CORPORATION CODE

1. DEFINITIONS, THEORIES and CLASSIFICATIONS

Section 2

A corporation is an artificial being created by operation of law, having the right

of succession, and the power, attributes and properties expressly authorized by
law or incident to its existence.

Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27

a. Four Attributes of Corporation

An Artificial Being - Juridical Capacity to Contract and Transact Business

Created By Operation of Law - Creature of Law

With Right of Succession- Strong Juridical Personality

Having Such Powers, Attributes and Properties Expressly Authorized by

Law or Incident to its Existence - A Creature of Laimited Powers

Reynoso IV v. Court of Appeals, 345 SCRA 335

Shipside, Inc. v. Court of Appeals, 352 SCRA 334 (2001)

Being only a juridical entity, the physical acts of the corporation like the signing of
documents, can by performed only be natural persons duly authorized for the purpose.

2. THEORIES OF CORPORATE EXISTENCE AND POWERS

a. Theory of Concession

A corporation is a creature of the State and all its powers and capacities are only
to the extent that the laws and its charter has granted it.

Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968)1

1
CFI ordered domiciliary administrator County Trust Company of New York to surrender to the
ancillary administrator in the Philippines 33,002 shares of stock certificates owned by her in a Philippine
corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors. When County
Trust Company of New refused, the court ordered Benguet Consolidated, Inc. to declare the stocks lost
and required it to issue new certificates in lieu thereof. Appeal was taken by Benguet Consolidated, Inc.
alleging the failure to comply with its by-laws setting forth the procedure to be followed in case of a lost,
stolen or destroyed so it cannot issue new stock certs.
A corporation will have no rights and privileges of a higher priority that of its creator and
cannot legitimately refuse to yield obedience to acts of its state organs. Thus, a
corporation cannot use the terms of its by-laws to refuse to heed the order of the courts
to issue new certificates of stocks to meet the claims of local creditors in lieu of those
which have remained in the custody of a foreign administrator.

b. Theory of Business Enterprise

Under this theory, the Supreme Court has looked upon the corporation not merely as an
artificial being, but more importantly as an aggregation of persons doing business
through an underlying economic unit called the “business enterprise.”

Underlying theory is used to justify piercing the veil of corporate fiction.

Arnold v. Willits & Patterson, Ltd., 44 Phil. 6342

The proposition that a corporation has an existence separate and distinct from its
membership has its limitations. It must be noted that this 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

2
The Firm Willits & Patterson in San Francisco entered into a contract with Arnold whereby Arnold was to
be employed for a period of five years as the agent of the firm here in the PI to operate an oil mill for
which he was to receive a minimum a compensation package under Exh. ‘’A”. Later, Patterson retired and
Willits acquired all interests of the business. For convenience of operation and to serve his own purpose,
Willits organized a corporation under the laws of California with its principal office at San Francisco, in
and by which he subscribed for, and became the exclusive owner of all the capital stock except a few
shares for organization purposes only, and the name of the firm was used as the name of the corporation.
A short time after that Willits came to Manila and organized a corporation here known as Willits &
Patterson, Ltd., in and to which he again subscribed for all of the capital stock except the nominal shares
necessary to qualify the directors. In legal effect, the San Francisco corporation took over and acquired all
of the assets and liabilities of the Manila corporation.
At the time that Willits was in Manila and while to all intents and purposes he was the sole owner of the
stock of corporations, Arnold and Willits came to agreement to revise Exhibit A and agree on Exhibit B,
the purpose of which was to more clearly define and specify the compensation which the plaintiff was to
receive for his services. Willits received and confirmed this letter by signing the name of Willits &
Patterson, By C.d. Willits. At the time both corporations were legally organized, and there is nothing in the
corporate minutes to show that Exhibit B was ever formally ratified or approved by either corporation.
After its organization, the Manila corporation employed a regular accountant whose duty it was to audit
the accounts of the company and render financial statements both for the use of the local banks and the
local and parent corporations at San Francisco. Accountant forwarded to the home office a statement
showing that there was due and owing the plaintiff under Exhibit B the sum of P106,277.50. A short time
previous to that date, the San Francisco corporation became involved in financial trouble, and all of its
assets were turned over to a "creditors' committee." When this statement was received, the "creditors'
committee" immediately protested its allowance. An attempt was made without success to adjust the
matter on a friendly basis and without litigation. The plaintiff brought this action to recover from the
defendant the sum of P106,277.50 with legal interest and costs, and written instruments known in the
record as Exhibits A and B were attached to, and made a part of, the complaint.
necessary for the interests of the public or for the protection or enforcement of the rights
of the membership, courts will disregard this legal fiction and operate upon both the
corporation and the persons composing it.

PSE v. Court of Appeals, 281 SCRA 232 (1997)3

The legislature, through the Revised Securities Act, Presidential Decree No. 902-A, and
other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not otherwise vested in some
other government office.
sectThis is not to say, however, that the PSEs management prerogatives are under
the absolute control of the SEC. The PSE is, after all, a corporation authorized by its
corporate franchise to engage in its proposed and duly approved business. One of the
PSEs main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to sue
and be sued, to hold property in its own name, to enter (or not to enter) into contracts
with third persons, and to perform all other legal acts within its allocated express or
implied powers.
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 body. As to its corporate and management decisions, therefore, the state will
generally not interfere with the same. Questions of policy and of management are left to
the honest decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board of directors.
The board is the business manager of the corporation, and so long as it acts in good

3
Facts: The Puerto Azul Land Inc. (PALI), a domestic real estate corporation, had sought to offer its
shares to the public in order to raise funds allegedly to develop its properties and pay its loans with
several banking institutions. In January, 1995, PALI was issued a permit to sell its shares to the public by
the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors,
PALI sought to course the trading of its shares through the Philippine Stock Exchange Inc. (PSEi), for
which purpose it filed with the said stock exchange an application to list its shares, with supporting
documents attached pending the approval of the PALI’s listing application, a letter was received by PSE
from the heirs of Ferdinand Marcos to which the latter claims to be the legal and beneficial owner of some
of the properties forming part of PALI’s assets. Board of Governors of the PSE reached its decision to
reject PALIs application, citing the existence of serious claims, issues and circumstances surrounding
PALIs ownership over its assets that adversely affect the suitability of listing PALIs shares in the stock
exchange. As a result, PSE denied PALI’s application which caused the latter to file a complaint before
the SEC.
PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr. requested
that the SEC, in the exercise of its supervisory and regulatory powers over stock exchanges under
Section 6(j) of P.D. No. 902-A, review the PSEs action on PALIs listing application and institute such
measures as are just and proper and under the circumstances.
The SEC issued an order to PSE to grant listing application of PALI on the ground that PALI have
certificate of title over its assets and properties and that PALI have complied with all the requirements to
enlist with PSE.
faith, its orders are not reviewable by the courts.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant
authority to reverse the PSEs decision in matters of application for listing in the market,
the SEC may exercise such power only if the PSEs judgment is attended by bad faith.
In board of Liquidators vs. Kalaw, (G.R. No. L-18805, 14 August 1967, 20 SCRA 987) it
was held that bad faith does not simply connote bad judgment or negligence. It imports
a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest of ill will, partaking of the nature
of fraud.
In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be
determined as an absolute fact. What is material is that the uncertainty of the properties
ownership and alienability exists, and this puts to question the qualification of PALIs
public offering.

Tan Boon & Co. v. Jarencio, 163 SCRA 19984

Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity
(Chenplex, Philippines, Inc., et al. vs. Hon. Pamatian, et al., 57 SCRA 408 [1974]).
4
Petitioner doing business under the name and style of Anchor Supply Co., sold on credit to Graphic
Publishing, Inc. (Graphic) paper products. Graphic made partial payment by check to petitioner and a
promissory note was executed to cover the balance. For failure of Graphic to pay any installment,
petitioner filed a Civil case for a Sum of Money. In a Decision the trial court ordered Graphic to pay the
petitioner. On motion of petitioner, a writ of execution was issued by respondent judge; but the writ having
expired without the sheriff finding any property of Graphic, an alias writ of execution was issued. Pursuant
to said issued alias writ of execution, the executing sheriff levied upon one unit printing machine found in
the premises of Graphic. Said printing machine was scheduled for auction sale but Philippine American
Drug Company (PADC) had informed the sheriff that the printing machine is its property and not that of
Graphic.
The plaintiff, however, contends that the controlling stockholders of the PADC are also the same
controlling stockholders of Graphic and, therefore, the levy upon the said machinery which was found in
the premises occupied by the Graphic Publishing, Inc. should be upheld.

Issue:

Whether or not the corporate fiction of the two corporations shall be disregarded?

Ruling:

In the instant case, petitioner's evidence established that PADCO was never engaged in the printing
business; that the board of directors and the officers of Graphic and PADCO were the same; and that
PADCO holds 50% share of stock of Graphic. Petitioner likewise stressed that PADCO's own evidence
shows that the printing machine in question had been in the premises of Graphic since May, 1965, long
before PADCO even acquired its alleged title on July 11, 1966 from Capitol Publishing. That the said
machine was allegedly leased by PADCO to GRAPHIC on January 24, 1966, even before PADCO
purchased it from Capital Publishing on July 11, 1966, only serves to show that PADCO's claim of
ownership over the printing machine is not only farce and sham but also unbelievable.
Considering the principles and the circumstances established in this case, respondent judge should have
pierced PADCO's veil of corporate Identity.
Likewise, this is true when the corporation is merely an adjunct, business conduit or
alter ego of another corporation. In such case, the fiction of separate and distinct
corporation entities should be disregarded (Commissioner of Internal Revenue vs.
Norton & Harrison, 11 SCRA 714 [1964]).

3. Private Corporations Cannot be Created by Specific Legislative Act

Section 16, Article XII of the 1987 Constitution expressly provides that, except for
government-owned or controlled corporations, private corporations cannot be given a
special charter, but may incorporate only pursuant to a general enabling law, i.e., under
the Corporation Code.

Section 16. 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.

NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990)

Congress by a legislative act intends to create the “New Agrix, Inc.” a private
corporation engaged in the business of selling agricultural products. Does Congress
have the power to do so?

violated Sec. 4, Article XIV of 1973 Constitution which prohibits the formation of a
private corporation by a special legislative act, since the new corporation was neither
owned or controlled by the government.

Feliciano v. Commission on Audit, 419 SCRA 363 (2004)

Congress cannot enact a law creating a private a corporation with a special charter. All
water districts, which are not created under the Corporation Code but pursuant to P.D.
198, are deemed to be government-owned and controlled corporations, and within the
jurisdiction of COA.

4. FOUR BASIC ADVANTAGES OF CORPORATE ORGANIZATIONS

a. Strong Juridical Personality

PLDT v. NTC, 190 SCRA 717 (1990)

Although a telecommunication corporation has a personality separate and

distinct from that of each stockholder and has the right of succession, nevertheless a
distinction should be made between the shares of stock which are owned by
stockholders, the sale of which requires only NTC approval, and the franchise itself,
which is owned by the corporation as the grantee thereof, the sale of transfer of which
requires Congressional sanction.

ETCI admits that in 1964, the Albertos, as original owners of more than 40% of the
outstanding capital stock sold their holdings to the Orbes. In 1968, the Albertos re-
acquired the shares they had sold to the Orbes. In 1987, the Albertos sold more than
40% of their shares to Horacio Yalung. Thereafter, the present stockholders acquired
their ETCI shares. Moreover, in 1964, ETCI had increased its capital stock from
P40,000.00 to P360,000.00; and in 1987, from P360,000.00 to P40M.

PLDT contends that the transfers in 1987 of the shares of stock to the new stockholders
amount to a transfer of ETCI’s franchise, which needs Congressional approval pursuant
to Rep. Act No. 2090, and since such approval had not been obtained, ETCI’s franchise
had been invalidated.

DBP v. NLRC, 186 SCRA 841 (1990)

The ownership of a majority of capital stock and that fact that majority of the directors of
the corporation are the directors of another corporation do not create employer-
employee relationship between the holding corporation and the employees of the held
corporation.

Philippine Smelters Corporation (PSC), a corporation registered under Philippine law,

obtained a loan in 1983 from the Development Bank of the Philippines, a government-
owned financial institution created and operated in accordance with Executive Order
No. 81, to finance its iron smelting and steel manufacturing business. To secure said
loan, PSC mortgaged to DBP real properties with all the buildings and improvements
thereon and chattels, with its President, Jose T. Marcelo, Jr., as co-obligor.

By virtue of the said loan agreement, DBP became the majority stockholder of PSC,
with stockholdings in the amount of P31,000,000.00 of the total P60,226,000.00
subscribed and paid up capital stock. Subsequently, it took over the management of
PSC.

When PSC failed to pay its obligation with DBP, DBP foreclosed and acquired the
mortgaged real estate and chattels of PSC in the auction sales.

Edward J. Nell v. Pacific Farms, 15 SCRA 415 (1965)

A corporation which buys all the shares of another corporation which becomes insolvent
will not be liable for the latter’s debts.

Basic is the rule that a corporation has a legal personality distinct and separate from the
persons and entities owning it. The corporate veil may be lifted only if it has been used
to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad
faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB)
acquired ownership or management of some assets of the Pampanga Sugar Mill
(PASUMIL), which had earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not make PNB liable for
the PASUMIL’s contractual debts to respondent.

b. LIMITED LIABILITY TO INVESTORS

As a general rule, stockholders in a stock corporation are personally liable for corporate
debts and liabilities only the extent of what they have invested (paid-up capital) and
what they have promised to invest in the corporation (unpaid subscriptions).

- in line with “doctrine of separate juridical personality” and “trust fund doctrine”.

Edward A. Keller v. COB Group Marketing, 141 SCRA 86 (1986)

San Juan Structural v. Court of Appeals, 299 SCRA 86 (1986)

Halley v. Printwell, Inc., 649 SCRA 116 (2011)

c. CENTRALIZED MANAGEMENT

b. CENTRALIZED MANAGEMENT

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code,

the corporate powers of all corporations formed under this Code shall be
exercised,

all business conducted and

all property of such corporations controlled and held

by the board of directors or trustees to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation,

who shall hold office for one (1) year until their successors are elected and qualified.

Section 22. The Board of Directors of a Corporation; Qualification and Term. – Unless
otherwise provided in this code, the board of directors or trustees shall exercise the
corporate powers, conduct all business, and control all properties of the corporation.

Directors shall be elected for a term of one (1) year from the among the holders of
stocks registered in the corporation’s books, while trustees shall be elected for a term
not exceeding three (3) years from among the members of the corporation. Each
director and trustee shall hold office until their successor is elected and qualified. A
director who ceases to won at least one (1) share of stock or a trustee who ceases to be
a member of the corporation shall cease to be as such.

The board of the following corporations vested with public interest shall have
independent directors constituting at least 20% of such board:

(a) Corporations covered by Section 17.2 of Republic Act 8799 otherwise known
as “The Securities Regulation Code” namely those whose securities are
registered with the Commission, corporation listed on an exchange or with
assets at least Fifty Million pesos (P50,000,000.00) and having two hundred
or more holders of shares, each holding at least one hundred (100) shares of
a class of its equity shares;

(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in

money service business, preneed, trust and insurance companies and other
financial intermediaries. X xx

(c) Other corporations engaged in the businesses vested with public interest
similar to the above, as may be determined by the Commission, after taking
into account the relevant factors which are germane to the objective and
purpose of requiring the election of an independent director, such as the
extent of the minority ownership, type of financial products or securities
issued or offered to investors, public interest involved in the nature of
business operations and other analogous factors.

An independent director is a person who, apart from shareholdings and fees received
from the corporation, is independent of management and free from any business or
other relationship which could, or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying out the responsibilities as a
director.

An independent director must be elected by the shareholders present or entitled to vote

in absentia during the election of directors. Independent directors shall be subject to
rules and regulations governing their qualifications, disqualifications, voting
requirements, duration of term and term limit, maximum number of board memberships
and other requirements that the Commission will prescribe to strengthen their
independence and align with internationally best practices.

Ease of doing business

One person, full subscription, not 25%, 1 M minimum

Corporations vested with public interest. The Revised Code refers to corporations vested with
public interest, which are subject to additional regulatory conditions that do not apply to other
corporations. Corporations vested with public interest are required to elect a compliance officer
upon organization. (Sec. 24) They are required to submit additional annual reports to the
Securities and Exchange Commission (SEC), particularly a director/trustee compensation report
and a director/trustee appraisal or performance report. (Sec. 177) Stockholders in such
corporations have the unequivocal right to vote to elect directors or trustees during stockholders
meetings through remote communications or in absentia. (Sec. 23)

Section 22 of Revised Code identifies as corporations vested with public interest those whose
securities are registered with the SEC, those listed with an exchange, those with assets of at
least 50 Million Pesos and having 200 or more holders of shares (with each holding at least 100
shares of a class of its equity shares), banks and quasi-banks, non-stock savings and loan
associations, pawnshops, corporations engaged in money service business, preneed, trust and
insurance companies, and financial intermediaries. The provision requires that at least 20%
composition of the boards of these corporations be independent directors. The SEC is also
authorized to determine other corporations engaged in businesses vested with public interest,
after taking into account relevant factors which are germane to the objective and purpose of
requiring the election of an independent director.

Removal of minimum capital stock requirement. The Revised Code does away with the
minimum capital stock requirement for stock corporations, except as otherwise specifically
provided by special law. The change again works to the benefit of small to medium-sized
enterprises by making it easier for them to incorporate. (Sec. 12)

b. LIMITED LIABILITY TO INVESTORS

As a general rule, stockholders in a stock corporation are personally liable for corporate
debts and liabilities only the extent of what they have invested (paid-up capital) and
what they have promised to invest in the corporation (unpaid subscriptions).

- in line with “doctrine of separate juridical personality” and “trust fund doctrine”.

Edward A. Keller v. COB Group Marketing, 141 SCRA 86 (1986)

San Juan Structural v. Court of Appeals, 299 SCRA 86 (1986)

Halley v. Printwell, Inc., 649 SCRA 116 (2011)

d. FREE TRANSFERABILITY OF UNITS OF OWNERSHIP- The doctrine of

delectus personam in partnership is not applicable to corporate setting, and that
stockholders hold their shares as personal property with rights to dispose, assign
or encumber them as they desire.

5. MAIN DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

 A corporation has a personality separate and distinct from that of its
stockholders or members, and the officers that represent it.

Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001)

Lim vs. Court of Appeals, 323 SCRA 102 (2000)

6. PIERCING THE VEIL OF CORPORATE FICTION

Upon coming into existence, a corporation is legally invested with a personality separate
and distinct from those persons composing it, its directors and officers, as well as from
any other legal entity to which it may be related. This separate personality is, however,
merely a fiction created by law for convenience and may therefore be pierced to
promote the ends of justice. Land Bank of the Philippines v. Court of Appeals 364
SCRA 375 (2001).

The separate personality of a corporation may be disregarded under the doctrine

of “piercing the veil of corporate fiction.”

United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905)

Hi- Cement Corp. v. Insular Bank of Asia and America, 534 SCRA 169 (2007)

a. Types of Piercing Application

Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009)

The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely:

(a) “defeat of public convenience,” as when the corporate fiction is used a

vehicle for the evasion of an existing obligation (“equity piercing”);

(b) “fraud cases”, as when the corporation is used to justify a wrong, protect
fraud, or defend a crime (fraud piercing); or

(c) “alter ego cases” - where a corporation is merely a farce since it is a mere
alter ego or business conduit of a person or where the corporation is so
organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another
corporation (alter ego piercing or the instrumentality test).

General Credit Corp. v. Alsons Dev. & Investment Corp., 513 SCRA 225
(2007)
 Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003)

In an an alter ego doctrine case, there is no need of showing of fraud.

On the first issue, petitioners contend that both the appellate and trial courts erred in
holding them liable for the obligations incurred by BEC through the application of the
doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on
their part.

Respondents counter that there is clear and convincing evidence to show fraud on part
of petitioners given the findings of the trial court, as affirmed by the Court of Appeals,
that BEC was organized as a business conduit for the benefit of petitioners.

Petitioners' contentions fail to persuade this Court. A careful reading of the judgment of
the RTC and the resolution of the appellate court show that in finding petitioners'
mortgaged property liable for the obligations of BEC, both courts below relied upon the
alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of
corporate fiction. When the corporation is the mere alter ego or business conduit of a
person, the separate personality of the corporation may be disregarded. This is
commonly referred to as the "instrumentality rule" or the alter ego doctrine, which the
courts have applied in disregarding the separate juridical personality of corporations. As
held in one case,

Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the
fiction of the corporate entity of the 'instrumentality' may be disregarded. The
control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and
is but a conduit for its principal. x x x

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export
Trading" (BET), a single proprietorship engaged in the manufacture of garments for
domestic and foreign consumption. The Lipats also owned the "Mystical Fashions" in
the United States, which sells goods imported from the Philippines through BET. Mrs.
Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines
while she was managing "Mystical Fashions" in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed a special
power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and
other credit accommodations from respondent Pacific Banking Corporation (Pacific
Bank). She likewise authorized Teresita to execute mortgage contracts on properties
owned or co-owned by her as security for the obligations to be extended by Pacific
Bank including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to
"Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as
represented by Teresita, executed a Real Estate Mortgage over their property located at
No. 814 Aurora Blvd., Cubao, Quezon City.

BET was incorporated into a family corporation named Bela's Export Corporation (BEC)
in order to facilitate the management of the business. BEC was engaged in the
business of manufacturing and exportation of all kinds of garments of whatever kind and
description and utilized the same machineries and equipment previously used by BET.
Its incorporators and directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and
other close relatives and friends of the Lipats. Estelita Lipat was named president of
BEC, while Teresita became the vice-president and general manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans
were obtained by BEC with the corresponding promissory notes duly executed by
Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank
in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC
executed the corresponding trust receipt therefor. Export bills were also executed in
favor of Pacific Bank for additional finances. These transactions were all secured by the
real estate mortgage over the Lipats' property.

The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific
Bank's demand letters,.

The Lipats filed a complaint, which was docketed as Civil Case No. Q-89-4152, alleged,
among others, that the promissory notes, trust receipt, and export bills were all ultra
vires acts of Teresita as they were executed without the requisite board resolution of the
Board of Directors of BEC. The Lipats also averred that assuming said acts were valid
and binding on BEC, the same were the corporation's sole obligation, it having a
personality distinct and separate from spouses Lipat. It was likewise pointed out that
Teresita's authority to secure a loan from Pacific Bank was specifically limited to Mrs.
Lipat's sole use and benefit and that the real estate mortgage was executed to secure
the Lipats' and BET's P583,854.00 loan only.

Spouses

b. Rundown on Instances of Application of the Piercing Doctrine

Sta. Monica Industrial v. DAR Regional Director, 555 SCRA 97 (2008)

-agrarian case.

Martinez vs. Court of Appeals, 438 vs. 139 (2004)

 PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002)

Reynoso IV v. Court of Appeals, 345 SCRA 335 (2000)

c. Standing on Who can Invoke Piercing Doctrine

Secosa v. Heirs of Erwin Suarez Francisco, 433 SCRA 273 (2004)

Gochan v. Young, 354 SCRA 207 (2001)

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing
to bring the suit before the SEC because the latter were no longer stockholders at the
time. Allegedly, the stocks had already been purchased by the corporation. Petitioners
further assert that, being allegedly a simple contract of sale cognizable by the regular
courts, the purchase by Gochan Realty of Cecilia Gochan Uys 210 shares does not
come within the purview of an intra-corporate controversy.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint. For purposes of resolving a motion to
dismiss, Cecilia Uys averment in the Complaint -- that the purchase of her stocks by the
corporation was null and void ab initio is deemed admitted. It is elementary that a void
contract produces no effect either against or in favor of anyone; it cannot create, modify
or extinguish the juridical relation to which it refers. Thus, Cecilia remains a stockholder
of the corporation in view of the nullity of the Contract of Sale. Although she was no
longer registered as a stockholder in the corporate records as of the filing of the case
before the SEC, the admitted allegations in the Complaint made her still a bona fide
stockholder of Felix Gochan & Sons Realty Corporation (FGSRC), as between said
parties.

The fact that respondents are not stockholders of the corporations involved does not
make them non-parties to this case, when the corporations are mere alter-ego of the
directors, and the former acquired the properties sought to be reconveyed in violation of
directors fiduciary duty.
Corporation is the alter-ego of the directors. Reconveyed in violation of directors
fiduciary duty.

Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because the spouses and
not the corporation were the injured parties. The Court is not convinced. The following quoted portions of the
Complaint readily shows allegations of injury to the corporation itself:

"16. That on information and belief, in further pursuance of the said conspiracy and for the fraudulent
purpose of depressing the value of the stock of the Corporation and to induce the minority stockholders to
sell their shares of stock for an inadequate consideration as aforesaid, respondent Esteban T. Gochan . . ., in
 violation of their duties as directors and officers of the Corporation . . ., unlawfully and fraudulently
appropriated [for] themselves the funds of the Corporation by drawing excessive amounts in the form of
salaries and cash advances. . . and by otherwise charging their purely personal expenses to the
Corporation."

xxx xxx xxx

"41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for her
shares of stock constituted an unlawful, premature and partial liquidation and distribution of assets to a
stockholder, resulting in the impairment of the capital of the Corporation and prevented it from otherwise
utilizing said amount for its regular and lawful business, to the damage and prejudice of the Corporation, its
creditors, and of complainants as minority stockholders;

Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997)

Facts: Filriters Guaranty Assurance Corporation (FGAC) is the owner of several Central
Bank Certificates of Indebtedness (CBCI). These certificates are actually proof that
FGAC has the required reserve investment with the Central Bank to operate as an
insurer and to protect third persons from whatever liabilities FGAC may incur. In 1979,
FGAC agreed to assign said CBCI to Philippine Underwriters Finance Corporation
(PUFC). PUFC owns 90% of FGAC. Later, PUFC sold said CBCI to Traders Royal Bank
(TRB). Said sale with TRB comes with a right to repurchase on a date certain. However,
when the day to repurchase arrived, PUFC failed to repurchase said CBCI hence TRB
requested the Central Bank to have said CBCI be registered in TRB’s name. Central
Bank refused as it alleged that the CBCI are not negotiable; that as such, the transfer
from FGAC to PUFC is not valid; that since it was invalid, PUFC acquired no valid title
over the CBCI; that the subsequent transfer from PUFC to TRB is likewise invalid.

TRB then filed a petition for mandamus to compel the Central Bank to register said
CBCI in TRB’s name. TRB averred that PUFC is the alter ego of FGAC; that the two
corporations have identical sets of directors; that payment of said CBCI to PUFC is like
a payment to FGAC hence the sale between PUFC and TRB is valid. In short, TRB
avers that that the veil of corporate fiction, between PUFC and FGAC, should be
pierced because the two corporations allegedly used their separate identity to defraud
TRD into buying said CBCI.

HELD: No. Traders Royal Bank failed to show that the corporate fiction is used by the
two corporations to defeat public convenience, justify wrong, protect fraud or defend
crime or where a corporation is a mere alter ego or business conduit of a person. TRB
merely showed that PUFC owns 90% of FGAC and that their directors are the same.
The identity of PUFC can’t be maintained as that of FGAC because of this mere fact;
there is nothing else which could lead the court under the circumstance to disregard
their corporate personalities. Further, TRB can’t argue that it was defrauded into buying
those certificates. In the first place, TRB as a banking institution is not ignorant about
these types of transactions. It should know for a fact that a certificate of indebtedness is
not negotiable because the payee therein is inscribed specifically and that the Central
Bank is obliged to pay the named payee only and no one else.

Petitioner knew that PUFC (Philfinance) is not registered owner of the CBCI No. D891.
The fact that a non-owner was disposing of the registered CBCI owned by another
entity was a good reason for petitioner to verify of inquire as to the title Philfinance to
dispose to the CBCI.The subject CBCI was acquired by Filriters to form part of its legal
and capital reserves, which are required by law to be maintained at a mandated level.

Concededly, the subject CBCI (Central Bank Certificate of Indebtedness) was acquired
by Filriters to form part of its legal and capital reserves, which are required by law to be
maintained at a mandated level. It cannot, therefore, be taken out of the said fund,
without violating the requirements of the law. Thus, the unauthorized use or
distribution of the same by a corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of Directors, and the maintenance of
the required reserve fund
Central Bank 769

d. Effects of the Application of the Piercing Doctrine

Umali v. Court of Appeals, 189 SCRA 529 (1990)

Mauricia Castillo was the administratrix in charge over a parcel of land left be Felipe
Castillo. Said land was mortgaged to the Development Bank of the Philippines and was
about to be foreclosed but then Mauricia’s nephew, Santiago Rivera, proposed that they
convert the land into 4 subdivisions so that they can raise the necessary money to avoid
foreclosure. Mauricia agreed.
Rivera sought to develop said land through his company, Slobec Realty Corporation
(SRC), of which he was also the president.

SRC then contracted with Bormaheco, Inc. for the purchase of one tractor. Bormaheco
agreed to sell the tractor on an installment basis. At the same time, SRC mortgaged
said tractor to Bormaheco as security just in case SRC will default. As additional
security, Mauricia and other family members executed a surety agreement whereby in
case of default in paying said tractor, the Insurance Corporation of the Philippines (ICP)
shall pay the balance. The surety bond agreement between Mauricia and ICP was
secured by Mauricia’s parcel of land (same land to be developed).

SRC defaulted in paying said tractor. Bormaheco foreclosed the tractor but it wasn’t
enough hence ICP paid the deficiency. ICP then foreclosed the property of Mauricia.
ICP later sold said property to Philippine Machinery Parts Manufacturing Corporation
(PMPMC). PMPMC then demanded Mauricia et al to vacate the premises of said
property.

While all this was going on, Mauricia died. Her successor-administratrix, Buenaflor
Umali, questioned the foreclosure made by ICP. Umali alleged that all the transactions
are void and simulated hence they were defrauded; that through Bormaheco’s
machinations, Mauricia was fooled into entering into a surety agreement with ICP; that
Bormaheco even made the premium payments to ICP for said surety bond; that the
president of Bormaheco is a director of PMPMC; that the counsel who assisted in all the
transactions, Atty. Martin De Guzman, was the legal counsel of ICP, Bormaheco, and
PMPMC.

ISSUE: Whether or not the veil of corporate fiction should be pierced.

HELD: No. There is no clear showing of fraud in this case. The mere fact that
Bormaheco paid said premium payments to ICP does not constitute fraud per se. As it
turned out, Bormaheco is an agent of ICP. SRC, through Rivera, agreed that part of the
payment of the mortgage shall be paid for the insurance. Naturally, when Rivera was
paying some portions of the mortgage to Bormaheco, Bormaheco is applying some
parts thereof for the payment of the premium – and this was agreed upon beforehand.

Further, piercing the veil of corporate fiction is not the proper remedy in order that the
foreclosure conducted by ICP be declared a nullity. The nullity may be attacked directly
without disregarding the separate identity of the corporations involved. Further still,
Umali et al are not enforcing a claim against the individual members of the corporations.
They are not claiming said members to be liable. Umali et al are merely questioning the
validity of the foreclosure.

The veil of corporate fiction can’t be pierced also by the simple reason that the
businesses of two or more corporations are interrelated, absent sufficient showing that
the corporate entity was purposely used as a shield to defraud creditors and third
persons of their rights. In this case, there is no justification for disregarding their
separate personalities.

In the case at bar, petitioners seek to pierce the corporate entity of Bormaheco, ICP and
PM Parts, alleging that these corporations employed fraud in causing the foreclosure
and subsequent sale of the real properties belonging to petitioners While we do not
discount the possibility of the existence of fraud in the foreclosure proceeding, neither
are we inclined to apply the doctrine invoked by petitioners in granting the relief sought.
It is our considered opinion that piercing the veil of corporate entity is not the proper
remedy in order that the foreclosure proceeding may be declared a nullity under the
circumstances obtaining in the legal case at bar.

Robledo v. NLRC, 238 SCRA 52 (1994)

The doctrine of piercing the veil of corporate entity 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 is apparent, therefore, that the
doctrine has no application to this case 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. Piercing 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 petitioners' claims, assuming them to be valid, are the personal
liability of the late Felipe Bacani. It is immaterial that he was also a stockholder of
BASEC

The facts of this case are as follows:

Petitioners were former employees of Bacani Security and Protective Agency (BSPA,
for brevity). They were employed as security guards at different times during the period
1969 to December 1989 when BSPA ceased to operate.

BSPA was a single proprietorship owned, managed and operated by the late Felipe
Bacani. It was registered with the Bureau of Trade and Industry as a business name in
1957. Upon its expiration, the registration was renewed for a term of five (5) years
ending 1992.

On December 31, 1989, Felipe Bacani retired the business name and BSPA ceased to
operate effective on that day. At that time, respondent Alicia Bacani, daughter of Felipe
Bacani, was BSPA's Executive Directress.

On January 15, 1990 Felipe Bacani died. An intestate proceeding was instituted for the
settlement of his estate.

Earlier, on October 26, 1989, respondent Bacani Security and Allied Services Co., Inc.
(BASEC, for brevity) had been organized and registered as a corporation with the
Securities and Exchange Commission. The following were the incorporators with their
respective shareholdings:

ALICIA BACANI — 25,250 shares

LYDIA BACANI — 25,250 shares
AMADO P. ELEDA — 25,250 shares
VICTORIA B. AURIGUE — 25,250 shares
FELIPE BACANI — 20,000 shares

The primary purpose of the corporation was to "engage in the business of providing
security" to persons and entities. This was the same line of business that BSPA was
engaged in. Most of the petitioners, after losing their jobs in BSPA, were employed in
BASEC.

But there are several reasons why BASEC is not liable for the personal obligations of
Felipe Bacani. For one, BASEC came into existence before BSPA was retired as a
business concern. BASEC was incorporated on October 26, 1989 and its license to
operate was released on May 28, 1990, while BSPA ceased to operate on December
31, 1989. Before, BSPA was retired, BASEC was already existing. It is, therefore, not
true that BASEC is a mere continuity of BSPA.

Second, Felipe Bacani was only one of the five (5) incorporators of BASEC. He owned
the least number of shares in BASEC, which included among its incorporators persons
who are not members of his family. That his wife Lydia and daughter Alicia were also
incorporators of the same company is not sufficient to warrant the conclusion that they
hold their shares in his behalf.

Third, there is no evidence to show that the assets of BSPA were transferred to BASEC.
If BASEC was a mere continuation of BSPA, all or at least a substantial part of the
latter's assets should have found their way to BASEC.

Umali and Robledo rulings should be limited to fraud piercing, and have no application
to alter ego piercing when the objective of the application of the doctrine is not
necessarily one to make the corporate actors personally liable for corporate debts.

Lim v. Court of Appeals, 323 SCRA 102 (2000)

Velarde v. Lopez, 419 SCRA 422 (2004)

Pantranco Employees Assn. (PEA-PTWGO) v. NLRC, 581 SCRA 589

e. Nature of Piercing Doctrine

(1) General Rule: A corporation will be looked upon as a separate legal entity,
unless and until sufficient reason to the contrary appears.

The fact that related corporations may be engaged in the same business, or that they
share the same address or have interlocking incorporators, directors and officers, in the
absence of fraud or other public policy consideration, which must be clearly proven,
does not warrant piercing.

(2) Piercing Doctrine is only an Equitable Remedy

 Piercing the veil of corporate fiction is remedy of last resort.

 Fraud must be proven clearly and convincingly.
 It cannot be alleged nor presumed.
 The burden is on the party who seeks its application.
 And piercing of the corporate veil has to be done with caution.

Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997)

One cannot invoke the doctrine to save itself from transactions which it knew to be
defective or contrary to the law applicable to its industry.
 National Power Corp. v. Court of Appeals, 273 SCRA 419 (1997)

When corporate officers and directors are sued merely as nominal parties in their official
capacities as such, they cannot be held liable personally for the judgment rendered
against the corporation.

Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999)

To disregard the separate juridical entity, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)

(3) Piercing the Veil Cannot be Employed to Allow Fraud

Gregorio Araneta, Inc. v. Tuason de Paterno, 91 Phil. 786 (1952)

Piercing doctrine cannot be availed of to perpetuate a fraud, such as in a case

where the seller of real property wishes to avoid the consequences of a sale to a
corporate entity by claiming that the broker through whom the seller transacted
sale was also the President of the corporate buyer, which such fact was known to
her from the beginning.

Laguio v. NLRC, 262 SCRA 715 (1996)

Mere substantial identity of the incorporators of the two corporations does not
necessarily imply fraud, nor warrant piercing.

Enriquez Security Services v. Cabotaje, 496 SCRA 169 (2006)

The attempt to make the security agencies appear as two separate entities, when
in reality they were but one, was a devise to defeat the law, i.e., in order to avoid
labor claims, and should not be permitted.

(4) Piercing Applies Only When the Corporate Fiction Was the Very Tool
Used to Commit Fraud or Evade Obligations

PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002)

NASECO Guards Assn. v. National Service Corp., 629 SCRA 90 (2010)

Even control over the financial and operational concerns of a subsidiary company does
not of itself call for disregarding of its corporate fiction- there must be a perpetuation of
fraud behind the control or at least a fraudulent or illegal purpose behind the control
in order to justify piercing the veil of corporate fiction.
(5) Piercing Not Available to Establish a Right for the First Time or to Theorize

Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992)

It cannot be allowed when there is no wrong committed, such as in the case to justify a
theory of co-ownership to allow the stockholders the continued personal use and
possession of corporate properties.

The respondent is a bona fide corporation. As such, it has a juridical personality of its
own separate from the members composing it. (Western Agro Industrial Corporation v.
Court of Appeals, 188 SCRA 709 [1990]; Tan Boon Bee & Co., Inc. v. Jarencio, 163
SCRA 205 [1988]; Yutivo Sons Hardware Company v. Court of Tax Appeals, 1 SCRA
160 [1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290
[1965]) There is no dispute that title over the questioned land where the Hidden Valley
Springs Resort is located is registered in the name of the corporation. The records also
show that the staff house being occupied by petitioner Rebecca Boyer-Roxas and the
recreation hall which was later on converted into a residential house occupied by
petitioner Guillermo Roxas are owned by the respondent corporation.

The petitioners point out that their occupancy of the staff house which was later used as
the residence of Eriberto Roxas, husband of petitioner Rebecca Boyer-Roxas and the
recreation hall which was converted into a residential house were with the blessings of
Eufrocino Roxas, the deceased husband of Eugenia V. Roxas, who was the majority
and controlling stockholder of the corporation.

In the present case, the record shows that Eufrocino V. Roxas who then controlled the
management of the corporation, being the majority stockholder, consented to the
petitioners' stay within the questioned properties. Specifically, Eufrocino Roxas gave his
consent to the conversion of the recreation hall to a residential house, now occupied by
petitioner Guillermo Roxas. The Board of Directors did not object to the actions of
Eufrocino Roxas. The petitioners were allowed to stay within the questioned properties
until August 27, 1983, when the Board of Directors approved a Resolution ejecting the
petitioners

Again, we must emphasize that the respondent corporation has a distinct personality
separate from its members. The corporation transacts its business only through its
officers or agents. (Western Agro Industrial Corporation v. Court of Appeals, supra).
Whatever authority these officers or agents may have is derived from the board of
directors or other governing body unless conferred by the charter of the corporation. An
officer's power as an agent of the corporation must be sought from the statute, charter,
the by-laws or in a delegation of authority to such officer, from the acts of the board of
directors, formally expressed or implied from a habit or custom of doing business.
(Vicente v. Geraldez, 52 SCRA 210 [1973])
We find nothing irregular in the adoption of the Resolution by the Board of Directors.
The petitioners' stay within the questioned properties was merely by tolerance of the
respondent corporation in deference to the wishes of Eufrocino Roxas, who during his
lifetime, controlled and managed the corporation. Eufrocino Roxas' actions could not
have bound the corporation forever. The petitioners have not cited any provision of the
corporation by-laws or any resolution or act of the Board of Directors which authorized
Eufrocino Roxas to allow them to stay within the company premises forever. We rule
that in the absence of any existing contract between the petitioners and the respondent
corporation, the corporation may elect to eject the petitioners at any time it wishes for
the benefit and interest of the respondent corporation.

The petitioners' suggestion that the veil of the corporate fiction should be pierced is
untenable. The separate personality of the corporation may be disregarded only when
the corporation is used "as a cloak or cover for fraud or illegality, or to work injustice, or
where necessary to achieve equity or when necessary for the protection of the
creditors." (Sulong Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 [1976] cited in Tan Boon
Bee & Co., Inc., v. Jarencio, supra and Western Agro Industrial Corporation v. Court of
Appeals, supra) The circumstances in the present cases do not fall under any of the
enumerated categories.

Union Bank v. Court of Appeals, 290 SCRA 198 (1998)

The piercing doctrine can not be availed of to dislodge from SEC’s jurisdiction a petition
for suspension of payments filed under P.D. 902-A, on the ground that the petitioning
individuals should be treated as real petitioners to the exclusion of the petitioning
corporate debtor.

Neither are we convinced by petitioners reasoning that the Yutingcos and the corporate
entities making up the EYCO Group, on the basis of the footnote, that the former were
filing the petition because they bound themselves as surety to the corporate obligations,
should be considered as mere individuals who should file their petition for suspension of
payments with the regular courts pursuant to Section 2 of the Insolvency Law. We do
not see any legal ground which should lead one to such conclusion. The doctrine of
piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely
misplaced, as said doctrine only applies when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime.
From the foregoing, it is thus clear that in a case of misjoinder of parties --- which in
this case is the co-filing of the petition for suspension of payments by both the
Yutingcos and the EYCO group --- the remedy has never been to dismiss the petition in
its entirety but to dismiss it only as against the party upon whom the tribunal or body
cannot acquire jurisdiction. The result, therefore, is that the petition with respect to
EYCO shall subsist and may be validly acted upon by the SEC. The Yutingcos, on the
other hand, shall be dropped from the petition and be required to pursue their remedies
in the regular courts of competent jurisdiction.
 Ramoso v. Court of Appeals, 347 SCRA 463 (2000)

The petitioners had signed the continuing guaranty of the franchise company’s bad
debts in their individual acts, and their liabilities arose out of the regular financing
venture of the franchise companies. There is no fraud. Changing of the petitioner’s
subsidiary liabilities by converting them to guarantors of bad debts cannot be done by
piercing the veil of the corporate entity.

We agree with the findings of the SEC concurred in by the appellate court that there
was no fraud nor mismanagement in the control exercised by GCC and by CCC Equity,
over the franchise companies. Whether the existence of the corporation should be
pierced depends on questions of facts, appropriately pleaded. Mere allegation that a
corporation is the alter ego of the individual stockholders is insufficient. The
presumption is that the stockholders or officers and the corporation are distinct entities.
The burden of proving otherwise is on the party seeking to have the court pierce the veil
of the corporate entity. 10 In this, petitioner failed.chanrob1es virtua1 1aw 1ibrary

Petitioners contend that the issue of whether the investors may be held liable on the
surety agreements for bad accounts incurred by GCC through the discounting process
cannot be isolated from the fundamental issue of validly piercing GCC’s corporate veil.
They argue that since these surety agreements are intra-corporate matters, only the
SEC has the specialized knowledge to evaluate whether fraud was perpetrated.

We note, however, that petitioners signed the continuing guaranty of the franchise
companies’ bad debts in their own personal capacities. Consequently, they are
responsible for their individual acts The liabilities of petitioners as investors arose out of
the regular financing venture of the franchise companies. There is no evidence that
these bad debts were fraudulently incurred. Any taint of bad faith on the part of GCC in
enticing investors may be resolved in ordinary courts, inasmuch as this is in the nature
of a contractual relationship. Changing petitioners’ subsidiary liabilities by converting
them to guarantors of bad debts cannot be done by piercing the veil of corporate identity

Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009)

An employee who has officially retired and availed of her retirement benefits, but who
continued to be employed as a consultant with affiliate companies, cannot employ the
piercing doctrine in order to treat her stint with the affiliate companies as part of her
employment with the main company she retired from.

R & E Transport, Inc. v. Latag, 422 SCRA 698 (2004)

Since no evidence has been shown that one company had stock control and complete
domination over the other or vice versa, and the fact that there was a 17 year gap
between the first corporation closed shop and the date when the second corporation
came into being, also casts doubt on any alleged intention to commit a wrong or to
violate a statutory duty.
 Siain Enterprises, Inc. v. Cupertino Realty Corp., 590 SCRA 435 (2009)

(6) Piercing the Veil of Corporate Fiction is a Judicial Power and Cannot be
Assumed Improvidently by a Sheriff

Cruz v. Dalisay, 152 SCRA 482 (1987)

f. Tests Evolved to Determine Applicability of Piercing Doctrine

Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000)

The Test in determining the applicability of the doctrine of piercing the veil of corporate
fiction are as follows:

(a) 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;

(b) Such control must have been sued by the defendant to commit fraud or wrong to
perpetuate the violation of a statutory right or other positive legal duly, or dishonest and
unject acts in contravention of plaintiff’s legal rights; and

(c) The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)

The Circumstance rendering the subsidiary an instrumentality (common

circumstances)

(a) The parent corporation owns all or most of the capital stock of the
subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary
or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of
the subsidiary.
(g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.
 (h) In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent
corporation, or its business or financial responsibility is referred to as the
parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in
the interest of the subsidiary but take their orders from the parent
corporation.
(k) The formal legal requirements of the subsidiary are not observed.

ASJ Corp. v. Evangelista, 545 SCRA 300 (2006)

Furthermore, although no hard and fast rule can be accurately laid down under which
the juridical personality of a corporate entity may be disregarded, the FOLLOWING
PROBATIVE FACTORS OF IDENTITY JUSTIFY THE APPLICATION OF THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION IN THIS CASE:

(1) San Juan and his wife own the bulk of shares of ASJ Corp.;
(2) The lot where the hatchery plant is located is owned by the San Juan spouses;
(3) ASJ Corp. had no other properties or assets, except for the hatchery plant and
the lot where it is located;
(4) San Juan is in complete control of the corporation;
(5) There is no bona fide intention to treat ASJ Corp. as a different entity from San
Juan; and

(6) The corporate fiction of ASJ Corp. was used by San Juan to insulate himself from
the legitimate claims of respondents, defeat public convenience, justiy wrong, defend
crime, and evade a corporations subsidiary liability for damages.

Respondents, under the name and style of R.M. Sy Chicks, are engaged in the large-
scale business of buying broiler eggs, hatching them, and selling their hatchlings
(chicks) and egg by-products4 in Bulacan and Nueva Ecija. For the incubation and
hatching of these eggs, respondents availed of the hatchery services of ASJ Corp., a
corporation duly registered in the name of San Juan and his family.

Sometime in 1991, respondents delivered to petitioners various quantities of eggs at an

agreed service fee of 80 centavos per egg, whether successfully hatched or not.

“G” Holdings, Inc. v. National Mines and Allied Workers, 604 SCRA 73 (2010)

Halley v. Printwell, Inc., 649 SCRA 116 (2011)

g. Fraud Piercing Cases

(1) When it is proven that the corporate officer has used the corporation fiction to
defraud a third party, or that he has acted negligently, maliciously, or in bad faith, the
corporate fiction may be pierced to make both the officer and the corporation liable.

Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005)

Mendoza and Yokoto obtained a loan on behalf of TVI with LBC Bank and mortgaged
the company’s video machines to guarantee the loan. Later, the video machines were
relocated to a new corporation named FGT. When the Bank sought to foreclose on the
machines, Mendoza and Yokoto claimed ignorance.

Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522
(2004)
Namarco v. Associated Finance Co., 19 SCRA 962 (1967)

Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000)

(2) When the corporate officers do fraudulent or illegal acts in the names of the
corporation, such as illegal dismissal or unfair labor practices, they become personally
liable for the consequences of their fraudulent or illegal acts done in behalf of the
corporation.

Malayang Samahan ng mga Manggagawa, 357 SCRA 77 (2001)

(3) When one tries to evade the civil liability by incorporating the properties or the
business to insulate them from judgment creditors and employing the doctrine of limited
liability.

Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999)

Villa Rey Transit, Inc. v. Ferrer, 81 SCRA 298 (1978)

(4) Inadequate Capitalization as to Constitute Fraud on the Investing Public.

Gabionza v. Court of Appeals, 568 SCRA 38, 51 (2008)

The DOJ Resolution explicitly identified the false pretense, fraudulent act
upon the investing public. Petitioners were made to believe that ASBHI had
the financial capacity to repay the loans it enticed petitioners to extend,
despite the fact that “it had an authorized capital of only P500,000.00 and
paid up capital of P125,000.00.”

BUT SEE:

Kukan International Corp. v. Reyes, 631 SCRA 596 (2010)

 Paid-up capital is merely seed money to start a corporation or a business
entity. Paid-up capital of P5,000.00 is not and should not be taken as a
reflection of the firm’s capacity to meet its recurrent and long term
obligations- the equity portion cannot be equated to the viability of a
business concern or the best test is the working capital which consists of
the liquid cash of a given business.

(5) Tax Fraud:

In piercing cases, the fiction of the separate entities of the corporations are
disregarded and are treated as one taxable entity.

Commissioner of Internal Revenue v. Menguito, 565 SCRA 461 (2008)

h. Alter-Ego Piercing Cases

In alter ego cases, there is a disrespect by the individual officers and/or

stockholders of the separate juridical entity, such as when the corporate
entity is being used as an alter-ego of the controlling officers or
stockholders.

(1) The question of whether a corporation is a mere alter ego is purely one of
fact.

Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375

(2001)

Use in corporate name of initials of controlling stockholder is not sufficient

reason to pierce the veil of corporate fiction.

(2) It is established doctrine that control of the equity of a corporation by one

stockholder or by another corporation by itself would not warrant the
application of the piercing doctrine.

PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)

(3) In early alter ego cases, the fact that there was a merging of personnel,
resources, and holding offices in the same offices where sufficient to apply
the piercing doctrine to hold two corporation as one.

General Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007)
Sicam v. Jorge, 529 SCRA 443 (1997)

When the facts show Luly pawned her jewelry at the time the pawnshop was
owned by Sicam himself, thus inevitably misleading, or at the very least, creating
the wrong impression on Luly and the public as well, then piercing may be
applied to treat Sicam and the corporation as one and the same.

Sibagat Timber Corp. v. Garcia, 529 SCRA 443 (1997)

There would be basis for piercing when the officers and directors of two (2)
corporations are practically the same and both corporations hold office in the
same room.

PBCom v. Court of Appeals, 195 SCRA 567 (1991)

When a debtor registers his residence to a family corporation in exchange for

shares of stock and continues to live therein, then the separate juridical
personality may be disregarded.

La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160

(1953)

Piercing allowed. Two corporations had different lines of business (one gawgaw
factory and the other coffee factory) but both factories were located in the same
compound, shared officers and employees and were owned by the same set of
stockholders.

Arnold v. Willets and Patterson Ltd., 44 Phil. 634 (1923)

Where the capital stock is owned by one person and it functions only for the
benefit of such individual owner, the corporation and the individual should be
seen as one.

Tan Boon Been & Co. v. Jarencio, 163 SCRA 205 (1988)

(4) In more recent alter ego cases, however, unless there was showing that a
wrong or inequity committed by the merging of resources and interests,
then the piercing doctrine was refused application, especially when there is
a plausible business purpose for the existence of corporate fiction.

Padilla v. Court of Appeals, 370 SCRA 2008 (2001)

PKA and Phoenix-Omega are admittedly sister companies, and may be

sharing personnel and resources, but we find in the present case no
allegation, much less positive proof, that their separate corporate
personalities are being used to defeat public convenience, justify wrong,
protect fraud, or defend crime. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. We find no reason to
justify piercing the corporate veil in this instance.
Land bank of the Philippines v. Court of Appeals, 364 SCRA 375
(2001)

The fact that the majority stockholder had used his own money to pay part
of the loan of the corporation cannot be used as basis to pierce.

DBP v. Court of Appeals, 363 SCRA 307 (2001)

There is no bad faith on the part of DBP to create mining companies in

order to manage and operate the assets acquired in the foreclosure sale
since DBP is not authorized under its charter to engage in mining.

Marubeni Corp. v. Lirag, 362 SCRA 620 (2001)

Just because two (2) foreign corporations came from same country and
worked together on certain projects would justify the conclusion that one is
the conduit of the other. We cannot just rely on the testimony of respondent
regarding the existence of the “Marubeni-Sanritsu tandem” to justify his
claim for payment of commission.

Francisco v. Mejia, 362 SCRA 738 (2001)

That Merryland acquired the property at the public auction only serves to
shed more light upon Francisco's fraudulent purposes. Based on the
findings of the Court of Appeals, Francisco is the controlling stockholder
and President of Merryland. Thus, aside from the instrumental role she
played as an officer of Cardale, in evading that corporation's legitimate
obligations to Gutierrez, it appears that Francisco's actions were also
oriented towards securing advantages for another corporation in which she
had a substantial interest. We cannot agree, however, with the Court of
Appeals' decision to hold Merryland solidarily liable with Francisco. The
only act imputable to Merryland in relation to the mortgaged properties is
that it purchased the same and this by itself is not a fraudulent or wrongful
act. No evidence has been adduced to establish that Merryland was a
mere alter ego or business conduit of Francisco. Time and again it has
been reiterated that 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.
Neither has it been alleged or proven that Merryland is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of Cardale. Even assuming that
the businesses of Cardale and Merryland are interrelated, this alone is not
justification for disregarding their separate personalities, absent any
showing that Merryland was purposely used as a shield to defraud
 creditors and third persons of their rights. Thus, Merryland's separate
juridical personality must be upheld.
Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005)

i. Parent-Subsidiary Relationships Warranting Piercing

Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997)

Three corporations referred to as “Lao Group of Companies”.

Reynoso IV v. Court of Appeals, 345 SCRA 335 (2000)

De Leon v. NLRC, 358 SCRA 274 (2001)
Mariano v. Petron Corp., 61 SCRA 487 (2010)

j. Extent of Legal Effects When Piercing Applied

Koppel (Phil.), Inc. v. Yatco, 77 Phil. 496 (1946)

Piercing Doctrine only applies for the particular transaction or instance in

which the doctrine is applied and does not deny the corporation of legal
personality.

k. Due Process Issues in Application of Piercing Doctrine

PCGG v. Sandiganbayan, 365 SCRA 538 (2001)

A suit against individuals as shareholders in a corporation is not a suit

against the corporation.

Padilla v. Court of Appeals, 370 SCRA 208 (2001)

Although the Court found sufficient basis for the conclusion that PKA and
Phoenix Omega were one and the same, and the former is merely a
conduit of the other, We hold void the application of a writ of execution on a
judgment held only against PKA as no summons were served on the latter.

Kukan International Corp. v. Reyes, 631 SCRA 596 (2010)

Where the motion to pierce the veil of corporate fiction states a new cause
of action, i.e., for the liability of defendant corporation to be borne by
another entity on the alleged identity of the two corporations, such new
cause of action should be properly ventilated in another complaint and
subsequent trial where the doctrine of piercing the corporate veil can, if
appropriate, be applied.
7. NATIONALITY OF CORPORATION

The corporation is a national of the country under whose laws it is organized or

incorporated. This is termed as the “Place of Incorporation Test” which is the primary
test in Philippine jurisdiction.

Primary Place of Incorporation Test

Section 123

Sec. 123. Definition and rights of foreign corporations. - For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any 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 it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate
government agency.

Special Rules: In the following cases, in addition to the place of incorporation

test, the nationality of the corporation is also determined by the “Control Test.”

Control Test

In cases involving properties, business or industries reserved for Filipinos, in addition to

the place of incorporation test, the “Control Test” is applied: The nationality of a
corporation is determined by the nationality of the “controlling” stockholders.

SEC has adopted DOJ Opinion No. 18, s. 1989

Shares belonging to corporations or partnerships at least 60% of the capital of which is

owned by Filipino citizens shall be considered as Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60% only
the number of shares corresponding to such percentage shall be counted as Philippine
Nationality.

Lately, the SEC overturned the use of the formula “60% or more equals 100% Filipino
ownership” in the Medusa Ruling, involving Medusa Mining Ltd., an Australian
company.

We opine that we must look into the citizenship of the individual stockholders, i.e.,
natural persons, of that investor-corporation in order to determine if the Constitutional
and statutory restrictions are complied with. This is the strict application of the
grandfather rule.
Three distinct sub-tests have evolved administrative and jurisprudentially under the
Control Test, thus:

(a) DOJ-SEC Control Test

Shares belonging to corporations at least 60% of the capital of which is owned by

Filipino citizens shall be considered Philippine Nationality. (DOJ Opinion No. 20, s.
2005)

(b) Grandfather Rule

(c) FIA Test of Philippine National: Sec. 3 (a) and (b) of Foreign Investments Act
(R.A. 7042)

(d) SEC Control Test: SEC Memorandum Circular No. 8, s. 2013

All covered corporations shall observe the constitutional ownership requirement in that
the required ownership percentage of Filipino ownership shall be applied to BOTH (a)
the total number of outstanding shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding shares of stock (common shares,
preferred non-voting and preferred shares), whether or not entitled to vote in the
election of directors.

Gamboa v. Teves, 652 SCRA 690 (2011)

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:

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. X x x 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. (Emphasis supplied)

The crux of the controversy is the definition of the term "capital." Does the term "capital" in
Section 11, Article XII of the Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting preferred shares)?

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That
no share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par value as may
be provided for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be permitted
to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution
of the assets of the corporation in case of liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of stock may be issued only with a
stated par value. The Board of Directors, where authorized in the articles of incorporation, may
fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That
such terms and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be issued for a consideration less than
the value of five (₱5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital and shall not
be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other

corporations;

7. Investment of corporate funds in another corporation or business in accordance

with this Code; and
 8. Dissolution of the corporation.

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII
of the Constitution refers only to common shares. However, if the preferred shares also have
the right to vote in the election of directors, then the term "capital" shall include such preferred
shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term "capital" in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in
the election of directors.

Gamboa v. Teves, 682 SCRA 397 (2012)

The 1987 Constitution “provides for the Filipinization of public utilities by requiring that
any form of authorization for the operation of public utilities should be granted only to
‘citizens of the Philippines or to corporation or associations organized under the laws of
the Philippines at least 60% of whose capital is owned by such citizens.’

Narra Nickel Mining and Dev. Corp. v. Redmont Consolidated Mines Corp.,
G.R. No. 195580, 21 April 2014

Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule.

Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling
interests in enterprises engaged in the exploitation of natural resources owned by Filipino
citizens, provides:

Shares belonging 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
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. 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 of the shares shall be
recorded as owned by Filipinos. 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 first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality," pertains to the control test or the liberal rule. On the
other hand, the second part of the DOJ Opinion which provides, "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," pertains to the
stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of
the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision
under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%)
of the capital stock outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the members of the
Board of Directors, in order that the corporation shall be considered a Philippine national.
(emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable rule." They
also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate
layering" scheme of corporations. Petitioners claim that the clear and unambiguous wordings of
the statute preclude the court from construing it and prevent the court’s use of discretion in
applying the law. They said that the plain, literal meaning of the statute meant the application of
the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to

circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned must be
discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. 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 sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.

xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of the
country. In such agreements, the State shall promote the development and use of local scientific
and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities
who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since
the issues are centered on the utilization of our country’s natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution
so provides, such agreements are only allowed corporations or associations "at least 60 percent
of such capital is owned by such citizens." The deliberations in the Records of the 1986
Constitutional Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty
and the welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased,
it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not
total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP
Law Center who provided us with a draft. The phrase that is contained here which we adopted
from the UP draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather
rule in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will
have no place of application. As decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the
shares in the Investee Corporation may be owned both by individual stockholders (‘Investing
Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus
provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967
SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’
Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or
more) Filipino stockholdings of the Investing Corporation since a corporation which is at least
60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict
Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of
Filipino ownership.

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 in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in
doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders
with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation
which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-
40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply.
(emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt
is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro,
since their common investor, the 100% Canadian corporation––MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than
60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60%
fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the ownership of the corporation exists. It
would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate schemes
and layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

In a situation where a mining corporation is owned by three domestic corporations which are all
uniformly held by the same set of stockholders in the proportion of 60% Filipino and 40%
Foreign, such corporate layering to achieve conformity with the “control Test” are best, or the
“grandfather rule” at worst, shall be deemed an unlawful attempt to circumvent constitutional
nationalization provisions, and are void.
8. a. Exploitation of Natural Resources

Section 2, Article XII, 1987 Constitution

Only Filipino citizens or corporations whose capital stock are at least 60%
Filipinos can qualify to exploit natural resources.

b. Ownership of Land

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413
(2009)

Radstock, a foreign corporation with unknown owners whose nationalities are also
unknown, is not qualified to own land in the Philippines. Since Radstock is disqualified
to own land in the Philippines, it is also disqualified to own the rights to ownership of
lands in the Philippines. The assignment by PNCC of the real properties to a nominee to
be designated by Radstock is a circumvention of the constitutional prohibition against a
foreign corporation owning lands in the Philippines.

J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005)

If the foreign shareholdings in a landholding corporation exceed 40%, it is not the

foreign stockholders’ ownership of the shares which is adversely affected by the
capacity of the corporation to own land - that is, the corporation becomes disqualified to
own land.

c. Public Utilities

Section 11, Article XII, 1987 Constitution

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 60% of whose capital
is owned by such citizens.

People v. Quasha, 93 Phil. 33 (1953)

The constitutional prohibition on foreign corporations on public utilities pertain to the

grant of secondary franchise on public utilities and does not cover the grant of primary
franchise upon incorporation of a juridical entity organized for such purpose.
d. War-time Test

Haw Pia v. China Banking Corp., 80 Phil. 604 (1984)

The veil of corporate fiction of corporations whose controlling stockholders are enemies
shall be pierced.

e. Anti-Dummy Law

Comm. Act 108, as amended by Presidential Decree 715

J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005)

The agreement of the co-shareholders to mutually grant the right of first refusal to each
other does not by itself constitute a violation of the provisions of the Constitution limiting
land ownership to Filipinos and Filipino corporations: If the foreign shareholdings in a
landholding corporation exceed 40%, it is not the foreign stockholders’ ownership of the
shares which is adversely affected by the capacity of the corporation to own land - that
is, the corporation becomes disqualified to own land.

9. MATTERS PERTAINING TO CORPORATION AS “PERSON”

a. Liability for Torts or Negligence

A corporation can be held liable for torts committed by its officers for corporate
purpose.

Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997)

Professional Services Inc. v. Court of Appeals, 611 SCRA 282 (2010)

Hospital setting

b. Liability for Crimes

Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed
by its officers, since it does not have the essential element of malice; in such case the
responsible officers would be criminally liable.

Republic Gas Corp. Petron Corp., 698 SCRA 666 (2013)

In a trademark infringement and unfair competition case, a corporate officer cannot

protect himself with the corporate fiction of the corporation where is the actual, present
and efficient actor.
 Espiritu v. Petron Corp., 605 SCRA 245 (2009)

Bicol Gas Corp. had been found guilty of having committed the criminal offense
punished under R.A. 623 (illegally filling up registered cylinder tanks), and it is the
stockholders and directors were sought to be made personally liable.

Ching v. Secretary of Justice, 481 SCRA 602 (2006)

In a trust receipt, though the entrustee is a corporation, nevertheless, P.D. 115

specifically makes the officers, employees or other officers of persons responsible for
the offense, without prejudice to the civil liabilities of such corporations and/or board of
directors, officers responsible for the offence.

Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005)

c. Constitutional Rights

Albert v. University Publication Co., 13 SCRA 84 (1965)

Smith Bell & Co. v. Natividad., 40 Phil. 136 (1920)
Stonehill v. Diokno, 20 SCRA 383 (1967)
Bataan Shipyard & Engineering Co. v. PCGG, 150 SCRA 181 (1987)

d. Non-Entitlement to Moral Damages

Filipinas Broadcasting Network v. Ago Medical and Educational

Center, 448 SCRA 413 (2005)

ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589

(1999)

e. Corporation Cannot Practice a Profession

Acebedo Optical Co. v. Court of Appeals, 329 SCR 314 (2000)

10. CLASSIFICATIONS OF CORPORATIONS

a. Stock Corporation - Section 3

Sec. 3. Classes of corporations. - Corporations formed or organized under this Code

may be stock or non-stock corporations. Corporations 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 are stock corporations.
All other corporations are non-stock corporations.
 b. Non-Stock Corporation

NON-STOCK CORPORATIONS

Sec. 86. Definition. - For the purposes of this Code, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this Code on dissolution: Provided, That any profit
which a non-stock corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized, subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-
stock corporations, except as may be covered by specific provisions of this Title.
Sec. 87. Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of this Title
governing particular classes of non-stock corporations.

c. Corporation de Jure - a corporation organized in accordance with the

requirements of law.

d. De Facto Corporation - Section 20

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

e. Corporation by Estoppel - Section 22

Arnold Hall v. Piccio, 86 Phil. 603 (1950)

Requisites of De Factor Corporation:

(a) Organized under a valid law;

(b) Bonafide compliance with formalities of law;

(c) User of corporate powers;

(d) SEC issuance of certificate of incorporation.

e. Corporation by Estoppel

Sec. 22. 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
defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Albert v. University Publishing Co., 13 SCRA 84 (1945)

Meryll Lynch Futures v. Court of Appeals, 211 SCRA 842 (1992)

Foreign corporation

Lim v. Philippine Fishing Gear Industries, 317 SCRA 728 (1999)

Int’l Express Travel v. Court of Appeals, 343 SCRA 674 (2000)

f. Public Corporation - one formed or organized for the government of a portion of

the State. Its purpose is for the general good and welfare.

Shipside, Inc. v. Court of Appeals, 352 SCRA 334 (2001)

BCDA is a not a mere government agency but a corporate body performing proprietary
functions.

Polytechnic University of the Phils. v. Court of Appeals, 368 SCRA 691

(2001)

g. Private Corporation - one formed for some private purpose, benefit, aim or end.

Baluyot v. Holganza, 325 SCRA 248 (2000)

The test to determine whether a corporation is government-owned or controlled, or

private in nature, is if a corporation is created by its own charter for the exercise of a
public function, or by incorporation under the general corporation law. The Philippine
National Red Cross is a government-owned and controlled corporation, with an original
charter under R.A. 95. Consequently, the employees are under the jurisdiction of the
Civil Service Commission and are compulsorily covered by GSIS.

h. Corporation Sole
Section 110

Sec. 108. Corporation sole - For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such religious denomination, sect or church.

Roman Catholic Apostolic, etc. v. Register of Deeds of Davao City, 102

Phil. 596

A corporation sole has no nationality.

Section 111 (2)

Sec. 111. Articles of incorporation. - In order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities and Exchange Commission
articles of incorporation setting forth the following:

1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his
religious denomination, sect or church and that he desires to become a corporation
sole;
2. That the rules, regulations and discipline of his religious denomination, sect or church
are not inconsistent with his becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he
is charged with the administration of the temporalities and the management of the
affairs, estate and properties of his religious denomination, sect or church within his
territorial jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop,
priest, minister, rabbi of presiding elder is required to be filled, according to the rules,
regulations or discipline of the religious denomination, sect or church to which he
belongs; and
5. The place where the principal office of the corporation sole is to be established and
located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to law for the
regulation of the affairs of the corporation.

i. Domestic Corporation - a corporation organized or existing under the laws of the

Republic.

j. Foreign Corporation
Section 140

Sec. 140. Definition and rights of foreign corporations. - For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any 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 it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate
government agency.

Chapter III
One Person Corporation

Section 115. Applicability of Provisions to One Person Corporations. – The Provisions of

this Title shall primarily apply to One Person Corporations. Other provisions of this cade
apply suppletorily, except as otherwise provided in this Title.

Section 116. One Person Corporation – A One Person is a corporation with a single
stockholder; Provided, That only a natural person, trust, or an estate may form a One
Person Corporation.

Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,
and non-chartered government owned and controlled corporations may not incorporate
as One Person Corporations; Provided further, That a natural person who is licensed to
exercise a profession may not organize as a One Person Corporation for the purpose of
exercising such profession except as otherwise provided under special laws.

Section 117. Minimum Capital Stock Not Required for One Person Corporation- A One
Person Corporation shall not be required to have a minimum authorized capital stock
except as otherwise provided by special law.

11. CORPORATORS AND INCORPORATORS, STOCKHOLDERS and

MEMBERS

Sec. 5. Corporators and incorporators, stockholders and members. - Corporators

are those who compose a corporation, whether as stockholders or as members.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators
in a non-stock corporation are called members.

a. Incorporators

Incorporators are those stockholders or members mentioned in the articles of

incorporation as originally forming and composing the corporation and who are
signatories thereof.

b. Corporators
Corporators are those who compose a corporation, whether as stockholders or as
members
c. Stockholders or Shareholders

d. Members

12. SHARES OF STOCK

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be

divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles of
incorporation:

Provided, That no share may be deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:

Provided, further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have a par value
or have no par value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to issue no-par value shares of
stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value.

The board of directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided, That
such terms and conditions shall be effective upon the filing of a certificate thereof with
the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued
for a consideration less than the value of five (P5.00) pesos per share: Provided,
further, That the entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

Section 6. new provision Classification of Shares – The classification of shares, their

corresponding rights, privileges or restrictions, and their stated par value, if any, must
be indicted in the articles of incorporation. Each share shall be equal in all respects to
every other share, except as otherwise provided in the articles of incorporation and in
the certificate of stock.

The shares in stock corporations may be divided in classes or series of shares or both.
No share may be deprived of voting rights except those classified or issued as
preferred or “redeemable” shares, unless otherwise provided in this Code: Provided,
That there shall always be a class or series of shares with complete voting rights.

Holders of nonvoting shares shall nevertheless be entitled to vote on the following

matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage or pledge, or other disposition of all or
substantially all of the corporate property;
(d) Incurring, creating or increasing bonded indebtedness;
(e) Increase or decrease of capital stock;
(f) Merger or consolidation of the corporation with another corporation or other
corporations;
(g) Investment of corporate funds in another corporation or business in accordance
with this Code; and
(h) Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote required under
this code to approve a particular corporate act shall be deemed to refer to only to
stocks with voting rights.
The shares or series of shares may or may not have a par value: Provided, That banks,
trust, insurance and preneed companies, public utilities, building and loan associations,
and other corporations authorized to obtain or access funds from the public, whether
publicly listed or not, shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by a corporation may be given preference in the

distribution of dividends and in the distribution of corporate assets in case of liquidation,
or such other preferences: Provided, That preferred shares of stock may be issued only
with a stated par value. The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock or any
series thereof: Provided further, That such terms and conditions shall be effective upon
filing of a certificate thereof with the Securities and Exchange Commission, hereinafter
referred to as the “Commission”.

Shares of stock issued without par value shall be deemed to be fully paid and
nonassessable and the holder of such shares shall not be liable to the corporation or to
its creditors in respect thereto: Provided, That no par value shares must be issued for a
consideration of at least Five pesos (P5.00) per share: Provided further, That the entire
consideration received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

A corporation may further classify its shares for the purpose of ensuring compliance
with constitutional and legal requirements.

a. General Rule on Classification of Shares

The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation.

Exceptions:

(1) No share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares.
(2) There shall always be a class or series of shares which have complete voting
rights.
(3) Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of stock.

Except as provided in the immediately preceding paragraph, the vote required under
this code to approve a particular act shall be deemed to refer only to stocks with voting
rights.

Castillo v. Balinghasay, 440 SCRA 442 (2004)

Section 6 which prohibits the classification of shares as non-voting, except when they
are expressly classified as preferred or redeemable shares, shall apply to corporation
organized under the old Corporation Law. Section 148 expressly provides that it shall
apply to corporations in existence at the time of the effectivity of the Code.

Gamboa v. Teves, 652 SCRA 690 (2011)

In the absence of provisions in the articles of incorporation denying voting rights to

preferred shares, preferred shares have the same voting rights as common shares.
Under the Corporation Code, only preferred or redeemable shares can be deprived of
the right to vote. Common shares cannot be deprived of the right to vote in any
corporate meeting.

Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011)

The power to issue shares of stock in a corporation is lodged in the board of directors
and no stockholders’ meeting is required to consider it because additional shares of
stock does not need approval of the stockholders- what is only required is the board
resolution approving the additional issuance of shares.

b. Common Shares

- a stockholder, owner of at least one common share has the following rights: (i) right to
vote at meetings; (2) right to dividends; (iii) right examine corporate books.

c. Preferred Shares

- may enjoy preference in (1) dividends; (ii) voting (particularly in election of directors;
(iii) corporate property upon dissolution.

Preferred stocks are those which entitle the shareholder to some priority on dividends
and asset distribution.

LIMITATIONS: Preferred shares can only be issued with par value, and such preference
must be:

(a) Stated in the Articles of Incorporation; or

(b) May be fixed by Board of Directors when authorized by articles of

incorporation, Provided such terms and conditions shall be effective upon filing of a
SEC certificate.

Republic Planters Bank v. Agana, 269 SCRA 1 (1997)

Although the certificates of stock granted the stockholders the right to receive dividends
at 1%, cumulative and participating, the stockholders do not become entitled to the
payment thereof as a matter of right without necessity of prior declaration of dividends.
Both Section 16 of the Corporation Law and Sec. 43 of the Corporation Code prohibit
issuance the issuance of stock dividends without the approval of not less than 2/3 of the
outstanding capital stock at a regular or special meeting duly called for the purpose.

Section 42. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%)
of their paid-in capital stock, except: (a) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (b) when the corporate is prohibited under any loan
agreement with financial institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or (c) when it is clearly shown that
such retention is necessary under special circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies.

d. Par Value Shares - value is fixed in the articles of incorporation.

e. No - Par Value Shares - They have no assigned value, their value being
dependent on the changes in the profits of the corporation and the market value of the
shares themselves at the time the shares are issued. Minimum consideration; P5.00.

Three ways of Determining Value of No-Par Value Share:

(1) By majority vote of the outstanding shares (issued shares) in a meeting called
for that purpose;
(2) By Board of Directors pursuant to authority conferred upon it by the articles of
incorporation; or
(3) By amendment of articles of incorporation.

Section 62

Sec. 61. Considering for stocks. - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be any
or a combination of any two or more of the following:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the corporation and

necessary or convenient for its use and lawful purposes at a fair valuation equal to the
par or issued value of the stock issued;

(c) Labor performed for or services actually rendered to the corporation;

(d) Previously incurred indebtedness of the corporation;

(e)Amounts transferred from unrestricted retained earnings to stated capital; and

(f)Outstanding shares exchanged for stocks in the event of reclassification or

conversion.
(g) shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.

Where the consideration is other than actual cash, or consists of intangible property
such as patents or copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approvalof the Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable,
may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or
by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, if it not so fixed, by the stockholders representing at least
a majority of the outstanding capital stock at a meeting duly called for the purpose. (5
and 16)

f. Redeemable Shares

Redeemable shares can only be issued when expressly authorize by the articles of
incorporation, wherein in the terms and conditions affecting them much so stated, as
well as on the certificates of stock.

Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152

(1999)

Republic Planters Bank v. Agana, 269 SCRA 1 (1997)

Redeemable shares are shares usually preferred, which by their terms are redeemable
at a fixed date, or at the option of either issuing corporation, or the stockholder, or both
at a certain redemption price. A redemption by the corporation of its stock is, in a sense,
a repurchase of it for cancelation. The present Code allows redemption of shares even
if there are no unrestricted retained earnings on the books of the corporation, subject to
the condition that the corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock, (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.

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 purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but
not limited to the following cases::
1. To eliminate fractional shares arising out of stock dividends;
2. 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
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions
of this Code.

Section 139. Corporate liquidation

g. Founders’ Shares

These must be provided for in the articles of incorporation, which would be entitled to
vote and be voted directors to the Board of Directors. But such privilege is good only for
five (5) years, which period shall begin from the date of the approval thereof by SEC.
Thereafter, they may form part of the common shares.

Castillo v. Balinghasay, 440 SCRA 442 (2004)

h. Treasury Stocks

They are shares of stock which have been issued and fully paid for, but subsequently
re-acquired by the issuing corporation by purchase, donation, or through some lawful
means.

The definition is defective because it requires that such shares be previously issued as
fully paid whereas, under Section 67 of the Code, which deals with delinquent stocks,
not fully paid shares become treasury stocks upon bid of the corporation in absence of
other bidders, become treasury shares.
Section 67. Delinquency sale. - x x x x
Should there be no bidder at the public auction who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid
for the same, and the total amount due shall be credited as paid in full in the books of the corporation.
Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the provisions of this Code.

Philippine Coconut Producers Federation v. Republic, 600 SCRA 102 (2009)

A treasury share, which may be common or preferred, may be used for a variety of
corporate purposes, such as a stock bonus plan for management and employees, or for
acquiring another company. It may be held indefinitely, resold or retired. While held in
the company treasury, it earns no dividends and has no vote in company affairs.

i. Escrow Shares

Shares that specifically segregated and to be issued subject to a condition.

II. ARTICLES OF INCORPORATION: INCORPORATION AND ORGANIZATION OF

PRIVATE CORPORATIONS

1. Nature of Articles of Incorporation

Government of P.I. v. Manila Railroad Co., 52 Phil 699 (1929)

The charter of a corporation is in the nature of a contract between the corporation and
the Government.

Lanuza v. Court of Appeals, 454 SCRA 54 (2005)

The articles of incorporation has been described as one that defines the charter of the
corporation and the contractual relationship between the state and the corporation, the
stockholders and the State and between the corporation and its stockholders. There is
no denying that the contents of the articles of incorporation are binding, not only on the
corporation, but also on its shareholders.

2. Corporate Name

Section 14 (1) and 18

Sec. 13. Contents of the articles of incorporation. - All corporations shall file with
the Securities and Exchange Commission articles of incorporation in any of the official
languages duly signed and acknowledged or authenticated by all of the incorporators,
in such form and manner as may be allowed by the Commission, containing
substantially the following matters, except as otherwise prescribed by this Code or by
special law:

1. The name of the corporation;

Sec. 17. Corporate name. - No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.

Sec. 17. Corporate name. No corporate name shall be allowed by the commission if
its Not Distinguishable from that already reserved or registered for the use of another
corporation, or if such name is already protected by law, or when its use is contrary to
existing law, rules and regulations.

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

(a) The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”,

or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions, abbreviations,
different tenses, spacing or number of the same words or phrase.

The Commission, upon determination that the corporate name is: (1) not distinguishable
from a name already reserved or registered for the use of another corporation; (2)
already protected by law; or (3) contrary to law, rules or regulations, and may summarily
order the corporation to immediately cease and desist from using such name and
require the corporation to register a new one. The Commission shall also case the
removal of all visible signages, marks, advertisements, labels, prints and other effects
bearing such corporate name. Upon approval of the new corporate name, the
Commission shall issue a certificate of incorporation under the amended name.

If the corporation fails to comply with the Commission’s order, the Commission may
hold the corporation and its responsible directors and officers in contempt and/or hold
them administratively, civilly and/or criminally liable under the Code and other applicable
laws and/or revoke the registration of the corporation.

Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002)

The policy behind the foregoing prohibition (Section 18) is to avoid fraud upon
the public that will occasion to deal with the entity concerned, the evasion of the legal
obligations and duties, and the reduction of difficulties of administration and supervision
over corporations.

Zuellig Freight and Cargo Systems v. NLRC, 701 SCRA 561 (2013)

Change of name is not a change of being.

 a. Guidelines in Use of Corporate Names5

5
SEC MEMO CIRCULAR NO. 14-2000
SECURITIES AND EXCHANGE COMMISSION
MEMORANDUM CIRCULAR NO. 14
Series of 2000
To : All Concerned
SUBJECT : Revised Guidelines in the Approval of Corporate and Partnership Names

In implementing Section 18 of the Corporation Code of the Philippines (BP 68), the following revised
guidelines in the approval of corporate and partnership names are hereby adopted for the information and
guidelines of all concerned:

The corporation name shall contain the word "Corporation" or its abbreviation "Corp." or
"Incorporated", or "Inc.". The partnership name shall contain the word "Company" or "Co.". For
limited partnership, the word "Limited" or "Ltd." Shall be included. In case of professional
partnership, the word "Company" need not be used.

Terms descriptive of a business in the name shall be indicative of the primary purpose. If there
are two (2) descriptive terms, the first shall refer to the primary purpose and the second shall refer
to one of the secondary purposes.

The name shall not be identical, misleading or confusingly similar to one already registered by
another corporation or partnership with the Commission or a sole proprietorship registered with
the Department of Trade and Industry. If the proposed name is similar to the name of a registered
firm, the proposed name must contain at least one distinctive word different from the name of the
company already registered.

Business or tradename of any firm which is different from its corporate or partnership name shall
be indicated in the articles of incorporation or partnership of said firm.

Tradename or trademark duly registered with the Intellectual Property Office can not be used as
part of a corporate or partnership name without the consent of the owner of such tradename of
trademark.

If the name or surname of a person is used as part of a corporate or partnership name, the
consent of said person or his heirs must be submitted except of that person is a stockholder,
member, partner of a declared national hero. If such person can not be identified or non-existent,
an explanation for the use of such name shall be required.

The meaning of initials in the name shall be disclosed in writing by the registrant.

Name containing a term descriptive of a business different from the business of a registered
company whose name also bears similar term(s) used by the former may be allowed.
The name should not be patently deceptive, confusing or contrary to existing laws.

The name which contains a word identical to a word in a registered name shall not be allowed if such
word is coined or already appropriated by a registered firm, regardless of the number of the
different words in the proposed name, unless there is consent from the registered firm of this firm
is one of the stockholders of partners of the entity to be registered.
The name of an internationally known foreign corporation or one similar to it may not be used by a
domestic corporation without the consent of the former.
The term "Philippines" when used as part of the name of a subsidiary corporation of a foreign
corporation shall be in parenthesis: i.e. "(Philippines)" or "(Phil.)".
The following words shall not be used as part of a corporate or partnership names:
 Philips Export B. V. v. Court of Appeals, 206 SCRA 457 (1992)

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing law. Where a change in a corporate name is approved,
the commission shall issue an amended certificate of incorporation under the amended
name. (Emphasis supplied)
The statutory prohibition cannot be any clearer. To come within its scope, two requisites
must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such
corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

As provided by special laws:

"Finance", "Financing" or "Finance and Investment" by corporations or
partnerships not engaged in the financing business (R.A. 5980, as amended)
"Engineer", "Engineering" or "Architects" as part of the corporate name (R. A. 546 and
R.A. 1582)
"Bank", "Banking", "Banker", Building and Loan Association", Trust Corporation", "Trust
Company" or words of similar import by corporations or associations not engaged
in banking business. (R.A. 337, as amended)
"United Nations" in full or abbreviated form can not be part of a corporate or
partnership name (R.A. 226)
"Bonded" for corporations or partnerships with unlicensed warehouse (R.A. 245)
As a matter of policy:
"Investment(s)" by corporations or partnership not organized as investment house
company or holding company.
"National" by all stock corporations and partnership.
"Asean", "Calabarzon" and "Philippines 2000".

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

Registrant corporations or partnership shall submit a letter undertaking to change their corporate
or partnership name in case another person or firm has acquired a prior right to the use of the
said firm name or the same is deceptively or confusingly similar to one already registered unless
this undertaking is already included as one of the provisions of the articles of incorporation or
partnership of the registrant.

These guidelines shall take effect fifteen (15) days after publication in a newspaper of general circulation.
Mandaluyong City. October 24, 2000.
The right to the exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption In this regard, there is no doubt with
respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate
name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29
August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was
issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo,
p. 16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all
types and their accessories since 30 September 1922, as evidenced by Certificate of
Registration No. 1651.

The second requisite no less exists in this case. In determining the existence of
confusing similarity in corporate names, the test is whether the similarity is such as to
mislead a person, using ordinary care and discrimination. In so doing, the Court must
look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life
Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private
Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS
EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the
dominant word in that all the companies affiliated or associated with the principal
corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of
Companies.

Ang mga Kaanib sa Iglesia ng Dios v. Iglesia ng Dios Kay Cristo Hesus,
372 SCRA 171 (2001)

Names involved: Iglesia ng Dios Cristo Jesus, Haligi at Suhay ng Katotohanan; Iglesia
ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan

SEC has the authority to de-register at all times corporate names which under its
estimation are likely to spawn confusion.

Laureano Investment v. Court of Appeals, 272 SCRA 253 (1997)

A corporation has no right to intervene using a name other than its registered name.

b. Change of Corporate Name

Change of name is not a change of being.

P.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005)

Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992)

c. SEC Has Jurisdiction Over Issues Involving Corporate Name

 Industrial Refractories Corp. v. Court of Appeals, 309 SCRA 252 (2002)

Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)

3. Purposes Clauses

Articles of incorporation must state expressly what is its primary purpose, as

distinguished from its secondary purposes. (Section 13) 6 Under Section 41, if the funds
are to be diverted from the primary purpose to a secondary purpose, this can be done
only by a 2/3 votes of the outstanding shares and cannot be done by mere resolution of
the Board of Directors.7

Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)

If a corporation’s purpose is lawful, then the SEC has no authority to inquire whether the
corporation has purpose other than those stated, and mandamus will lie to compel it to
issue the certificate of incorporation.

4. Principal Place of Business

Hyatt Elevators v. Goldstar Elevators, 473 SCRA 705 (2005)

6
Sec. 13. Contents of the articles of incorporation. - All corporations organized under this code shall
file with the Securities and Exchange Commission articles of incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators, containing substantially the following matters,
except as otherwise prescribed by this Code or by special law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where
a corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;
7
Sec. 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 or 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
members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for
the purpose. Notice of the proposed investment and the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or 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 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.
It now becomes apparent that the residence or domicile of a juridical person is fixed by
the law creating or recognizing it. Under Section 14(3) (now 13(3)) of the Corporation
Code, the place where the principal office of the corporation is to be located is one of
the required contents of the articles of incorporation, which shall be filed with the
Securities and Exchange Commission (SEC).

Petitioner argues that the Rules of Court do not provide that when the plaintiff is a
corporation, the complaint should be filed in the location of its principal office as
indicated in its articles of incorporation. Jurisprudence has, however, settled that the
place where the principal office of a corporation is located, as stated in the articles,
indeed establishes its residence. This ruling is important in determining the venue of an
action by or against a corporation, as in the present case.

SEC Circular No. 3, s. 2006 - full disclosure of address. “Metro Manila” as address
shall no longer be allowed.

5. Corporate Term

Section 11 (old Provision)

Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the Securities and Exchange Commission.

Section 11
A corporation shall have perpetual existence unless its articles of incorporation
provides otherwise.

Corporations with certificates of incorporation issued prior to the effectivity of this Code,
and which continue to exist, shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority of its outstanding capital stock,
notifies the Commission that it elects to retain to specific corporate term pursuant
to its articles of incorporation; Provided, that any change in the corporate term under
this section is without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this code.

A corporate term for a specific period may be extended or shortened by amending

the articles of incorporation; Provided, That no extension may be made earlier than
three (3) years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the Commission:
Provided, further, That such extension of the corporate term shall take effect only on the
day following the original or subsequent expiry date (s).
A corporation whose term has expired may apply for a revival of its corporate
existence, together with all the rights and privileges under its certificate of incorporation
and subject to all of its duties, debts, and liabilities existing prior to its revival. Upon
approval by the Commission, the corporation shall be deemed revived and a certificate
of revival of corporate existence shall be issued, giving its perpetual existence, unless
its application for revival provides otherwise.

No application for revival of certificate of incorporation of banks, banking and quasi-

banking institutions, preneed insurance and trust companies, non-stock savings
and loan associations (NSSLAs), pawnshops, corporations engaged in money
service business shall other financial intermediaries shall be approved b the
Commission unless accompanied by a favorable recommendation of the appropriate
government agency.

Section 19

Sec. 19. Commencement of corporate existence. - A private corporation formed or

organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of incorporation for the period
of time mentioned therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law.

Sec. 18. Registration, Incorporation and Commencement of corporate existence.

A person or group of persons desiring to incorporate shall submit the intended corporate
name to the Commission for verification. If the Commission finds that the name is
distinguishable from a name already reserved or registered for the use of another
corporation not protected by law and is not contrary to law, rules and regulations, the
name shall be reserved in favor of the incorporators. The incorporators shall then
submit their articles of incorporation and bylaws of the Commission.
If the Commission finds that the submitted documents and information are fully
compliant with the requirements of this Code, other relevant laws, rules and regulations,
the Commission shall issue the certificate of incorporation.

A private corporation formed or organized under this Code commences to have

corporate existence and juridical personality and is deemed incorporated from the date
the Securities and Exchange Commission issues a certificate of incorporation under its
official seal; and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the name stated in the
articles of incorporation for the period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in accordance with law.
Sec. 15. Amendment of Articles of Incorporation. - Unless otherwise prescribed by
this Code or by special law, and for legitimate purposes, any provision or matter stated
in the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this Code. The
articles of incorporation of a nonstock corporation may be amended by the vote or
written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation.

Sec. 36. Power to extend or shorten corporate 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 representing at least two-thirds (2/3) of the outstanding capital stock or by
at least two-thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally; or when allowed in the bylaws 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 message: Provided, That in case of extension
of corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code.

Alhambra Cigar v. SEC, 24 SCRA 269 (1968)

When the term of the corporation ends, it will continue to exist for a 3-year period
to wind up affairs but not to extend its corporate term (Section 122).

NHA v. Court of Appeals, 456 SCRA 17 (2005)

6. Incorporators

Section 10

Sec. 10. Number and qualifications of incorporators. - Any number of natural

persons not less than five (5) but not more than fifteen (15), all of legal age and a
majority of whom are residents of the Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the incorporators of s stock corporation must own
or be a subscriber to at least one (1) share of the capital stock of the corporation.

Section 10. Number and Qualifications of Incorporators. Any person, partnership,

association or corporation, singly or jointly with others but not more than fifteen (15) in
number, may organize a corporation for any lawful purpose or purposes, That natural
persons who are licensed to practice a profession and partnerships or
associations organized for the purpose of practicing a profession, shall not be allowed
to organize as a corporation unless otherwise provided under special laws.
Incorporators who are natural persons must be of legal age.

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

A corporation with a single stockholder is considered a One Person Corporation as

described in Title XII, Chapter III of this Code.

Section 13 (e)
Sec. 13. Contents of the articles of incorporation. - All corporations organized under
this code shall file with the Commission articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporators, in such form and
manner as my be allowed by the Commission, containing substantially the following
matters, except as otherwise prescribed by this Code or by special law:
(a). The name of the corporation;
xxx
(e) The names, nationalities and residences of the incorporators;

Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005)

The shares were registered in Yumul’s name even it the shares were actually
paid by Dee. It is possible for a business to be wholly owned by one individual, and the
validity of its incorporation is not affected when give nominal ownership of only one
share of stock to each of the other four (4) incorporators.

7. Minimum Capital Stock Required of Stock Corporations

Section 12 Minimum Capital Stock Not required in Stock Corporation. – stock

corporations shall not be required to have a minimum capital stock, except as otherwise
provided by law.
Section 13 (old law)

Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call for
payment by the board of directors: Provided, however, That in no case shall the paid-up
capital be less than five Thousand (P5,000.00) pesos.
8. Incorporating Board of Directors

Sec. 13. Contents of the articles of incorporation. - All corporations organized under
this code shall file with the Commission articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporators, in such form and
manner as my be allowed by the Commission, containing substantially the following
matters, except as otherwise prescribed by this Code or by special law:
(a). The name of the corporation;
xxx
(e) The names, nationalities and residences of the incorporators;

(f) The number of directors, which shall not be more than fifteen (15), or the
number of trustees, which may be more than fifteen (15).

a. Concept of “Capital Stock” and “Paid-up Capital Stock”

PLDT v. National Telecommunications Council, 539 SCRA 365 (2007)

“Capital” refers to the value of the property or assets of a corporation.

The “Capital subscribed” is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and can
be more than, the par value of the shares. In fine, it is the amount that the corporation
receives, inclusive of the premiums, if any, in consideration of the original issuances of
the shares.

In the case of stock dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account. It is the same amount that can be loosely
termed as the “trust fund” on the corporation.

Lanuza v. Court of Appeals, 454 SCRA 54 (2005)

The “Outstanding Capital Stock” is defined under Section 137 of the Corporation Code
as the “total shares of stock issued to subscribers or stockholders whether or not fully or
partially paid (as long as there is binding subscription agreement) except treasury
shares””. Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders’ shares or common shares.

MSCI-NACUSIP Local Chapter v. National Wages and Productivity

Commission, 269 SCRA 173 (1997)

By express provision of Section 13 of the Corporation Code, paid-up capital is that

portion of authorized capital stock which has been both subscribed and paid up. Not all
funds or assets received by the corporation can be considered paid-up capital, for this
term has a technical signification in Corporation Law. Such must for part of authorized
capital stock, subscribed and then paid-up.

9. Procedure for Amendment of Articles of Incorporation

Section 16
Sec. 15. Amendment of Articles of Incorporation. - Unless otherwise prescribed by
this Code or by special law, and for legitimate purposes, any provision or matter stated
in the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this Code. The
articles of incorporation of a non-stock corporation may be amended or the vote or
written assent of the majority of the trusteed and the at least two-thirds (2/3) of the
member.
The original and amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation. Such articles, as amended shall be
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or trustees
stating the fact that said amendment or amendments have been duly approved by the
required vote of the stockholders or members, shall be submitted to Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within
six (6) months from the date of filing for a cause not attributable to the corporation.

TITLE X - APPRAISAL RIGHT

Section 80. When the Right of Appraisal May be Exercised- Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair value of his
shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation.

4. In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation.

Section 168

10. Effects of Non-use of Corporate Charter and Continuous Inoperation of

Corporation

Section 22

Section 21. Effects on non-use of corporate charter and continuous inoperation of a

corporation. - If a corporation does not formally organize and commence the transaction
of its business or the construction of its works within five (5)years (old law: two (2)
years) from the date of its incorporation, its certificate of incorporation shall be deemed
revoked as of the day following the end of the five (5) year period.

However, if a corporation has commenced the transaction of its business but

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

A delinquent corporation shall have a period of two (2) years to resume operations and
comply with all the requirements that the Commission shall prescribe. Upon compliance
by the corporation, the Commission shall issue an order lifting the delinquent status.
Failure to comply with the requirements and resume operations within the period given
by the Commission shall cause the revocation of the corporation’s certificate of
incorporation.

8
Sec. 16. Grounds when articles of incorporation or amendment may be rejected or disapproved. -
The Commission may reject the articles of incorporation or disapprove any amendment thereto if the
same is not in compliance with the requirements of this Code: Provided, That the Commission shall give
the incorporators a reasonable time within which to correct or modify the objectionable portions of the
articles or amendment. The following are grounds for such rejection or disapproval:
(a) The articles of incorporation or any amendment thereto is not substantially in accordance with the
form prescribed herein;
(b) The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
(c) The Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; (d)
The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-
banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or amendment is in
accordance with law.
The Commission shall give reasonable notice to, and coordinate with the appropriate
regulatory agency prior to the suspension or revocation of the certificate of incorporation
of companies under the special regulatory jurisdiction.
III. BY-LAWS

TITLE V

BYLAWS

SEC. 45. Adoption of Bylaws.

SEC. 46. Contents of Bylaws.
SEC. 47. Amendment to Bylaws.

1. Nature of By-Laws

Loyala Grand Villas Homeowners v. Court of Appeals, 276 SCRA 681 (1997)

By-laws 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. By-laws are required for orderly governance and management of
corporation but failure to file them within the period required by law by no means tools
the automatic dissolution of a corporation.

San Miguel Corp. v. Mandaue Packing Products Plants Union, 467 SCRA
107 (2005)

By-laws has traditionally been defined as regulations, ordinances, rules or laws adopted
by an association or corporation or the like for its internal governance, including rules for
routine matters such as calling meetings and the like. If these key by-law provisions on
the internal governance of the local/chapter are themselves already provided for in the
constitution, then it would be feasible to overlook the requirement in the by-laws.

China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997)

The purpose of by-laws is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although
adopted pursuant to statutory authority, have no status as public law.

Section 45. Adoption of by-laws. –

Every corporation formed under this Code must, within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not inconsistent with
this Code.
For the adoption of by-laws by the corporation the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at least a majority
of the members in case of non-stock corporations, shall be necessary. The by-laws
shall be signed by the stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the inspection of the stockholders or
members during office hours. A copy thereof, duly certified to by a majority of the
directors or trustees countersigned by the secretary of the corporation, shall be filed
with the Securities and Exchange Commission which shall be attached to the original
articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted

and filed prior to incorporation; in such case, such by-laws shall be approved and
signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this
Code.

The Commission shall not accept for filing the by-laws or any amendment thereto of any
bank, banking institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate government agency
to the effect that such by-laws or amendments are in accordance with law. (20a)

Section 46. Contents of by-laws. - A private corporation may provide the following in its
by-laws:

(a) The time, place and manner of calling and conducting regular or special meetings of
the directors or trustees;

(b) The time and manner of calling and conducting regular or special meetings of the
stockholders or members;

(c) The required quorum in meetings of stockholders or members and the manner of
voting therein;

(d) The modes by which a stockholder, member, director, or trustee may attend
meetings and cast their votes.

(e)The form for proxies of stockholders and members and the manner of voting them;

(f) The directors or trustees’qualifications, duties and responsibilities, the guidelines for
setting the compensation of directors or trustees and officers and the maximum number
of other board representatives that an independent director or trustee may have which
shall, in no case, be more than the number prescribed by the Commission.
(g) The time for holding the annual election of directors of trustees and the mode or
manner of giving notice thereof;

(h) The manner of election or appointment and the term of office of all officers other
than directors or trustees;

(i) The penalties for violation of the by-laws;

(j) In the case of stock corporations, the manner of issuing stock certificates; and

(k). Such other matters as may be necessary for the proper or convenient transaction of
its corporate business and affairs for the promotion of good governance and anti-graft
and corruption measures.

An arbitration agreement may be provided for in the bylaws pursuant to Section 181 of
this Code.

SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in the articles
of incorporation or bylaws of an unlisted corporation. When such an agreement is in place, disputes
between the corporation, its stockholders or members, which arise from the implementation of the
articles of incorporation or bylaws, or from intra-corporate relations, shall be referred to arbitration.
A dispute shall be nonarbitrable when it involves criminal offenses and interests of third parties.

Section 47. Amendments to by-laws. - The board of directors or trustees, by a majority

vote thereof, and the owners of at least a majority of the outstanding capital stock, or at
least a majority of the members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3)
of the members in a non-stock corporation may delegate to the board of directors or
trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided,
That any power delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such amendment or new by-
laws shall be attached to the original by-laws in the office of the corporation, and a copy
thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange Commission the
same to be attached to the original articles of incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)
 SEC. 47. Amendment to Bylaws. – A majority of the board of directors or trustees, and
the owners of at least a majority of the outstanding capital stock, or at least a majority of the
members of a nonstock corporation, at a regular or special meeting duly called for the purpose,
may amend or repeal the bylaws or adopt new bylaws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a nonstock corporation may
delegate to the board of directors or trustees the power to amend or repeal the bylaws or
adopt new bylaws: Provided, That any power delegated to the board of directors or trustees to
amend or repeal the bylaws or adopt new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or majority of
the members shall so vote at a regular or special meeting.

Whenever the bylaws are amended or new bylaws are adopted, the corporation shall
file with the Commission such amended or new bylaws and, if applicable, the stockholders’ or
members’ resolution authorizing the delegation of the power to amend and/or adopt new
bylaws, duly certified under oath by the corporate secretary and a majority of the directors or
trustees.

The amended or new bylaws shall only be effective upon the issuance by the Commission of a
certification that the same is in accordance with this Code and other relevant laws.

2. Period of Adoption of By-Law

Within one month after receipt of official notice of the issuance of its certificate of
incorporation by SEC, the corporation must adopt a code of by-laws for its government.

By-laws may be adopted and filed prior to incorporation; in such case, such by-laws
shall be approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation.

Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005)

A corporation which has failed to file its by-laws within the prescribed period does not
ipso facto lose its powers as such, and may be considered a de facto corporation whose
right exercise corporation powers may not be inquired into collaterally in any private suit
to which such corporations may be a party.

3. How By-Laws Adopted

(a) By-laws filed together with articles of incorporation -

(1) must be approved and signed by all incorporators; and
(2) must be submitted to SEC with articles.
(b) Filed with SEC within one (1) month from notice of issuance of certificate of
incorporation-

(1) Affirmative vote of the stockholders representing at least a majority of the

outstanding capital stock, or at least a majority of the members, in case of a non-stock
corporation; and

(2) By-laws shall be signed by stockholders or members voting for them.

 one copy kept in office of corporation
 another copy sent to SEC.
(i) certified by majority of directors or trustees
(ii) counter-signed by the Secretary of the Corporation.

4. Effectivity of By-Laws

By-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or amendments are in
accordance with law.

5. Contents of By-Laws

Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968)

By-law provisions providing for the manner and procedure when certificates of stocks
are deemed lost and replaceable cannot be used by the corporation to defy the order of
the State, through its courts, to consider certificates lost and new ones to be issued the
ancillary administrator of the entity of the foreign-decedent stockholder.

Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997)

A provision to be included in the By-Laws granting to a stockholder a permanent

representation in the Board of Directors of the corporation is contrary to the provisions
of the Corporation Code requiring all members of the Board to be elected by the
stockholders or members.

Pena v. Court of Appeals, 193 SCRA 717 (1991)

By-laws are the corporation’s own private laws which substantially have the same effect
as the laws of the corporation. Therefore, when the by-laws require the attendance of
four (4) members of the five -man board for a special meeting, the attendance of only
three (3) members, although constituting a majority, makes any resolution adopted
therein void as to affect the contract entered into by the corporation with a third party.

Thomson v. Court of Appeals, 298 SCRA 280 (1998)

By-laws cannot restrict the property rights of stockholders with respect to shares but
merely authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer.

In this case, the petitioner was the nominee of the private respondent to hold the share
and enjoy the privileges of the club. But upon the expiration of petitioner’s employment
as officer and consultant of AmCham, the incentives that go with the position, including
use of the MPC share, also ceased to exist. It now behooves petitioner to surrender
said share to private respondents next nominee, another natural person. Obviously this
arrangement of trust and confidence cannot be defeated by the petitioners citation of
the MPC rules to shield his untenable position, without doing violence to basic tenets of
justice and fair dealing.

Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469

(1998)

The amendment of a by-law provision to undermine the right to security of tenure of a

regular employee of the corporation cannot be allowed. If we were to rule otherwise, it
would enable an employer to remove any employee from his employment by the simple
expediency of amending its by-law and providing that his/her position shall cease to
exist upon the occurrence of a specified event.

6. Binding Effect of By-Laws To Third Parties

China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997)

Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc. (VGCCI),
pledged his Stock Certificate 1219 to China Banking Corporation (CBC). The deed of
pledge executed by Calapatia in CBC's favor was duly noted in its corporate books. Due
to Calapatia's failure to pay his obligation, CBC filed a petition for extrajudicial
foreclosure for the conduct of a public auction sale of the pledged stock. CBC informed
VGCCI of the foreclosure proceedings and requested that the pledged stock be
transferred to its name and the same be recorded in the corporate books. However, on
15 July 1985, VGCCI wrote CBC expressing its inability to accede to CBC's request in
view of Calapatia's unsettled accounts with the club. Despite the foregoing, Notary
Public de Vera held a public auction on 17 September 1985 and CBC emerged as the
highest bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the
corresponding certificate of sale.
Third persons are not bound to provisions of By-Laws, except when they have
knowledge of the provisions thereof. VGCCI could have easily informed CBC of its by-
laws when it sent notice formally recognizing CBC as pledgee of one of its shares
registered in Calapatia's name. CBC's belated notice of said by-laws at the time of
foreclosure will not suffice.

PMI Colleges v. NLRC, 277 SCRA 462 (1997)

PMI Colleges cannot avoid liability under a contract of services which was not signed by
the Chairman of the Board contrary to the requirements under its by-laws.

7. How By-Laws May be Repealed or New By-Laws Adopted

SEC. 47. Amendment to Bylaws. – A majority of the board of directors or trustees, and
the owners of at least a majority of the outstanding capital stock, or at least a majority of the
members of a nonstock corporation, at a regular or special meeting duly called for the purpose,
may amend or repeal the bylaws or adopt new bylaws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a nonstock corporation may
delegate to the board of directors or trustees the power to amend or repeal the bylaws or
adopt new bylaws: Provided, That any power delegated to the board of directors or trustees to
amend or repeal the bylaws or adopt new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or majority of
the members shall so vote at a regular or special meeting.

Whenever the bylaws are amended or new bylaws are adopted, the corporation shall
file with the Commission such amended or new bylaws and, if applicable, the stockholders’ or
members’ resolution authorizing the delegation of the power to amend and/or adopt new
bylaws, duly certified under oath by the corporate secretary and a majority of the directors or
trustees.

The amended or new bylaws shall only be effective upon the issuance by the Commission of a
certification that the same is in accordance with this Code and other relevant laws.

(a) With stockholders or members approval:

(i) Majority vote of the members of the Board;

(ii) Majority of the outstanding capital stock or majority of the members in case of
non-stock corporation, in a meeting duly called for the purpose.

(b) By the Directors/Trustees:

(i) 2/3 of the outstanding capital stock; or
(ii) 2/3 of the members in a non-stock corporation may delegate to the board the
power to amend or repeal any by-laws or adopt new by-laws.
 Such power of the Board may be revoked by majority vote of the outstanding
capital stock or majority of the members in a non-stock corporation.
 The power to adopt the first original by-laws cannot be delegated to the board of
directors or trustees; only the power to adopt new by-laws that will supplant the
old by-laws can be validly delegated.

IV. Board of Directors/Trustees, Corporate Officers

BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term.
SEC. 23. Election of Directors or Trustees.
SEC. 24. Corporate Officers.
SEC. 25. Report of Election of Directors, Trustees and Officers, Non-holding of Election and
Cessation from Office.
SEC. 26. Disqualification of Directors, Trustees or Officers.
SEC. 27. Removal of Directors or Trustees.
SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board.
SEC. 29. Compensation of Directors or Trustees.
SEC. 30. Liability of Directors, Trustees or Officers.
SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation.
SEC. 32. Contracts Between Corporations with Interlocking Directors.
SEC. 33. Disloyalty of a Director.
SEC. 34. Executive, Management, and Other Special Committees.

1. Doctrine of “Centralized Management”

a. The Board is Seat of Corporate Powers

Section 23

Section 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified.

Section 6
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other

corporations;

7. Investment of corporate funds in another corporation or business in accordance with

this Code; and

8. Dissolution of the corporation.

Gamboa v. Teves, 652 SCRA 690 (2011)

The right of a stockholders to participate in the control or management of the

corporation is exercised through his vote in the election of directors as it is the board
that controls or manages the corporation.

Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010)

The Board of Directors may validly delegate some of its functions and powers to is
officers, committees or agents. The authority of these individuals to bind the corporation
is generally derived from law, corporate by-laws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of
business.

Hornilla v. Salunat, 405 SCRA 220 (2003)

Members of the board have been characterized as trustees or directors clothed with a
fiduciary character. It is clearly separate and distinct from the corporate entity itself.

People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

Absence authority from the Board, no person, not even its officers, can validly bind the
corporation.

China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997)

Power to borrow money requires board approval.

Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992)

The commitment by the former corporate officer allowing parties to remain in

possession of properties registered in the name of the corporation, without board
approval or contract entered into in the name of the corporation.

(1) Theory of Directly Vested Power; Board as Trustee of the

Stockholders-Beneficiaries. Under Section 23, it is the board which exercises all
corporation powers in a corporation. Under the doctrine of centralized management, the
Board does not act as agents of the stockholders, since their source of power is
originally vested by law and not delegated by the stockholders.

Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009)

The board of directors occupies a position of trusteeship.

Filipinas Port Services v. Go, 518 SCRA 453 (2007)

The doctrine of centralized management is necessary for efficiency in any large

organization.

Tan v. Sycip, 499 SCRA 216 (2006)

Acts of management pertain to the board, and those of ownership to the stockholders or
members. In the latter case, board cannot act alone but must seek approval of
stockholders or members.

ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999)

For officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specifically authorize them to do so. The laws on agency apply.

Ramirez v. Orientalist Co., 38 Phil. 634 (1918)

When a corporation contract has been effected with the approval of the Board of
Directors, a resolution adopted by the stockholders refusing to recognize the contract is
without legal effect.
 Lingayen Gulf Electric v. Baltazar, 93 Phil 404 (1953)

If the by-laws are silent as to per diems, the President, who at the same time is a
member of the Board of Directors, must serve the corporation free of charge.

(2) Countervailing Theory: Stockholders Delegate Powers to the Board

Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009)

The theory of delegated power of the board of directors similarly explains why,
under Section 29 (now Section 28) of the Corporation Code, in cases where the
vacancy in the corporation’s board of directors is caused not only the expiration of a
member’s term, the successor “so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessors in office. The board may fill the vacancy so as not
to retard the corporation’s operations; yet, in recognition of the stockholders’ right to
elect members of the board, it limited the period during which the successor shall only
to the “unexpired term of his predecessor in office.”

Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only or the unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting authorizing the increase of directors
or trustees if so stated in the notice of the meeting.

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. – Any vacancy
occurring in the board of directors or trustees other than by removal or by expiration of term
may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders or members
in a regular or special meeting called for that purpose.
When the vacancy is due to term expiration, the election shall be held no later than the
day of such expiration at a meeting called for that purpose. When the vacancy arises as a result
of removal by the stockholders or members, the election may be held on the same day of the
meeting authorizing the removal and this fact must be so stated in the agenda and notice of
said meeting. In all other cases, the election must be held no later than forty-five (45) days
from the time the vacancy arose. A director or trustee elected to fill a vacancy shall be referred
to as replacement director or trustee and shall serve only for the unexpired term of the
predecessor in office.

However, when the vacancy prevents the remaining directors from constituting a
quorum and emergency action is required to prevent grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may be temporarily filled from among the officers of
the corporation by unanimous vote of the remaining directors or trustees. The action by the
designated director or trustee shall be limited to the emergency action necessary, and the term
shall cease within a reasonable time from the termination of the emergency or upon election of
the replacement director or trustee, whichever comes earlier. The corporation must notify the
Commission within three (3) days from the creation of the emergency board, stating therein the
reason for its creation.

Any directorship or trusteeship to be filled by reason of an increase in the number of

directors or trustees shall be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.

In all elections to fill vacancies under this section, the procedure set forth in Sections 23
and 25 of this Code shall apply.

SEC. 23. Election of Directors or Trustees

SEC. 25. Report of Election of Directors, Trustees and Officers, Non-holding of Election and
Cessation from Office.

PNCC v. Pabion, 320 SCRA 188 (1999)

The directors of a GOCC, which is not created by special law, owe their offices to their
shareholders and not the presidential fiat; and the SEC can compel such corporation to
hold a stockholders’ meeting for the purpose of electing members of the Board of
Directors.

These GOCCs are regarded as private corporations despite common misconception.

That the government may own the controlling shares in the corporation does not
diminish the fact that the latter owes its existence to the Corporation Code. Prescinding
from such premises, it necessarily follows that SEC can compel PNCC to hold a
stockholders’ meeting for the purpose of electing members of the latter’s BOD as clearly
provided for by Section 50 of the Corporation Code.

b. Requirement that Board Must Act as a Body

AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385
(2002)

Declarations of an individual director or officer relating to the affairs of the corporation

but not connected with the performance of authorized duties of such director or officer
are held not binding on the corporation.

c. Principle That Board Power may be Delegated

 People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

However, it is familiar doctrine that if a corporation knowingly permits one of its officers,
or any other agent, to act within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agent’s authority. Thus private respondent shall not be faulted for believing
that Punsalan’s conformity to the contract in dispute was also binding on petitioner. In
the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the
First Contract without first securing board approval. Despite such lack of board
approval, petitioner did not object to or repudiate said contract, thus "clothing" its
president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong — senior vice president, treasurer and
major stockholder of petitioner. Furthermore, private respondent prepared an operations
manual and conducted a seminar for the employees of petitioner in accordance with
their contract. Petitioner accepted the operations manual, submitted it to the Bureau of
Customs and allowed the seminar for its employees. As a result of its aforementioned
actions, petitioner was given by the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract was outside the usual
powers of the president, petitioner's ratification of said contract and acceptance of
benefits have made it binding, nonetheless. The enforceability of contracts under Article
1403(2) is ratified "by the acceptance of benefits under them" under Article 1405.

San Juan Structural and Steel Fabricators v. Court of Appeals, 296 SCRA
692

A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes powers which have been intentionally conferred, and also such
powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage,
as usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it has
conferred.

Motorich is right in invoking that it is not bound by the acts of Nenita because her act in
entering into a contract with San Juan was not authorized by the board of directors of
Motorich. Nenita is however ordered to return the P100k.

There is no merit in the contention that the corporate veil should be pierced even though
it is true that Nenita and her husband own 98% of the capital stocks of Motorich. The
corporate veil can only be pierced if the corporate fiction is merely used by the
incorporators to shield themselves against liability for fraud, illegality or inequity
committed on third persons. It is incumbent upon San Juan to prove that Nenita or her
husband is merely using Motorich to defraud San Juan. In this case however, San Juan
utterly failed to establish that Motorich was formed, or that it is operated, for the purpose
of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or
that the said veil was used to conceal fraud, illegality or inequity at the expense of third
persons like San Juan.

2. BUSINESS JUDGMENT RULE

Unless otherwise provided in the Code, all corporate powers and prerogatives are
vested directly in the Board of Directors. Consequently, the rule has two consequences:

(a) The resolution, contracts and transactions of the Board, cannot be overturned or
set aside by the stockholders or members and not even by the courts under the
principle that the business of the corporation has been left to the hands of the Board;
and

(b) Directors and duly authorized officers cannot be held personally liable for acts or
contracts done with the exercise of their business judgment.

Exceptions:

(1) When expressly provided otherwise in the Corporation Code;

(2) When the Directors or officers acted with fraud, gross negligence or in bad
faith; and

(3) When the Directors or officers act against the corporation in conflict of
interest situation.

Montelibano v. Bacolod Murcia Milling Co., 5 SCRA 36 (1962)

The Board of Directors of a milling company has the authority to modify the proposed
terms of the milling contract for the purpose of making the terms more acceptable to
other contracting parties. As long as the resolution was passed upon in good faith by
the board of directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the corporation, the court has no authority to review them.

Ong Yong v. Tiu, 401 SCRA 1 (2003)9

9
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of
rescission of the subject agreement based on a less than substantial breach of subscription contract. Not
only are they not parties to the subscription contract between the Ongs and FLADC; they also have other
available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not prosper since rescission will
violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under
the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation
to compel FLADC to file at the SEC a petition for the issuance of a certificate of
decrease of stock. Decreasing a corporation’s authorized capital stock is an amendment
of the Articles of Incorporation. It is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties thereto. In this
case, the Tius are actually not just asking for a review of the legality and fairness of a

Rivera,provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in
the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of
the existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire
its own shares and in Section 122 on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.
The distribution of corporate assets and property cannot be made to depend on the whims and caprices of
the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of
the court a quo to prevent further squabbles and future litigations unless the indispensable conditions and
procedures for the protection of corporate creditors are followed. Otherwise, the corporate peace laudably
hoped for by the court will remain nothing but a dream because this time, it will be the creditors turn to
engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of
the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the premature liquidation of
the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120
of the Corporation Code. The Tius maintain that rescinding the subscription contract is not synonymous to
corporate liquidation because all rescission will entail would be the simple restoration of the status quo
ante and a return to the two groups of their cash and property contributions. We wish it were that simple.
Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not
effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission
(which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and disastrous
effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not
result in an unauthorized liquidation of the corporation because their case is actually a petition to
decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides
that (e)xcept by decrease of capital stock, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and liabilities. The Tius claim that their
case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures
under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file
with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said
decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital stock because such
action never complied with the formal requirements for decrease of capital stock under Section 33 of the
Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurers affidavit and no proof that said decrease will
not prejudice the creditors rights. On the contrary, all their pleadings contained were alleged acts of
violations by the Ongs to justify an order of rescission.
corporate decision. They want this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not voluntarily agreed upon
by its stockholders and directors.

Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs
directors and stockholders is a violation of the business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of the
minority, as when plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious injury to the plaintiffs
stockholders.
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule or
the free enterprise system prevailing in our social and economic set-up dictates that it is
better for the State and its organs to leave business to the businessmen; especially so,
when courts are ill-equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the corporate business has been
vested in the board and not with courts
Apparently, the Tius do not realize the illegal consequences of seeking rescission and
control of the corporation to the exclusion of the Ongs. Such an act infringes on the law
on reduction of capital stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its authorized capital stock
is not only against the law but is also prejudicial to corporate creditors who enjoy
absolute priority of payment over and above any individual stockholder thereof.

Philippine Association of Stock Transfer and Registry Agencies v. Court of

Appeals, 536 SCRA 61 (2007)

Facts: The Puerto Azul Land Inc. (PALI), a domestic real estate corporation, had
sought to offer its shares to the public in order to raise funds allegedly to develop its
properties and pay its loans with several banking institutions. In January, 1995, PALI
was issued a permit to sell its shares to the public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its shares among investors, PALI sought
to course the trading of its shares through the Philippine Stock Exchange Inc. (PSEi),
for which purpose it filed with the said stock exchange an application to list its shares,
with supporting documents attached pending the approval of the PALI’s listing
application, a letter was received by PSE from the heirs of Ferdinand Marcos to which
the latter claims to be the legal and beneficial owner of some of the properties forming
part of PALI’s assets. As a result, PSE denied PALI’s application which caused the
latter to file a complaint before the SEC. The SEC issued an order to PSE to grant
listing application of PALI on the ground that PALI have certificate of title over its assets
and properties and that PALI have complied with all the requirements to enlist with PSE.
Issue: Whether or not the denial of PALI’s application is proper.
Held: Yes. This is in accord with the “Business Judgment Rule” whereby the SEC and
the courts are barred from intruding into business judgments of corporations, when the
same are made in good faith. The same rule precludes the reversal of the decision of
the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion
to accept of reject applications for listing. Thus, even if an issuer has complied with the
PSE listing rules and requirements, PSE retains the discretion to accept or reject the
issuer’s listing application if the PSE determines that the listing shall not serve the
interests of the investing public.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it
is clothed with the markings of a corporate entity, it functions as the primary channel
through which the vessels of capital trade ply. The PSEi’s relevance to the continued
operation and filtration of the securities transaction in the country gives it a distinct color
of importance such that government intervention in its affairs becomes justified, if not
necessarily. Indeed, as the only operational stock exchange in the country today, the
PSE enjoys monopoly of securities transactions, and as such it yields a monopoly of
securities transactions, and as such, it yields an immerse influence upon the country’s
economy.
The SEC’s power to look into the subject ruling of the PSE, therefore, may be implied
from or be considered as necessary or incidental to the carrying out of the SEC’s
express power to insure fair dealing in securities traded upon a stock exchange or to
ensure the fair administration of such exchange. It is likewise, observed that the
principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities may
be encouraged and protected and their activities for the promotion of economic
development.
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 requisites appropriate to such a body
as to its corporate and management decisions, therefore, the state will generally not
interfere with the same. Questions of policy and management are left to the honest
decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgements for the judgement of the board of directors. The
board is the business manager of the corporation and so long as it acts in good faith, its
orders are not reviewable by the courts.
In matters of application for listing in the market the SEC may exercise such power only
if the PSE’s judgement is attended by bad faith.
The petitioner was in the right when it refused application of PALI, for a contrary ruling
was not to the best interest of the general public.

Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454

(1997)10

10
1971, the ISLAMIC DIRECTORATE OF THE PHILIPPINES ("IDP") was incorporated with the primary
purpose of establishing a mosque, school, and other religious infrastructures in Quezon City.

IDP purchased a 49,652-square meter lot in Tandang Sora, QC, which was covered by TCT Nos. RT-
Since the SEC has declared the Carpizo group as a void Board of Trustees, the sale it
entered into with INC is likewise void. Without a valid consent of a contracting party,
there can be no valid contract.

In this case, the IDP, never gave its consent, through a legitimate Board of Trustees, to
the disputed Deed of Absolute Sale executed in favor of INC. Therefore, this is a case
not only of vitiated consent, but one where consent on the part of one of the supposed
contracting parties is totally wanting. Ineluctably, the subject sale is void and produces
no effect whatsoever.

b. Remedies in Case of Mismanagement - In case of mismanagement or

abuse of powers, the remedy of stockholders shall be:

(a) receivership;

(b) Injunction if the act has not yet been done;

(c) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General
refuses to act;

(d) Derivative suit or complaint filed with SEC (RTC).

26520 (176616) and RT-26521 (170567).

When President Marcos declared martial law in 1972, most of the members of the 1971 Board of
Trustees ("Tamano Group") flew to the Middle East to escape political persecution.

Thereafter, two contending groups claiming to be the IDP Board of Trustees sprung: the Carpizo group
and Abbas group.

In a suit between the two groups, SEC rendered a decision in 1986 declaring both groups to be null and
void. SEC recommended that t a new by-laws be approved and a new election be conducted upon the
approval of the by-laws. However, the SEC recommendation was not heeded.

In 1989, the Carpizo group passed a Board Resolution authorizing the sale of the land to Iglesia Ni Cristo
("INC"), and a Deed of Sale was eventually executed.

In 1991, the Tamano Group filed a petition before the SEC questioning the sale.

Meanwhile, INC filed a suit for specific performance before RTC Branch 81 against the Carpizo group.
INC also moved to compel a certain Leticia Ligon (who is apparently the mortgagee of the lot) to
surrender the title.

The Tamano group sought to intervene, but the intervention was denied despite being informed of the
pending SEC case. In 1992, the Court subsequently ruled that the INC as the rightful owner of the land,
and ordered Ligon to surrender the titles for annotation. Ligon appealed to CA and SC, but her appeals
were denied.

In 1993, the SEC ruled that the sale was null and void . On appeal CA reversed the SEC ruling.
3. QUALIFICATIONS and DISQUALIFICATIONS OF BOARD MEMBERS

(a) He must own at least one (1) share in his name and if he ceases to own at least
one (1) share in his own name, he automatically ceases as a director. EXCEPTION:
Trustee in a voting trust may be elected director/trustee.

(b) Majority of corporate directors must be Philippines residents.

(c) He must not have been convicted (not mere commission) by final judgment of an
offense punishable by imprisonment for a period exceeding six (6) years or constituting
a violation of the Code, five (5) years prior to his election of appointment.

NOTE: It is the commission (not the conviction) that must take place within five (5) years
prior to election.

Section 23 (old provision). The board of directors or trustees. - Unless otherwise

provided in this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and
qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this Code must be residents of
the Philippines.

SEC. 23. Election of Directors or Trustees. – Except when the exclusive right is reserved
for holders of founders’ shares under Section 7 of this Code, each stockholder or member shall
have the right to nominate any director or trustee who possesses all of the qualifications and
none of the disqualifications set forth in this Code.

At all elections of directors or trustees, there must be present, either in person or

through a representative authorized to act by written proxy, the owners of majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to
vote. When so authorized in the bylaws or by a majority of the board of directors, the
stockholders or members may also vote through remote communication or in absentia:
Provided, That the right to vote through such modes may be exercised in corporations vested
with public interest, notwithstanding the absence of a provision in the bylaws of such
corporations.

A stockholder or member who participates through remote communication or in

absentia, shall be deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or member.

In stock corporations, stockholders entitled to vote shall have the right to vote the
number of shares of stock standing in their own names in the stock books of the corporation at
the time fixed in the bylaws or where the bylaws are silent, at the time of the election. The said
stockholder may: (a) vote such number of shares for as many persons as there are directors to
be elected; (b) cumulate said shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned; or (c) distribute them on
the same principle among as many candidates as may be seen fit: Provided, That the total
number of votes cast shall not exceed the number of shares owned by the stockholders as
shown in the books of the corporation multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided
in the articles of incorporation or in the bylaws, members of nonstock corporations may cast as
many votes as there are trustees to be elected but may not cast more than one (1) vote for one
(1) candidate. Nominees for directors or trustees receiving the highest number of votes shall be
declared elected.

If no election is held, or the owners of majority of the outstanding capital stock or

majority of the members entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting, such meeting may be
adjourned and the corporation shall proceed in accordance with Section 25 of this Code.
The directors or trustees elected shall perform their duties as prescribed by law, rules of
good corporate governance, and bylaws of the corporation.

Section 27

Section 27. Disqualification of directors, trustees or officers. - No person convicted by

final judgment of an offense punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer of any corporation.

SEC. 26. Disqualification of Directors, Trustees or Officers. – A person shall be

disqualified from being a director, trustee or officer of any corporation if, within five (5) years
prior to the election or appointment as such, the person was:
 (a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”;

(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the

Commission, the primary regulatory agency, or the Philippine Competition Commission may
impose in its promotion of good corporate governance or as a sanction in its administrative
proceedings.

Lee v. Court of Appeals, 205 SCRA 752 (1992)

Directors who transfer all their shares to a trustee under a VTA automatically ceases to
directors of the corporation.
Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for
the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding
five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must
be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange Commission;
Otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the
trustee or trustees stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to
said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect as certificates of stock.

SEC. 58. Voting Trusts. – One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other
rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5) years but shall automatically expire upon full
payment of the loan. A voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such agreement shall be filed with
the corporation and with the Commission; otherwise, the agreement is ineffective and
unenforceable.

The certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees, stating that they
are issued pursuant to said agreement. The books of the corporation shall state that the
transfer in the name of the trustee or trustees is made pursuant to the voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors, voting trust
certificates, which shall be transferable in the same manner and with the same effect as
certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by
any stockholder of the corporation in the same manner as any other corporate book or record:
Provided, That both the trustor and the trustee or trustees may exercise the right of inspection
of all corporate books and records in accordance with the provisions of this Code.

Any other stockholder may transfer the shares to the same trustee or trustees upon the
terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all
the provisions of said agreement.

No voting trust agreement shall be entered into for purposes of circumventing the laws
against anti-competitive agreements, abuse of dominant position, anti-competitive mergers
and acquisitions, violation of nationality and capital requirements, or for the perpetuation of
fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period. The voting trust certificates as well as the
certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the trustors.

The voting trustee or trustees may vote by proxy or in any manner authorized under the
bylaws unless the agreement provides otherwise.

4. ELECTION of DIRECTORS or TRUSTEES

SEC. 23. Election of Directors or Trustees. – Except when the exclusive right
is reserved for holders of founders’ shares under Section 7 of this Code, each
stockholder or member shall have the right to nominate any director or trustee who
possesses all of the qualifications and none of the disqualifications set forth in this
Code.

At all elections of directors or trustees, there must be present, either in person or

through a representative authorized to act by written proxy, the owners of majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members
entitled to vote. When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members may also vote through remote communication or
in absentia: Provided, That the right to vote through such modes may be exercised
in corporations vested with public interest, notwithstanding the absence of a
provision in the bylaws of such corporations.

A stockholder or member who participates through remote communication or in

absentia, shall be deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or member.

In stock corporations, stockholders entitled to vote shall have the right to vote the
number of shares of stock standing in their own names in the stock books of the
corporation at the time fixed in the bylaws or where the bylaws are silent, at the
time of the election. The said stockholder may:
(a) vote such number of shares for as many persons as there are directors to be
elected;
(b) cumulate said shares and give one (1) candidate as many votes as the
number of directors to be elected multiplied by the number of the shares owned; or
(c) distribute them on the same principle among as many candidates as may be
seen fit:
 Provided, That the total number of votes cast shall not exceed the number of
shares owned by the stockholders as shown in the books of the corporation multiplied
by the whole number of directors to be elected:
Provided, however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the bylaws, members of nonstock
corporations may cast as many votes as there are trustees to be elected but may not
cast more than one (1) vote for one (1) candidate. Nominees for directors or trustees
receiving the highest number of votes shall be declared elected.

If no election is held, or the owners of majority of the outstanding capital stock or

majority of the members entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting, such meeting may be
adjourned and the corporation shall proceed in accordance with Section 25 of this
Code.
The directors or trustees elected shall perform their duties as prescribed by law,
rules of good corporate governance, and bylaws of the corporation.

a. Required Attendance at Meeting for Election

(1) Stock corporation - majority of outstanding capital stock

(2) Non-Stock corporation - majority of members entitled to vote

b. Manner of Election

(1) In any form; or

(2) By ballot when requested by any voting stockholder or member;

(3) Voting may be in person or by proxy.

(4) When so authorized in the bylaws or by a majority of the board of directors,

the stockholders or members may also vote through remote communication or in
absentia

(5) The right to vote through remote communication or in absentia may be

exercised in corporations vested with public interest, notwithstanding the
absence of a provision in the bylaws of such corporations.

c. Time to Determine Voting Right

(1) Share standing in one’s name at the time fixed in by-laws.

(2) Where by-laws silent, at time of election.

d. Cumulative Voting
 - Cumulative voting is a type of voting system that helps strengthen the ability of
minority shareholders to elect a director. This method allows shareholders to cast all of
their votes for a single nominee for the board of directors when the company has
multiple openings on its board. In contrast, in "regular" or "statutory" voting,
shareholders may not give more than one vote per share to any single nominee. For
example, if the election is for four directors and you hold 500 shares (with one vote per
share), under the regular method you could vote a maximum of 500 shares for each one
candidate (giving you 2,000 votes total—500 votes per each of the four candidates).
With cumulative voting, you are afforded the 2,000 votes from the start and could
choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or
otherwise divide your votes whichever way you wanted.

The said stockholder may:

(a) vote such number of shares for as many persons as there are directors to be
elected;

(b) cumulate said shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned; or

(c) distribute them on the same principle among as many candidates as may be seen fit:
Provided, That the total number of votes cast shall not exceed the number of shares
owned by the stockholders as shown in the books of the corporation multiplied by the
whole number of directors to be elected. No delinquent stock shall be voted.

e. If no election is held

If no election is held, or the owners of majority of the outstanding capital stock or

majority of the members entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting, such meeting may be
adjourned and the corporation shall proceed in accordance with Section 25 of this
Code.

f. election in non stock corporations

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

nonstock corporations may cast as many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1) candidate. Nominees for directors or
trustees receiving the highest number of votes shall be declared elected.

e. Report of Election of Directors, Trustees and Officers

Within thirty (30) days after the election of the directors, trustees and officers of the
corporation, the secretary, or any other officer of the corporation, shall submit to the
Commission, the names, nationalities, shareholdings, and residence addresses of the directors,
trustees, and officers elected.
 Should a director, trustee or officer die, resign or in any manner cease to hold office, the
secretary, or the director, trustee or officer of the corporation, shall, within seven (7) days from
knowledge thereof, report in writing such fact to the Commission.

f. Report of Non-holding of elections

The non-holding of elections and the reasons therefor shall be reported to the
Commission within thirty (30) days from the date of the scheduled election. The report shall
specify a new date for the election, which shall not be later than sixty (60) days from the
scheduled date.

g. Summary Order for Holding of Elections

If no new date has been designated, or if the rescheduled election is likewise not held,
the Commission may, upon the application of a stockholder, member, director or trustee, and
after verification of the unjustified non-holding of the election, summarily order that an
election be held.

The Commission shall have the power to issue such orders as may be appropriate,
including orders directing the issuance of a notice stating the time and place of the election,
designated presiding officer, and the record date or dates for the determination of stockholders
or members entitled to vote.

Notwithstanding any provision of the articles of incorporation or bylaws to the contrary,

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

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

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

The non-holding of elections and the reasons therefor shall be reported to the
Commission within thirty (30) days from the date of the scheduled election. The report shall
specify a new date for the election, which shall not be later than sixty (60) days from the
scheduled date.

If no new date has been designated, or if the rescheduled election is likewise not held,
the Commission may, upon the application of a stockholder, member, director or trustee, and
after verification of the unjustified non-holding of the election, summarily order that an election
be held. The Commission shall have the power to issue such orders as may be appropriate,
including orders directing the issuance of a notice stating the time and place of the election,
designated presiding officer, and the record date or dates for the determination of stockholders
or members entitled to vote.
Notwithstanding any provision of the articles of incorporation or bylaws to the contrary,
the shares of stock or membership represented at such meeting and entitled to vote shall
constitute a quorum for purposes of conducting an election under this section.
Should a director, trustee or officer die, resign or in any manner cease to hold office, the
secretary, or the director, trustee or officer of the corporation, shall, within seven (7) days from
knowledge thereof, report in writing such fact to the Commission.

Premium Marble Resources V. Court of Appeals, 264 SCRA 11 (1996)

The objective sought to be achieved by Section 26 is to give the public information,

under sanction of oath of responsible officers, of the nature of business, financial
condition and operational status of the company together with information of its key
officers or managers so that those dealing with it and those who intend to do business
with it may know or have the means of knowing facts concerning the corporations
financial resources and business responsibility.

Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27

(2004)

When the names of some of directors who signed the board resolution does not appear
in the GIS filled with SEC, then there is doubt whether they were indeed duly elected
members of the Board legally constituted to bring suit in behalf of the Corporation.

f. No permanent Un-Elected Seat in the Board of Directors

Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009)

Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997)

Any provision in the by-laws or the practice of the corporation giving a stockholder a
permanent seat in the Board of Directors of the corporation would be against the
provision of Section 28 (27 now) and 29 (28 now) of the Corporation Code which require
of the board of corporations to be elected. In addition, Section 23 which provides for the
powers of the Board of Directors expressly requires them “to be elected from among the
holders of stock or when there is no stock, from among the members of the
corporation.”

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. – Any vacancy
occurring in the board of directors or trustees other than by removal or by expiration of term
may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders or members
in a regular or special meeting called for that purpose.
When the vacancy is due to term expiration, the election shall be held no later than the
day of such expiration at a meeting called for that purpose. When the vacancy arises as a result
of removal by the stockholders or members, the election may be held on the same day of the
meeting authorizing the removal and this fact must be so stated in the agenda and notice of
said meeting. In all other cases, the election must be held no later than forty-five (45) days
from the time the vacancy arose. A director or trustee elected to fill a vacancy shall be referred
to as replacement director or trustee and shall serve only for the unexpired term of the
predecessor in office.

However, when the vacancy prevents the remaining directors from constituting a
quorum and emergency action is required to prevent grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may be temporarily filled from among the officers of
the corporation by unanimous vote of the remaining directors or trustees. The action by the
designated director or trustee shall be limited to the emergency action necessary, and the term
shall cease within a reasonable time from the termination of the emergency or upon election of
the replacement director or trustee, whichever comes earlier. The corporation must notify the
Commission within three (3) days from the creation of the emergency board, stating therein the
reason for its creation.

Any directorship or trusteeship to be filled by reason of an increase in the number of

directors or trustees shall be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.

In all elections to fill vacancies under this section, the procedure set forth in Sections 23
and 25 of this Code shall apply.

Valle Verde Country Club v. Africa, 598 SCRA 202 (2009)

During the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc.
(VVCC), the VVCC Board of Directors were elected including Eduardo Makalintal
(Makalintal) among others. In the years 1997, 1998, 1999, 2000, and 2001, however,
the requisite quorum for the holding of the stockholders’ meeting could not be
obtained. Consequently, the directors continued to serve in the VVCC Board in a hold-
over capacity. Later, Makalintal resigned as member of the VVCC Board. He was
replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of
the VVCC Board. Respondent Africa (Africa), a member of VVCC, questioned the
election of Ramirez as members of the VVCC Board with the Regional Trial Court
(RTC), respectively. Africa claimed that a year after Makalintal’s election as member of
the VVCC Board in 1996, his [Makalintal’s] term – as well as those of the other
members of the VVCC Board – should be considered to have already expired. Thus,
according to Africa, the resulting vacancy should have been filled by the stockholders in
a regular or special meeting called for that purpose, and not by the remaining members
of the VVCC Board, as was done in this case. The RTC sustained Africa’s complaint.
ISSUE

Whether the remaining directors of the corporation’s Board, still constituting a quorum,
can elect another director to fill in a vacancy caused by the resignation of a hold-over
director?

RULING
NO.

When Section 23 of the Corporation Code declares that “the board of directors…shall
hold office for one (1) year until their successors are elected and qualified,” we construe
the provision to mean that the term of the members of the board of directors shall
be only for one year; their term expires one year after election to the office. The
holdover period – that time from the lapse of one year from a member’s election to the
Board and until his successor’s election and qualification – is not part of the director’s
original term of office, nor is it a new term; the holdover period, however, constitutes
part of his tenure. Corollary, when an incumbent member of the board of directors
continues to serve in a holdover capacity, it implies that the office has a fixed
term, which has expired, and the incumbent is holding the succeeding term.

[Here], when remaining members of the VVCC Board elected Ramirez to replace
Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-year
term had already expired. Pursuant to law, the authority to fill in the vacancy caused by
Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its
board of directors. To assume – as VVCC does – that the vacancy is caused by
Makalintal’s resignation in 1998, not by the expiration of his term in 1997, is both
illogical and unreasonable. His resignation as a holdover director did not change the
nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had been
created long before his resignation.

VVCCs construction of Section 29 of the Corporation Code on the authority to fill up

vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens
the stockholders power to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the directing and
controlling body of the corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board should exercise
not only care and diligence, but utmost good faith in the management of corporate
affairs.

Barayuga v. Adventist University of the Philippines, 655 SCRA 640 (2011)

A trustee occupying his office in a holdover capacity could be removed at any time,
without cause, upon the election or appointment of his successor.

Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009)

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.

This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations
board of directors is caused not by the expiration of a members term, the successor so
elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office. The law has authorized the remaining members of the board to fill
in a vacancy only in specified instances, so as not to retard or impair the corporations
operations; yet, in recognition of the stockholders right to elect the members of the
board, it limited the period during which the successor shall serve only to the unexpired
term of his predecessor in office.

h. “Tenure” versus “Term of Office”

Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009)

The word term has acquired a definite meaning in jurisprudence. In several cases, we
have defined term as the time during which the officer may claim to hold the office
as of right, and fixes the interval after which the several incumbents shall succeed one
another. The term of office is not affected by the holdover. The term is fixed by
statute and it does not change simply because the office may have become vacant, nor
because the incumbent holds over in office beyond the end of the term due to the fact
that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officers tenure represents the term
during which the incumbent actually holds office. The tenure may be shorter (or, in
case of holdover, longer) than the term for reasons within or beyond the power of the
incumbent.

Based on the above discussion, when Section 23 of the Corporation Code declares that
the board of directors shall hold office for one (1) year until their successors are elected
and qualified, we construe the provision to mean that the term of the members of the
board of directors shall be only for one year; their term expires one year after
election to the office. The holdover period that time from the lapse of one year from a
members election to the Board and until his successors election and qualification is not
part of the directors original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an incumbent member of the
board of directors continues to serve in a holdover capacity, it implies that the office
has a fixed term, which has expired, and the incumbent is holding the succeeding
term.

Removal of Directors

a. Vote Required.

Any director or trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock,
or in a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to
vote

b. Meeting and Notice of Meeting

Such removal shall take place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous notice to stockholders or
members of the corporation of the intention to propose such removal at the meeting.

c. Who may call Special Meeting

A special meeting of the stockholders or members for the purpose of removing any director
or trustee must be called by the secretary on order of the president, or upon written demand
of the stockholders representing or holding at least a majority of the outstanding capital stock,
or a majority of the members entitled to vote.
If there is no secretary, or if the secretary, despite demand, fails or refuses to call the special
meeting or to give notice thereof, the stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the stockholders or members. Notice
of the time and place of such meeting, as well as of the intention to propose such removal,
must be given by publication or by written notice prescribed in this Code.

d. Removal with or without cause.

Removal may be with or without cause: Provided, That removal without cause may not be used
to deprive minority stockholders or members of the right of representation to which they may
be entitled under Section 23 of this Code.

e. Removal by Commission

The Commission shall, motu proprio or upon verified complaint, and after due notice and
hearing, order the removal of a director or trustee elected despite the disqualification, or
whose disqualification arose or is discovered subsequent to an election. The removal of a
disqualified director shall be without prejudice to other sanctions that the Commission may
impose on the board of directors or trustees who, with knowledge of the disqualification, failed
to remove such director or trustee.

SEC. 27. Removal of Directors or Trustees. – Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding
capital stock, or in a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of
the intention to propose such removal at the meeting.

A special meeting of the stockholders or members for the purpose of removing any director or trustee
must be called by the secretary on order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or a majority of the members entitled
to vote.
If there is no secretary, or if the secretary, despite demand, fails or refuses to call the special meeting or
to give notice thereof, the stockholder or member of the corporation signing the demand may call for the
meeting by directly addressing the stockholders or members. Notice of the time and place of such meeting, as
well as of the intention to propose such removal, must be given by publication or by written notice prescribed in
this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to
deprive minority stockholders or members of the right of representation to which they may be entitled under
Section 23 of this Code.

The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order
the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is
discovered subsequent to an election. The removal of a disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee.

Raniel v. Jochicho, 517 SCRA 221 (2007)

In this case, petitioner Raniel was removed as a corporate officer through the resolution
of Nephro's Board of Directors adopted in a special meeting on February 2, 1998. As
correctly ruled by the SEC, petitioners' removal was a valid exercise of the powers of
Nephro's Board of Directors.

Petitioners do not dispute that the stockholders' meeting was held in accordance with
Nephro's By-Laws.
The ownership of Nephro's outstanding capital stock is distributed as follows:

Jochico - 200 shares;

Steffens - 100 shares;
Viriya - 100 shares;
 Raniel - 75 shares; and
Pag-ong - 25 shares, or a total of 500 shares.

A two-thirds vote of Nephro's outstanding capital stock would be 333.33 shares, and
during the Stockholders' Special Meeting held on February 16, 1998, 400 shares voted
for petitioners' removal. Said number of votes is more than enough to oust petitioners
from their respective positions as members of the board, with or without cause.

Velarde v. Lopez, 419 SCRA 422 (2004)

Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code)
applies to a corporate officers’ dismissal. For a corporate officers dismissal is always a
corporate act and/or an intra-corporate controversy and that its nature is not altered by
the reason or wisdom which the Board of Directors may have in taking such action.

With regard to petitioners claim for unpaid salaries, unpaid share in net income,
reasonable return on the stock ownership plan and other benefits for services rendered
to Sky Vision, jurisdiction thereon pertains to the Securities Exchange Commission even
if the complaint by a corporate officer includes money claims since such claims are
actually part of the prerequisite of his position and, therefore, interlinked with his
relations with the corporation. The question of remuneration involving a person who is
not a mere employee but a stockholder and officer of the corporation is not a simple
labor problem but a matter that comes within the area of corporate affairs and
management, and is in fact a corporate controversy in contemplation of the Corporation
Code.

6. Vacancies in Board - Vacancy resulting from removal pursuant to Section 27

may be filled by election at the same meeting without further notice, or at any regular or
any special meeting called for the purpose, after giving notice.

Any vacancy occurring in the Board of Directors or trustees other than by removal by
the stockholders or members or by expiration of term, may be filled:

(a) If still constituting quorum, by the vote of at least a majority of the remaining
directors or trustees;

(b) Otherwise, said vacancies must be filled by the stockholders in a regular of

special meeting called for the purpose.

A director or trustee so elected to fill a vacancy shall only be for the unexpired term of
his predecessor in office.

Tan v. Sycip, 499 SCRA 216 (2006)

The By-laws of the corporation provides expressly that specific mode of filling up
existing vacancies in the board of directors: by majority vote of the remaining members
of the Board. Can the vacancies be filled-up by majority vote of the members in a
membership meeting called for the purpose?

Held. No. The remaining member-trustees must sit as a board in order to validly elect
the new ones. There is a well-defined distinction between a corporate act to be done by
the board and that by the constituent members of the corporation. The board of
directors, must act, not individually or separately, but as a body in a lawful meeting.

a. Increase in Board Seats

- may be filled only by an election at a regular or at a special meeting of stockholders or

members duly called for the purpose, or in the same meeting authorizing the increase of
directors or trustees, if so stated in the notice of the meeting.

7. MEETINGS OF THE BOARD

MEETINGS

SEC. 48. Kinds of Meetings. – Meetings of directors, trustees, stockholders, or members

may be regular or special.

SEC. 52. Regular and Special Meetings of Directors or Trustees; Quorum. – Unless the
articles of incorporation or the bylaws provides for a greater majority, a majority of the
directors or trustees as stated in the articles of incorporation shall constitute a quorum to
transact corporate business, and every decision reached by at least a majority of the directors
or trustees constituting a quorum, except for the election of officers which shall require the
vote of a majority of all the members of the board, shall be valid as a corporate act.

Regular meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the bylaws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon the
call of the president or as provided in the bylaws.

Meetings of directors or trustees of corporations may be held anywhere in or outside of

the Philippines, unless the bylaws provide otherwise. Notice of regular or special meetings
stating the date, time and place of the meeting must be sent to every director or trustee at
least two (2) days prior to the scheduled meeting, unless a longer time is provided in the
bylaws. A director or trustee may waive this requirement, either expressly or impliedly.
 Directors or trustees who cannot physically attend or vote at board meetings can
participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them reasonable
opportunities to participate. Directors or trustees cannot attend or vote by proxy at board
meetings.

A director or trustee who has a potential interest in any related party transaction must
recuse from voting on the approval of the related party transaction without prejudice to
compliance with the requirements of Section 31 of this Code.

SEC. 53. Who Shall Preside at Meetings. – The chairman or, in his absence, the
president shall preside at all meetings of the directors or trustees as well as of the stockholders
or members, unless the bylaws provide otherwise.

Section 48

Kinds of Meetings.

Meetings of directors, trustees, stockholders, or members may be regular or special.

A director or trustee who has a potential interest in any related party transaction must
recuse from voting on the approval of the related party transaction without prejudice to
compliance with the requirements of Section 31 of this Code.

a. Types of Board Meetings

(1) Regular meetings - shall be held monthly, unless the by-laws provide otherwise.

(2) Special meetings - may be held at any time upon the call of the president or as
provided in the by-laws.

b. Notice

Notice of regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly.

c. Place of Meetings
Meetings of directors or trustees of corporations may be held anywhere in or outside of
the Philippines, unless the by-laws provide otherwise.

d. Quorum of Board

SEC. 52. Regular and Special Meetings of Directors or Trustees; Quorum. – Unless the
articles of incorporation or the bylaws provides for a greater majority, a majority of the
directors or trustees as stated in the articles of incorporation shall constitute a quorum to
transact corporate business, and every decision reached by at least a majority of the directors
or trustees constituting a quorum, except for the election of officers which shall require the
vote of a majority of all the members of the board, shall be valid as a corporate act.

e. Requisites of Board Meetings

(1) Meeting of the Board duly assembled;

(2) Existence of quorum (majority of the board of members); and
(3) Decisions of the majority of the quorum duly assembled.
(4) Directors or trustees who cannot physically attend or vote at board meetings can
participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them reasonable
opportunities to participate.

A director or trustee who has a potential interest in any related party transaction must
recuse from voting on the approval of the related party transaction without prejudice to
compliance with the requirements of Section 31 of this Code.

e. Who Shall Preside at Meetings.

Section 53
– The chairman or, in his absence, the president shall preside at all meetings of the directors or
trustees as well as of the stockholders or members, unless the bylaws provide otherwise.

Directors or trustees cannot attend or vote by proxy at board meetings.

Calica v. Labatique, (CA) 55 OG 647

A resolution to be valid must be passed by the Board of Directors acting as a body in a

meeting. They cannot act upon it individually, if they do so, the resolution is null.

f. Teleconferencing

Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147 (2005)
In the Philippines, teleconferencing and videoconferencing of members of the board of
directors of private corporations is a reality in light of R.A. 8792. The SEC issued
Memorandum Circular No. 15 (30 November 2001), providing the guidelines to be
complied with related to such conferences.

g. Minutes of Board Meetings

People v. Dumlao, 580 SCRA 409 (2009)

Signature of the Corporate Secretary alone (and not all members of the Board) gives
the minutes probative value and credibility.

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

The minutes of the meeting of 23 April 1982 were prepared by the Deputy Corporate
Secretary of the GSIS Board of Trustees. Having been made by a public officer, the
minutes carry the presumption of regularity in the performance of his functions and
duties. Moreover, the entries contained in the minutes are prima facie evidence of what
actually took place during the meeting, pursuant to Section 44, Rule 130 of the Revised
Rule on Evidence.

We agree with petitioner that the Sandiganbayan erred in equating the minutes of the
meeting with the supposed resolution of the GSIS Board of Trustees. A resolution is
distinct and different from the minutes of the meeting. A board resolution is a formal
action by a corporate board of directors or other corporate body authorizing a particular
act, transaction, or appointment. It is ordinarily special and limited in its operation,
applying usually to some single specific act or affair of the corporation; or to some
specific person, situation or occasion. On the other hand, minutes are a brief statement
not only of what transpired at a meeting, usually of stockholders/members or
directors/trustees, but also at a meeting of an executive committee. The minutes are
usually kept in a book specially designed for that purpose, but they may also be kept in
the form of memoranda or in any other manner in which they can be identified as
minutes of a meeting.

The Sandiganbayan concluded that since only three members out of seven signed the
minutes of the meeting of 23 April 1982, the resolution approving the Lease-Purchase
Agreement was not passed by the GSIS Board of Trustees. Such conclusion is
erroneous. The non-signing by the majority of the members of the GSIS Board of
Trustees of the said minutes does not necessarily mean that the supposed resolution
was not approved by the board. The signing of the minutes by all the members of the
board is not required. There is no provision in the Corporation Code of the Philippines
that requires that the minutes of the meeting should be signed by all the members of the
board.

8. COMPENSATION OF DIRECTORS

Section 30

Compensation of directors. - In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors,
except for reasonable per diems:

Provided, however, That any such compensation other than per diems may be granted
to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such directors, exceed ten (10%) percent
of the net income before income tax of the corporation during the preceding year.

SEC. 29. Compensation of Directors or Trustees. – In the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any compensation, as
such directors, except for reasonable per diems:

Provided, however, That any such compensation other than per diems may be granted
to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such directors, exceed ten (10%) percent
of the net income before income tax of the corporation during the preceding year.

Directors or trustees shall not participate in the determination of their own per diems or
compensation.

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

Singson v. Commission on Audit, 627 SCRA 36 (2010)11

11
The Court upholds the findings of respondent that petitioners right to compensation as members of the
PICCI Board of Directors is limited only to per diem of P1,000.00 for every meeting attended, by virtue of
Section 8 of the Amended By-Laws of PICCI, in consonance with Section 30 (now
Section 29) of the Corporation Code, restricted the scope of petitioners compensation
by fixing their per diem at P1,000.00:

Sec. 8. Compensation. Directors, as such, shall not receive any salary for their services
but shall receive a per diem of one thousand pesos (P1,000.00) per meeting actually
attended; Provided, that the Board of Directors at a regular and special meeting may
increase and decrease, as circumstances shall warrant, such per diems to be received.
Nothing herein contained shall be construed to preclude any director from serving the
Corporation in any capacity and receiving compensation therefor.

The nomenclature for the compensation of the directors used herein is per diems, and
not salary or any other words of similar import. Thus, petitioners are allowed to receive
only per diems of P1,000.00 for every meeting that they actually attended. However, the
Board of Directors may increase or decrease the amount of per diems, when the
prevailing circumstances shall warrant. No other compensation may be given to them,
except only when they serve the corporation in another capacity.

Western Institute of Technology v. Salas, 278 SCRA 216 (1997)12

There is no argument that directors or trustees, as the case may be, are not entitled to

the PICCI By-Laws. In the same vein, we also clarify that there has been no double compensation despite
the fact that, apart from the RATA they have been receiving from the BSP, petitioners have been granted
the RATA of P1,500.00 for every board meeting they attended, in their capacity as members of the Board
of Directors of PICCI, pursuant to MB Resolution No. 15 dated January 5, 1994, as amended by MB
Resolution No. 34 dated January 12, 1994, of the Bangko Sentral ng Pilipinas. In this regard, we take into
consideration the good faith of petitioners.
12
This Court finds that under the Eleventh Article (Exh. 3-D-1) of the Articles of Incorporation (Exh. 3-B) of
the Panay Educational Institution, Inc., now the Western Institute of Technology, Inc., the officers of the
corporation shall receive such compensation as the Board of Directors may provide. These Articles of
Incorporation was adopted on May 17, 1957 (Exh. 3-E). The Officers of the corporation and their
corresponding duties are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of the Amended By-
Laws of the Corporation (Exh. 4-A) which was adopted on May 31, 1957. According to Sec. 6, Art. III of
the same By-Laws, all officers shall receive such compensation as may be fixed by the Board of
Directors.
It is the perception of this Court that the grant of compensation or salary to the accused in their capacity
as officers of the corporation, through Resolution No. 48, enacted on March 30, 1986 by the Board of
Trustees, is authorized by both the Articles of Incorporation and the By-Laws of the Corporation. To state
otherwise is to depart from the clear terms of the said articles and by-laws. In their defense the accused
have properly and rightly asserted that the grant of salary is not for directors, but for their being officers of
the corporation who oversee the day to day activities and operations of the school.
xxx xxx xxx
xxx [O]n the question of whether or not the accused can be held liable for estafa under Sec. 1 (b) of Art.
315 of the Revised Penal Code, it is perceived by this Court that the receipt and the holding of the money
by the accused as salary on basis of the authority granted by the Articles and By-Laws of the corporation
are not tainted with abuse of confidence. The money they received belongs to them and cannot be said to
have been converted and/or misappropriated by them.
salary or other compensation when they perform nothing more than the usual and
ordinary duties of their office. This rule is founded upon a presumption that directors
/trustees render service gratuitously and that the return upon their shares adequately
furnishes the motives for service, without compensation.

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

This proscription, however, against granting compensation to directors/trustees of a

corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30
which states: xxx [T]he directors shall not receive any compensation, as such directors,
xxx. The phrase as such directors is not without significance for it delimits the scope of
the prohibition to compensation given to them for services performed purely in their
capacity as directors or trustees. The unambiguous implication is that members of the
board may receive compensation, in addition to reasonable per diems, when they
render services to the corporation in a capacity other than as directors/trustees.

In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to
private respondents not in their capacity as members of the board, but rather as officers
of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and
Secretary of Western Institute of Technology.

Clearly, therefore, the prohibition with respect to granting compensation to corporate

directors/trustees as such under Section 30 is not violated in this particular case.

Central Cooperative Exchange v. Enciso, 162 SCRA 706 (1988)

Since it is the stockholders who have the power to set such Board compensation, the
resolution of the board of directors setting their compensation is void.

9. EXECUTIVE COMMITTEE

SEC. 34. Executive, Management, and Other Special Committees. – If the bylaws so
provide, the board may create an executive committee composed of at least three (3) directors.

Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-laws or on a
majority vote of the board, except with respect to:

(1) approval of any action for which shareholders' approval is also required;

(2) the filing of vacancies in the board;

(3) the amendment or repeal of by-laws or the adoption of new by-laws;

(4) the amendment or repeal of any resolution of the board which by its express terms
is not so amendable or repealable; and

(5) a distribution of cash dividends to the shareholders.

Filipinas Port Services v. NLRC, 177 SCRA 203 (1989)

Notwithstanding the silence in Filport’s by-laws, We cannot rule that the creation of the
executive committee by the board of directors is illegal or unlawful.

10. CORPORATE OFFICERS

a. Who are “Corporate Officers”?

Immediately after their election, the directors of a corporation must formally organize
and elect:

(1) a president, who shall be a director,

(2) a treasurer who may or may not be a director,

(3) a secretary who shall be a resident and citizen of the Philippines, and

(4) such other officers as may be provided for in the by-laws.

(5) If the corporation is vested with public interest, the board shall also elect a compliance officer.

Any two (2) or more positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and treasurer at the same
time.

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

Unless otherwise provided in the articles of incorporation or the by-laws, officers of a

non-stock corporation may be directly elected by the members. (Section 91)

(1) Coverage of “Corporate Officer” under the Business Judgment Power of

the Board to Hire and Fire

Gurrea v. Lezama, 105 Phil. 553 (1958)

Section 33 (now Section 24) of the Corporation Law provides: "Immediately after the
election, the directors of a corporation must organize by the election of a president, who
must be one of their number, a secretary or clerk who shall be a resident of the
Philippines . . . and such other officers as may be provided for in the by-laws."

The by-laws of the instant corporation in turn provide that in the board of directors there
shall be a president, a vice-president, a secretary and a treasurer. These are the only
ones mentioned therein as officers of the corporation. The manager is not included
although the latter is mentioned as the person in whom the administration of the
corporation is vested, and with the exception of the president, the by-laws provide that
the officers of the corporation may be removed or suspended by the affirmative vote of
2/3 of the corporation (Exhibit A).
From the above the following conclusion is clear: that we can only regard as officers of
a corporation those who are given that character either by the Corporation Law or by its
by-laws. The rest can be considered merely as employees or subordinate officials.

And considering that plaintiff has been appointed manager by the board of directors and
as such does not have the character of an officer, the conclusion is inescapable that he
can be suspended or removed by said board of directors under such terms as it may
see fit and not as provided for in the by-laws. Evidently, the power to appoint carries
with it the power to remove, and it would be incongruous to hold that having been
appointed by the board of directors he could only be removed by the stockholders.

Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982)

Executive Secretary is not a corporate officer.

Ongkiko v. NLRC, 270 SCRA 613 (1982)

“Superintendent/Administrator” is a corporate officer position because it is provided for

in by-laws.
 WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010)

Since the by-laws of the company provided for only one position of Vice-President
which was already filled-up, the appointment of another vice-president in a special
meeting of the board of directors did not constitute the appointee a corporate officer.

Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12(2010)

By-laws provide expressly that the Board of Directors “shall have full power to create
new offices and to appoint the officers thereto.”

Any office created, and any officer appointed pursuant to such clause does not become
a corporate officer, but is an employee and the determination of the rights and liabilities
relating to his removal are within the jurisdiction of the NLRC.

Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011)

The Board of Directors has no power to create other corporate offices without first
amending the by-laws so as to include therein the newly created corporate offices.

Pamplona Plantation Company v. Acosta, 510 SCRA 249 (2006)

A mere manager not so named in the by-laws is not an officer of the corporation.

Gomez v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009)

Corporate officers are elected or appointed by the director or stockholders, and are
those who are given that character either by the Corporation Code or by the
corporation’s by-laws. A corporation is not prohibited from hiring a corporate officer to
perform services under the circumstances which will make him an employee.

Okol v. Slimmers World International, 608 SCRA 97 (2009)

A corporate officer’s dismissal is always a corporate act, an intra-corporate controversy

which arises between a stockholder and a corporation.

Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009)

A corporate officer’s removal is an intra-corporate controversy cognizable by RTC and

not by SEC.

b. Doctrine of the Powers of the Corporate Officers to Bind the

Corporation

Section 22
 Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010)13

Section 22 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. The power and the
responsibility to decide whether the corporation should enter into a contract that will
bind the corporation are lodged in the board, subject to the articles of incorporation,
bylaws, or relevant provisions of law. In the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation.

However, just as a natural person may authorize another to do certain acts for and on
his behalf, the board of directors may validly delegate some of its functions and powers
to its officers, committees or agents. The authority of these individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the
board, either expressly or impliedly by habit, custom or acquiescence in the general
course of business.

The authority of a corporate officer or agent in dealing with third persons may be actual
or apparent. Actual authority is either express or implied. The extent of an agents
express authority is to be measured by the power delegated to him by the corporation,
while the extent of his implied authority is measured by his prior acts which have been
ratified or approved, or their benefits accepted by his principal. The doctrine of apparent
authority, on the other hand, with special reference to banks, had long been recognized
in this jurisdiction.

The existence of apparent authority may be ascertained through:

(1) the general manner in which the corporation holds out an officer or agent
as having the power to act, or in other words, the apparent authority to act in general,
with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his ordinary powers.

Accordingly, the authority to act for and to bind a corporation may be presumed
from acts of recognition in other instances when the power was exercised without any
objection from its board or shareholders.

13
Whether the purported agreement between the petitioners and Mondigo novated the mortgage
contract over the subject properties and is thus binding upon PCRB?

Notably, the petitioners action for specific performance is premised on the supposed actual or
apparent authority of the branch manager, Mondigo, to release the subject properties from the mortgage,
although the other obligations remain unpaid. In light of our discussion above, proof of the branch
managers authority becomes indispensable to support the petitioners contention. The petitioners make no
claim that Mondigo had actual authority from PCRB, whether express or implied. Rather, adopting the trial
courts observation, the petitioners posited that PCRB should be held liable for Mondigos commitment, on
the basis of the latters apparent authority.
 Associated Bank v. Pronstroller, 558 SCRA 113 (2008)14

Naturally, the third person has little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents in accordance with law. What
transpires in the corporate board room is entirely an internal matter. Hence, petitioner
may not impute negligence on the part of the respondents in failing to find out the scope
of Atty. Solutas authority. Indeed, the public has the right to rely on the trustworthiness
of bank officers and their acts.

c. Corporate Officers’ Privileges

Kwok v. Philippine Corporate Manufacturing Corp., 457 SCRA 465 (2005)

d. The President

H.R. Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004)15

When the records of the case are bereft of any evidence that an officer acted in bad
faith with gross or inexcusable negligence, or that he acted outside the scope of his

14
As early as June 1993, or prior to the 90-day period within which to make the full payment, respondents
already requested a modification of the earlier agreement such that the full payment should be made
upon receipt of this Courts decision confirming petitioners right to the subject property. The matter was
brought to the petitioners attention and was in fact discussed by the members of the Board. Instead of
acting on said request (considering that the 90-day period was about to expire), the board deferred action
on the request. It was only after one year and after the banks reorganization that the board rejected
respondents request. We cannot therefore blame the respondents in relying on the July 14, 1993 Letter-
Agreement. Petitioners inaction, coupled with the apparent authority of Atty. Soluta to act on behalf of the
corporation, validates the July 14 agreement and thus binds the corporation. All these taken together,
lead to no other conclusion than that the petitioner attempted to defraud the respondents. This is
bolstered by the fact that it forged another contract involving the same property, with another buyer, the
spouses Vaca, notwithstanding the pendency of the instant case.

We would like to emphasize that if a corporation knowingly permits its officer, or any other agent, to
perform acts within the scope of an apparent authority, holding him out to the public as possessing power
to do those acts, the corporation will, as against any person who has dealt in good faith with the
corporation through such agent, be estopped from denying such authority.
15
Section 30. Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the corporation.
authority as company president, he cannot be held liable under Section 31 (now Section
30) of the Corporation Code.

Secosa v. Heirs of Erwin Suarez Francisco, 433 SCRA 273 (2004)

The President of the corporation which becomes liable for the accident caused by its
truck driver cannot be held solidarily liable for the judgment obligation arising from
quasi-delict, since the fact along of being President is not sufficient to hold solidarily
liable for the liabilities adjudged against the corporation and its employee.

Rovels Enterprises, Inc. v. Ocampo, 392 SCRA 176 (2002)

The President of a corporation is considered as the corporation’s agent, and as such,

his knowledge of the repeal of a resolution in another juridical person in which his
corporation has an interest, is ascribed to his principal under the theory of imputed
knowledge.

Safic Alcan & Cie v. Imperial Vegetable Oil Co., 355 SCRA 559 (2001)

It can be clearly seen from the foregoing provision of IVOs By-laws that Monteverde had
no blanket authority to bind IVO to any contract. He must act according to the
instructions of the Board of Directors. Even in instances when he was authorized to act
according to his discretion, that discretion must not conflict with prior Board orders,
resolutions and instructions. The evidence shows that the IVO Board knew nothing of
the 1986 contracts and that it did not authorize Monteverde to enter into speculative
contracts.

In fact, Monteverde had earlier proposed that the company engage in such transactions
but the IVO Board rejected his proposal. Since the 1986 contracts marked a sharp
departure from past IVO transactions, Safic should have obtained from Monteverde the
prior authorization of the IVO Board. Safic can not rely on the doctrine of implied agency
because before the controversial 1986 contracts, IVO did not enter into identical
contracts with Safic. The basis for agency is representation and a person dealing with
an agent is put upon inquiry and must discover upon his peril the authority of the agent.
In the case of Bacaltos Coal Mines v. Court of Appeals, we elucidated the rule on
dealing with an agent thus:

Every person dealing with an agent is put upon inquiry and must discover upon his peril
the authority of the agent. If he does not make such inquiry, he is chargeable with
knowledge of the agents authority, and his ignorance of that authority will not be any
excuse. Persons dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the principal, to
ascertain not only the fact of the agency but also the nature and extent of the authority,
and in case either is controverted, the burden of proof is upon them to establish it.
The most prudent thing petitioner should have done was to ascertain the extent of the
authority of Dominador Monteverde. Being remiss in this regard, petitioner can not seek
relief on the basis of a supposed agency.

e. Vice-President

Ilusorio v. Ilusorio, 540 SCRA 182 (2007)

The Vice-President and Assistant Vice-President of a corporation, as such officers,

would, ostensibly, have the right and authority to freely enter and perform acts of
maintenance of the office premises, which right includes breaking upon the door and
replacing its locks,

f. Corporate Secretary

Civil Service Commission v. Javier, 546 SCRA 485 (2008)

The position of Corporate Secretary of GSIS is confidential.

Lim Tay v. Court of Appeals, 293 SCRA 634 (1998)16

16
On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the petitioner in the amount of
P40,000 payable within six (6) months. To secure the payment of the aforesaid loan and interest thereon,
Respondent Guiok executed a Contract of Pledge in favor of the petitioner whereby he pledged his three
hundred (300) shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake.
Respondent Guiok obliged himself to pay interest on said loan at the rate of 10% per annum from the
date of said contract of pledge. On the same date, Alfonso Sy Lim secured a loan from the petitioner in
the amount of P40,000 payable in six (6) months. To secure the payment of his loan, Sy Lim executed a
"Contract of Pledge" covering his three hundred (300) shares of stock in Respondent Corporation. Under
said contract, Sy Lim obliged himself to pay interest on his loan at the rate of 10% per annum from the
date of the execution of said contract.
Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim covenanted, inter alia, that:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the
date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock
hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at
which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized
and empowered at his option to transfer the said shares of stock on the books of the corporation to his
own name and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the
said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and
interest, in the manner hereinabove provided;
4. In the event of the foreclosure of this pledge and the sale of the pledged certificate, any surplus
remaining in the hands of the PLEDGEE after the payment of the said sum and interest, and the
expenses, if any, connected with the foreclosure sale, shall be paid by the PLEDGEE to the PLEDGOR;
5. Upon payment of the said amount and interest in full, the PLEDGEE will, on demand of the PLEDGOR,
redeliver to him the said shares of stock by surrendering the certificate delivered to him by the PLEDGOR
or by retransferring each share to the PLEDGOR, in the event that the PLEDGEE, under the option
hereby granted, shall have caused such shares to be transferred to him upon the books of the issuing
company."(idem, supra)
Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same
The duty of a corporate secretary to record transfers of stocks is ministerial. However,
he cannot be compelled to do so when the transferee's title to said shares has no prima
facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale,
does not acquire ownership rights over the pledged shares and thus cannot compel the
corporate secretary to record his alleged ownership of such shares on the basis merely
of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute
when a party's claim to being a shareholder is, on the face of the complaint, invalid or
inadequate or is otherwise negated by the very allegations of such complaint.
Mandamus will not issue to establish a right, but only to enforce one that is already
established.

Esguerra v. Court of Appeals, 267 SCRA 380 (1997)

When a Secretary’s Certificate is regular on its face, it cannot be relied upon by a third
part who does not have to investigate the truths of the facts contained in such
certification; otherwise, business transactions of corporations would become tortuously
slow and unnecessarily hampered.

Francisco V. GSIS, 7 SCRA 577 (1963)17

When the Corporate Secretary, who is a responsible corporate officer, makes a

mistake, or does an act contrary to the resolution passed by the Board, the corporation
will be bound by such act to bind the corporation to an innocent third party who acted in
good faith.

g. Corporate Treasurer/Comptroller

to the [p]etitioner.
However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests
thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed a "Petition for Mandamus" against
Respondent Corporation, with the SEC entitled "Lim Tay versus Go Fay & Company. Inc., SEC Case No.
03894", praying that:
PRAYER
WHEREFORE, premises considered, it is respectfully prayed that an order be issued directing the
corporate secretary of [R]espondent Go Fay & Co., Inc. to register the stock transfers and issue new
certificates in favor of Lim Tay. It is likewise prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to
pay all dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay.
Plaintiff further prays for such other relief just and equitable in the premises. ( page 34, Rollo)
17
We find no reason for altering the conclusion reached by the court below that the offer of compromise
made by plaintiff in the letter, Exhibit "A", had been validly accepted, and was binding on the defendant.
The terms of the offer were clear, and over the signature of defendant's general manager, Rodolfo Andal,
plaintiff was informed telegraphically that her proposal had been accepted. There was nothing in the
telegram that hinted at any anomaly, or gave ground to suspect its veracity, and the plaintiff, therefore,
can not be blamed for relying upon it. There is no denying that the telegram was within Andal's apparent
authority, but the defense is that he did not sign it, but that it was sent by the Board Secretary in his name
and without his knowledge. Assuming this to be true, how was appellee to know it? Corporate
transactions would speedily come to a standstill were every person dealing with a corporation held duty-
bound to disbelieve every act of its responsible officers, no matter how regular they should appear on
their face.
 San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998)

Treasurer is not authorized to sell land. Unless duly authorized, a treasurer, whose
powers are limited, cannot bind the corporation in a sale of its assets.

Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001)

h. External Auditor

Visitacion v. Libre, 459 SCRA 398 (2005)

Judicially appointed external auditors need not be accredited by SEC.

Bank of P.I. v. Casa Montessori Internationale, 430 SCRA 261 (2004)

The major purpose of an independent audit is to investigate and determine objectively if

the financial statements submitted for audit by a corporation have been prepared in
accordance with the appropriate financial reporting practices of private entities. The
relationship that arises therefrom is both legal and moral. It begins with the execution of
the engagement letter that embodies the terms and conditions of the audit and ends with
the fulfilled expectation of the auditors ethical and competent performance in all aspects
of the audit.

The financial statements are representations of the client; but it is the auditor who has
the responsibility for the accuracy in the recording of data that underlies their
preparation, their form of presentation, and the opinion expressed therein. The auditor
does not assume the role of employee or of management in the clients conduct of
operations and is never under the control or supervision of the client.

Yabut was an independent auditor hired by CASA. He handled its monthly bank
reconciliations and had access to all relevant documents and checkbooks. In him was
reposed the clients trust and confidence that he would perform precisely those functions
and apply the appropriate procedures in accordance with generally accepted auditing
standards. Yet he did not meet these expectations. Nothing could be more horrible to a
client than to discover later on that the person tasked to detect fraud was the same one
who perpetrated it.

j. Manager or General Manager

Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010)

Being a branch manager alone is insufficient to support the conclusion that he has been
clothed with “apparent authority” to verbally alter terms of the bank’s written contract,
such as the mortgage contract.
 Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000)18

When a bank, by its acts and failure to act, has clearly clothed its manger with apparent
authority to sell an acquired asset in the normal course of business, it is legally obliged
to confirm the transactions by issuing a board resolution to enable the buyers to register
the property in their names.

11. DUTIES OF DIRECTORS, TRUSTEES OR OFFICERS

SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

18
The evidence presented by the respondents through the testimony of Marife O. Niño, shows that she is
the daughter of Francisca Ocfemia and the late Renato Ocfemia who died on July 23, 1994. The parents
of her father, Renato Ocfemia, were Juanita Arellano Ocfemia and Felicisimo Ocfemia.

Marife O. Niño knows the five (5) parcels of land which are located in Bombon, Camarines Sur and that
they are the ones possessing them which were originally owned by her grandparents. During the lifetime
of her grandparents, respondents mortgaged the said five (5) parcels of land and two (2) others to the
Rural Bank of Milaor.

The spouses Felicisimo Ocfemia and Juanita Arellano Ocfemia were not able to redeem the mortgaged
properties consisting of 7 parcels of land and so the mortgage was foreclosed and thereafter ownership
thereof was transferred to the bank. Out of the 7 parcels that were foreclosed, 5 of them are in the
possession of the respondents because these 5 parcels of land were sold by the bank to the parents of
Marife O. Niño as evidenced by a Deed of Sale executed in January 1988.

The aforementioned 5 parcels of land subject of the deed of sale, have not been, however transferred in
the name of the parents of Merife O. Niño after they were sold to her parents by the bank because
according to the Assessor's Office the five (5) parcels of land, subject of the sale, cannot be transferred in
the name of the buyers as there is a need to have the document of sale registered with the Register of
Deeds of Camarines Sur.

In view of the foregoing, Marife O. Niño went to the Register of Deeds of Camarines Sur with the Deed of
Sale in order to have the same registered. The Register of Deeds, however, informed her that the
document of sale cannot be registered without a board resolution of the Bank. Marife Niño then went to
the bank, showed to it the Deed of Sale, the tax declaration and receipt of tax payments and requested
the bank for a board resolution so that the property can be transferred to the name of Renato Ocfemia the
husband of petitioner Francisca Ocfemia and the father of the other respondents having died already.

Despite several requests, the bank refused her request for a board resolution and made many alibis. She
was told that the bank had a new manager and it had no record of the sale.
 A director, trustee, or officer shall not attempt to acquire, or acquire any interest
adverse to the corporation in respect of any matter which has been reposed in them in
confidence, and upon which, equity imposes a disability upon themselves to deal in their own
behalf; otherwise the said director, trustee, or officer shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the
corporation.

a. When directors or trustees may be jointly and severally liable for damages
Directors or trustees shall be liable jointly and severally for all damages suffered by the
corporation, its stockholders or members and other persons resulting from the foregoing:

1. Directors or trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation
2. guilty of gross negligence or bad faith in directing the affairs of the corporation
3. acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees

b. Duty of Loyalty imposed on Director, Trustee or Officer

A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the
corporation in respect of any matter which has been reposed in them in confidence, and upon
which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the
said director, trustee, or officer shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation.

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413
(2009)19

19
Construction Development Corporation of the Philippines (CDCP) was incorporated in 1966. It was
granted a franchise to construct, operate and maintain toll facilities in the North and South Luzon
Tollways and Metro Manila Expressway.

CDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans from Marubeni
Corporation of Japan (Marubeni). A CDCP official issued letters of guarantee for the loans although there
was no CDCP Board Resolution authorizing the issuance of such letters of guarantee. CDCP Mining
secured the Marubeni loans when CDCP and CDCP Mining were still privately owned and managed.

In 1983, CDCP’s name was changed to Philippine National Construction Corporation (PNCC) in order to
reflect that the Government already owned 90.3% of PNCC and only 9.70% is under private ownership.
Meanwhile, the Marubeni loans to CDCP Mining remained unpaid.

On 20 October 2000 and 22 November 2000, the PNCC Board of Directors (PNCC Board) passed Board
Resolutions admitting PNCC’s liability to Marubeni. Previously, for two decades the PNCC Board
consistently refused to admit any liability for the Marubeni loans.

In January 2001, Marubeni assigned its entire credit to Radstock Securities Limited (Radstock), a foreign
corporation. Radstock immediately sent a notice and demand letter to PNCC.
The PNCC Board Acted in Bad Faith and with Gross Negligence
in Directing the Affairs of PNCC
In this jurisdiction, the members of the board of directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty.33 Accordingly, the members of the
board of directors (1) shall direct the affairs of the corporation only in accordance with
the purposes for which it was organized;34 (2) shall not willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or act in bad faith or
with gross negligence in directing the affairs of the corporation; and (3) shall not
acquire any personal or pecuniary interest in conflict with their duty as such directors or

PNCC and Radstock entered into a Compromise Agreement. Under this agreement, PNCC shall pay
Radstock the reduced amount of P6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP
Mining’s debt allegedly totaling P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its
reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by
Radstock all its rights and interests" to the listed real properties of PNCC; (2) issue to Radstock or its
assignee common shares of the capital stock of PNCC issued at par value which shall comprise 20% of
the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s 6%
share, for the next 27 years, in the gross toll revenues of the Manila North Tollways Corporation.

Strategic Alliance Development Corporation (STRADEC) moved for reconsideration. STRADEC alleged
that it has a claim against PNCC as a bidder of the National Government’s shares, receivables, securities
and interests in PNCC.

Issue

Whether or not the Compromise Agreement between PNCC and Radstock is valid in relation to the
Constitution, existing laws, and public policy

Held

The Compromise Agreement is contrary to the Constitution, existing laws and public policy.

PNCC’s toll fees are public funds. PNCC cannot use public funds like toll fees that indisputably form part
of the General Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as
expenditure for a public purpose. The toll fees are merely held in trust by PNCC for the National
Government, which is the owner of the toll fees. Considering that there is no appropriation law passed by
Congress for the compromise amount, the Compromise Agreement is void for being contrary to law,
specifically Section 29(1), Article VI of the Constitution. And since the payment pertains to CDCP Mining’s
private debt to Radstock, the Compromise Agreement is also void for being contrary to the fundamental
public policy that government funds or property shall be spent or used solely for public purposes.

Radstock is not qualified to own land in the Philippines. Consequently, Radstock is also disqualified to
own the rights to ownership of lands in the Philippines. Radstock cannot own the rights to ownership of
any land in the Philippines because Radstock cannot lawfully own the land itself. Otherwise, there will be
a blatant circumvention of the Constitution, which prohibits a foreign private corporation from owning land
in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in the Philippines if
it cannot own the land itself. It is basic that an assignor or seller cannot assign or sell something he does
not own at the time the ownership, or the rights to the ownership, are to be transferred to the assignee or
buyer. The third party assignee under the Compromise Agreement who will be designated by Radstock
can only acquire rights duplicating those which its assignor is entitled by law to exercise. Thus, the
assignee can acquire ownership of the land only if its assignor owns the land. Clearly, the assignment by
PNCC of the real properties to a nominee to be designated by Radstock is a circumvention of the
Constitutional prohibition against a private foreign corporation owning lands in the Philippines. The said
circumvention renders the Compromise Agreement void.
trustees.
In the present case, the PNCC Board blatantly violated its duty of diligence as it
miserably failed to act in good faith in handling the affairs of PNCC.
First. For almost two decades, the PNCC Board had consistently refused to admit
liability for the Marubeni loans because of the absence of a PNCC Board resolution
authorizing the issuance of the letters of guarantee.
There is no dispute that between 1978 and 1980, Marubeni Corporation extended two
loans to Basay Mining (later renamed CDCP Mining): (1) US$5 million to finance the
purchase of copper concentrates by Basay Mining; and (2) Y5.46 billion to finance the
completion of the expansion project of Basay Mining including working capital.
There is also no dispute that it was only on 20 October 2000 when the PNCC Board
approved a resolution expressly admitting PNCC’s liability for the Marubeni loans. This
was the first Board Resolution admitting liability for the Marubeni loans, for PNCC never
admitted liability for these debts in the past.20

20
Even Radstock admitted that PNCC’s 1994 Financial Statements did not reflect the Marubeni loans.
Also, former PNCC Chairman Arthur Aguilar stated during the Senate hearings that "the Marubeni claim
was never in the balance sheet x x x nor was it in a contingent account."38 Miriam M. Pasetes, SVP
Finance of PNCC, and Atty. Herman R. Cimafranca of the Office of the Government Corporate Counsel,
confirmed this fact, thus:
SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board suddenly
recognized it as an obligation. It was on that basis that the case was filed, is that correct? In fact, the case
hinges on – they knew that this claim has prescribed but because of that board resolution which
recognized the obligation they filed their complaint, is that correct?
MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of the case came after the
acknowledgement.
SEN. DRILON. Yes. In fact, the filing of the case came three months after the acknowledgement.
MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.
SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in the
financial statements of PNCC but revived – in the financial statements because it has prescribed
but revived by the board effectively. That's the theory, at least, of the plaintiff. Is that correct? Who
can answer that?
Ms. Pasetes, yes.
MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial statements.39
(Emphasis supplied)
In short, after two decades of consistently refuting its liability for the Marubeni loans, the PNCC Board
suddenly and inexplicably reversed itself by admitting in October 2000 liability for the Marubeni loans.
Just three months after the PNCC Board recognized the Marubeni loans, Radstock acquired Marubeni's
receivable and filed the present collection case.
Second. The PNCC Board admitted liability for the Marubeni loans despite PNCC’s total liabilities far
exceeding its assets. There is no dispute that the Marubeni loans, once recognized, would wipe out the
assets of PNCC, "virtually emptying the coffers of the PNCC."40 While PNCC insists that it remains
financially viable, the figures in the COA Audit Reports tell otherwise.41 For 2006 and 2005, "the
Corporation has incurred negative gross margin of ₱84.531 Million and ₱80.180 Million,
respectively, and net losses that had accumulated in a deficit of ₱14.823 Billion as of 31 December
2006."42 The COA even opined that "unless [PNCC] Management addresses the issue on net losses
in its financial rehabilitation plan, x x x the Corporation may not be able to continue its operations
as a going concern."
Notably, during the oral arguments before this Court, the Government Corporate Counsel admitted the
PNCC’s huge negative net worth, thus:
JUSTICE CARPIO
x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion at least[?]
ATTY. AGRA
Yes, your Honor.43 (Emphasis supplied)
Clearly, the PNCC Board’s admission of liability for the Marubeni loans, given PNCC’s huge negative net
worth of at least ₱6 billion as admitted by PNCC’s counsel, or ₱14.823 billion based on the 2006 COA
Audit Report, would leave PNCC an empty shell, without any assets to pay its biggest creditor, the
National Government with an admitted receivable of ₱36 billion from PNCC.
Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been a dead
claim by abandoning one of PNCC’s strong defenses, which is the prescription of the action to collect the
Marubeni loans.
Settled is the rule that actions prescribe by the mere lapse of time fixed by law.44 Under Article 1144 of the
Civil Code, an action upon a written contract, such as a loan contract, must be brought within ten years
from the time the right of action accrues. The prescription of such an action is interrupted when the action
is filed before the court, when there is a written extrajudicial demand by the creditor, or when there is any
written acknowledgment of the debt by the debtor.45
In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While
Radstock claims that numerous demand letters were sent to PNCC, based on the records, the
extrajudicial demands to pay the loans appear to have been made only in 1984 and 1986. Meanwhile, the
written acknowledgment of the debt, in the form of Board Resolution No. BD-092-2000, was issued only
on 20 October 2000.
Thus, more than ten years would have already lapsed between Marubeni’s extrajudicial demands in 1984
and 1986 and the acknowledgment by the PNCC Board of the Marubeni loans in 2000. However, the
PNCC Board suddenly passed Board Resolution No. BD-092-2000 expressly admitting liability for the
Marubeni loans. In short, the PNCC Board admitted liability for the Marubeni loans despite the fact that
the same might no longer be judicially collectible. Although the legal advantage was obviously on its side,
the PNCC Board threw in the towel even before the fight could begin. During the Senate hearings, the
matter of prescription was discussed, thus:
SEN. DRILON. ... the prescription period is 10 years and there were no payments – the last demands
were made, when? The last demands for payment?
MS. OGAN. It was made January 2001 prior to the filing of the case.
SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they filed the
complaint more than 10 years already lapsed.
MS. OGAN. On record, Mr. Chairman, we have demands starting from - - a series of demands which
started from May 23, 1984, letter from Marubeni to PNCC, demand payment. And we also have the letter
of September 3, 1986, letter of Marubeni to then PNCC Chair Mr. Jaime. We have the June 24, 1986
letter from Marubeni to the PNCC Chairman. Also the March 4, 1988 letter...
SEN. DRILON. The March 4, 1988 letter is not a demand letter.
MS. OGAN. It is exactly addressed to the Asset Privatization Trust.
SEN. DRILON. It is not a demand letter? Okay.
MS. OGAN. And we have also...
SEN. DRILON. Anyway...
THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the record
whether it is "yes" or "no".
MS. OGAN. Yes, sir.
SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years prescription set in
and it should have prescribed in 1998, whatever is the date, or before the case was filed in 2001.
MR. CIMAFRANCA. The 10-year period for – if the contract is written, it's 10 years and it should have
prescribed in 10 years and we did raise that in our answer, in our motion to dismiss.
SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your answer. Now,
we are not saying that you were negligent in not raising that. What we are just putting on the record that
indeed there is basis to argue that these claims have prescribed.
Now, the reason why there was a colorable basis on the complaint filed in 2001 was that somehow the
board of PNCC recognized the obligation in a special board meeting on October 20, 2000. Hindi ba
ganoon 'yon?
MS. OGAN. Yes, that is correct.
SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear that at that
point more than 10 years have lapsed since the last demand letter?
MR. AGUILAR. May I volunteer an answer?
SEN. DRILON. Please.
MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go to the folder
letter "N." In our own demand research it was not period, Your Honor, that Punongbayan in the big folder,
sir, letter "N" it was the period where PMO was selling PNCC and Punongbayan and Araullo Law Office
came out with an investment brochure that indicated liabilities both to national government and to
Marubeni/Radstock. So, PMO said, "For good order, can you PNCC board confirm that by board
resolution?" That's the tone of the letter.
SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan investment
prospectus both to the national government and to PNCC. That is the reason at least from the record,
Your Honor, how the PNCC board got to deliberate on the Marubeni.
THE CHAIRMAN. What paragraph? Second to the last paragraph?
MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong – that"s to our recollection, in the records, that was
the reason.
SEN. DRILON. Is that the only reason why ...
MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who are still
around.
SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this paragraph?
MR. AGUILAR. I don’t know what legal advice we were following at that time, Mr. Chairman.46 (Emphasis
supplied)
Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally believed that
PNCC had another formidable legal weapon against Radstock, that is, the lack of authority of Alfredo
Asuncion, then Executive Vice-President of PNCC, to sign the letter of guarantee on behalf of CDCP.
During the Senate hearings, the following exchange reveals the OGCC’s original opinion:
THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?
MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC should exhaust
all means to resist the case using all defenses available to a guarantee and a surety that there is a valid
ground for PNCC's refusal to honor or make good the alleged guarantee obligation. It appearing that from
the documents submitted to the OGCC that there is no board authority in favor or authorizing Mr.
Asuncion, then EVP, to sign or execute the letter of guarantee in behalf of CDCP and that said letter of
guarantee is not legally binding upon or enforceable against CDCP as principals, your Honors.
xxxx
SEN. DRILON. Now that we have read this, what was the opinion of the Government Corporate Counsel,
Mr. Cimafranca?
MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and our opinion
was that there was no valid obligation, no valid guarantee. And we incorporated that in our pleadings in
court. (Emphasis supplied)
Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally opined by
the OGCC. It is quite puzzling, therefore, that the PNCC Board, which had solid grounds to refute the
legitimacy of the Marubeni loans, admitted its liability and entered into a Compromise Agreement that is
manifestly and grossly prejudicial to PNCC.
Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria
Law Office, was not even shown to the PNCC Board.
Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at the time,
was responsible for recommending to the PNCC Board the admission of PNCC’s liability for the Marubeni
loans. Atty. Francisco based his recommendation solely on a mere alleged opinion of the Feria Law
Office. Atty. Francisco did not bother to show this "Feria opinion" to the members of the PNCC Board,
except to Atty. Renato Valdecantos, who as the then PNCC Chairman did not also show the "Feria
opinion" to the other PNCC Board members. During the Senate hearings, Atty. Francisco could not
produce a copy of the "Feria opinion." The Senators grilled Atty. Francisco on his recommendation to
recognize PNCC’s liability for the Marubeni loans, thus:
THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum dated 17
October 2000 to Atty. Valdecantos. Can you tell us the background why you wrote the letter
acknowledging a debt which is non-existent?
MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at that time,
sir. And I was tasked to do a study and engage the services of financial advisors as well as legal advisors
to do a legal audit and financial study on the position of PNCC. I bidded out these engagements, the
financial advisership went to Punongbayan and Araullo. The legal audit went to the Feria Law Offices.
THE CHAIRMAN. Spell it. Boy Feria?
MR. FRANCISCO. Feria-- Feria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office – that the
Marubeni account was a legal obligation.
So, I presented this to our board. Based on the findings of the legal audit conducted by the Ferial Law
Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you have to ask for
the opinion of an outside counsel?
MR. FRANCISCO. That was the – that was the mandate given to us, sir, that we have to engage the ...
THE CHAIRMAN. Mandate given by whom?
MR. FRANCISCO. That is what we usually do, sir, in the APT.
THE CHAIRMAN. Ah, you get outside counsel?
MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded to, in effect,
recognize an obligation which is not even entered in the books of the PNCC? You probably resuscitated a
non-existing obligation anymore?
MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the law office that
we engaged, sir.
THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we were going to
raise it to the Committee on Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.
THE CHAIRMAN. That’s a cabinet level?
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who unfortunately is
not here but I think we have to get his response to this. And as part of the minutes of special meeting with
the board of directors on October 20, 2000, the board resolved in its Board Resolution No. 092-2000, the
board resolved to recognize, acknowledge and confirm PNCC’s obligations as of September 30, 1999,
etcetera, etcetera. (A), or rather (B), Marubeni Corporation in the amount of ₱10,740,000.
Now, we asked to be here because the franchise of PNCC is hanging in a balance because of the – on
the questions on this acknowledgement. So we want to be educated.
Now, the paper trail starts with your letter. So, that’s it – that’s my kuwan, Frank.
Yes, Senator Drilon.
SEN. DRILON. Thank you, Mr. Chairman.
Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?
MR. FRANCISCO. I’m sorry, sir, we don’t have a copy.
SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?
Okay naman andiyan siya.
(Ms. Ogan handing the document to Mr. Francisco.)
You have familiarized yourselves with the minutes, Atty. Francisco?
MR. FRANCISCO. Yes, sir.
SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this board’s minutes. It
says, "Director Francisco has prepared a memorandum requesting confirmation, acknowledgement, and
ratification of this indebtedness of PNCC to the national government which was determined by Bureau of
Treasury as of September 30, 1999 is 36,023,784,751. And with respect to PNCC’s obligation to
Marubeni, this has been determined to be in the total amount of 10,743,103,388, also as of September
30, 1999; that there is need to ratify this because there has already been a representation made with
respect to the review of the financial records of PNCC by Punongbayan and Araullo, which have been
included as part of the package of APT’s disposition to the national government’s interest in PNCC."
You recall having made this representation as found in the minutes, I assume, Atty. Francisco?
MR. FRANCISCO. Yes, sir. But I’d like to be refreshed on the memorandum, sir, because I don’t have a
copy.
SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the secretary can
give him a copy? Give him a copy?
MS. OGAN. (Handing the document to Mr. Francisco.)
MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty.
Valdecantos, which says that – in the last paragraph, if I may read? "May we request therefore, that a
board resolution be adopted, acknowledging and confirming the aforementioned PNCC obligations with
the national government and Marubeni as borne out by the due diligence audit."
SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum dated 17
October 2000 is the memorandum referred to in the minutes.
MR. FRANCISCO. I would assume, Mr. Chairman.
SEN. DRILON. Right.
Now, the Punongbayan representative who was here yesterday, Mr...
THE CHAIRMAN. Navarro.
SEN. DRILON. ... Navarro denied that he made this recommendation.
THE CHAIRMAN. He asked for opinion, legal opinion.
SEN. DRILON. He said that they never made this representation and the transcript will bear us out. They
said that they never made this representation that the account of Marubeni should be recognized.
MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the acknowledgement and
confirmation of the PNCC obligations. I was not asking for a ratification. I never mentioned ratification in
the memorandum. I just based my memo based on the due diligence audit of the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a ratification...
MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a ratification. I was
just – in my memo it says, "acknowledging and confirming the PNCC obligation." This was what ...
SEN. DRILON. Isn’t it the same as ratification? I mean, what’s the difference?
MR. FRANCISCO. I – well, my memorandum was meant really just to confirm the findings of the legal
audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, there’s a difference between ratification and –
what’s your term? -- acknowledgment and confirmation?
MR. FRANCISCO. Well, I guess there’s no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here yesterday said that they never made such
representation.
In any case, now you’re saying it’s the Feria Law Office who rendered that opinion? Can we – you know,
yesterday we were asking for a copy of this opinion but we were never furnished one. The ... no less than
the Chairman of this Committee was asking for a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because it’s opinion
rendered for the Asset Privatization Trust which is its client, not the PNCC, Mr. Chairman.
THE CHAIRMAN. All right. The question is whether – but you see, this is a memorandum of Atty.
Francisco to the Chairman of the Asset Privatization Trust. You say now that you were never furnished a
copy because that’s supposed to be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. ... but yet the action of – or rather the opinion of the Feria Law Offices was in effect
adopted by the board of directors of PNCC in its minutes of October 20, 2000 where you are the
corporate secretary, Ms. Ogan.
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria Law Offices
of which you don’t have a copy?
MS. OGAN. Yes, sir.
THE CHAIRMAN. And the reason being that, it does not concern the PNCC because that’s an opinion
rendered for APT and not for the PNCC.
MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several requests to the
APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the question why
did PNCC adopt it? That was not for the consumption of PNCC. It was for the consumption of the Asset
Privatization Trust. And that is what Atty. Francisco says and it’s confirmed by you saying that this was a
memo – you don’t have a copy because this was sought for by APT and the Feria Law Offices just
provided an opinion – provided the APT with an opinion. So, as corporate secretary, the board of
directors of PNCC adopted it, recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the board of directors on Item V. The resolution
speaks of .. so, go ahead.
MS. OGAN. I gave my copies. Yes, sir.
THE CHAIRMAN. In effect the Feria Law Offices’ opinion was for the consumption of the APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.
MS. OGAN. Yes, sir.
SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.
SEN. DRILON. She was just recording the minutes.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?
MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty. Francisco,
memorandum to the board.
SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is that correct,
Mr. Francisco?
THE CHAIRMAN. You’re an ex-officio member.
SEN. DRILON. Yes.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of PNCC.
SEN. DRILON. With the permission of Mr. Chair, may I ask a question...
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a lawyer,
there was a legal opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in your memorandum.
Did you discuss – first, did you give a copy of this opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a member of the board
of PNCC, Mr. Valdecantos, sir.
SEN. DRILON. And because he was...
MR. FRANCISCO. Because he was my immediate boss in the APT.
SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos because the
corporate secretary, Glenda Ogan, who is supposed to be the custodian of the records of the board never
saw a copy of this.
MR. FRANCISCO. Well, sir, my – the copy that I gave was to Mr. Valdecantos because he was the one
sitting in the PNCC board, sir.
SEN. DRILON. No, you sit in the board.
MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed through our
Chairman, Mr. Valdecantos, sir.
SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at least from the
documents it is possible that the claim has prescribed?
MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told them about this
matter, sir.
SEN. DRILON. No, you told them that the claim could have, under the law, could have prescribed?
MR. FRANCISCO. No, sir.
SEN. DRILON. Why? You mean, you didn’t tell the board that it is possible that this liability is no longer a
valid liability because it has prescribed?
MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the professional opinion
of the Feria Law Office to be sufficient.49 (Emphasis supplied)
Atty. Francisco’s act of recommending to the PNCC Board the acknowledgment of the Marubeni loans
based only on an opinion of a private law firm, without consulting the OGCC and without showing this
opinion to the members of the PNCC Board except to Atty. Valdecantos, reflects how shockingly little his
concern was for PNCC, contrary to his claim that "he only had the interest of PNCC at heart." In fact, if
what was involved was his own money, Atty. Francisco would have preferred not just two, but at least
three different opinions on how to deal with the matter, and he would have maintained his non-liability.
SEN. OSMEÑA. x x x
All right. And lastly, just to clear our minds, there has always been this finger-pointing, of course,
whenever – this is typical Filipino. When they're caught in a bind, they always point a finger, they pretend
they don't know. And it just amazes me that you have been appointed trustees, meaning, representatives
of the Filipino people, that's what you were at APT, right? You were not Erap's representatives, you were
representative of the Filipino people and you were tasked to conserve the assets that that had been
confiscated from various cronies of the previous administration. And here, you are asked to recognize the
P10 billion debt and you point only to one law firm. If you have cancer, don't you to a second opinion, a
second doctor or a third doctor? This is just a question. I am just asking you for your opinion if you would
take the advice of the first doctor who tells you that he's got to open you up.
MR. FRANCISCO. I would go to three or more doctors, sir.
SEN. OSMEÑA. Three or more. Yeah, that's right. And in this case the APT did not do so.
MR. FRANCISCO. We relied on the findings of the …
SEN. OSMEÑA. If these were your money, would you have gone also to obtain a second, third opinion
from other law firms. Kung pera mo itong 10 billion na ito. Siguro you're not gonna give it up that easily
ano, 'di ba?
MR. FRANCISCO. Yes, sir.
SEN. OSMEÑA. You'll probably keep it in court for the next 20 years.
x x x x50 (Emphasis supplied)
This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he would
not have recognized the Marubeni loans if his own funds were involved or if he were the owner of PNCC.
The PNCC Board admitted liability for the ₱10.743 billion Marubeni loans without seeing, reading or
discussing the "Feria opinion" which was the sole basis for its admission of liability. Such act surely goes
against ordinary human nature, and amounts to gross negligence and utter bad faith, even bordering on
fraud, on the part of the PNCC Board in directing the affairs of the corporation. Owing loyalty to PNCC
and its stockholders, the PNCC Board should have exercised utmost care and diligence in admitting a
gargantuan debt of ₱10.743 billion that would certainly force PNCC into insolvency, a debt that previous
PNCC Boards in the last two decades consistently refused to admit.
Instead, the PNCC Board admitted PNCC’s liability for the Marubeni loans relying solely on a mere
opinion of a private law office, which opinion the PNCC Board members never saw, except for Atty.
Valdecantos and Atty. Francisco. The PNCC Board knew that PNCC, as a government owned and
controlled corporation (GOCC), must rely "exclusively" on the opinion of the OGCC. Section 1 of
Memorandum Circular No. 9 dated 27 August 1998 issued by the President states:
SECTION 1. All legal matters pertaining to government-owned or controlled corporations, their
subsidiaries, other corporate off-springs and government acquired asset corporations (GOCCs) shall be
exclusively referred to and handled by the Office of the Government Corporate Counsel (OGCC).
(Emphasis supplied)
The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that PNCC is
required to rely "exclusively" on the OGCC’s opinion. Worse, the PNCC Board, in admitting liability for
₱10.743 billion, relied on the recommendation of a private lawyer whose opinion the PNCC Board
members have not even seen.
During the oral arguments, Atty. Sison explained to the Court that the intention of APT was for the PNCC
Board merely to disclose the claim of Marubeni as part of APT's full disclosure policy to prospective
buyers of PNCC. Atty. Sison stated that it was not the intention of APT for the PNCC Board to admit
liability for the Marubeni loans, thus:
x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The A-P-T, for
purposes of disclosure statements, tasked the Feria Law Office to handle the documentation and the
study of all legal issues that had to be resolved or clarified for the information of prospective bidders and
or buyers. In the performance of its assigned task the Feria Law Office came upon the Marubeni claim
and mentioned that the APTC and/or PNCC must disclose that there is a claim by Marubeni against
PNCC for purposes of satisfying the requirements of full disclosure. This seemingly innocent statement or
requirement made by the Feria Law Office was then taken by two officials of the Asset Privatization Trust
and with malice aforethought turned it into the basis for a multi-billion peso debt by the now government
owned and/or controlled PNCC. x x x.51 (Emphasis supplied)
While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution No. BD-
092-2000, such amendment merely added conditions for the recognition of the Marubeni loans, namely,
subjecting the recognition to a final determination by COA of the amount involved and to the declaration
by OGCC of the legality of PNCC’s liability. However, the PNCC Board reiterated and stood firm that it
"recognizes, acknowledges and confirms its obligations" for the Marubeni loans. Apparently, Board
Resolution No. BD-099-2000 was a futile attempt to "revoke" Board Resolution No. BD-092-2000. Atty.
Alfredo Laya, Jr., a former PNCC Director, spoke on his protests against Board Resolution No. BD-092-
2000 at the Senate hearings, thus:
MR. LAYA. Mr. Chairman, if I can …
THE CHAIRMAN. Were you also at the board?
MR. LAYA. At that time, yes, sir.
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. That's why if – maybe this can help clarify the sequence. There was this meeting on October
20. This matter of the Marubeni liability or account was also discussed. Mr. Macasaet, if I may try to
refresh. And there was some discussion, sir, and in fact, they were saying even at that stage that there
should be a COA or an OGCC audit. Now, that was during the discussion of October 20. Later on, the
minutes came out. The practice, then, sir, was for the minutes to come out at the start of the meeting of
the subsequent. So the minutes of October 20 came out on November 22 and then we were going over it.
And that is in the subsequent minutes of the meeting …
THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the October 20
minutes?
MR. LAYA. Yes, sir.
THE CHAIRMAN. This minutes that we have?
MR. LAYA. Yes, sir.
THE CHAIRMAN. All right, go ahead.
MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for confirmation of the
board – proceedings of October 20. So immediately we made – actually, protest would be a better term
for that – we protested the wording of the resolution and that's why we came up with this resolution
amending the October 20 resolution.
SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not accurately reflect the
decisions that you made on October 20 because you were saying that this recognition should be subject
to OGCC and COA? You seem to imply and we want to make it – and I want to get that for the record.
You seem to imply that there was no decision to recognize the obligation during that meeting because
you wanted it to subject it to COA and OGCC, is that correct?
MR. LAYA. Yes, your Honor.
SEN. DRILON. So how did...
MR. LAYA. That's my understanding of the proceedings at that time, that's why in the subsequent
November 22 meeting, we raised this point about obtaining a COA and OGCC opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the resolution
previously adopted only now you are saying subject to final determination which is completely of different
import from what you are saying was your understanding of the decision arrived at on October 20.
MR. LAYA. Yes, sir. Because our thinking then...
SEN. DRILON. What do you mean, yes, sir?
MR. LAYA. It's just a claim under discussion but then the way it is translated, as the minutes of October
20 were not really verbatim.
SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. I think so, sir. That was our – personally, that was my position.
SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect what the
board …
THE CHAIRMAN. Ms. Pasetes …
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. … you are the chief financial officer of PNCC.
MS. PASETES. Your Honor, before that November 22 board meeting, management headed by Mr.
Rolando Macasaet, myself and Atty. Ogan had a discussion about the recognition of the obligations of 10
billion of Marubeni and 36 billion of the national government on whether to recognize this as an obligation
in our books or recognize it as an obligation in the pro forma financial statement to be used for the
privatization of PNCC because recognizing both obligations in the books of PNCC would defeat our going
concern status and that is where the position of the president then, Mr. Macasaet, stemmed from and he
went back to the board and moved to reconsider the position of October 20, 2000, Mr. Chair.52 (Emphasis
supplied)
In other words, despite Atty. Laya’s objections to PNCC’s admitting liability for the Marubeni loans, the
PNCC Board still admitted the same and merely imposed additional conditions to temper somehow the
devastating effects of Board Resolution No. BD-092-2000.
The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting liability for
the Marubeni loans demonstrates the PNCC Board’s gross and willful disregard of the requisite care and
diligence in managing the affairs of PNCC, amounting to bad faith and resulting in grave and irreparable
injury to PNCC and its stockholders. This reckless and treacherous move on the part of the PNCC Board
clearly constitutes a serious breach of its fiduciary duty to PNCC and its stockholders, rendering the
members of the PNCC Board liable under Section 31 of the Corporation Code, which provides:
SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith
in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous admission of
liability for the Marubeni loans. During the oral arguments, Atty. Sison narrated to the Court:
x x x After President Estrada was ousted, I was appointed as President and Chairman of PNCC in April of
2001, this particular board resolution was brought to my attention and I immediately put the matter before
the board. I had no problem in convincing them to reverse the recognition as it was illegal and had no
basis in fact. The vote to overturn that resolution was unanimous. Strange to say that some who voted to
overturn the recognition were part of the old board that approved it. Stranger still, Renato Valdecantos
who was still a member of the Board voted in favor of reversing the resolution he himself instigated and
pushed. Some of the board members who voted to recognize the obligation of Marubeni even came to
me privately and said "pinilit lang kami." x x x.53 (Emphasis supplied)
In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused
undue injury to the Government and gave unwarranted benefits to Radstock, through manifest partiality,
evident bad faith or gross inexcusable negligence of the PNCC Board. Such acts are declared under
Section 3(e) of RA 3019 or the Anti-Graft and Corrupt Practices Act, as "corrupt practices xxx and xxx
unlawful." Being unlawful and criminal acts, these PNCC Board Resolutions are void ab initio and cannot
be implemented or in any way given effect by the Executive or Judicial branch of the Government.
Not content with forcing PNCC to commit corporate suicide with the admission of liability for the Marubeni
loans under Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail
on PNCC’s coffin when the PNCC Board entered into the manifestly and grossly disadvantageous
Compromise Agreement with Radstock. This time, the OGCC, headed by Agnes DST Devanadera,
reversed itself and recommended approval of the Compromise Agreement to the PNCC Board. As Atty.
Sison explained to the Court during the oral arguments:
x x x While the case was pending in the Court of Appeals, Radstock in a rare display of extreme
generosity, conveniently convinced the Board of PNCC to enter into a compromise agreement for ½ the
amount of the judgment rendered by the RTC or ₱6.5 Billion Pesos. This time the OGCC, under the
a. DUTY OF OBEDIENCE - The directors or trustees and officers to be elected
shall perform the duties enjoined on them by law and the by-laws of the corporation.

b. DUTY OF DILIGENCE- Directors or trustee who (1) willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or (ii) who are guilty of gross
negligence or (iii) bad faith in directing the affairs of the corporation, trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

c. DUTY OF LOYALTY- shall not acquire any personal or pecuniary interest in

conflict with their duty as such directors or trustees.

a. Duty of Obedience

EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25

(2008) 21

The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time
ESHRI defaulted in paying BFs monthly progress bill, was still a director, for, before she
could be held personally liable as corporate director, it must be shown that she acted in
a manner and under the circumstances contemplated in Sec. 31 of the Corporation
Code, which reads:

Section 31. Directors or trustees who willfully or knowingly

vote for or assent to patently unlawful acts of the corporation
or acquire any pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. (Emphasis ours.)
We do not find anything in the testimony of one Crispin Balingit to indicate that Roxas-
del Castillo made any misrepresentation respecting the payment of the bills in question.

leadership of now Solicitor General Agnes Devanadera, approved the compromise agreement
abandoning the previous OGCC position that PNCC had a meritorious case and would be hard press to
lose the case. What is strange is that although the compromise agreement we seek to stop ostensibly is
for ₱6.5 Billion only, truth and in fact, the agreement agrees to convey to Radstock all or substantially all
of the assets of PNCC worth ₱18 Billion Pesos. There are three items that are undervalued here, the real
estate that was turned over as a result of the controversial agreement, the toll revenues that were being
assigned and the value of the new shares of PNCC the difference is about ₱12 Billion Pesos. x x x
(Emphasis supplied)
21
Both petitions stemmed from a construction contract denominated as Agreement for the Execution of
Builders Work for the EDSA Shangri-la Hotel Project that ESHRI and BF executed for the construction of
the EDSA Shangri-la Hotel starting May 1, 1991. Among other things, the contract stipulated for the
payment of the contract price on the basis of the work accomplished as described in the monthly progress
billings. Under this arrangement, BF shall submit a monthly progress billing to ESHRI which would then
re-measure the work accomplished and prepare a Progress Payment Certificate for that months progress
billing.
Balingit, in fact, testified that the submitted but unpaid billings were still being evaluated.
Further, in the said testimony, in no instance was bad faith imputed on Roxas-del
Castillo.

Carag v. NLRC, 520 SCRA 28 (2007)

On the Liability of Directors for Corporate Debts

This case also raises this issue: when is a director personally liable for the debts of the
corporation? The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own. Section 31 of the
Corporation Code lays down the exceptions to the rule, as follows:

Liability of directors, trustees or officers. - Directors or trustees who

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

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

Complainants did not allege in their complaint that Carag wilfully and knowingly voted
for or assented to any patently unlawful act of MAC. Complainants did not present any
evidence showing that Carag wilfully and knowingly voted for or assented to any
patently unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this
effect in her Decision.

Complainants did not also allege that Carag is guilty of gross negligence or bad faith in
directing the affairs of MAC. Complainants did not present any evidence showing that
Carag is guilty of gross negligence or bad faith in directing the affairs of MAC. Neither
did Arbiter Ortiguerra make any finding to this effect in her Decision.

Arbiter Ortiguerra stated in her Decision that:

”In instances where corporate officers dismissed employees in bad

faith or wantonly violate labor standard laws or when the company
had already ceased operations and there is no way by which a
 judgment in favor of employees could be satisfied, corporate officers
can be held jointly and severally liable with the company.

After stating what she believed is the law on the matter, Arbiter Ortiguerra stopped there
and did not make any finding that Carag is guilty of bad faith or of wanton violation of
labor standard laws. Arbiter Ortiguerra did not specify what act of bad faith Carag
committed, or what particular labor standard laws he violated.

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

There is merit in the contention of petitioner Raul Locsin that the complaint
against him should be dismissed. A corporate officer is not personally
liable for the money claims of discharged corporate employees unless he
acted with evident malice and bad faith in terminating their employment.
There is no evidence in this case that Locsin acted in bad faith or with
malice in carrying out the retrenchment and eventual closure of the
company (Garcia vs. NLRC, 153 SCRA 640), hence, he may not be held
personally and solidarily liable with the company for the satisfaction of the
judgment in favor of the retrenched employees.

Neither does bad faith arise automatically just because a corporation fails to comply
with the notice requirement of labor laws on company closure or dismissal of
employees. The failure to give notice is not an unlawful act because the law does not
define such failure as unlawful. Such failure to give notice is a violation of procedural
due process but does not amount to an unlawful or criminal act. Such procedural defect
is called illegal dismissal because it fails to comply with mandatory procedural
requirements, but it is not illegal in the sense that it constitutes an unlawful or criminal
act.

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

An example of a patently unlawful act is violation of Article 287 of the Labor Code,
which states that [V]iolation of this provision is hereby declared unlawful and subject to
the penal provisions provided under Article 288 of this Code. Likewise, Article 288 of the
Labor Code on Penal Provisions and Liabilities, provides that any violation of the
provision of this Code declared unlawful or penal in nature shall be punished with a
fine of not less than One Thousand Pesos (P1,000.00) nor more than Ten Thousand
Pesos (P10,000.00), or imprisonment of not less than three months nor more than three
years, or both such fine and imprisonment at the discretion of the court.

In this case, Article 283 of the Labor Code, requiring a one-month prior notice to
employees and the Department of Labor and Employment before any permanent
closure of a company, does not state that non-compliance with the notice is an unlawful
act punishable under the Code. There is no provision in any other Article of the Labor
Code declaring failure to give such notice an unlawful act and providing for its penalty.
Complainants did not allege or prove, and Arbiter Ortiguerra did not make any finding,
that Carag approved or assented to any patently unlawful act to which the law attaches
a penalty for its commission. On this score alone, Carag cannot be held personally
liable for the separation pay of complainants.

This leaves us with Arbiter Ortiguerras assertion that when the company had already
ceased operations and there is no way by which a judgment in favor of employees could
be satisfied, corporate officers can be held jointly and severally liable with the company.
This assertion echoes the complainants claim that Carag is personally liable for MACs
debts to complainants on the basis of Article 212(e) of the Labor Code, as amended,
which says:

Employer includes any person acting in the interest of an employer,

directly or indirectly. The term shall not include any labor organization or
any of its officers or agents except when acting as employer. (Emphasis
supplied)

Indeed, complainants seek to hold Carag personally liable for the debts of MAC based
solely on Article 212(e) of the Labor Code. This is the specific legal ground cited by
complainants, and used by Arbiter Ortiguerra, in holding Carag personally liable for the
debts of MAC.

We have already ruled in McLeod v. NLRC and Spouses Santos v. NLRC that Article
212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation.

Sanchez v. Republic, 603 SCRA 229 (2009)22

22
In resolving the issue of whether or not petitioner Sanchez, a director and chief executive officer of
ULFI, can be held liable in damages under Section 31 of the Corporation Code for bad faith or gross
neglect in directing the corporation's affairs, the Court will consider only the Court of Appeals' findings of
facts. This Court's jurisdiction in a Petition for Review on Certiorari under Rule 45 is limited to reviewing
only errors of law. It is bound by the findings of fact of the Court of Appeals.
The Court of Appeals found that from January 1992 to January 1996, after ULFI's authority to manage the
Complex expired and despite the ejectment suit that the DECS filed against it, petitioner Sanchez and
Kahn still continued to lease spaces in those facilities to third persons. And they collected and kept all the
rents although they knew that these primarily belonged to the DECS. ULFI had merely managed the
The case before this Court presents the following issues:

1. Whether or not petitioner Sanchez, a director and chief executive officer of ULFI, can
be held liable in damages under Section 31 of the Corporation Code for gross neglect or
bad faith in directing the corporation's affairs; and

Petitioner Sanchez claims that there is no ground for the courts below to pierce the veil
of corporate identity and hold him and Kahn, who were mere corporate officers,
personally liable for ULFI's obligations to the DECS. But this is not a case of piercing the
veil of corporate fiction. The DECS brought its action against Sanchez and Kahn under
Section 31 of the Corporation Code, which should not be confused with actions
intended to pierce the corporate fiction.

Section 31 of the Corporation Code makes directors-officers of corporations jointly and

severally liable even to third parties for their gross negligence or bad faith in directing
the affairs of their corporations.

The DECS does not have to invoke the doctrine of piercing the veil of corporate fiction.
Section 31 above expressly lays down petitioner Sanchez and Kahn's liability for
damages arising from their gross negligence or bad faith in directing corporate affairs.
The doctrine mentioned, on the other hand, is an equitable remedy resorted to only
when the corporate fiction is used, among others, to defeat public convenience, justify
wrong, protect fraud or defend a crime.13

Moreover, in a piercing case, the test is complete control or domination, not only of
finances, but of policy and business practice in respect of the transaction attacked.14
This is not the case here. Section 31, under which this case was brought, makes a
corporate director who may or may not even be a stockholder or member accountable
for his management of the affairs of the corporation.

Bad faith implies breach of faith and willful failure to respond to plain and well
understood obligation. It does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of wrong; it means
breach of a known duty through some motive or interest or ill will. It partakes of the
nature of fraud.

facilities and collected earnings from them for the DECS. What is more, Sanchez and Kahn were aware
that they had to submit written accounts of those rents and remit the net earnings from them to the
Bureau of Treasury, through the DECS, at the end of the year. Yet, Sanchez and Kahn, acting in bad faith
or with gross neglect did not turn over even one centavo of rent to the DECS nor render an accounting of
their collections. Nor did they account for the money they collected by submitting to the Securities and
Exchange Commission the required financial statements covering such collections.
Parenthetically, a witness for the defense, Evangeline Naniong, ULFI's bookkeeper, testified that the
revenues from the rents were deposited in the bank in the names of Sanchez and ULFI's accountant. And
so only they could withdraw and spend those revenues
Gross negligence, on the other hand, is the want of even slight care, acting or omitting
to act in a situation where there is duty to act, not inadvertently but willfully and
intentionally, with a conscious indifference to consequences insofar as other persons
may be affected. It evinces a thoughtless disregard of consequences without exerting
any effort to avoid them; the want or absence of or failure to exercise slight care or
diligence, or the entire absence of care.

Filipinas Port Services v. NLRC, 177 SCRA 203 (1989)

Meaning of “Bad Faith”- If the cause of the losses is merely in business judgment, not
amounting to dab faith or negligence, directors and/or officers are not liable. To be held
accountable, the mismanagement and resulting losses on account thereof are not the
only matters to be proven; it is necessary to show that the directors and/or officers acted
in bad faith and with malice in doing the assailed acts. Bad faith does not simply
connote bad judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing or wrong, a breach of a known duty through some motice
or interest or ill-will, thereby partaking of the nature of fraud.

Aratea v. Suico, 518 SCRA 2007 (2007)23

23
Petitioners Aratea and Canonigo are the controlling stockholders of Samar Mining Development
Corporation (SAMDECO), a domestic corporation engaged in mining operations in San Isidro, Wright,
Western Samar. On the other hand, private respondent Suico is a businessman engaged in export and
general merchandise.

Sometime in 1989, Suico entered into a Memorandum of Agreement (MOA) with SAMDECO. Armed with
the proper board resolution, Aratea and Canonigo signed the MOA as the duly authorized representatives
Considering that the veil of corporate fiction cannot be pierced in this case but the
evidence indisputably established that Suico released loans and cash advances in favor
of SAMDECO, which loans and cash advances remain unpaid to the present, to Suicos
damage and prejudice, may Aratea and Canonigo, as SAMDECOs controlling
stockholders and/or representatives, be nonetheless held personally and solidarily liable
with SAMDECO and its successors-in-interest for obligations the corporation incurred
under the facts herein obtaining?

We rule in the affirmative.

In MAM Realty Development Corporation v. NLRC, the Court stated:

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 general
rule is that obligations incurred by the corporation, acting through its directors, officers
and employees, are its sole liabilities. There are times, however, when solidary liabilities
may be incurred but only when exceptional circumstances warrant such as in the
following cases:
1. When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;

of the corporation. Under the MOA, Suico would extend loans and cash advances to SAMDECO in
exchange for the grant of the exclusive right to market fifty percent (50%) of the total coal extracted by
SAMDECO from its mining sites in San Isidro, Wright, Western Samar.

Suico was enticed into the aforementioned financing scheme because Aratea and Canonigo assured him
that the money he would lend to SAMDECO would easily be paid with five percent (5%) monthly interest
as the coals in said sites is easier to gather because it is excavated from open-pit mines. Aratea and
Canonigo also promised to Suico that the loan the latter would extend to SAMDECO could easily be paid
from the profits of his fifty percent (50%) share of the coal produced. Also reserved in favor of Suico was
the right of first priority to operate the mining facilities in the event SAMDECO becomes incapable of
coping with the work demands. By way of further incentive, Suico was actually appointed SAMDECOs
Vice-President for Administration.

Pursuant to the same MOA, Suico started releasing loans and cash advances to SAMDECO, still through
Aratea and Suico. SAMDECO started operations in its mining sites to gather the coal. As agreed in the
MOA, fifty percent (50%) of the coals produced were offered by Suico to different buyers. However,
SAMDECO, again through Aratea and Canonigo, prevented the full implementation of the marketing
arrangement by not accepting the prices offered by Suicos coal buyers even though such prices were
competitive and fair enough, giving no other explanation for such refusal other than saying that the price
was too low. Aratea and Canonigo did not also set any criterion or standard with which any price offer
would be measured against. Because he failed to close any sale of his 50% share of the coal-produce
and gain profits therefrom, Suico could not realize payment of the loans and advances he extended to
SAMDECO.
SAMDECO, on the other hand, successfully disposed of its 50% share of the coal-produce. Even with
said coal sales, however, SAMDECO absolutely made no payment of its loan obligations to Suico,
despite demands.
Aratea and Canonigo eventually sold the mining rights and passed on the operations of SAMDECO to
Southeast Pacific Marketing, Inc. (SPMI). They also sold their shares in SAMDECO to SPMIs President,
Arturo E. Dy without notice to, or consent of Suico, in violation of the MOA.
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;
xxx

Petitioners Aratea and Canonigo acted in bad faith when they, as officers of
SAMDECO, unreasonably prevented Suico from selling his part of the coal-produce of
the mining site, in gross violation of their MOA. This resulted in Suico not being unable
to realize profits from his 50% share of the coal-produce, from which Suico could obtain
part of the payment for the loans and advances he made in favor of SAMDECO.
Moreover, petitioners also acted in bad faith when they sold, transferred and assigned
their proprietary rights over the mining area in favor of SPMI and Dy, thereby causing
SAMDECO to grossly violate its MOA with Suico. Suico suffered grave injustice
because he was prevented from acquiring the opportunity to obtain payment of his
loans and cash advances, while petitioners Aratea and Canonigo profited from the sale
of their shareholdings in SAMDECO in favor of SPMI and Dy. These facts duly
established Aratea and Canonigos personal liability as officers/stockholders of
SAMDECO and their solidary liability with SAMDECO for its obligations in favor of Suico
for the loans and cash advances received by the corporation.

Magaling V. Ong, 562 SCRA 152 (2008)

To hold a director, a trustee or an officer personally liable for the debts of the
corporation and, thus, pierce the veil of corporate fiction, bad faith or gross negligence
by the director, trustee or officer in directing the corporate affairs must be established
clearly and convincingly. Bad faith is a question of fact and is evidentiary. Bad faith does
not connote bad judgment or negligence. It imports a dishonest purpose or some moral
obliquity and conscious wrongdoing. It means breach of a known duty through some ill
motive or interest. It partakes of the nature of fraud.

In the present case, there is nothing substantial on record to show that Reynaldo
Magaling, as President of Termo Loans, has, indeed, acted in bad faith in inviting Ong
to invest in Termo Loans and/or in obtaining a loan from Ong for said corporation in
order to warrant his personal liability. From all indications, the proceeds of the
investment and/or loan were indeed utilized by Termo Loans. Likewise, bad faith does
not arise just because a corporation fails to pay its obligations, because the inability to
pay ones obligation is not synonymous with fraudulent intent not to honor the
obligations.

The foregoing discussion notwithstanding, this Court still cannot totally absolve
Reynaldo Magaling from any liability considering his gross negligence in directing the
affairs of Termo Loans; thus, he must be made personally liable for the debt of Termo
Loans to Ong.

In order to pierce the veil of corporate fiction, for reasons of negligence by the director,
trustee or officer in the conduct of the transactions of the corporation, such negligence
must be gross. Gross negligence is one that is characterized by the want of even slight
care, acting or omitting to act in a situation where there is a duty to act, not inadvertently
but willfully and intentionally with a conscious indifference to consequences insofar as
other persons may be affected; and must be established by clear and convincing
evidence. Parenthetically, gross or willful negligence could amount to bad faith.

Reynaldo Magalings foregoing testimony only convincingly displayed his gross

negligence in the conduct of the affairs of Termo Loans. From our standpoint, his casual
manner, insouciance and nonchalance, nay, indifference, to the predicament of the
distressed corporation glaringly exhibited a lackadaisical attitude from a top office of a
corporation, a conduct totally abhorrent in the corporate world.

c. DUTY OF LOYALTY-

SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

A director, trustee, or officer shall not attempt to acquire, or acquire any interest
adverse to the corporation in respect of any matter which has been reposed in them in
confidence, and upon which, equity imposes a disability upon themselves to deal in their own
behalf; otherwise the said director, trustee, or officer shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the
corporation.

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of
the corporation with (1) one or more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of
such corporation, unless all the following conditions are present:

(a) The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;

(b) The vote of such director or trustee was not necessary for the approval of the
contract;

(c) The contract is fair and reasonable under the circumstances;

(d) In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board, with at least a
majority of the independent directors voting to approve the material contract; and
 (e) In case of an officer, the contract has been previously authorized by the board of
directors.

Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting
and the contract is fair and reasonable under the circumstances.

Classic self -dealing transactions include:

(1) Transactions directly between director or officer of the firm
Transaction between the firm and a person or entity in which the subject director or
officer has an indirect interest, such as a strong personal relationship or a financial
stake.
(1) Full disclosure + good faith authorization of majority of disinterested directors
-In case of corporations vested with public interest, material contracts are approved by
at least two-thirds (2/3) of the entire membership of the board, with at least a majority
of the independent directors voting to approve the material contract; and

(2) Full disclosure + good faith authorization of shareholders

(3) Transaction is “fair”

SEC. 32. Contracts Between Corporations with Interlocking Directors. – Except in cases of
fraud, and provided the contract is fair and reasonable under the circumstances, a contract
between two (2) or more corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking director in one (1)
corporation is substantial and the interest in the other corporation or corporations is merely
nominal, the contract shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.

Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.

SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such office, acquires a
business opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and refund to the latter all such
profits, unless the act has been ratified by a vote of the stockholders owning or representing at
least twothirds (2/3) of the outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked one’s own funds in the venture.
 Sec. 33 applies only to a director (and not to a trustee or officer as in the case of
Sec. 31), and the implication is that only ratificatory vote of the stockholders would allow
a director who violates his duty of loyalty to keep the profits from the venture; while for
the trustees or officers who violate such duties, it is within the business judgment of the
Board to ratify the act. Secs. 31 and 33 contain the doctrine of corporate opportunity. In
case of such conflicts-of-interests, and the director and acts against the good of the
corporation, he shall be accountable for the profits he obtained, even if he had risked
his own funds.

Gokongwei v. SEC, 86 SCRA 336 (1979)

Whether or not the amended by-laws of SMC of disqualifying a competitor from

nomination or election to the Board of Directors of SMC are valid and reasonable —

It is also well established that corporate officers "are not permitted to use their position
of trust and confidence to further their private interests." In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of its products, the court held
that equity would regard the new contract as an offshoot of the old contract and,
therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the
fruits of his misconduct to the exclusion of his principal.

The doctrine of "corporate opportunity" is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of an opportunity for
his own personal profit when the interest of the corporation justly calls for protection.
It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.

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

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

12. RULES ON LIABILITY of DIRECTORS or TRUSTEES and OFFICERS

Business Judgment Rule
 Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009)

It is settled that in the absence of malice, bad faith, or specific provision of law, [or when
they exceed their authority], a director or an officer of a corporation cannot be made
personally liable for corporate liabilities. Corporate officers have personalities distinct
and separate from that of the corporation’s. In the absence evidence showing that they
acted with malice or in bad faith in pursuing corporate affairs (in this case declining a
position redundant), the acting officers are not personally liable for the monetary awards
adjudged against the corporation.

Section 118

Tramat Mercantile v. Court of Appeals, 238 SCRA 14 (1994)

Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when —

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;4
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.

Valley Golf and Country Club v. Vda. De Caram, 585 SCRA 218 (2009)

Valley Golf acted in clear bad faith when it sent the final notice to Caram under the
pretense they believed him to be still alive, when in fact they had very well known that
he had already died. That it was in the final notice that Valley Golf had perpetrated the
duplicity is especially blameworthy, since it was that notice that carried the final threat
that his Golf Share would be sold at public auction should he fail to settle his account on
or before 31 May 1987.

Valley Golf could have very well addressed that notice to the estate of Caram, as it had
done with the third and fourth notices. That it did not do so signifies that Valley Golf was
bent on selling the Golf Share, impervious to potential complications that would impede
its intentions, such as the need to pursue the claim before the estate proceedings of
Caram. By pretending to assume that Caram was then still alive, Valley Golf would have
been able to capitalize on his previous unresponsiveness to their notices and proceed in
feigned good faith with the sale. Whatever the reason Caram was unable to respond to
the earlier notices, the fact remains that at the time of the final notice, Valley Golf
knew that Caram, having died and gone, would not be able to settle the obligation
himself, yet they persisted in sending him notice to provide a color of regularity
to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of
the Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the
Court of Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into
operation Articles Articles 19, 20 and 21 under the Chapter on Human Relations of the
Civil Code. These provisions enunciate a general obligation under law for every person
to act fairly and in good faith towards one another. Non-stock corporations and its
officers are not exempt from that obligation.

Cebu Country Club v. Elizagaque, 542 SCRA 65 (2008)24

Lastly, petitioners argument that they could not be held jointly and severally liable for
damages because only one (1) voted for the disapproval of respondents application
lacks merit.
Section 31 of the Corporation Code provides:
SEC. 31. Liability of directors, trustees or officers. Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors, or
trustees shall be liable jointly and severally for all damages resulting therefrom

24
In rejecting respondents application for proprietary membership, we find that petitioners violated the
rules governing human relations, the basic principles to be observed for the rightful relationship between
human beings and for the stability of social order. The trial court and the Court of Appeals aptly held that
petitioners committed fraud and evident bad faith in disapproving respondent’s applications. This is
contrary to morals, good custom or public policy. Hence, petitioners are liable for damages pursuant to
Article 19 in relation to Article 21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCIs Amended By-Laws requiring the
unanimous vote of the directors present at a special or regular meeting was not printed on the
application form respondent filled and submitted to CCCI. What was printed thereon was the original
provision of Section 3(c) which was silent on the required number of votes needed for admission of an
applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the application form due to economic
reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being extremely
significant, was introduced way back in 1978 or almost twenty (20) years before respondent filed his
application. We cannot fathom why such a prestigious and exclusive golf country club, like the CCCI,
whose members are all affluent, did not have enough money to cause the printing of an updated
application form.
It is thus clear that respondent was left groping in the dark wondering why his application was
disapproved. He was not even informed that a unanimous vote of the Board members was required.
When he sent a letter for reconsideration and an inquiry whether there was an objection to his application,
petitioners apparently ignored him. Certainly, respondent did not deserve this kind of treatment. Having
been designated by San Miguel Corporation as a special non-proprietary member of CCCI, he should
have been treated by petitioners with courtesy and civility. At the very least, they should have informed
him why his application was disapproved.
suffered by the corporation, its stockholders or members and other persons. (Emphasis
ours)

Palay, Inc. v. Clave, 124 SCRA 638 (1983)

Petitioner Onstott was made liable because he was then the President of the
corporation and he was the controlling stockholder. No sufficient proof exists 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 is not of
itself sufficient ground for disregarding the separate corporate personality.

National Power Corp. v. Court of Appeals, 273 SCRA 419 (1997)

The finding solidarity liability among the NPC and its officers and Members of the Board
of Directors, is patently baseless. The decision of the trial court contains no such
allegation, finding or conclusion regarding particular acts committed by said officers and
members of the Board of Directors that show them to have individually guilty of
unmistakable malice, bad faith, or ill-motive in their personal dealings with Growth Link.
In fact, it was only in the dispositive portion of the decision of the court a quo that
solidary liability as such was first mentioned.

NPCs officers and members of the Board of Directors were sued merely as nominal
parties in their official capacities as such. They were impleaded by Growth Link not in
their personal capacities as individuals but in their official capacities as officers and
members of the Board of Directors through whom the NPC conducts business and
undertakes its operations pursuant to its avowed corporate purposes. Therefore, as a
bonafide government corporation, NPC should alone be liable for its corporate acts as
duly authorized by its officers and directors.

Toh v. Solid Bank Corp., 408 SCRA 544 (2003)

Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the
surety agreement shows that he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore personally bound. There is no law
that prohibits a corporate officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended to protect the stockholder
by immunizing him from personal liability for the corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has
by his own acts effectively waived.

Security Bank and Trust Co. v. Cuenca, 341 SCRA 781 (2000)

It is a common banking practice to require the JSS (joint and solidary signature) of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the
creditors recourse, which is normally limited to the corporate properties under the veil of
separate corporate personality, would extend to the personal assets of the surety.
Second, such surety would be compelled to ensure that the loan would be used for the
purpose agreed upon, and that it would be paid by the corporation.

Paradise Sauna Massage v. Ng, 181 SCRA 719 (1990)

Thus, being a party to a simulated contract of management, petitioner Uy cannot be

permitted to escape liability under the said contract by using the corporate entity theory.
This is one instance when the veil of corporate entity has to be pierced to avoid injustice
and inequity.

Heirs of Trinidad de Leon Vda. De Roxas v. Court of Appeals, 422 SCRA

101 (2004)

The general rule is that a corporation and its officers and agents may be held liable for
contempt. A corporation and those who are officially responsible for the conduct of its
affairs may be punished for contempt in disobeying judgments, decrees, or orders of a
court made in a case within its jurisdiction.

Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010)

We see no competent and convincing evidence of any wrongful, fraudulent or unlawful

act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon
[Chairman and President] denied personal liability in his Answer, he made himself
accountable in the promissory note in his personal capacity and as authorized by the
Board Resolution of PRISMA. With this statement of personal liability and in the
absence of any representation on the part of PRISMA that the obligation is all its own
because of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.

a. Corporate Officers’ Liability for Labor Claims

(1) Majority School: Directors and Senior Officers Cannot Be Held

Personally Liable for Labor Claims

Santos v. NLRC, 254 SCRA 674 (1996)

It is not even shown that petitioner has had a direct hand in the dismissal of private
respondent enough to attribute to him (petitioner) a patently unlawful act while acting for
the corporation. Neither can Article 289 of the Labor Code be applied since this law
specifically refers only to the imposition of penalties under the Code. It is undisputed
that the termination of petitioners employment has, instead, been due, collectively, to
the need for a further mitigation of losses, the onset of the rainy season, the insurgency
problem in Sorsogon and the lack of funds to further support the mining operation in
Gatbo.

It is true, there were various cases when corporate officers were themselves held by the
Court to be personally accountable for the payment of wages and money claims to its
employees. In A.C. Ransom Labor Union-CCLU vs. NLRC,[ for instance, the Court ruled
that under the Minimum Wage Law, the responsible officer of an employer corporation
could be held personally liable for nonpayment of backwages for (i)f the policy of the law
were otherwise, the corporation employer (would) have devious ways for evading
payment of backwages. In the absence of a clear identification of the officer directly
responsible for failure to pay the backwages, the Court considered the President of the
corporation as such officer. The case was cited in Chua vs. NLRC in holding personally
liable the vice-president of the company, being the highest and most ranking official of
the corporation next to the President who was dismissed for the latters claim for unpaid
wages.
A review of the above exceptional cases would readily disclose the attendance of facts
and circumstances that could rightly sanction personal liability on the part of the
company officer. In A.C. Ransom, the corporate entity was a family corporation and
execution against it could not be implemented because of the disposition posthaste of
its leviable assets evidently in order to evade its just and due obligations. The doctrine
of piercing the veil of corporate fiction was thus clearly appropriate. Chua likewise
involved another family corporation, and this time the conflict was between two brothers
occupying the highest ranking positions in the company. There were incontrovertible
facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in
the easing out from the company of one of the brothers by the other.

Uichico v. NLRC, 273 SCRA 35 (1997)

In labor cases, particularly, corporate directors and officers are solidarily liable with the
corporation for the termination of employment of corporate employees done with malice
or in bad faith. In this case, it is undisputed that petitioners have a direct hand in the
illegal dismissal of respondent employees. They were the ones, who as high-ranking
officers and directors of Crispa, Inc., signed the Board Resolution retrenching the
private respondents on the feigned ground of serious business losses that had no basis
apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had
no evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners
for which they can be held jointly and severally liable with Crispa, Inc. for all the money
claims of the illegally terminated respondent employees in this case.

Asionics Philippines, Inc. v. NLRC, 290 SCRA 198 (1998)

The basic rule is still that which can deduced from the Courts pronouncement in Sunio
vs. National Labor Relations Commission (127 SCRA 390), thus:
We come now to the personal liability of petitioner, Sunio, who was made jointly and
severally responsible with petitioner company and CIPI for the payment of the
backwages of private respondents. This is reversible error. The Assistant Regional
Directors Decision failed to disclose the reason why he was made personally liable.
Respondents, however, alleged as grounds thereof, his being the owner of one-half
(1/2) interest of said corporation, and his alleged arbitrary dismissal of private
respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of
petitioner corporation. There appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services of private respondents. His act,
therefore, was within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any other legal entity to
which it may be related. Mere 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. Petitioner Sunio, therefore,
should not have been made personally answerable for the payment of private
respondents back salaries.
The Court, to be sure, did appear to have deviated somewhat in Gudez vs. NLRC (183
SCRA 644), however, it should be clear from our recent pronouncement in Mam Realty
Development Corporation and Manuel Centeno vs. NLRC (244 SCRA 797), that the
Sunio doctrine still prevails.
Nothing on record is shown to indicate that Frank Yih has acted in bad faith or with
malice in carrying out the retrenchment program of the company. His having been held
by the NLRC to be solidarily and personally liable with API is thus legally unjustified.

(2) Minority School: The Highest Officer of the Company Becomes

Personally Liable for Labor Claims

A.C. Ransom Labor Union v. NLRC, 142 SCRA 269 (1986)

"(c) ‘Employer’ includes any person acting in the interest of an employer, directly or
indirectly. The term shall not include any labor organization or any of its officers or
agents except when acting as employer."

The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since
RANSOM is an artificial person, it must have an officer who can be presumed to be the
employer, being the "person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say
even criminally, liable for non-payment of back wages. That is the policy of the law. In
the Minimum Wage Law, Section 15(b) provided:

"(b) If any violation of this Act is committed by a corporation, trust, partnership or

association, the manager or in his default, the person acting as such when the violation
took place, shall be responsible. In the case of a government corporation, the managing
head shall be made responsible, except when shown that the violation was due to an
act or commission of some other person, over whom he has no control, in which case
the latter shall be held responsible."cralaw virtua1aw library
In PD 525, where a corporation fails to pay the emergency allowance therein provided,
the prescribed penalty "shall be imposed upon the guilty officer or officers" of the
corporation.

(c) If the policy of the law were otherwise, the corporation employer can have devious
ways for evading payment of back wages. In the instant case, it would appear that
RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages to
the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be
eventually phased out if the 22 strikers win their case. RANSOM actually ceased
operations on May 1, 1973, after the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against RANSOM.

(d) The record does not clearly identify "the officer or officers" of RANSOM directly
responsible for failure to pay the back wages of the 22 strikers. In the absence of
definite proof in that regard, we believe it should be presumed that the responsible
officer is the President of the corporation who can be deemed the chief operation officer
thereof. Thus, in RA 602, criminal responsibility is with the "Manager or in his default,
the person acting as such." In RANSOM, the President appears to be the Manager.

Chua v. NLRC, 182 SCRA 253 (1990)

Vice-President may be held personally liable for being the highest and most
ranking officer of the corporation for the claims of the President who had been
dismissed.

Reahs Corp. v. NLRC, 271 SCRA 247 (1997)

The Solicitor General, in behalf of private respondents, argues that the doctrine laid
down in the case of A.C. Ransom Labor Union - CCLU v. NLRC should be applied to
the case at bar. In that case, a judgment against a corporation (A.C. Ransom) to
reinstate its dismissed employees with back wages was declared to be a continuing
solidary liability of the company president and all who may have thereafter succeeded to
said office after the records failed to identify the officer or agents directly responsible for
failure to pay the back wages of its employees. The Court noted Ransom's subterfuge in
organizing another family corporation while the case was on litigation with the intent to
phase out the existing corporation in case of an adverse decision, as what actually
happened when it ceased operations a few months after the labor arbiter ruled in favor
of Ransom's employees.
The basis, said the Court, is found in Article 212(c) of the Labor Code which provides
that "an employer includes any person acting in the interest of an employer, directly or
indirectly." "Since Ransom is an artificial person, it must have an officer who can be
presumed to be the employer, x x x. The corporation only in the technical sense is the
employer."
This ruling was eventually applied by the Court in the following cases: Maglutac v.
NLRC] an illegal dismissal case, where the most ranking officer of Commart, petitioner
therein, was held solidarily liable with the corporation which thereafter became insolvent
and suspended operations; Chua v. NLRC, also an illegal dismissal case, where the
vice-president of a corporation was held solidarily liable with the corporation for the
payment of the unpaid salaries of its president; and in Gudez v. NLRC, where the
president and treasurer were held solidarily liable with the corporation which had
ceased operations but failed to pay the wage and money claims of its employees.
These cases, however, should be construed still as exceptions to the doctrine of
separate personality of a corporation which should remain as the guiding rule in
determining corporate liability to its employees. At the very least, as what we held in
Pabalan v. NLRC,[ to justify solidary liability, "there must be an allegation or showing
that the officers of the corporation deliberately or maliciously designed to evade the
financial obligation of the corporation to its employees", or a showing that the officers
indiscriminately stopped its business to perpetrate an illegal act, as a vehicle for the
evasion of existing obligations, in circumvention of statutes, and to confuse legitimate
issues.
In the case at bar, the thrust of petitioners' arguments was aimed at confining liability
solely to the corporation, as if the entity were an automaton designed to perform
functions at the push of a button. The issue, however, is not limited to payment of
separation pay under Article 283 but also payment of labor standard benefits such as
underpayment of wages, holiday pay and 13th month pay to two of the private
respondents. While there is no sufficient evidence to conclude that petitioners have
indiscriminately stopped the entity's business, at the same time, petitioners have opted
to abstain from presenting sufficient evidence to establish the serious and adverse
financial condition of the company.
As the NLRC aptly stated:
"Neither did respondents (petitioners) present any evidence to prove that Reah's
closure was really due to SERIOUS business losses or financial reverses. We only have
respondents mere say-so on the matter."
This uncaring attitude on the part of the officers of Reah's gives credence to the
supposition that they simply ignored the side of the workers who, more or less, were
only demanding what is due them in accordance with law. In fine, these officers were
conscious that the corporation was violating labor standard provisions but they did not
act to correct these violations; instead, they abruptly closed business. Neither did they
offer separation pay to the employees as they conveniently resorted to a lame excuse
that they suffered serious business losses, knowing fully well that they had no
substantial proof in their hands to prove such losses.
The findings of the NLRC did not indicate whether or not Reah's Corporation has
continued its personality after it had stopped operations when it closed its sing-along,
coffee shop, and massage clinic in November 1990. But in its petition, petitioners aver,
among others, that the "company totally folded for lack of patrons, (disconnection of)
light and discontinuance of the leased premises [sic] for failure to pay the increased
monthly rentals from P8,000 to P20,000."[if Under the Rules of Evidence, petitioners are
bound by the allegations contained in their pleading. Since petitioners themselves have
admitted that they have dissolved the corporation de facto, the Court presumes that
Reah's Corporation had become insolvent and therefore would be unable to satisfy the
judgment in favor of its employees. Under these circumstances, we cannot allow labor
to go home with an empty victory. Neither would it be oppressive to capital to hold
petitioners Castulo, Pascua and Valenzuela solidarily liable with Reah's Corporation
because the law presumes that they have acted in the latter's interest when they
obstinately refused to grant the labor standard benefits and separation pay due private
respondent-employees.

Restaurante Las Conchas v. Llego, 314 SCRA 24 (1996)

In the present case, the employees can no longer claim their separation benefits and
13th month pay from the corporation because it has already ceased operation. To
require them to do so would render illusory the separation and 13th month pay awarded
to them by the NLRC. Their only recourse is to satisfy their claim from the officers of the
corporation who were, in effect, acting in behalf of the corporation. It would appear that,
originally, Restaurante Las Conchas was a single proprietorship put up by the parents
of Elizabeth Anne Gonzales, who together with her husband, petitioner David Gonzales,
later took over its management. Private respondents claim, and rightly so, that the
former were the real owners of the restaurant. The conclusion is bolstered by the fact
that petitioners never revealed who were the other officers of the Restaurant Services
Corporation, if only to pinpoint responsibility in the closure of the restaurant that resulted
in the dismissal of private respondents from employment. Petitioners David Gonzales
and Elizabeth Anne Gonzales are, therefore, personally liable for the payment of the
separation and 13th month pay due to their former employees.

(3) Reiteration of the A.C. Ransom Doctrine

NYK International Knitwear Corp. Phil. v. NLRC, 397 SCRA 607 (2003)

In this case Cathy Ng, admittedly, is the manager of NYK. Conformably with our ruling
in A. C. Ransom, she falls within the meaning of an employer as contemplated by the
Labor Code, who may be held jointly and severally liable for the obligations of the
corporation to its dismissed employees. Pursuant to prevailing jurisprudence, Cathy Ng,
in her capacity as manager and responsible officer of NYK, cannot be exonerated from
her joint and several liability in the payment of monetary award to private respondent.

(4) Rulings Contrary to the A.C. Ransom Doctrine

Carag v. NLRC, 520 SCRA 28 (2007)

Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation. The governing law on personal liability of directors
for debts of the corporation is still Section 31 of the Corporation Code.

Acesite Corp. v. NLRC, 449 SCRA 360 (2005)

Unless they have exceeded their authority, corporate officers are, as a general rule, not
personally liable for their official acts, because a corporation, by legal fiction, has a
personality separate and distinct from its officers, stockholders and members. However,
this fictional veil may be pierced whenever the corporate personality is used as a means
of perpetuating fraud or an illegal act, evading an existing obligation, or confusing a
legitimate issue. In cases of illegal dismissal, corporate directors and officers are
solidarily liable with the corporation, where terminations of employment are done with
malice or in bad faith. (Underscoring supplied, citations omitted)
In holding Angerbauer and Kennedy solidarily liable, the NLRC intended to deter other
foreign employer[s] from repeating the inhuman treatment of their Filipino employees
who should be treated with equal respect especially in their own land and prevent
further violation of their human rights as employees.
The records of the case do not, however, show any inhuman treatment of Gonzales. His
superiors just happen to be foreigners. Moreover, as previously discussed, bad faith or
malice was not proven. Angerbauer, acting on behalf of Acesite, was, like Gonzales,
perhaps also too presumptuous in thinking that the telegrams ordering the latter to
report for work were all received on time, drawing him to hastily conclude that Gonzales
intentionally disobeyed the orders contained therein.

b. Dealings of Directors, Trustees or Officers with Corporation

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of
the corporation with (1) one or more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of
such corporation, unless all the following conditions are present:

(f) The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;

(g) The vote of such director or trustee was not necessary for the approval of the
contract;

(h) The contract is fair and reasonable under the circumstances;

(i) In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board, with at least a
majority of the independent directors voting to approve the material contract; and

(j) In case of an officer, the contract has been previously authorized by the board of
directors.

Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting
and the contract is fair and reasonable under the circumstances.

Yao Ka Sin Trading v. Court of Appeals, 209 SCRA 763 (1992)

When a distributorship agreement for the cement company, covering a long period
under a fixed amount, has been entered into with one of the directors, which was not
authorized by the Board of Directors, and which in fact disapproved the contract
subsequently, cannot be binding on the corporation, being essentially a
disadvantageous contract involving a director.

Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230
(2009)

In Yao Ka Sin Trading, the therein respondent cement company has shown by clear
and convincing evidence that its president was not authorized to undertake a particular
transaction. It presented it by-laws stating its board of directors has the power to enter
into an agreement or contract of any kind. The company’s board of directors even
forthwith issued a resolution to repudiate the contract. Thus, it was only after the
company successfully discharged its burden that the other party, the therein petitioner
Yao Ka Sin Trading, had to prove that indeed the cement company had clothed its
president with apparent power to execute the contract by evidence of similar acts
executed in its favor or in favor of other parties.

Unmistakably, the Court’s directive in Yao Ka Sin Trading is a corporation should first
prove by clear evidence that its corporate officer is not in fact authorized to act on its
behalf the burden of evidence shifts to the other party to prove, by previous specific
acts, that an officer was clothed by the corporation with apparent authority.

c. Contracts Between Corporation with Interlocking Directors

SEC. 32. Contracts Between Corporations with Interlocking Directors. – Except in cases of
fraud, and provided the contract is fair and reasonable under the circumstances, a contract
between two (2) or more corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking director in one (1)
corporation is substantial and the interest in the other corporation or corporations is merely
nominal, the contract shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.

Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.

V. POWERS OF CORPORATION
SEC. 35. Corporate Powers and Capacity.
SEC. 36. Power to Extend or Shorten Corporate Term.
SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded
Indebtedness.
SEC. 38. Power to Deny Preemptive Right.
SEC. 39. Sale or Other Disposition of Assets.
SEC. 40. Power to Acquire Own Shares.
SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose.
SEC. 42. Power to Declare Dividends.
SEC. 43. Power to Enter into Management Contract.

SEC. 44. Ultra Vires Acts of Corporations.

TITLE IV

POWERS OF CORPORATIONS

SEC. 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 a corporate seal;

(d) To amend its articles of incorporation in accordance with the provisions of this
Code;

(e) To adopt bylaws, 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 nonstock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage,
and otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by law and the Constitution;
 (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
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign
corporation shall give donations in aid of any political party or candidate or for 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.

SEC. 36. Power to Extend or Shorten Corporate 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 two-thirds (2/3) of the outstanding capital stock or of its members.
Written notice of the proposed action and the time and place of the meeting shall be sent to
stockholders or members at their respective place of residence as shown in the books of the
corporation, and must either be deposited to the addressee in the post office with postage
prepaid, served personally, or when allowed in the bylaws 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.

SEC. 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
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 and served on the stockholders personally, or through
electronic means recognized in the corporation’s bylaws and/or the Commission’s rules as a
valid mode for service of notices.

A certificate must be signed by a majority of the directors of the corporation and countersigned
by the chairperson and secretary of the stockholders’ meeting, setting forth:

(a) That the requirements of this section have been complied with;
 (b) The amount of the increase or decrease of the capital stock;

(c) In case of an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
addresses of the persons subscribing, the amount of capital stock or number of no-par
stock subscribed by each, and the amount paid by each on the subscription in cash or
property, or the amount of capital stock or number of shares of no-par stock allotted
to each stockholder if such increase is for the purpose of making effective stock
dividend therefor authorized;

(d) Any bonded indebtedness to be incurred, created or increased;

(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Commission, and where appropriate,
of the Philippine Competition Commission. The application with the Commission shall be made
within six (6) months from the date of approval of the board of directors and stockholders,
which period may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the corporation and filed with the
Commission and attached to the original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its certificate of filing, the capital stock shall
be deemed increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That the Commission
shall not accept for filing any certificate of increase of capital stock unless accompanied by a
sworn statement of the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five percent (25%) of the increase in capital
stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed
has been paid in actual cash to the corporation or that property, the valuation of which is equal
to twenty-five percent (25%) of the subscription, has been transferred to the corporation:
Provided, further, That no decrease in capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.

Nonstock corporations may incur, create or increase bonded indebtedness when approved by a
majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting
duly called for the purpose.

Bonds issued by a corporation shall be registered with the Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
SEC. 38. Power to Deny Preemptive Right. – All stockholders of a stock corporation shall enjoy
preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such preemptive right shall not extend to shares issued in
compliance with laws requiring stock offerings or minimum stock ownership by the public; or to
shares 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 in
payment of a previously contracted debt.

SEC. 39. Sale or Other Disposition of Assets. – Subject to the provisions of Republic Act No.
10667, otherwise known as “Philippine Competition Act”, and other related laws, a corporation
may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and assets, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds, or other instruments for the payment
of money or other property or consideration, as its board of directors or trustees may deem
expedient.

A sale of all or substantially all of the corporation’s properties and assets, including its goodwill,
must be authorized by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the members, in a stockholders’ or
members’ meeting duly called for the purpose.

In nonstock corporations where there are no members with voting rights, the vote of at
least a majority of the trustees in office will be sufficient authorization for the corporation to
enter into any transaction authorized by this section.

The determination of whether or not the sale involves all or substantially all of the
corporation’s properties and assets must be computed based on its net asset value, as shown in
its latest financial statements. A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.

Written notice of the proposed action and of the time and place for the meeting shall be
addressed to stockholders or members at their places of residence as shown in the books of the
corporation and deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed by the bylaws or done with the consent of the stockholder, sent
electronically: Provided, That any dissenting stockholder may exercise the right of appraisal
under the conditions provided in this Code.

After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,
pledge, or other disposition of property and assets, subject to the rights of third parties under
any contract relating thereto, without further action or approval by the stockholders or
members.

Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge, or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of the corporation or if the proceeds of the sale or other disposition
of such property and assets shall be appropriated for the conduct of its remaining business.

SEC. 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 purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including the following cases:

(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.

SEC. 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 members in the case of nonstock corporations, at a meeting duly
called for the purpose. Notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at the place of residence as shown
in the books of the corporation and deposited to the addressee in the post office with 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.

SEC. 42. Power to Declare Dividends. – The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholders until their unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the approval of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one hundred
percent (100%) of their paid-in capital stock, except: (a) when justified by definite corporate
expansion projects or programs approved by the board of directors; or (b) when the
corporation is prohibited under any loan agreement with financial institutions or creditors,
whether local or foreign, from declaring dividends without their consent, and such consent has
not yet been secured; or (c) when it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.

SEC. 43. Power to Enter into Management Contract. – No corporation shall conclude a
management contract with another corporation unless such contract is approved by the board
of directors and by stockholders owning at least the majority of the outstanding capital stock,
or by at least a majority of the members in the case of a nonstock corporation, of both the
managing and the managed corporation, at a meeting duly called for the purpose: Provided,
That (a) where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (b) where a majority
of the members of the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a nonstock corporation.

These shall apply to any contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods as may be provided by
the pertinent laws or regulations.

No management contract shall be entered into for a period longer than five (5) years for any
one (1) term.

SEC. 44. Ultra Vires Acts of 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.
 1. Underlying Theory on Power of Corporation

Reynoso IV v. Court of Appeals, 345 SCRA 355 (2000)

Precisely because the corporation is such a prevalent and dominating factor in the
business life of the country, the law has to look carefully into the exercise of powers by
these artificial persons it has created.

2. Express Powers of Corporations

SEC. 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 a corporate seal;

(d) To amend its articles of incorporation in accordance with the provisions of this
Code;

(e) To adopt bylaws, 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 nonstock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage,
and otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by law and the Constitution;

(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
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign
corporation shall give donations in aid of any political party or candidate or for 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.

SEC. 44. Ultra Vires Acts of 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.

Montelibano v. Bacolod Murcia Milling Co., 5 SCRA 36 (1962)

The rule is that in each case it is a question of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in itself,
and not otherwise, and is reasonably tributary and to promotion od those end, in a
substantial, and not in a remote and fanciful sense, it may be fairly considered within a
charter powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incidental to the express
powers and reasonably necessary to their exercise. If so, the corporation has the power
to do it; otherwise no.

a. Power to Sue and Be Sued

Shipside, Inc. v. Court of Appeals, 352 SCRA 334 (2001)

The power of the corporation to sue and to be sued in any court is lodged with the
Board of Directors that exercise its corporate powers. No person, not even its officers,
could validly sue it behalf of a corporation in the absence of any resolution from the
Board authorizing the filing of such suit.

Umale v. ABS Realty Corp., 652 SCRA 215 (2011)

As a creature of the law, the powers and attributes of a corporation are those set out,
expressly or implied, in the law. Among the general powers granted by law to a
corporation is the power to use in its own name. This power is granted to a duly-
organized corporation, unless specifically revoked by another law. There is nothing in
the concept of corporation rehabilitation that would deprive the corporation from suing to
recover its property.

DBP v. Court of Appeals, 440 SCRA 200 (2004)

The failure of petitioner to attach a certified copy of the board resolution authorizing the
filing of the petition for certiorari in the Court of Appeals is fatal to the case. Courts are
not expected to take judicial notice of corporate board resolutions or a corporate
officer’s authority to represent a corporation.

Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620 (2009)

When a corporate officer has been granted express power by the Board of Directors to
institute a suit, the same is considered broad enough to include the power of said
corporate officer to execute verification and certification against forum shopping
required in initiatory pleadings under the Rules of Court.

Bitong v. Court of Appeals, 292 SCRA 304 (1998)25

In the absence of a special authority from the Board of Directors to institute a

derivative suit, the president of Managing Director is disqualified by law to sue in her
own or on behalf of the corporation. The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the Board of Directors that exercises its
corporate powers and not in the President.

b. Power to Sell Land

Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003)

SEC. 3 5. powers and capacity. Every corporation incorporated under this Code has the

25
A careful perusal of the records shows that neither the alleged endorsement of Certificate of
Stock No. 001 in the name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in
favor of petitioner could have legally transferred or assigned on 25 July 1983 the shares of stock in favor
of petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the name of JAKA was already
cancelled and a new one, Certificate of Stock No. 007, issued in favor of respondent Apostol by virtue of
a Declaration of Trust and Deed of Sale.
It should be emphasized that on 10 May 1983 JAKA executed a deed of sale over 1,000 Mr. & Ms.
shares in favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a
declaration of trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by
Certificate of Stock No. 007.
The declaration of trust further showed that although respondent Apostol was the registered owner,
she held the shares of stock and dividends which might be paid in connection therewith solely in trust for
the benefit of JAKA, her principal. It was also stated therein that being a trustee, respondent Apostol
agreed, on written request of the principal, to assign and transfer the shares of stock and any and all such
distributions or dividends unto the principal or such other person as the principal would nominate or
appoint.
Petitioner was well aware of this trust, being the person in charge of this documentation and being
one of the witnesses to the execution of this document. Hence, the mere alleged endorsement of
Certificate of Stock No. 001 by Senator Enrile or by a duly authorized officer of JAKA to effect the transfer
of shares of JAKA to petitioner could not have been legally feasible because Certificate of Stock No. 001
was already canceled by virtue of the deed of sale to respondent Apostol.
power and capacity:
xxx
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of a lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by the law and
the Constitution.
xxx
Under these provisions, the power to purchase real property is vested in the board of
directors or trustees. While a corporation may appoint agents to negotiate for the
purchase of real property needed by the corporation, the final say will have to be with
the board, whose approval will finalize the transaction. A corporation can only exercise
its powers and transact its business through its board of directors and through its
officers and agents when authorized by a board resolution or its by-laws. As held in AF
Realty & Development, Inc. v. Dieselman Freight Services, Co.:

Section 23 (now 22) of the Corporation Code expressly provides that the corporate
powers of all corporations shall be exercised by the board of directors. Just as a natural
person may authorize another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its functions to individual officers or
agents appointed by it. Thus, contracts or acts of a corporation must be made
either by the board of directors or by a corporate agent duly authorized by the
board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but
not in the course of, or connected with, the performance of authorized duties of
such director, are held not binding on the corporation. (Emphasis supplied)

In this case, Aviles, who negotiated the purchase of the Property, is neither an officer of
Bukal Enterprises nor a member of the Board of Directors of Bukal Enterprises. There is
no Board Resolution authorizing Aviles to negotiate and purchase the Property for Bukal
Enterprises. There is also no evidence to prove that Bukal Enterprises approved
whatever transaction Aviles made with the Spouses Firme. In fact, the president of
Bukal Enterprises did not sign any of the deeds of sale presented to the Spouses Firme.
Even De Castro admitted that he had never met the Spouses Firme. Considering all
these circumstances, it is highly improbable for Aviles to finalize any contract of sale
with the Spouses Firme.

AF Realty & Dev. v. Dieselman Freight Services, 373 SCRA 385 (2002)

Involved in this case is a sale of land through an agent. Thus, the law on agency under
the Civil Code takes precedence. This is well stressed in Yao Ka Sin Trading vs. Court
of Appeals:
Since a corporation, such as the private respondent, can act only through its officers
and agents, all acts within the powers of said corporation may be performed by agents
of its selection; and, except so far as limitations or restrictions may be imposed by
special charter, by-law, or statutory provisions, the same general principles of law which
govern the relation of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act for the
corporation; and agents when 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. (Emphasis supplied)

Pertinently, Article 1874 of the same Code provides:

ART. 1874. When a sale of piece of land or any interest therein is through an agent, the
authority of the latter shall be in writing; otherwise, the sale shall be void. (Emphasis
supplied)

Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo were not
authorized by respondent Dieselman to sell its lot, the supposed contract is void.

San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998)

When the corporation’s primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the
corporation acting through its officers, much less when acting through the treasurer.
Likewise, Arts. 1874 and 1878 of Civil Code require that when land is sold through an
agent, the agent’s authority must be in writing, otherwise the sale is void.

c. Power to Obtain Bank Loans

China Bank v. Court of Appeals, 270 SCRA 503 (1997)

The power to borrow money is one of those cases where even a special power of
attorney is required under Art. 1878 of Civil Code. There is invariably a need of an
enabling act of the corporation to be approved by its Board of Directors. The argument
that the obtaining of loan was in accordance with the ordinary course of business
usages and practices of the corporation is devoid of merit, because the prevailing
practice in the corporation was explicitly authorize an officer to contract loans in behalf
of the corporation.

d. Power to Hire Employees and Appoint Agents

Yu Chuck v. “Kong Li Po”, 46 Phil. 608 (1924)

The principal question presented by the assignments of error is whether Chen

had the power to bind the corporation by a contract of the character indicated. It is
conceded that he had no express authority to do so, but the evidence is conclusive that
he, at the time the contract was entered into, was in effect the general business
manager of the newspaper Kong Li Po and that he, as such, had charge of the printing
of the paper, and the plaintiff maintain that he, as such general business manager, had
implied authority to employ them on the terms stated and that the defendant corporation
is bound by his action. The general rule is that the power to bind a corporation by
contract lies with its board of directors or trustees, but this power may either expressly
or impliedly be delegated to other officers or agents of the corporation, and it is well
settled that except where the authority of employing servants and agent is expressly
vested in the board of directors or trustees, an officer or agent who has general control
and management of the corporation's business, or a specific part thereof, may bind the
corporation by the employment of such agent and employees as are usual and
necessary in the conduct of such business. But the contracts of employment must be
reasonable

3. Ultra Vires Doctrine

a. Court Attitude Towards the Ultra Vires Doctrine

Zomer Dev. Corp. v. International Exchange Bank, 581 SCRA 115 (2009)26

The plea of ultra vires will not be allowed to prevail, whether interposed for or against a
corporation, when it will not advance justice but, on the contrary, will accomplish a legal
wrong to the prejudice of another who acted in good faith.

b. Types of Ultra Vires Act

(1) First Type: Those which are outside of the express, implied or incidental powers
of the corporation;

26
The Petitioners shrill incantations that the Resolution, approved by its Board of Directors,
authorizing its Treasurer and General Manager to execute a Real Estate Mortgage as security for the
payment of the account of Prime Aggregates, a sister corporation, is not for its best interest, is a
puzzlement xxx. Since when is a private corporation, going to the aid of a sister corporation, not for the
best interest of both corporation? For in doing so, the two (2) corporations are enhancing, boosting and
promoting a common interest, the interest of family having ownership of both corporations. In the
second place, Courts are loathe to overturn decisions of the management of a corporation in the conduct
of its business via its Board of Directors x x x. x x x xThere is no evidence on record that the Real
Estate Mortgage was executed by the Petitioner and the Private Respondent to prejudice corporate
creditors of the Petitioner or will result in the infringement of the trust fund doctrine or hamper the
continuous business operation of the Petitioner or that the Prime Aggregates was insolvent or incapable
of paying the Private Respondent. Indeed, the latter approved Prime Aggregates loan availments and
credit facilities after its investigation of the financial capability of Prime Aggregates and its capacity to
pay its account to the Private respondent. As it was, the Petitioner finally awoke from its slumber when
the Private Respondent filed its Petition for the extra-judicial foreclosure of the Real Estate Mortgage,
with the Sheriff, and assailed the authority of its Board of Directors to approve the said Resolution and
of its Treasurer and General Manager to execute the deed and brand the said Resolution and the said
deed as ultra vires and hence, not binding on the Petitioner, and hurried off to the Respondent Court
and prayed for injunctive relief. Before then, the Petitioner maintained a stoic silence and adopted a
hands off stance. We find the Petitioners stance grossly inequitable.
(2) Second Type: Those which are effected by corporate representative who
act without authority (even though the contract is within the express/implied/incidental
powers of the corporation they represent),

(3) Third Type: Those which are contrary to laws or public policy.

Woodchild Holdings v. Roxas Electric Construction Co., 436 SCRA 235 (2004)27

Generally, the acts of the corporate officers within the scope of their authority are
binding on the corporation. However, under Article 1910 of the New Civil Code, acts
done by such officers beyond the scope of their authority cannot bind the corporation
unless it has ratified such acts expressly or tacitly, or is estopped from denying them:

Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the corporation.

Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001)28

It is, however, our view that there is basis to rule that the act of issuing the checks was
well within the ambit of a valid corporate act, for it was for securing a loan to finance the
activities of the corporation, hence, not an ultra vires act.

27
Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor
of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof.
The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did
not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey
real rights thereon. Neither may such authority be implied from the authority granted to Roxas to sell Lot
No. 491-A-3-B-2 to the petitioner on such terms and conditions which he deems most reasonable and
advantageous. Under paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is
required to convey real rights over immovable property. Article 1358 of the New Civil Code requires that
contracts which have for their object the creation of real rights over immovable property must appear in a
public document. The petitioner cannot feign ignorance of the need for Roxas to have been specifically
authorized in writing by the Board of Directors to be able to validly grant a right of way and agree to sell a
portion of Lot No. 491-A-3-B-1. The rule is that if the act of the agent is one which requires authority in
writing, those dealing with him are charged with notice of that fact.
28
ourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized
to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter
requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounti
ng of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly
endorsed for deposit only to the payees account and not to be further negotiated. What is more, the
confirmation letter contained a clause that was not true, that is, that the checks issued to E.T. Henry were
in payment of Hydro oil bought by Hi-Cement from E.T. Henry. Her negligence resulted in damage to the
corporation. Hence, Ms. de Leon may be held personally liable therefor.
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 power conferred upon
it by law. The term ultra vires is distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the
latter is void and cannot be validated.

BA Finance Corp. v. Court of Appeals, 211 SCRA 112 (1992)29

Petitioner contends that the letter guaranty is ultra vires, and therefore unenforceable;
that said letter-guaranty was issued by an employee of petitioner corporation beyond
the scope of his authority since the petitioner itself is not even empowered by its articles
of incorporation and by-laws to issue guaranties. Petitioner also submits that it is not
guilty of estoppel to make it liable under the letter-guaranty because petitioner had no
knowledge or notice of such letter-guaranty; that the allegation of Philip Wong, credit
administrator, that there was an audit was not supported by evidence of any audit report
or record of such transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled rule that persons dealing
with an assumed agent, whether the assumed agency be a general or special one are
bound at their peril, if they would hold the principal liable, to ascertain not only the fact
of agency but also the nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).
Hence, the burden is on respondent bank to satisfactorily prove that the credit
administrator with whom they transacted acted within the authority given to him by his
principal, petitioner corporation. The only evidence presented by respondent bank was
the testimony of Philip Wong, credit administrator, who testified that he had authority to
issue guarantees as can be deduced from the wording of the memorandum given to him
by petitioner corporation on his lending authority.

Tuason & Co. v. Bolanos, 95 Phil. 106 (1954)

Tuason & Co. as owner of large tract of real estate entered into a contract with Araneta,
Inc. for the development and subdivision of its real property. The two corporations
brought an action to oust Bolanos, a squatter on the land. Bolanos questioned the
capacity to sue alleging that the two corporations have formed a partnership, which is
an ultra vires act.
It is 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 being represented by another person, natural or juridical, in a
suit in court. The contention that Gregorio Araneta, Inc. can not 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
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." (Wyoming-

29
Although Wong was clearly authorized to approve loans even up to P350,000.00 without any security
requirement, which is far above the amount subject of the guaranty in the amount of P60,000.00, nothing
in the said memorandum expressly vests on the credit administrator power to issue guarantees.
Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp.,
1082.) 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.

c. Doctrine of Ratification

Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006)

The corporation can also act through its corporate officers who may be authorized either
expressly by the by-laws or board resolutions or impliedly such as by general practice or
policy or as are implied from express powers. The general principles of agency govern
the relation between the corporation and its officers or agents. When authorized, their
acts can bind the corporation. Conversely, when unauthorized, their acts cannot bind it.

However, the corporation may ratify the unauthorized act of its corporate officer.
Ratification means that the principal voluntarily adopts, confirms and gives sanction to
some unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly
made, which amounts to a ratification of what was theretofore unauthorized and
becomes the authorized act of the party so making the ratification. The substance of the
doctrine is confirmation after conduct, amounting to a substitute for a prior authority.
Ratification can be made either expressly or impliedly. Implied ratification may take
various forms like silence or acquiescence, acts showing approval or adoption of the
act, or acceptance and retention of benefits flowing therefrom.

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

National Power Corp. v. Alonzo -Legasto, 433 SCRA 342 (2004)

Petitioners argument that it is not bound by the acts of its officials who acted beyond the
scope of their authority in allowing the blasting works is correct. Petitioner is a
government agency with a juridical personality separate and distinct from the
government. It is not a mere agency of the government but a corporate entity
performing proprietary functions. It has its own assets and liabilities and exercises
corporate powers, including the power to enter into all contracts, through its Board of
Directors.

In this case, petitioners officials exceeded the scope of their authority when they
authorized FUCC to commence blasting works without an extra work order properly
approved in accordance with P.D. 1594. Their acts cannot bind petitioner unless it has
ratified such acts or is estopped from disclaiming them.

However, the Compromise Agreement entered into by the parties, petitioner being
represented by its President, Mr. Guido Alfredo A. Delgado, acting pursuant to its Board
Resolution No. 95-54 dated April 3, 1995, is a confirmatory act signifying petitioners
ratification of all the prior acts of its officers. Significantly, the parties agreed that [t]his
Compromise Agreement shall serve as the Supplemental Agreement for the payment of
plaintiffs blasting works at the Botong site in accordance with CI 1(6) afore-quoted. In
other words, it is primarily by the force of this Compromise Agreement that the Court is
constrained to declare FUCC entitled to payment for the blasting works it undertook.

Moreover, since the blasting works were already rendered by FUCC and accepted by
petitioner and in the absence of proof that the blasting was done gratuitously, it is but
equitable that petitioner should make compensation therefor, pursuant to the principle
that no one should be permitted to enrich himself at the expense of another.

Pirovano v. Dela Rama Steamship, 96 Phil. 335 (1954)30

30
1.CORPORATIONS; DONATIONS; DONATION GlVEN "OUT OF GRATITUDE FOR SERVICES
RENDERED" Is REMUNERATIVE.—A donation given by the corporation to the minor children of its late
president because he "was to a large extent responsible for the rapid and very successful development
and expansion of the activities of this company" is remunerative in nature in contemplation of law.

2.ID.; ID.; PERFECTED DONATION CAN ONLY BE RESCINDED ON LEGAL GROUNDS.—Where the
donation made by the corporation has not only been granted in several resolutions duly adopted by its
board of directors but also it has been formally ratified by its stockholders, with the concurrence of its only
creditor, and accepted by the donee, the donation -has reached the stage of perfection which is valid and
binding upon the corporation and as such cannot be rescinded unless there exist legal grounds for doing
so.

3.ID.; ID.; DONATION DISTINGUISHED FROM GRATUITY.—While a donation may technically be

different from a gratuity, in substance they are the same. They are even similar to a pension. Thus, it was
said that "A pension is a gratuity only when it is granted for services previously rendered, and which at the
time they were rendered gave rise to no legal obligation." (Words and Phrases, Permanent Edition, p.
675; O'Dea vs. Cóók, 169 Pac., 306, 176 Cal., 659.) [Pirovano, et al. vs. De la Rama Steamship Co., 96
Phil. 335(1954)]

4.ID.; POWERS OF A CORPORATION; ACTS PERFORMED WITHIN THE POWERS GRANTED ARE
NOT "ULTRA VIRES".—Where the corporation was given broad and almost unlimited powers to carry out
the purposes for which it was organized among them, to aid in any other manner any person in the affairs
and prosperity of whom it has a lawful interest, a donation made to the heirs of its late president in
recognition of the valuable services rendered by the latter which had immensely contributed to its growth,
comes within this broad grant of power and can not be considered an ultra vires act.

5.ID.; ID.; "ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF RATIFICATION BY

STOCKHOLDERS.—Illegal acts of a corporation contemplate the doing of an act which is contrary to law,
morals, or public order, or contravene some rules of public policy or public duty, and are, like similar
transactions between individuals, void. They can not serve as basis of a court action, nor acquire validity
by performance, ratification, or estoppel. On the other hand, ultra vires acts or those which are not illegal
and void ab initio but are merely within the scope of the article of incorporation, are merely voidable and
For valid ratification of an ultra vires act, the following requisites must concur:

(a) Act or contract must be consummated, not merely executory;

(b) The creditors are not prejudiced, or all of them have given their consent;

(c) The rights of the public or the State are not involved; and

(d) All the stockholders must give their consent.

Ayala Corp. v. Rosa-Diana Realty, 346 SCRA 663 (2000)

We agree with petitioner Ayalas observation that respondent Rosa-Dianas special and
affirmative defenses before the trial court never mentioned any allegation that its
president and chairman were not authorized to execute the Undertaking. It was
inappropriate therefore for the trial court to rule that in the absence of any authority or
confirmation from the Board of Directors of respondent Rosa-Diana, its Chairman and
the President cannot validly enter into an undertaking relative to the construction of the
building on the lot within one year from July 27, 1989 and in accordance with the deed
restrictions. Curiously, while the trial court stated that it cannot be presumed that the
Chairman and the President can validly bind respondent Rosa-Diana to enter into the
aforesaid Undertaking in the absence of any authority or confirmation from the Board of
Directors, the trial court held that the ordinary presumption of regularity of business
transactions is applicable as regards the Deed of Sale which was executed by Manuel
Sy and Sy Ka Kieng and respondent Rosa-Diana. In the light of the fact that respondent
Rosa-Diana never alleged in its Answer that its president and chairman were not
authorized to execute the Undertaking, the aforesaid ruling of the trial court is without
factual and legal basis and surprising to say the least.

Lao v. Court of Appeals, 325 SCRA 694 (2000)

Under procedural law, the lack of authority of an officer to bind the corporation should
be specifically pleaded by the corporation. Failure of the corporation to interpose such
defense could only mean that the action, transaction or representation was with its
consent and authority.

San Juan Structural v. Court of Appeals, 296 SCRA 631 (19931

may become binding and enforceable when ratified by the stockholders.

6.ID.; ID.; "ULTRA VIRES" ACTS; RATIFICATION BY STOCKHOLDERS OF "ULTRA VIRES" ACTS
CURES INFIRMITY.—The ratification by the stockholders of an ultra vires act which is not illegal cures
the infirmity of the corporate act and makes it perfectly valid and enforceable, specially so if it is not mere
y within the scope of the article of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
31
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made
As a general rule, the acts of corporate officers within the scope of their authority are
binding on the corporation. But when these officers exceed their authority, their actions
cannot bind the corporation, unless it has ratified such acts or is estopped from
disclaiming them. The officer acting without proper authority cannot by his act be the
basis upon which to bind the corporation of ratification. Such ratification can only come
from the act or omission of the Board of Directors.

d. Doctrine of Estoppel

Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003)32

The principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of petitioner Estelita Lipat and

it appear to any third person that she had the authority, to sell its land or to receive the earnest money.
Neither was there any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its
argument on the receipt, which, however, does not prove the fact of ratification. The document is a hand-
written one, not a corporate receipt, and it bears only Nenita Gruenbergs signature. Certainly, this
document alone does not prove that her acts were authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the
obligation which is established. As found by the trial court and affirmed by the Court of Appeals, there is
no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said contract was
ratified by Motorich. This factual finding of the two courts is binding on this Court. As the consent of the
seller was not obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid
contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of
land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under
Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot be
ratified.
32
Petitioners contend further that the mortgaged property should not bind the loans and credit lines
obtained by BEC as they were secured without any proper authorization or board resolution. They also
blame the bank for its laxity and complacency in not requiring a board resolution as a requisite for
approving the loans. Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution since per admissions by
both petitioner Estelita Lipat and Alice Burgos, petitioners rebuttal witness, no business or stockholders
meetings were conducted nor were there election of officers held since its incorporation. In fact, not a
single board resolution was passed by the corporate board and it was Estelita Lipat and/or Teresita Lipat
who decided business matters.
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special
power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager of both BEC
and BET and had been deciding business matters in the absence of Estelita Lipat. Further, the export
bills secured by BEC were for the benefit of Mystical Fashion owned by Estelita Lipat. Hence, Pacific
Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by
virtue of a special power of attorney. It is a familiar doctrine that if a corporation knowingly permits one of
its officers or any other agent to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agents authority.
both BET and BEC. While the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in its
board of directors, subject to the articles of incorporation, by-laws, or relevant provisions
of law, yet, just as a natural person may authorize another to do certain acts for and on
his behalf, the board of directors may validly delegate some of its functions and powers
to officers, committees, or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate by-laws, or authorization from the
board, either expressly or impliedly by habit, custom, or acquiescence in the general
course of business. Apparent authority, is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.

People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into
the First Contract without first securing board approval. Despite such lack of board
approval, petitioner did not object to or repudiate said contract, thus clothing its
president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong -- senior vice president, treasurer and
major stockholder of petitioner.

The First Contract was consummated, implemented and paid without a hitch.

Hence, private respondent should not be faulted for believing that Punsalan’s conformity
to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public as possessing the power to
do those acts; and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agents authority.

Republic v. Acoje Mining, 3 SCRA 361 (1963)

e. Doctrine of Apparent Authority

Soler v. Court of Appeals, 358 SCRA 57 (2001)33

33
We see that the issues raised boil down to whether or not there was a perfected contract between
petitioner Jazmin Soler and respondents COMBANK and Nida Lopez, and whether or not Nida Lopez, the
manager of the bank branch, had authority to bind the bank in the transaction.
The discussions between petitioner and Ms. Lopez was to the effect that she had authority to engage the
services of petitioner. During their meeting, she even gave petitioner specifications as to what was to be
renovated in the branch premises and when petitioners requested for the blueprints of the building, Ms.
Lopez supplied the same.
It is familiar doctrine that if a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agents authority.

Woodchild Holdings v. Roxas Electric Construction Co., 436 SCRA 235 (2004)34

It bears stressing that apparent authority is based on estoppel and can arise from two
instances: first, the principal may knowingly permit the agent to so hold himself out as
having such authority, and in this way, the principal becomes estopped to claim that the
agent does not have such authority; second, the principal may so clothe the agent with
the indicia of authority as to lead a reasonably prudent person to believe that he actually
has such authority. There can be no apparent authority of an agent without acts or
conduct on the part of the principal and such acts or conduct of the principal must have
been known and relied upon in good faith and as a result of the exercise of reasonable
prudence by a third person as claimant and such must have produced a change of
position to its detriment. The apparent power of an agent is to be determined by the acts
of the principal and not by the acts of the agent.

For the principle of apparent authority to apply, the petitioner was burdened to prove the
following: (a) the acts of the respondent justifying belief in the agency by the petitioner;
(b) knowledge thereof by the respondent which is sought to be held; and, (c) reliance
thereon by the petitioner consistent with ordinary care and prudence.

People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

Apparent authority is derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent as
having the power to act or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers. It requires presentation of evidence of similar act(s) executed either in
its favor or in favor of other parties. It is not the quantity of similar acts which establishes

Ms. Lopez was aware that petitioner hired the services of people to help her come up with the designs for
the December, 1986 board meeting of the bank. Ms. Lopez even insisted that the designs be rushed in
time for presentation to the bank. With all these discussion and transactions, it was apparent to petitioner
that Ms. Lopez indeed had authority to engage the services of petitioner.
34
In this case, there is no evidence on record of specific acts made by the respondent showing or
indicating that it had full knowledge of any representations made by Roxas to the petitioner that the
respondent had authorized him to grant to the respondent an option to buy a portion of Lot No. 491-A-3-
B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that the respondent allowed him
to do so.
apparent authority, but the vesting of a corporate officer with the power to bind the
corporation.

(1) Application of the Doctrine of Apparent Authority

Lapulapu Foundation, Inc. v. Court of Appeals, 421 SCRA 328 (2004)

The evidence shows that Tan has been representing himself as the President of
Lapulapu Foundation, Inc. He opened a savings account and a current account in the
names of the corporation, and signed the application form as well as the necessary
specimen signature cards (Exhibits A, B and C) twice, for himself and for the foundation.
He submitted a notarized Secretary’s Certificate (Exhibit G) from the corporation,
attesting that he has been authorized, inter alia, to sign for and in behalf of the Lapulapu
Foundation any and all checks, drafts or other orders with respect to the bank; to
transact business with the Bank, negotiate loans, agreements, obligations, promissory
notes and other commercial documents; and to initially obtain a loan for P100,000.00
from any bank (Exhibits G-1 and G-2). Under these circumstances, the defendant
corporation is liable for the transactions entered into by Tan on its behalf.
Per its Secretary’s Certificate, the petitioner Foundation had given its President,
petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent
Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner
Tans authority to obtain the subject loans from the respondent Bank. It is a familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be estopped from denying the
agents authority.

Inter-Asia Investment, Inc. v. Court of Appeals, 403 SCRA 452 (2003)

A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused person dealing with the officer or agent
to believe that it has conferred.

Safic Alcan & Cie v. Imperial Vegetable Co., 355 SCRA 559 (2001)

Every person dealing with an agent is put upon inquiry and must discover upon his peril
the authority of the agent. If he does not make such inquiry, he is chargeable with
knowledge of the agents authority, and his ignorance of that authority will not be any
excuse. Persons dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the principal, to
ascertain not only the fact of the agency but also the nature and extent of the authority,
and in case either is controverted, the burden of proof is upon them to establish it.

The most prudent thing petitioner should have done was to ascertain the extent of the
authority of Dominador Monteverde. Being remiss in this regard, petitioner can not seek
relief on the basis of a supposed agency.

Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his
authority do not bind the principal unless the latter ratifies the same expressly or
impliedly. It also bears emphasizing that when the third person knows that the agent
was acting beyond his power or authority, the principal can not be held liable for the
acts of the agent. If the said third person is aware of such limits of authority, he is to
blame, and is not entitled to recover damages from the agent, unless the latter
undertook to secure the principals ratification.

There was no such ratification in this case. When Monteverde entered into the
speculative contracts with Safic, he did not secure the Boards approval. He also did not
submit the contracts to the Board after their consummation so there was, in fact, no
occasion at all for ratification. The contracts were not reported in IVOs export sales
book and turn-out book. Neither were they reflected in other books and records of the
corporation. It must be pointed out that the Board of Directors, not Monteverde,
exercises corporate power. Clearly, Monteverdes speculative contracts with Safic never
bound IVO and Safic can not therefore enforce those contracts against IVO.

Aguenza v. Metropolitan, 271 SCRA 1 (1997)

In the case at bench, we find that the respondent Court of Appeals committed an error
in appreciating the "Answer" filed by the lawyer of Intertrade as an admission of
corporate liability for the subject loan. A careful study of the responsive pleading filed by
Atty. Francisco Pangilinan, counsel for Intertrade, would reveal that there was neither
express nor implied admission of corporate liability warranting the application of the
general rule. Thus, the alleged judicial admission may be contradicted and controverted
because it was taken out of context and no admission was made at all.

In any event, assuming arguendo that the responsive pleading did contain the aforesaid
admission of corporate liability, the same may not still be given effect at all. As correctly
found by the trial court, the alleged admission made in the answer by the counsel for
Intertrade was "without any enabling act or attendant ratification of corporate act," as
would authorize or even ratify such admission. In the absence of such ratification or
authority, such admission does not bind the corporation.

Second, the respondent appellate court likewise adjudged Intertrade liable because of
the two letters emanating from the office of Mr. Arrieta which the respondent court
considered "as indicating the corporate liability of the corporation." These documents
and admissions cannot have the effect of a ratification of an unauthorized act. As we
elucidated in the case of Vicente v. Geraldez, "ratification can never be made on the
part of the corporation by the same persons who wrongfully assume the power to make
the contract, but the ratification must be by the officer as governing body having
authority to make such contract." In other words, the unauthorized act of respondent
Arrieta can only be ratified by the action of the Board of Directors and/or petitioner
Aguenza jointly with private respondent Arrieta.

Francisco v. GSIS, 7 SCRA 577 (1963)

Facts: Francisco, a government employee borrowed money from GSIS, secured by a

mortgage on her house. Upon failure to pay the installments due, GSIS threatened to
foreclose the security. Francisco answered that she could not keep up with the
installment and she submitted a proposal whereby she could liquidate the debt. Said
proposal was rejected by the GSIS Board. However, the Corporate Secretary
erroneously sent her a wire that the proposal was accepted. When she received
summons for foreclosure, she brought action for damages against GSIS.
Held:

The Corporate Secretary is the custodian of corporate records and if he certifies that a
certain action had been taken by the Board, such certification is binding upon the
corporation although the same may be erroneously made. The reason for this is that the
corporate secretary is clothed with apparent authority.

f. How Corporation Bound or Not Bound by its President

Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005)

Contracts entered into by a corporate officer or obligations or prestations assumed by

such officer for and in behalf of such corporation are binding on the said corporation
only if such officer acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony to prove that Lim
made a verbal promise to give him vacation and sick leave credits, as well as the
privilege of converting the same into cash upon retirement. The Court agrees that those
who belong to the upper corporate echelons would have more privileges. However, the
Court cannot presume the existence of such privileges or benefits. The petitioner was
burdened to prove not only the existence of such benefits but also that he is entitled to
the same, especially considering that such privileges are not inherent to the positions
occupied by the petitioner in the respondent corporation, son-in-law of its president or
not.

Woodchild Holdings v. Roxas-Electric Constructions Co., 463 SCRA 235 (2004)

Evidently, Roxas was not specifically authorized under the said resolution to grant a
right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to
sell to the petitioner a portion thereof.
The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by
TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No.
491-A-3-B-1, or to create or convey real rights thereon.

Neither may such authority be implied from the authority granted to Roxas to sell Lot
No. 491-A-3-B-2 to the petitioner on such terms and conditions which he deems most
reasonable and advantageous. Under paragraph 12, Article 1878 of the New Civil Code,
a special power of attorney is required to convey real rights over immovable property.
Article 1358 of the New Civil Code requires that contracts which have for their object the
creation of real rights over immovable property must appear in a public document. The
petitioner cannot feign ignorance of the need for Roxas to have been specifically
authorized in writing by the Board of Directors to be able to validly grant a right of way
and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that if the act of the agent
is one which requires authority in writing, those dealing with him are charged with notice
of that fact.

People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

However, it is familiar doctrine that if a corporation knowingly permits one of its officers,
or any other agent, to act within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agent’s authority. Thus, private respondent shall not be faulted for believing
that Punsalan’s conformity to the contract in dispute was also binding on petitioner. In
the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the
First Contract without first securing board approval. Despite such lack of board
approval, petitioner did not object to or repudiate said contract, thus "clothing" its
president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong — senior vice president, treasurer and
major stockholder of petitioner. Furthermore, private respondent prepared an operations
manual and conducted a seminar for the employees of petitioner in accordance with
their contract. Petitioner accepted the operations manual, submitted it to the Bureau of
Customs and allowed the seminar for its employees. As a result of its aforementioned
actions, petitioner was given by the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract was outside the usual
powers of the president, petitioner's ratification of said contract and acceptance of
benefits have made it binding, nonetheless. The enforceability of contracts under Article
1403(2) is ratified "by the acceptance of benefits under them" under Article 1405.

Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991)

Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao
(Nyco's President) to even apply to BA Finance for credit accommodation. It supports its
argument with the fact that it did not issue a Board resolution giving Yao such authority.
However, the very evidence on record readily belies Nyco's contention. Its corporate By-
Laws clearly provide for the powers of its President, which include, inter alia, executing
contracts and agreements, borrowing money, signing, indorsing and delivering checks,
all in behalf of the corporation. Furthermore, the appellate court correctly adopted the
lower court's observation that there was already a previous transaction of discounting of
checks involving the same personalities wherein any enabling resolution from Nyco was
dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was
able to discharge its own undertakings. Such effectively places Nyco under estoppel in
pais which arises when one, by his acts, representations or admissions, or by his
silence when he ought to speak out, intentionally or through culpable negligence,
induces another to believe certain facts to exist and such other rightfully relies and acts
on such belief, so that he will be prejudiced if the former is permitted to deny the
existence of such facts (Panay Electric Co., Inc. v. Court of Appeals, G.R. No. 81939,
June 29,1989). Nyco remained silent in the course of the transaction and spoke out only
later to escape liability. This cannot be countenanced. Nyco is estopped from denying
Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.

g. Bank Bound by its Manager and Officer

BPI Family Bank v. First Metro Investments Corp., 429 SCRA 30 (2004)

Petitioner maintains that respondent should have first inquired whether the deposit of
P100 Million and the fixing of the interest rate were pursuant to its (petitioners) internal
procedures. Petitioners stance is a futile attempt to evade an obligation clearly
established by the intent of the parties. What transpires in the corporate board room is
entirely an internal matter. Hence, petitioner may not impute negligence on the part of
respondents representative in failing to find out the scope of authority of petitioners
Branch Manager. Indeed, the public has the right to rely on the trustworthiness of bank
managers and their acts. Obviously, confidence in the banking system, which
necessarily includes reliance on bank managers, is vital in the economic life of our
society.

Significantly, the transaction was actually acknowledged and ratified by petitioner when
it paid respondent in advance the interest for one year. Thus, petitioner is estopped
from denying that it authorized its Branch Manager to enter into an agreement with
respondents Executive Vice President concerning the deposit with the corresponding
17% interest per annum.

Premiere Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004)35

If a private corporation intentionally or negligently clothes its officers or agents with

apparent power to perform acts for it, the corporation will be estopped to deny that the
apparent authority is real as to innocent third persons dealing in good faith with such

Premiere Bank deviated from the terms of the credit line agreement when it unilaterally and arbitrarily
35

downgraded the credit line of Panacor from P4.1 million to P2.7 million.
officers or agents. As testified to by Martillano, after she received a copy of the credit
line agreement and affixed her signature in conformity thereto, she forwarded the same
to the legal department of the Bank at its Head Office. Despite its knowledge, Premiere
Bank failed to disaffirm the contract. When the officers or agents of a corporation
exceed their powers in entering into contracts or doing other acts, the corporation, when
it has knowledge thereof, must promptly disaffirm the contract or act and allow the other
party or third persons to act in the belief that it was authorized or has been ratified. If it
acquiesces, with knowledge of the facts, or fails to disaffirm, ratification will be implied
or else it will be estopped to deny ratification.

Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000)36

Likewise, Tena had previously transacted business on behalf of the bank, and the latter
had acknowledged her authority. A bank is liable to innocent third persons where
representation is made in the course of its normal business by an agent like Manager
Tena, even though such agent is abusing her authority.

If a corporation knowingly permits one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent out to the public as possessing the
power to do those acts; thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent’s authority.

DBP v. Ong, 460 SCRA 170 (2005)

Bank cannot be bound by mere clerk because a clerk is not among the bank officers
upon whom putative authority may be reposed by a third party.

h. Doctrine of Laches or “Stale Demands”

Rovels Enterprises, Inc. v. Ocampo, 391 (2002)37

36
In any event, the bank acknowledged, by its own acts or failure to act, the authority of Fe S. Tena to
enter into binding contracts. After the execution of the Deed of Sale, respondents occupied the properties
in dispute and paid the real estate taxes due thereon. If the bank management believed that it had title to
the property, it should have taken some measures to prevent the infringement or invasion of its title
thereto and possession thereof. Unquestionably, petitioner has authorized Tena to enter into the Deed of
Sale. Accordingly, it has a clear legal duty to issue the board resolution sought by respondents. Having
authorized her to sell the property, it behooves the bank to confirm the Deed of Sale so that the buyers
may enjoy its full use.
37
However, Rovels, to whom the TTTDC shares of stock (worth P108,000.00) were transferred, claimed
that it became aware of the July 6, 1993 SEC Decision only in June of 1995. So on September 6, 1995, it
filed a petition with the SEC, docketed as SEC Case No. 09-95-5135, praying that it be declared the
majority stockholder of TTTDC as against respondents Ocampo, Silva, Leviste, Sr., Calalang and
Carreon (belonging to the SILVA GROUP). The material allegations of the petition state that: (1) TTTDC
passed a Resolution dated December 29, 1975 authorizing the transfer of its unissued shares to Rovels
as the latters construction fee (2) Pursuant to that Resolution, TTTDC shares of stock worth P692,000.00
were transferred to Rovels; (3) While TTTDC, in its March 1, 1976 Resolution, repealed the December 29,
It was only on September 6, 1995, or almost twenty (20) years from the time Eduardo
Santos learned of the March 1, 1976 Resolution, that Rovels filed its petition in SEC
Case No. 09-95-5135. Within that long period of time, Rovels did nothing to contest the
March 1, 1976 TTTDC Resolution to protect its rights, if any. Obviously, such inaction
constitutes estoppel, prescription and laches. As stated by Rovels itself, Article 1149 of
the New Civil Code limits the filing of actions, whose periods are not fixed therein or in
any other laws, to only five (5) years. In addition, the principle of laches or stale
demands provides that the failure or neglect, for an unreasonable and unexplained
length of time, to do that which by exercising due diligence could or should have been
done earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it either has abandoned it or
declined to assert it.

4. Power to Extend or Shorten Corporate Term

Section 37

Power to extend or shorten corporate 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 representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members in case of non-stock
corporations.

Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally:

Provided, That in case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code.

The requirements for extending or shortening corporate life:

(a) majority vote of the board of directors or trustees; and

(b) ratification at a meeting 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 members in case of
non-stock corporations.

In case of extension (not shortening) of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code.

1975 Resolution, such repeal does not bind Rovels for lack of notice; (4) Several interrelated cases (SEC
Case Nos. 1322 and 3806) were filed with the SEC involving the SILVA and SANTOS GROUPS (5)
Rovels is not bound by the SEC Decisions since it was not impleaded as a party in said cases.
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the following
instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation.

a. Power to Temporary Cease Corporate Operations

Considering the critical nature of the issue, which is not mere exercise of management
prerogative, the two-thirds (2/3) vote of the outstanding capital stock is required either
prior to the voting of the board by subsequent ratification in a meeting of the
stockholders called for the purpose (SEC Opinion No. 04-03 dated 26 October 2004,
addressed to Ms. Shirly M. Malapote).

5. Power to Increase or Decrease Capital Stock; Incur, Create or Increase

Bonded Indebtedness38
38
Section 38. 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 increase any
bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor
authorized;
The requirements for the increase or decrease of the capital stock of a corporation are
as follows:

(a) majority vote of the board of directors;

(b) ratification by two-thirds (2/3) of the outstanding capital stock at a stockholder's
meeting duly called for the purpose;
(c) certificate of said corporate act shall be signed by a majority of the directors of
the corporation and countersigned by the chairman and the secretary of the
stockholders;
corporate act shall take effect from and after SEC approval.
(d) Certified must be accompanied by the Treasurer’s Affidavit certifying compliance
with the 25%-25% requirement as to stock subscription;

 No decrease in capital stock shall be approved by SEC if it will prejudice

corporate creditors.
 Bonds issued by the corporation shall be registered with SEC which is
given the power to determine the sufficiency of the terms of such bonds.

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and attached to the original articles of incorporation.
From and after approval by the Securities and Exchange Commission and the issuance by the
Commission of its certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate
of increase of capital stock unless accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-
five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that
there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which
shall have the authority to determine the sufficiency of the terms thereof.
NOTE: (1) Where these corporation increases capital stock, stockholders are
entitled to pre-emptive rights to subscribe to a sufficient number of shares in order to
maintain their previous relative voting power.

(2) Dissenting stockholders cannot exercise the right of appraisal in this case.

6. Disposition or Encumbrance of All or Substantially All Corporate Assets39

The requirements:

(a) majority vote of the board of directors or trustees; and

(b) ratification at a meeting 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 members in case of
non-stock corporations.

39
Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by 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, including its goodwill, upon such terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money or other property or consideration,
as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation,
by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.

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

After such authorization or approval by the stockholders or members, the board of directors or trustees
may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties under any contract relating thereto,
without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated
for the conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.
  dissenting stockholder may exercise his appraisal
 despite approval by the stockholders or members it is not mandatory for the
Board to continue with the disposition

NOTE: (a) all or substantially all-render corporation incapable of continuing the

business or accomplishing purpose for which it was incorporated.
(b) disposition of properties in the regular course of business does not need
approval or authority of the board.

Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997)

The Tandang Sora property, it appears from the records, constitutes the only property of
the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate
property and assets of IDP falling squarely within the contemplation of the foregoing
section. For the sale to be valid, 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. These twin requirements were not met as the Carpizo
Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and
those whose names and signatures were affixed by the Carpizo Group together with the
sham Board Resolution authorizing the negotiation for the sale were, from all
indications, not bona fide members of the IDP as they were made to appear to be.
Apparently, there are only fifteen (15) official members of the petitioner corporation
including the eight (8) members of the Board of Trustees. All told, the disputed Deed of
Absolute Sale executed by the fake Carpizo Board and private respondent INC was
intrinsically void ab initio.

Caltex (Phils.). Inc. v. PNOC Shipping, 498 SCRA 400 (2006)40

While the Corporation Code allows the transfer of all or substantially all the properties
and assets of a corporation, the transfer should not prejudice the creditors of the
assignor. The only way the transfer can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the assignor. The acquisition by the
assignee of all or substantially all of the assets of the assignor necessarily includes the
40
Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not
be satisfied because LUSTEVECOs remaining properties had been foreclosed by lienholders. In addition,
all of LUSTEVECOs business, properties and assets pertaining to its tanker and bulk business had been
assigned to PSTC without the knowledge of its creditors. Caltex now has no other means of enforcing the
judgment debt except against PSTC.

If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be
fraud on the creditors of LUSTEVECO. PSTC agreed to take over, and in fact took over, all the assets of
LUSTEVECO upon its express written commitment to pay all obligations of LUSTEVECO pertaining to
those assets, including specifically the claim of Caltex. LUSTEVECO no longer informed its creditors of
the transfer of all of its assets presumably because PSTC committed to pay all such creditors. Such
transfer, leaving the claims of creditors unenforceable against the debtor, is fraudulent and rescissible. To
allow PSTC now to welsh on its commitment is to sanction a fraud on LUSTEVECOs creditors.
assumption of the assignors liabilities, unless the creditors who did not consent to the
transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and
without requiring the assignee to assume the assignors obligations will defraud the
creditors. The assignment will place the assignors assets beyond the reach of its
creditors.

Strategic Alliance Dev. Corp. v. Radstock Securites Ltd., 607 SCRA 413 (2009)
The Corporation Code defines a sale or disposition of substantially all assets and
property of a corporation as one by which the corporation "would be rendered incapable
of continuing the business or accomplishing the purpose for which it was incorporated" -
any sale or disposition short of this will not need stockholder ratification, and may be
pursued by the majority vote of the Board of Directors.

7. Power to Acquire Own Shares

Section 41. Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. 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

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares

under the provisions of this Code.

Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010)

Under the common law, there were originally conflicting views on whether a corporation
had the power to acquire or purchase its own stocks. In England, it was held invalid for
a corporation to purchase its issued stocks because such purchase was an indirect
method of reducing capital (which was statutorily restricted), aside from being
inconsistent with the privilege of limited liability to creditors. Only a few American
jurisdictions adopted by decision or statute the strict English rule forbidding a
corporation from purchasing its own shares. In some American states where the English
rule used to be adopted, statutes granting authority to purchase out of surplus funds
were enacted, while in others, shares might be purchased even out of capital provided
the rights of creditors were not prejudiced The reason underlying the limitation of share
purchases sprang from the necessity of imposing safeguards against the depletion by a
corporation of its assets and against the impairment of its capital needed for the
protection of creditors.

Now, however, a corporation can purchase its own shares, provided payment is made
out of surplus profits and the acquisition is for a legitimate corporate purpose. In the
Philippines, this new rule is embodied in Section 41 of the Corporation Code.

a. Instances When Corporation May Buy its Own Stocks

(a) To complete fractional shares;

(b) To collect indebtedness or in case of delinquency; and
(c) To exercise right of appraisal.

b. Trust Fund Doctrine41

Under Section 43 of the Code, the corporation can declare dividends only out of
“unrestricted retained earnings;”42 and that under Section 122, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment
of all debts and liabilities.

These provisions in essence provide for the “trust fund doctrine” where the subscription
of capital of a corporation constitute a fund to which the creditors have a right to look for
satisfaction of their claims.”

Ong Yiu v. Tiu, 401 SCRA 1 (2003)43

41
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)

Sec. 122 Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities.
42
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies.
43
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is allowed.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock, (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection
of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors
turn to engage in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.

Steinberg v. Velasco, 52 Phil. 953 (1929)44

Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.

Boman Environmental Dev’t Corp. v. Court of Appeals, 167 SCRA 540 (1988)

Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999)

Halley v. Printwell, Inc., 649 SCRA 116 (2011)

44
It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in
declaring the dividends on the stock was all done at the same meeting of the board of directors, and it
appears in those minutes that the both Ganzon and Mendaros were formerly directors and resigned
before the board approved the purchase and declared the dividends, and that out of the whole 330
shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which
were purchased by the corporation, and for which it paid P3,300. In other words, that the directors were
permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital
stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000
of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this
situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that
they were grossly ignorant of their duties.
8. Power to Invest Funds in Another Corporation or Business for Non-Primary
Purpose

SEC. 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 members in the case of nonstock corporations, at a meeting duly
called for the purpose. Notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at the place of residence as shown
in the books of the corporation and deposited to the addressee in the post office with 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.

Dela Rama v. Ma-ao Central Co., Inc., 27 SCRA 247 (1969)

9. Power to Enter into Management Contract45

45
Section 44. Power to enter into management contract. - No corporation shall conclude a management
contract with another corporation unless such contract shall have been approved by the board of directors
and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority
of the members in the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose:

Provided, That (1) where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a period longer than five years for any one
term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations.
Requirements of management contract are as follows, for both the managed and
managing corporation:

(1) Resolution of the Board of Directors/Trustees; and

(2) Majority vote of the outstanding capital stock or members for a meeting called for
that purpose.

EXCEPT: That 2/3 votes shall be necessary if:

(1) where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing corporation; or

(2) where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors of the
managed corporation.