11

NATURE AND ATTRIBUTES OF CORPORATIONS

~ts right. Correlatively, it is not immune from judicial control in those

instances, wh~re _a duty under the law as ascertained in an appropriate
legal proceeding 1s cast upon.
. To ass~rt that it can choose which court order to follow and which
to di~regard is _to confer upon it not autonomy which may be conceded
but h?ense which cannot be tolerated. It is to argue that it may, when
so minded, overrule the state, the source of its very existence; it is to
contend t~at what any of its governmental organs may lawfully require
could be ignored at will. So extravagant a claim cannot possibly merit
approval.6

Ang Pue & Co. v. Secretary of Commerce and Industry, 7 would hold
that to "organize a corporation .. . that could claim a juridical personality of
its own and transact business as such, is not a matter of absolute right but a
privilege which may be enjoyed only under such terms as the State may deem
necessary to impose."
Torres v. Court of Appeals, a in invalidating the act of the principal
shareholder of a family corporation in canceling stock certificates and issuing
new ones and not coursing the same through the Corporate Secretary,
emphasized the doctrine that since a corporation is a creature of the State, it
has no choice but to follow the law, "All corporations, big or small, must abide
by the provisions of the Corporation Code. Being a simple family corporation
is not an exemption. Such corporations cannot have rules and practices other
than those established by law."

2. Theory of Enterprise Entity

Under the theory of enterprise entity, the corporation is viewed as taking
its significance primarily from the reality of the underlying business enterprise,
formed or in formation; that the State's approval of the corporate form sets up
a prima facie case that the assets, liabilities and operations of the corporation
are those of the enterprise. But that where the corporate entity is defective,
or otherwise challenged, its existence, extent and consequences may be
determined by the actual existence and operations of the underlying business
enterprise, which by these very qualities and operations acquires a "being of
its own" recognized by law. 9
The theory of enterprise entity is meant to cover situations ~here the
courts have either: (a) erected corporate personality which the State had
not granted; or (b) disregarded corporate personality where the State had

6Supra.
75 SCRA645, 647 (1962).
6278 SCRA 793, 81 9 (1 997).
9Berle, The Theory of Enterprise, 47 CoL L. Rev. No. 3 (April 1947).
 12 PHILIPPINE CORPORATE LAW

1· granted it; both for the purpose of giving legal effect to factual relationships
11 set up between an economic entity and an outsider. 10 As the proponent of the
I I
theory had written, 'The corporation is emerging as an enterprise bounded by
!i I : economics, rather than as an artificial juriqical personality bounded by forms of
I
11
words in a charter, minute books, and books of account."
Ii The theory of enterprise entity draws its vitality from the fact that it is
not legal fiction alone that creates a corporate entity. Any state-grant charter
presupposes the existence of consent or common venture among those who
will form the corporation. Although it is within the power of the State to give
or deny such grant, the corporate fiction cannot be created unless there is
an enterprise or group upon whom it would be conferred. In essence, the
theory epitomizes the public policy that the State cannot prohibit the pursuit of
a legal business enterprise. As the theory goes, once legal fiction is granted
and the entity acquires juridical personality, it does not mean that the group,
as distinguished from the juridical entity, becomes a creature of the State, but
actually becomes a creature of its own volition and maintains either singly or
collectively among its constituents their inherent rights under the law, which
may tend to project to their business dealings done through the corporate
entity.
Although the theory of enterprise entity has to a great extent been
marginalized in American corporate literature, its basic flaw may not pertain
to .Philippine setting since we .have in our jurisdiction a different principle
on juridical personality. While under American common law, a partnership
does not have a personality separate and distinct from the partners, under
I,· Philippine civil law traditions, although a partnership is inhe.rently a contractual
relationship, the Civil Code grants to it a personality separate and distinct from
the partners. 12 Therefore, other than a general code provision· granting it a
juridical personality, the partnership personality becomes a reality when two or
more persons decide to contribute money, property or industry 'to a common
fund with the intention of dividing the profits among themselves without need
of a grant of specific authority by the State.
Under tt:ie theory of enterprise entity, when a corporate entity comes into
bejng, it has certain rights almost independent of the whims of its creator. Even
th.ough the corporation is a creature of the State, the underlying relationship
is still composed of moral individuals who are not creatures of the State. For
example, the State would not destroy the group or the business, without
observing the due process clause of the Constitution. Bache & Co. (Phil.), Inc.
Ii

10 /dem, at 345.
,I 11
/bid.
I
12Art. 1768 of the Civil Code: "The partnership has a juridical personality separate and distinct

'i from that of each of the partners," even in case of failure to comply with the requirements of the law on
registration . See also Campos Rueda & Co. v. Pacific Commercial Co. , 44 Phil. 916 (1922).
 NATURE AND ATTRIBUTES OF CORPORATIONS 13

v. Ruiz, 13 held that a corporation is entitled to immunity against unreasonable

searches and seizures: "A corporation is, after all, but an association of
individuals under an assumed name and with a distinct legal entity. In organizing
itself as a collective body it waives no constitutional immunities appropriate for
such body. Its property cannot be taken without compensation. It can only be
proceeded against by due process of law, and is protected against unlawful
discrimination."

Philippine Stock Exchange (PSE) v. Court of Appeals, 14 recognized that

"A corporation is but an association of individuals, allowed to transact under
an assumed corporate name, and with a distinct legal personality, [and that
in] organizing itself as a collective body, it waives no constitutional immunities
and perquisites appropriate to such a body." 15 It held that although the SEC
has been entrusted under what is now the Securities Regulation Code_the
serious responsibility of enforcing all laws affecting corporations and other
forms of associations not otherwise vested in some other government office,
nevertheless, the SEC did not have absolute control on the management
prerogatives of the PSE Board of Directors, since the "PSE is, after all, a
corporation authorized by its corporate franchise to engage in its proposed and
duly approved business. One of the PSE's main concerns, as such, is stj_ll the
generation of profit for its stockholders. . .. As to its corporate and management
decisions, therefore, the state will generally not interfere with the same." 16
The theory of enterprise entity hinges itself on the fact that there can
be no corporate existence without persons to compose it; there can be no
association without associates. 17 The separate juridical existence granted to
a corporation is mere legal fiction, and whenever necessary for the interests
of the public or for the protection or enforcement of the rights of the members,
courts will disregard the legal fiction and operate upon both the corporate
enterprise and the persons composing it.
The recognition of the organizational existence of a group of individuals
extant any State grant or recognition is now more recognized in the case of
unincorporated associations. The courts generally will not interfere in the ruling
of its policy-making body on matters involving affairs of an unincorporated
association, such as election contests for officers of civic clubs. 18 If the
State would consider binding among the associates in an unincorporated
associations their acts and actuations, then more so in a duly incorporated
association, which has a juridical personality.

13
37 SCRA823, 837 (1971).
14
281 SCRA232 (1997).
15
/dem, at p. 247, citing Bache & Co., (Phils.), Inc. v. Ruiz, 37 SCRA 823 (1971).
16
ldem, at pp. 247-248.
17
Arnold v. Willets & Patterson, Ltd., 45 Phil. 634 (1923).
18
Lions Club International v. Amores, 121 SCRA 621 (1983).
 I I

14 PHILIPPINE CORPORATE LAW

The underlying relationship between and among individuals as the root of

every corporate setting was recognized and reinforced under Section 1Oof the
I I
old Corporation Code when it required that no corporation can be organized
unless fonned by "Any number of natural persons not less than five (5) but not
more than fifteen (15), all of legal age and a majority of whom are residents
of the Philippines." Although Section 10 of the Revised Corporation Code now
expressly allows "Any person, partnership, association or corporation, singly
or jointly with others ... [to] organize a corporation for any lawful purpose or
purposes," the impetus behind the change was more to promote ease of doing
business through the corporate medium.
The theory of enterprise entity finds its application in the de facto
corporation doctrine and corporation by estoppel doctrine that remain
recognized and operative under the Revised Corporation Code. 19

., I
li TRI-LEVEL RELATIONSHIPS IN THE CORPORATE SETTING

In considering developments in PHILIPPINE CORPORATE LAw, there are three

iii (3) "Levels of Corporate Relationships" in the corporate setting that must be
11 considered, thus:

(a) Juridical Entity Level, which treats the relationship between the
State and its various instrumentalities and the corporation as a
f'I juridical person before the law.
I The doctrines evolving within the juridical entity level
I considers the various aspect of the relationship between the
I State, as the creator, and the corporation, as its creature. ·
(b) Intra-Corporate Level, which considers the intra-corporate
setting as providing for three sub-levels of contractual
relationships between:
( 1) the corporation and its agents-directors, trustees
and officers-who represent the juridical person in the
commercial world, governed by underlying principles of
the Law on Agency;
(2) the directors, trustees and officers, on one hand, and
I the shareholders or members, on the other, governed
·1
by underlying principles taken from the Law on Business
Trusts;
(3) the corporation and the persons composing it
(shareholders or members); and

19
De facto corporation doctrine and the doctrine of corporation by estoppel are covered in Chapter
5 on Corporate Contract Law.