SYLLABUS FIRST EXAM

I. REVISED CORPORATION CODE (RA 11232)

a. HISTORY - G.R. L-37331 | March 18, 1933
b. JURIDICAL PERSONS – ART. 46, 47 CIVIL CODE

Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization. (38a)

Article 47. Upon the dissolution of corporations, institutions and other entities for public interest
or purpose mentioned in No. 2 of article 44, their property and other assets shall be disposed of in
pursuance of law or the charter creating them. 

If nothing has been specified on this point, the property and other assets shall be applied to similar
purposes for the benefit of the region, province, city or municipality which during the existence of
the institution derived the principal benefits from the same. (39a)
c. Advantages vs Disadvantages of a Corporation
ADVANTAGES DISADVANTAGES
as distinguished from Partnership, it has strong legal There is greater degree of government control and
personality having a separate and distinct personality supervision than in other forms of business organizations
from the members composing it, unaffected by the
death, incapacity, withdrawal or insolvency of any of
its stockholders or members.

Centralized Management- Corporation’s management
is centralized in the Board of Directors, to whom also
are granted all corporate powers under Section 23 of
the Corporation Code. Shareholders are not agents of
the corporation, nor can they bind the corporations
unlike in the partnership setting.
Lack of Personal Element and Abuse of Corporate
Management (Villanueva)
 there is ordinarily lack of personal element in view of
the transferability of shares, and the vesting of
management powers in the BOD who may be
professional managers.

 In large corporations, management and control are

separate from the powers and prerogatives of
ownership with respect to the corporate assets and
the corporate enterprise, since control is vested in
the BOD.

Limited liability of investors Limited liability feature abused

SAN JUAN STRUCTURAL AND STEEL
FABRICATORS, INC., vs COURT OF APPEALS  business in order to avoid having to provide adequate
(296 SCRA 631)
One of the advantages of a corporate form of business
organization is the limitation of an investor’s liability
to the amount of the investment. This feature flows
from the legal theory that a corporate entity is
separate and distinct from its stockholders. However,
the statutorily granted privilege of a corporate veil
may be used only for legitimate purposes. 
 The limited liability has often been abused by
protection and compensation for victims of the
business ventures they undertake.
 Also, the limited liability feature has tended to
increase transaction costs by the parties being forced
to enter into contractual schemes skirting the limited
liability features of the corporation when it is a party
to a transaction.

On equitable considerations, the veil can be

disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a
mere alter ego or business conduit of a person or an
instrumentality, agency or adjunct of another
corporation.
 
Free transferability of Units of Investments Double Taxation
The shares of stock can be transferred without the
consent of the other stockholder.  Corporations have been subjected to heavier taxation
than other forms of business organizations; the profits of
This would assure investors of a ready mechanism to the corporation are subject to corporate income tax.
dispose of their investments when their personal or
financial situation may require it, and therefore places It is subject to tax again when declared and
more liquidity bin [in] the corporate setting and distributed as dividends.
would be better encourage investors to channel their
investments through corporate vehicles.

d. Joint Account vs Partnership

 e. Corporation vs Partnership

II. CORPORATION, DEFINED; Attributes of a Corporation (ALS-PAPI)

a. Juridical Personality; Concession Theory; Contract Theory

i. Franchises – JGe)

Facts: J. R. Da Silva, is the President of the J.R.S. Business Corporation (the

Corporation), an establishment duly franchised by the Congress of the
Philippines, to conduct a messenger and delivery express service. It lost a
collection suit which lead to the issuance of a Notice of Sale of the "whole capital
stocks of JRS Business Corporation, the business name, right of operation, the
whole assets, furnitures and equipment, the total liabilities, and Net Worth,
books of accounts, etc.. Issue: Whether the business name or trade name,
franchise (right to operate) and capital stocks of the petitioner are properties or
property rights which could be the subject of levy, execution and sale.

SC: for practical purposes, franchises, so far as relating to corporations, are

divisible into (1) corporate or general franchises; and (2) special or secondary
franchises. The former is the franchise to exist as a corporation, while the latter,
are certain rights and privileges conferred upon existing corporations, such as the
right to use the streets of a municipality to lay pipes of tracks, erect poles or
string wires. The primary franchise of a corporation, that is, the right to exist as
such, is vested ‘in the individuals who compose the corporation and not in the
corporation itself’, and cannot be conveyed in the absence of legislative authority
so to do so, but the special or secondary franchises of a corporation are vested in
the corporation and may ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its property except such special or
secondary franchises as are charged, with a public use. The right to operate a
messenger and express delivery service, by virtue of a legislative enactment, is
admittedly a secondary franchise and, as such, under our corporation law, is
subject to levy and sale on execution together and including all the property
necessary for the enjoyment thereof.

b. Right of Succession
SME Bank, Inc., el al. v. De Guzman, et al., October 8, 2013

There was a stock sale (distinct from asset sale where it does not require the
buyer to absorb corporate employees) where another corporation acquired the
majority shareholdings of the acquired corporation. Following the rule in stock
sales, respondent employees may not be dismissed except for just or authorized
causes under the Labor Code. Ratio: Because the corporation possesses a
personality separate and distinct from that of its shareholders, a shift in the
composition of its shareholders will not affect its existence and continuity. Thus,
notwithstanding the stock sale, the corporation continues to be the employer of
its people and continues to be liable for the payment of their just claims.
Furthermore, the corporation or its new majority shareholders are
not entitled to lawfully dismiss corporate employees absent a just or
authorized cause.

c. Doctrine of Limited Power

Section 2. Corporation Defined. - A corporation is an artificial being created by operation
of law, having the right of succession and the powers, attributes, and properties
expressly authorized by law or incidental to its existence.

d. GR: DOCTRINE OF SEPARATE PERSONALITY

EXN: PIERCING THE VEIL OF CORPORATE FICTION
CLASSIFICATION/GROUNDS TO JUSTIFY THE PIERCING OF CORPORATE
FICTION: 

[1] Fraud Cases—when the corporate entity is used to commit fraud or to do a wrong; 
[2] Alter Ego Cases—when the corporate entity is merely a farce since the corporation
is merely the alter ego, business conduit or instrumentality of a person or another entity;
and 
[3] Equity Cases —when the piercing the corporate fiction is necessary to achieve
justice or equity―equity cases. 
CASES:

===

STOCKHOLDERS OF F.GUENON AND SONS, INC. VS. ROD OF

MANILA [6 SCRA 373] Is a stockholders a co-owner and a tenant of
corporate property? A corporation is a juridical person distinct from
the members composing it. SC: Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members.
While shares of stock constitute personal property they don’t represent property of
the corporation. The corporation has property of its own which consists chiefly of
real estate.

A share of stock only typifies an aliquot part of the corporation’s property, or the
right to share in its proceeds to that extent when distributed according to law and
equity but its holder is not the owner of any part of the capital of the corporation.
Nor is he entitled to the possession of any definite portion of its property or assets.

The stockholder is not a co-owner or tenant in common of the corporate property.

Therefore, it is clear that the act of liquidation made by the stockholders of the F.
Guanzon and Son, Inc. of the latter’s assets is not and cannot be considered a
partition of community property, but rather a transfer or conveyance of the title of
its assets to the individual stockholders.

i. FACTS: Respondent Price Richardson Corporation (Price Richardson) is a

Philippine corporation duly incorporated under Philippine laws on December 7,
2000. Its primary purpose is "[t]o provide administrative services which includes
but is not limited to furnishing all necessary and incidental clerical, bookkeeping,
mailing and billing services. Its former employee, Michelle S. Avelino, (Avelino)
executed a sworn affidavit at the National Bureau of Investigation's Interpol
Division,10 alleging that Price Richardson was "engaged in boiler room operations,
wherein the company sells non[-]existent stocks to investors using high pressure
sales tactics."Whenever this activity was discovered, the company would close and
emerge under a new company name. Boiler Room operation is an illegal activity
considering that the company has no license from the Securities and Exchange
Commission to deal on securities or stocks. This led to the filing by the SEC before
the DOJ of its complaint against the Corporation with its incorporators and
directors, for Estafa and under Sections 26.3 and 28 of the Securities Regulation
Code. VELARDE-ALBERT was its Director for Operations and RESNICK was its
Associated Person. ISSUE: Can Velarde-Albert and Resnick be indicted for
violations of the SRC and RPC? SC: NO. Petitioner failed to allege the specific acts
of respondents Velarde-Albert and Resnick that could be interpreted as
participation in the alleged violations. There was also no showing, based on the
complaints, that they were deemed responsible for Price Richardson's violations. 

As found by State Prosecutor Reyes in his March 13, 2002 Resolution:

[T]here is no sufficient evidence to substantiate SEC's allegation that individual
respondents, Connie Albert and Gordon Resnick, acted as broker, salesman or
associated person without prior registration with the Commission. The evidence at
hand merely proves that the above-named respondents were not licensed to act as
broker, salesman or associated person. No further proof, however, was presented
showing that said respondents have indeed acted as such in trading securities.
Although complainant SEC presented several confirmation of trade receipts and
documents intended to establish respondents Albert and Resnick illegal activities,
the said documents, standing alone as heretofore stated, could not warrant the
indictment of the two respondents for the offense charged. 116

A corporation's personality is separate and distinct from its officers, directors, and
shareholders. To be held criminally liable for the acts of a corporation, there must
be a showing that its officers, directors, and shareholders actively participated in or
had the power to prevent the wrongful act.117
 ii. TRADERS ROYAL BANK VS. CA [177 SCRA 789]
SC: Although Ching was impleaded in the SEC case as a co-petitioner of PBM, the
SEC couldn’t assume jurisdiction over his person and properties. The Securities
and Exchange Commission was empowered, as rehabilitation receiver, to take
custody and control of the assets and properties of PBM only, for the SEC has
jurisdiction over corporations only not over private individuals, except stockholders
in an intra- corporate dispute (Sec. 5, PD 902-A and Sec 2, PD 1758). Being a
nominal party in the SEC Case No. 2250, Ching’s properties were not included in
the rehabilitation that the SEC constituted to take custody of PBM’s assets.
Therefore, the petitioner bank was not barred from filing a suit against Ching, as a
surety of PBM.

It is elementary that a corporation has a personality distinct and separate from its
individual stockholders or members. Being an officer of stockholder of a
corporation doesn’t make one’s property the property also of the corporation, for
they are separate entities. Ching’s act of joining as a co-petitioner with PBM in the
SEC case didn’t vest in the SEC jurisdiction over his person or property, for
jurisdiction doesn’t depend on the consent or acts of the parties but upon express
provision of the law.

iii. GOOD EARTH EMPORIUM INC. VS COURT OF APPEAL 194 SCRA 544
[GR NO. 82797 FEBRUARY 27, 1991]
SC: Being an officer or stockholder of a corporation does not by itself make one’s property
also of the corporation, and vice versa. A corporation has a personality distinct and separate
from its individual stockholders or members. Being an officer or stockholder of a corporation
does not make one’s property also of the corporation, and vice-versa, for they are separate
entities. As a consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder’s
debt or credit that of the corporation.

In the case at bar, the supposed payments were not made to Roces-Reyes Realty Inc. or to its
successors in interest nor is there positive evidence that payment was made to a person
authorized to receive it. No such proof was submitted but merely inferred by the RTC from
Marcos Roces having signed the lease contract as President which was witnessed by Jesus
Marcos Roces. The later, however, was no longer President or even an officer of the Roces-
Realty Inc at the time he received the money and signed the sale with pacto de retro. He, in
fact denied being in possession of authority to receive payment for the respondent
corporation nor does the receipt show that he signed in the same capacity as he did in the
lease contract at a time when he was President for respondent corporation.

iv. DEVELOPMENT BANK OF THE PHILIPPINES VS. NATIONAL LABOR

RELATIONS COMMISSION
Does the ownership of majority of stocks in a corporation create an ER-
EE relationship? SC: No. Ownership of majority of capital stock and fact that
majority of directors of a corporation are the directors of another corporation
creates no employer-employee relationship with latter’s employees.— These
circumstances are NOT sufficient indicia of the existence of an employer-employee
relationship as would confer jurisdiction over the case on the labor arbiter.

v. POLYTECHNIC UNIVERSITY VS CA
National Development Corporation (NDC) is a GOCC which owned a 10-hectare
property known as the NDC Compound. Sometime in May 1965, Firestone
Ceramics Inc. (FIRESTONE) leased a portion of the property for its ceramic
manufacturing business with a right of first refusal in case of sale. When it was to
be sold by NDC to PUP, Firestone filed an action for specific performance to
compel NDC to sell the leased property in its favor. Specifically, NDC contends that
if the parties involved are both government entities (NDC & PUP), the transaction
cannot be legally called a sale. SC: Beyond cavil, a government owned and
controlled corporation has a personality of its own, distinct and separate from that
of the government. The intervention in the transaction of the Office of the President
through the Executive Secretary did not change the independent existence of these
entities. The involvement of the Office of the President was limited to brokering the
consequent relationship between NDC and PUP.

vi. Dee Hwa Liong Foundation v. ASIAMED, G.R. No. 205638 | Aug. 23, ‘17
Dee Hwa Liong Foundation Medical Center (DHLFMC) and respondent Asiamed
Supplies and Equipment Corporation (Asiamed) entered into a Contract of Sale.
 This Contract of Sale stated that DHLFMC agreed to purchase from Asiamed an
equipment for a consideration of 31m, to be paid 2days after the delivery. However,
DHLFMC failed to pay, hence a collection suit ensued against it and Anthony Dee.
RTC rendered both to be solidarily liable.

Petitioners aver that petitioner Anthony should not have been held jointly and
severally liable for the breach of contract, invoking the separate personality of a
corporation. They point out that officers of a corporation are generally not liable for
the consequences of their acts done on behalf of the corporation and that there was
no proof that Anthony acted with bad faith or malice. ISSUE: whether or not
petitioner Anthony Dee was properly held solidarity liable with
petitioner Dee Hwa Liong Foundation Medical Center?

SC: Petitioners do not dispute that they specifically denied the allegation regarding
petitioner DHLFMC's corporate circumstances. Petitioners fail to show how the
Court of Appeals appreciation of this specific denial is an error of law. Petitioners
merely insist that petitioner Anthony was not shown to have acted in bad faith, and
thus, cannot be held solidarily liable with petitioner DHLFMC. However,
petitioners do not point to anything on record to counter their own specific denial
that would establish DHLFMC's existence as a corporation with separate juridical
personality. Thus, this argument must fail.

vii. SAVERIO V. PUYAT G.R. No. 186433| November 27, 2013

Alfonso Puyat granted a loan to NS International, represented by Nuccio Saverio.

This was made for the purpose of financing NSI‘s proposed business.
Unfortunately, the proposed business failed to materialize and the NSI defaulted in
the payment of its loan. This prompted Puyat to file a collection suit. Puyat alleged
that NS International and Saverio are one and the same, and that ―NS‖ stands for
Nuccio Saverio. Puyat further contends that the doctrine of piercing the veil of
corporate fiction should be applied. Nuccio Saverio maintains that NSI has a
separate and distinct personality, hence he cannot be made solidarily liable with
NSI. The mere ownership of 40% of NSI does not justify the piercing of the
separate and distinct personality of NSI.

SC: The rule is settled that a corporation is vested by law with a personality
separate and distinct from the persons composing it. Following this principle, a
stockholder, generally, is not answerable for the acts or liabilities of the
corporation, and vice versa. The obligations incurred by the corporate officers, or
other persons acting as corporate agents, are the direct accountabilities of the
corporation they represent, and not theirs. SC held that there was no clear and
convincing explanation that would justify piercing the veil of corporate fiction. In
this case, the mere fact that it was NS who, in behalf of the corporation, signed the
MOA is not sufficient to prove that he exercised control over the corporation‘s
finances. Neither the absence of a board resolution authorizing him to contract the
loan nor NSI‘s failure to object thereto supports this conclusion. These may be
indicators that, among others, may point the proof required to justify the piercing
the veil of corporate fiction, but by themselves, they do not rise to the level of proof
required to support the desired conclusion.

viii. Situs Dev Corp vs Asiatrust Bank G.R. No. 180036. July 25, 2012
In this case, the parcels of land mortgaged to respondent banks are owned not by
petitioners, but by spouses Chua. Applying the doctrine of separate juridical
personality, these properties cannot be considered as part of the corporate assets.
Even if spouses Chua are the majority stockholders in petitioner corporations, they
own these properties in their individual capacities. Thus, the parcels of land in
question cannot be included in the inventory of assets of petitioner corporations.

ix. Fortun v. Quinsayas G.R. No. 194578, Feb. 13, 2013

During the pendency of Maguindanao Massacre case, respondent Quinsayas,
counsel of Mangudadatu, filed a disbarment complaint against Fortun, counsel
for Amptuan, for allegedly unduly delaying the proceedings, the details of which
were published and circulated among several news outlets, which include SNN.
Fortun alleges that the dissemination of the details of the disbarment complaint
against him violated Rule 139-B of the ROC on the confidential nature of
 disbarment proceedings Thus, he filed a case for contempt against the news
outlets which included ABS-CBN whose subsidiary is SNN. In its comment, ABS-
CBN contends that ABS-CBN News Channel, commonly known as ANC, is
maintained and operated by Sarimanok Network News (SNN) and not by ABS-
CBN. SNN, which produced the program "ANC Presents: Crying for Justice: the
Maguindanao Massacre," is a subsidiary of ABS-CBN but it has its own juridical
personality although SNN and ABS-CBN have interlocking directors.

SC: A subsidiary has an independent and separate juridical personality distinct

from that of its parent company and that any suit against the latter does not bind
the former and vice-versa. A corporation is an artificial being invested by law with
a personality separate and distinct from that of other corporations to which it may
be connected. Hence, SNN, not ABS-CBN, should have been made respondent in
this case.

e. Doctrine of Piercing the Veil of Corporate Fiction

GENERAL RULE:, a corporation’s representatives are generally not bound by the terms
of the contract executed by the corporation. HENCE, they are not personally liable for
obligations and liabilities incurred on or in behalf of the corporation.

EXCEPTION: When Piercing the Veil of Corporate Fiction is warrantedwhen "[the

separate personality of a corporation] is used
1. as a means to perpetrate fraud or an illegal act, or
2. as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.”
3. in 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
• When corporate veil is pierced, the corporation and persons who are normally treated
as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.

i. Heirs of Fe Ten Uy v. International Exchange Bank G.R. No. 166282

Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in
its behalf and, in general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues.

Before a director or officer of a corporation can be held personally liable for

corporate obligations, however, the following requisites must concur:

(1) the complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer
was guilty of gross negligence or bad faith; and

(2) the complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.

ii. De Lima v. Gois G.R. No. 178352

Delima filed an illegal dismissal case against Golden Corporation and Susan Gois.
The Labor Arbiter (LA) rendered a decision that Delima was illegally dismissed
and Golden Corporation is to pay Backwages, Separation Pay, Salary
Differentials, SIL. The decision became final and executory. A writ of execution
was issued and a certain Isuzu Jeep was attached which is registered in Gois’
name, not Golden Corporation. SC: The rule is that obligations incurred by the
Corporation, acting through its directors, officers and employees, are its sole
 liabilities. Thus, property belonging to a corporation cannot be attached to satisfy
the debt of a stockholder and vice versa, the latter having only an indirect interest
in the assets and business of the former.

iii. Padilla and Phoenix-Omega v. CA and Susana Realty G.R. No.

123893
The general rule is that a corporation is clothed with a personality separate and
distinct from the persons composing it. It may not be held liable for the
obligations of the persons composing it, and neither can its stockholders be held
liable for its obligations. As an exception, a veil of corporate fiction may only be
disregarded in cases where the corporate vehicle is being used to defeat public
convenience, justify wrong, protect fraud, or defend crime.

PKA and Phoenix-Omega are admittedly sister companies, and may be sharing
personnel and resources, but in this case there is no allegation, much less positive
proof, that their separate corporate personalities are being used to defeat public
convenience, justify wrong, protect fraud, or defend crime.

iv. PNB, NASUDECO vs. Andrada Electric and Engineering Company

Gr No. 142936.April 17,2002

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 Andrada Electric & Engineering Company
(AEEC).

Piercing the veil of corporate fiction may be allowed only if the following
elements concur:
1. control not mere stock control, but complete domination² not only of
finances, but of policy and business practice in respect to the transaction
attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. such control must have been used by the defendant to commit a fraud or
a wrong to perpetuate the violation of a statutory or other positive legal
duty, or a dishonest and an unjust act in contravention of plaintiff's legal
right; and
3. the said control and breach of duty must have proximately caused the
injury or unjust loss complained of.

The absence of the foregoing elements in the present case precludes the piercing
of the corporate veil.

First, other than the fact that PNB and NASUDECO acquired the assets of
PASUMIL, there is no showing that their control over it warrants the disregard of
corporate personalities.

Second, there is no evidence that their juridical personality was used to commit a
fraud or to do a wrong; or that the separate corporate entity was farcically used as
a mere alter ego, business conduit or instrumentality of another entityor person.

Third, AEEC was not defrauded or injured when PNB and NASUDECO acquired
the assets of PASUMIL. Hence, although the assets of NASUDECO can be easily
traced to PASUMIL, the transfer of the latter's assets to PNB and NASUDECO
was not fraudulently entered into in order to escape liability for its debt to AEEC.

v. Concept Builders Inc. v. NLRC

Clearly, petitioner ceased its business operations in order to evade the payment
to private respondents of back wages and to bar their reinstatement to their
former positions. HPPI is obviously a business conduit of petitioner corporation
and its emergence was skillfully orchestrated to avoid the financial liability that
already attached to petitioner corporation.

vi. General Credit Corp vs. Alsons Dev and Investment Corp
It must be noted that as characterized by their business relationship,
[respondent] EQUITY and [petitioner] GCC had common directors and/or
 officers as well as stockholders. This is revealed by the proceedings recorded in
SEC Case No. 25-81 entitled "Avelina Ramoso, et al., v. GCC, et al., where it was
established, thru the testimony of EQUITY's own President - that more than 90%
of the stockholders of - EQUITY were also stockholders of - GCC '.. Disclosed
likewise is the fact that when [EQUITY's President] Labayen sold the
shareholdings of EQUITY in said franchise companies, practically the entire
proceeds thereof were surrendered to GCC, and not received by EQUITY
(EXHIBIT "RR").

It was likewise shown by a preponderance of evidence that not only had 'GCC
financed - EQUITY and that the latter was heavily indebted to the former but
EQUITY was, in fact, a wholly owned subsidiary of

'GCC. Thus, as affirmed by EQUITY's President, - the funds invested by EQUITY

in the CCC franchise companies actually came from CCC Phils. or GCC (Exhibit
"Y-5")'. that, as disclosed by the Auditor's report for 1982, past due receivables
alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates especially CCC
EQUITY. '; that [CB's] Report of Examination dated July 14, 1977 shows that -
EQUITY which has a paid-up capital of only P500,000.00 was the biggest
borrower of GCC with a total loan of P6.70 Million '.

Given the foregoing considerations, it behooves the petitioner, as a matter of law

and equity, to assume the legitimate financial obligation of a cash-strapped
subsidiary corporation which it virtually controlled to such a degree that the
latter became its instrument or agent. The facts, as found by the courts a quo, and
the applicable law call for this kind of disposition. Or else, the Court would be
allowing the wrong use of the fiction of corporate veil.

vii. Lanuza vs. BF Corporation

BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-La and the members of its board of directors: Alfredo C. Ramos, Rufo B.
Colayco, Antonio O. Olbes, Gerardo, alleging that it entered into agreements with
Shangri-La wherein it undertook to construct for Shangri-La a mall w/multilevel
parking structure, but the latter later defaulted in its payments and despite such,
still took possession of the buildings. BOD of Shangrila filed a motion to suspend
the proceedings in view of BF Corporation’s failure to submit its dispute to
arbitration, in accordance with the arbitration clause provided… in its contract
BF Corporation opposed the motion to suspend proceedings

W/N petitioners (Board of Directors) should be made parties to the arbitration

proceedings, pursuant to the arbitration clause provided in the contract between
BF Corporation and Shangri-La?

SC: The petitioners may be compelled to submit to the arbitration proceedings.

The Supreme Court held that the directors and officers should be included in the
arbitration proceedings in order to determine whether or not the distinction
between the directors and officers from Shangri-la must be disregarded. In other
words, the issue is to determine the application of the Doctrine of Piercing the
Corporate Veil.

viii. COMMISSIONER OF INTERNAL REVENUE vs. DOMINADOR

MENGUITO G.R. No. 167560 | September 17, 2008

In the present case, overwhelming evidence supports the CTA in disregarding the
separate identity of CKCS, Inc. from CKCS and in treating them as one taxable
entity.

1. First, in DOMINADOR’S Petition for Review before the CTA, he

expressly admitted that he "is engaged in restaurant and/or cafeteria
business" and that "[i]n 1991, 1992 and 1993, he also operated a branch
at Club John Hay, Baguio City with a business name of Copper Kettle
Cafeteria Specialist."32 MENGUITO repeated such admission in the
Joint Stipulation.33 And then in Exhibit "1"34 for petitioner, a July 18,
1994 letter sent by Jeanne Menguito to BIR, Baguio City, she stated.
 2. Second, in Exhibit "8"43 and Exhibit "E,"44 Texas Instruments identified
the concessionaire operating its canteen as "Copper Kettle Catering
Services, Inc."45 and/or "COPPER KETTLE CAFETERIA SPECIALIST
SVCS."46 It being settled that respondent's "Copper Kettle Cafeteria
Specialist" is also known as "Copper Kettle Catering Services," and that
respondent and Jeanne Menguito both own, manage and act as
proprietors of the business, Exhibit "8" and Exhibit "E" further establish
that, through said business, respondent also had taxable transactions
with Texas Instruments.

In view of the foregoing facts and circumstances, the Articles of

Incorporation of CKCS, Inc. -- a certified true copy of which respondent
attached only to his Reply filed with the CA47 -- cannot insulate it from
scrutiny of its real identity in relation to CKCS. It is noted that said
Articles of Incorporation of CKCS, Inc. was issued in 1989, but
documentary evidence indicate that after said date, CKCS, Inc. has also
assumed the name CKCS, and vice-versa.

ix. MENDOZA AND YOTOKO vs. BANCO REAL DEVELOPMENT BANK

G.R. No. 140923 | September 16, 2005

ISSUE: WON THE DOCTRINE OF PIERCING ON THE COPRORATE VEIL IS

APPLICABLE IN THIS CASE. NO. IT IS NOT APPLICABLE.

RULING: The general rule is that obligations incurred by a corporation, acting

through its directors, officers or employees, are its sole liabilities. However, the
veil with which the law covers and isolates the corporation from its directors,
officers or employees will be lifted when the corporation is used by any of them as
a cloak or cover for fraud or illegality or injustice.
Here, the fraud was committed by the officers to the prejudice of the bank. As
reported by the sheriff, TVI is no longer doing business at its given address and
Mendoza, when asked of its whereabouts have denied any knowledge thereof.
Both the trial court and the Court of Appeals thus concluded that the officers
succeeded to hide the chattels, preventing the sheriff to foreclose the mortgage.
Obviously, they acted in bad faith to defraud respondent bank.
Thus, the Supreme Court ruled that with the presence of fraud, the doctrine of
piercing on the corporate veil is not applicable in this case. The officers shall be
held personally liable to the bank.

x. Livesey v. Binswanger Philippines 719 SCRA 433

In the present case, we see an indubitable link between CBB’s closure and
Binswanger’s incorporation. CBB ceased to exist only in name; it re-emerged in
the person of Binswanger for an urgent purpose — to avoid payment by CBB of
the last two installments of its monetary obligation to Livesey, as well as its other
financial liabilities. Freed of CBB’s liabilities, especially that owing to Livesey,
Binswanger can continue, as it did continue, CBB’s real estate brokerage
business.

Livesey’s evidence, whose existence the respondents never denied, converged to

show this continuity of business operations from CBB to Binswanger. It was not
just coincidence that Binswanger is engaged in the same line of business CBB
embarked on:
1. it even holds office in the very same building and on the very same
floor where CBB once stood;
2. CBB’s key officers, Elliot, no less, and Catral moved over to
Binswanger, performing the tasks they were doing at CBB;
3. notwithstanding CBB’s closure, Binswanger’s Web Editor (Young), in
an e-mail correspondence, supplied the information that Binswanger
is "now known" as either CBB (Chesterton Blumenauer Binswanger
or as Chesterton Petty, Ltd., in the Philippines;
4. the use of Binswanger of CBB’s paraphernalia (receiving stamp) in
connection with a labor case where Binswanger was summoned by
the authorities, although Elliot claimed that he bought the item with
his own money; and
 5. Binswanger’s takeover of CBB’s project with the PNB.

Binswanger Philippines Inc. and Keith Elliot (CEO and President) are jointly and
severally liable to Eric Livesy.

xi. Francisco v. Mejia 326 SCRA 738

The act of not paying or failing to pay taxes due the government by the defendant
Adalia B. Francisco, as treasurer of Cardale Financing and Realty Corporation do
not, per se, constitute perpetration of fraud or an illegal act. It do [sic] not also
constitute an act of evasion of an existing obligation (to plaintiff) if there is no
clear showing that such an act of non-payment of taxes was deliberately made
despite its (Cardales) solvency and capability to pay. There is no evidence
showing that Cardale Financing and Realty Corporation was financially capable
of paying said taxes at the time.

SUMMARY IN FRAUD CASES

1. There must have been fraud or an evil motive in the affected transaction, and the
mere proof of control of the corporation by itself would not authorize piercing;
2. Corporate entity has been used in the perpetration of fraud or in the justification of
wrong, or to escape personal liability;
3. The main action should seek for the enforcement of pecuniary claims pertaining to
the corporation against corporate officers or stockholders; or vice versa.

ALTER-EGO CASES

xii. WPM INTERNATIONAL TRADING, INC. & MANLAPAZ v. LABAYEN

G.R. 182770 | September 17, 2014

Three elements before the doctrine can apply

Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements, namely:

1. Control, not mere majority or complete stock control, but complete

domination, not only of finances, but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will, or existence of its
own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiff’s legal right; and
3. The said control and breach of duty must have proximately caused
the injury or unjust loss complained of.

The absence of any of these elements prevents piercing the corporate

veil.
 
IN THIS CASE: The attendant circumstances do not establish that WPM is a
mere alter ego of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records
do not show that WPM was organized and controlled, and its affairs conducted in
a manner that made it merely an instrumentality, agency, conduit ,or adjunct of
Manlapaz. 

RULE: The control necessary to invoke the instrumentality or alter ego 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. The control must be shown to have been exercised at
the time the acts complained of took place. Moreover, the control and breach of
duty must proximately cause the injury or unjust loss for which the complaint is
made.

Here, the respondent failed to prove that Manlapaz, acting as president, had
absolute control over WPM. Even granting that he exercised a certain degree of
 control over the finances, policies and practices of WPM, in view of his position
as president, chairman and treasurer of the corporation, such control does not
necessarily warrant piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN or the respondent, or that
Manlapaz was guilty of bad faith or fraud.

xiii. Gala v. Ellice Agro-Industrial 418 SCRA 431

Petitioners pray that the veil of corporate fiction that shroud both Ellice and
Margo be pierced, consistent with their earlier allegation that both corporations
were formed for purposes contrary to law and public policy.

SC: With regard to their claim that Ellice and Margo were meant to be used as
mere tools for the avoidance of estate taxes, suffice it say that the legal right of a
taxpayer to reduce the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted. Thus, even if
Ellice and Margo were organized for the purpose of exempting the properties of
the Gala spouses from the coverage of land reform legislation and avoiding estate
taxes, the court cannot disregard their separate juridical personalities. To
warrant resort to the extraordinary remedy of piercing the veil of corporate
fiction, there must be proof that the corporation is being used as a cloak or cover
for fraud or illegality, or to work injustice.

The petitioners have failed to prove that Ellice and Margo were being used thus.
They have not presented any evidence to show how the separate juridical entities
of Ellice and Margo were used by the respondents to commit fraudulent, illegal or
unjust acts.

xiv. PNB vs Ritratto Group 362 SCRA 216

xv. Commissioner of Customs v. Oilink G.R. No. 161759, July 2, 2014
xvi. A.D. Santos vs. Vasquez
xvii. International Academy and Economics vs. Litton and Company, Inc.
(2017)

Atty. Santos is a lessee of two buildings owned by Litton and he owed the latter
rental arrears as well as his share of the payment of realty taxes. Litton filed a
complaint for unlawful detainer against Santos and eventually, he was ordered by
the Court to vacate the building and pay various sums of money. When the sheriff
levied on a piece of real property registered in the name of International
Academy of Management and Economics Incorporated (IAME) in order to
execute the judgment against Santos, IAME filed a Motion to Lift or Remove the
Annotations inscribed in the TCT claiming that it has a separate and distinct
personality from Santos, hence its properties should not be made to answer for
the latter’s liabilities.
1. WON the piercing of the Corporate veil may apply to Non-stock
Corporations. YES
2. WON piercing the Corporate veil may apply to Natural Persons. YES

SC: I/AME argues that the doctrine of piercing the corporate veil applies only to
stock corporations, and not to non-stock, nonprofit corporations such as I/AME
since there are no stockholders to hold liable in such a situation but instead only
members. Hence, they do not have investments or shares of stock or assets to
answer for possible liabilities.To this the Court agreed with the CA when it ruled
that ruled that since the law does not make a distinction between a stock and
non-stock corporation, neither should there be a distinction in case the doctrine
of piercing the veil of corporate fiction has to be applied. While I/AME is an
educational institution, the CA further ruled, it still is a registered corporation
conducting its affairs as such.

II. The petitioner also insists that the piercing of the corporate veil cannot be
applied to a natural person - in this case, Santos - simply because as a human
being, he has no corporate veil shrouding or covering his person.

a) When the Corporation is the Alter Ego of a Natural Person

The doctrine of alter ego is based upon the misuse of a corporation by an
individual for wrongful or inequitable purposes, and in such case the court
 merely disregards the corporate entity and holds the individual responsible
for acts knowingly and intentionally done in the name of the corporation.
This Court has held that the "corporate mask may be lifted and the corporate
veil may be pierced when a corporation is just but the alter ego of a person or
of another corporation.

I/AME is the alter ego of Santos, and Santos - the natural person - is the alter
ego of I/AME. Santos falsely represented himself as President of I/AME in
the Deed of Absolute Sale when he bought the Makati real property, at a time
when I/AME had not yet existed. There were also several uncontroverted
facts showing IAME and Santos as being one and the same person:

a. Santos is the conceptualizer and implementor of IAME.

b. Santos is the majority contributor of IAME (1.2M out of the 1.5M)

c. The building occupied by IAME is named after Santos

d. Santos made admissions in his pleadings that the corporate entity is
his alter ego

(b) Reverse Piercing of the Corporate Veil

The Court discussed that we borrow from American parlance what is called
reverse piercing or reverse corporate piercing or piercing the corporate veil "in
reverse.

The court cited a US Case:

In a traditional veil-piercing action, a court disregards the existence of the
corporate entity so a claimant can reach the assets of a corporate insider. In a
reverse piercing action, however, the plaintiff seeks to reach the assets of a
corporation to satisfy claims against a corporate insider."

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-

piercing and makes the corporation liable for the debt of the shareholders.

It has two (2) types: outsider reverse piercing and insider reverse piercing.

Outsider reverse piercing – occurs when a party with a claim against an

individual or corporation attempts to be repaid with assets of a corporation
owned or substantially controlled by the defendant.

Insider reverse piercing – the controlling members will attempt to ignore the
corporate fiction in order to take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or protection of personal assets.

In this case, Outsider reverse piercing is applicable. Litton, as judgment creditor,

seeks the Court's intervention to pierce the corporate veil of I/AME in order to
make its Makati real property answer for a judgment against Santos, who
formerly owned and still substantially controls I/AME.

The Court discussed that the equitable remedy of reverse corporate piercing or
reverse piercing is not meant to encourage a creditor’s failure to undertake such
remedies that could have otherwise been available, to the detriment of other
creditors.

Reverse corporate piercing is an equitable remedy which if utilized cavalierly,

may lead to disastrous consequences.

The Court discussed that it may have been possible for the Court to recommend,
pursuant to the Rules of Civil Procedure, that Litton run after the other
properties of Santos that could satisfy the money judgment

However, if this were allowed, it would frustrate the decades-old yet valid MeTC
judgment which levied on the real property now titled under the name of the
school. Moreover, this Court will unwittingly condone the action of Santos in
hiding all these years behind the corporate form to evade paying his obligation
under the judgment in the court a quo. This we cannot countenance without
being a party to the injustice.
 Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on
execution of the Makati real property where the school now stands is applied.

xviii. C.F. Trust, Inc., vs. First Flight Limited Partnership (U.S. Case)
Reverse-piercing flows in the opposite direction (of traditional corporate veil-
piercing) and makes the corporation liable for the debt of the shareholders.

2 types of Reverse Piercing

1. Outsider Reverse Piercing

Outsider reverse piercing occurs when a party with a claim against an

individual or corporation attempts to be repaid with assets of a
corporation owned or substantially controlled by the defendant. 

2. Insider Reverse Piercing

 
The controlling members will attempt to ignore the corporate fiction in
order to take advantage of a benefit available to the corporation, such as
an interest in a lawsuit or protection of personal assets. 

xix. Palacio vs. Fely Transportation Co

xx. Maricalum Mining Corporation vs Florentino (G.R. No. 221813, G.R.
No. 222723 July 23, 2018)

The dispute traces its roots back to when the Philippine National Bank (PNB, a
former government-owned-and-controlled corporation) and the Development
Bank of the Philippines (DBP) transferred its ownership of Maricalum Mining to
the National Government for disposition or privatization because it had become a
non-performing asset. 

On October 2, 1992, the National Government thru the Asset Privatization Trust
(APT) executed a Purchase and Sale Agreement (PSA) with G Holdings, a
domestic corporation primarily engaged in the business of owning and holding
shares of stock of different companies. G Holding bought 90% of Maricalum
Mining's shares and financial claims in the form of company notes. In exchange,
the PSA obliged G Holdings to pay APT the amount of P673,161,280.00, with a
down payment of P98,704,000.00 and with the balance divided into four
tranches payable in installment over a period of ten years. Concomitantly, G
Holdings also assumed Maricalum Mining's liabilities in the form of company
notes. The said financial liabilities were converted into three (3) Promissory
Notes (PNs) totaling P550,000,000.00 (P114,715,360.00, P186,550,560.00 and
P248,734,080.00), which were secured by mortgages over some of Maricalum
Mining's properties. These PNs obliged Maricalum Mining to pay G Holdings the
stipulated amount of P550,000,000.00. 

Upon the signing of the PSA and paying the stipulated down payment, G
Holdings immediately took physical possession of Maricalum Mining's Sipalay
Mining Complex, as well as its facilities, and took full control of the latter's
management and operations. 

On January 26, 1999, the Sipalay General Hospital, Inc. (Sipalay Hospital) was
duly incorporated to provide medical services and facilities to the general public. 

On June 1, 2001, Maricalum Mining's Vice President and Resident Manager

Jesus H. Bermejo wrote a Memorandum to the cooperatives informing them that
Maricalum Mining has decided to stop its mining and milling operations effective
July 1, 2001 in order to avert continuing losses brought about by the low metal
prices and high cost of production. 

On September 23, 2010, some of Maricalum Mining's workers, including

complainants, and some of Sipalay General Hospital's employees jointly filed a
Complaint with the LA against G Holdings, its president, and officer-in-charge,
and the cooperatives and its officers for illegal dismissal. 
The complainants posited that: the manpower cooperatives were mere alter egos
of G Holdings organized to subvert the "tenurial rights" of the complainants; G
Holdings implemented a retrenchment scheme to dismiss the caretakers it hired
before the foreclosure of Maricalum Mining's assets; and G Holdings was their
employer because it allegedly had the power to hire, pay wages, control working
methods and dismiss them. 

Correspondingly, G Holdings filed its Position Paper maintaining that: it was

Maricalum Mining who entered into an agreement with the manpower
corporations for the employment of complainants' services for auxiliary or
seasonal mining activities; the manpower cooperatives were the ones who paid
the wages, deducted social security contributions, withheld taxes, provided
medical benefits and had control over the working means and methods of
complainants; despite Maricalum Mining's decision to stop its mining and
milling operations, complainants still continued to render their services for the
orderly winding down of the mines' operations; Maricalum Mining should have
been impleaded because it is supposed to be the indispensable party in the
present suit; (e) Maricalum Mining, as well as the manpower cooperatives, each
have distinct legal personalities and that their individual corporate liabilities
cannot be imposed upon each other; and there was no employer-employee
relationship between G Holdings and complainants. 
ISSUE: Whether or not the piercing of the Corporate veil fiction is proper. 
RULING: No. The piercing of the Corporate veil fiction is not proper. 
The Supreme Court said, 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 as a vehicle
for the evasion of an existing obligation; 
(b) fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; 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. 

This principle is basically applied only to determine established liability.

However, piercing of the veil of corporate fiction is frowned upon and must be
done with caution. This is because a corporation is invested by law with a
personality separate and distinct from those of the persons composing it as well
as from that of any other legal entity to which it may be related. 

A parent or holding company is a corporation which owns or is organized to own

a substantial portion of another company's voting shares of stock enough to
control or influence the latter's management, policies or affairs thru election of
the latter's board of directors or otherwise. However, the term "holding company"
is customarily used interchangeably with the term "investment company" which,
in turn, is defined by Section 4 (a) of Republic Act (R.A.) No. 262961 as "any
issuer (corporation) which is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting, or trading
in securities." 

In other words, a "holding company" is organized and is basically conducting its

business by investing substantially in the equity securities of another company
for the purposes of controlling their policies (as opposed to directly engaging in
operating activities) and "holding" them in a conglomerate or umbrella structure
along with other subsidiaries. Significantly, the holding company itself-being a
separate entity-does not own the assets of and does not answer for the liabilities
of the subsidiary or affiliate. The management of the subsidiary or affiliate still
rests in the hands of its own board of directors and corporate officers. It is in
keeping with the basic rule a corporation is a juridical entity which is vested with
a legal personality separate and distinct from those acting for and in its behalf
and, in general, from the people comprising it. The corporate form was created to
allow shareholders to invest without incurring personal liability for the acts of the
corporation. 

While the veil of corporate fiction may be pierced under certain instances, mere
ownership of a subsidiary does not justify the imposition of liability on the parent
company. It must further appear that to recognize a parent and a subsidiary as
separate entities would aid in the consummation of a wrong. Thus, a holding
corporation has a separate corporate existence and is to be treated as a separate
entity; unless the facts show that such separate corporate existence is a mere
sham, or has been used as an instrument for concealing the truth. 

In the case at bench, complainants mainly harp their cause on the alter ego
theory. Under this theory, piercing the veil of corporate fiction may be allowed
only if the following elements concur: 

1) Control-not mere stock control, but complete domination-not only of finances,

but of policy and business practice in respect to the transaction attacked, must
have been such that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own; 
2) Such control must have been used by the defendant to commit a fraud or a
wrong, to perpetuate the violation of a statutory or other positive legal duty, or a
dishonest and an unjust act in contravention of plaintiffs legal right; and 
3) The said control and breach of duty must have proximately caused the injury
or unjust loss complained of. 

The elements of the alter ego theory were discussed in Philippine National Bank
v. Hydro Resources Contractors Corporation, to wit: 

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

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

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

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

Again, all these three elements must concur before the corporate veil may be
pierced under the alter ego theory. Keeping in mind the parameters, guidelines
and indicators for proper piercing of the corporate veil, the Court now proceeds
to determine whether Maricalum Mining's corporate veil may be pierced in order
to allow complainants to enforce their monetary awards against G Holdings. 

I. Control or Instrumentality Test 

In Concept Builders, Inc. v. National Labor Relations Commission, et al the Court

first laid down the first set of probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, viz: 
 1) Stock ownership by one or common ownership of both corporations. 
2) Identity of directors and officers. 
3) The manner of keeping corporate books and records. 
4) Methods of conducting the business. 

Later, in Philippine National Bank v. Ritratto Group Inc., et al., the Court
expanded the aforementioned probative factors and enumerated a combination
of any of the following common circumstances that may also render a subsidiary
an instrumentality, to wit: 

1) The parent corporation owns all or most of the capital stock of

the subsidiary; 
2) The parent and subsidiary corporations have common directors
or officers; 
3) The parent corporation finances the subsidiary; 
4) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation; 
5) The subsidiary has grossly inadequate capital; 
6) The parent corporation pays the salaries and other expenses or
losses of the subsidiary; 
7) The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
the parent corporation; 
8) In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division
of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own; 
9) The parent corporation uses the property of the subsidiary as its
own; 
10) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their
orders from the parent corporation; and 
11) The formal legal requirements of the subsidiary are not
observed. 

In the instant case, there is no doubt that G Holdings-being the majority and
controlling stockholder-had been exercising significant control over Maricalum
Mining. This is because this Court had already upheld the validity and
enforceability of the PSA between the APT and G Holdings. It was stipulated in
the PSA that APT shall transfer 90% of Maricalum Mining's equity securities to G
Holdings and it establishes the presence of absolute control of a subsidiary's
corporate affairs. 

Moreover, the Court evinces its observation that Maricalum Mining's corporate
name appearing on the heading of the cash vouchers issued in payment of the
services rendered by the manpower cooperatives is being superimposed with G
Holding's corporate name. Due to this observation, it can be reasonably inferred
that G Holdings is paying for Maricalum Mining's salary expenses. Hence, the
presence of both circumstances of dominant equity ownership and provision for
salary expenses may adequately establish that Maricalum Mining is an
instrumentality of G Holdings. 

However, mere presence of control and full ownership of a parent over a

subsidiary is not enough to pierce the veil of corporate fiction. It has been
reiterated by this Court time and again 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. 

Additional cases

xxi. Philippine Overseas Telecommunication Corp., v. SB, G.R. No.

174462, Feb. 10, 2016

SC: The facts surrounding the present case square with those in PCGG v.
Sandiganbayan (PCGG). In PCGG, the complaint was filed against private
individuals, Nieto and Africa, who are shareholders in Aerocom. The Court ruled
that the failure to implead Aerocom, the corporation, violated the fundamental
 principle that a corporation's legal personality is distinct and separate from its
stockholders, and that mere annexation to the list of corporations does not
suffice. In the same manner as PCGG, in the case at bar, the Complaint was filed
only against POTC and PHILCOMSAT' s stockholders, who are private
individuals. Similarly, POTC and PHILCOMSAT were also merely annexed to the
list of corporations and were not properly impleaded in the case. The suit was
against its individual shareholders, herein respondents, Jose L. Africa, Manuel H.
Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos, Ferdinand R. Marcos, Jr.,
Roberto S. Benedicto, Juan Ponce Enrile, and Potenciano Ilusorio.

Failure to implead POTC and PHILCOMSAT is a violation of the fundamental

principle that a corporation has a legal personality distinct and separate from its
stockholders;24 that, the filing of a complaint against a stockholder is not ipso
facto a complaint against the corporation. Our pronouncement in Aerocom is apt:
There is no existing sequestration to talk about in this case, as the writ issued
against Aerocom, to repeat, is invalid for reasons hereinbefore stated. Ergo, the
suit in Civil Case No. 0009 against Mr. Nieto and Mr. Africa as shareholders in
Aerocom is not and cannot ipso facto be a suit against the unimpleaded Aerocom
itself without violating the fundamental principle that a corporation has a legal
personality distinct and separate from its stockholders. Such is the ruling laid
down in PCGG v. Jnterco reiterated anew in a case of more recent vintage
- Republic v. Sandiganbayan, Sipalay Trading Corp. and Allied Banking
Corp. where this. Court, speaking through Mr. Justice Ricardo J. Francisco,
hewed to the lone dissent of Mr. Justice Teodoro R. Padilla in the very same
Republic v. Sandiganbayan case herein invoked by the PCGG, to wit:
xxxx. (Emphasis supplied, citations omitted)

The basic tenets of fair play and principles of justice dictate that a corporation, as
a legal entity distinct and separate from its stockholders, must be impleaded as
defendants, giving it the opportunity to be heard. The failure to properly implead
POTC and PHILCOMSAT not only violates the latters' legal personality, but is
repugnant on POTC's and PHILCOMSAT's right to due process. "[F]ailure to
implead these corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of their right to due process for it
would in effect be disregarding their distinct and separate personality without a
hearing."25 As already settled, a suit against individual stockholders is not a suit
against the corporation.

Proceeding from the foregoing, as POTC and PHILCOMSAT were not impleaded,
there is no longer any existing sequestration on POTC and PHILCOMSAT.26 The
sequestration order over POTC and PHILCOMSAT was automatically lifted six
(6) months after the ratification of the 1987 Constitution on 2 February 1987 for
failure to implead POTC and PHILCOMSAT in Civil Case No. 0009 before the
Sandiganbayan or before any court for that matter.27 To recite Section 26, Article
XVIII of the Constitution, if no judicial action has been filed within six (6)
months after the ratification of the 1987 Constitution, the writ of sequestration
shall automatically be lifted. Note must be made of the fact that we do not here
touch our previous holding that Civil Case No. 0009 was filed within the 6-month
period. We now say that such notwithstanding, and as shown by the facts on
record, the POTC and PHILCOMSA T were not impleaded in the Civil Case.

xxii. Stockholders of Guanzon & Sons, Inc. v. ROD Manila, G.R. No. L-18216, Oct.
30, 1962
xxiii. Litonjua, Jr. v. Eternit Corporaton, G.R. No. 144805, June 8, 2006
xxiv. Siochi Fishery Enterprises, Inc., et a. v. BPI, G.R. No. 193872, October 19, 2011
xxv. PNB v. Aznar, G.R. No. 171805 and 172021, May 30, 2011
xxvi. Lim v. Court of Appeals, G.R. No. 124716, January 24, 2000

III. Doctrine of Corporate Responsibility – direct and primary responsibility of Hospitals (or other
form of Corporations) is based on this doctrine which stem from its duty to make reasonable
effort to monitor and oversee the treatment prescribed and administered by the physicians
practicing in its premises. [See Article 2176 of the Civil Code] – consequence, diligence in the
selection and supervision of employee is not a valid defense unlike in Art. 2180 of the Civil Code.
IV. Right to Moral Damages

i. MAMBULAO LUMBER v. PNB 22 SCRA 359 (1968); San Fernando

Regala Trading Inc. vs. Cargill Phil. 707 SCRA 187 (2013)
Obviously, an artificial person like herein appellant corporation cannot
experience physical sufferings, mental anguish, fright, serious anxiety, wounded
feelings, moral shock or social humiliation which are the basis of moral damages.
A corporation may have a good reputation which, if besmirched, may also be a
ground for the award of moral damages.

ii. MERALCO v. TEAM ELECTRONICS CORP 540 SCRA 62 (2007);

xxxIt is imperative for the claimant Corporation to present proof to justify the
award for moral damages. It is essential to prove the existence of the factual basis
of the damage and its causal relation to petitioner's acts.

iii. ABS CBN Broadcasting vs. Court of Appeals 301 SCRA 589 (1999)
The statement in People v. Manero and Mambulao Lumber Co. v. PNB that a
corporation may recover moral damages if it "has a good reputation that is debased,
resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

iv. Employees’ Union of Bayer Phils vs. Bayer Phil. 636 SCRA 437
(2010)
A corporation, and by analogy a labor organization, being an artificial person and
having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish.

V. Constitutional Rights
i. SMITH, BELL & COMPANY v. NATIVIDAD (40 Phil 136)
Smith, Bell & Co argues that Act 2761 denies them the equal protection of the
laws because it in effect prohibits the corporation from owning vessels and that it
deprives the corporation of its property without due process of law, because by
the passage of the law it left them with only naked title to a boat it could not use.
Whether or not a corporation as an artificial being is entitled to the constitutional
right of due process and equal protection of the laws? Yes. SC: The guaranties of
due process of law and equal protection of the laws in the 14th amendment and
the Philippine bill of rights are universal in their application to all persons.

ii. STONEHILL v. DIOKNO GR L-19550, JUNE 19, 1967

Several judges issued 42 search warrants against Stonehill, et al and the
corporations where they are officers. The warrant directed the peace officers to
search the offices, warehouses and residences of Stonehill, et al, as well as to seize
various documents of the corporations which showed their business transactions.
Because of this, Stonehill, et al assailed the validity of the warrants and seizures.
Whether or not Stonehill, et al has the capacity to assail the validity of the
warrants against the corporation? NO. SC: Stonehill et al has no cause of action
to assail the legality of the contested warrants and the seizures made against the
corporations. It is because said corporations have their respective personalities,
separate and distinct from the personality of its officers, regardless of the amount
of shares of stock or of the interest of each of them in the corporations, and
whatever offices they hold therein may be. Thus, the legality of a seizure can
be contested only by the party whose rights have been impaired
thereby, and that the objection to an unlawful search and seizure is
purely personal and cannot be availed of by third parties. Consequently,
Stonehill et al may not validly object to the use in evidence against them of the
documents, papers and things seized from the offices and premises of the
corporations since the right to object to the admission of said pieces of
evidence belongs exclusively to the corporations, to whom the seized
effects belong, and may not be invoked by the corporate officers in
proceedings against them in their individual capacity.

iii. BACHE & CO. vs RUIZ

 In the case at bar, the corporation to whom the seized documents belong, and
whose rights have thereby been impaired, is itself a petitioner. Therefore, it has
standing to object to the legality of the search and seizure.

iv. BATAAN SHIPYARD VS PCGG

BASECO argues that the April 18, 1986 order to produce corporate records from
1973-1986 was issued without court authority and infringed its constitutional
right against self-incrimination, and unreasonable search and seizure. SC: right
against self-incrimination has no application to juridical persons. Jurisprudence
provides that corporations are not entitled to all of the constitutional protections
which private individuals have. The corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the public. It received certain
special privileges and franchises, and holds them subject to the laws of the state
and the limitations of its charter. Its powers are limited by law.

VI. Criminal Liability

- Only for offenses mala prohibita, not mala in se since a corporate entity is
incapable of having criminal intent
- Officers may be held criminally loiable for acts committed by the corporation, if
it is shown that the former had knowledge of the criminal act committed inn
the name of the corporation and that he took part in the same or give consent
to its commission whether by action/inaction
-
VII. NATIONALITY OF CORPORATIONS
a. Tests in Determining the Nationality of Corporations

1. Aggregate Test/Control Test – requires looking into the nationality, domicile,

or residence of the individuals who control the corporation;

2. Entity Test/Place of Incorporation Test – looks to the nation where the

corporation was incorporated. [see Section 140, RCCP]
o Wartime Control Test – Place of Incorporation Test may be disregarded
in times of war where the nationality of the controlling stockholders will
be considered to determine if it can be deemed a public enemy
corporation. [See Filipinas Compania de Seguros v. Christern, Huenefeld
& Vo., Inv., (1951)]
o Investment Test: Voting Control Test and Beneficial Ownership Test [See
Foreign Investment Negatives List promulgated under RA 7042 as
amended by RA 8179]
 Ex: 40% foreign equity limit in public utility companies and 60%
legal and beneficial ownership (outstanding capital stock) must
belong to Ph citizens.
 Capital Stock – full beneficial ownership of stocks w/ voting
rights [see Section 11, Art. XI of the PC].
 The requirement of atleast 60% Filipino ownership must apply
separately to (1) total number of OCS entitled to vote in the
election of directors and (2) total number of OCS, whether or not
entitled to vote in the election of directors [see SEC
Memorandum Circular No. 8, Series of 2013]

3. Grandfather Rule – resorted to as an exception to the Control test, when there

is doubt as to the 60-40 Filipino equity ownership in the corporation undertaking
partly nationalized activities. Here, the percentage of Filipino equity in the
corporation is determined by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate
shareholder.

The percentage of shares held by the second corporation in the first corporation
is multiplied by the latter’s own Filipino equity and the product of these
percentages is determined to be the ultimate Filipino ownership of the subsidiary
corporation.

EX:
• A Corporation with 1m shares
- 400, 000 shares or 40% owned by X Corp (US)
- 600, 000 shares or 60% owned by B Corp (FIL)
 • B Corporation is in turn:
 40% owned by JP
 60% owned by FIL
- 600,000 shares x 60/100 = 360, 000 shares FIL
- 600,000 shares – 360,000 = 240,000 shares JP
- If the indirect foreign equity of 240,000 shares belong to JP is added
to direct foreign equity of 400, 000 shares owned by X Corp, the
total number of shares belonging to foreign nationals exceed the 40%
limitation, considering the aggregate foreign equity of 640,000 or
64% of the total number of shares of A Corporation which is 1m.

 Does not apply to Corporation sole

CASES

i. ROD RIZAL vs. UNG SUI SI TEMPLE 97 Phil. 58 (1955)

ii. TATAD vs. GARCIA, JR. 243 SCRA 436 (1995)
iii. IN RE: RAPPLER INC. SEC Ruling January 11, 2018
iv. RAPPLER, INC. v. SECURITIES AND EXCHANGE COMMISSION CA-G.R. SP
No. 154292 | JULY 26, 2018
v. S. DAVIS WINSHIP vs. PHILIPPINE TRUST COMPANY G.R. No. L-3869
January 31, 1952
vi. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING
AND DEVELOPMENT, INC., and McARTHUR MINING, INC., vs. REDMONT
CONSOLIDATED MINES CORP. G.R. No. 195580 January 28, 2015
vii. GAMBOA v. TEVES June 28, 2011
viii. GAMBOA V. TEVES G.R. No. 176579 (2012)
ix. Roy III v. Herbosa G.R. No. 207246 Nov 22, 2016

VIII. FOREIGN INVESTMENT ACT (RA 7042 as amended by RA 8179)

a. PCAB vs. Manila Waters Company Inc.
b. Jacobus Bernhard Hulst v. PR Builders G.R. No. 156364. September 25, 2008
c. SEC-OGC OPINION NO. 27-11 (April 20, 2011)
d. EUROPEAN RESOURCES AND TECHNOLOGIES, INC VS INGENIEUBURO BIRKHAN
+ NOLTE G.R. No. L-37331, March 18, 1933
e. Steelcase, Inc. v. Design International G.R. No. 171995
IX. CLASSES OF CORPORATIONS
a. As to whether it is represented by stock or not
STOCK
Corporations which have capital stock
divided into shares and are authorized
to distribute to the holders of shares
dividends or allotments of the surplus
profits on the basis of the shares.  87)
Primarily to make profits for its
shareholders
Each stockholder votes according to
the proportion of his shares in the
corporation. No shares may be
deprived of voting rights except those
classified and issued as “preferred” or
“redeemable” shares, and as
otherwise provided by the Code. (Sec.
6)
Corporations which have capital stock
divided into shares and are authorized to
distribute to the holders of shares
dividends or allotments of the surplus
profits on the basis of the shares. 
Primarily to make profits for its
shareholders
Each stockholder votes according to the
proportion of his shares in the corporation.
No shares may be deprived of voting
rights except those classified and issued
as “preferred” or “redeemable” shares, and
as otherwise provided by the Code. (Sec.
6)
Distribute to the shareholders
Proxy representation cannot be denied
Delinquency of stock automatically
suspends the right to vote and be acted
upon
Quorum is determined by the number of
outstanding voting stocks
Only cumulative voting
Distribute to the shareholders
NON-STOCK
All other private corporations (Sec. 3,
RCC); One where no part of its
income is distributable as dividends to
its members, trustees or officers (Sec.
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
Each member, regardless of class, is
entitled to one (1) vote UNLESS such
right to vote has been limited,
broadened or denied in the AOI or
by-laws. (Sec. 89)
All other private corporations (Sec. 3,
RCC); One where no part of its income is
distributable as dividends to its members,
trustees or officers (Sec. 87)
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
Each member, regardless of class, is
entitled to one (1) vote UNLESS such
right to vote has been limited, broadened
or denied in the AOI or by-laws. (Sec. 89)
Sec. 93. Rules of Distribution
May be denied in AOI/BL
Suspended only when the delinquent
member is disenfranchised under the
AOI/BL
By the number of ACTUAL LIVING
MEMBERS with voting rights
GR: Straight Voting
EXN: Cumulative voting if allowed under
AOI/BL
Sec. 93. Rules of Distribution
 b. As to number of persons composing them
i. Aggregate – a corporation which consists of many persons united to form a body
politic and corporate (IEMELIF v. Lazaro, G.R. No. 184088, 2010).
ii. Corporation sole – Formed by one person who may be the chief archbishop,
bishop, minister, rabbi, or other presiding elder of any religious denomination,
sect or church. (RCC, Sec. 108)
iii. Close Corporation - a corporation where stockholders of record shall not exceed
twenty (20) (RCC, Sec. 95)
iv. One Person Corporation - a corporation with a single stockholder. Only a natural
person, trust, or an estate may form a One Person Corporation. (RCC, Sec. 115)

c. As to purpose
i. Municipal corporation
ii. Religious corporation
iii. Educational corporation
iv. Charitable, Scientific or Vocational corporation
v. Business corporation

d. As to whether open to public or not

i. Public Corporations – those created for political purposes connected with the
public good in the administration of the civil government
ii. Private Corporations – divided into stock corporations and non-stock
corporations

e. As to state of creation
i. Domestic Corporations – one incorporated under the laws of the Philippines
ii. Foreign Corporation – other than the laws of the Philippines

f. As to legal right to corporate existence

i. De Jure Corporations – organized in accordance with the requirements of the
law
ii. De facto corporation – a corporation with some flaw in its incorporation
iii. Corporation by Estoppel – it is a status acquired by persons who assume to act
as a corporation knowing it to be without authority. Such persons shall be liable
as general partners for all debts, liabilities and damages incurred or arising as a
result thereof (Sec. 21) (for purposes of protecting the rights of third persons, it
is considered as a corporation)
iv. Corporation by prescription

g. As to their relation to another corporation

i. Holding company – one that controls another as a subsidiary or affiliate by the
power to elect its management; one which holds shares in other companies for
purposes of control rather than for mere investment. (SEC Opinion No. 15-15)
ii. Affiliate company – one that is subject to common control of a parent or
holding company and operated as part of a system. (SEC Opinion No. 15-15)
iii. Parent and subsidiary companies – when a corporation has a controlling
financial interest in one or more corporations, the one having control is known
as the “parent company” and the controlled corporations are known as the
“subsidiary companies”.

X. CAPITAL STRUCTURE
XI. PROCESS OF ESTABLISHING A CORPORATION

PROMOTION  INCORPORATION  COMMENCEMENT OF BUSINESS OPERATION

a. Components
i. Corporators are those who compose a corporation, whether as stockholders
or shareholders in a stock corporation or as members in a nonstock corporation
ii. Incorporators are those stockholders or members mentioned in the articles
of incorporation as originally forming and composing the corporation and who
are signatories thereof. 
iii. Directors and Trustees – governing body in a corporation
iv. Corporate Officers – those identified as such in the RCC, AOI/BL
v. Stockholders – owners of shares of stock in a Stock Corporation
vi. Members – corporators of a non-stock corporation (RCC, Sec. 90)
Promoter is a person who, acting alone or with others, takes initiative in
founding and organizing the business or enterprise of the issuer and receives
consideration therefor. (Sec 3.10, Security and Exchange Commission Code
(RA 8799)
Status of Promoter's Contract
 General Rule: promoter's contract is not necessarily binding on the
corporation once formed
 Exception: when the corporation received benefits from the contract at
the time of its constitution.

vii. Subscribers – Persons who have agreed to take and pay for original, unissued
shares of a corporation formed or yet to be formed
viii. Underwriter – a person who guarantees on a firm commitment and/or
declared best effort basis the distribution and sale of securities of any kind by
another (Sec. 3.15, Security and Exchange Commission Code (RA 8799)

 A pre-incorporation subscription contract is a special contract and

a type of promoter's contract and although these are contracts between
subscriber and the corporation they are at the same time deemed to be
contracts among the shareholders of the corporation.
 Subscription Contract Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall
be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some
other contract. Section 59 RCC. It is indivisible and cannot be divided
into portions [See RCC, Sec. 63]

Effect: A subscription of shares in a corporation till to be formed shall be

irrevocable for a period of at least six (6) months from the date of
subscription, unless
1. all of the other subscribers consent to the revocation, or
2. the corporation fails to incorporate within the same period or
within a longer period stipulated in the contract of subscription.

No pre-incorporation subscription may be revoked after the articles of

incorporation is submitted to the Commission. Section 60 of RCC

b. Consideration for Stocks [See RCC, Sec.61]

c. Articles of Incorporation – threefold nature; manner of Amendment of the AOI; when
amendment takes effect; conversion of a stock to non-stock corporation [see RCC, Sec.
15];Non-amendable items in the AOI; Grounds for Rejection of AOI Amendment;
Limitations on the Use of Corporate Name; Effects of Change of Name by a Corporation;
d. Registration and Issuance of Certificate of Incorporation –
e. Commencement of Corporate Existence [See RCC, Sec. 18]
f. Election of Directors/Trustees [See RCC, Sec. 24&25] – election contests is within the
jurisdiction of RTC per R.A. 8799

g. Voting in the Election of BOD/BOT

i. Methods
1. Straight Voting – every SH may vote such number of shares for as many
persons as there are directors to be elected
 2. Cumulative for 1 candidate – SH is allowed to concentrate his votes to 1
cnadidate (only allowed in SC)
3. Cumulative voting by distribution – SH may cumulate his shares by
multiplying the no. of his shares by the no. of directors to be elected and
distribute the same among as many candidates as he may deem fit

h. Voting in Corporate Acts

1. majority stockholders’ vote required
1. To enter into management contract if any of the two instances
stated below are absent; i. Where stockholders of both managing
and managed corporation (the common stockholders) own or
control more than 1/3 or the outstanding stock of managing
corporation
2. Where majority of directors in both corporations are the same
(RCC, sec. 43)
3. To adopt, amend or repeal the by-laws. (RCC, sec. 48)
4. Voluntary dissolution where no creditor is affected (RCC, Sec.
134)

2. 2/3 of Stockholder’s vote

1. Extend or shorten corporate term; (RCC, sec, 36)
2. Increase/Decrease Corporate Stock; (RCC, sec. 37)
3. Incur, Create Bonded Indebtedness; (RCC, sec. 37)
4. Deny pre-emptive right; (RCC, Sec. 15 and 38)
5. Sell, dispose, lease, encumber all or substantially all of corporate
assets; (RCC, sec. 39)
6. Investing another corporation, business other than the primary
purpose; (RCC, sec. 41)
7. Declare stock dividends (RCC, sec. 42)
8. Enter into management contract if a stockholder or stockholders
representing the same interest of both the managing and the
managed corporations own or control more than 1/3 of the total
outstanding capital entitled to vote of the managing corporation;
or (RCC, sec. 43) NB: 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 the managed corporation;
9. Amend the Articles of Incorporation (RCC, sec. 15)
10. To merge or consolidate with another corporation or other
corporations (RCC, sec. 76)
11. To voluntarily dissolve the corporation where creditors are
affected. (RCC, sec. 135)

3. Without prior Board approval

1. 2/3 of OCS or of the members – delegate to the Board the power
to amend by-laws (RCC, sec. 37)
2. Majority of the OCS or of the members – Revoke the power of
the Board to amend by the BL which was previously delegated
(RCC, sec. 47)
3. 2/3 of the OCS or of the members – remove any director or
trustee subject to the requirements under Sec. 27
4. Majority of the OCS or of the members – grant directors/trustees
with compensation and approve the amount thereof at a regular
or special meeting (RCC, sec. 29)

i. Quorum – consists of SH = majority of the OCS or a majority of the members in the AOI
(RCC, Sec. 51); (1) SC: based on the no. of Outstanding Voting Stocks ; (2) NSC – only
those are actual living members w/ voting rights shall be counted
j. Adoption of By-Laws – See RCC, Sec. 35 (e) and Sec. 45; How Amended or Revised;
Effects of Non-Use of Corporate Charter
 TITLE II

I. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

a. Incorporators –Qualifications
i. Capacity to Act; No residency/citizenship requirement
ii. Accomplished Fact
1. Persons who can be Incorporators; Reason for the Rule
2. Practice of Profession
3. Nominees obviated; subject to RCC, Sec. 41
b. Corporate Term –
i. GR: Perpetual
ii. EXN: optional fixed term
iii. Revival of Corporate Existence – exceptions

c. Minimum Capital Stock- removed

Illustration:

Authorized Capital Stock

1 MILLION
Subscribed Capital
Stock
Paid-Up
250,000.00
Capital
62,500.00

i. ACS - The term capital stock or authorized capital stock is the amount
fixed in the articles of incorporation to be subscribed and paid by the
stockholders of the corporation.
ii. SCS – portion of the ACS which is covered by subscription agreements whether
fully paid or not
iii. PUC – portion of the ACS that is subscribed and paid (NB: special laws require
certain companies to have minimum PUC. [See Page 195, RCC by Aquino]
iv. OCS – total shares of stock issued to subscribers/SHs, whether or not fully or
partially paid except treasury shares so long as there is binding subscription
agreement
 d. Contents of the AOI – name, purpose, principal office, corporate term, incorporators,
directors, capital stock, Treasurer’s Certification;
e. Check Foreign Investment Negative List for Minimum Cap
Concept of Shares
 Reason for Classification
 Doctrine of Equality of Shares
 Kinds of Shares
1. Par Value Shares
2. No Par Value Shares
3. Common
4. Preferred Shares
5. Redeemable Shares
6. Treasury Shares
7. Founding Shares
8. Voting/Non-voting
shares
9. Convertible Shares
10. Watered stock
11. Fractional Shares
12. Shares in escrow
13. Over-issued stock
14. Street Certificate
15. Promotional share
w/ value fixed in the AOI
No value fixed in AOI, subject to
limitations under (RCC, Sec.6)
Ordinarily and usually issued stocks
w/o extraordinary rights and
privileges and entitle the shareholder
to a pro rata division of profits; w/
complete voting rights
Entitle the shareholder to some
priority on distribution of dividends
and assets over those holders of
common shares. *preference only
applies once dividends are declared.
Shares which may be purchased by the
corporation from the holders of such
shares upon the expiration of a fixed
period, regardless of the existence of
URE in the books of a corporation,
and upon such other terms and
conditions stated in the AOI and the
Certificate of stock representing the
shares, subject to the rules issued by
SEC (RCC, Sec.8)
*once redeemed, deemed retired,
unless reissuance is expressly allowed
in the AOI.
Shares that have been earlier issued as
fully paid and have thereafter been
acquired by the corporation by means
of PDRO (RCC, Sec. 9)
Shares classified as such in the AOI
and may be given special preference in
voting rights and dividend payments.
See RCC, Sec. 6
GR: SH may demand conversion at his
pleasure EXN: AOI
Shares issued below its par value or
issued value
Less than a full share
Share is deposited by the grantor or
his agent w/ a third person to be kept
by the depositary until the
performance of certain condition or
the happening of a certain event
contained in the agreement
Stock issued in excess of the
authorized capital stock. > null and
void
Endorsed by the registered holder in
blank and the transferee can
command its transfer to his name
from issuing corporation
Share issued to promoters or those in
some way interested in the company
at its launching
 SUMMARY OF NEW RULES

Corporate Name OPC should be included in the corporate name of the

corporation in One Person Corporation
Incorporators Can be a natural person, partnership, corporation, or
association; 1 incorporator is sufficient; no residency
requirement for incorporators
Term Can be perpetual/fixed term.
Treasurer’s certificate Affidavit is no longer required, but is now incorporated under
the 9th clause
Undertaking to Now included in the 10th clause
Change Corporate
Name
Signatories The incorporators and the treasurer sign the AOI
Directors and Trustees No more minimum, Except educational and religious
societies (5 trustees); no more residency requirement
Subscribed and Paid- Both in the 8th clause; no longer minimum required, but see
up Capital FINL

f. Amendment in the AOI

i. General Amendment (RCC, Sec. 15)
1. Legitimate purpose
2. Majority Vote of BOD/BOT + Vote or written assent of 2/3 of the SH w
OCS /M
a. Need not be obtained in a meeting except in cases of:
 Amendment to extend/ shorten corporate term
 Amendment to increase/decrease capital stock
3. Underscoring of the amended portions
4. Copy of the Amended AOI duly certified under oath by the CS + majority
of the BOD/BOT
5. Submitted to and approved by SEC expressly or impliedly (6mos
inaction)
6. Must not impair vested rights

ii. Grounds for Disapproval of AOI (RCC, Sec. 16)

1. No substantial compliance
2. Defective Purpose
3. False Certification of Capital Stock
4. Filipino Equity Requirement
5. No Favorable Recommendation by Govt Agency

iii. Remedies : reasonable time to modify

g. Corporate Name
i. Power of the SEC for the enforcement of protection under (RCC, Sec. 17)
ii. Distinguishability Test – a corporate name is prohibited if it 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, confusingly similar,
or contrary to existing laws.
iii. Prior Right
iv. Doctrine of Secondary Meaning
v. Priority of Adoption Rule
vi. SEC Rules [See SEC MC No. 13, Series of 2019 dated June 21, 2019]
vii. In case of Revoked/Dissolved Corporations, their names can only be used five
(5) years after the approval of dissolution/date of revocation

h. Registration, Incorporation, and Commencement of Corporate Existence

i. Certificate of Incorporation
ii. Contract law in Corporate Law [See RCC, Sec.60]
iii. Other binding Pre-incorporation Contracts
iv. Promoters [See RA 8799, Sec. 3.1]
v. Underwriters [See RA 8799, Sec. 3.15]

i. De Facto Corporations (RCC, Sec. 19) – quo warranto proceedings

 i. Effect of Non-filing of by-laws

j. Corporation by Estoppel
i. Effect – Liability as a General Partner
ii. Lack of corporate personality not a defense when sued
iii. Cannot resist performance of an obligation on the basis of lack of capacity to act
iv. Can be invoked only for the purpose of protecting third persons or creditors.

k. Effect of Non-Use of Corporate Charter and Continuous Inoperation

i. Conditions Subsequent
1. Revocation – not organized w/I 5 yrs after incorporation
2. Delinquent Status –
a. organized but inoperative for 5 consecutive yrs, subject to a 2yr
period chance for resumption of operations
b. failure to submit reportorial requirements 3x
consecutively/intermittently within 5 yr period

CASES

 CAGAYAN FISHING DEVELOPMENT CO., Inc., v. TEODORO SANDIKO

[G.R. No. 43350. December 23, 1937.]

the transfer was made almost five months before the incorporation of the
company. Unquestionably, a duly organized corporation has the power to purchase
and hold such real property as the purposes for which such corporation was formed
may permit and for this purpose may enter into such contracts as may be necessary. 
But before a corporation may be said to be lawfully organized, many things have to
be done. Among other things, the law requires the filing of articles of incorporation.
Although there is a presumption that all the requirements of law have been complied
with, IN THIS CASE, the plaintiff was not yet incorporated when it entered into the
contract of sale.

 RIZAL LIGHT & ICE CO., INC. vs. THE MUNICIPALITY OF MORONG,
RIZAL and THE PUBLIC SERVICE COMMISSION G.R. No. L-20993;
September 28, 1968

The acts of promoters of a corporation be ratified or accepted by the corporation if

and when subsequently organized. . It will be noted that American courts generally
hold that a contract made by the promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation when organized. The incorporation
of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown
by its action in prosecuting the application filed with the Commission for the
approval of said franchise, not only perfected a contract between the respondent
municipality and Morong Electric but also cured the deficiency pointed out by the
petitioner in the application of Morong EIectric. Thus, the Commission did not err in
denying petitioner's motion to dismiss said application and in proceeding to hear the
same. The efficacy of the franchise, however, arose only upon its approval by the
Commission on March 13, 1963.

 Hall v. Piccio 86 Phil 603 (1950)

Section 19 of the RCC, providing for the de facto corporation doctrine is not
applicable in this case. This is because in this case, all the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding
certificate of incorporation. All of them know, or sought to know, that the personality
of a corporation begins to exist only from the moment such certificate is issued — not
before (sec. 11, Corporation Law). The complaining associates have not represented to
the others that they were incorporated any more than the latter had made similar
representations to them.

 Sawadjaan v. CA G.R. 141735

 The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business,
has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact,
here represented by the Office of the Government Corporate Counsel, "the principal law office
of government-owned corporations, one of which is respondent bank." At the very least, by its
 failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation
whose right to exercise corporate powers may not be inquired into collaterally in any private
suit to which such corporations may be a party. Moreover, a corporation which has failed to file
its by-laws within the prescribed period does not ipso facto lose its powers as such. The SEC
Rules on Suspension/Revocation of the Certificate of Registration of Corporations, details the
procedures and remedies that may be availed of before an order of revocation can be issued.
There is no showing that such a procedure has been initiated in this case. 

 Asia Banking Corporation vs Standard Products, Co., Inc GR No. 22106

September 11, 1924

Standard Products, through its President obtained a loan from Asia Banking as
evidenced by a promissory note. This action is brought to recover the balance due on
the said promissory note. The RTC rendered judgment in favor of the Asia Banking
for the sum demanded in the complaint. From this judgment Standard Products
appealed because at the trial of the case allegedly, Asia Banking failed to prove the
corporate existence of the parties. Standard Products further insists that under these
circumstances, the court erred in finding that the parties were corporations with
juridical personality.

ISSUE: W/n Standard Products is estopped from denying its own and Asia Banking’s
corporate existence?

SC: YES.  The general rule provides that in the absence of fraud of a person who has
contracted or otherwise dealt with an association in such a way as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped to deny its
corporate existence in any action leading out of or involving such contract or dealing.
Unless its existence is attacked for cause which have arisen since making the contract
or other dealing relied on as an estoppel and this applies to foreign as well as to
domestic corporations. 

Standard Products having recognized the corporate existence of the Asia Banking by
making a promissory note in its favor and making partial payments on the same is
therefore estopped to deny said Asia Banking’s corporate existence. It is, of course,
also estopped from denying its own corporate existence. 

 Paz v. New International Environmental Universality, Inc. G.R. No.

203993, April 20, 2015

On Sept. 4, 2002, New International Environmental Universality filed a complaint

against Paz for breach of contract before the RTC, alleging that Paz violated the terms
of the MOA when he took over the hangar space without giving NIEU the requisite 6-
month advance notice of termination.
In his defense, Paz alleged that respondent had no cause of action against him as the
MOA was executed between him and Capt. Clarke, in his personal capacity, and that
the 6-month advance notice of termination was already given in the letters he sent to
Capt. Clarke.
The RTC ruled in favor of respondent, finding Paz liable for breach of contract for
illegally terminating the MOA even before the expiration of the term. Moreover, the
RTC declared that the MOA was executed by the parties not only in their personal
capacities but also in representation of their respective corporations or entities. (sept
3, 2001 – issuance of cert of incorporation)

SC: Paz cannot deny that he contracted with NIEU, since it is evident from the very
language itself of the MOA, whereby he obligated himself to allow the use of the
hangar space for COMPANY aircraft/helicopter. Also, in his final letter, Paz reiterated
and strongly demanded the former to immediately vacate the hangar space that the
COMPANY is occupying/utilizing. Section 20 of the Corporation Code explicitly
provides that one who assumes an obligation to an ostensible corporation, as such,
cannot resist performance thereof on the ground that there was in fact no
corporation. Clearly, petitioner is bound by his obligation under the MOA not only on
estoppel but by express provision of law. The lower courts, therefore, did not err in
finding petitioner liable for breach of contract for effectively evicting respondent from
the leased premises even before the expiration of the term of the lease.

 PLDT vs NTC 539 SCRA 365 | December 04, 2007

 The term "capital" refers to the value of the property or assets of a corporation. The
capital subscribed is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily by, and can
be more than, the par value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premiums if any, in consideration of the original
issuance of the shares. In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital account. It is the
same amount that can be loosely termed as the "trust fund" of the corporation. The
"Trust Fund" doctrine considers this subscribed capital as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for
satisfaction.

Until the liquidation of the corporation, no part of the subscribed capital may be
returned or released to the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot be condoned or remitted; nor
can the corporation buy its own shares using the subscribed capital as the
considerations therefor.

PLDT's contention, that stock dividends are not similarly situated as the subscribed
capital stock because the subscribers or shareholders do not pay for their issuances as
no amount was received by the corporation in consideration of such issuances since
these are effected as a mere book entry, is erroneous.

Dividends, regardless of the form these are declared, whether in cash, property or
stocks, are valued at the amount of the declared dividend taken from the unrestricted
retained earnings of a corporation. Thus, the value of the declaration in the case of a
stock dividend is the actual value of the original issuance of said stocks.

Thus, it cannot be said that no consideration is involved in the issuance of stock

dividends. In fact, the declaration of stock dividends is akin to a forced purchase of
stocks. By declaring stock dividends, a corporation ploughs back a portion or its
entire unrestricted retained earnings either to its working capital or for capital asset
acquisition or investments. It is simplistic to say that the corporation did not receive
any actual payment for these. When the dividend is distributed, it ceases to be a
property of the corporation as the entire or portion of its unrestricted retained
earnings is distributed pro rata to corporate shareholders.

In essence, therefore, the stockholders by receiving stock dividends are forced to

exchange the monetary value of their dividend for capital stock, and the monetary
value they forego is considered the actual payment for the original issuance of the
stocks given as dividends. Therefore, stock dividends acquired by shareholders for
the monetary value they forego are under the coverage of the SRF and the basis for
the latter is such monetary value as declared by the board of directors

o Simply put: The dividends should be taken from the retained earnings, not from
capital as it will constitute a violation of the Trust Fund Doctrine.

 MSCI-NACUSIP vs. NWPC 269 SCRA 173 (1997)

Paid-up capital is that portion of the authorized capital stock which has been both
subscribed and paid.

Asturias Sugar Central, Inc. (ASCI), executed a Memorandum of Agreement with

Monomer Trading Industries, Inc. (MTII), whereby MTII shall acquire the assets of
ASCI by way of a Deed of Assignment provided that an entirely new organization in
place of MTII shall be organized, which new corporation shall be the assignee of the
assets of ASCI. This created MSCI (Monomer Sugar Central, Inc), which applied for
exemption from the coverage of Wage Order No. RO VI-01 issued by the Board on the
ground that it is a distressed employer. MSCI-NACUSIP Local Chapter (Union),
maintained that MSCI is not distressed and that MSCI has not complied with the
requirements for exemption.

But the Board held that the paid-up capital of MSCI on was actually P64,688,528.00
and not P5,000,000 and, thus, the established losses constitute an impairment of
only 5.25% of the true paid-up capital of P64 million plus, which losses are not
enough to meet the required 25% impairment requirement. This conclusion is
 anchored on the belief of the Board that the value of the assets of ASCI, party to the
Memorandum of Agreement, transferred to MSCI on March 28, 1990 should be taken
into consideration in computing the paid-up capital of MSCI to reflect its true
financial structure.

ISSUE: What is the correct paid up capital of MSCI?

RULING: MSCI’s paid-up capital is P5,000,000.

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

authorized capital stock which has been both subscribed and paid. To
illustrate, where the authorized capital stock of a corporation is worth P1,000,000
and the total subscription amounts to P250,000.00, at least 25% of this amount,
namely, P62,500.00 must be paid up per Section 13. The latter, P62,500.00, is the
paid-up capital or what should more accurately be termed as "paid-up capital stock."

MSCI was incorporated with an authorized capital stock of P60M.

Authorized Capital Stock - 60,000,000

Subscribed Capital Stock - 20,000,000 (more than 25% of the authorized capital
stock)
Paid-up Capital - 5,000,000 (25% of the subscribed capital stock that has been paid)

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

 CIR v CA [G.R. No. 108576. January 20, 1999]

On the Characteristics of Common Shares

Issue: WON ANSCOR's exchange of common shares with preferred shares can be
considered as taxable exchange?

SC: No. Exchange of common with preferred shares is not a taxable exchange. There
was no change in their proportional interest after the exchange. There was no cash
flow. Both stocks had the same par value. Under the facts herein, any difference in
their market value would be immaterial at the time of exchange because no income is
yet realized — it was a mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of wealth, in which case
income tax may be imposed.

Reclassification of shares does not always bring any substantial alteration in the
subscriber's proportional interest. But the exchange is different — there would be a
shifting of the balance of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor exchange per se, yields
realize income for tax purposes.

A common stock represents the residual ownership interest in the corporation. It is

a basic class of stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of profits.

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

Both shares are part of the corporation's capital stock. Both stockholders are no
different from ordinary investors who take on the same investment risks.

Preferred and common shareholders participate in the same venture, willing to share
in the profits and losses of the enterprise. Moreover, under the doctrine of
equality of shares — all stocks issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences. In this case, the exchange of shares, without more, produces no
realized income to the subscriber. There is only a modification of the subscriber's
rights and privileges — which is not a flow of wealth for tax purposes.

The issue of taxable dividend may arise only once a subscriber disposes of his entire
interest and not when there is still maintenance of proprietary interest. Thus, the
exchange of common shares with preferred shares cannot be taxed.
 Republic Planters Bank vs Agana G.R. No. 51765, March 3, 1997

ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION secured a loan

from Republic Planter’s Bank (RPB). RPB lent partially in money and partially in the
form of two stock certificates: Each for 400 preferred shares of stock with par value of
P10 each, a total of P8,000. The stock certificates indicated that the preferred stocks
in the hands of Robes-Francisco shall have the right to receive quarterly dividends of
1%, cumulative and participating and that such preferred shares may be redeemed by
RPB at the option of ROBES-FRANCISCO at any time after two (2) years from the
date of issue at the option of the Corporation.

ROBES-FRANCISCO filed a complaint against RPB anchored on its alleged rights to

collect dividends under the preferred shares in question and to have RPB redeem said
shares under the terms and conditions of the stock certificate.

ISSUE: Does ROBES-FRANCISCO have the right to collect dividends pursuant to

the stock certificate? SC: In spite of the specific preferences granted to preferred
shares there is no guaranty, however, that the share will receive any dividends. There
has to be unrestricted retained earnings.

A preferred share of stock, is one which entitles the holder thereof to certain
preferences over the holders of common stock. The preferences are designed to
induce persons to subscribe for shares of a corporation. Preferred shares take a
multiplicity of forms. The most common forms may be classified into two:
1. Preferred shares as to assets; and
2. Preferred shares as to dividends.

The former is a share which gives the holder thereof preference in the distribution of
the assets of the corporation in case of liquidation; the latter is a share the holder of
which is entitled to receive dividends on said share to the extent agreed upon before
any dividends at all are paid to the holders of common stock.

The Supreme Court first discussed the nature of preferred shares and redeemable
shares.

There is no guaranty, however, that the share will receive any dividends.

Under the old Corporation Law in force at the time the contract between the
petitioner and the private respondents was entered into, it was provided that "no
corporation shall make or declare any dividend except from the surplus profits
arising from its business, or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment of its debts and
the termination of its existence by limitation or lawful dissolution."

Similarly, the present Corporation Code provides that the board of directors of a
stock corporation may declare dividends only out of unrestricted retained earnings.

The Code, in Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," which may be a more precise
term, in place of "surplus profits arising from its business" in the former law. Thus,
the declaration of dividends is dependent upon the availability of surplus profit or
unrestricted retained earnings, as the case may be.

Preferences granted to preferred stockholders, moreover, do not give

them a lien upon the property of the corporation nor make them
creditors of the corporation, the right of the former being always
subordinate to the latter.

Dividends are thus payable only when there are profits earned by the corporation and
as a general rule, even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared. Shareholders,
both common and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts and liabilities are
fully paid.

ISSUE: Can RPB be compelled to redeem? SC: NO. More so, the bank is declared by
the CB to be suffering from chronic reserve deficiency.
 Redeemable shares, on the other hand, are shares usually preferred, which by
their terms are redeemable at a fixed date, or at the option of either issuing
corporation, or the stockholder, or both at a certain redemption price. A redemption
by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The
present Code allows redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation.

This is a new provision which in effect qualifies the general rule that the corporation
cannot purchase its own shares except out of current retained earnings. However,
while redeemable shares may be redeemed regardless of the existence of unrestricted
retained earnings, this is subject to the condition that the corporation has, after such
redemption, assets in its books to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as
they mature.

In this case, the redemption of shares cannot be allowed. As pointed out by the
petitioner, the Central Bank made a finding that said petitioner has been suffering
from chronic reserve deficiency and that such finding resulted in a directive,
prohibiting the latter from redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the prejudice of its depositors and
creditors.

 Delpher Trades Corp vs IAC

A no-par value share does not purport to represent any stated proportionate
interest in the capital stock measured by value, but only an aliquot part of the whole
number of such shares of the issuing corporation. The holder of no-par shares may
see from the certificate itself that he is only an aliquot sharer in the assets of the
corporation. But this character of proportionate interest is not hidden beneath a false
appearance of a given sum in money, as in the case of par value shares.

The capital stock of a corporation issuing only no-par value shares is not
set forth by a stated amount of money, but instead is expressed to be
divided into a stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10.
Thus, by removing the par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of assets and the
amount of its debts.

 Philippine Coconut Producers (COCOFED) v. Republic G.R. Nos. 177857-

58 (2009)

ISSUE: Whether the conversion will result in the loss of voting rights of PCGG in
SMC and enable Cojuangco, Jr. to acquire the sequestered shares, without
encumbrances, using SMC funds.

SC: NO.
The common shares after conversion and release from sequestration become treasury
stocks or shares. Treasury shares under Sec. 9 of the Corporation Code (Batas
Pambansa Blg. 68) are "shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may again be disposed of
for a reasonable price fixed by the board of directors."

A treasury share or stock, which may be common or preferred, may be used for a
variety of corporate purposes, such as for a stock bonus plan for management and
employees or for acquiring another company. It may be held indefinitely, resold or
retired.

While held in the company’s treasury, the stock earns no dividends and has no vote in
company affairs. Thus, in this case, the CIIF common shares that would become
treasury shares are not entitled to voting rights. And should conversion push through,
SMC, not Cojuangco, Jr., becomes the owner of the reacquired sequestered CIIF SMC
common shares. Should SMC opt, however, to sell said shares in the future,
prospective buyers, including possibly Cojuangco, Jr., have to put up their own
 money to acquire said common shares. Thus, it is erroneous for intervenors to say
that Cojuangco, Jr., with the use of SMC funds, will be acquiring the CIIF SMC
common shares.

 Turner v. Lorenzo Shipping Corp

On the right of dissenting stockholders to demand payment of the value of their
shareholdings.

Petitioners Philip and Elnora Turner held 1,010,000 shares of stock of the respondent
Lorenzo Shipping Corporation, a domestic corporation engaged primarily in cargo
shipping activities.

In June 1999, the respondent decided to amend its articles of incorporation to

remove the stockholders’ pre-emptive rights to newly issued shares of stock. Feeling
that the corporate move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment of their shares at
the rate of ₱2.276/share based on the book value of the shares, or a total of
₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners
unacceptable. It insisted that the market value on the date before the action to
remove the pre-emptive right was taken should be the value, or ₱0.41/share (or a
total of ₱414,100.00). The disagreement on the valuation of the shares led the parties
to constitute an appraisal committee. The appraisal committee reported its valuation
of ₱2.54/share, for an aggregate value of ₱2,565,400.00 for the petitioners.

Subsequently, the petitioners demanded payment based on the valuation of the

appraisal committee.The respondent refused the petitioners’ demand, explaining that
pursuant to the Corporation Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the corporation had unrestricted retained
earnings to cover the fair value of the shares, but that it had no retained earnings at
the time of the petitioners’ demand, as could be seen in its Financial Statements for
Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31, 1999.

Upon the respondent’s refusal to pay, the petitioners sued the respondent for
collection and damages.

ISSUE: Whether or not the Petitioner-Stockholders can recover the value of their
shareholding. NO.

SC: A stockholder who dissents from certain corporate actions has the right to
demand payment of the fair value of his or her shares. This right, known as the right
of appraisal, is expressly recognized in Section 81 of the Corporation Code, to wit:

Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the
following instances:

1. In case any amendment to the articles of incorporation has the effect of

changing or restricting the rights of any stockholder or class of shares, or
of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence;
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. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change
in the charter or articles of incorporation substantially prejudicing the rights of the
stockholders. Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover the payment. In case the corporation has no
available unrestricted retained earnings in its books, Section 83 of the Corporation
Code provides that if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be
restored.
 [Unrestricted retained earnings refer to profits a business has accumulated since its
creation that it has not distributed to stockholders as dividends.]

The trust fund doctrine backstops the requirement of unrestricted retained

earnings to fund the payment of the shares of stocks of the withdrawing stockholders.
Under the doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are preferred
in the distribution of corporate assets.

The creditors of a corporation have the right to assume that the board of directors will
not use the assets of the corporation to purchase its own stock for as long as the
corporation has outstanding debts and liabilities.There can be no distribution of
assets among the stockholders without first paying corporate debts. Thus, any
disposition of corporate funds and assets to the prejudice of creditors is null and void.

TITLE III

I. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

Centralized Management Doctrine – BOD/BOT exercises corporate powers, conducts all

business, and controls or properties of the corporation. The directors or trustees are the executive
representatives of the corporation, charged with the administration of its internal affairs and
management and use of its assets. In the management of the affairs of the Corporation, the
directors are dependent solely upon their own knowledge of its business and their own judgment
as to what the corporation’s interest required. Stockholders do not have a hand in running the
daily business operations of the corporation, unless they are at the same time directors/officers of
the corporation. Nevertheless, SHs are not entirely helpless as they have the power to unite to
remove the directors installed if they have the required number of votes.

Business Judgment Rule - that 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.

EXCEPTION:
(a) When the Corporation Code expressly provides otherwise;
(b) When the Directors or officers acted with fraud, gross negligence or in bad faith; and
(c) When Directors or officers act against the corporation in conflict of interest situation.
NB:

II. Qualifications and Disqualification for Directors/Trustees

1. Must own atleast one share of Capital Stock of a Corporation in his own name or must be
a member, in case of non-stock Corporations;
2. Must not be disqualified under the RCCP or any applicable special law or rules;
i. Within 5 years prior to his election or appointment, the person was:
1. Convicted by a final judgment of an offense punishable by imprisonment
for a period exceeding six (6) years;
2. Violated the RCC/SRC
3. Found administratively liable for an offense involving fraudulent acts;
4. Found by a foreign court or equivalent foreign regulatory for acts,
violations, or misconduct similar to the above

3. Must be of legal age;

4. Must possess other qualifications as may be prescribed in special laws or regulations or in
the by-laws of the corporation
 Must be a natural person
  No Residency or Citizenship requirement, save in cases when Nationalization laws
apply
 In the absence of a provision in the by-laws, a corporation cannot require additional
qualifications for directors other than those provided under Sections 22 and 91 of the
RCCP as well as other pertinent laws

III. Election of Directors or Trustees:

1. Required Attendance at Meeting for Election:
(1) Stock corporation - majority of outstanding capital stock
(2) Non-stock corporation - majority of members entitled to vote
2. 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, or remote communication, or in absentia

3. Cumulative Voting - At a stockholders' meeting, where the election for Board of

Directors takes place, a stockholder shall have as many votes as he has number of shares
times the number of the directors up for election. This is a device to enable minority, by
concentrating their cumulative votes on at least one candidate, to have a representative in
the Board of Directors. Cumulative voting is mandatory for election of the Board of
Directors in a stock corporation. Members of the board in a non-stock corporation shall
not be voted cumulatively unless specifically provided for in the by-laws. In determining
how many shares are needed to vote for the desired number of directors (this will be
necessary when one campaigns for proxies), the following formula may be followed:

[Outstanding Shares] x [Desired No. of Directors] + 1

______________________________________________
[Total No. of Directors] + 1

Cumulative voting of directors in a stock corporation is mandatory and cannot be

dispensed with in the articles of incorporation nor in the by-laws. Being a statutory right,
the stockholders cannot be deprived of the use of cumulative voting. (SEC Opinion, 2 Oct.
1964).

4. Corporate Officers - Immediately after their election, the directors of a corporation

must formally organize by the election of:
(a) President, who shall be a director;
(b) Treasurer who must be a resident;
(c) Secretary who must be a resident and citizen of the Philippines; and
(d) Such other officers as may be provided for in the By-laws.
(e) Compliance Officer in case the corporation is vested with public interest.

NOTE: Any two (2) or more positions may be held currently by the same person,
EXCEPT: No one shall act as
 President and Secretary or as
 President and Treasurer, at the same time

5. Report of Election of Directors, Trustees, and Officers

Election. Within 30 days after the election of the directors, trustees and officers of the
corporation, secretary, or any other officer of the corporation, shall submit to SEC, the
names, nationalities and residences of the directors, trustees and officers elected.

Vacancy. Within 7 days from knowledge of the death, resignation, or cessation of office
by a director, trustee or officer or officers, the secretary, director, trustee or any other
officer of the corporation, shall immediately report such fact to SEC.

Non-Holding. Within 30 days from the date of the scheduled election, which should
include the (1) fact of non-holding; (2) reason for non-holding; and (3) new date for the
election , which shall not be later than 60 days from the originally scheduled date

IV. Removal of Directors or Trustees - Any director or trustee of a corporation may be removed
from office, with or without cause, by a vote of the stockholders holding or representing 2/3 of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of 2/3 of the
members entitled to vote.
 NOTE: Such removal shall take place either at a regular meeting or at a special meeting called for
the purpose of removal of directors or trustees, with previous notice of the time and place of such
meeting, as well as of the intention to propose such removal. If the officers refuse to call a meeting
to consider the removal of the director, it may called at the instance of any stockholder or
member, but with due notice.

BUT: Directors who have been elected by minority stockholders exercising cumulative voting can
only be removed for cause.

V. Vacancy.
Cause
Removal by Stockholders
Expiration of the Term
Any other Cause
Increase in Board Seats
How or When Filled in
On the same day of the meeting authorizing removal
On or before the expiration of the term at a meeting called for
that purpose
Majority of the remaining D/T still constituting quorum in a
meeting held not later than 45 days from the vacancy; or by a
unanimous vote of the BOD/BOT no longer constituting a
quorum, if necessary to prevent grave, substantial, and
irreparable loss or damage to the corporation (Emergency
Board)
Election at a regular or special meeting duly called for the
purpose or in the same meeting authorizing the increase

VI. Compensation of Directors

In the absence of any provision in the by-laws fixing their compensation, the directors shall not
receive any compensation, except for reasonable per diems. 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

Limit: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of
the net income before income tax of the corporation during the preceding year

VII.Executive Committee
The by-laws of a corporation may create an Executive Committee, composed of not less than
three members of the board to be appointed by the Board. 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:

(a) Approval of any action for which shareholder's approval is also required;
(b) Filling of vacancies in the Board;
(c) Amendment or repeal of any resolution of the Board which by its express terms is not so
amendable or repealable; and
(d) Distribution of cash dividends.

VIII. LIABILITIES OF DIRECTORS, TRUSTEES, OFFICERS

 Directors or trustees shall be liable solidarily for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons when:
1. They 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
2. They acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees.

 Directors or trustees shall be liable as a trustee for the Corporation and must account for
profits which otherwise would have accrued to the Corporation if they shall attempt to
acquire or have acquired 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.

Cebu Country Club, Inc. v. Elizagaque542 SCRA 65 (2008)

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

Tramat Mercantile v. Court of Appeals 238 RA 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:
a. He assents: to a patently unlawful act of the corporation, or for bad faith or gross
negligence in directing its affairs, or or conflict of interest resulting in damage to the
corporation, its stockholders or other persons;
b. 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 (Sec. 65,
Corporation Code);
c. He agrees to hold himself personally and solidarily liable with the corporation (De Asis
and Co., Inc. v. CA, 136 SCRA 599 [1985]);
d. He is made by a specific provision of law, to personally answer for his corporate action
(exemplified in Sec. 144, Corporation Code; also Sec. 13 of P.D. 115 or the Trust Receipts
Law).

 Dealings of Directors, Trustees or Officers with Corporation[91] –

A contract of the corporation with one or more of its directors or trustees or officers 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; and
(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; a
(e) In case of an officer, the contract with the officer has been previously authorized by the
Board of Directors.

In the case of a contract with a director or trustee, where any of the first two conditions set
forth is absent, such contract may be ratified by the vote of the stockholders representing at
least 2/3 of the outstanding capital stock or of 2/3 of the members in a meeting called for
the purpose; Provided, That full disclosure of the adverse interest of the director or trustee
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.

 Contracts Between Corporations with Interlocking Directors:

RULE: Contracts between corporations with interlocking directorates are valid so long as
there is no fraud and the contract is fair and reasonable under the existing facts.

LIMIT: If the director's interest is nominal in one of the contracting corporations (i.e., not
exceeding 20% of outstanding capital stock), then the contract must comply with the
requisites provided for under Sec. 32, otherwise, the contract is voidable at the option of the
corporation.