facts reversed the Court of Tax appeals disposition
that SM was organized for no other purpose than to defraud the Government. The facts of the case do
no constitute a fraud warranting the piercing of the veil.
1. SM was organized when it could not have cause Yutivo any tax savings
2. For a period of more than one year, GM was the importer of cars and trucks sold to Yutivo,
which in turn resold them to SM. During that period, it is not disputed that GM as importer was
the one solely liable for sales tax.
3. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and
simply continued its practice of selling to SM.

Liddel & Co. vs Collector 2 SCRA 632 (1961) (tax evasion)

Facts: Liddel and Co (LC) is a domestic corporation 98% owned by Frank Liddel engaged in the business
of selling Oldsmobile and Chevrolet cars. Liddel Motors Inc (LMC) is a domestic corporation with Frank
LIddel’s wife Irene as sole incorporation. Later 3 employees of LC transferred to LMC. LC stopped
retailing cars and trucks and conveyed them instead to Liddel Motors, Inc. which in turn sold the
vehicles to the public with a steep mark-up. Since then, LC paid sales taxes on the basis of its sales to
LMI as original sales.

CIR upon review determined that LMI is a mere alter ego of LC and concluded that for sale tax purposes,
those sales made by LMI to the public were considered as original sales of LC and charged them with
sales tax deficiency and surcharges .the CTA upheld the CIR

Issue: Whether or not LMI is a mere alter-ego of LC

Ruling: Yes, although it is accepted that the mere fact that one or more corporations are owned and
controlled by a single stockholder is not of itself sufficient ground for disregarding separate corporate
entity. However, there are series of conspicuous circumstances that militate against the separate and
distinct personality of LMI and LC such as:
1. Scant participation of Irene Liddell (LMI) in the affairs of LMI. Her income tax forms record no
independent income of her own, her checks for bonus and salary found their way into the
personal account of Frank Liddell. Her frequent absences from the country negate any active
participation in the affairs of the Motors Company
2. Bulk of the business of LC was channelled through LMI
3. LMI pursued no other activities except to secure cars, trucks, and spare parts from LC and then
sell them to general public.
4. The sales of vehicle of LC to LMI for most part were shown to have taken place on the same day
that LMI sold such vehicles to the public. A matter of formality.
Hence, where a corporation is a dummy, is unreal or a sham and serves no business purpose and is
intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that
is bald and a mischievous fiction, and lastly, the taxpayer may gain advantage of doing business thru a
corporation if he please, but the revenue officers in proper cases, may disregard the separate corporate
entity where it serves buy as a shield for tax evasion and treat the person who actually may take the
benefits of the transactions as the person accordingly taxable.

Note: to allow a taxpayer to deny tax liability on the ground that the sales were made through another
and distinct corporation when it is proved that the latter is virtually owned by the former or that they
are practically one and the same is to sanction a circumvention of our tax laws.

Ramirez Telephone vs Bank of America, EF Herbosa, the Sheriff of Manila and the CA 29 SCRA 191
(Comingling)

Facts: Herbosa was an owner of Building which he had lease to Ruben Ramirez, who was then the
president of Ramirez Telephone Corporation. Ruben Ramirez failed to pay rents, Herbosa filed an
eviction lawsuit against Ramirez and obtained a favourable decision. But on the eve of the promulgation
of sentence, he discovered a garnishment to the money, interest or stock of Ruben Ramirez in the Bank
of America. The Bank replied that they do not hold any fund in the name of Ruben R. Ramirez. The
sheriff asked the bank to garnish an interest or participation of the Ramirez Telephone Corporation. The
bank garnished 2,400 in the name of Ramirez Telephone Inc. RT’s lawyer filed a lawsuit arguing that the
bank should have known that Ruben N. Ramirez as defendant in a civil case who is the subject of
garnishment and not the RTC. They are separate and distinct and the mere fact that Ruben R. Ramirez
happens to be its president and General Manager is of no moment. The CA affirmed the garnishment

Ramirez on appeal in the SC argues that the CA erred in not applying the settled legal principle that a
corporation has a personality separate and distinct from that of its stockholders and, therefore, the
funds of a corporation cannot be reached to satisfy the debt of its stockholders.

Issue: Whether or not CA erred is disregarding the Separate and Distinct personality of the Ramirez and
RTC

Ruling: No, petitioner maintains that the personality as an entity separate and distinct from its major
stockholders, Ruben Ramirez and his wife even if they did own 75% of the stock of the corporation.
Thus, it that its funds as a corporation cannot be garnished to satisfy the debts of a principal
stockholder.

While respect for the corporate personality as such is the general rule, there are exceptions “Even with
regard to corporations duly organized and existing under the law, we have in many case pierced the veil
of corporate fiction to administer the ends of justice. In the present case, the following are findings of
the CA

“although Ruben Ramirez is the tenant at first, later it was the shop of company that was
established, and the company actually occupied the rented premises, Ramirez paid the rents
through checks from the Ramirez Telephone Corporation and was evidenced by a check.
Further, where it is seen that Ruben Ramirez and had funds deposited in the aforementioned
Bank, Bank of America, so it is evident that the funds of the Ramirez Telephone were in truth,
funds that their President have. Ruben Ramirez used these for payment of rents due to
Herbosa”

Guatson International Travel and Tours Inc, Philippine Integrated Labour Assistance Corporation,
Mercury Express International Courier Service vs NLRC and Jolly Almoradie 1994.

Facts: Jolly M. Almoradie was first employed by Mercury Express International Courier Service, Inc
(MEREX) as messenger, when it closed she was absorbed by MEREX’s sister company Philippine
Integrated Labour Assistance Corp. She was then transferred to Guatson Travel another sister company
of MEREX and Philac. Sometime, he was forced to resign by Guatson’s Vice-President and General
Manager Henry Ocier. NLRC finds that he was force to resign in violation of the Labour Code and grant
the payment of separate pay and back wages to Almoradie by the Guatson, Philac and Merex. On appeal
the three companies argues that they have separate and distinct personalities such that Philac and
Merex should not be held liable

Issue: Whether or not Philac and Merex should not be held liable

Ruling: No, they are liable. The 3 companies are owned by one family, such that the majority of the
officers of the companies are the same. The companies are located in one building and use the same
messenger service. Moreover, there was no showing that private respondent was paid separation pay
when he was absorbed by Philac upon closure of Merex, nor was there evidence that she resigned from
Philac when she transferred to Guatson Travel.

Under the doctrine of piercing of the veil of corporate fiction, when valid grounds exists, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or
stockholders may be disregarded.

Concept Builders Inc vs NLRC (1996)

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. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the
notion of legal entity should come to naught. The law in these instances will regard the corporation as
mere association of persons and, in case of two corporations merge them into one. Thus, where a sister
corporation is used as a shield to evade a corporation’s subsidiary liability for damages, the corporation
may not be heard to say that it has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.

Facts: Workers of Concepts builders filed an action for illegal dismissal and payment of back wages
against the company. The LA found for the workers and ordered reinstatement and payment of back
wages which have become final an executory.

LA issued a write of execution but the service was refused by the security guard of the compound on the
ground that petitioner corporation no longer occupied the premises. The 2 nd alias writ was also not
enforced because it was Hydro Pipes Philippines Inc that occupies the premise and their guards with
high powers guns prevent him from removing the properties he had levied upon. The sheriff
recommends a break-open order.

A certain Dennies Cuyegkeng, as owner of HPPI opposed the break open order alleging that HPPI has a
separate and distinct personality from Concept builders. The workers filed the motion of issuance of a
Break Open Order alleging that HPPI and Concept builders are one and the same. And that Concept
suspended its business operations in order to evade its legal obligations to them. NLRC issued the break
open order. Hence this appeal

Issue: WON HPPI and Concept is one and the same that the break-open order is proper

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

Test in determining the applicability of the doctrine of piercing the veil:

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 (Control test)
 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty or dishonest and unjust act in
contravention of plaintiff’s legal rights, and (fraud test)
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. (harm test)
Absence of one will prevent the piercing of the corporate veil

In instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how
the corporation operate and the individual defendant’s relationship to that operation.

In the present case, the following are facts:

1. Concept builders ceased it business and on May 15, 1987 it submitted an information sheet with
the SEC its office address is at 355 Maysan Road, Valenzuela, Metro Manila, on the same day
HPPI submitted a similar sheet stating its office address at 355 Maysan Road, Valenzuela, Metro
Manila.
2. Both sheets were filed by the same VIrgilio O. Casino as corporate secretary of both corporation.
3. Both corporation has the same president, board of directors, corporate offices, and same
subscribers.

From the foregoing it cannot be said that the property levied upon by the sheriff were not of
respondents. Clearly, Concept builders 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 Concept builders, and its emergence was skilfully orchestrated to avoid
the financial liability that already attached to the Concept Builders.

Equity Cases

Telephone Engineering and Service Company Inc (TESCO) vs WCC, Provincial Sheriff of Rizal and Leonila
Santos Gatus for herself and in behalf of her minor children.

Facts: TESCO is a domestic corporation engaged in manufacturing telephone equipment with business
address at Sheridan Stress, Mandaluyong, Rizal. Its executive Vice-President and General Manager is
Jose Luis Santiago. It has a sister company, the Utilities Management Corporation (UMACOR), with
offices in the same location and under the management of the same Jose Luis Santiago.

UMACOR employed the late Pacifico L. Gatus as purchasing agent. Sometime he was detailed to TESCO
and reported back to UMACOR. He contracted illness and eventually died of liver cirrhosis with
malignant degeneration. His widow filed claimed to the RO 4 of the WCS alleging that his husband was
an employee of TESCO and he died of liver cirrhosis. WCC asked for an employer’s report to TESCO,
which was submitted as UMACOR as employed and signed by Jose Luis Santiago. The report also
admitted that the deceased employee contracted illness in regular occupation. Hence, the acting referee
awarded death benefits. TESCO appealed but was denied, the sheriff will now levy properties of TESCO.

TESCO filed with SC certiorari seeking to annul the award and to enjoin the sheriff from levying and
selling its properties at public auction. Asserting that WCC has no jurisdiction nor authority to render
award against TESCO there being no employer-employee relationship.
Ruling: TESCO is estopped from the defence of no employer-employee relationship. Previously, in their
MR petitioner represented and defended itself as the employer of the deceased and even admitted that
TESCO and UMACOR are sister companies operating under one single management and housed in the
same building. Although respect for the corporate personality as such, is the general rule, there are
exceptions. In appropriate cases, the veil of corporate fiction may be pierced as when the same is made
as a shield to confuse the legitimate issues.

TESCO’s denial at this stage that it is not the employer of the deceased is obviously an afterthought, a
devise to defeat the law and evade its obligations. The denial also

AD Santos Inc. vs Ventura Vasquez 1968

Facts: Ventura Vasquez was a taxi driver for AD Santos Inc. sometime while driving the taxicab he
vomited blood, he was confined and diagnosed with pulmonary tuberculosis. Ventura filed claim with
the WCC which granted him compensation. AD Santos Inc appealed and raised among others that the
claim for compensation is directed against Amador Santos, not against AD Santos Inc.

Issue: Whether or not Ventura cannot claim against AD Santos Inc

Ruling: No, Ventura’s claim is directed against AD Santos Inc. petitioner in answer categorically admitted
that the claimant was its taxi driver, they further cites the fact that respondent driver, mentioned that
he worked for the City Cab operated by Amador Santos.
This will not detract the validity of the claim. 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 AD Santos Inc
in which Amador was an officer. The mention by respondent of Amador Santos as his employer in the
course of his testimony, in the words of the Court – 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 of fraud and/or confuse legitimate issued (employer-employee) the same should be pierced.

Due Process
McConnel vs CA 1961 (Another suit was made to pierce the veil)

Facts: Park Rite Co., Inc., leased from Rafael Perez Rosales a vacant lot which it used for parking motor
vehicles, however, they also occupied an adjacent lot without the owner’s knowledge and consent.
When this was discovered the owner’s demanded payment for use and occupation of the lot. The Trail
court favoured the owners. However, it was found out that the Corporation has no sufficient assets. The
judgment creditors filed a separate suit in the CFI against the corporation and its past and present
stockholders to recover from them jointly and severally. The CFI denied by the CA appealed.

Issue: Where or not the CA is correct

Ruling: Yes, because the corporation was a mere alter-ego of its owners, controlled for their own
benefits.
Emilio Cano Enterprise vs CIR 1965 (no need for another suit, since the respondents were sued in their
capacity as officers of the corporation)
Facts: Honorata Cruz filed unfair labor practices against Emilio, Aristo, and Rodolfo Cano of the Emilio
Cano Enterprises., Inc in their capacity as officers of the corporation. Judgment was rendered in favour
of Cruz and ordered her reinstatement and payment of back wages. An execution order was then
directed to Emilio Cano enterprises instead of the named responded, hence the corporation moved to a
motion to quash arguing that it has a separate juridical personality distinct from the Emilio and Rodolfo.

Issue: Whether or not the motion to quash should be granted

Ruling: No, while it is true that a corporation has a personality separate and distinct from its members or
stockholders because of a fiction of law. In the present case, Emilio and Rodolfo Cano are here indicted,
not in their private capacity, but as president and manager of the corporation. What is sued officially is
their connection with the case and must be deemed to be impressed with the representation of the
corporation. The order against them is an order against the corporation. A corporation is a fiction, it can
only act through its officers

NAMARCO vs Associated Finance Co. Inc. 19 SCRA 962 (No need for separate suit, since the President is
impleaded as defendant with the corporation at the onset of the case)

Facts: Associated Finance Co. through its President Francisco Sycip enter into an agreement to exchange
sugar with NAMARCO. However, later sometime, Sycip offers to pay 15.30 per bag instead of delivering
the sugar. NAMARCO filed for the recovery of their paid money indicting Associated and its President
Sycip. Judgment if rendered against Associated but not Sycip. NAMARCO appealed

Issue: Whether or not Sycip should be held solidarily liable

Ruling: Yes, it was fully established that Associated is a mere alter ego of Sycip. And Sycip was guilty of
fraud when he contracted under the name of Associated which he has full control and knowledge that it
cannot deliver the promised sugar. He cannot therefore seek refuge behind the general principle that
the corporation has a separate and distinct personality

Jacinto vs CA 1992 (Courts can pierce the veil even if it is not prayed, as long as evidenced adduced
during trial is sufficient)

Facts: Jacinto appeals the decision of the CA, making him solidary liable with Inland Corporation for their
obligation to Metrobank. He contends, that the CA was in error when it pierced the veil of corporation
fiction without the request of Metrobank.

Issue: Whether or not the CA is correct

Ruling: Yes, primarily it is correctly concluded that Inland Corporation was only and alter-ego or business
conduit by Jacinto. Secondarily, there is a host of cases decided by the SC that command “when the veil
of corporation fiction is made as a shield to perpetuate fraud and/or confuse legitimate issues, the same
should be pierced or where a corporation is merely an adjunct, business conduit or alter ego, the fiction
of separate and distinct corporate entity should be disregarded.

Arcilla vs CA and Emilio Rodulfo 1986

Facts: Arcilla argues does he is not solidarily liable with the obligation incurred as a loan under CSAR
Marine Resources. He seeks an appeal against an order of the CA that held him personality liable for the
amount and the case be dismissed against him

Issue: Whether or not the CA is correct

Ruling: Yes, primarily, the petitioner was taking advantage of the innocuous phrase in his capacity as
President to his sanctuary of defence, which according to him he long since abandoned. The purpose of
this is merely to avoid compliance with his adjudge liability. Secondly, even if the obligation was incurred
in the name of the corporation, the petitioner would still be personally liable because for all legal intents
and purposes, he and the corporation are one and the same since the court has pierced the veil of
corporate fiction, CSAR Marine is nothing more than his business conduit or alter ego.

AC Ransom Labor Union vs NLRC (The Corporation here does not exist)

Facts: A.C. Ranson Labor Union were granted a favourable decisions against A.C. Ransom. However, they
cannot recover because the corporation was in a precarious financial situation. Hence, the Union file a
motion for writ of execution and garnishment against the officers or agents of Ransom. LA Genilo issued
the writ of execution against the officers, which the NLRC reversed. The SC, reinstated the Genilo writ
but limited the liability to the President of Ransom jointly and severally with other presidents of the
Corporation. A MR was filed by the Private respondents, pointing out that they were never impleaded as
parties and their personal liabilities were never at issue. The Union aver that the veil of corporate fiction
be pierce and hold that all individual private respondents and not only the President should be held
liable.

Ruling: It is an incontrovertible fact that Random was found guilty by the CIR for unfair labour practice,
and its officers and agents were ordered to cease and desist from further committing acts constitutive of
the same. It has become, final, conclusive and executory. This could upheld that portion of the judgment
ordering the officers and agents of RANSOM. The officers and agents was but proper since a
corporation, as an artificial being can only act through them also based on the Industrial Peace Act and
the Minimum wage Law. We limited it to only the Presidents since it is the President should be deemed
included in the term employer- this is wrong as it limited and deviates from the CIR decision. Hence, it
should be the officers and agents.

Lim vs NLRC 1989

Facts: Samuel Casas Lim was the general manager of Sweet Lines, he handed the letter of termination to
Victoria Calsado. Calsado then complained against illegal dismissal which was favourable adjudge and
made Lim as personally liable with Sweet Lines for having signed the letter of informing Calsado of her
separation, following the ruling in AC Ransom

Issue: Whether or not Lim must be held solidarily liable

Ruling: No, there is no evidence that he acted with malice or bad faith when he signed the letter. His
actions was within the scope of his authority and was a corporate act. AC Ransom will not apply since it
that case the corporation actually ceased operations making it necessary to enforce it against its former
President, this is not the situation in this case.

De Guzman vs NLRC 1992

Facts: Arturo de Guzman was the general manager of Manila Office of AMAL. AMAL later on wrote to de
Guzman that they will be closing their manila branch due to financial reverses. De Guzman communicate
this to all personnel. Some employees lodge a complaint against AMAL and De Guzman for illegal
dismissal etc. De Guzman on the other hand sold AMAL’s assets and applied the proceeds thereof to the
payment of his claims.
Meanwhile, the Illegal dismissal was found to be tenable by the LA and order the joint liability of AMAL
and de Guzman. Hence this motion

Issue: Whether or not De Guzman is jointly liable

Ruling: No, Ransom case cannot apply in the present. In Ransom the persons made liable were
stockholders-officers of the corporation. In the present case, while de Guzman was admittedly the
highest ranking officer of AMAL in the Philippines, he is not a stockholder and much less a member of
the Board of Directors or an officer thereof. He is at most only a managerial employee. He has no direct
responsibility to close the business, his only participation was limited to the enforcement of this decision
in line with his duties as general manager of the company.

 He was held liable for his abuse of position when he appropriate AMAL’s property for the
satisfaction of his claim.

Garcia vs ES 1999

Facts: After the declaration

Standard Oil Co vs US 1910

International Academy vs Litton

Reverse Piercing: 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
corporate liable for debts of the shareholders. It has two (2) types: Outsider reverse piercing and insider
reverse 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. In contrast, in reverse insider 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 protection of personal assets.

Corporate Powers

Corporate Powers and Capacity

Article 42 of the Civil Code

Civil personality is extinguished by death. The effect of death upon the rights and obligations of the
deceased is determined by law, by contract and by will.

Express powers

Section 35. Corporate Powers and Capacity – Every corporation incorporated under this Code has the
power and capacity:
a) To sue and be sued in its corporate name;
b) To have perpetual existence unless the certificate of incorporation provides otherwise
c) To adopt and use of a corporate seal;
d) To amend its articles of incorporation in accordance with the provisions of this code
e) To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same
in accordance with this code;
f) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation;
g) To purchase, receive, take or grant, hold, covey, sell, lease pledge, mortgage, and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as
the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the constitution
h) To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons
i) To make reasonable donations, including those for the public welfare or for hospitals,
charitable, cultural, scientific, civic, or similar purposes: provided, that no foreign corporation
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity
j) To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers, and employees; and
k) To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation

Section 22 – all corporate powers shall be exercised and all corporate business shall be conducted by
the board of directors and of the corporation. The source of power of the board of directors is therefore
primary, and is not a delegated power from the stockholders or members of the corporation.

However, there are instances where the consent of the stockholders or members and the state is
required to validate or give legal effect to a corporate power.
The sources of express powers of a corporation are therefore those provided for by law and those
enumerated in its charter

BA Savings vs Roger T. Sia

Facts: The CA denied a certiorari due to the ground that the Certification on anti-forum shopping was
not signed by the duly authorized representative of the petitioner (corporation) as required, but by its
counsel. The Petitioner BA Savings presented a Board Resolution authorizing the corporate’s retained
counsel to present it in any action of proceedings before any court and to sign, execute and deliver the
Certificate of Non-forum shopping among others. The CA denied the reconsideration because the SC
circular requires that it is the petitioner, not the counsel, who must certify under oath to all of the fact
sand undertakings required therein.

Issue: Whether or not the rules allows a corporation to authorize its counsel to execute a certificate of
non-forum shopping for and on its behalf

Ruling: Yes. A corporation has no powers except those expressly conferred on it by the Corporation
Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said
powers through its board of directors and/or its duly authorized officers or agents. Physical acts, like the
signing of documents can be performed only by a natural persons duly authorized for the purpose by
corporate bylaws or by specific act of the board of directors.
“All acts within the powers of a corporation may be performed by agents of its selection and
except so far as limitations or restrictions which may be imposed by special charter, by-law, or
statutory provisions, the same general principles of law which govern the relation of agency for
natural person govern the officer or agent of a corporation, of whatever the status or rank, in
respect to his power to act for the corporation; and agents once appointed, or members acting
in their stead, are subject to the same rules, liabilities and incapacities as are agents of
individuals and private persons”

In the present case, the resolution was sufficient to vest such persons with the authority to bind the
corporation and was specific enough as to the acts they were empowered to do. In fact, the counsel was
in best position to verify the truthfulness and the correctness of allegations in the complaint and to
know and to certify if an action had already been filed and pending with the courts. Furthermore the
Circular does not require corporate officers to sign the certificate, more important, there is even no
prohibition against authorizing agents to do so.

Incidental Powers are those that attach to a corporation at the moment of its creation without regard to
its express powers or particular primary purpose, and may be said to be inherent in it as a legal entity or
a legal organization.
Ex. The power to sue and be sued, to grant and receive, in corporate name.
Non-incidental powers: power to merge or consolidate with another corporate entity.

Implied or necessary powers to exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in its articles of incorporation. This exist as a necessary consequence of
the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in
the articles of incorporation.
Sections 36. Power to Extend or Shorten Corporation Term – A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by a majority vote of the board
of directors or trustees, and ratified at a meeting by the stockholders or members representing at least
2/3 of the outstanding capital stock of its members. Written notice of the proposed action and the time
and place of the meeting shall be sent to the stockholders or members at their respective place of
residence as shown in the books of the corporation, and must be deposited to the addressee in the post
office with postage prepaid, served personally, or when allowed in the by-laws or done with the consent
of the stockholder, sent electronically in accordance with the rules and regulations of the Commission
on the use of electronic data messages. In case of extension of corporate term, a dissenting stockholder
may exercise the right of appraisal under the conditions provided in this Code.

Power to extend life is not inherent as it needs the State approval, while power to shorten may be
considered a business decision of the Board, but eventually needs State approval.

Appraisal Rights Issues

In case of extension, any dissenting stockholder may excise his appraisal right to have his shares bought
back at fair value by the corporation. Also available to a dissenting stockholder even when it covers the
shortening of the term of corporate existence (Section 81)

Belongs to the case of extension since extension actually novates the corporate relationship beyond the
original term provided for in the AOI

81(a)

Section 37: Power to increase or Decrease Capital Stock; incur, create or increase bonded
indebtedness – No corporation shall increase or decrease its capital stock or incur, create or incur,
create or increase any bonded indebtedness unless approved by a majority vote of the board of
directors and by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called
for the purpose. Written notice of the time and place of the stockholders’ meeting and the purpose for
said meeting must be sent to the stockholders at their places of residence as shown in the books of the
corporation served on the stockholders personally, or through electronic means recognized in the
corporation’s by-laws and/or the Commission’s rules as a valid mode for service of notices.

Power is not inherent, because it touches an item expressly required to be provided for in the AOI but is
also governed by common law doctrines such as the trust fund doctrine and pre-emptive rights. It
amends the underlying contractual relationships between and among the members of the corporate
family; which is the reason for requiring the contractual parties to give their consent before the exercise
of such power can be validly implemented.

No Appraisal Rights in Increase of capital stock.

The reason why a corporation would undertake to increase its capital stock is to raise the working
capital of the corporation.

No Appraisal Right in the Decrease of Capital Stock.

The decrease of capital stock would result in returning part of the investments of the stockholders,
including those stockholders who dissented.
Madrigal and Company Inc vs Zamora and Madrigal Central Office Employees Union

Facts: Madrigal Central Office Employees Union seeks to renew their CBA and demanded wage increase.
The Company deferred to sit down with the union, citing stockholders action reducing its capital stock
effected through the distribution of the marketable securities owned by the petitioner to its
stockholders in exchange for their shares in an equivalent amount in the corporation. The company also
intimated that they plan to phase out 3 stages of operations and reorganization.

The Union commenced action for unfair labour practices and the company responded with operational
losses to the NLRC. The Labour Arbiter finds for the Union granting the Union demands of wage increase
and allowance. The Company filed for clearance to terminate the services of other employees, with the
DOLE finds that the dismissals are contrary to law and orders reinstatement. The Company now files
before the Supreme Court, arguing, among others, that the Administrative agencies and the office of the
president ignored the undisputed fact that the petitioner had virtually ceased operations after having
twice decreased its capital stocks and therefore, not financially capable to absorb such award of
benefits.

Issue: Whether or not the decrease of stocks is enough to retrench employees

Ruling: No, The pattern of the company’s action has convinced us that its sole objective was to render
moot and academic the desire of the union to exercise its right to bargain collectively with the
management. Especially its demand for wage increase and allowances was granted. Respondent’s action
was a systematic and deliberate attempt to get rid of complainants because of their union activities.
We do not subscribed to appellant’s argument that by reducing its capital, it is made evident that it is
phasing out its operations. On the contrary, whatever may be the reason behind such reductions, it is
indicative of an intention to keep the company a going concern. So much so that until now almost four
(4) years later, it is still very much in existence and operational as before.
Also we also reject that statement that the yearly statement of income are dividends from security
holdings on the pretext that they belong exclusively to its stockholders. These dividends are corporate
earnings arising from corporate investments otherwise it would not have been reflected as part of
profits in the company’s yearly financial statements.

Finally, what clearly emerges from the recorded facts is that the petitioner, awash with profits from its
business operations but confronted with the demand of the union for wage increases, decided to evade
its responsibility towards the employees by a devised capital reduction. While the reduction in capital
stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of
union members, who, by then, had agitated for wage increases. In the face of the petitioner company’s
piling profits, the unionist had the right to demand for such salary adjustments.

Retrenchment can only be availed of it the company is losing or meeting financial reverses in its
operations.

Section 38:

Pre-emptive right refers to the common law right granted to the stockholders of a corporation to be
granted the first option to subscribe to any opening of the unissued capital stock, or to any increase of
the authorized capital stock of the corporation. Intended to protect both the proprietary and voting
rights of a stockholder in a corporation.
Except.
a) When such right is denied by the articles of incorporation or an amendment thereto
b) No pre-emptive rights on:
a. Shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public;
b. To shares to be issued in good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for
corporate purposes; or
c. To shares to be issued in good faith with the approval of the stockholders representing
2/3 of the outstanding capital stock in payment of previously contracted debt.
Pre-emptive right pertains to that portion of the authorized capital stock that has not been subscribed,
unissued shares that are offered for subscription. It is a right claimed against a corporation on unissued
shares of its capital stock.

Datu Tagoranao Benito vs SEC and Jamiatul Philippine-Al Islamia, Inc.

Facts: Jamiatul Philippine-Al Islamia Inc has an authorized capital stock of 200,000 divided into 20,000
shares at 10.00 par value each. Of the authorized capital stock 8,058 worth 80, 580 were subscribed and
fully paid for. The corporation filed to increase capital stock from 200,000 to 1,000,000. 191,560 were
represented in the stock holders meeting. 110,980 or 11,980 shares from the unissued portion were
issued by the corporation from the 200,000 or 20,000 shares of stock.

Datu Benito filed with the SEC that the additional issue of 110,980 of previously subscribed shares of the
corporation was made in violation of his pre-emptive rights hence should be cancelled. The SEC ruled
that the issuance of the corporation unissued shares was validly made and was not subject to the pre-
emptive rights of stockholders.

Issue: whether or not there is pre-emptive rights

Ruling: None, the questioned issuance of the unsubscribed portion of the capital stock worth 110,980 is
not invalid even if assuming that it was made without notice to the stockholders. The power to issue
shares of stock in a corporation is lodged in the board of directors and no stockholders meeting is
necessary to consider it because additional issuance of shares of stock does not need approval of the
stockholders as provided in its bylaws.

The general rule is that pre-emptive right is recognized only with respect new issue of shares, and not
with respect to additional issues of originally authorized shares. This is on the theory that when a
corporation at its inception offers its first shares, it is presumed to have offered all of those which it
authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a
definite proportionate part of the whole number of authorized shares. When the shares left
unsubscribed are later re-offer, he cannot therefore claim a dilution of interest.

Power to Sell, Dispose, Lease or Encumber of Assets

Subject only to the provisions of the Philippine Competition Act a corporation may be a majority vote of
its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets.

This power is deem to undermine the contractual relationship of two members of the corporate
relationship, namely, the corporation acting through its board and the group of stockholders. No
consent of the state I required.

Pena vs CA (PAMBUSCO)

Facts: PAMBUSCO was the original owners of the lot, they mortgage it to DBP. The mortgage was
foreclosed, in the foreclosure sale it was sold to Rosita Pena as the highest bidder which was registered.

The PAMBUSCO through 3 out of its 5 directors resolved to assign its rights of redemption over the
aforesaid lots and authorized one of its members Briones to executed and sign a deed of assignment.
Which he executed to Marcelino Enriquez, who later redeemed the property. After which, he executed a
deed of sale to the spouses Yap.

A levy on attachment in favour of Capitol Allied Trading was entered as an additional encumbrance was
annotated to the lots in question, questioning the registrability of the aforesaid lots in the name of the
spouses Yap was sought to resolved (Dante Gutierrez vs PAMBUSCO). The Sheriff informed Pena that the
lots was redeemed by Enriquez

Pena wrote the sheriff notifying him that the redemption was not valid as it was made under a void deed
of assignment.

The Present Petition: Spouses Yap seeks to recover the land to Rosita Pena as they are the true owners
of the land. Pena asserted that she is the legitimate owner through a foreclosure proceedings without
being redeemed. That the deed of assignment by PAMBUSCO is invalid as an ULTA Vires for being
without valuable consideration. The RTC declared the PAMBUSCO resolution on assignment null and
void, while the CA reversed.

Issue: Whether or not the Board Resolution is Ultra Vires

Ruling: Yes. The by-laws of a corporation are its own private laws which have the same effect as the laws
of the corporation. The by-laws required 4 members to be present to constitute a quorum in a special
meeting of the board of directors of respondent PAMBUSCO. The resolution was attended only by 3 out
of 5 members. Furthermore, under Section 28 ½ of the said law, the sale or disposition of an and/or
substantially all properties of the corporation requires, in addition to a proper board resolution, the
affirmative votes of the stockholders holding at least two-thirds 2/3 of the voting power in the
corporation in a meeting duly called for that purpose. No doubt, the questioned resolution was not
confirmed at a subsequent stockholders meeting duly called for the purpose by the affirmative votes of
the stockholders holding at least 2/3 of the voting power in the corporation. The same requirement is
found in Section 40 of the present Corporation Code. (Now Section 39)

Islamic Directorate of the Philippines vs CA and Iglesia ni Cristo

Facts: IDP is a corporation internally in conflict with two groups, the Carpizo Group and Tamano Group.
Sometime, without properly electing a Board of trustee of the IDP, the Carpizo group signed an alleged
Board Resolutions authorizing the sale of two parcels of land (tandang sora property) to Iglesia ni Cristo.
Tamano Group filed a petition before SEC seeking to declare it null and void since the Carpizo group is
not a legitimate board of trustee. SEC ruled in favour of the Tamano Group declaring the sale null and
void, however in the CA, where the intervention case filed by INC was pending (ordering mortageee to
deliver titles) , set aside the SEC decision

Issue: whether or not the CA committed an error in setting aside the portion of the SEC’s decision

Ruling Yes, SEC is the legitimate body who can decide among different contending groups is the
legitimate board of trustees of the IDP. In the present case, it should be noted that the SEC have
previously adjudge that the election of the Carpizo Group to the IDP is null and void, consequently the
group is bereft of any authority whatsoever to bind IDP In any kind of transaction including the sale or
disposition of its property. The sale is further deemed null and void because of the Carpizo’s group
failure to comply with the corporation code which requires the majority vote of the legitimate board of
trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should
have been obtained.

Section 40: Power to acquire own shares. – Provided, that the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired, a stock corporation shall have the
power to purchased or acquired, a stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes including the following case:
a) To eliminate fractional shares arising out of stock dividends;
b) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription,
in a delinquency sale, and to purchase delinquent shares sold during said sale; and
c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this code.

Philippine Trust Company vs Marciano Rivera

Facts: Philippine Trust Company was the assigned in insolvency of La Cooperative Naval Filipina as
against Marciano Rivera for the purpose of recovering a balance of 22,500 from a subscription contract
to the capital stock of said Insolvent Corporation. According to Rivera, a previous meeting of the
stockholders a resolution was adopt to reduce the capital by 50 percent and released the subscribers
from the obligation to pay any unpaid balance in excess of the 50 percent. As a result the subscription of
various shareholders had been cancelled.

Issue: Whether or not the resolution released Rivera

Ruling: No. A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manger and under the conditions
prescribed by the statute or the charter or the articles of incorporation. The resolution releasing the
shareholders from their obligation to pay 50 per centum of their respective subscriptions was an
attempted withdrawal of so much capital from the fund upon which the company’s creditors were
entitled ultimately to rely and, having been effected without compliance with the statutory
requirements, was wholly ineffectual

Boman Environmental Development Corporation vs CA and Fajilan

Facts: Nilcar Y. Fajilan resigned as member of the Board of Directors and Company President of the
Boman Environmental Development Corporation. He offered to sell his shares and interest in the
company, which was acceded by the board of directors. Consequently, the Board issued a promissory
note to pay Fajilan within a period of 6 months for the amount of 300,000 corresponding to his shares
and interest. Boman defaulted in payment. Fajilan filed for a collection suit in the RTC, the RTC dismissed
the case citing lack of jurisdiction as it is in the nature of an intra-corporate dispute. The CA reverses
hence this appeal.

Issue: Whether or not the suit if an intra-corporate suit.

Ruling: Yes, The case is an intra-corporate controversy because the parties are a stockholder and the
corporation. The suit against the corporation to enforce the promissory note is cognizable by SEC alone
which shall determine whether such payment will not constitute a distribution of corporate assets to a
stockholder in preference over creditors of the corporation. The SEC shall investigate whether the
corporation has unrestricted retained earnings to cover the payment for the share and whether the
purchase if for a legitimate corporate purpose as provided by the Corporation Code.

The requirement of the availability of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors. There can be no distribution of assets
among the stockholders without first paying the corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void, the board of directors cannot use the assets of the
corporation to purchase its own stock as long as there are outstanding debts and liabilities.

Section 41. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose- Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation, business or for any purpose other than the primary purpose for which it was organized,
when approved by a majority of the board of directors or trustees and ratified by the stockholders
representing at least two-thirds 2/3 of the outstanding capital stock, or by at least two-thirds 2/3 of the
outstanding capital stock, or by at least 2/3 of the members in the case of non-stock corporations at a
meeting duly called for the purpose. Notice of the proposed investment and the time place of residence
as shown in the books of the corporation and deposited to the addressee in the post office with the
postage prepaid. Served personally, or sent electronically in accordance with the rules and regulations of
the Commission on the use of electronic data message, when allowed by the bylaws or done with the
consent of the stockholders: Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of
the stockholders or members shall not be necessary.

Ramon dela Rama vs Ma-ao Sugar 1969

Facts: Dela Rama filed a derivative suit for the alleged illegal and ultra-vires acts consisting of self-
dealing irregular loans and unauthorized investments. The lower court finds for dela Rama and ordered
the company to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other
company whose purpose is not connected with the Sugar Central Business. The plaintiff contest that the
investment of the corporation to the Philippine Fiber Processing Co.inc is in violation of section 17 ½
which provides:

No corporation organized under this act shall invest its funds in any other corporation or
business or for any purpose other than the main purpose for which it was organized unless
its board of directors has been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least two-thirds of
the voting power on such proposal at the stockholders' meeting called for the purpose.

While the defendants argue that the corporation code allows the corporation to enter into any
obligation or contract essential to the proper administration of its corporate affairs or necessary for the
proper transaction of the business or accomplishment of the purpose for which the corporation was
organized.

Issue: Whether or not the investment in question is prohibited by the corporation law

Ruling: No, The power to invest corporation funds, when investment is necessary to accomplish its
purpose or purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary. Furthermore, the corporation law allows a corporation to invest its funds in any other
corporation or business, or for any purpose other than the main purpose for which it was organized
provided that its board of directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least 2/3 of the voting power.

Power to enter into Partnership, joint venture

There is an underlying theory that the stockholders of a corporation are entitled to assume that their
directors will conduct the corporate business without sharing that duty and responsibility with others.

JM. Tuason and Co., Inc represented by Its Managing Partner, Gregorio Arante Inc vs Bolanos (1954)

Facts: In a suit for recovery of possession of land in Quezon City, defendant avers that the lower court
erred in not dismissing the case on the ground that it was not brought by the real party in interest. As
JM Tuason and Co., was represented by its managing partner, which in accordance with the corporation
law is illegal, since corporations are not allowed to enter into partnerships with other corporations.

Issue: Whether or not Corporation are not allowed to enter into partnerships

Ruling: No, though a corporation has no power to enter into a partnership, it may nevertheless enter
into a joint venture with another where the nature of that venture is in line with the business authorized
by its charter. There is nothing in the record that says that their partnership is not in line with their
corporate business. Hence, acting as its managing party, the action is brought in the name of the real
party in interest JM Tuason
Section 44. Ultra Vires Acts of the Corporations – No corporation shall possess or exercise corporate
powers other than those conferred by this Code or by its articles of incorporation and except as
necessary or incidental to the exercise of the powers conferred

Only 3 intra-vires contracts or transactions: Express, implied or incidental powers.

Formula for determining the applicability of the ultra vires doctrine

Whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly
incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not.

Types of Ultra Vires Acts

a) Acts done beyond the powers of the corporation as provided for in law and or its AOI
b) Acts or contracts entered into in behalf of the corporation by persons who have no corporate
authority
c) Acts or contracts which are per se illegal as being contrary to law

Alfredo Montelibano et. Al vs Bacolod-Murcia Milling Co., Inc

Facts: Bacolod-Murcia Milling Co Inc. passed a board resolution increasing the participation shares of its
planters subject to the condition that the total annual production shall exceed on third of the
production of all the sugar mills in the province. The condition was present and the planters now they
demand the increase in participation shares. The Company alleged that the Resolution of the Board of
Directors is an ultra vires act as it partakes a gratuitous concession not supported by any legal
consideration.

Issue: whether or not the increase in shares by the BOD was ultra vires

Ruling: No. There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the amended milling contract for the purpose of making its terms more
acceptable to the other contracting parties. The rules is that: Whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the power to do it, otherwise not. The
Resolution was valid and biding regardless if it will cause losses or decrease the profits of the central. As
purely business and economic problem is to be determined by the directors of the corporation not by
the court.

Note: All disquisition concerning donations and the lack of power of the directors of the respondent
sugar milling company to make a gift to the planters would be relevant if the resolution in question had
embodied a separate agreement after the appellants had already bound themselves to the terms of the
printed milling contract.

Pirovano et al vs Dela Rama Steamship Co.

Facts: Minor Children of Enrico Pirovano, represented by Estefania R. Pirovano seeks to enforce certain
resolutions adopted by the Board of Directors and stockholders of the defendant company the proceeds
of the insurance policies of their decease father. The company defended that it is ultra vires.

Enrico Pirovano became the president of the Dela Rama Steamship under his management the company
grew to become a multi-million corporation. He was executed by the Japanese during the occupation.
The corporation passed a first resolution granting Pirovano children the proceeds of the insurance
policies of their father. Don Estaban and members of his family were agreeable to give 400,000 out of
the proceeds of the insurance policies taken on the life of Enrico, however, when the realized that this
amount will be more than what they actually plan to give they adopted another resolution changing the
form of the donation. A renunciation of 4,000 shares of stock in favour of the children of all the
company’s right, title and interest in and to the proceeds of the abovementioned life insurance policies
subject that it will be retained by the company as a loan drawing interest and payable until the company
shall have first settled in full the balance of its present remaining bonded interest.

An agreement was set up with Mrs. Pirovano to buy a new house in New York which would be paid from
the funds held in trust belonging to her minor children. It was approved and a resolution was adopted.
The formal transfer was made and approved by the court, and was ratified by the stockholders of the
Dela Rama company.

The president of the corporation inquired to the SEC regarding the validity of the donation of the
proceeds of the insurance. SEC said that it was void, because the corporation could not dispose of its
assets by gift and therefore the corporation acted beyond the scope of its corporation powers. Due to
opinion the board revoked the donation. Mrs. Pirovano demanded the payment of the credit due to
them.

Issue: Whether or not the donation of the proceeds is ultra vires

Ruling: No. The articles of incorporation of the corporation provides as one of its purpose “to aid in any
other manner any person, association, or corporation of which any obligation or in which any interest is
held by this corporation or in the affairs or prosperity of which this corporation has lawful interest. As
the court finds out the word deal is broad enough to include any manner of disposition and the donation
in question undoubtedly comes within the scope of this broad power.

Past actions of the corporation has proved that it has gratuitous contributions to other employees and
even political parties. There is really no distinction between these acts, and if they can be sanctioned
and considered valid there is no reason why the donation in question may be deemed ultra vires.

Other Doctrines:

2 types of Ultra vires acts

a) An act performed merely outside the scope of the powers granted to it by its articles of
incorporation – voidable, valid until avoided and may become binding and enforceable when
ratified by the stockholders.
 b) An act which is contrary to law or violative of any principle which would void any contract
whether done individually or collectively – void for being contrary to law, morals, or public
order, or public policy

Luneta Motor Company vs AD. Santos, Inc. et. Al

Facts: The two corporations are arguing over the ownership of a certificate of public convenience to
operate a Taxi Transport. In a court trial, ownership was acquired by Luneta Motor Company. In the PSC
AD Santos Inc. interposed the argument that LMC’s articles of incorporation does not authorized it to
engage in the taxicab business or operate as a common carrier. LMC files and appeal saying that the
corporation law and its AOI provides that it can acquire said certificate and could make use of it by
operating a taxicab business.

Issue: Whether or not the corporation law or the AOI of LMC allows it to engage and operate a taxicab
business

Ruling: No. In its AOI its corporate purpose are to carry on a general mercantile and commercial
business and deal in and concerning automobiles and automobile accessories and to operate steamship
and sailing ships in the transportation of persons, merchandise and chattels by waters. The courts find
nothing in the legal provision and the provisions of the LMC’s AOI that it may engage in the land
transportation – an entirely different line of business. If it could not engage in this line of business, it
follows that it may not acquire any certificate of public convenience to operate a taxicab service because
such acquisition would be without purpose and would have no necessary connection with the
petitioner’s legitimate business.

Republic of the Philippines vs Acoje Mining Company, Inc.

Facts: Acoje Mining Company wrote the Director of Post to establish a post office in their mining camp
for the benefit of its employees and families. The Director of post agrees on the condition that the
Mining Company will provide for the quarters, equipment, employee and the assumption of direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of Post. A resolution was made
by the Board of Directors by the mining company and the post office was established. Sometime, the
postmaster assigned took a 3 day leave and never returned, and it was later revealed that the accounts
was 13,000 short. A demand was made by the government, the mining company defended that it
cannot be held liable as the resolution was an ultra vires act.

Issue: Whether or not the resolution to establish a post office was ultra vires

Ruling: No. Modern authorities favours the rule that where the ultra vires transaction has been
executed by the other party and the corporation has received the benefit of it, the law interposes an
estoppel, and will not permit the validity of the transaction or contract to be questioned. In the present
case, it was the mining company who wrote to the director to open a branch of post office for its
convenience. The mining company agreed will all the conditions of the Director of Post, and it cannot
now be heard to complain that it is not liable for the irregularity committed by its employee based on
ultra vires.
While as a rule an ultra vires act is one committed outside the object for which a corporation is created
as defined by the law of its organization and therefore beyond the powers conferred upon it by law.
There are however, certain corporate acts that may be performed outside the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of the corporation.

Ernestina Crisologo-Jose vs CA and Ricardo S. Santos, Jr.

Facts: Atty. Oscar Z. Benares was the president of Mover Enterprises and Ricardo Santos was its Vice-
President. In accommodation of the client of Atty. Benares issued a check drawn against Traders Royal
Bank in the amount of 45,000 signed by Benares and Santos, because it was under the account of
Movers Enterprises, payable to Jose. Because of delay to their agreement, another check was issued for
the same amount, but when Jose tried to encashed it, it was rejected due to insufficiency of funds which
promoted Jose to file a criminal case against the two.

Pending the criminal action, Santos deposited the 45,000 to the court.

Jose argued that it was Mover Enterprise and not the private respondents who have merely signed the
check in question in a representative capacity.

After the trial the court rendered judgment dismissed the plaintiff’s complaint. The CA reversed the RTC
and revived the complaint for consignation.

Issue: Whether or not the corporation may be held liable on the accommodation instrument

Ruling: No. The issue or indorsement of negotiable paper by a corporation without consideration and for
the accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge
of the accommodation nature thereof cannot recover against a corporation where it is only an
accommodation party. If the form of the instrument, or the nature of transaction, is such as to charge
the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for
the accommodation of another, he cannot recover against the corporation. By way of exception, an
officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person only if specifically authorized to do so.
In the present case. Corporates offices such as the president and vice-president, have no power to
execute for mere accommodation a negotiable instrument of the corporation for their individual debts
or transactions arising from or in relation to matters in which the corporation has no legitimate concern.

The accommodation paper cannot thus be enforced against the corporation, especially since it is not
involved in any aspect of the corporate business or operations. However, the fact that for lack of
capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should
render personally liable, the signatories of said instrument where the facts show that the
accommodation involved was for their personal account, undertaking or purpose and the creditor was
aware thereof.

The claims should be directed personally against Atty. Oscar Z. Benares and respondent Ricardo S.
Santos Jr as president and Vice-president respectively of Mover Enterprises.

Ireneo G. Carlos vs Mindoro Sugar Co., Et Al.

Facts: Plaintiff wants to recover the value of four bonds with due and unpaid interest thereon, issued by
the Mindoro Sugar Company and place in trust with the Philippines Trust Company who also guaranteed
them for the value received.

The Board of Directors of the Philippine Trust Company, a domestic corporation engaged in acquiring
and selling stocks, bonds, mortgages and other securities, adopted a resolution authorizing its president
purchase of the bonds of the Mindoro Sugar Company was about to issue and eventually resell them.
Mindoro Sugar then executed a deed of trust transferring all of its property to it in consideration of the
bonds it had issue for value with interest at 8 percent per annum. The PTC guaranteed to the holders all
the obligations contracted by the Mindoro Sugar company.

The bonds with their coupons were place on the market and sold by the PTC with guarantee of payment
of the principal and interest of the within bond. The bonds in question was sold to the petitioner. The
PTC paid the appellant but refused to pay interest or to redeem the obligation because the guarantee
given for the bonds was illegal and void.

Issue: Whether or not the guarantee was ultra vires

Ruling: No. The PTC is a corporation secondarily engage in banking and was primarily organized as a
trust corporation with full power to acquire personal property such as the bonds in question as provided
by the Corporation Law and its By-laws and AOI. Thus, being authorized to acquire the bonds, it was
given implied powers to guarantee them in order to place them upon the market under better, more
advantageous conditions.

It is not ultra vires for a corporation to enter into contract of guaranty or suretyship where it does so in
the legitimate furtherance of its purposes and business.

The doctrine of the Supreme Court of the United States together with the English courts and some of
the state courts is that no performance upon either side can validate an ultra vires transaction or
authorize an action to be maintained directly upon it. However, the great weight of authority in the
state courts is to the effect that a transaction which is merely ultra vires and not malum in se or malum
prohibitum although it may be made by the state a basis for the forfeiture of the corporate charter or
the dissolution of the corporation, is, if performed by one party, not void as between the parties to all
intents and purposes, and that an action may be brought directly upon the transaction and relief had
according to its terms.

When a contract is not on its face necessarily beyond the scope of the power of the corporation by
which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations
are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal
wrong

Torts
a wrongful act or an infringement of a right (other than under contract) leading to civil legal liability.
Philippine National Bank vs CA, Rita Gueco Tapnio, Cecilio Gueco and the Philippine American general
insurance company, inc.

Facts: There was a contract of lease of quota allotment at 2.50 per picul between Tapnio and Tuazon.
This contract was submitted to the Branch Manager of PNB to facilitate an arrangement necessary to
settle Tapnio’s indebtedness to the PNB, such indebtedness was secured by a mortgage on her standing
crop including a sugar quota allocation. PNB requires the Tapnio and Tuazon to raise the prince at 2.80
per picul, which Tuazon agreed and further informed the bank that he was ready to pay the sum of
2,800. The Branch manager submitted the contract of lease to the head office which the BOD required
the parties to raise the consideration to 3.00 per picul. Tuazon asked for reconsideration but the board
returned the recommendation unacted. Tuazon eventually wrote a letter to the bank saying he was no
longer interest in continuing the lease of sugar quota. Consequently, Tapnio failed to utilize her sugar
quota resulting a loss of 2,800. The Bank defends that it is within their rights as provided in the
corporation code and its AOI to review and approve the price beneficial to their interest.

Issue: Whether or not the Bank should be held liable

Ruling: Yes, A corporation is civilly liable in the same manner as natural persons for torts, because
generally speaking, the rules governing the liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master be a natural person or a corporation, and
whether the servant or agent be a natural or artificial person. All of the authorities agree that a principal
or master is liable for every tory which he expressly directs or authorizes, and this is just as true of a
corporation as of a natural person. A corporation is liable, therefore, whenever a tortious act is
committed by an officer or agent under express direction or authority from the stockholders or
members acting as a body, or generally, from the directors as the governing body. In the present case, it
was due to the disapproval of the lease by the Board of Directors of PNB, as time if of the essence in the
approval of the lease of sugar quota allotments, since the same must be utilized during the milling
season, because any allotment which is not filled during such milling season may be reallocated by the
Sugar Quota Administration to other holders of allotment. While PNB has the ultimate authority of
approving or disapproving the proposed lease since the quota was mortgaged to the Bank, the latter
certainly cannot escape its responsibility of observing, for the protection of the interest of private
respondents, the degree of care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of said sugar quota.

People vs Tan Boon Kong

Facts: Tan Boon Kong was the manager of a corporation engage in buying and selling native products.
Tan Boon Kong made a false tax return and an information was filed against him. He filed a demurrer
citing that it should be the corporation who should be liable and not him. The lower court agreed and
quashed the information

Issue: Whether or not the lower court is court

Ruling: No. A corporation can acct only through its officers and agents, and where the business itself
involves a violation of law, the correct rule is that all who participate in it are liable. In the present case,
the filing of such false return constitutes a violation of law, the defendant as the author of the illegal act
must necessarily answer for its consequences, provided the allegations are proven.
Jose O. Sia vs People

Facts: Petitioner Jose O. Sia was the president of MEMAP, acting in behalf of the corporation he
entered into a trust receipt agreement with Continental Bank for the cold rolled steel sheets
under the express obligation the Sia will sell them and turn over the proceeds to the
Continental bank. However, Sia failed to turn over the proceeds despite demand. He was
charge with Estafa. He defended that he is acting only in behalf of the Company. The CA opined
that A corporation is an artificial person if the defence theory is followed, unscrupulous legions
would form corporation to commit crimes where nobody could be convicted, citing Tan Boon
Kong
Issue: Whether or not Sia should be held liable
Ruling: No. In this case the act done by Sia in behalf of the corporation was not done because of
the requirement of the law, it was due to a contract agreement. Compare with Tan Boon Kong
where the act punished is a requirement by law. Hence, a corporate officer can only be held
liable for the crime committed by or in behalf of a corporation only in cases when the
corporation was directly required by law to do an act in a given manner and the same law
makes the person who fails to perform the act in the prescribed manner expressly liable
criminally.
Moral Damages
ABS-CBN Broadcasting Corporation vs CA, Republic Broadcasting, Viva and Vicente del Rosario
Facts: Relative to a specific performance case, the trial court ruled against ABS-CBN and
ordered the payment of damages including moral damages to Republic Broadcasting. ABS filed
an appeal to the court contending that there was no clear basis for award of moral damages as
award in juridical persons are available if only it enjoys a good reputation that was debased by
the offending party resulting in social humiliation. RBS on the other hand, stated that juridical
entities may recover moral and exemplary damages if it has a good reputation that is debased
resulting in social humiliation that was indeed suffered through ABS-CBN acts
Issue: whether or not there is basis in law for the award of moral damages to corporations
Ruling: None. Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered, and not to impose a penalty on the wrongdoer. It is aimed at
the restoration, within the limits of the possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. This cannot be awarded in favour 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 can be experience only by one having a nervous system. The people vs manero
statement that a corporation may recover damages if it has a good reputation that is debased,
resulting in a social humiliation is an obiter dictum. Hence. RBS as a corporation cannot be
awarded moral damage.
Filipinas Broadcasting Network Inc. vs Ago Medical and Educational Center (AMEC) and
Angelita F. Ago
Facts: FBNI is a broadcast corporation that employs two reporters. Who in one broadcast
imputed that AMEC has no morality in hiring teachers who have been removed by Aquinas
University due to immorality, that some subjects have no teachers among others. AMEC filed
for Libel which the Court agreed and awarded moral damages.
Issue: Whether or not AMEC as a corporation is entitled to moral damages
Ruling: Yes. FBNI argues that it is not entitled because a juridical person is generally not entitled
to moral damages because unlike a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.
However, the claim for moral damages of AMEC falls under Article 2219 (7) of the civil code.
The provision expressly authorize the recovery of moral damages in cases of libel, slander or
any other form of defamation. The article does not qualify whether the plaintiff is a natural or
juridical person. Therefore, such corporation can validly complain for libel or any other form of
defamation and claim for moral damages.
Financing a Corporation
1. Equity Investments – investor’s expects his returns shall be tied-up with the success or loss of
the operations of the corporation. Investor generally participates in all income earned by the
venture
For the corporation – the advantage is the absence of carrying cost, since corporate enterprise
is not bound to pay any return on the investment unless there are profits, and event hen, the
BOD is generally granted business discretion to determine when to declare such return in the
form of dividends.
2. Debt Contracts – the investor only looks at the financial condition and operations of the
corporation as means of gauging the ability of the corporation to pay-back loan at the specified
period. Investor can only demand the stipulated fixed return of his investment even if by the
use of the borrowed funds.
3. Operational or Transaction Income
Capital Stock or Outstanding Capital Stock –Section 173: Shall mean the total shares of stock
issued under binding subscription contracts to subscribers or stockholders, whether full or
partially paid, except treasury shares
It is the amount fixed in the AOI to be subscribed and paid by the stockholders of the
corporation. When shares are subscribed out of the authorized capital stock, that portion of the
paid-in capital arising from the subscriptions becomes the legal capital of the corporation which
cannot be returned to the stockholders in any form during the lifetime the corporation unless
otherwise allowed by law.
Paid-up Capital – the portion of the authorized capital stock which has been both subscribed
and paid, not all funds or assets received by the corporation can be considered paid-up capital.
It must form part of the authorized capital stock of the corporation, subscribed and then
actually paid up.
Classification of Shares
The corporation code expressly recognizes the freedom and power of a corporation to classify
shares.

 No share may be deprived of voting rights except those classified and issued as
preferred or redeemable shares
 Any or all the shares may have a par value or have no par value, But banks, trust
companies, insurance companies, public utilities, and building and loan associations
shall not be permitted to issue no-par value shares of stock
There is a presumption of equality of the rights and features of shares when nothing is
expressly provided to the contrary

 Although the corporation has the power to classify its shares of stock, provide for
preference and other conditions, when nothing has been provided for in the articles of
incorporation, no presumption should exist to distinguish one share from another.
 The mere classification of shares into preferred shares does not necessarily deprive
them of voting rights in absence of any restriction in the AOI or by laws of the
corporation.
Voting rights for all type of shares on matters it considers as fundamental measures.
Common Shares
The most common classification of stock is common and preferred shares.
Common stock do not have any special contract rights or preferences. It bears the greatest risk
of loss in the event of failure of the enterprise.

 Management of the corporation

 Participation in profits are the foremost elements of common shares
SC: represent the residual ownership interest in the corporation. 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 Shares
A preferred share of stock, on one hand, 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 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 profits
arising from its business" in the former law. Thus, the 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. 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. 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
As to assets – gives the holder thereof preference in the distribution of the assets of
corporation in case of liquidation.

 As to dividends – give the holder the right to receive dividends on said shares to the
extent agree upon before any dividends at all are paid to the holder of common stock.
Cumulative and non-cumulative preferred shares
Cumulative – entitle the holders thereof to payment not only of current dividends but also of
back dividends not previously paid. If dividend is not paid in full in any year, the deficiency must
be made up before any dividend may be paid on the common stock
Non-cumulative – entitle the holders merely to the payment of current dividends that are paid.
General Rule: preferred shares are deemed cumulative
Participating and Non-Participating Preferred Shares
Participating – entitle the holders to participate with holders of common shares in the retained
earnings after the amount of stipulated dividend has been paid to the preferred shares
Non-participating – those that entitle the holders only to stipulated preferred dividends and no
more.
Redeemable shares – 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 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. 
Founder’s Shares – may be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to exceed 5 years subject to the
approval of the SEC.
Issued basically to the founders or initial organizers of the corporation.
The existence of which must necessarily include that fact that there are other shares that do
not enjoy such rights and would necessarily include the existence of common shares, which
would ordinarily would have the right to vote or be voted into the board of directors.

No Par Value Shares- shall be deemed fully paid and no-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in respect thereto. May not be
issued less than the value of 5.00 per share
Treasury Shares are 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. These may again be disposed of for a reasonable price fixed by the BOD.
No voting rights, nor pre-emptive rights, no dividends are paid on treasury shares
Hybrid Securities
Equity securities represent an ownership interest in the corporation and include both common
and preferred stock. In addition, corporations finance much of their continued operations
through debt securities
Debt securities or bonds, do not represent an ownership interest in the corporation but rather
create a debtor-creditor relationship between the corporation and the bondholder.
Unsecured Bonds
Bonds that are not backed by some type of collateral. Only secured by the bond’s issuers
good credit rating

Secured Bonds
Bonds that is secured by a specific asset owned by the issuer. The asset serves as the
collateral for the loan.

Income Bonds
A debt security in which only the face value of the Bond is promised to be paid to the
investor, with any coupon payment paid only if the issuing company has enough earning to
pay for the coupon payment

Convertible Bonds
Fixed-income corporate debt security that yields interest payments, but can be converted
into predetermined number of common stock or equity shares.

Callable Bond – redeemable bond is a type of bond that allows the issuer of the bond to retain the
privilege of redeeming the bond at some point before the bond reaches its date of maturiyu.

Lirag Textile Mills, Inc. vs SSS 1987

Facts: Lirag Textile Mills and SSS entered into a Purchase Agreement. Which SSS agreed to
purchase preferred shares of stock worth 1 Million subject to the condition of redemption by
Lirag Mills. Lirag fails to redeem, hence SSS demanded for full payment of the obligation. SSS
filed to the court for specific performance, Lirag Mills answered that the Purchase Agreement is
not a debt instrument, it merely made SSS a preferred stockholder of the corporation. Hence,
the payment of shares purchased depended upon the financial stability of the corporation. The
RTC ruled in favour of SSS
Issue: Whether or not the Purchase Agreement is a debt instrument.
Ruling: Yes. The court stated that the Purchase Agreement is in the nature of the debt
instrument, that it created a debtor-creditor relationship between the parties. The argument of
Lirag that the Agreement merely made SSS a preferred stockholder is not tenable, if this was
the true intention, the Certificates should have been issued in the name of the SSS with its
corresponding rights and obligations. However, it was not even executed at the same time that
the petitioner corporation issued its preferred stock to the respondent SSS.
Note: A stockholder sinks or swims with the corporation and there is no obligation to return the
value of his shares by means of repurchase if the corporation incurs losses and financial revers,
much less guarantee such repurchase through a surety. While the purchase agreement serves
to define the rights and obligations of the parties and to establish firmly the liability of
petitioners in case of breach of contract.

Tirso Garcia as received of Mercantile Bank of China vs Lim Chu sing

Facts: Lim Chu Sing executed and delivered to the Mercantile Bank of China promissory note for
the sum of 19,000. He was constantly paying the sum when he defaulted leaving a deficiency of
9,100. The Bank demanded the deficiency. Lim Chu Sing argued that he was also a stockholder
of the Bank with a total worth of 10,000. He wanted the deficiency and his stock ownership to
be set-off and compensated
Issue: Whether or not the debt can be set-off by the value of the stock ownership
Ruling: No, a share of stock or the certificate thereof is not an indebtedness to the owner nor
evidence of indebtedness, and therefore it is not a credit. Stockholders are not creditors of the
corporation. In the present case, since Lim Chu Sing is not a creditor of the Mercantile Bank of
China, there is not sufficient ground to justify a compensation.
Roy vs Herbosa
Capital refers only to the share of stock entitled to vote in the election of directors, and thus in
the present case only to common shares, and not to the total outstanding capital stock. 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
Facts: SEC memo for the purposes of compliance with the constitutional provision of nationality
requirement, the required percentage of Filipino ownership shall be applied to both a) total
number of outstanding shares of stock entitled to vote in the election of directors and b) total
number of outstanding shares of stock, whether or not entitled to vote in the election of
directors.
Roy: 60-40 Filipino ownership requirement shall apply separately to each class of shares of a
public utility corporation, whether common, preferred nonvoting, preferred voting or other
class of shares.
Issue: Whether or not the SEC gravely abused its discretion by issuing the SEC memorandum
Preferred shares can either be a financial asset and equity instrument
A financial instrument is an equity instruments only if:
1. The instrument includes no contractual obligation to deliver cash or another financial
asset to another entity
2. The instrument will or may be settled in the issuer’s own equity instruments:
a. A non-derivative that includes no contractual obligation for the issuer to deliver
a variable number of its own equity instruments or
b. A derivative that will be settled only by the issuer exchanging a fixed amount of
cash or another financial asset for a fixed number of its own equity instruments
The substance or essence of the financial instrument is the key determinant whether it should
be categorized as a financial liability or an equity instrument, there is no compelling reason why
the same treatment may not be recognized from a legal perspective.
The National Exchange Co., Inc., vs I.B. Dexter
Facts: I.B. Dexter subscribed 300 shares of the capital Stock of C.S. Salmon and Company,
payable from the first dividends declared on any and all shares of said company owned by him
at the time dividends are declared, until full amount has been paid. The first 15,000 was paid
from a declared dividend, but the remaining was not paid because the company never declared
dividends. The National Exchange filed to the SC questioning whether the stipulation contained
in the subscription is valid. The RTC held it was invalid
Issue: Whether or not the stipulation the subscription contract is payable thru dividends is valid
Ruling: No. Although under its general power to contract, the corporation has the power to
accept subscriptions upon any special terms not prohibited by positive law or contrary to public
policy. Under the Organic Act, payment for subscription contracts are either in actual cash or
for property at affair valuation equal to the par value of the stock or bonds issued. In the
present case, it it conspicuous that the payment is not a cash or property, hence it is invalid.
Other doctrines:
Nor has a corporation the power to receive a subscription upon such terms as will operate as a
fraud upon the other subscribers or stockholders by subjecting the particular subscriber to
lighter burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of
the corporation by withdrawing or decreasing the capital. It is well settled therefore, as a
general rule, that an agreement between a corporation and a particular subscriber, by which
the subscription is not to be payable, or is to be payable in party only, whether it is for the
purpose of pretending that the stock is really greater than it is, or for the purpose, is illegal and
void as in fraud of other stockholders or creditors, or both, and cannot be either enforced by
the subscriber or interposed as a defence in an action on the subscription.
Lingayen Gulf vs Ireneo Baltazar
Facts: Irineo Baltazar have subscribed for 600 shares of account which he had paid until only
18,500 balance was unpaid. A stockholders meeting was called and it was agreed that it will
present to call the balance of all unpaid subscribed capital stock. Ireneo was presented with the
call demanding the payment of the unpaid balance. But the corporation did not published the
call in a newspaper of general circulation as required by section 40 of the corporation code
Issue: Whether or not there is a valid call
Ruling: None. The notice of any call for payment of unpaid subscription should be made not
only personally but also by publication. This is clear from the provisions of section 40 of the old
corporation code as amended. It is mandatory not only to assure notice to all subscribers, but
also to assure equality and uniformity in the assessment on stockholders. Except when the
corporation is insolvent, with proceedings instituted by creditors to wind up and distribute
assets, no call or assessment is necessary before the institution of suits to collect unpaid
balance on subscription.

Keller vs COB Group

Facts: Edward A. Keller and Co., Ltd appointed COB Group Marketing, Inc. as exclusive
distributor of its household products. Keller sold on credits its products to COB Group
Marketing, as security, one Asuncion Manahan mortgage her land to Keller and assumed
solidarily with COB the faithful performance of all the terms and conditions of the sales
agreement. Another sales agreement was issued for the extension of COB territory, as security
for credit purchase, Tomas Jr and Sr executed a mortgage on their land and assumed solidary
obligation. Sometime, an accounting was made and a credit of 179k was determined as the
obligation of the COB to keller. Bax was authorized to negotiate with Keller. Bax and Keller
agreed on several conditions.
Bax on the other hand, presented another statement that shows that COB overpaid Keller of
100k. Keller sued COB Manahan and Lorenzo. The trial court ruled in favour of COB and ordered
kelelr to pay, the CA affirmed judgment.
Issue: Whether or not the CA is correct in giving credence to the alleged overpayment
Ruling: Yes, The lower courts not only allowed Bax to nullify his admissions as to the liability of
the COB group but they also erroneously rendered judgment in its favour although they are in
default.
The liability of the stockholders, it is settled that a stockholder is personally liable for the
financial obligations of a corporation to the extent of his unpaid subscriptions.
Philippines Trust Company vs Rivera
Facts: Philippine Trust Company was an assigned in insolvency of La Cooperativa Naval Filipina
against Marciano Rivera for his unpaid subscription. Rivera argued that not long after the
corporation was incorporation a meeting of stockholders occurred which released him from the
obligation of paying the unpaid balance in excess of 50 per centum of the same.
Issue: Whether or not Rivera was released from payment
Ruling: No. It is an established doctrine that subscription to the capital of a corporation
constitute a fund to which creditors have a right to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action upon an unpaid stock subscription in order to
realize assets for the payment of its debts. A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the capital stock can take
place only in the manner and under the conditions prescribed by the statute or the charter or
the articles of incorporation. Moreover, strict compliance with the statutory regulations is
necessary.
Romana Miranda vs Tarlac Rice Mill Co
Facts: Alberto Miranda executed a written contract to subscribe for 100 shares of the capital
stock of a corporation to be organized for the purpose of operating a rice mill – Tarlac Rice Mill
Company, Inc. Miranda obligated to pay the corporation the sum of 10,000. Miranda further
assigned, mortgage or transferred in lieu of cash for the benefit of the credit in Tarlac Rice Mill
a parcel of land. The officers of the corporation, as attorneys-in-fact of Miranda mortgage the
land to Mariano Tablante to secure a 10,000 loan, which was retained by the corporation.
Romana Miranda contends that the officers of the corporation violated the terms of the power
of attorney in mortgaging the land for 10,000 because the only sum then due and demandable
was 3,000 and that when the remaining instalments of the stock subscription became due,
Miranda is not liable anymore since the corporation has already ceased to do business.
Issue: Whether or not the corporate officers violates the power of attorney
Ruling: No. It is a constrained construction to limit the power of the officers to mortgage it for
the amount due to corporation (3,000) the Power of Attorney only mentions that it should not
exceed 10,000. As it was written in the subscription contract the following words, for or to
increase the capital of the said Tarlac Rice Mill Company, Inc., in order to carry out the purposes
for which said firm is to be organized. Furthermore. According to the corporation code, the
board of directors of every corporation may at any time declare due and payable to the
corporation unpaid subscriptions as it may deem necessary. This power is absolute and cannot
be limited by the subscription contract, but this does not mean that the directors may not rely
on the subscription contract if they see fit to do so.
No call is necessary when a subscription is payable, not upon call or demand by the directors or
stockholders, but immediately, or on a specified day, or on, or before a specified day, or when it
is payable in instalments at specified times. In such case it is the duty of the subscriber to pay
the subscription or instalment thereof as soon as it is due without any call or demand, and, if he
fails to do so, an action may be brought at any time.
This court held that a stock subscription is a contract between the corporation and the
subscriber, and courts will enforce it for or against either that a corporation has no legal
capacity to release a subscriber to its capital stock from the obligation to pay for his shares, or
that any agreement to this effect is invalid.
Arnaldo F. de Silva vs Aboitiz and Company Inc
Facts: De Silva subscribed 650 shares of stock from Aboitiz Corporation. He paid a total of 200
shares, the remaining 450 was left unpaid. He was notified that a resolution of the Board of
Directors declared the unpaid subscriptions to the capital stock become due and demandable.
And failure to pay will trigger delinquent sales
He filed for injunction stating that article 46 of their by-laws prescribed another method of
payment. In which 70% of the profit obtained will be distributed among the subscribers who
shall not receive any dividend until said shares were paid in full.
Issue: Whether or not by Article 46 of the by-laws the corporation may declare the unpaid
shares delinquent or collect their value by another method different from that prescribe
Ruling: The Corporation may declare the shares delinquent. Art 46 specifies the manner in
which the net profit from the annual liquidation should be distribute, the 70% may be
distributed in equal parts among the shareholders, and authorizes the BOD to collect the value
of the shares subscribed to and not fully paid by deducting form the 70 percent. This is all upon
the discretion of the BOD. If in case the BOD does not wish to make it. The can avail the remedy
provided by law, that is to put the unpaid stock for sale and dispose of it and collecting the
unpaid subscription. In the present case, the Board availed the provisions provided by law, it is
within their power and violated no right of the stockholder.
Republic Planters vs. Hon. Agana (GR No. 51765 [1997])
Some definitions:
Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed
date, or at the option of either the 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.
Facts: Private Respondent Corporation secured a loan from petitioner in the amount of 120,000.
As part of the proceeds of loan, preferred shares of stocks were issued to private respondent
Corporation, through its officers: Adalia Robes and another. Said stock certificates bear the
following terms and conditions: 1) Right to receive a quarterly dividend of One Per Centum 1%
cumulative and participating and such preferred shares may be redeemed, by system of drawing
lots, at any time after two (2) years from the date of issue at the option of the corporation.
Issue: Whether or not the corporation can be compelled to redeem the preferred shares issued to
the private respondent.
Ruling: No. While the stock certificate does not allow redemption, the option to do so was
clearly vested in the petitioner bank. This redemption is clearly the type known as optional. The
redemption rests entirely with the corporation and the stockholder is without right to either
compel or refuse the redemption of its stock. In the present case, it cannot be allowed due to the
Central Bank finding that the corporation had been suffering from chronic reserve deficiency,
redeeming any preferred share would reduce the assets of the Bank to the prejudice of its
depositors and creditors.
Note: payment of dividends to a stockholder is not a matter of right but a matter of
consensus.
Commissioner vs Manning
Facts: The Commission of Internal Revenue issued income tax assessment against
Manning et.al for an alleged undeclared stock dividends received in 1958 from the
Manila Trading and Supply Co. MANTRASCO
MANTRASCO had 25,000 common shares, 24,700 of these were owned by Julius
Rees, and the rest, at 100 shares each, by the three respondents.
Reese’s desires upon his death that MANTRASCO and its two subsidiaries would
continue under the management of the respondents, a trust agreement on his and the
respondents interest in MANTRASCO was executed with the Law Firm as Trustees and
Respondents as Managers. The Agreement includes, among others that the 24,700
shares of the capital stock will be duly endorses and ready for transfer.
Reese died, but the company has no sufficient funds to buy the whole shares, that they
only made partial payment. The Certificates were then named to the Trustees until the
full payment. A resolution was then passed to revert the 24,700 shares held in treasury
to the capital account of the company as a stock dividend to be distributed to
shareholders of record.
The BIR then assessed the distribution and declared that the distribution of Reese’s
shares as stock dividends was in effect a distribution of the asset or property of the
corporation as may be gleaned from the payment of cash for the redemption of said
stock and distributing the same as stock dividend. The CTA absolved them on the
ground that their respective 1/3 interest in MANTRASCO remained the same before and
after the declaration of stock dividends and only the number of shares held by each of
them had change.
The parties argue on the taxability of the treasury stock
Issue: Whether or not the 24,700 shares declared as stock dividends were treasury
shares
Ruling: No. Treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. Also, they are
issued shares, but being in the treasury they do not have the status of outstanding
shares, furthermore, although a treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold again, such share as long as it is
held by the corporation as treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, and further lastly, in the
meetings of the corporation as voting stock, for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation though it still represents a paid-for interest in
the property of the corporation. The foregoing essential features of a treasury stock are
lacking in the questioned shares.
The manifest intention of the parties to the trust agreement was to treat the 24, 700
shares of Reese as absolutely outstanding shares of Reese’s estate until they were fully
paid. There declaration as treasury shares is a complete nullity and violative of public
policy. As a stock dividend, being one payable in capital stock cannot be declared out of
outstanding corporate stock, but only from retained earnings.
The aim of the declaration manifest the purpose of the trust, which is to make the
respondents the sole owners of Reese’s interest in MANTRASCO by utilizing the
periodic earnings of the company and its subsidiaries to directly subsidize their
purchase of the said inrestes
Note: A stock dividend always involve a transfer of surplus to capital stock. It is a
conversion of surplus or undivided profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend
Dividend is any distribution made by a corporation to its shareholders, whether in
money or in other property, out of its earnings or profits.
The essence of a stock dividend was the segregation out of surplus account of a
definite portion of the corporate earnings as part of the permanent capital resources of
the corporation by the device of capitalizing the same, and the issuance to the
stockholders of additional shares of stock representing the profits so capitalized
Outstanding capital stock – total shares of stock issued to subscribers or stockholders,
whether or not fully or partially paid (as long as there is a binding subscription
agreement) except treasury shares
Capital Stock or Authorized Capital Stock is the amount fixed in the articles of
incorporation to be subscribed and paid by the stockholders of the corporation.
Retained earnings of a corporation is the difference between the total present value of
its assets after deducting losses and liability and the amount of its capital.
Retained earnings = assets – (Liabilities and Legal Capital)
Stockholders’ equity = total assets – liabilities.
Net worth – outstanding capital stock = undistributed earnings
Unrestricted retained earnings is understood to mean the accumulated profits realized
out of normal and continuous operations of the business after deducting therefrom
distribution of stockholders and transfer of capital stock or other accounts.

Nielsen vs Lepanto
Facts: In a motion for reconsideration of a judgment of the SC against Lepanto. The
court ordered Lepanto to issue and deliver to Nielson shares of stock together with fruits
thereof as compensation based on its declared stock dividends . Lepanto contends that
the payments to Nielson of stock dividends as compensation for its services under the
management contract is a violation of the Corporation Law, and that it was not the
intention of the contracting parties.
Issue: Whether or not the contention is valid
Ruling: Yes, the contention is valid. Section 16 of the Corporation Law states that stock
dividends cannot be issued to a person who is not a stockholder in payment of services
rendered. The contention of Lepanto that the understanding between Lepanto and
Nielson was simply to make the cash value of the stock dividends declares as the basis
for determining the amount of compensation that should be paid to Nielson, in the
proportion of 10% of the cash value of the stock dividends declared. It does not mean,
that the compensation of Nielson would be taken from the amount actually declared a
cash dividend to be distributed to the stockholder, nor from the shares of stocks to be
issued to the stockholders as stock dividends, but from the other assets or funds of the
corporation which are not burdened by the dividends thus declared.
The consideration for which shares of stock may be issued are 1) cash, 2) Property and
3) undistributed profits.
 Shares of stocks are given the special name Stock Dividends only if they are
issued in lieu of undistributed profits.
 If shares of stocks are issued in exchange of cash or property then those shares
do not fall under the category of stock dividends
 A corporation may legally issue shares of stock in consideration of services
rendered to it by a person not a stockholder, or in payment of its indebtedness.
 A share of stock issue to pay for services rendered is equivalent to a stock issue
in exchange of property
  A share of stock issued to pay for services rendered is equivalent to a stock
issued in exchange of property, because services is equivalent to property. It is
the shares of stock that are originally issued by the corporation and forming part
of the capital that can be exchanged for cash or services rendered, or property,
that is, if the corporation has original shares of stock unsold, or unsubscribed,
either coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a stockholder or to a
person already a stockholder in exchange for services rendered or for cash or
property. But a share of stock coming from stock dividends declared cannot be
issued to one who is not a stockholder of a corporation
Some definitions
A stock dividend is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is a distribution of the shares of stock of the corporation among
the stockholders as dividends. It is paid in shares of stock instead of cash, and is properly
payable only out of surplus profits.
It is two things, 1) dividend and 2) the enforced use of the dividend money to purchase
additional shares of stock at par.
When a corporation issues stock dividends, it shows that the corporation’s accumulated profits
have been capitalized instead of distributed to the stockholders or retained as surplus available
for distribution, in money or kind, should opportunity offer. Far from being a realization of
profits for the stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from surplus to assets and no longer
available for actual distribution. Thus, it is apparent that stock dividends are issue only to
stockholders, because only stockholders are entitled to dividends. They are the only ones who
have a right to a proportional share in the part of the surplus which is declare dividends.
A stock dividend really adds nothing to the interest of the stockholder the proportional interest
of each stockholder remains the same. If a stockholder is deprived of his stock dividends – and
this happens if the share of stock forming part of the stock dividends are issue to a non-
stockholder – then the proportion of the stockholder’s interest changes radically. Stock
dividends are civil fruits of the original investment, and to the owners of the shares belong the
civil fruits.
Dividend

 That part or portion of the profits of the enterprise which the corporation, but its
governing agents, sets apart for ratable division among the holders of the capital stock.
CIR vs CA
Facts: ANSCORS redeemed shares of stock from a stockholder twice,
Issue: Whether such redemption is taxable
Ruling: Yes, the redemption is taxable
In the present case, ANSCOR Redeemed shares of stocks from Don Andres for 28,000 and
80,000 common shares. It is undisputed that at the time of the last redemption, the original
common shares owned by the estate of Don Andres were only 25, 247.5. The total of 108,
shares redeemed from the estate, the balance of 82, 752.5 must have come from stock
dividends. The tax code presumes that every distribution of corporate property, in whole or in
part, is made out of corporate profits, such as stock dividends.
ASNCOR redeemed stock dividends issued just 2 to 3 years earlier. The net effect test must be
considered. It is an inference to be drawn or a conclusion to be reached. The issuance of stock
dividends and its subsequent redemption must be separate, distinct and not related for the
redemption to be considered a legitimate tax scheme. The ultimate test is that did it result into
a flow of wealth
ANSCOR invoked two reasons to justify the redemptions, 1) Filipinization and 2) reduction of
foreign exchange remittances in case cash dividends are declared. These purposes does not
excuse ANSCOR for its tax liability.
Filipinization is not indicated in the board resolution, and the issuance of stock dividends will
increase the shareholdings of ANSCOR’s foreign stockholders and would also increase rather
than reduce their need for foreign exchange remittances in case of cash dividend declaration.
The presence or absence of genuine business purposes may be material with respect to the
issuance or declaration of stock dividends but not on its subsequent redemption.
Section 83 of the corporation code
Stock dividends represent capital and do not constitute income to its recipient. Mere issuance is
not yet subject to income tax, as they are nothing but an enrichment through increase in value
of capital investment. As capital, the stock dividends postpone the realization of profits because
the fund represented by the new stock has been transferred from surplus to capital and no
longer available for distribution.
Exception: If a corporation cancels or redeems stock issued as a dividend as such a time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits accumulated.
Corporate earnings would be distributed under the guise of its initial capitalization by declaring
the stock dividends previously issued and later redeemed said dividends by paying cash to the
stockholder. This process of issuance-redemption amounts to a distribution of taxable cash
dividends which just delayed so as to escape tax.
The exemption provides that redemption or cancellation depends on the time and manner that
it was made essentially equivalent to a distribution of taxable dividends to evade taxes.
“A pro-rate stock dividend followed by a pro-rate redemption that would have the same
economic consequences as a simple dividend”
Depending on the circumstances, the proceeds of redemption of stock dividends are essentially
distribution of cash dividends, which when paid becomes the absolute property of the
stockholder. Having realized gain from that redemption, the income earners cannot escape
income taxation.
American courts developed certain recognized criteria, which includes:
1. The presence or absence of real business purpose
2. The amount of earnings and profits available for the declaration of a regular dividend
and the corporation’s past record with respect to the declaration of dividends
3. The effect of the distribution as compared with the declaration of regular dividend
4. The lapse of time between issuance and redemption
5. The presence of a substantial surplus, and a generous supply of cash which invites
suspicion as does a meagre policy in relation both to current earnings and accumulated
surplus.
For the exempting clause of Section 83b to apply, it is indispensable that:
1. There is redemption or cancellation
2. The transaction involves stock dividends
3. The time and manner of the transaction makes it essentially equivalent to a distribution
of taxable dividends
Definitions
Redemption is repurchase, a re-acquisition of stock by a corporation which issued the stock in
exchange of property, whether or not the acquired stock is cancelled, retired or held in
treasury.
Decision: Because of the manner and the circumstances by which the issuance and redemption
of stock dividends were made, there is no other conclusion but that the proceeds thereof are
essentially considered equivalent to the distribution of taxable dividends.
Exchange of Common with Preferred shares
Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is
generally considered as a taxable transaction. In general, trade must be parts of merger,
transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No
taxable gain or loss may be recognized on exchange of property, stock or securities related to
reorganizations.
In the present case, the exchange of shares, produces no realized income to the subscriber.
There is only a modification of the subscribers’ rights and privileges which is not a flow of
wealth for tax purposes. The issue of taxability of dividend may arise only once a subscriber
disposes of his entire interest and not when there is still maintenance of proprietary interest

Steinberg vs Velasco
Facts: Plaintiff as the received of the SIbugeuy Trading Company alleged that the defendants,
Velasco, Del Castillo, Navallo and Manuel as officers of the Trading company approved and
authorized various unlawful purchases already made of a large portion of the capital stock of
the company from its various stockholders, causing to the injury, damaged and in fraud of the
creditors of the corporation. The stock purchases was 3,300 at a time when the company had
an account payable amounting to 13,000. Furthermore, the defendants declared, P3,000 as
dividends to its stockholders which was in bad faith because at the time of its dissolution the
corporation had accounts payable of the sum of 9, 241.19 and practically worthless accounts
receivables. They defended that it was made when the business of the company was going on
very well. The RTC dismissed the cases in favour of the defendant
Issue: Whether or not the Board of Directors was at fault in the redemption of the company
shares and the declaration of dividends.